UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
☒  Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2016
 
☐  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)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐  No
 
As of August 10, 2016, there were 47,519,173 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
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
7
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
15
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
21
 
 
 
Item 4.
Controls and Procedures
22
 
 
 
PART II
OTHER INFORMATION
22
 
 
 
Item 1.
Legal Proceedings
22
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 22
 
 
 
Item 6.
Exhibits
23
 
 
 
 
Signatures
25
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2015 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 the company's ability to obtain additional capital in the future to fund planned expansion, the demand for oil and natural gas, general economic factors, competition in the industry and other factors that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
 
As used herein, the “Company,” “we,” “Torchlight,” “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 CONDENSED BALANCE SHEETS (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash
  $ 318,011  
  $ 1,026,600  
Accounts receivable
    662,580  
    741,653  
Production revenue receivable
    8,817  
    199,317  
Note receivable
    -  
    613  
Prepayments - development costs
    150,362  
    -  
Prepaid expenses
    -  
    38,776  
Total current assets
    1,139,770  
    2,006,959  
 
       
       
Investment in oil and gas properties, net
    9,312,719  
    7,057,671  
Office equipment
    34,334  
    43,110  
Debt issuance costs, net
    5,479  
    8,224  
Other assets
    43,361  
    72,082  
 
       
       
TOTAL ASSETS
  $ 10,535,663  
  $ 9,188,046  
 
       
       
LIABILITIES AND STOCKHOLDERS' EQUITY
       
       
Current liabilities:
       
       
Accounts payable
  $ 1,707,289  
  $ 1,114,409  
Accrued liabilities
    671,364  
    628,876  
Related party payables
    276,112  
    130,000  
 
Convertible promissory notes, (Series B) net of discount of
 
       
   $185,155 at June 30, 2016
    3,384,345  
    0  
Notes payable within one year - related party
    131,250  
    205,000  
Notes payable within one year
    105,020  
    129,741  
Due to working interest owners
    216,476  
    103,364  
Interest payable
    161,759  
    173,710  
Total current liabilities
    6,653,615  
    2,485,100  
 
       
       
Convertible promissory notes, (Series B) net of discount of $277,911 at December 31, 2015
    -  
    3,291,589  
Asset retirement obligation
    1,670  
    29,083  
 
       
       
Commitments and contingencies
    -  
    -  
 
       
       
Stockholders’ equity:
       
       
 
Preferred stock, par value $.001, 10,000,000 shares authorized;
 
       
    37,000 issued and outstanding at June 30, 2016
    35  
    134  
    134,000 issued and outstanding at December 31, 2015
       
       
Common stock, par value $0.001 per share; 100,000,000 shares authorized;
    45,800  
    33,168  
45,793,587 issued and outstanding at June 30, 2016
       
       
33,166,344 issued and outstanding at December 31, 2015
       
       
Additional paid-in capital
    63,976,768  
    61,921,450  
Warrants outstanding
    20,546,667  
    16,330,961  
Accumulated deficit
    (80,688,892 )
    (74,903,439 )
Total stockholders' equity (deficit)
    3,880,378  
    3,382,274  
 
       
       
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 10,535,663  
  $ 9,188,046  
 
       
       
 
  The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
4
 

TORCHLIGHT ENERGY RESOURCES, INC.              
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THREE MONTHS
 
 
THREE MONTHS
 
 
SIX MONTHS
 
 
SIX MONTHS
 
 
 
ENDED
 
 
ENDED
 
 
ENDED
 
 
ENDED
 
 
 
June 30, 2016
 
 
June 30, 2015
 
 
June 30, 2016
 
 
June 30, 2015
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Oil and gas sales
  $ 105,220  
  $ 508,265  
  $ 303,513  
  $ 1,042,827  
SWD and royalties
       
    374  
    -  
    57,070  
 
       
       
       
       
Cost of revenue
    (139,116 )
    (279,646 )
    (245,300 )
    (510,544 )
 
       
       
       
       
Gross income
    -33,896  
    228,993  
    58,213  
    589,353  
 
       
       
       
       
 
       
       
       
       
Operating expenses:
       
       
       
       
General and administrative expense
    3,796,418  
    8,207,314  
    4,747,704  
    8,896,025  
Depreciation, depletion and amortization
    100,082  
    204,330  
    722,054  
    698,805  
Impairment expense
    57,912  
    22,438,114  
    57,912  
    22,438,114  
Loss on sale
    146,138  
    -  
    146,138  
    -  
     Total operating expenses
    4,100,550  
    30,849,758  
    5,673,808  
    32,032,944  
 
       
       
       
       
 
       
       
       
       
Other income (expense)
       
       
       
       
Other income
    -  
    962  
    -  
    962  
Interest income
    -  
    -  
    -  
    -  
Interest and accretion expense
    (47,481 )
    (239,667 )
    (169,858 )
    (1,631,109 )
     Total other income (expense)
    (47,481 )
    (238,705 )
    (169,858 )
    (1,630,147 )
 
       
       
       
       
 
       
       
       
       
Net loss before taxes
    (4,181,927 )
    (30,859,470 )
    (5,785,453 )
    (33,073,738 )
 
       
       
       
       
Provision for income taxes
    -  
    -  
    -  
    -  
 
       
       
       
       
Net (loss)
  $ (4,181,927 )
  $ (30,859,470 )
  $ (5,785,453 )
  $ (33,073,738 )
 
       
       
       
       
 
       
       
       
       
 
       
       
       
       
Loss per share:
       
       
       
       
Basic and Diluted
  $ (0.16 )
  $ (1.44 )
  $ (0.35 )
  $ (2.02 )
Weighted average shares outstanding:
 
       
       
       
       
Basic and Diluted
    26,062,804  
    21,428,769  
    16,506,672  
    16,342,225  
 
       
       
       
       
  The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
5
 
 
TORCHLIGHT ENERGY RESOURCES, INC.
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
 
 
SIX MONTHS
 
 
SIX MONTHS
 
 
 
ENDED
 
 
ENDED
 
 
 
June 30, 2016
 
 
June 30, 2015
 
Cash Flows From Operating Activities
 
 
 
 
 
 
Net (loss)
  $ (5,785,453 )
  $ (33,073,738 )
Adjustments to reconcile net loss to net cash from operations:

       
       
Stock based compensation
    3,214,690  
    7,078,791  
Accretion of convertible note discounts
    95,979  
    1,163,091  
Loss on sale of assets
    146,138  
    -  
Impairment expense
    57,912  
    22,438,114  
Depreciation, depletion and amortization
    722,054  
    698,805  
Change in:
       
       
Accounts receivable
    79,073  
    49,392  
Note receivable
    613  
    2,627  
Production revenue receivable
    190,500  
    (163,977 )
Prepayment of development costs
    (150,362 )
    10,602  
Debt issuance costs
    2,745  
    -  
Prepaid expenses
    38,776  
    29,634  
Other assets
    28,720  
    (23,938 )
Accounts payable and accrued liabilities
    635,368  
    3,165,044  
Due to working interest owners
    113,113  
    (30,231 )
Asset retirement obligation
    (27,413 )
    774  
Interest payable
    (15,174 )
    447,014  
Capitalized interest
    (157,581 )
    (395,738 )
Net cash provided by (used) in operating activities
    (810,302 )
    1,396,266  
 
       
       
Cash Flows From Investing Activities
       
       
Investment in oil and gas properties
    (1,700,209 )
    (4,618,743 )
Proceeds from Sale of Leases
    1,572,000  
    951,918  
Net cash used in investing activities
    (128,209 )
    (3,666,825 )
 
       
       
Cash Flows From Financing Activities
       
       
Proceeds from short term advance
    150,000  
    -  
Proceeds from sale of common stock
    -  
    1,300,000  
Proceeds from sale of preferred stock
    -  
    9,800,000  
Preferred dividends paid in cash
    (224,260 )
    -  
Proceeds from warrant exercise
    406,541  
    -  
Proceeds from promissory notes
    511,270  
    212,000  
Repayment of convertible notes
    -  
    (8,859,011 )
Repayment of promissory notes
    (613,629 )
    (150,000 )
Net cash provided by financing activities
    229,922  
    2,302,989  
 
       
       
Net increase (decrease) in cash
    (708,589 )
    32,430  
Cash - beginning of period
    1,026,600  
    179,787  
 
       
       
Cash - end of period
  $ 318,011  
  $ 212,217  
 
       
       
 
Supplemental disclosure of cash flow information:
 
       
Non cash transactions:
       
       
Common stock issued for services
  $ 410,474  
  $ 1,594,871  
Common stock issued for mineral interests
  $ 1,484,166  
  $ 26,400  
Warrants issued for services
  $ 2,716,125  
  $ 5,562,919  
Common stock issued in conversion of preferred stock
  $ 9,700,000  
  $ -  
Warrants issued in connection with promissory notes
  $ 80,750  
  $ -  
Common stock issued in warrant exercises
  $ 397,471  
  $ -  
Warrants issued for mineral interests
  $ 1,409,761  
    -  
Cash paid for interest
  $ 266,259  
  $ 931,011  
 
  The accompanying notes are an integral part of these consolidated financial statements.
 
 
6
 
 
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.  In addition to TEI, we also operate our business through our wholly-owned subsidiaries Torchlight Energy Operating, LLC, a Texas limited liability company and Hudspeth Oil Corporation, a Texas corporation.
 
On December 10, 2010, we effected a 4-for-1 forward split of our shares of common stock outstanding.  All owners of record at the close of business on December 10, 2010 (record date) received three additional shares for every one share they owned.  All share amounts reflected throughout this report take into account the 4-for-1 forward split.
 
Effective February 8, 2011, we changed our name to “Torchlight Energy Resources, Inc.”  In connection with the name change, our ticker symbol changed from “PPFT” to “TRCH.”
 
The Company is engaged in the acquisition, exploration, development and production of oil and gas properties within the United States. The Company’s success will depend in large part on its ability to obtain and develop profitable oil and gas interests.
 
2. GOING CONCERN
 
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.
 
At June 30, 2016, the Company had not yet achieved profitable operations. We had a net loss of approximately $5.8 million for the six months ended June 30, 2016 and had accumulated losses of $80,688,892 since our inception to June 30, 2016, and expect to incur further losses in the development of our business.  Working Capital as of June 30, 2016 was negative $5,513,845. Negative working capital is exacerbated by the inclusion in current liabilities of the $3,384,345 outstanding balance of subordinated convertible notes which have a maturity date of June 30, 2017 and are therefore included in current liabilities as of June 30, 2016.
 
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; (3) participating in joint venture transactions with third parties; or (4) sale of assets.  Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
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.
 
 
7
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
3. SIGNIFICANT ACCOUNTING POLICIES  - continued
 
Basis of presentation —The financial statements are presented on a consolidated basis and include all of the accounts of Torchlight Energy Resources Inc. and its wholly owned subsidiaries, Torchlight Energy, Inc., Torchlight Energy Operating, LLC, and Hudspeth Oil Corporation. All significant intercompany balances and transactions have been eliminated.
 
Risks and uncertainties – The Company’s operations are subject to significant risks and uncertainties, including financial, operational, technological, and other risks associated with operating an emerging business, including the potential risk of business failure.
 
Concentration of risks – The Company’s cash is placed with a highly rated financial institution, and the Company periodically reviews the credit worthiness of the financial institutions with which it does business. At times the Company’s cash balances are in excess of amounts guaranteed by the Federal Deposit Insurance Corporation.
 
Fair value of financial instruments – Financial instruments consist of cash, accounts receivable, accounts payable, notes payable to related party, and convertible promissory notes. The estimated fair values of cash, accounts receivable, accounts payable, and related party payables approximate the carrying amount due to the relatively short maturity of these instruments. The carrying amounts of the convertible promissory notes 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.
 
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 June 30, 2016 and December 31, 2015 no valuation allowance was considered necessary.
 
As of December 31, 2015, the Company had a $419,839 account receivable from Husky Ventures for the estimated balance of the sale proceeds from the sale of the Chisholm Trail properties in fourth quarter, 2015. The Chisholm Trail properties were sold to Husky Ventures who then included them with the Husky interests in Chisholm Trail and then entered into a sale agreement with Gastar Exploration Inc. for the combined Torchlight and Husky interests. Receipt of the balance of the sale proceeds was subject to final determination of mineral lease classification and was to occur by February 28, 2016.
 
On June 14, 2016, after the lawsuit that is described in Part II Item 1. Legal Proceedings regarding the Hunton Play, the Company received and subsequently deposited a check from Husky Ventures in the amount of $520,400.   Husky Ventures designated that the check was in full satisfaction of its obligations under the transaction in which the Company sold the Chisholm Trail properties as described above. The Company does not believe the check is in full satisfaction of Husky Ventures’s obligations, including but not limited to that Husky Ventures has provided insufficient information for the Company regarding this transaction.  The Company is currently pursuing claims against Husky Ventures, and others, related to this transaction and intends to continue to pursue those claims as described further in Part II Item 1. Legal Proceedings regarding the Hunton Play.
 
Investment in oil and gas properties – The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves.
 
Oil and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition costs to unevaluated properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated over the life of the reservoir.
 
As of June 30, 2016 the Company performed an assessment of evaluated and unevaluated costs in the cost pool to conform the cumulative value of the Full Cost Pool to the combined amount of Reserve Value of evaluated, producing properties (as determined by independent analysis at December 31, 2015), plus the lesser of cumulative historical cost or estimated realizable value of unevaluated leases and projects expected to commence production in future operating periods. The results of the assessment was an additional charge to Impairment Expense of $57,912.
 
 
 
 
8
 
 
 
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 periods ended June 30, 2016 and June 30, 2015, the Company capitalized $157,581 and $395,738, 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 tax affects, plus the cost of unproved oil and gas properties, the excess is charged to expense and reflected as additional accumulated DD&A. The ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes future cash outflows related to estimated abandonment costs. The Company recognized impairment of $22,438,114 on its oil and gas properties during the three months ended June 30, 2015 and an additional impairment at December 31, 2015 of $3,236,009 for a total impairment adjustment for 2015 of $25,674,123. Impairment in the amount of $57,912 was recognized at June 30, 2016 as a result of the Company’s assessment. Due to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is possible that a write-down could occur. Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions. The independent engineering estimates include only those amounts considered to be proved reserves and do not include additional amounts which may result from new discoveries in the future, or from application of secondary and tertiary recovery processes where facilities are not in place or for which transportation and/or marketing contracts are not in place. Estimated reserves to be developed through secondary or tertiary recovery processes are classified as unevaluated properties.
 
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.
 
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.
 
Asset retirement obligations – Accounting principles require that the fair value of a liability for an asset’s retirement obligation (“ARO”) be recorded in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the corresponding cost be capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then-present value each subsequent period, and the capitalized cost is depleted over the useful life of the related asset. Abandonment cost incurred is recorded as a reduction to the ARO liability.
 
Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement.
 
Asset retirement obligation activity is disclosed in Note 10.
 
Share-based compensation – Compensation cost for equity awards is based on the fair value of the equity instrument on the date of grant and is recognized over the period during which an employee is required to provide service in exchange for the award. Compensation cost for liability awards is based on the fair value of the vested award at the end of each period.
 
Revenue recognition – The Company recognizes oil and gas revenues when production is sold at a fixed or determinable price, persuasive evidence of an arrangement exists, delivery has occurred and title has transferred, and collectability is reasonably assured.
 
 
 
 
9
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
 
3. SIGNIFICANT ACCOUNTING POLICIES - continued
 
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 Company has not included potentially dilutive securities in the calculation of loss per share for any periods presented as the effects 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.
 
Recent accounting pronouncements
 
On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of the Company’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.
 
In May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
 
In April 2014, the FASB issued ASU 2014-08, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organization’s operations and financial results should be presented as discontinued operations. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new standard is effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption would be permitted for any annual or interim period for which an entity’s financial statements have not yet been made available for issuance. The adoption of this guidance is not expected to have an impact on the Company’s 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 August 15, 2016, the date of issuance of the financial statements. Subsequent events are disclosed in Note 11.
 
4. RELATED PARTY PAYABLES
 
As of June 30, 2016, related party payables consisted of accrued and unpaid compensation to two of our executive officers totaling $90,000 and a Director Fee payable to one of our Directors, Mr. Edward J. Devereaux of $36,112. Mr. Devereaux elected to receive $50,000 of the Director Fee in cash when funds are available. As of June 30, 2016 $13,888 had been paid to Mr. Devereaux.
 
Additionally, Gregory McCabe, who became a Director in July, 2016, advanced the Company $150,000 as a short term loan in June, 2016. Subsequent to June 30, 2016 these funds were applied as consideration for Series C Convertible Preferred Stock issued to Mr. McCabe.
 
On November 4, 2014, Eunis L. Shockey, a member of the Board of directors, loaned us $500,000 under a 30 day promissory note.  The promissory note accrues interest at an annual rate of 10%.  The balance of the note at June 30, 2016 was $131,250. The due date of the note is December 31, 2016.
 
5. COMMITMENTS AND CONTINGENCIES
 
The Company is subject to contingencies as a result of environmental laws and regulations.  Present and future environmental laws and regulations applicable to the Company’s operations could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time.  As of June 30, 2016, 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.
 
 
10
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
 
6. STOCKHOLDERS’ EQUITY
 
During the three months ended June 30, 2016 the Company issued 489,535 shares of common stock as compensation for consulting services, with total value of $357,301.
 
During the three months ended June 30, 2016 the Company issued 690,000 shares of common stock in connection with oil and gas lease related costs of $512,200.
 
During the three months ended June 30, 2016, the Company issued 8,413,044 shares of common stock in conversion of Preferred Stock valued at $9,675,000.
 
During the three months ended June 30, 2016, the Company issued 794,942 shares of common stock in exercise of warrants at $.50 per share in connection with an offering to warrant holders dated June 16, 2016 to exercise warrants at the reduced exercise price of $.50 per share regardless of the original exercise price of warrants they were holding. The offering was scheduled to close on June 30, 2016, however the Company elected to extend the expiration of the offering to July 15, 2016. Holders exercised an additional 2,069,065 warrants in July. Any warrants not exercised within the offering period retained their original terms including the original exercise price. The exercise price adjustment was considered as a debt agreement modification for accounting purposes. The adjustment arising from the comparison of the fair value of the warrants at their original grant date to the fair value recalculated at the modification date (the re pricing date) was $9,070.
 
During the three months ended June 30, 2016, the Company issued 189,861 shares of common stock for dividends on preferred stock with an aggregate value of $218,340.
 
During the three months ended June 30, 2016, the Company vested 2,487,500 stock options and warrants as compensation for services, with a total value of $2,714,125.
 
During the three months ended June 30, 2016, the Company issued 1,925,000 warrants in connection with oil and gas lease related costs of $1,091,000.
 
During the three months ended June 30, 2016, the Company issued 100,000 warrants in connection with renewal of a loan from a Director valued at $53,000.
 
A summary of stock options and warrants outstanding as of June 30, 2016 by exercise price and year of expiration is presented below:
 
 
Exercise
 
 
Expiration Date in
 
 
 
 
 
Price
 
 
2016
 
 
2017
 
 
2018
 
 
2019
 
 
2020
 
 
2021
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  $ 0.50  
 
 
 
 
 
 
    800,000  
 
 
 
 
 
 
 
 
 
    800,000  
  $ 0.70  
 
 
 
 
 
 
       
 
 
 
    850,000  
 
 
 
    850,000  
  $ 0.77  
 
 
 
 
 
 
       
    100,000  
       
 
 
 
    100,000  
  $ 1.00  
    -  
    150,000  
    -  
    161,617  
       
    1,500,000  
    1,811,617  
  $ 1.08  
       
       
       
    37,500  
       
       
    37,500  
  $ 1.40  
       
       
       
       
    1,682,606  
       
    1,682,606  
  $ 1.57  
       
       
       
       
    5,625,000  
       
    5,625,000  
  $ 1.73  
       
       
    100,000  
       
       
       
    100,000  
  $ 1.75  
    102,857  
    -  
    -  
    -  
       
       
    102,857  
  $ 1.79  
       
       
       
       
    337,500  
       
    337,500  
  $ 1.80  
       
       
       
       
    1,350,000  
       
    1,350,000  
  $ 2.00  
    702,414  
    126,000  
    1,437,809  
    -  
       
       
    2,266,223  
  $ 2.03  
       
       
    2,000,000  
       
       
       
    2,000,000  
  $ 2.09  
    -  
    -  
    2,800,000  
    -  
       
       
    2,800,000  
  $ 2.23  
       
       
       
       
    892,857  
       
    892,857  
  $ 2.29  
       
       
    120,000  
       
       
       
    120,000  
  $ 2.31  
       
       
    500,000  
       
       
       
    500,000  
  $ 2.50  
    100,000  
    -  
    -  
    35,211  
       
       
    135,211  
  $ 2.82  
    -  
    -  
    38,174  
    -  
       
       
    38,174  
  $ 3.00  
    100,000  
    -  
    -  
    -  
       
       
    100,000  
  $ 3.50  
       
       
       
    15,000  
       
       
    15,000  
  $ 4.50  
    -  
    -  
    -  
    700,000  
       
       
    700,000  
  $ 5.00  
    8,391  
    170,000  
    -  
    -  
       
       
    178,391  
  $ 5.05  
       
    40,000  
       
       
       
       
    40,000  
  $ 6.00  
    -  
    -  
    565,625  
    205,585  
       
       
    771,210  
  $ 7.00  
    -  
    -  
    -  
    700,000  
       
       
    700,000  
 
    1,013,662  
    486,000  
    8,361,608  
    1,954,913  
    10,737,963  
    1,500,000  
    24,054,146  
 
11
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
 
6. STOCKHOLDERS’ EQUITY - continued
 
At June 30, 2016 the Company had reserved 24,054,146 shares for future exercise of warrants.
 
Warrants issued in relation to the promissory notes issued (see note 9) were valued using the Black Scholes Option Pricing Model. The assumptions used in calculating the fair value of the warrants issued are as follows:
 
Risk-free interest rate
0.78%
Expected volatility of common stock
191% - 253%
Dividend yield
0.00%
Discount due to lack of marketability
20-30%
Expected life of warrant
3 years - 5 years
 
7. CAPITALIZED COSTS
 
The following table presents the capitalized costs of the Company as of June 30, 2016 and December 31, 2015:
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Evaluated costs subject to amortization
  $ 11,371,543  
  $ 24,177,851  
Unevaluated costs
    11,174,296  
    9,677,425  
Accumulated impairment expense
    (10,279,142 )
    (22,783,989 )
Total capitalized costs
    12,266,697  
    11,071,287  
Less accumulated depreciation, depletion and amortization
    (2,953,978 )
    (4,013,616 )
Net capitalized costs
  $ 9,312,719  
  $ 7,057,671  
 
Unevaluated costs as of June 30, 2016 include cumulative costs on developing projects including the Orogrande and Hazel Projects in West Texas and adjusted costs of nonproducing leases in Oklahoma.
 
8. 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.  The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.
 
Authoritative guidance for uncertainty in income taxes requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an examination.  Management has reviewed the Company’s tax positions and determined there were no uncertain tax positions requiring recognition in the consolidated financial statements.  The Company’s tax returns remain subject to Federal and State tax examinations for the years 2012 through 2015.  Generally, the applicable statutes of limitation are three to four years from their respective filings.
 
Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of operation.  The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements.
 
The Company had a net deferred tax asset related to federal net operating loss carry forwards at June 30, 2016 of $25,142,099 available to offset future taxable income.   The federal net operating loss carry forward will begin to expire in 2030.  Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income prior to expiration of the loss carry forwards.  The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.
 
 
 
12
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
 
9. PROMISSORY NOTES
 
During the quarter ended June 30, 2014, the Company issued $3,197,500 in principal value of 12% Series B Convertible Unsecured Promissory Notes. The 12% Notes are due and payable on June 30, 2017 and provide for conversion into common stock at a price of $4.50 per share and included the issuance of one warrant for each $22.50 of principal amount purchased.  The Company issued a total of 142,111 of these five-year warrants to purchase common stock at an exercise price of $6.00 per share.  The value of the warrant shares was $405,016 and the amount recorded for the beneficial conversion feature was $195,466.  These amounts were recorded as a discount on the 12% Notes.
 
During the quarter ended September 30, 2014, the Company issued an additional $1,372,000 in principal value of 12% Series B Convertible Unsecured Promissory Notes. The 12% Notes are due and payable on June 30, 2017 and provide for conversion into common stock at a price of $4.50 per share and included the issuance of one warrant for each $22.50 of principal amount purchased.  The Company issued a total of 60,974 of these five-year warrants to purchase common stock at an exercise price of $6.00 per share.  The value of the warrant shares was $157,388 and the amount recorded for the beneficial conversion feature was $-0-.  These amounts were recorded as a discount on the 12% Notes.
 
During the fourth quarter of 2015, $1 million in note principal was converted into common stock. The total outstanding balance of Series “B” Notes at June 30, 2016 was $3,569,500.
 
Notes Payable within one year 
 
The Company was obligated on a short term note payable in the amount of $105,020 as of June 30, 2016. The Note was paid in July, 2016.
 
The note payable to a related party of $131,250 is payable with interest to a Director on December 31, 2016.
 
10. ASSET RETIREMENT OBLIGATIONS
 
The following is a reconciliation of the asset retirement obligation liability through June 30, 2016:
 
Asset retirement obligation – December 31, 2014
  $ 35,951  
Accretion Expense
    1,107  
Asset retirement obligation – March 31, 2015
  $ 37,058  
Accretion Expense
    819  
Removal of ARO for wells sold
    (1,152 )
Asset retirement obligation – June 30, 2015
  $ 36,725  
Accretion Expense
    819  
Asset retirement obligation – September 30, 2015
  $ 37,544  
Accretion Expense
    747  
Removal of ARO for wells sold
    (9,208 )
Asset retirement obligation – December 31, 2015
  $ 29,083  
Accretion Expense
    747  
Asset retirement obligation – March 31, 2016
  $ 29,830  
Removal of ARO for wells sold
    (28,201 )
Accretion Expense
    41  
Asset retirement obligation – June 30, 2016
  $ 1,670  
 
 
 
13
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
 
11. SUBSEQUENT EVENTS
 
Divestiture of Assets
 
In August, 2016 the Company entered into an agreement to assign its interest in the Ring Energy project in Kansas to its joint venture partner in exchange for a release from a $1,500,000 drilling commitment, release from future plugging and abandonment liability and cancellation of an account payable of $100,500. Three wells were producing on the property with combined daily production of less than five barrels per day. As of June 30, 2016, $5,355,705 was specifically allocated to the Ring properties from accumulated impairment recorded in prior periods to adjust the book value of Ring to the amount realized from the transaction in August, 2016. No additional impairment was required.
 
Continuance of Offering to Warrant Holders
 
On June 16, 2016 an offering to warrant holders was circulated to allow holders to exercise warrants at the reduced exercise price of $.50 per share regardless of the original exercise price of warrants they were holding. The offering was scheduled to close on June 30, 2016. The Company, however, elected to extend the expiration of the offering to July 15, 2016 at which date the offering was closed. Holders exercised 2,069,065 warrants in July. Any warrants not exercised within the offering period retained their original terms including the original exercise price.
 
Preferred Series “C” Offering
 
On July 8, 2016, we sold a total of 10,000 shares of Series C Convertible Preferred Stock (the “Series C Preferred”) to certain investors at a purchase price of $100 per share for total consideration of $1,000,000. We filed the Certificate of Designation for the Series C Preferred with the Secretary of State of Nevada on July 8, 2016.  The designations, preferences, limitations, restrictions and relative rights of the Series C Preferred are as follows: (i) a stated value of $100 per share; (ii) mandatory conversion on the earlier of 92 days after the spud date of Hazel Prospect or October 13, 2016, with each holder having the right to convert at its election any time before that; (iii) a conversion price of $1.01 per share of common stock; (iv) each holder has the right to convert its shares into a proportionate heads up working interest in the Hazel Prospect, provided such election is made prior to the mandatory stock conversion date described in “(ii)” above, which working interest will be determined by dividing the number of shares the holder is converting by 10,000 and multiplying the result by one-third; (v) no rights to dividends; (vi) no voting rights; and (vii) in the event of any voluntary or involuntary liquidation, dissolution or winding up, the holders will be entitled to be paid out of the assets available for distribution to our stockholders, before any payment is to be made to the holders of common stock, but after the payment to the holders of Series B Convertible Preferred Stock.

 
 
 
 
 
 
 
 
 
 
 
 
14
 
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
We are engaged in the acquisition, exploration, exploitation, and/or development of oil and natural gas properties in the United States. We operate our business through our subsidiaries Torchlight Energy Inc., Torchlight Energy Operating, LLC, and Hudspeth Oil Corporation.

During the quarter ended June 30, 2016 the Board of Directors initiated a review of Company operations and focus given the divestiture of its Oklahoma properties beginning with the sale of the Chisholm Trail properties in fourth quarter, 2015 and the sale of the Cimarron properties in second quarter, 2016. During this same time frame development has continued on the Orogrande Project in West Texas and in April, 2016 the Company acquired the Hazel Project in the Midland Basin also in West Texas. These West Texas properties demonstrate significant potential, future production capabilities based upon the analysis of scientific data being gathered in the day by day development activity. Therefore, the Board has determined to focus its efforts and capital on these two projects to maximize shareholder value for the long run.
 
During the quarter ended June 30, 2016, in accordance with this new emphasis, remaining projects in other locations have been offered for sale. The result has been the closing on August 10, 2016 of the assignment of the Company’s Ring Properties in Kansas to our joint venture partner. Further, the Marcelina properties in South Texas have been offered for sale, however, discussions and negotiations are still in process at date of this filing. The Company’s remaining assets in Oklahoma consisting of three AMI’s (the Viking, Rosedale, and the Thunderbird) and four wells (two are producing) are held pending the outcome of the lawsuit filed by Torchlight against the operator, Husky Ventures, in May, 2016.
 
The strategy in divesting of projects other than the Orogrande and the Hazel Projects is to refocus on the greatest potential future value for the Company while systematically eliminating debt as noncore assets are sold and operations are streamlined.
 
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited financial statements included herewith and our audited financial statements included with our Form 10-K for the year ended December 31, 2015.  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.
 
Current Projects
 
As of June 30, 2016 the Company had interests in five oil and gas projects: the Marcelina Creek Field Development in Wilson County, Texas, the Ring Energy Joint Venture in Southwest Kansas, Hunton wells operated by Husky Ventures in Central Oklahoma, the Orogrande Project in Hudspeth County, Texas, and the Hazel Project in the Midland Basin in West Texas.
 
Marcelina Creek Field Development .
 
On July 6, 2010, TEI entered into a participation agreement with Bayshore Operating Corporation, LLC (“Bayshore”), which is currently the holder of an oil, gas, and mineral lease covering approximately 1,045 acres in Wilson County, Texas, known as the Marcelina Creek Field Development.  The Participation Agreement provides for the drilling of four wells. Three of the obligation wells have been drilled.  The first three wells include a horizontal re-entry well known as the Johnson-1-H, a vertical well known as the Johnson #4, and a lateral well known as the Johnson #2-H.  These three wells were producing a total of approximately 85 BOPD as of June 30, 2016.  The remaining well (Johnson #3) is to be a vertical development well at a location to be determined within the existing lease. Drilling is anticipated for midyear 2016.
 
The Company initiated a reentry project on the Johnson #4 well early in 2016 which has been completed. Initial production at completion was 2,920 barrels for the month of February, 2016. Production has declined to approximately 20 barrels per day.
 
Work is being planned on the Johnson #2 applying an acid treatment to increase production.
 
The Marcelina Creek Field Development is located over the Austin Chalk, Buda, and Eagle Ford Formations, which formations are well known and established producers in central Texas.  Their production is controlled by vertical fracturing of the rock with high productivity in wells which encounter the greatest amount of fractures.  With the advent of horizontal drilling technology, numerous opportunities exist in areas and fields that were only drilled vertically.
 
The Company has offered the Marcelina properties for sale and is in discussion with potential buyers.
 
 
 
 
15
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
The Ring Energy Joint Venture, Southwest Kansas
 
In October 2013, we entered into a Joint Venture agreement with Ring Energy.  The agreement called for us to provide for $6.2 million in drilling capital to, in effect, match Ring Energy’s expenditures for leasing.  In exchange for this commitment, we would receive a 50% interest in each well bore drilled and the acreage unit it held, until we had spent $6.2 million.  At such time, we would then receive a 50% Working Interest in the entire lease block consisting of 17,000 +/- acres.  We were to provide $3.1 million in advance of the program commencing, which would cover approximately 5 wells to be drilled and completed.  Once the initial five wells are completed, we and Ring would evaluate the program and the drilling activity and determine if another five wells are to be drilled.  Should we continue with the program, we would then deposit another $3.1 million with Ring for drilling and completion of the next five wells.
 
We have made the initial $3.1 million deposit and the first five well drilling program is completed. Drilling operations commenced in March, 2014. Seven wells have been drilled – three are producing, one can be converted to a salt water disposal well, one was not completed, and two were plugged and abandoned.  Based upon results from drilling, the participants elected to suspend further drilling and obtain seismic data to guide continuing development. As of June 30, 2016, the Company had invested approximately $5,500,000 in the Ring Joint Venture.
 
In August, 2016 the Company assigned its interest in the Ring Project in Kansas to its joint venture partner in exchange for a release from a $1,500,000 drilling commitment, release from future plugging and abandonment liability and cancellation of an account payable of $100,500. Three wells were producing on the property with combined daily production of less than five barrels per day.
 
Hunton Play, Central Oklahoma
 
As of June 30, 2016, we were actively producing from one well in Viking, and one in Prairie Grove.
 
Legal Proceeding 
 
As previously disclosed, in May, 2016, Torchlight Energy Resources, Inc. and its subsidiary Torchlight Energy, Inc. filed a lawsuit in the 429th judicial district court in Collin County, Texas against Husky Ventures, Inc., Charles V. Long, April Glidewell, Silverstar of Nevada, Inc., Maximus Exploration, LLC, Atwood Acquisitions, LLC, Gastar Exploration Inc., J. Russell Porter, Michael A. Gerlich, Jerry R. Schuyler, and John M. Selser, Sr. 
 
Reference Part II. Item 1. Legal Proceedings regarding the Hunton Play for further detail.
 
Cimarron AMI
 
The Company negotiated a 15% working interest in approximately 3,700 acres in the Cimarron Area of Logan County in May 2013.  The total acreage in which the Company had an interest increased to 5,200. The Company has divested of its Cimarron Project assets including lease rights and current production. Effective May 1, 2016 the sale of the Company’s Cimarron assets in Oklahoma was completed at a sales price $750,000 resulting in a loss of $146,138 on the sale.
 
 
16
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Chisholm Trail AMI
 
In the third quarter of 2013, we acquired from a third party for stock, a 15.3% working interest in 5011+/- acres in the Chisolm Trail AMI with Husky Ventures Inc. as the operator.
 
The Chisholm Trail properties were sold to Husky Ventures during fourth quarter, 2015 who then combined them with the Husky interests in Chisholm Trail and entered into a sale agreement with Gastar Exploration Inc. for the combined Torchlight and Husky interests. The estimated final sale price to Torchlight pending final review by Gastar of lease classification, is $4,150,000. Sale proceeds were applied to reduce Torchlight’s Joint Interest payable to Husky of $2,830,161 with the balance to be received in cash. The Company received $900,000 in cash and has recorded an account receivable as of December 31, 2015 of $419,839. Receipt of the balance of the sale proceeds was subject to final determination of mineral lease classification and was to occur by February 28, 2016.
 
On June 14, 2016, after the lawsuit that is described in Part II Item 1. Legal Proceedings regarding the Hunton Play, the Company received and subsequently deposited a check from Husky Ventures in the amount of $520,400.   Husky Ventures designated that the check was in full satisfaction of its obligations under the transaction in which the Company sold the Chisholm Trail properties as described above.  The Company does not believe the check is in full satisfaction of Husky Ventures’s obligations, including but not limited to that Husky Ventures has provided insufficient information for the Company regarding this transaction.  The Company is currently pursuing claims against Husky Ventures, and others, related to this transaction and intends to continue to pursue those claims as described further in Part II Item 1. Legal Proceedings regarding the Hunton Play.
 
Viking AMI
 
In the fourth quarter of 2013 we entered into an Area of Mutual Interest (AMI) with Husky Ventures, the Viking Prospect.   We acquired a 25% interest in 3,945 acres in the Viking. We subsequently acquired an additional 5% in May, 2014.  We had an interest in 8,800 total acres as of June 30, 2016. (Net undeveloped acres = 2,600) Husky drilled the first two wells in the AMI in second quarter, 2014. One well is currently producing nominal quantities of oil. Our net cumulative investment through June 30, 2016 in undeveloped acres in the Viking AMI was $1,387,928.
 
Rosedale AMI
 
In January of 2014 we contracted for a 25% Working Interest in approximately 5,000 acres in the Rosedale AMI in South Central Oklahoma. We acquired an additional 5% in May, 2014.  The Company had an interest in 11,600 total acres as of June 30, 2016 (Net undeveloped acres = 3,500). Our cumulative investment through June 30, 2016 in the Rosedale AMI was $2,834,514.
 
Prairie Grove – Judy Well
 
In February of 2014, we acquired a 10% Working Interest in a well in the Prairie Grove AMI from a non-consenting third party who elected not to participate in the well. The well is producing approximately 19 BOE per day.
 
Thunderbird AMI
 
In July of 2014, we contracted for a 25% Working Interest in the Thunderbird AMI.  The total acres in which the Company had an interest at June 30, 2016 totals 4,300 acres (Net undeveloped acres = 1,100). Our cumulative investment through June 30, 2016 in the Thunderbird AMI was $949,530.
 
Orogrande Project, West Texas
 
On August 7, 2014, we entered into a Purchase Agreement with Hudspeth Oil Corporation (“Hudspeth”), McCabe Petroleum Corporation (“MPC”), and Greg McCabe. Mr. McCabe was the sole owner of both Hudspeth and MPC. Under the terms and conditions of the Purchase Agreement, at closing, we purchased 100% of the capital stock of Hudspeth which holds certain oil and gas assets, including a 100% working interest in 172,000 mostly contiguous acres in the Orogrande Basin in West Texas. This acreage is in the primary term under five-year leases that carry additional five-year extension provisions. As consideration, at closing we issued 868,750 shares of our common stock to Mr. McCabe and paid a total of $100,000 in geologic origination fees to third parties.  Additionally, Mr. McCabe will have an optional 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.  Closing of the transactions contemplated by the Purchase Agreement occurred on September 23, 2014.
 
.
 
 
17
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
The Company finalized an agreement to sell a 5% working interest in the Orogrande acreage on June 30, 2015 with an effective date of April 1, 2015. Sale proceeds were $500,000 which were received in April, 2015. In addition, the Company issued 250,000 three year warrants with an exercise price of $.50 to the purchaser.
 
On September 23, 2015, our subsidiary, Hudspeth Oil Corporation (“HOC”), entered into a Farmout Agreement by and between HOC, Pandora Energy, LP (“Pandora”), Founders Oil & Gas, LLC (“Founders”), McCabe Petroleum Corporation and Greg McCabe (McCabe Petroleum Corporation and Greg McCabe are parties to the Farmout Agreement for limited purposes) for the entire Orogrande Project in Hudspeth County, Texas.  The Farmout Agreement provides for Founders to earn from HOC and Pandora (collectively, the “Farmor”) an undivided 50% of the leasehold interest in the Orogrande Project by Founder’s spending a minimum of $45 million on actual drilling operations on the Orogrande Project in the next two years.  Founders is to pay Farmor a total cost reimbursement of $5,000,000 in multiple installments as follows: (1) $1,000,000 at the signing of the Farmout Agreement, the balance of which was received on September 24, 2015; (2) within 90 days from the closing, Founders will frac and complete the Rich A-11 No. 1 Well; and (3) within five days of the spudding of each of the next eight wells drilled by Founders, Founders will pay to Farmor $500,000 resulting in the payment of the remaining amount; provided that, in the event that within 90 days after the fracing of the Rich Well, Founders notifies Farmor of its election not to drill any additional wells, Founders shall have no further obligation to make further payment.  Upon payment of the first $1,000,000, Farmor assigned to Founders an undivided 50% of the leasehold interest and a 37.5% net revenue interest in the leases subject to the terms of the Farmout Agreement (including obligations to re-assign to HOC and Pandora if the 50% interest in the entire Orogrande Project is not earned) and a proportionate share of the McCabe 10% BIAPO (back in after pay out) interest; provided, however, that for each well that Founders drills prior to earning the acreage, it will be assigned a 50% working interest in the wellbore and in the lease on which it sits.
 
Under a joint operating agreement (on A.A.P.L. Form 610 – 1989 Model Form Operating Agreement with COPAS 2005 Accounting Procedures) (“JOA”) also entered into on September 23, 2015, Founders Oil & Gas Operating, LLC is designated as operator of the leases.  Any variance to the operating plan will be determined by a Development Committee, which committee will be made up of members from Founders and Farmor, or their designees, to discuss and recommend the location of the drill wells, data to be gathered and the form of same.  As contemplated under the Farmout Agreement, starting within 90 days of the completion of the fracing on the Rich Well, and at all times subject to the 90 day continuous drilling clause, Founders has the option, but not the obligation, to retain the assigned interest as follows: (1) if Founders spends a minimum of $45 million on actual drilling operations while maintaining compliance with the continuous drilling clause, subject to reasonable delays resulting from reasonable Force Majeure conditions, Founders will have fulfilled its farmout obligations and will be entitled to retain the assigned interests. If Founders does not meet such obligations, it will reassign to Farmor the assigned interest except it will be entitled to retain its interest in the leases covering all wells drilled by Founders and the sections in which such wells are located. Additionally, Founders will resign as operator of the JOA as to all lands reassigned; and (2) Farmor will be carried in all drilling operations during the first two years and/or $45 million in drilling operations, whichever comes last, subject to Founders’ right to recoup certain expenses on “Gap Wells.”  After three years and after Founders has earned its working interest, either party may elect to market the acreage as an entire block, including operatorship.  Should an acceptable bid arise, and both parties agree, the block will be sold 100% working interest to that third party bidder.  However, if only one party wants to accept the outside offer, the other party (the party who wishes not to sell) has the right to purchase the working interest from the selling party.
 
Torchlight Energy and Founders have elected to move forward on planning the next phase of drilling in the Orogrande Project. The project operator planned to permit three new wells starting with the University Founders B-19 #1 well. The new wells would be   drilled vertically for test purposes and would have sufficient casing size to support lateral entry into any pay zone(s) encountered once the well is tested vertically. Torchlight and the project operator would then run a battery of tests on each well to gain information for future development of the field. The B-19 #1 well had been drilled and tested and pipe set at June 30, 2016.
 
Hazel Project in the Midland Basin in West Texas
 
Effective April 1, 2016, Torchlight Energy Inc. acquired from McCabe Petroleum Corporation (Seller) a 66.66% working interest in approximately 12,000 acres in the Midland Basin in exchange for 1,500,000 warrants to purchase Torchlight common stock with an exercise price of $1.00 for five years and a back-in after payout of a 25% working interest to the seller.
 
Initial development of the first well on the Property began July 10, 2016 and development continues in process at the date of this filing.
 
 
 
18
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Historical Results for the six months ended June 30, 2016 and 2015:
 
Revenues and Cost of Revenues
 
For the six months ended June 30, 2016, we had production revenue of $303,513 compared to $1,042,827 for the six months ended June 30, 2015.  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 $245,300, and $510,544 for the six months ended June 30, 2016 and 2015, respectively.
 
Property
 
Quarter
 
 
Oil Production {BBLS}
 
 
Gas Production {MCF}
 
 
 Oil Revenue
 
 
 Gas Revenue
 
 
 Total Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marcelina
    Q1 - 2015  
    2,425  
    0  
  $ 98,787  
  $ -  
  $ 98,787  
Oklahoma
    Q1 - 2015  
    5,931  
    37,226  
  $ 277,574  
  $ 117,521  
  $ 395,095  
Kansas
    Q1 - 2015  
    979  
    0  
  $ 40,680  
  $ -  
  $ 40,680  
Total Q1-2015
       
    9,335  
    37,226  
    417,041  
    117,521  
    534,562  
 
       
       
       
       
       
       
Marcelina
    Q2 - 2015  
    1,957  
    0  
  $ 101,291  
  $ -  
  $ 101,291  
Oklahoma
    Q2 - 2015  
    5,495  
    32,348  
  $ 290,540  
  $ 97,374  
  $ 387,914  
Kansas
    Q2 - 2015  
    889  
    0  
  $ 19,060  
  $ -  
  $ 19,060  
Total Q2-2015
       
    8,341  
    32,348  
  $ 410,891  
  $ 97,374  
  $ 508,265  
 
       
       
       
       
       
       
Marcelina
    Q3 - 2015  
    2,177  
    0  
  $ 86,845  
  $ -  
  $ 86,845  
Oklahoma
    Q3 - 2015  
    4,550  
    31,275  
  $ 212,156  
  $ 87,791  
  $ 299,947  
Kansas
    Q3 - 2015  
    370  
    0  
  $ 13,238  
  $ -  
  $ 13,238  
Total Q3-2015
       
    7,097  
    31,275  
  $ 312,239  
  $ 87,791  
  $ 400,030  
 
       
       
       
       
       
       
Marcelina
    Q4 - 2015  
    1,337  
    0  
  $ 44,391  
  $ -  
  $ 44,391  
Oklahoma
    Q4 - 2015  
    1,624  
    12,380  
  $ 93,864  
  $ 37,349  
  $ 131,213  
Kansas
    Q4 - 2015  
    247  
    0  
  $ 9,573  
  $ -  
  $ 9,573  
Total Q4-2015
       
    3,208  
    12,380  
  $ 147,828  
  $ 37,349  
  $ 185,177  
 
       
       
       
       
       
       
Year Ended 12/31/15
       
    27,981  
    113,229  
  $ 1,287,999  
  $ 340,035  
  $ 1,628,034  
 
       
       
       
       
       
       
Marcelina
    Q1 - 2016  
    3,000  
    0  
  $ 92,546  
  $ -  
  $ 96,604  
Oklahoma
    Q1 - 2016  
    2,026  
    21,148  
  $ 54,211  
  $ 38,624  
  $ 92,835  
Kansas
    Q1 - 2016  
    312  
    0  
  $ 8,854  
  $ -  
  $ 8,854  
Total Q1-2016
       
    5,338  
    21,148  
    155,611  
    38,624  
    198,293  
 
       
       
       
       
       
       
Marcelina
    Q2 - 2016  
    917  
    0  
  $ 38,812  
  $ -  
  $ 38,812  
Oklahoma
    Q2 - 2016  
    675  
    9,689  
  $ 30,411  
  $ 11,142  
  $ 41,553  
Kansas
    Q2 - 2016  
    608  
    0  
  $ 24,855  
  $ -  
  $ 24,855  
Total Q2-2016
       
    2,200  
    9,689  
  $ 94,078  
  $ 11,142  
  $ 105,220  
 
We recorded depreciation, depletion, and amortization expense of $722,054 for the six months ended June 30, 2016 compared to $698,805 for the quarter ended June 30, 2015.
 
 
 
19
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
General and Administrative Expenses
 
Our general and administrative expenses for the quarters ended June 30, 2016 and 2015 were $4,747,704 and $8,896,025, respectively, a decrease of $4,148,321. 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 six months ended June 30, 2016 compared to 2015 is detailed as follows:
 
Increase(decrease) in non cash stock and warrant compensation
  $ (3,864,101 )
Increase(decrease) in consulting expense
  $ (97,868 )
Increase(decrease) in professional fees
  $ (246,404 )
Increase(decrease) in investor relations
  $ 46,796  
Increase(decrease) in travel expense
  $ 15,079  
Increase(decrease) in salaries and compensation
  $ 112,494  
Increase(decrease) in legal fee's
  $ (113,002 )
Increase(decrease) in insurance
  $ (22,306 )
Increase(decrease) in general corporate expenses
  $ 20,991  
 
       
Total (Decrease) in General and Administrative Expenses
  $ (4,148,321 )
 
Historical Results for the three months ended June 30, 2016 and 2015:
 
Revenues and Cost of Revenues
 
For the three months ended June 30, 2016, we had production revenue of $105,220 compared to $508,265 for the three months ended June 30, 2015. Refer to the table of production and revenue history above.  Our cost of revenue, consisting of lease operating expenses and production taxes, was $139,116, and $279,646 for the three months ended June 30, 2016 and 2015, respectively.
 
General and Administrative Expenses
 
Our general and administrative expenses for the three months ended June 30, 2016 and 2015 were $3,796,418 and $8,207,314, respectively, a decrease of $4,410,896. 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 June 30, 2016 compared to 2015 is detailed as follows:
 
Increase(decrease) in non cash stock and warrant compensation
  $ (4,044,024 )
Increase(decrease) in consulting expense
  $ (57,451 )
Increase(decrease) in professional fees
  $ (254,191 )
Increase(decrease) in investor relations
  $ 26,392  
Increase(decrease) in travel expense
  $ 7,117  
Increase(decrease) in salaries and compensation
  $ 60,114  
Increase(decrease) in legal fees
  $ (129,991 )
Increase(decrease) in insurance
  $ (7,976 )
Increase(decrease) in general corporate expenses
  $ (10,886 )
 
       
Total (Decrease) in General and Administrative Expenses
  $ (4,410,896 )
 
       
 
 
20
 
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Liquidity and Capital Resources
 
At June 30, 2016, we had working capital of ($5,513,845), current assets of $1,139,770 consisting of cash, accounts receivable, notes receivable, and prepaid expenses and total assets of $10,535,663 consisting of current assets, investments in oil and gas properties, and other assets. As of June 30, 2016, we had current liabilities of $6,653,615, consisting of, accounts payable (principally for development costs), payables to related parties, notes payable, and accrued interest. Negative working capital is exacerbated by the inclusion in current liabilities of the $3,384,345 outstanding balance of subordinated convertible notes which have a maturity date of June 30, 2017 and are therefore included in current liabilities as of June 30, 2016. Stockholders’ equity was $3,880,378.
 
Cash flow provided by (used) in operating activities for the six months ended June 30, 2016 was $(810,302) compared to $1,396,266 for the six months ended June 30, 2015, a decrease of $2,206,568. Cash flow provided (used) by operating activities for the six months ended June 30, 2016 can be primarily attributed to net losses from operations of $5,785,453 which consists primarily of $4,747,704 in general and administrative expenses, depreciation, depletion and amortization of $722,054, and accretion of convertible note discounts of $95,979. Cash flow provided by operating activities for the six months ended June 30, 2015 can be primarily attributed to net losses from operations of $33,073,738, which consists primarily of $8,896,025 in general and administrative expenses, depreciation, depletion, and amortization of $698,805, accretion of convertible note discounts of $1,163,091, and impairment expense of $22,438,114. 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 flow used in investing activities for the quarter ended June 30, 2016 was $128,209 compared to $3,666,825 for the six months ended June 30, 2015.  Cash flow used in investing activities consists primarily of oil and gas investments in Texas properties during the six months ended June 30, 2016.
 
Cash flow provided by financing activities for the six months ended June 30, 2016 was $229,922 as compared to $2,302,989 for the six months ended June 30, 2015.  Cash flow provided by financing activities consists primarily of proceeds from common stock issues, promissory notes, and warrant exercises.  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.
 
Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the next twelve months and as such we will require additional debt or equity financing to meet our plans and needs.  We face obstacles in continuing to attract new financing due to industry conditions and our history and current record of net losses and working capital deficits.   Despite our efforts, we can provide no assurance that we will be able to obtain the financing required to meet our stated objectives or even to continue as a going concern.
 
We do not expect to pay cash dividends on our common stock in the foreseeable future.
 
Commitments and Contingencies
 
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 June 30, 2016 and June 30, 2015, no amounts have been recorded because no specific liability has been identified that is reasonably probable of requiring us to fund any future material amounts.
 
As of June 30, 2016 the Company had interests in five oil and gas projects: the Marcelina Creek Field Development in Wilson County, Texas, the Ring Energy Joint Venture in Southwest Kansas, the Hunton play in Central Oklahoma, the Orogrande Project in Hudspeth County, Texas, and the Hazel Project in the Midland Basin in West Texas. See the description under “Current Projects” above under “Overview” for more information and disclosure regarding commitments and contingencies relating to these projects.  
 
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not Applicable.
 
 
 
 
 
 
 
 
21
 
 
 
ITEM 4.   CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of June 30, 2016. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, 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 principal executive officer and principal financial officer, in a manner that allowed for timely decisions regarding disclosure. 
 
Changes in Internal Control over Financial Reporting
 
Our principal executive officer and principal financial officer have indicated that, upon evaluation, there were no changes in our internal control over financial reporting or other factors during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
 
 
PART II   OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
On February 16, 2012, Torchlight Energy Inc. filed a lawsuit against Hockley Energy, Inc. and Frank O. Snortheim in the District Court of Harris County, Texas in connection with farmout agreements entered into with Hockley Energy in November 2011.  In the lawsuit, we sued Hockley Energy and Snortheim for breach of contract, fraudulent inducement, prommissory estoppel pertaining to failure to perform two farmout agreements entered into on November 4, 2011, the first relating to the Marcelina Creek prospect and the second relating to the East Stockdale prospect.  Under the Marcelina Farmout, Hockley Energy had an obligation to fund $2,231,250.00 no later than November 18, 2011.  They did not perform as promised.  On February 23, 2015, we obtained a summary judgment against Hockley Energy in the amount of $16,400,000 in damages and $21,877 in attorney fees.  On June 30, 2015, we obtained a judgement against Snortheim for $16,400,000 in damages plus pre judgement interest of $3,385,587. We are currently seeking to enforce the judgment, but it is doubtful that any substantial portion of the judgment is recoverable from Hockley Energy.  
 
In May, 2016 , Torchlight Energy Resources, Inc. and its subsidiary Torchlight Energy, Inc. filed a lawsuit in the 429th judicial district court in Collin County, Texas against Husky Ventures, Inc., Charles V. Long, April Glidewell, Silverstar of Nevada, Inc., Maximus Exploration, LLC, Atwood Acquisitions, LLC, Gastar Exploration Inc., J. Russell Porter, Michael A. Gerlich, Jerry R. Schuyler, and John M. Selser, Sr.  In the lawsuit, we allege, among other things, that the defendants acted improperly in connection with multiple transactions, and that the defendants misrepresented and omitted material information to us with respect to these transactions.  The lawsuit seeks damages arising from 15 different causes of action, including without limitation, violations of the Texas Securities Act, fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, unjust enrichment and tortious interference.  The lawsuit also seeks a complete accounting as to how our investment funds were used, including all transfers between and among the defendants.  We are seeking the full amount of our damages on $20,000,000 invested.  At this time we believe our damages to be in excess of $1,000,000, but the precise amount will be determined in the litigation.
 
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the three months ended June 30, 2016 the Company issued a total of 489,535 shares of common stock as compensation for consulting services.
 
During the three months ended June 30, 2016 the Company issued a total of 690,000 shares of common stock in connection with oil and gas lease related costs, including without limitation 115,000 shares to Green Hill Minerals, LLC (Green Hill Minerals is owned by sons of Gregory McCabe, our director since July 2016).
 
During the three months ended June 30, 2016, the Company issued a total of 189,861 shares of common stock for dividends on preferred stock.

 
 
 
22
 
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - continued
 
During the three months ended June 30, 2016, the Company vested 500,000 warrants to a consultant as compensation for services, which warrants have an exercise price of $1.80 per share and expire in June 2020.
 
During the three months ended June 30, 2016, the Company issued 1,925,000 warrants in connection with oil and gas lease related costs, including (i) 1,500,000 warrants to purchase our common stock at an exercise price of $1.00 for five years, which were issued to McCabe Petroleum Corporation (“MPC”) (of which Gregory McCabe, our director since July 2016, is the sole owner) in April 2016 in connection with the acquisition from MPC of a working interest in the Midland Basin, and (ii) 425,000 warrants to purchase our common stock at an exercise price of $0.70 per share that expire in February 2020, which were issued to Green Hill Minerals, LLC.
 
In April 2016, the Company issued 100,000 warrants in connection with renewal of a loan from our director E.L. Shockey, which warrants have an exercise price of $0.77 per share of common stock and expire in April 2019.
 
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.
 
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 S-1 filed with the SEC on May 2, 2008.) *
 
 
 
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
 
Amended and Restated Bylaws (Incorporated by reference from Form 8-K filed with the SEC on January 12, 2011.) *
 
 
 
4.1
 
Certificate of Designation for Series A Convertible Preferred Stock (Incorporated by reference from Form 8-K filed with the SEC on June 9, 2015.) *
 
 
 
4.2
 
Certificate of Designation for Series B Convertible Preferred Stock (Incorporated by reference from Form 8-K filed with the SEC on September 30, 2015.) *
 
 
 
4.3
 
Certificate of Designation for Series C Convertible Preferred Stock (Incorporated by reference from Form 8-K filed with the SEC on July 11, 2016.) *
 
 
 
10.1
 
Agreement to Participate in Oil and Gas Development Joint Venture between Bayshore Operating Corporation, LLC and Torchlight Energy, Inc. (Incorporated by reference from Form 8-K filed with the SEC on November 24, 2010) *
 
 
 
10.2
 
Purchase and Sale Agreement between Torchlight Energy Inc. and Xtreme Oil and Gas Inc..effective April 1, 2013. (Incorporated by reference from Form 10-Q filed with the SEC on May 15, 2013)*
 
 
 
10.3
 
Development Agreement between Ring Energy, Inc. and Torchlight Energy Resources, Inc. (Incorporated by reference from Form 8-K filed with the SEC on October 22, 2013.) *
 
 
 
10.4
 
Coulter Limited Partnership Agreement dated January 10, 2012 (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
 
 
 
 
 
 
 
 
23
 
 
 
ITEM 6.  EXHIBITS - continued
 
10.5
 
Promissory Note with Boeckman Well LLC dated May 1, 2013 and amendments thereto (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
 
 
 
10.6
 
Securities Purchase Agreement (form of), January 2014  (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
 
 
 
10.7
 
Registration Rights Agreement (form of), January 2014  (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
 
 
 
10.8
 
Purchase Agreement with Hudspeth Oil Corporation, McCabe Petroleum Corporation and Greg McCabe dated August 7, 2014 (Incorporated by reference from Form 10-Q/A filed with the SEC on October 21, 2014.) *
 
 
 
10.9
 
Purchase and Sale Agreement between Torchlight Energy, Inc. and Zenith Petroleum Corporation (Incorporated by reference from Form 8-K filed with the SEC on June 10, 2014) *
 
 
 
10.10
 
Securities Purchase Agreement with Castleton Commodities Opportunities Master Fund, L.P. (Incorporated by reference from Form 8-K filed with the SEC on August 20, 2014) *
 
 
 
10.11
 
Purchase Agreement with Hudspeth Oil Corporation, McCabe Petroleum Corporation and Greg McCabe dated August 7, 2014 (Incorporated by reference from Form 10-Q/A filed with the SEC on October 21, 2014) *
 
 
 
10.12
 
12% Series B Unsecured Convertible Promissory Note (form of) (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2015.) *
 
10.13
 
Securities Purchase Agreement (for Series A Convertible Preferred Stock) (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2015.) *
 
 
 
10.14
 
Employment Agreement (with John A. Brda) (Incorporated by reference from Form 8-K filed with the SEC on June 16, 2015.) *
 
 
 
10.15
 
Employment Agreement (with Willard G. McAndrew) (Incorporated by reference from Form 8-K filed with the SEC on June 16, 2015.) *
 
 
 
10.16
 
Employment Agreement (with Roger Wurtele) (Incorporated by reference from Form 8-K filed with the SEC on June 16, 2015.) *
 
 
 
10.17
 
Loan documentation and warrants with Eunis L. Shockey (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2015.) *
 
 
 
10.18
 
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) *
 
 
 
10.19
 
Securities Purchase Agreement and Amendment to Securities Purchase Agreement (for Series B Convertible Preferred Stock) (Incorporated by reference from Form 10-Q filed with the SEC on November 12, 2015) *
 
 
 
10.20
 
Purchase and Sale Agreement with Husky Ventures, Inc. (Incorporated by reference from Form 8-K filed with the SEC on November 12, 2015) *
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
24
 
 
 
 
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: August 15, 2016
 /s/ John A. Brda
 
By: John A. Brda
 
Chief Executive Officer
 
 
 
 
  Date: August 15, 2016
  /s/ Roger Wurtele
 
By: Roger Wurtele
 
Chief Financial Officer and Principal Accounting Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
25
 
EXHIBIT 10.21
 
PURCHASE AGREEMENT
 
This Purchase Agreement ( “Agreement” ) is made and entered into this 4th day of April 2016, by and among McCabe Petroleum Corporation, a Texas corporation ( “MPC” ), Torchlight Energy Resources, Inc., a Nevada corporation ( “TRCH” ), and Torchlight Energy, Inc., a Nevada corporation ( “TEI” or “Purchaser” ). MPC and TEI are sometimes hereinafter collectively referred to as the “Parties.”
 
WHEREAS, MPC owns certain beneficial rights in leasehold estate of approximately 12,000 gross acres located in Sterling, Tom Green and Irion Counties, Texas, (the “Oil and Gas Leases” ). Such Interest was created by that certain Farmout Agreement (the “Farmout Agreement”) between Oxy USA Inc. (“Farmor”) and Imperial Exploration, LLC (“Imperial”), dated effective March 21, 2016. The Oil and Gas Leases and lands that such leases cover are more particularly described in the Farmout Agreement;
 
WHEREAS, MPC desires to transfer and convey a 2/3rds of 8/8ths undivided interest in its rights in the Oil and Gas Leases and Farmout Agreement (“Subject Interest”) to TEI. Additionally, MPC desires to create an area of mutual interest (“AMI”) with TEI as set forth in the AMI attached hereto as Exhibit “A” ;
 
WHEREAS, TEI is a wholly owned subsidiary of TRCH; and
 
WHEREAS, the Purchaser desire to purchase the oil and gas rights from MPC.
 
NOW, THEREFORE , in consideration of the premises, the mutual covenants and agreements and the respective representations and warranties herein contained, and on the terms and subject to the conditions herein set forth, the parties hereto, intending to be legally bound, hereby agree as follows:
 
ARTICLE I
PURCHASE AND SALE OF THE OIL AND GAS LEASES
 
Section 1.1       Sale of the Oil and Gas Leases . Subject to the terms and conditions set forth in this Agreement, MPC hereby sells, transfers, conveys and delivers to TEI the Subject Interest. The Oil and Gas Leases represent a 75% net revenue interest and are subject to a 25% royalty interest. In the event that the Oil and Gas Leases cover less than a 75% net revenue interest, Purchaser’s interest in the Oil and Gas Leases shall be proportionately reduced and MPC shall return to TEI or TRCH the same proportion of the warrants received through this Agreement. The Oil and Gas Leases will be subject to a retention by the MPC of a 25% Back-In After Payout to the 8/8ths interest as defined below. The Farmout Agreement from Oxy attached as Exhibit “B” provides for a 5% Project Back-In After Payout on the Farmout Agreement acreage only; it does not provide for a Back-In on any other acreage within the AMI. In the event the OXY back-in occurs before MPC Back-In event, then Purchaser will be proportionately reduced by the 5% working interest given to OXY. The reduced income will be accounted for in the project payout accounting for MPC back-in. Once MPC back-in occurs, the 5% OXY back-in will be deducted from the 25% MPC back-in, leaving MPC with 20% of the Farmout acreage and 25% of any additional acreage within the AMI. In the event the OXY back-in occurs after MPC Back-In, the OXY back-in will immediately be deducted from the 25% owned by MPC as described above.
 
Purchase Agreement - Page 1
 
 
Section 1.2        Purchase Price . As consideration for the purchase of the Oil and Gas Leases, TEI shall pay to MPC a total aggregate consideration in the form of a five-year warrant (the “Warrant” ) to purchase 1,500,000 shares of common stock, par value $.001 per share, of Torchlight Energy Resources, Inc. at a purchase price of $1.00 per share (the “Warrant Shares” ). The Warrant provides that in the event an initial well is not drilled on the Oil and Gas Leases on or before July 10, 2016, that (i) if as of July 10, 2016 MPC has exercised no portion of the Warrant, the number of Warrant Shares that MPC will be able to acquire will be reduced to 500,000, (ii) if as of July 10, 2016 MPC has exercised a portion of the Warrant in an amount less than 500,000 Warrant Shares, the number of Warrant Shares that MPC will be able to acquire will be reduced to the difference between 500,000 and the number of Warrant Shares for which the Warrant has already been exercised, and (iii) if as of July 10, 2016 MPC has exercised a portion of the Warrant in an amount more than 500,000 Warrant Shares, the number of Warrant Shares that MPC will be able to acquire will be reduced to zero.
 
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF MPC
 
MPC hereby represents and warrants to Purchaser and TRCH as follows:
 
Section 2.1        Organization.   MPC is a Texas corporation, duly organized and validly existing and in good standing under the laws of the state of Texas.
 
Section 2.2       Authorization . All action on the part of MPC necessary for the authorization, execution, delivery and performance of this Agreement and all documents related to consummate the transactions contemplated herein have been taken by MPC. MPC has the requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement, when duly executed and delivered in accordance with its terms, will constitute a valid and binding obligation of MPC, enforceable against it in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, and other similar laws of general application relating to or affecting creditors’ rights and to general equitable principles.
 
Section 2.3       Ownership . MPC represents and warrants to Purchaser that (a) it owns all of the Subject Interest in the Oil and Gas Leases free and clear of any liens, claims, equities, charges, options, rights of first refusal, or encumbrances; (b) it has not assigned any of the Subject Interest in the Oil and Gas Leases to any third party, nor is any such assignment pending; (c) it has the unrestricted right and power to transfer, convey and deliver full ownership of the Subject Interest in the Oil and Gas Leases without the consent or agreement of any other person and without any designation, declaration or filing with any governmental authority; and (d) upon the transfer of the Subject Interest in the Oil and Gas Leases to Purchaser as contemplated herein, Purchaser will receive good and valid title thereto to such Subject Interest, free and clear of any liens, claims, equities, charges, options, rights of first refusal, encumbrances or other restrictions.
 
Section 2.4         No Transfer . MPC has not transferred, sold, assigned conveyed, encumbered, pledged or hypothecated any rights, title or interest in or to the Subject Interest in the Oil and Gas Leases.
 

Purchase Agreement - Page 2
 
 
Section 2.5          Validity of Leases . The leases included in the Oil and Gas Leases are valid, in effect, and have not lapsed or reverted to the lessor(s).
Section 2.6         Pending Claims . There is no claim, suit, arbitration, investigation, action, litigation or other proceeding, whether judicial, administrative or otherwise, now pending or, to the MPC’s knowledge, contemplated or threatened against MPC or the Subject Interest in the Oil and Gas Leases before any court, arbitration, administrative or regulatory body or any governmental agency which may result in any judgment, order, award, decree, liability or other determination which will or could reasonably be expected to have any material effect upon the Oil and Gas Leases. No litigation is pending, or, to MPC’s knowledge, threatened against MPC or the Subject Interest in the Oil and Gas Leases which seeks to restrain or enjoin the execution and delivery of this Agreement or any of the documents referred to herein or the consummation of any of the transactions contemplated thereby or hereby.
Section 2.7         Access to Information . MPC hereby confirms and represents that it (a) has access to and has reviewed all current information about the TEI filed with the Securities and Exchange Commission (the “ SEC ”) (which filings can be accessed by going to www.sec.gov/edgar/searchedgar/companysearch.html, typing “Torchlight Energy Resources” in the “Company name” field, and clicking the “Search” button) (collectively, the “ SEC Reports ”); (b) has been afforded the opportunity to ask questions of and receive answers from representatives of TEI concerning the business and financial condition, properties, operations and prospects of the TEI and all such questions have been answered to the full satisfaction of MPC; (c) has such knowledge and experience in financial and business matters so as to be capable of evaluating the relative merits and risks of the transactions contemplated hereby; (d) has had an opportunity to engage and is represented by an attorney of his choice; (e) has had an opportunity to negotiate the terms and conditions of this Agreement; (f) has been given adequate time to evaluate the merits and risks of the transactions contemplated hereby; and (g) has been provided with and given an opportunity to review all current information about TEI.
 
Section 2.8       Purchase for Investment – Accredited Investor . MPC is acquiring the Warrant for its own account, for investment purposes only and not with view to any public resale or other distribution thereof. MPC represents and warrants that it is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D of the Act.
 
Section 2.9        Acquisition of Warrant for Investment . MPC understands that the issuance of the Warrant (as referenced in Section 1.2 herein) will not have been registered under the Securities Act of 1933, as amended (the “ Act ”), or any state securities acts, and accordingly, are restricted securities, and MPC represents and warrants to TEI that the present intention of MPC is to receive and hold the Warrant for investment only and not with a view to the distribution or resale thereof. Additionally, MPC understands that any sale of the Warrant or any of the Warrant Shares underlying the Warrant, under current law, will require either (a) the registration of such security under the Act and applicable state securities acts; (b) compliance with Rule 144 of the Act; or (c) the availability of an exemption from the registration requirements of the Act and applicable state securities acts.
 
To assist in implementing the above provisions, MPC hereby consents to the placement of the legend, or a substantially similar legend, set forth below, on all certificates representing ownership of the Warrant or any Warrant Shares underlying the Warrant acquired hereby until the securities have been sold, transferred, or otherwise disposed of, pursuant to the requirements hereof. The legend shall read substantially as follows:
 
Purchase Agreement - Page 3
 
 
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES ACTS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT, ARE RESTRICTED AS TO TRANSFERABILITY, AND MAY NOT BE SOLD, HYPOTHECATED, OR OTHERWISE TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION AND QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.”

Section 2.10       Farmout Agreement. The Farmout Agreement is valid and in existence.
 
Section 2.11       Breach of Representation or Warranty . If any of these representation and warranties are found to be false or if MPC breaches this Agreement, MPC’s total liability for such false representations or warranties or breach shall be capped at the total compensation received under this Agreement (the 1.5MM warrants, any proceeds received therefrom, and any cash consideration received by MPC).
 
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF TEI AND TRCH
 
TEI and TRCH hereby represent and warrant to MPC as follows:
 
Section 3.1       Organization. (a) TEI is a corporation duly organized, validly existing and in good standing under the laws of the state of Nevada, and (b) TRCH is a corporation duly organized, validly existing and in good standing under the laws of the state of Nevada.
 
Section 3.2       Authorization . All action on the part of TEI and TRCH necessary for the authorization, execution, delivery and performance of this Agreement and all documents related to consummate the transactions contemplated herein has been taken by TEI and TRCH. TEI has the requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement, when duly executed and delivered in accordance with its terms, will constitute a valid and binding obligation of TEI and TRCH, enforceable against TEI and TRCH in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, and other similar laws of general application relating to or affecting creditors’ rights and to general equitable principles.
 
Section 3.3        Pending Claims. No litigation is pending, or, to TEI’s or TRCH’s knowledge, threatened against the TEI or TRCH which seeks to restrain or enjoin the execution and delivery of this Agreement or any of the documents referred to herein or the consummation of any of the transactions contemplated thereby or hereby.
 
Purchase Agreement - Page 4
 
 
ARTICLE IV
COVENANTS OF MPC AND PURCHASERS
 
Section 4.1       Participation Agreement . The Parties hereto will enter into a Participation and Development Agreement (the “Participation Agreement” ), which will provide, among other terms and conditions customary for oil and gas transactions, that MPC will have a 25% Back-In After Payout ( “BIAPO” ). The Participation Agreement will also provide: that the Purchaser will pay its proportion of the $25,000 fee to the prior lessor of the Oil and Gas Leases to spud each well and its proportionate share of approximately $75,000 for geological and land man costs; that the Purchaser will spud the first vertical development well by July 10, 2016; that there will be a 180 day continuous development clause from spud to spud of each well throughout the life of the Agreement; that drilling vertical pilot wells are required on the first two wells provided they are completed with sufficient casing size; that the third well must be horizontal, however this first horizontal well shall not be proposed until at least one year from the effective date of the Agreement; and that the Purchaser shall run a full suite of logs and core data as required on all wells drilled on the acreage. The Participation Agreement will further provide that all drilled, completed and producing wells will hold the acreage according to acceptable field rules established by the Texas Railroad Commission. Once acreage is held by production, it will fall outside the continuous development agreement and will not be subject to surrender. BIAPO hall be defined as the point in time when the proceeds of all production from all operations conducted on all acreage within the AMI (attached hereto as Exhibit “A”) (exclusive of royalty, overriding royalty and taxes chargeable to the working interest) equals the actual cost incurred by the Operator in drilling, testing, equipping and the cost of operating the well(s), inclusive of overhead charges as defined in the “COPAS” attached to the Joint Operating Agreement, any additional acreage acquisition, seismic costs, spud fees, land costs, and further including the cost of the Warrant Shares as accounted for by TRCH utilizing the Black Sholes method of accounting and including the geologic and land man costs of $75,000. No sales proceeds of working interests shall ever be included in or characterized as revenues attributable to ownership of the oil and gas leases for purposes of calculating BIAPO under the Participation Agreement. For the first three wells drilled on the lands subject to the Oil and Gas Leases or on AMI lands, if any Party of this Agreement, the Participation Agreement or Joint Operating Agreement does not pay their proportionate drilling or completion costs for any operations authorized under the Joint Operating Agreement, then such Party shall forfeit all of its leasehold interest in the Oil and Gas Leases and any leases obtained on AMI lands that have not been already earned through drilling and completion operations. After the first three wells, any Party that elects not to consent to any authorized operations under the Joint Operating Agreement shall be penalized by 500% of the costs of all authorized operations for that well and any wells drilled on any tract that is directly adjacent to the tract where the well was drilled and such party went non-consent. If upon reasonable efforts and/or no later than 30 days after the effective date of this Agreement, the Participation Agreement has not been executed by MPC and Purchaser and any other necessary party, then this Agreement shall be terminated, MPC shall return all warrants to TEI or TRCH and MPC, TEI and TRCH shall have no liability to each other under this Agreement (except for and unless there is a breach under another provision of this Agreement).
 
Section 4.2       Joint Operating Agreement . Purchaser and MPC will enter into a Joint Operating Agreement which will provide that the Purchaser will be the operator of the acreage and will contain such terms and conditions as are customary for oil and gas transactions. Such Joint Operating Agreement shall be entered into contemporaneously with the Participation and Development Agreement.
 
Purchase Agreement - Page 5
 
 
Section 4.3        Geologic Data . Purchaser agrees to furnish to MPC all geologic, seismic and engineering data related to the Oil and Gas Leases.
 
Section 4.4       Mid-stream Activities . Any activity on the Oil and Gas Leases and/or the AMI related to mid-stream or associated economic activities will be subject to the terms of an agreement between the Purchaser and MPC.
 
Section 4.5      Farmout Agreement. This Agreement is expressly subject to the Farmout Agreement. If there is any conflict between the terms of this Agreement and the Farmout Agreement, the Farmout Agreement shall control. (See attached Exhibit B)
 
ARTICLE V
MISCELLANEOUS
 
Section 5.1      Amendment; Waiver . Neither this Agreement nor any provision hereof may be amended, modified or supplemented unless in writing, executed by all the parties hereto. Except as otherwise expressly provided herein, no waiver with respect to this Agreement shall be enforceable unless in writing and signed by the party against whom enforcement is sought. Except as otherwise expressly provided herein, no failure to exercise, delay in exercising, or single or partial exercise of any right, power or remedy by any party, and no course of dealing between or among any of the parties, shall constitute a waiver of, or shall preclude any other or further exercise of, any right, power or remedy.
 
Section 5.2        Notices . Any notices or other communications required or permitted hereunder shall be sufficiently given if in writing and delivered in Person or sent by registered or certified mail (return receipt requested) or nationally recognized overnight delivery service, postage pre-paid, addressed as follows, or to such other address has such party may notify to the other parties in writing:
 
(a)
If to the MPC:
McCabe Petroleum Corporation
 
 
Attn: Greg McCabe
 
 
500 W. Texas, Suite 1110
 
 
Midland, Texas 79702
 
 
 
(b)
If to the TEI
Torchlight Energy Resources, Inc.
 
or TRCH:  
Torchlight Energy, Inc.
 
 
Attn: John Brda, CEO
 
 
5700 W. Plano Parkway, Suite 3600
 
 
Plano, Texas 75093
 
A notice or communication will be effective (i) if delivered in Person or by overnight courier, on the business day it is delivered and (ii) if sent by registered or certified mail, three (3) business days after dispatch.
 
Purchase Agreement - Page 6
 
 
Section 5.3          Severability . Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.
 
Section 5.4          Assignment; Successors and Assigns . Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and permitted assigns of the parties hereto. No party hereto may assign its rights or delegate its obligations under this Agreement without the prior written consent of the other parties hereto, which consent will not be unreasonably withheld.
 
Section 5.5          Entire Agreement . This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subject matter hereof and thereof and supersede and cancel all prior representations, alleged warranties, statements, negotiations, undertakings, letters, acceptances, understandings, contracts and communications, whether verbal or written among the parties hereto and thereto or their respective agents with respect to or in connection with the subject matter hereof.
 
Section 5.6           Choice of Law . This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas.
 
Section 5.7          Execution . This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.
 
Section 5.8           Costs and Expenses . Each party shall pay their own respective fees, costs and disbursements incurred in connection with this Agreement.
 
Section 5.9          No Third-Party Beneficiaries . Nothing in this Agreement will confer any third party beneficiary or other rights upon any person (specifically including any employees of The Company) or any entity that is not a party to this Agreement.
 
Section 5.10         Further Assurances . Each party covenants that at any time, and from time to time, after the Closing Date, it will execute such additional instruments and take such actions as may be reasonably be requested by the other parties to confirm or perfect or otherwise to carry out the intent and purposes of this Agreement.
 
Purchase Agreement - Page 7
 
 
Section 5.11         Exhibits Not Attached . Any exhibits not attached hereto on the date of execution of this Agreement shall be deemed to be and shall become a part of this Agreement as if executed on the date hereof upon each of the parties initialing and dating each such exhibit, upon their respective acceptance of its terms, conditions and/or form.
 
Section 5.12         Attorney Review - Construction . In connection with the negotiation and drafting of this Agreement, the parties represent and warrant to each other that they have had the opportunity to be advised by attorneys of their own choice and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments hereto.
 
IN WITNESS WHEREOF, the undersigned have executed this Purchase Agreement to become effective as of the date first set forth above.
 
 
 
TORCHLIGHT ENERGY RESOURCES, INC.
 
 
 
 
 
 
By:  
/s/ John Brda
 
 
 
John Brda, CEO
 
 
 
 
TORCHLIGHT ENERGY, INC.
 
 
 
 
 
 
By:  
/s/ John Brda
 
 
 
John Brda, CEO
 
 
 
 
MCCABE PETROLEUM CORPORATION
 
 
 
 
 
 
By:  
/s/ Greg McCabe
 
 
 
Greg McCabe, President
 

 
 
 
 
 
 
Purchase Agreement - Page 8
 
Exhibit A
 
 
 
Torchlight Energy Resources, Inc.
5700 Plano Parkway, Suite 3600
Plano, Texas 75093
Telephone: (214) 432-8002
 
July 7, 2016
 
McCabe Petroleum Corporation
Attn: Greg McCabe
500 W. Texas, Suite 1110
Midland, Texas 79702
 
RE: Purchase Agreement dated April, 2016
 
Dear Mr. McCabe:
 
On or about April 4, 2016, McCabe Petroleum Corporation (“MPC”), Torchlight Energy Resources, Inc. (“TERI”) and Torchlight Energy, Inc. (“TEI”) entered into a Purchase Agreement whereby MPC conveyed an interest to TEI of a certain leasehold estate located in Sterling, Tom Green and Irion Counties, Texas (the “Purchase Agreement”). It has come to our attention, that section 1.2 of the Purchase Agreement incorrectly references July 10, 2016 for purpose of that section. The intent of the parties to the Purchase Agreement was that the date referenced in that section was to correspond with the underlying lease and Farmout Agreement, and accordingly should be July 11, 2016. Accordingly, MPC, TERI and TEI hereby mutually agree that reference to July 10, 2016 in section 1.2 of the Purchase Agreement is hereby amended and replaced with July 11, 2016. All terms and conditions of the Purchase Agreement shall, except as herein modified, remain in full force and effect.
 
If the foregoing accurately sets forth our agreement and understanding regarding the matters set forth therein, please so indicate by signing this letter on behalf of MPC and returning one copy.
 
 
 
TORCHLIGHT ENERGY RESOURCES, INC.
 
 
 
 
 
 
By:  
/s/ John Brda
 
 
 
John Brda, President and CEO
 
 
 
 
TORCHLIGHT ENERGY, INC.
 
 
 
 
 
 
By:  
/s/  John Brda
 
 
 
John Brda, President
 

 
AGREED TO AND ACCEPTED ON
July 7, 2016.
 
 
MCCABE PETROLEUM CORPORATION
 
 
 
 
 
 
By:  
/s/  Greg McCabe
 
 
 
Name 
 
 
 
Greg McCabe, President
 

 
 
 
 
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 quarter ended June 30, 2016;
 
2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d- 15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
     a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material  information relating to the small  business issuer, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
     c) Evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
     d)  Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over the financial reporting; and
 
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
/s/ John A. Brda
 
By: John A. Brda
Chief Executive Officer
(Principal Executive Officer)
Date: August 15, 2016
 
 
 
 
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 quarter ended June 30, 2016;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d- 15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
     a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material  information relating to the small  business issuer, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
     c) Evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
     d)  Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over the financial reporting; and
 
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
/s/ Roger Wurtele
 
By: Roger Wurtele,
Chief Financial Officer
(Principal Financial Officer)
Date: August 15, 2016
 
 
 
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 quarter ended June 30, 2016, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such 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: August 15, 2016
 
 
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 quarter ended June 30, 2016, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such 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: Augut 15, 2016
 
 
 
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.