As filed with the Securities and Exchange Commission on September
6, 2019
Registration No. __________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Torchlight Energy Resources, Inc.
(Exact
Name of Registrant as Specified in its Charter)
Nevada
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1311
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74-3237581
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(State or Other Jurisdiction of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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5700 W. Plano Parkway, Suite 3600
Plano, Texas 75093
(214) 432-8002
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of
Registrant’s Principal Executive Offices)
John A. Brda
Chief Executive Officer
5700 W. Plano Parkway, Suite 3600
Plano, Texas 75093
(214) 432-8002
(Name,
Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
Copies to:
Robert D. Axelrod
Axelrod & Smith
5300 Memorial Drive, Suite 1000
Houston, Texas 77007
(713) 861-1996
Approximate Date of Commencement of Proposed Sale to the Public:
From time to time after the effective date of this registration
statement.
If the
only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check
the following box: ☐
If any
of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check the
following box: ☒
If this
Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering.
☐
If this
Form is a registration statement pursuant to General Instruction
I.D. or a post-effective amendment thereto that shall become
effective upon filing with the Commission pursuant to Rule 462(e)
under the Securities Act, check the following box.
☐
If this
Form is a post-effective amendment to a registration statement
filed pursuant to General Instruction I.D. filed to register
additional securities or additional classes of securities pursuant
to Rule 413(b) under the Securities Act, check the following box.
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ☐
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Accelerated
filer ☒
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Non-accelerated
filer ☐
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Smaller
reporting company ☒
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Emerging
growth company ☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of Securities Act.
☐
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered
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Amount to be registered (1)
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Proposed maximum offering price per Share
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Proposed maximum aggregate offering price
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Amount of registration fee (2)
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Common stock, $.001 par value
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1,353,500
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$
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1.065
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(4)
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$
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1,441,478
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$
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174.71
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Common stock, $.001 par value, upon conversion of convertible
promissory notes
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1,827,273
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(3)
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$
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1.065
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(4)
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$
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1,946,046
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$
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235.86
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Common stock, $.001 par value, upon exercise of
warrants
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365,455
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(3)
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$
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1.065
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(4)
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$
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389,210
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$
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47.17
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Total:
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3,546,228
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1.065
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$
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3,776,732
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$
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457.74
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(1)
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In accordance with Rule 416 under the Securities Act of 1933, as
amended (the “Securities Act”), this registration
statement also covers any additional shares of common stock which
may become issuable by reason of any stock dividends, stock splits,
or similar transactions which results in an increase in the number
of registrant’s outstanding shares of common
stock.
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(2)
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This calculation is made solely for the purposes of determining the
registration fee pursuant to the provisions of Rule 457 under the
Securities Act.
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(3)
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Represents the maximum number of shares of common stock that the
registrant expects could be issuable upon conversion of the
convertible promissory notes and/or exercise of the
warrants.
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(4)
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The shares offered will be sold by the selling stockholders in
market transactions, or through negotiated transactions or
otherwise, at market prices prevailing at the time of sale or at
negotiated prices. Accordingly, the price indicated is
based on the average of the high and low prices reported by NASDAQ
for September 4, 2019, in compliance with Rule 457(c) under the
Securities Act.
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The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment
which specifically states that this registration statement
shall become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission acting
pursuant to section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES
UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND THE SELLING STOCKHOLDERS ARE NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
Subject to Completion, Dated September 6, 2019
Prospectus
Torchlight Energy Resources, Inc.
3,546,228 SHARES OF COMMON STOCK
This
prospectus relates to the offering for resale by the selling
stockholders of up to 3,546,228 shares of our common stock, $0.001
par value, which includes:
(i) 1,353,500 shares of common stock (the
“Common Shares”);
(ii)
1,827,273 shares of common stock issuable upon conversion of
certain 8% Unsecured Convertible Promissory Notes at a conversion
price of $1.10 per share (the “Notes”);
and
(iii)
365,455 shares of common stock issuable upon exercise of certain
warrants to purchase common stock at an exercise price of $1.35 per
share (the “Warrants”).
We
sold the 1,353,500 Common Shares to investors in June and July of
2019 in a private offering. We sold the $2,010,000 in total
principal amount in Notes, which included warrant coverage in the
total amount of 365,455 Warrants, to investors in July of 2019 in a
private offering. We are required to file a registration statement
covering the Common Shares and the shares of common stock
underlying the Notes and Warrants, pursuant to the subscription
agreements we entered into with the respective
investors.
For a
list of the selling stockholders, please see “Selling
Stockholders” section herein. We are not selling
any shares of our common stock in this offering and therefore will
not receive any proceeds from the sale thereof. We will, however, receive proceeds from any
Warrants exercised, which are exercisable for
cash. We will bear all expenses, other than
selling commissions and fees of the selling stockholders, in
connection with the registration and sale of the shares being
offered by this prospectus.
These
shares may be sold by the selling stockholders from time to time in
the over-the-counter market or other national securities exchange
or automated interdealer quotation system on which our common stock
is then listed or quoted, through negotiated transactions or
otherwise at market prices prevailing at the time of sale or at
negotiated prices.
Our
common stock is listed on the NASDAQ Capital Market under the
symbol “TRCH.” On September 5, 2019, the last
reported sales price of our common stock was $1.11 per
share.
Investing in any of our securities involves risk. Please see the
“Risk Factors” sections beginning on page
11 for a discussion
of certain risks that you should consider in connection with an
investment in the securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this prospectus is _________ __, 2019.
TABLE OF CONTENTS
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Page
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ABOUT
THIS PROSPECTUS
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4
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WHERE
YOU CAN FIND ADDITIONAL INFORMATION
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4
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INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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5
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THE
COMPANY
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5
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RISK
FACTORS
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11
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USE OF
PROCEEDS
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21
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DETERMINATION
OF OFFERING PRICE
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21
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SELLING
STOCKHOLDERS
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21
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PLAN OF
DISTRIBUTION
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22
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DESCRIPTION
OF SECURITIES TO BE REGISTERED
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24
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EXPERTS
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25
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LEGAL
MATTERS
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25
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COMMISSION
POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
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25
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ABOUT THIS PROSPECTUS
In this
prospectus, unless the context otherwise requires,
“Torchlight,” “Torchlight Energy,” the
“Company,” “we,” “us” and
“our” refer to Torchlight Energy Resources, Inc., a
Nevada corporation, and its subsidiaries.
You
should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to
provide you with different information. The shares of common stock
are not being offered in any state where the offer is not
permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the
front of this prospectus, and you should assume that any
information incorporated by reference is accurate only as of the
date of the document incorporated by reference, regardless of the
time of delivery of this prospectus or of any sale of the common
stock.
As
permitted under the rules of the Securities and Exchange Commission
(the “SEC”), this prospectus incorporates important
business information about us that is contained in documents that
we file with the SEC but that are not included in or delivered with
this prospectus. You may obtain copies of these documents, without
charge, from the website maintained by the SEC at www.sec.gov, as
well as from us. See “Where You Can Find Additional
Information” and “Incorporation of Certain Information
by Reference” in this prospectus.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file
annual, quarterly and current reports, proxy statements and other
documents with the SEC electronically. The SEC maintains an
Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC. You can access the electronic versions
of these filings on the SEC’s website found
at www.sec.gov.
We have
filed with the SEC a registration statement on Form S-3 relating to
the securities covered by this prospectus. This prospectus is a
part of the registration statement and does not contain all the
information in the registration statement. Whenever a reference is
made in this prospectus to a contract, agreement or other document,
the reference is only a summary and you should refer to the
exhibits that are filed with, or incorporated by reference into,
the registration statement for a copy of the contract, agreement or
other document. You may review a copy of the registration statement
at the SEC’s website.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The
rules of the SEC allow us to “incorporate by reference”
into this prospectus the information we file with the SEC, which
means that we can disclose important information to you by
referring you to that information. The information incorporated by
reference is considered to be part of this prospectus, and later
information that we file with the SEC will automatically update and
supersede that information. We incorporate by reference the
documents listed below:
●
Our Annual Report
on Form 10-K for the fiscal year ended December 31, 2018, filed
with the SEC on March 18, 2019;
●
Our Quarterly
Reports on Form 10-Q filed for the quarter ended March 31, 2019,
filed with the SEC on May 10, 2019, and the quarter ended June 30,
2019, as filed with the SEC on August 9, 2019;
●
Our Current Reports
on Form 8-K, as filed with the SEC on February 8, 2019 and February
26, 2019; and
●
The description of
our common stock, par value $0.001 per share, contained in our
registration statement on Form 8-A (Registration Statement No.
001-36247) filed with the SEC on December 13, 2013, including any
amendment or report filed for the purpose of updating such
description.
All
documents filed by us pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act (excluding any information furnished
pursuant to Item 2.02 or Item 7.01, or any corresponding
information furnished under Item 9.01, on any Current Report on
Form 8-K) after the date of the initial registration statement and
prior to the effectiveness of the registration statement and after
the date of this prospectus and prior to the termination of each
offering under this prospectus shall be deemed to be incorporated
in this prospectus by reference and to be a part hereof from the
date of filing of such documents.
Any
statement contained in a document incorporated, or deemed to be
incorporated, by reference in this prospectus shall be deemed
modified, superseded, or replaced for purposes of this prospectus
to the extent that a statement contained in this prospectus or in
any subsequently filed document that also is, or is deemed to be
incorporated, by reference in this prospectus modifies, supersedes,
or replaces such statement. Any statement so modified, superseded,
or replaced shall not be deemed, except as so modified, superseded,
or replaced, to constitute a part of this prospectus.
We will
provide without charge to each person, including any beneficial
owner, to whom a copy of this prospectus is delivered, upon that
person’s written or oral request, a copy of any or all of the
information incorporated by reference in this prospectus (other
than exhibits to those documents, unless the exhibits are
specifically incorporated by reference into those documents).
Requests should be directed to:
John A.
Brda, Chief Executive Officer
Torchlight
Energy Resources, Inc.
5700 W.
Plano Parkway, Suite 3600
Plano,
Texas 75093
Telephone:
(214) 432-8002
Email:
john@torchlightenergy.com
You
also may access these filings on our website at www.torchlightenergy.com. We do not
incorporate the information on our website into this prospectus or
any supplement to this prospectus and you should not consider any
information on, or that can be accessed through, our website as
part of this prospectus or any supplement to this prospectus (other
than those filings with the SEC that we specifically incorporate by
reference into this prospectus or any supplement to this
prospectus).
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus, including information included or incorporated by
reference in this prospectus or any supplement to this prospectus,
may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, but are not limited to,
statements about our plans, objectives, expectations and intentions
that are not historical facts, and other statements identified by
words such as “may,” “will,”
“expects,” believes,” “plans,”
“estimates,” “potential,” or
“continue,” or the negative thereof or other and
similar expressions are forward-looking statements. In addition, in
some cases, you can identify forward-looking statements by words of
phrases such as “trend,” “potential,”
“opportunity,” “believe,”
“comfortable,” “expect,”
“anticipate,” “current,”
“intention,” “estimate,”
“position,” “assume,”
“outlook,” “continue,”
“remain,” “maintain,”
“sustain,” “seek,” “achieve,”
and similar expressions. These forward looking statements are based
on current beliefs and expectations of management and are
inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are
beyond our control. In addition, these forward-looking statements
are subject to assumptions with respect to future business
strategies and decisions that are subject to change. In addition to
the factors set forth in this prospectus and the documents
incorporated by reference in this prospectus, including under the
section entitled “Risk Factors” in this prospectus and
in our Annual Report on Form 10-K, as amended, for the year ended
December 31, 2018 and in any other reports that we file with
the SEC, the following factors, among others, could cause actual
results to differ materially from the anticipated results: demand
for oil and natural gas; our ability to raise or access capital;
general economic or industry conditions, nationally and/or in the
communities in which our company conducts business; changes in the
interest rate environment; legislation or regulatory requirements;
conditions of the securities markets; changes in accounting
principles, policies or guidelines; financial or political
instability; acts of war or terrorism; and other economic,
competitive, governmental, regulatory and technical factors
affecting our operations, products and prices.
All
forward-looking statements speak only as of the date of this
prospectus or, in the case of any documents incorporated by
reference in this prospectus, the date of such document, in each
case based on information available to us as of such date, and we
assume no obligation to update any forward-looking statements,
except as required by law.
THE COMPANY
Overview
We are an energy company engaged in the acquisition, exploration,
exploitation and/or development of oil and natural gas properties
in the United States. We are primarily focused on the acquisition
of early stage projects, the development and delineation of these
projects, and then the monetization of those assets once these
activities are completed.
Since 2010, our primary focus has been the development of interests
in oil and gas projects we hold in the Permian Basin in West Texas,
which presently include the Orogrande Project in Hudspeth County,
Texas, the Hazel Project in the Midland Basin and the project in
Winkler County, Texas in the Delaware Basin.
We employ a private equity model within a public platform, with the
goal to (i) enter into a play at favorable valuations, (ii)
“prove up” and delineate the play through committed
capital and exhaustive geologic and engineering review, and (iii)
monetize our position through an exit to public and private
independents that can continue full-scale development.
We operate our business through five wholly-owned subsidiaries,
Torchlight Energy, Inc., a Nevada corporation (“TEI”),
Torchlight Energy Operating, LLC, a Texas limited liability
company, Hudspeth Oil Corporation, a Texas corporation
(“Hudspeth”), Torchlight Hazel, LLC, a Texas limited
liability company, and Warwink Properties, LLC, a Texas limited
liability company.
We currently have two full time employees and no part time
employees. We anticipate, as needed, we will add additional
employees, and we will continue using independent contractors,
consultants, attorneys, and accountants as necessary to complement
services rendered by our employees. We presently have independent
technical professionals under consulting agreements who are
available to us on an as needed basis.
We were incorporated in October 2007 under the laws of the State of
Nevada as Pole Perfect Studios, Inc. Our principal executive
offices are located at 5700 W. Plano Parkway, Suite 3600, Plano,
Texas 75093. The telephone number of our principal executive
offices is (214) 432-8002.
Current Projects
As of
June 30, 2019, we had interests in four oil and gas projects: the
Orogrande Project in Hudspeth County, Texas, the Hazel Project in
Sterling, Tom Green, and Irion Counties, Texas, the Warwink Project
in Winkler County, Texas and the Hunton wells in partnership with
Husky Ventures in central Oklahoma.
Orogrande Project, West Texas
On
August 7, 2014, we entered into a Purchase Agreement with Hudspeth
Oil Corporation (“Hudspeth”), McCabe Petroleum
Corporation (“MPC”), and Gregory McCabe, our Chairman.
Mr. McCabe was the sole owner of both Hudspeth and MPC. Under the
terms and conditions of the Purchase Agreement, at closing, we
purchased 100% of the capital stock of Hudspeth which holds certain
oil and gas assets, including a 100% working interest in
approximately 172,000 mostly contiguous acres in the Orogrande
Basin in West Texas. As of December 31, 2017, leases covering
approximately 134,000 acres remain in effect. As consideration, at
closing we issued 868,750 restricted shares of our common stock to
Mr. McCabe and paid a total of $100,000 in geologic origination
fees to third parties. Additionally, Mr. McCabe has, at his option,
a 10% working interest back-in after payout and a reversionary
interest if drilling obligations are not met, all under the terms
and conditions of a participation and development agreement among
Hudspeth, MPC and Mr. McCabe. Mr.
McCabe also holds a 4.5% overriding royalty interest in the
Orogrande acreage, which he obtained prior to, and was not a part
of, the August 2014 transaction. We believe all drilling
obligations through June 30, 2019 have been met.
On
September 23, 2015, Hudspeth entered into a Farmout Agreement with
Pandora Energy, LP (“Pandora”), Founders Oil & Gas,
LLC (“Founders”), and for the limited purposes set
forth therein, MPC and Mr. McCabe, for the entire Orogrande Project
in Hudspeth County, Texas. The Farmout Agreement provided that
Hudspeth and Pandora (collectively referred to as
“Farmor”) would assign to Founders an undivided 50% of
the leasehold interest and a 37.5% net revenue interest in the oil
and gas leases and mineral interests in the Orogrande Project,
which interests, except for any interests retained by Founders,
would be reassigned to Farmor by Founders if Founders did not spend
a minimum of $45.0 million on actual drilling operations on the
Orogrande Project by September 23, 2017. Under a joint operating
agreement also entered into on September 23, 2015, Founders was
designated as operator of the leases.
On
March 22, 2017, Founders, Founders Oil & Gas Operating, LLC,
Founders’ operating partner, Hudspeth and Pandora signed a
Drilling and Development Unit Agreement (the “DDU
Agreement”), with the Commissioner of the General Land
Office, on behalf of the State of Texas, and as approved by the
Board for Lease of University Lands, or University Lands, on the
Orogrande Project. The DDU Agreement has an effective date of
January 1, 2017 and required a payment from Founders, Hudspeth and
Pandora, collectively, of $335,323 as the initial consideration
fee. The initial consideration fee was paid by Founders in April
2017 and was to be deducted from the required spud fee payable to
us at commencement of the next well drilled.
The DDU
Agreement allows for all 192 existing leases covering approximately
134,000 net acres leased from University Lands to be combined into
one drilling and development unit for development purposes. The
term of the DDU Agreement expires on December 31, 2023, and the
time to drill on the drilling and development unit continues
through December 2023. The DDU Agreement also grants the right to
extend the DDU Agreement through December 2028 if compliance with
the DDU Agreement is met and the extension fee associated with the
additional time is paid. Our drilling obligations began with one
well to be spudded and drilled on or before September 1, 2017, and
increased to two wells in year 2018, three wells in year 2019, four
wells in year 2020 and five wells per year in years 2021, 2022 and
2023. The drilling obligations are minimum yearly requirements and
may be exceeded if acceleration is desired. The DDU Agreement
replaces all prior agreements, and will govern future drilling
obligations on the drilling and development unit if the DDU
Agreement is extended. The Company drilled three wells during
fourth quarter, 2018.
There
are two vertical tests wells in the Orogrande Project, the
Orogrande Rich A-11 test well and the University Founders B-19 #1
test well. The Orogrande Rich A-11 test well was spudded on March
31, 2015, drilled in the second quarter of 2015 and was evaluated
and numerous scientific tests were performed to provide key data
for the field development thesis. We believe that future utility of
this well may be conversion to a salt water disposal well in the
course of further development of the Orogrande acreage. The
University Founders B-19 #1 was spudded on April 24, 2016 and
drilled in the second quarter of 2016. The well successfully pumped
down completion fluid in the third quarter of 2016 and indications
of hydrocarbons were seen at the surface on this second Orogrande
Project test well. We believe that future utility of this well may
be conversion to a salt water disposal well in the course of
further development of the Orogrande acreage.
During
the fourth quarter of 2017, we took back operational control from
Founders on the Orogrande Project. We were joined by Wolfbone
Investments, LLC, (“Wolfbone”), a company owned by Mr.
McCabe. We, along with Hudspeth, Wolfbone and, for the limited
purposes set forth therein, Pandora, entered into an Assignment of
Farmout Agreement with Founders, (the “Assignment of Farmout
Agreement”), pursuant to which we and Wolfbone will share the
remaining commitments under the Farmout Agreement. All original
provisions of our carried interest were to remain in place
including reimbursement to us on each wellbore. Founders was to
remain a 9.5% working interest owner in the Orogrande Project for
the $9.5 million it had spent as of the date of the Assignment of
Farmout Agreement, and such interests were to be carried until
$40.5 million is spent by Wolfbone and us, with each contributing
50% of such capital spend, under the existing agreement. Our
working interest in the Orogrande Project thereby increased by
20.25% to a total of 67.75% and Wolfbone then owned
20.25%.
Founders was to
operate a newly drilled horizontal well called the University
Founders #A25 (at 5,540’ depth in a 1,000’ lateral)
with supervision from us and our partners. The University Founders
#A25 was spudded on November 28, 2017. During the month of April,
2018, we, MPC and Mr. McCabe were to assume full operational
control including managing drilling plans and timing for all future
wells drilled in the project.
On July
25, 2018, we and Hudspeth entered into a Settlement & Purchase
Agreement (the “Settlement Agreement”) with Founders
(and Founders Oil & Gas Operating, LLC), Wolfbone and MPC,
which agreement provides for Hudspeth and Wolfbone to each
immediately pay $625,000 and for Hudspeth or the Company and
Wolfbone or MPC to each pay another $625,000 on July 20, 2019, as
consideration for Founders assigning all of its working interest in
the oil and gas leases of the Orogrande Project to Hudspeth and
Wolfbone equally. The final payments were made on July 18, 2019.
The assignments to Hudspeth and Wolfbone were made in July when the
first payments were made. Future well capital spending obligations
will require the same 50% contribution from Hudspeth and 50% from
Wolfbone until such time as the $40.5 million to be spent on the
project (as per our Assignment of Farmout Agreement with Founders)
is completed. The Company estimates that there is still
approximately $16 million remaining to be spent on the project
until such time as the capital expenditures revert back to the
percentages of the working interest owners.
After
the assignment by Founders (for which Hudspeth’s total
consideration is $1,250,000), Hudspeth’s working interest
increased to 72.5%.
The
Orogrande Project ownership as of June 30, 2019 is detailed as
follows:
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University
Lands - Mineral Owner
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20.000%
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n/a
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ORRI
- Magdalena Royalties, LLC, an entity
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4.500%
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n/a
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controlled
by Gregory McCabe, Chairman
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ORRI
- Unrelated Party
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0.500%
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n/a
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Hudspeth
Oil Corporation, a subsidiary of Torchlight
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54.375%
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72.500%
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Energy
Resources Inc.
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Wolfbone
Investments LLC, an entity
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18.750%
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25.000%
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controlled
by Gregory McCabe, Chairman
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Unrelated
Party
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1.875%
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2.500%
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100.000%
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100.000%
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Additionally, the
Settlement Agreement provides that the Founders parties will assign
to the Company, Hudspeth, Wolfbone and MPC their claims against
certain vendors for damages, if any, against such vendors for
negligent services or defective equipment. Further, the Settlement
Agreement has a mutual release and waivers among the
parties.
Rich
Masterson, our consulting geologist, is credited with originating
the Orogrande Project in Hudspeth County in the Orogrande Basin.
With Mr. Masterson’s assistance and based on all the science
we have gathered to date, we have identified multiple
unconventional and conventional target pay zones with depths
between 3,000’ and 8,000’ with primary pay, described
as the Penn formation, located at depths of 5,300 to 5,900’.
Based on our geologic analysis to date, this basin has stacked pay
with zones including the Wolfcamp, Penn, Barnett, Woodford, Atoka
and more. These potential zones are prospective for oil and gas
with a GOR of 1100 expected based on our gathered scientific
information and analysis from independent third
parties.
During
the fourth quarter, 2018, the Company drilled three additional test
wells in the Orogrande in order to stay in compliance with
University Lands D&D Unit Agreement, as well as, to test for
potential shallow pay zones and deeper pay zones that may be
present on structural plays. Development of these wells continued
into the six months ended June 30, 2019 to further capture and
document the scientific base in support of demonstrating the
production potential of the property. The Company is currently
marketing the project for an outright sale or farm in partner. This
marketing process has been long and ardous as the overall market is
quite soft. In addition, due to the size and scope of the project,
we are dealing with very large companies that have multitudes of
people reviewing our material, which in itself is extensive. During
the marketing process, the Company and Wolfbone will endeavor to
complete the University Maverick A24 #1 as a potential producer in
the Atoka formation. In addition, should a farm out partner or sale
not occur, the Company and Wolfbone will proceed to drill two
additional wells in the play prior to year-end, in order to fulfill
the obligations under the DDU Agreement.
Hazel Project in the Midland Basin in West Texas
Effective April 4,
2016, TEI acquired from MPC a 66.66% working interest in
approximately 12,000 acres in the Midland Basin in exchange for
1,500,000 warrants to purchase shares of our common stock with an
exercise price of $1.00 for five years and a back-in after payout
of a 25% working interest to MPC.
Initial
development of the first well on the property, the Flying B Ranch
#1, began July 9, 2016 and development continued through September
30, 2016. This well is classified as a test well in the development
pursuit of the Hazel Project. We believe that this wellbore will be
utilized as a salt water disposal well in support of future
development.
In
October 2016, the holders of all of our then-outstanding shares of
Series C Preferred Stock (which were issued in July 2016) elected
to convert into a total 33.33% working interest in our Hazel
Project, reducing our ownership from 66.66% to a 33.33% working
interest. As of December 31, 2018, no shares of our Series C
Preferred Stock were outstanding.
On
December 27, 2016, drilling activities commenced on the second
Hazel Project well, the Flying B Ranch #2. The well is a vertical
test similar to our first Hazel Project well, the Flying B Ranch
#1. Recompletion in an alternative geological formation for this
well was performed during the three months ended September 30,
2017; however, we believe that the results were uneconomic for
continuing production. We believe that this wellbore will be
utilized as a salt water disposal well in support of future
development.
We
commenced planning to drill the Flying B Ranch #3 horizontal well
in the Hazel Project in June 2017 in compliance with the continuous
drilling obligation. The well was spudded on June 10, 2017. The
well was completed and began production in late September 2017. As
of June 30, 2019, the well is shut in due to high lease operating
expenses as a result of lack of three phase electricity to the
property which forced the use of diesel generation equipment to
power the production facilities.
Acquisition of Additional Interests in Hazel Project
On
January 30, 2017, we and our then wholly-owned subsidiary,
Torchlight Acquisition Corporation, a Texas corporation
(“TAC”), entered into and closed an Agreement and Plan
of Reorganization and a Plan of Merger with Line Drive Energy, LLC,
a Texas limited liability company (“Line Drive”), and
Mr. McCabe, under which agreements TAC merged with and into Line
Drive and the separate existence of TAC ceased, with Line Drive
being the surviving entity and becoming our wholly-owned
subsidiary. Line Drive, which was wholly-owned by Mr. McCabe, owned
certain assets and securities, including approximately 40.66% of
12,000 gross acres, 9,600 net acres, in the Hazel Project and
521,739 warrants to purchase shares of our common stock (which
warrants had been assigned by Mr. McCabe to Line Drive). Upon the
closing of the merger, all of the issued and outstanding shares of
common stock of TAC automatically converted into a membership
interest in Line Drive, constituting all of the issued and
outstanding membership interests in Line Drive immediately
following the closing of the merger, the membership interest in
Line Drive held by Mr. McCabe and outstanding immediately prior to
the closing of the merger ceased to exist, and we issued Mr. McCabe
3,301,739 restricted shares of our common stock as consideration
therefor. Immediately after closing, the 521,739 warrants held by
Line Drive were cancelled, which warrants had an exercise price of
$1.40 per share and an expiration date of June 9, 2020. A
Certificate of Merger for the merger transaction was filed with the
Secretary of State of Texas on January 31, 2017. Subsequent to the
closing the name of Line Drive Energy, LLC was changed to
Torchlight Hazel, LLC. We are required to drill one well every six
months to hold the entire 12,000 acre block for eighteen months,
and thereafter two wells every six months starting June 2018.
During the six months ended June 30, 2019 modifications were made
to mineral owner leases as described below.
Also on
January 30, 2017, TEI entered into and closed a Purchase and Sale
Agreement with Wolfbone. Under the agreement, TEI acquired certain
of Wolfbone’s Hazel Project assets, including its interest in
the Flying B Ranch #1 well and the 40 acre unit surrounding the
well, for consideration of $415,000, and additionally, Wolfbone
caused to be cancelled a total of 2,780,000 warrants to purchase
shares of our common stock, including 1,500,000 warrants held by
MPC, and 1,280,000 warrants held by Green Hill Minerals, an entity
owned by Mr. McCabe’s son, which warrant cancellations were
effected through certain Warrant Cancellation Agreements. The
1,500,000 warrants held by MPC that were cancelled had an exercise
price of $1.00 per share and an expiration date of April 4, 2021.
The warrants held by Green Hill Minerals that were cancelled
included 100,000 warrants with an exercise price of $1.73 and an
expiration date of September 30, 2018 and 1,180,000 warrants with
an exercise price of $0.70 and an expiration date of February 15,
2020.
Since
Mr. McCabe held the controlling interest in both Line Drive and
Wolfbone, the transactions were combined for accounting purposes.
The working interest in the Hazel Project was the only asset held
by Line Drive. The warrant cancellation was treated in the
aggregate as an exercise of the warrants with the transfer of the
working interests as the consideration. We recorded the
transactions as an increase in its investment in the Hazel Project
working interests of $3,644,431, which is equal to the exercise
price of the warrants plus the cash paid to Wolfbone.
Upon
the closing of the transactions, our working interest in the Hazel
Project increased by 40.66% to a total ownership of
74%.
Effective June 1,
2017, we acquired an additional 6% working interest from unrelated
working interest owners in exchange for 268,656 shares of common
stock valued at $373,430, increasing our working interest in the
Hazel project to 80%, and an overall net revenue interest of
74-75%.
Mr.
Masterson is credited with originating the Hazel Project in the
Midland Basin. With Mr. Masterson’s assistance, we are
targeting prospects in the Midland Basin that have 150 to 130 feet
of thickness, are likely to require six to eight laterals per
bench, have the potential for 12 to 16 horizontal wells per
section, and 200 long lateral locations, assuming only two
benches.
In
April 2018, we announced that we have commenced a process that
could result in the monetization of the Hazel Project. We believe
the development activity at the Hazel Project, coupled with nearby
activities of other oil and gas operators, suggests that this
project has achieved a level of value worth monetizing. We
anticipate that the liquidity that would be provided from selling
the Hazel Project could be redeployed into the Orogrande Project.
While this process is underway, we will take all necessary steps to
maintain the leasehold as required. As of this filing, we continue
to maintain the leases in good standing and continue to market the
acreage in an effort to focus on the Orogrande
Project.
During
the six months ended June 30, 2019 the Company deepened the Flying
B #4 and took whole cores through all of the Wolfcamp A and the
upper portion of the Wolfcamp B. We anticipate having the results
of the core work back from Schlumberger in September, 2019. In
addition, in May, 2019 we entered into agreements with two of the
three mineral owners on the northern section of the leases to keep
the entire acreage block as one lease with a one-year extension. We
issued each of them 50,000 shares of our common stock as
consideration for this extension. We are presently in the process
of structuring the extension agreement with the third mineral owner
for cash consideration. Due to this extension, our obligation in
November reduces to one obligation well.
The
marketing process is ongoing for the Hazel project. We continue to
encounter, as does the entire industry, a soft market for
acquisitions and divestitures transactions. We will continue to
look to sell the property or joint venture the property via farm in
or a drillco transaction.
Warwink Project, Winkler County, Texas
On
December 1, 2017, the Agreement and Plan of Reorganization that we
and our then wholly-owned subsidiary, Torchlight Wolfbone
Properties, Inc., a Texas corporation (“TWP”), entered
into with MPC and Warwink Properties, LLC (“Warwink
Properties”) on November 14, 2017 closed. Under the
agreement, TWP merged with and into Warwink Properties and the
separate existence of TWP ceased, with Warwink Properties being the
surviving entity and becoming our wholly-owned subsidiary. Warwink
Properties was wholly owned by MPC. Warwink Properties owns certain
assets, including a 10.71875% working interest in approximately 640
acres in Winkler County, Texas. Upon the closing of the merger, all
of the issued and outstanding shares of common stock of TWP
converted into a membership interest in Warwink Properties,
constituting all of the issued and outstanding membership interests
in Warwink Properties immediately following the closing of the
merger, the membership interest in Warwink Properties held by MPC
and outstanding immediately prior to the closing of the merger
ceased to exist, and we issued MPC 2,500,000 restricted shares of
our common stock as consideration. Also on December 1, 2017, MPC
closed its transaction with MECO IV, LLC (” MECO”), for
the purchase and sale of certain assets as contemplated by the
Purchase and Sale Agreement dated November 9, 2017 among MPC, MECO
and additional parties thereto (the “MECO PSA”), to
which we are not a party. Under the MECO PSA, Warwink Properties
received a carry from MECO (through the tanks) of up to $1,179,076
in the next well drilled on the Winkler County leases. A
Certificate of Merger for the merger transaction was filed with the
Secretary of State of Texas on December 5, 2017.
Also on
December 1, 2017, the transactions contemplated by the Purchase
Agreement that TEI entered into with MPC closed. Under the Purchase
Agreement, which was entered into on November 14, 2017, TEI
acquired beneficial ownership of certain of MPC’s assets,
including acreage and wellbores located in Ward County, Texas (the
“Ward County Assets”). As consideration under the
Purchase Agreement, at closing TEI issued to MPC an unsecured
promissory note in the principal amount of $3,250,000, payable in
monthly installments of interest only beginning on January 1, 2018,
at the rate of 5% per annum, with the entire principal amount
together with all accrued interest due and payable on January 1,
2021. In connection with TEI’s acquisition of beneficial
ownership in the Ward County Assets, MPC sold those same assets, on
behalf of TEI, to MECO at closing of the MECO PSA, and accordingly,
TEI received $3,250,000 in cash for its beneficial interest in the
Ward County Assets. Additionally, at closing of the MECO PSA, MPC
paid TEI a performance fee of $2,781,500 in cash as compensation
for TEI’s marketing and selling the Winkler County assets of
MPC and the Ward County Assets as a package to
MECO.
Addition to the Warwink Project
As of
May 7, 2018 our Warwink Project in the Delaware Basin had begun the
drilling phase of the first Warwink Project well, the UL 21
War-Wink 47 #2H. Our operating partner, MECO had begun the pilot
hole on the project. The plan is to evaluate the various potential
zones for a lateral leg to be drilled once logging is completed. We
expect the most likely target to be the Wolfcamp A interval. The
well is on 320 newly acquired acres offsetting the original
leasehold we entered into in December, 2017. The additional acreage
was leased by our operating partner under the Area of Mutual
Interest Agreement (AMI) and we exercised its right to participate
for its 12.5% in the additional 1,080 gross acres at a cash cost of
$447,847 in July, 2018. Our carried interest in the first well, as
outlined in the agreement, was originally planned to be on the
first acreage acquired. That carried interest is being applied to
this new well and will allow MECO to drill and produce potential
revenues sooner than originally planned. The primary leasehold is a
320-acre block directly west of the current position and will allow
for 5,000-foot lateral wells to be drilled. The well was completed
and began production in October, 2018 and is producing currently.
Recently the operator has informed us that there will be no planned
additional wells in the acreage this year. All acreage is presently
held by production.
In
December 2018, the Company began to take measures on its own to
market the Warwink Project in an effort to focus on the Orogrande.
This process is ongoing.
Hunton Play, Central Oklahoma
Presently,
we were producing from one well in the Viking Area of Mutual
Interest and one well in Prairie Grove.
Assets Held for Sale
With
respect to marketing oil and natural gas properties, the Company
has evaluated the properties being marketed to determine whether
any should be reclassified as held-for-sale at June 30, 2019. The
held-for-sale criteria include: management commits to a plan to
sell; the asset is available for immediate sale; an active program
to locate a buyer exists; the sale of the asset is probable and
expected to be completed within one year; the asset is being
actively marketed for sale; and it is unlikely that significant
changes to the plan will be made. If each of these criteria is met,
the property would be reclassified as held-for-sale on the
Company’s consolidated balance sheets and measured at the
lower of their carrying amount or estimated fair value less costs
to sell. Fair values are estimated using accepted valuation
techniques, such as a discounted cash flow model, valuations
performed by third parties, earnings multiples, or indicative bids,
when available. Management considers historical experience and all
available information at the time the estimates are made; however,
the fair value that is ultimately realized upon the sale of the
assets to be divested may differ from the estimated fair values
reflected in the consolidated financial statements. If each of
these criteria is met, DD&A expense would not be recorded on
assets to be divested once they are classified as held for sale.
Based on management’s assessment, these criteria have not
been met and no assets are classified as held for sale as of June
30, 2019.
RISK FACTORS
Investing in our
common stock involves a high degree of risk. Before investing in
our common stock, you should carefully consider the risks described
below, together with all of the other information contained in this
prospectus supplement, and accompanying prospectus and incorporated
by reference herein and therein, including from our most recent
Annual Report on Form 10-K and subsequent Quarterly Reports on Form
10-Q as well as any amendment or update to our risk factors
reflected in subsequent filings with the SEC. Some of these factors
relate principally to our business and the industry in which we
operate. Other factors relate principally to your investment in our
securities. The risks and uncertainties described below and the
risks and uncertainties incorporated by reference into this
prospectus supplement and accompanying prospectus are not the only
risks facing us. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also
materially and adversely affect our business and
operations.
Risks Related to our Business and Industry
We have a limited operating
history relative to larger companies in our industry, and may not
be successful in developing profitable business
operations.
We have
a limited operating history relative to larger companies in our
industry. Our business operations must be considered in light of
the risks, expenses and difficulties frequently encountered in
establishing a business in the oil and natural gas industries. As
of the date of this prospectus, we have generated limited revenues
and have limited assets. We have an insufficient history at this
time on which to base an assumption that our business operations
will prove to be successful in the long-term. Our future operating
results will depend on many factors, including:
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our
ability to raise adequate working capital;
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the
success of our development and exploration;
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the
demand for natural gas and oil;
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the
level of our competition;
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our
ability to attract and maintain key management and employees;
and
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our
ability to efficiently explore, develop, produce or acquire
sufficient quantities of marketable natural gas or oil in a highly
competitive and speculative environment while maintaining quality
and controlling costs.
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To
achieve profitable operations in the future, we must, alone or with
others, successfully manage the factors stated above, as well as
continue to develop ways to enhance our production efforts. Despite
our best efforts, we may not be successful in our exploration or
development efforts, or obtain required regulatory approvals. There
is a possibility that some, or all, of the wells in which we obtain
interests may never produce oil or natural gas.
We have limited capital and will need to raise additional capital
in the future.
We do
not currently have sufficient capital to fund both our continuing
operations and our planned growth. We will require additional
capital to continue to grow our business via acquisitions and to
further expand our exploration and development programs. We may be
unable to obtain additional capital when required. Future
acquisitions and future exploration, development, production and
marketing activities, as well as our administrative requirements
(such as salaries, insurance expenses and general overhead
expenses, as well as legal compliance costs and accounting
expenses) will require a substantial amount of additional capital
and cash flow.
We may
pursue sources of additional capital through various financing
transactions or arrangements, including joint venturing of
projects, debt financing, equity financing, or other means. We may
not be successful in identifying suitable financing transactions in
the time period required or at all, and we may not obtain the
capital we require by other means. If we do not succeed in raising
additional capital, our resources may not be sufficient to fund our
planned operations.
Our
ability to obtain financing, if and when necessary, may be impaired
by such factors as the capital markets (both generally and in the
oil and gas industry in particular), our limited operating history,
the location of our oil and natural gas properties and prices of
oil and natural gas on the commodities markets (which will impact
the amount of asset-based financing available to us, if any) and
the departure of key employees. Further, if oil or natural gas
prices on the commodities markets decline, our future revenues, if
any, will likely decrease and such decreased revenues may increase
our requirements for capital. If the amount of capital we are able
to raise from financing activities, together with our revenues from
operations, is not sufficient to satisfy our capital needs (even to
the extent that we reduce our operations), we may be required to
cease our operations, divest our assets at unattractive prices or
obtain financing on unattractive terms.
Any
additional capital raised through the sale of equity may dilute the
ownership percentage of our stockholders. Raising any such capital
could also result in a decrease in the fair market value of our
equity securities because our assets would be owned by a larger
pool of outstanding equity. The terms of securities we issue in
future capital transactions may be more favorable to our new
investors, and may include preferences, superior voting rights and
the issuance of other derivative securities, and issuances of
incentive awards under equity employee incentive plans, which may
have a further dilutive effect.
We may
incur substantial costs in pursuing future capital financing,
including investment banking fees, legal fees, accounting fees,
securities law compliance fees, printing and distribution expenses
and other costs. We may also be required to recognize non-cash
expenses in connection with certain securities we may issue, which
may adversely impact our financial condition.
Our auditor indicated that certain factors raise substantial doubt
about our ability to continue as a going concern.
The
financial statements included with our Form 10-K for the year ended
December 31, 2018 are presented under the assumption that we will
continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business over a reasonable length of time. We had a net loss of
approximately $5.8 million for the year ended December 31, 2018 and
an accumulated deficit in aggregate of approximately $89.3 million
at year end. We are not generating sufficient operating cash flows
to support continuing operations, and expect to incur further
losses in the development of our business.
In our
financial statements for the year ended December 31, 2018, our
auditor indicated that certain factors raised substantial doubt
about our ability to continue as a going concern. These factors
included our accumulated deficit, as well as the fact that we were
not generating sufficient cash flows to meet our regular working
capital requirements. Our ability to continue as a going concern is
dependent upon our ability to generate future profitable operations
and/or to obtain the necessary financing to meet our obligations
and repay our liabilities arising from normal business operations
when they come due. Management’s plan to address our ability
to continue as a going concern includes: (1) obtaining debt or
equity funding from private placement or institutional sources; (2)
obtaining loans from financial institutions, where possible, or (3)
participating in joint venture transactions with third parties.
Although management believes that it will be able to obtain the
necessary funding to allow us to remain a going concern through the
methods discussed above, there can be no assurances that such
methods will prove successful. The financial statements for the
year ended December 31, 2018 do not include any adjustments that
might result from the outcome of this uncertainty.
The negative covenants contained in our outstanding unsecured
promissory notes may limit our activities and make it difficult to
run our business.
On
April 10, 2017, we sold to investors in a private transaction two
12% unsecured promissory notes with a total of $8,000,000 in
principal amount, or the 2017 Notes. In addition, on February 6,
2018, we sold to an investor in a private transaction a 12%
unsecured promissory note with a principal amount of $4,500,000, or
the 2018 Note, containing substantially the same terms as the 2017
Notes. We refer to the 2017 Notes and the 2018 Note collectively
as, the Notes. Interest only is due and payable on the Notes each
month at the rate of 12% per annum, with a balloon payment of the
outstanding principal due and payable at maturity on April 10,
2020. The holders of the Notes will also receive annual payments of
common stock at the rate of 2.5% of principal amount outstanding,
based on a volume-weighted average price. We sold the 2017 Notes at
an original issue discount of 94.25% and accordingly, we received
total proceeds of $7,540,000 from the investors. We sold the 2018
Note at an original issue discount of 96.27% and accordingly, we
received total proceeds of $4,332,150 from the investor. The Notes
allow for early redemption, provided that if we redeem before April
10, 2018 for the 2017 Notes and February 6, 2019 for the 2018 Note,
we must pay the holder all unpaid interest and common stock
payments on the portion of the Note redeemed that would have been
earned through April 10, 2018 and February 6, 2019,
respectively.
The
Notes contain negative covenants which may make it difficult for us
to run our business. Under the Notes, we may not, directly or
indirectly, consolidate with or merge into another person or sell,
lease, convey or transfer all or substantially all of our assets
(computed on a consolidated basis), unless either (i) in the case
of a merger or consolidation, we are the surviving entity or (ii)
the resulting, surviving or transferee entity expressly assumes by
supplemental agreement all of the obligations of us in connection
with the Notes.
In
addition, the Notes also contain certain covenants under which we
have agreed that, except for financing arrangements with
established commercial banking or financial institutions and other
debts and liabilities incurred in the normal course of business, we
will not issue any other notes or debt offerings which have a
maturity date prior to the payment in full of the respective Note,
unless consented to by the holder. Further, our subsidiaries cannot
sell or otherwise dispose of any shares of capital stock or assets
unless the transaction is for fair value and approved by our
disinterested directors or is pursuant to any contractual
obligation entered into by us in the ordinary course of business in
connection with drilling, exploration and development of our oil
and gas properties.
The
Notes also restrict us and our subsidiaries from (i) issuing any
preferred stock or any other comparable equity interest which are
mandatorily redeemable at a date prior to the maturity date of the
Notes, without the consent or approval of the holder, (ii)
distributing any cash or other assets to any holders of our common
stock prior to payment in full of the Notes, without the consent of
the holder, (iii) entering into any transaction with an affiliate,
subject to limited exceptions, and (iv) issuing any other notes or
debt offerings which have a maturity date prior to the payment in
full of the Notes, unless consented to by the holder.
Failure
to comply with the negative covenants could accelerate the
repayment of any debt outstanding under the Notes. Additionally, as
a result of these negative covenants, we may be at a disadvantage
compared to our competitors that have greater operating and
financing flexibility than we do.
Lastly,
we may have difficulty securing additional sources of capital
through debt financing. If we do not succeed in raising additional
capital, our resources may not be sufficient to fund our planned
operations.
As a non-operator, our development of successful operations relies
extensively on third-parties who, if not successful, could have a
material adverse effect on our results of operation.
We
expect to primarily participate in wells operated by third-parties.
As a result, we will not control the timing of the development,
exploitation, production and exploration activities relating to
leasehold interests we acquire. We do, however, have certain rights
as granted in our joint operating agreements that allow us a
certain degree of freedom such as, but not limited to, the ability
to propose the drilling of wells. If our drilling partners are not
successful in such activities relating to our leasehold interests,
or are unable or unwilling to perform, our financial condition and
results of operation could have an adverse material
effect.
Further, financial
risks are inherent in any operation where the cost of drilling,
equipping, completing and operating wells is shared by more than
one person. We could be held liable for the joint activity
obligations of the operator or other working interest owners such
as nonpayment of costs and liabilities arising from the actions of
the working interest owners. In the event the operator or other
working interest owners do not pay their share of such costs, we
would likely have to pay those costs. In such situations, if we
were unable to pay those costs, there could be a material adverse
effect to our financial position.
We are mainly concentrated in one geographic area, which increases
our exposure to many of the risks enumerated herein.
Operating in a
concentrated area increases the potential impact that many of the
risks stated herein may have upon our ability to perform. For
example, we have greater exposure to regulatory actions impacting
Texas, natural disasters in the geographic area, competition for
equipment, services and materials available in the area and access
to infrastructure and markets. In addition, the effect of
fluctuations on supply and demand may become more pronounced within
specific geographic oil and gas producing areas such as the Permian
Basin, which may cause these conditions to occur with greater
frequency or magnify the effect of these conditions. Due to the
concentrated nature of our portfolio of properties, a number of our
properties could experience any of the same conditions at the same
time, resulting in a relatively greater impact on our results of
operations than they might have on other companies that have a more
diversified portfolio of properties. Such delays or interruptions
could have a material adverse effect on our financial condition and
results of operations.
We may be unable to monetize the Orogrande, Hazel and/or Warwink
Projects at an attractive price, if at all, and the disposition of
such assets may involve risks and uncertainties.
We have
commenced a process that could result in the monetization of the
Orogrande, Hazel and/or Warwink Projects. Such dispositions may
result in proceeds to us in an amount less than we expect or less
than our assessment of the value of the assets. We do not know if
we will be able to successfully complete such disposition on
favorable terms or at all. In addition, the sale of these assets
involves risks and uncertainties, including disruption to other
parts of our business, potential loss of customers or revenue,
exposure to unanticipated liabilities or result in ongoing
obligations and liabilities to us following any such
divestiture.
For
example, in connection with a disposition, we may enter into
transition services agreements or other strategic relationships,
which may result in additional expense. In addition, in connection
with a disposition, we may be required to make representations
about the business and financial affairs of the business or assets.
We may also be required to indemnify the purchasers to the extent
that our representations turn out to be inaccurate or with respect
to certain potential liabilities. These indemnification obligations
may require us to pay money to the purchasers as satisfaction of
their indemnity claims. It may also take us longer than expected to
fully realize the anticipated benefits of this transaction, and
those benefits may ultimately be smaller than anticipated or may
not be realized at all, which could adversely affect our business
and operating results. Any of the foregoing could adversely affect
our financial condition and results of operations.
Because of the speculative nature of oil and gas exploration, there
is risk that we will not find commercially exploitable oil and gas
and that our business will fail.
The
search for commercial quantities of oil and natural gas as a
business is extremely risky. We cannot provide investors with any
assurance that any properties in which we obtain a mineral interest
will contain commercially exploitable quantities of oil and/or gas.
The exploration expenditures to be made by us may not result in the
discovery of commercial quantities of oil and/or gas. Problems such
as unusual or unexpected formations or pressures, premature
declines of reservoirs, invasion of water into producing formations
and other conditions involved in oil and gas exploration often
result in unsuccessful exploration efforts. If we are unable to
find commercially exploitable quantities of oil and gas, and/or we
are unable to commercially extract such quantities, we may be
forced to abandon or curtail our business plan, and as a result,
any investment in us may become worthless.
Strategic relationships upon which we may rely are subject to
change, which may diminish our ability to conduct our
operations.
Our
ability to successfully acquire oil and gas interests, to build our
reserves, to participate in drilling opportunities and to identify
and enter into commercial arrangements with customers will depend
on developing and maintaining close working relationships with
industry participants and our ability to select and evaluate
suitable properties and to consummate transactions in a highly
competitive environment. These realities are subject to change and
our inability to maintain close working relationships with industry
participants or continue to acquire suitable property may impair
our ability to execute our business plan.
To
continue to develop our business, we will endeavor to use the
business relationships of our management to enter into strategic
relationships, which may take the form of joint ventures with other
private parties and contractual arrangements with other oil and gas
companies, including those that supply equipment and other
resources that we will use in our business. We may not be able to
establish these strategic relationships, or if established, we may
not be able to maintain them. In addition, the dynamics of our
relationships with strategic partners may require us to incur
expenses or undertake activities we would not otherwise be inclined
to in order to fulfill our obligations to these partners or
maintain our relationships. If our strategic relationships are not
established or maintained, our business prospects may be limited,
which could diminish our ability to conduct our
operations.
The price of oil and natural gas has historically been volatile. If
it were to decrease substantially, our projections, budgets, and
revenues would be adversely affected, potentially forcing us to
make changes in our operations.
Our
future financial condition, results of operations and the carrying
value of any oil and natural gas interests we acquire will depend
primarily upon the prices paid for oil and natural gas production.
Oil and natural gas prices historically have been volatile and
likely will continue to be volatile in the future, especially given
current world geopolitical conditions. Our cash flows from
operations are highly dependent on the prices that we receive for
oil and natural gas. This price volatility also affects the amount
of our cash flows available for capital expenditures and our
ability to borrow money or raise additional capital. The prices for
oil and natural gas are subject to a variety of additional factors
that are beyond our control. These factors include:
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the
level of consumer demand for oil and natural gas;
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the
domestic and foreign supply of oil and natural gas;
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the
ability of the members of the Organization of Petroleum Exporting
Countries (“OPEC”) to agree to and maintain oil price
and production controls;
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the
price of foreign oil and natural gas;
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domestic
governmental regulations and taxes;
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the
price and availability of alternative fuel sources;
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market
uncertainty due to political conditions in oil and natural gas
producing regions, including the Middle East; and
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worldwide economic
conditions.
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These
factors as well as the volatility of the energy markets generally
make it extremely difficult to predict future oil and natural gas
price movements with any certainty. Declines in oil and natural gas
prices affect our revenues, and could reduce the amount of oil and
natural gas that we can produce economically. Accordingly, such
declines could have a material adverse effect on our financial
condition, results of operations, oil and natural gas reserves and
the carrying values of our oil and natural gas properties. If the
oil and natural gas industry experiences significant price
declines, we may be unable to make planned expenditures, among
other things. If this were to happen, we may be forced to abandon
or curtail our business operations, which would cause the value of
an investment in us to decline or become worthless.
If oil or natural gas prices remain depressed or drilling efforts
are unsuccessful, we may be required to record additional write
downs of our oil and natural gas properties.
If oil
or natural gas prices remain depressed or drilling efforts are
unsuccessful, we could be required to write down the carrying value
of certain of our oil and natural gas properties. Write downs may
occur when oil and natural gas prices are low, or if we have
downward adjustments to our estimated proved reserves, increases in
our estimates of operating or development costs, deterioration in
drilling results or mechanical problems with wells where the cost
to re drill or repair is not supported by the expected
economics.
Under
the full cost method of accounting, capitalized oil and gas
property costs less accumulated depletion and net of deferred
income taxes may not exceed an amount equal to the present value,
discounted at 10%, of estimated future net revenues from proved oil
and gas reserves plus the cost of unproved properties not subject
to amortization (without regard to estimates of fair value), or
estimated fair value, if lower, of unproved properties that are
subject to amortization. Should capitalized costs exceed this
ceiling, an impairment would be recognized.
The
Company identified impairment of $2,300,626 in 2017 related to its
unevaluated properties. The Company adjusted the separation of
evaluated versus unevaluated costs within its full cost pool to
recognize the value impairment related to the expiration of
unevaluated leases in 2017 in the amount of $2,300,626. The impact
of this change was to increase the basis for calculation of future
period’s depletion, depreciation and amortization to include
$2,300,626 of cost which will effectively recognize the impairment
on the consolidated statement of operations over future periods.
The $2,300,626 has also become an evaluated cost for purposes of
ceiling tests and which may further recognize the impairment
expense recognized in future periods. The impact of this cost
reclassification at March 31, 2018 was a recognized impairment
expense of $139,891. Impairment expense was recognized for the six
months ended June 30, 2019 of $474,357 as required by the ceiling
test calculation.
Due to
the volatility of commodity prices, should oil and natural gas
prices decline in the future, it is possible that a further
write-down could occur. Proved reserves are estimated quantities of
crude oil, natural gas, and natural gas liquids, which geological
and engineering data demonstrate with reasonable certainty to be
recoverable from known reservoirs under existing economic and
operating conditions. The independent engineering estimates include
only those amounts considered to be proved reserves and do not
include additional amounts which may result from new discoveries in
the future, or from application of secondary and tertiary recovery
processes where facilities are not in place or for which
transportation and/or marketing contracts are not in place.
Estimated reserves to be developed through secondary or tertiary
recovery processes are classified as unevaluated
properties.
Because of the inherent dangers involved in oil and gas operations,
there is a risk that we may incur liability or damages as we
conduct our business operations, which could force us to expend a
substantial amount of money in connection with litigation and/or a
settlement.
The oil
and natural gas business involves a variety of operating hazards
and risks such as well blowouts, pipe failures, casing collapse,
explosions, uncontrollable flows of oil, natural gas or well
fluids, fires, spills, pollution, releases of toxic gas and other
environmental hazards and risks. These hazards and risks could
result in substantial losses to us from, among other things, injury
or loss of life, severe damage to or destruction of property,
natural resources and equipment, pollution or other environmental
damage, cleanup responsibilities, regulatory investigation and
penalties and suspension of operations. In addition, we may be
liable for environmental damages caused by previous owners of
property purchased and leased by us. In recent years, there has
also been increased scrutiny on the environmental risk associated
with hydraulic fracturing, such as underground migration and
surface spillage or mishandling of fracturing fluids including
chemical additives. This technology has evolved and continues to
evolve and become more aggressive. We believe that new techniques
can increase estimated ultimate recovery per well to over 1.0
million barrels of oil equivalent, and have increased initial
production two or three-fold. We believe that recent designs have
seen improvement in, among other things, proppant per foot, barrels
of water per stage, fracturing stages, and clusters per fracturing
stage. As a result, substantial liabilities to third parties or
governmental entities may be incurred, the payment of which could
reduce or eliminate the funds available for exploration,
development or acquisitions or result in the loss of our properties
and/or force us to expend substantial monies in connection with
litigation or settlements. In addition, we will need to quickly
adapt to the evolving technology, which could take time and divert
our attention to other business matters. We currently have no
insurance to cover such losses and liabilities, and even if
insurance is obtained, it may not be adequate to cover any losses
or liabilities. We cannot predict the availability of insurance or
the availability of insurance at premium levels that justify our
purchase. The occurrence of a significant event not fully insured
or indemnified against could materially and adversely affect our
financial condition and operations. We may elect to self-insure if
management believes that the cost of insurance, although available,
is excessive relative to the risks presented. In addition,
pollution and environmental risks generally are not fully
insurable. The occurrence of an event not fully covered by
insurance could have a material adverse effect on our financial
condition and results of operations.
The market for oil and gas is intensely competitive, and
competition pressures could force us to abandon or curtail our
business plan.
The
market for oil and gas exploration services is highly competitive,
and we only expect competition to intensify in the future. Numerous
well-established companies are focusing significant resources on
exploration and are currently competing with us for oil and gas
opportunities. Other oil and gas companies may seek to acquire oil
and gas leases and properties that we have targeted. Additionally,
other companies engaged in our line of business may compete with us
from time to time in obtaining capital from investors. Competitors
include larger companies which, in particular, may have access to
greater resources, may be more successful in the recruitment and
retention of qualified employees and may conduct their own refining
and petroleum marketing operations, which may give them a
competitive advantage. Actual or potential competitors may be
strengthened through the acquisition of additional assets and
interests. Additionally, there are numerous companies focusing
their resources on creating fuels and/or materials which serve the
same purpose as oil and gas, but are manufactured from renewable
resources.
As a
result, we may not be able to compete successfully and competitive
pressures may adversely affect our business, results of operations,
and financial condition. If we are not able to successfully compete
in the marketplace, we could be forced to curtail or even abandon
our current business plan, which could cause any investment in us
to become worthless.
We may not be able to successfully manage our expected growth,
which could lead to our inability to implement our business
plan.
Our
expected growth may place a significant strain on our managerial,
operational and financial resources, especially considering that we
currently only have a small number of executive officers, employees
and advisors. Further, as we enter into additional contracts, we
will be required to manage multiple relationships with various
consultants, businesses and other third parties. These requirements
will be exacerbated in the event of our further growth or in the
event that the number of our drilling and/or extraction operations
increases. Our systems, procedures and/or controls may not be
adequate to support our operations or that our management will be
able to achieve the rapid execution necessary to successfully
implement our business plan. If we are unable to manage our growth
effectively, our business, results of operations and financial
condition will be adversely affected, which could lead to us being
forced to abandon or curtail our business plan and
operations.
The due diligence undertaken by us in connection with all of our
acquisitions may not have revealed all relevant considerations or
liabilities related to those assets, which could have a material
adverse effect on our financial condition or results of
operations.
The
due diligence undertaken by us in connection with the acquisition
of our properties may not have revealed all relevant facts that may
be necessary to evaluate such acquisitions. The information
provided to us in connection with our diligence may have been
incomplete or inaccurate. As part of the diligence process, we have
also made subjective judgments regarding the results of operations
and prospects of the assets. If the due diligence investigations
have failed to correctly identify material issues and liabilities
that may be present, such as title defects or environmental
problems, we may incur substantial impairment charges or other
losses in the future. In addition, we may be subject to
significant, previously undisclosed liabilities that were not
identified during the due diligence processes and which may have a
material adverse effect on our financial condition or results of
operations.
Our operations are heavily dependent on current environmental
regulation, changes in which we cannot predict.
Oil and
natural gas activities that we will engage in, including
production, processing, handling and disposal of hazardous
materials, such as hydrocarbons and naturally occurring radioactive
materials (if any), are subject to stringent regulation. We could
incur significant costs, including cleanup costs resulting from a
release of hazardous material, third-party claims for property
damage and personal injuries fines and sanctions, as a result of
any violations or liabilities under environmental or other laws.
Changes in or more stringent enforcement of environmental laws
could force us to expend additional operating costs and capital
expenditures to stay in compliance.
Various
federal, state and local laws regulating the discharge of materials
into the environment, or otherwise relating to the protection of
the environment, directly impact oil and gas exploration,
development and production operations, and consequently may impact
our operations and costs. These regulations include, among others,
(i) regulations by the Environmental Protection Agency and various
state agencies regarding approved methods of disposal for certain
hazardous and non-hazardous wastes; (ii) the Comprehensive
Environmental Response, Compensation, and Liability Act, Federal
Resource Conservation and Recovery Act and analogous state laws
which regulate the removal or remediation of previously disposed
wastes (including wastes disposed of or released by prior owners or
operators), property contamination (including groundwater
contamination),and remedial plugging operations to prevent future
contamination; (iii) the Clean Air Act and comparable state and
local requirements which may result in the gradual imposition of
certain pollution control requirements with respect to air
emissions from our operations; (iv) the Oil Pollution Act of 1990
which contains numerous requirements relating to the prevention of
and response to oil spills into waters of the United States; (v)
the Resource Conservation and Recovery Act which is the principal
federal statute governing the treatment, storage and disposal of
hazardous wastes; and (vi) state regulations and statutes governing
the handling, treatment, storage and disposal of naturally
occurring radioactive material.
We
believe that we will be in substantial compliance with applicable
environmental laws and regulations. To date, we have not expended
any amounts to comply with such regulations, and we do not
currently anticipate that future compliance will have a materially
adverse effect on our consolidated financial position, results of
operations or cash flows. However, if we are deemed to not be in
compliance with applicable environmental laws, we could be forced
to expend substantial amounts to be in compliance, which would have
a materially adverse effect on our financial
condition.
Government regulatory initiatives
relating to hydraulic fracturing could result in increased costs
and additional operating restrictions or
delays.
Vast
quantities of natural gas, natural gas liquids and oil deposits
exist in deep shale and other unconventional formations. It is
customary in our industry to recover these resources through the
use of hydraulic fracturing, combined with horizontal drilling.
Hydraulic fracturing is the process of creating or expanding
cracks, or fractures, in deep underground formations using water,
sand and other additives pumped under high pressure into the
formation. As with the rest of the industry, our third-party
operating partners use hydraulic fracturing as a means to increase
the productivity of most of the wells they drill and complete.
These formations are generally geologically separated and isolated
from fresh ground water supplies by thousands of feet of
impermeable rock layers.
We
believe our third-party operating partners follow applicable legal
requirements for groundwater protection in their operations that
are subject to supervision by state and federal regulators.
Furthermore, we believe our third-party operating partners’
well construction practices are specifically designed to protect
freshwater aquifers by preventing the migration of fracturing
fluids into aquifers.
Hydraulic
fracturing is typically regulated by state oil and gas commissions.
Some states have adopted, and other states are considering
adopting, regulations that could impose more stringent permitting,
public disclosure, and/or well construction requirements on
hydraulic fracturing operations.
In
addition to state laws, some local municipalities have adopted or
are considering adopting land use restrictions, such as city
ordinances, that may restrict or prohibit the performance of well
drilling in general and/or hydraulic fracturing in particular.
There are also certain governmental reviews either underway or
being proposed that focus on deep shale and other formation
completion and production practices, including hydraulic
fracturing. Depending on the outcome of these studies, federal and
state legislatures and agencies may seek to further regulate such
activities. Certain environmental and other groups have also
suggested that additional federal, state and local laws and
regulations may be needed to more closely regulate the hydraulic
fracturing process.
Further, the EPA
has asserted federal regulatory authority over hydraulic fracturing
involving “diesel fuels” under the Solid Waste Disposal Act’s Underground
Injection Control Program. The EPA is also engaged in a
study of the potential impacts of hydraulic fracturing activities
on drinking water resources in the states where the EPA is the
permitting authority. These actions, in conjunction with other
analyses by federal and state agencies to assess the impacts of
hydraulic fracturing could spur further action toward federal
and/or state legislation and regulation of hydraulic fracturing
activities.
We
cannot predict whether additional federal, state or local laws or
regulations applicable to hydraulic fracturing will be enacted in
the future and, if so, what actions any such laws or regulations
would require or prohibit. Restrictions on hydraulic fracturing
could make it prohibitive for our third-party operating partners to
conduct operations, and also reduce the amount of oil, natural gas
liquids and natural gas that we are ultimately able to produce in
commercial quantities from our properties. If additional levels of
regulation or permitting requirements were imposed on hydraulic
fracturing operations, our business and operations could be subject
to delays, increased operating and compliance costs and process
prohibitions.
Our estimates of the volume of reserves could have flaws, or such
reserves could turn out not to be commercially extractable. As a
result, our future revenues and projections could be
incorrect.
Estimates of
reserves and of future net revenues prepared by different petroleum
engineers may vary substantially depending, in part, on the
assumptions made and may be subject to adjustment either up or down
in the future. Our actual amounts of production, revenue, taxes,
development expenditures, operating expenses, and quantities of
recoverable oil and gas reserves may vary substantially from the
estimates. Oil and gas reserve estimates are necessarily inexact
and involve matters of subjective engineering judgment. In
addition, any estimates of our future net revenues and the present
value thereof are based on assumptions derived in part from
historical price and cost information, which may not reflect
current and future values, and/or other assumptions made by us that
only represent our best estimates. If these estimates of
quantities, prices and costs prove inaccurate, we may be
unsuccessful in expanding our oil and gas reserves base with our
acquisitions. Additionally, if declines in and instability of oil
and gas prices occur, then write downs in the capitalized costs
associated with any oil and gas assets we obtain may be required.
Because of the nature of the estimates of our reserves and
estimates in general, reductions to our estimated proved oil and
gas reserves and estimated future net revenues may not be required
in the future, and/or that our estimated reserves may not present
and/or commercially extractable. If our reserve estimates are
incorrect, we may be forced to write down the capitalized costs of
our oil and gas properties.
Decommissioning costs are unknown
and may be substantial. Unplanned costs could divert resources from
other projects.
We may
become responsible for costs associated with abandoning and
reclaiming wells, facilities and pipelines which we use for
production of oil and natural gas reserves. Abandonment and
reclamation of these facilities and the costs associated therewith
is often referred to as “decommissioning.” We accrue a
liability for decommissioning costs associated with our wells, but
have not established any cash reserve account for these potential
costs in respect of any of our properties. If decommissioning is
required before economic depletion of our properties or if our
estimates of the costs of decommissioning exceed the value of the
reserves remaining at any particular time to cover such
decommissioning costs, we may have to draw on funds from other
sources to satisfy such costs. The use of other funds to satisfy
such decommissioning costs could impair our ability to focus
capital investment in other areas of our business.
We may have difficulty
distributing production, which could harm our financial
condition.
In
order to sell the oil and natural gas that we are able to produce,
if any, the operators of the wells we obtain interests in may have
to make arrangements for storage and distribution to the market. We
will rely on local infrastructure and the availability of
transportation for storage and shipment of our products, but
infrastructure development and storage and transportation
facilities may be insufficient for our needs at commercially
acceptable terms in the localities in which we operate. This
situation could be particularly problematic to the extent that our
operations are conducted in remote areas that are difficult to
access, such as areas that are distant from shipping and/or
pipeline facilities. These factors may affect our and potential
partners’ ability to explore and develop properties and to
store and transport oil and natural gas production, increasing our
expenses.
Furthermore,
weather conditions or natural disasters, actions by companies doing
business in one or more of the areas in which we will operate, or
labor disputes may impair the distribution of oil and/or natural
gas and in turn diminish our financial condition or ability to
maintain our operations.
Our business will suffer if we cannot obtain or maintain necessary
licenses.
Our
operations will require licenses, permits and in some cases
renewals of licenses and permits from various governmental
authorities. Our ability to obtain, sustain or renew such licenses
and permits on acceptable terms is subject to change in regulations
and policies and to the discretion of the applicable governments,
among other factors. Our inability to obtain, or our loss of or
denial of extension of, any of these licenses or permits could
hamper our ability to produce revenues from our
operations.
Challenges to our properties may impact our financial
condition.
Title
to oil and gas interests is often not capable of conclusive
determination without incurring substantial expense. While we have
made and intend to make appropriate inquiries into the title of
properties and other development rights we have acquired and intend
to acquire, title defects may exist. In addition, we may be unable
to obtain adequate insurance for title defects, on a commercially
reasonable basis or at all. If title defects do exist, it is
possible that we may lose all or a portion of our right, title and
interests in and to the properties to which the title defects
relate. If our property rights are reduced, our ability to conduct
our exploration, development and production activities may be
impaired. To mitigate title problems, common industry practice is
to obtain a title opinion from a qualified oil and gas attorney
prior to the drilling operations of a well.
We rely on technology to conduct our business, and our technology
could become ineffective or obsolete.
We rely
on technology, including geographic and seismic analysis techniques
and economic models, to develop our reserve estimates and to guide
our exploration, development and production activities. We and our
operator partners will be required to continually enhance and
update our technology to maintain its efficacy and to avoid
obsolescence. The costs of doing so may be substantial and may be
higher than the costs that we anticipate for technology maintenance
and development. If we are unable to maintain the efficacy of our
technology, our ability to manage our business and to compete may
be impaired. Further, even if we are able to maintain technical
effectiveness, our technology may not be the most efficient means
of reaching our objectives, in which case we may incur higher
operating costs than we would were our technology more
efficient.
The loss of key personnel would directly affect our efficiency and
profitability.
Our
future success is dependent, in a large part, on retaining the
services of our current management team. Our executive officers
possess a unique and comprehensive knowledge of our industry and
related matters that are vital to our success within the industry.
The knowledge, leadership and technical expertise of these
individuals would be difficult to replace. The loss of one or more
of our officers could have a material adverse effect on our
operating and financial performance, including our ability to
develop and execute our long-term business strategy. We do not
maintain key-man life insurance with respect to any employees. We
do have employment agreements with each of our executive
officers.
We have limited management and staff and are dependent upon
partnering arrangements and third-party service
providers.
We
currently have two full-time employees, including our Chief
Executive Officer and Chief Financial Officer. The loss of these
individuals would have an adverse effect on our business, as we
have very limited personnel. We leverage the services of other
independent consultants and contractors to perform various
professional services, including engineering, oil and gas well
planning and supervision, and land, legal, environmental and tax
services. We also pursue alliances with partners in the areas of
geological and geophysical services and prospect generation,
evaluation and prospect leasing. Our dependence on third-party
consultants and service providers create a number of risks,
including but not limited to:
●
the possibility
that such third parties may not be available to us as and when
needed; and
●
the risk that we
may not be able to properly control the timing and quality of work
conducted with respect to its projects.
If we
experience significant delays in obtaining the services of such
third parties or they perform poorly, our results of operations and
stock price could be materially adversely affected.
Our officers and directors control a significant percentage of our
current outstanding common stock and their interests may conflict
with those of our stockholders.
As of
the date of this prospectus, our executive officers and directors
collectively and beneficially own approximately 28% of our
outstanding common stock. This concentration of voting control
gives these affiliates substantial influence over any matters which
require a stockholder vote, including without limitation the
election of directors and approval of merger and/or acquisition
transactions, even if their interests may conflict with those of
other stockholders. It could have the effect of delaying or
preventing a change in control or otherwise discouraging a
potential acquirer from attempting to obtain control of us. This
could have a material adverse effect on the market price of our
common stock or prevent our stockholders from realizing a premium
over the then prevailing market prices for their shares of common
stock.
In the future, we may incur significant increased costs as a result
of operating as a public company, and our management may be
required to devote substantial time to new compliance
initiatives.
In the
future, we may incur significant legal, accounting, and other
expenses as a result of operating as a public company. The
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”),
as well as new rules subsequently implemented by the SEC, have
imposed various requirements on public companies, including
requiring changes in corporate governance practices. Our management
and other personnel will need to devote a substantial amount of
time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs
and will make some activities more time-consuming and costly. For
example, we expect these new rules and regulations to make it more
difficult and more expensive for us to obtain director and officer
liability insurance, and we may be required to incur substantial
costs to maintain the same or similar coverage.
In
addition, the Sarbanes-Oxley Act requires, among other things, that
we maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, we are required
to perform system and process evaluation and testing on the
effectiveness of our internal controls over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act. In performing
this evaluation and testing, management concluded that our internal
control over financial reporting is effective as of December 31,
2018. Our continued compliance with Section 404, will require that
we incur substantial accounting expense and expend significant
management efforts. We do not have an internal audit group. We have
however, engaged independent professional assistance for the
evaluation and testing of internal controls.
Terrorist attacks or cyber-incidents could result in information
theft, data corruption, operational disruption and/or financial
loss.
Like
most companies, we have become increasingly dependent upon digital
technologies, including information systems, infrastructure and
cloud applications and services, to operate our businesses, to
process and record financial and operating data, communicate with
our business partners, analyze mine and mining information,
estimate quantities of coal reserves, as well as other activities
related to our businesses. Strategic targets, such as
energy-related assets, may be at greater risk of future terrorist
or cyber-attacks than other targets in the United States.
Deliberate attacks on, or security breaches in, our systems or
infrastructure, or the systems or infrastructure of third parties,
or cloud-based applications could lead to corruption or loss of our
proprietary data and potentially sensitive data, delays in
production or delivery, difficulty in completing and settling
transactions, challenges in maintaining our books and records,
environmental damage, communication interruptions, other
operational disruptions and third-party liability. Our insurance
may not protect us against such occurrences. Consequently, it is
possible that any of these occurrences, or a combination of them,
could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Further, as cyber
incidents continue to evolve, we may be required to expend
additional resources to continue to modify or enhance our
protective measures or to investigate and remediate any
vulnerability to cyber incidents.
We have
adopted an Information Security Policy and Acceptable Use Statement
to address precautions with respect to data security and we have
created an Incident Response Plan which outlines appropriate
responses in case of a reported breach. These policies and plan
have been executed in coordination with our independent Information
Technology Service provider.
Certain Factors Related to Our Common Stock
There presently is a limited market for our common stock, and the
price of our common stock may be volatile.
Our
common stock is currently quoted on The NASDAQ Stock Market LLC.
There could be volatility in the volume and market price of our
common stock moving forward. This volatility may be caused by a
variety of factors, including the lack of readily available
quotations, the absence of consistent administrative supervision of
“bid” and “ask” quotations, and generally
lower trading volume. In addition, factors such as quarterly
variations in our operating results, changes in financial estimates
by securities analysts, or our failure to meet our or their
projected financial and operating results, litigation involving us,
factors relating to the oil and gas industry, actions by
governmental agencies, national economic and stock market
considerations, as well as other events and circumstances beyond
our control could have a significant impact on the future market
price of our common stock and the relative volatility of such
market price.
Securities analysts may not initiate coverage or continue to cover
our shares of common stock and this may have a negative impact
on the market price of our shares of common stock.
The
trading market for our shares of common stock will depend, in part,
on the research and reports that securities analysts publish about
our business and our shares of common stock. We do not have any
control over these analysts. If securities analysts do not cover
our shares of common stock, the lack of research coverage may
adversely affect the market price of those shares. If securities
analysts do cover our shares of common stock, they could issue
reports or recommendations that are unfavorable to the price of our
shares of common stock, and they could downgrade a previously
favorable report or recommendation, and in either case our share
prices could decline as a result of the report. If one or more of
these analysts does not initiate coverage, ceases to cover our
shares of common stock or fails to publish regular reports on our
business, we could lose visibility in the financial markets, which
could cause our share prices or trading volume to
decline.
Offers or availability for sale of a substantial number of shares
of our common stock may cause the price of our common stock to
decline.
Our
stockholders could sell substantial amounts of common stock in the
public market, including shares sold upon the filing of a
registration statement that registers such shares and/or upon the
expiration of any statutory holding period under Rule 144 of the
Securities Act of 1933 (the “Securities Act”), if
available, or upon the expiration of trading limitation periods.
Such volume could create a circumstance commonly referred to as a
market “overhang” and in anticipation of which the
market price of our common stock could fall. Additionally, we have
a large number of warrants that are presently exercisable. The
exercise of a large amount of these securities followed by the
subsequent sale of the underlying stock in the market would likely
have a negative effect on our common stock’s market price.
The existence of an overhang, whether or not sales have occurred or
are occurring, also could make it more difficult for us to secure
additional financing through the sale of equity or equity-related
securities in the future at a time and price that we deem
reasonable or appropriate.
Our directors and officers have rights to
indemnification.
Our
Bylaws provide, as permitted by governing Nevada law, that we will
indemnify our directors, officers, and employees, whether or not
then in service as such, against all reasonable expenses actually
and necessarily incurred by him or her in connection with the
defense of any litigation to which the individual may have been
made a party because he or she is or was a director, officer, or
employee of the company. The inclusion of these provisions in the
Bylaws may have the effect of reducing the likelihood of derivative
litigation against directors and officers, and may discourage or
deter stockholders or management from bringing a lawsuit against
directors and officers for breach of their duty of care, even
though such an action, if successful, might otherwise have
benefited us and our stockholders.
We do not anticipate paying any cash dividends on our common
stock.
We do
not anticipate paying cash dividends on our common stock for the
foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital
requirements, and general financial condition. The payment of any
dividends will be within the discretion of our Board of Directors.
We presently intend to retain all earnings, if any, to implement
our business strategy; accordingly, we do not anticipate the
declaration of any dividends in the foreseeable
future.
NASDAQ may delist our common stock from trading on its exchange,
which could limit shareholders’ ability to trade our common
stock.
As
a listed company on NASDAQ, we are required to meet certain
financial, public float, bid price and liquidity standards on an
ongoing basis in order to continue the listing of our common stock.
If we fail to meet these continued listing requirements, our common
stock may be subject to delisting. If our common stock is delisted
and we are not able to list our common stock on another national
securities exchange, we expect our securities would be quoted on an
over-the-counter market. If this were to occur, our shareholders
could face significant material adverse consequences, including
limited availability of market quotations for our common stock and
reduced liquidity for the trading of our securities. In addition,
we could experience a decreased ability to issue additional
securities and obtain additional financing in the
future.
Issuance of our stock in the future could dilute existing
shareholders and adversely affect the market price of our common
stock.
We
have the authority to issue up to 150,000,000 shares of common
stock and 10,000,000 shares of preferred stock, and to issue
options and warrants to purchase shares of our common stock. We are
authorized to issue significant amounts of common stock in the
future, subject only to the discretion of our board of directors.
These future issuances could be at values substantially below the
price paid for our common stock by investors. In addition, we could
issue large blocks of our stock to fend off unwanted tender offers
or hostile takeovers without further shareholder approval. Because
the trading volume of our common stock is relatively low, the
issuance of our stock may have a disproportionately large impact on
its price compared to larger companies.
The issuance of preferred stock in the future could adversely
affect the rights of the holders of our common stock.
An
issuance of preferred stock could result in a class of outstanding
securities that would have preferences with respect to voting
rights and dividends and in liquidation over the common stock and
could, upon conversion or otherwise, have all of the rights of our
common stock. Our board of directors’ authority to issue
preferred stock could discourage potential takeover attempts or
could delay or prevent a change in control through merger, tender
offer, proxy contest or otherwise by making these attempts more
difficult or costly to achieve.
USE OF PROCEEDS
We are
not selling any shares of our common stock in this offering and
therefore will not receive any proceeds from the sale thereof. We
will, however, receive proceeds from any Warrants exercised, which
are exercisable for cash. We will use any proceeds received from
the exercise of Warrants for working capital and general corporate
purposes. The selling stockholders will pay any underwriting
discounts and commissions and expenses incurred by the selling
stockholders for brokerage, accounting, tax or legal services or
any other expenses incurred by the selling stockholders in
disposing of the shares. We will bear all other costs, fees and
expenses incurred in effecting the registration of the shares
covered by this prospectus, including, without limitation, all
registration and filing fees, NASDAQ listing fees, and fees and
expenses of our counsel and our accountants.
DETERMINATION OF OFFERING PRICE
This
offering is being made solely to allow the selling stockholders to
offer and sell shares of common stock to the public. The selling
stockholders may offer for resale some or all of their shares at
the time and price that they choose. On any given day, the price
per share is likely to be based on the market price for the common
stock on NASDAQ on the date of sale, unless shares are sold in
private transactions. Consequently, we cannot currently make a
determination of the price at which shares offered for resale
pursuant to this prospectus may be sold.
SELLING STOCKHOLDERS
The
following is a table of the selling stockholders. The
shares of common stock being offered by the selling stockholders
include shares of common stock held by selling stockholders and
shares of common stock issuable to the selling stockholders upon
conversion of certain convertible promissory notes held by the
selling stockholders and upon exercise of certain warrants held by
the selling stockholders. Beneficial ownership in the
table below is determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”) promulgated by the SEC, and generally includes voting
or investment power with respect to securities. The
inclusion of any shares in this table does not constitute an
admission of beneficial ownership.
The
shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the
registration statement of which this prospectus is a part remains
effective, by or for the account of the selling stockholders.
After the date of effectiveness of the registration statement of
which this prospectus is a part, a selling stockholder may sell or
transfer, in transactions covered by this prospectus or in
transactions exempt from the registration requirements of the
Securities Act, some or all of its common stock. At the
time of the acquisition of the shares of common stock, the
convertible promissory notes and the warrants, the selling
stockholders had no agreements, understandings or arrangements with
any other persons, either directly or indirectly, to distribute any
securities.
The
information in the table below is based on the information provided
to us by the selling stockholders and is as of the date the same
was provided to us. The information set forth concerning
the selling stockholders includes the number of shares currently
held and the number of shares offered by each selling
stockholder. The ownership percentages in the table are based
on the 73,677,793 shares of common stock we had outstanding as of
August 9, 2019. Shares of common stock subject to
warrants, options and other convertible securities that are
currently exercisable or exercisable within 60 days are considered
outstanding and beneficially owned by a selling stockholder who
holds those warrants, options or other convertible securities for
the purpose of computing the percentage ownership of that selling
stockholder, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other selling
stockholder. Unless otherwise footnoted, share amounts
represent shares of common stock. Unless otherwise
footnoted, the persons and entities named in the table below have
sole voting and investment power with respect to all shares of
common stock that they beneficially own, subject to applicable
community property laws. None of the selling security holders below
is a registered broker-dealer.
|
|
|
Shares Beneficially Owned
After the Offering
|
Selling Stockholders
|
Shares of Common Stock Beneficially Owned Prior to the
Offering
|
Number of Shares Being Offered
|
Number (1)
|
Percentage
(%)*
|
Gordon L. Holmes
|
181,250
|
175,000
|
6,250
|
*
|
Steven Mark Nelson
|
62,500
|
62,500
|
0
|
*
|
Robin Denkinger
|
82,500
|
62,500
|
20,000
|
*
|
Matthew Tondini
|
15,000
|
15,000
|
0
|
*
|
Orion 4 LLC (2)
|
30,000
|
30,000
|
0
|
*
|
Danny Noonan
|
450,000
|
150,000
|
300,000
|
*
|
John R. Shand
|
439,324
|
62,500
|
376,824
|
*
|
Hans A. Mansion
|
1,007,878
(3)
|
796,000
|
211,878
(3)
|
*
|
Allan Marshall
|
218,182
(4)
|
218,182
(4)
|
0
|
*
|
Thoroughbred Capital Advisors LLC (5)
|
1,974,546
(6)
|
1,974,546
(6)
|
0
|
*
|
_________________________
*
|
Less
than 1%
|
(1)
|
Assumes
all shares offered by the selling stockholders are
sold.
|
(2)
|
Mohsen
Khorassani, the chief executive officer of this entity, has sole
voting and investment power.
|
(3)
|
Includes
106,278 shares of common stock over which he has shared voting and
investment power.
|
(4)
|
Includes
a promissory note that is convertible into 181,818 shares of common
stock, which promissory note is presently exercisable, and warrants
that are exercisable into 36,364 shares of common stock, which
warrants are presently exercisable.
|
(5)
|
Joe
Giamichael, the manager of this entity, has sole voting and
investment power.
|
(6)
|
Includes
a promissory note that is convertible into 1,645,455 shares of
common stock, which promissory note is presently exercisable, and
warrants that are exercisable into 329,091 shares of common stock,
which warrants are presently exercisable.
|
PLAN OF DISTRIBUTION
We are
registering the shares of common stock issuable to the selling
stockholders to permit the resale of these shares of common stock
by the holders of the shares of common stock from time to time
after the date of this prospectus. We will not receive any of the
proceeds from the sale by the selling stockholders of the shares of
common stock. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.
The
selling stockholders may sell all or a portion of the shares of
common stock beneficially owned by them and offered hereby from
time to time directly or through one or more underwriters,
broker-dealers or agents. If the shares of common stock are sold
through underwriters or broker-dealers, the selling stockholders
will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of common stock may be sold
on any national securities exchange or quotation service on which
the securities may be listed or quoted at the time of sale, in the
over-the-counter market or in transactions otherwise than on these
exchanges or systems or in the over-the-counter market and in one
or more transactions at fixed prices, at prevailing market prices
at the time of the sale, at varying prices determined at the time
of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve crosses or block transactions. The
selling stockholders may use any one or more of the following
methods when selling shares:
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its account;
|
·
|
an
exchange distribution in accordance with the rules of the
applicable exchange;
|
·
|
privately
negotiated transactions;
|
·
|
settlement
of short sales entered into after the effective date of the
registration statement of which this prospectus is a
part;
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such shares at a stipulated price per share;
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether such options are listed on an options exchange or
otherwise;
|
·
|
a
combination of any such methods of sale; and
|
·
|
any
other method permitted pursuant to applicable law.
|
The
selling stockholders also may resell all or a portion of the shares
in open market transactions in reliance upon Rule 144 under the
Securities Act, as permitted by that rule, or Section 4(1) under
the Securities Act, if available, rather than under this
prospectus, provided that they meet the criteria and conform to the
requirements of those provisions.
Broker-dealers
engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. If the selling stockholders
effect such transactions by selling shares of common stock to or
through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling stockholders
or commissions from purchasers of the shares of common stock for
whom they may act as agent or to whom they may sell as principal.
Such commissions will be in amounts to be negotiated, but, except
as set forth in a supplement to this Prospectus, in the case of an
agency transaction will not be in excess of a customary brokerage
commission in compliance with FINRA Rule 5110.
In
connection with sales of the shares of common stock or otherwise,
the selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn
engage in short sales of the shares of common stock in the
course of hedging in positions they assume. The selling
stockholders may also sell shares of common stock short and if such
short sale shall take place after the date that this Registration
Statement is declared effective by the SEC, the selling
stockholders may deliver shares of common stock covered by this
prospectus to close out short positions and to return borrowed
shares in connection with such short sales. The selling
stockholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares, to the extent
permitted by applicable law. The selling stockholders may also
enter into option or other transactions with broker-dealers or
other financial institutions or the creation of one or more
derivative securities which require the delivery to such
broker-dealer or other financial institution of shares offered by
this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented
or amended to reflect such transaction). Notwithstanding the
foregoing, the selling stockholders have been advised that they may
not use shares registered on this registration statement to cover
short sales of our common stock made prior to the date the
registration statement, of which this prospectus forms a part, has
been declared effective by the SEC.
The
selling stockholders may, from time to time, pledge or grant a
security interest in some or all of the shares of common stock
owned by them and, if they default in the performance of their
secured obligations, the pledgees or secured parties may offer and
sell the shares of common stock from time to time pursuant to this
prospectus or any amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act of 1933, as
amended, amending, if necessary, the list of selling stockholders
to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling
stockholders also may transfer and donate the shares of common
stock in other circumstances in which case the transferees, donees,
pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
The
selling stockholders and any broker-dealer or agents participating
in the distribution of the shares of common stock may be deemed to
be “underwriters” within the meaning of Section 2(11)
of the Securities Act in connection with such sales. In such event,
any commissions paid, or any discounts or concessions allowed to,
any such broker-dealer or agent and any profit on the resale of the
shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Selling
Stockholders who are “underwriters” within the meaning
of Section 2(11) of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act and may be
subject to certain statutory liabilities of, including but not
limited to, Sections 11, 12 and 17 of the Securities Act and Rule
10b-5 under the Securities Exchange Act of 1934, as amended, or the
Exchange Act.
Each
selling stockholder has informed us that it is not a registered
broker-dealer and does not have any written or oral agreement or
understanding, directly or indirectly, with any person to
distribute the common stock. Upon the company being notified in
writing by a selling stockholder that any material arrangement has
been entered into with a broker-dealer for the sale of common stock
through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a
supplement to this prospectus will be filed, if required, pursuant
to Rule 424(b) under the Securities Act, disclosing (i) the name of
each such selling stockholder and of the participating
broker-dealer(s), (ii) the number of shares involved, (iii) the
price at which such the shares of common stock were sold, (iv) the
commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s)
did not conduct any investigation to verify the information set out
or incorporated by reference in this prospectus, and (vi) other
facts material to the transaction. In no event shall any
broker-dealer receive fees, commissions and markups, which, in the
aggregate, would exceed eight percent (8%).
Under
the securities laws of some states, the shares of common stock may
be sold in such states only through registered or licensed brokers
or dealers. In addition, in some states the shares of common stock
may not be sold unless such shares have been registered or
qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
There
can be no assurance that any selling stockholder will sell any or
all of the shares of common stock registered pursuant to the
registration statement, of which this prospectus forms a
part.
Each
selling stockholder and any other person participating in such
distribution will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder, including, without limitation, Regulation M
of the Exchange Act, which may limit the timing of purchases and
sales of any of the shares of common stock by the selling
stockholder and any other participating person. Regulation M may
also restrict the ability of any person engaged in the distribution
of the shares of common stock to engage in market-making activities
with respect to the shares of common stock. All of the foregoing
may affect the marketability of the shares of common stock and the
ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.
We will
pay all expenses of the registration of the shares of common stock,
including, without limitation, Securities and Exchange Commission
filing fees and expenses of compliance with state securities or
“blue sky” laws; provided, however, that each selling
stockholder will pay all underwriting discounts and selling
commissions, if any, and any legal expenses incurred by it. We may
be indemnified by the selling stockholders against civil
liabilities, including liabilities under the Securities Act, that
may arise from any written information furnished to us by the
selling stockholders specifically for use in this prospectus, in
accordance with documentation and agreements with the selling
stockholders, or we may be entitled to contribution.
DESCRIPTION OF SECURITIES TO BE REGISTERED
The
following is a description of certain provisions relating to the
Common Shares, Notes and Warrants. For additional information
regarding our stock, please refer to our Articles of Incorporation
(as amended) and our Amended and Restated Bylaws, all of which have
previously been filed with the SEC.
General
Our
authorized capital stock consists of 150,000,000 shares of common
stock, par value $0.001 per share, and 10,000,000 shares of
preferred stock, par value $0.001 per share. We have no
shares of preferred stock outstanding.
Common Stock
As of
August 9, 2019, there were 73,677,793 shares of common stock
outstanding. We are registering 3,546,228 shares of our common
stock, in aggregate.
The
rights of all holders of the common stock are identical in all
respects. Each stockholder is entitled to one vote for
each share of common stock held on all matters submitted to a vote
of the stockholders. The holders of the common stock are
entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of legally available funds.
The current policy of the Board of Directors, however, is to retain
earnings, if any, for reinvestment.
Upon
liquidation, dissolution or winding up of the Company, the holders
of the common stock are entitled to share ratably in all aspects of
the Company that are legally available for distribution, after
payment of or provision for all debts and liabilities and after
payment to the holders of preferred stock, if any. The
holders of the common stock do not have preemptive subscription,
redemption or conversion rights under our Articles of
Incorporation. Cumulative voting in the election of directors is
not permitted. There are no sinking fund provisions applicable to
the common stock. The outstanding shares of common stock are
validly issued, fully paid and nonassessable.
Our
common stock is listed on the NASDAQ Capital Market under the
symbol “TRCH.”
8% Unsecured Convertible Promissory Notes
Some of
the shares of common stock covered by this prospectus underly
certain 8% Unsecured Convertible Promissory Notes (the
“Notes”) held by the selling stockholders. We sold the
Notes to two investors in July 2019 in a private offering. The
Notes have a total principal amount of $2,010,000 and mature on May
31, 2021. The Notes are convertible into shares of our common stock
at a conversion price of $1.10 per share. The Notes are redeemable,
in whole or in part, anytime, provided that if we elect to redeem
the Notes before the first anniversary of original issue date, we
must pay all unpaid interest that would have been earned from the
redemption date through such first anniversary. We may require
conversion of the Notes, in whole or in part, if (i) there is an
effective registration statement filed with the SEC covering the
shares of common stock underlying the Notes or such shares are
eligible for resale under Rule 144 under the Securities Act, (ii)
there is a 30-day average daily trading volume of 150,000 or more
shares of common stock for the last 30 consecutive trading days,
and (iii) the closing price of our common stock is $1.75 or more
for 10 consecutive trading days.
Warrants
Some of
the shares of common stock covered by this prospectus underly
certain Warrants that were issued to the Note holders in connection
with the private offering of the Notes in July 2019 (the
“Warrants”). Each investor in the private offering
received a Warrant to purchase a number of shares of common stock
equal to 20% of the number of shares of common stock issuable upon
conversion of such investor’s Note, amounting to a total of
365,455 Warrants being issued in connection with the offering. The
Warrants have an exercise price of $1.35 per share and expire in
June 2022. We may require exercise of the Warrants, in whole or in
part, if (i) there is an effective registration statement filed
with the SEC covering the shares of common stock underlying the
Warrants and (ii) the closing price of our common stock on the
trading market is $2.00 for more for 20 consecutive trading
days.
EXPERTS
The
consolidated financial statements incorporated in this prospectus
by reference from Torchlight Energy Resources, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2018 have been
audited by Briggs & Veselka Co., our independent registered
public accounting firm, as stated in its report included in such
consolidated financial statements, and have been so incorporated in
reliance upon the report of such firm given upon its authority as
experts in accounting and auditing.
Certain
information contained in the documents we incorporate by reference
in this prospectus with respect to the oil and natural gas reserves
associated with our oil and natural gas prospects is derived from
the reports of PeTech Enterprises, Inc., an independent petroleum
and natural gas consulting firm, and has been incorporated by
reference in this prospectus upon the authority of said firm as an
expert with respect to the matters covered by such reports and in
giving such reports.
LEGAL MATTERS
The
validity of the issuance of the common stock offered under this
prospectus has been passed upon for us by Axelrod & Smith,
Houston, Texas.
COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
As
permitted by Nevada law, our Bylaws provide that we shall indemnify
a person in connection with an action, suit or proceeding, whether
civil, criminal, administrative or investigative, including without
limitation an action in our right to procure a judgment in our
favor, by reason of the fact that the person is or was our
director, officer, employee or agent, including attorneys’
fees, judgments, fines and amounts paid in settlement, if the
person acted in good faith and did not breach his or her fiduciary
duties to the company through intentional misconduct, fraud or a
knowing violation of law.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, we have been advised that in
the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
PART II – INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The
following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the
securities being registered. All such expenses will be paid by
us.
Securities and
Exchange Commission Registration Fee
|
$457.74
|
Printing and
Engraving Expenses
|
$2,000.00
|
Accounting Fees and
Expenses
|
$10,000.00
|
Legal Fees and
Expenses
|
$10,000.00
|
Blue Sky
Qualification Fees and Expenses
|
-0-
|
Miscellaneous
|
$1,000.00
|
|
|
TOTAL
|
$23,457.74
|
Item 15. Indemnification of Directors and
Officers.
Our
Bylaws provide that we shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or
in our right, by reason of the fact that the person is or was our
director, officer, employee or agent, or is or was serving at our
request as a director, officer, employee or agent of another
enterprise, against expenses, including attorneys’ fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with the action,
suit or proceeding if the person: (a) is not liable pursuant to
Section 78.138 of the Nevada Revised Statutes (“NRS”);
or (b) acted in good faith and in a manner which he or she
reasonably believed to be in or not opposed to our best interests,
and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was
unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, does not, of itself,
create a presumption that the person is liable pursuant to NRS
78.138 or did not act in good faith and in a manner which he or she
reasonably believed to be in or not opposed to our best interests,
or that, with respect to any criminal action or proceeding, he or
she had reasonable cause to believe that the conduct was
unlawful.
Our
Bylaws also provide that we shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in our right to procure a
judgment in our favor by reason of the fact that the person is or
was our director, officer, employee or agent, or is or was serving
at our request as a director, officer, employee or agent of another
enterprise against expenses, including amounts paid in settlement
and attorneys’ fees actually and reasonably incurred by the
person in connection with the defense or settlement of the action
or suit if the person: (a) is not liable pursuant to NRS 78.138; or
(b) acted in good faith and in a manner which he or she reasonably
believed to be in or not opposed to our best
interests. Indemnification may not be made for any
claim, issue or matter as to which such a person has been adjudged
by a court of competent jurisdiction, after exhaustion of all
appeals therefrom, to be liable to us or for amounts paid in
settlement to us, unless and only to the extent that the court in
which the action or suit was brought or other court of competent
jurisdiction determines upon application that in view of all the
circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems
proper.
Further, our Bylaws
provide that the expenses of officers and directors incurred in
defending a civil or criminal action, suit or proceeding must be
paid by the Corporation as they are incurred and in advance of the
final disposition of the action, suit or proceeding, upon receipt
of an undertaking by or on behalf of the director or officer to
repay the amount if it is ultimately determined by a court of
competent jurisdiction that the director or officer is not entitled
to be indemnified by us.
Sections 78.7502
and 78.751 of the NRS permit the indemnifications described
above. Further, Section 78.7502 provides that, to the
extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above, or in defense of any
claim, issue or matter therein, we are required to indemnify him or
her against expenses, including attorneys’ fees, actually and
reasonably incurred by him or her in connection with the
defense.
Item
16. Exhibits.
The
following is a list of exhibits filed as part of this registration
statement. Where so indicated by footnote, exhibits which were
previously filed are incorporated herein by reference. Any
statement contained in an incorporated document will be deemed to
be modified or superseded for purposes of this registration
statement to the extent that a statement contained herein or in any
other subsequently filed incorporated document modifies or
supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this registration
statement.
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24.1
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Power
of Attorney (included in signature page hereto)
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*
Incorporated by reference from our previous filings with the
SEC.
Item 17. Undertakings.
Insofar
as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
(a) To
include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(b) To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the
effective registration statement.
(c) To
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
provided, however, that paragraphs
(1)(a), (1)(b) and (1)(c) do not apply if the information required
to be included in a post-effective amendment by those paragraphs is
contained in reports filed with or furnished to the SEC by the
registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, that are incorporated
by reference in this registration statement, or is contained in a
form of prospectus filed pursuant to Rule 424(b) that is part of
this registration statement.
(2)
That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To
remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The
undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant’s annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan’s annual
report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused
this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Plano, State
of Texas, on September 4, 2019.
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TORCHLIGHT
ENERGY RESOURCES, INC.
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By:
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/s/
John A. Brda
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John A. Brda
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President and Chief
Executive Officer
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POWER OF ATTORNEY
We the
undersigned officers and directors of Torchlight Energy Resources,
Inc., hereby, severally constitute and appoint John A. Brda and
Gregory McCabe, each of them singly, our true and lawful attorneys
with full power to them and each of them singly, to sign for us and
in our names in the capacities indicated below, the registration
statement on Form S-3 filed herewith and any and all pre-effective
and post-effective amendments to said registration statement and
any subsequent registration statement for the same offering which
may be filed under Rule 462(b) and generally to do all such things
in our names and on our behalf in our capacities as officers and
directors to enable Torchlight Energy Resources, Inc. to comply
with the provisions of the Securities Act of 1933, and all
requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by
our said attorneys, or any of them, to said registration statement
and any and all amendments thereto or to any subsequent
registration statement for the same offering which may be filed
under Rule 462(b).
Pursuant to the
requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature
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Title
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Date
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/s/ John A. Brda
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John A.
Brda
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Director,
Chief Executive Officer, President and Secretary
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September
4, 2019
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/s/ Gregory McCabe
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Gregory
McCabe
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Director
(Chairman of the Board)
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September
4, 2019
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/s/ Roger N. Wurtele
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Roger
N. Wurtele
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Chief
Financial Officer and Principal Accounting Officer
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September
4, 2019
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/s/ Robert Lance Cook
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Robert
Lance Cook
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Director
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September
4, 2019
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/s/ Alexandre Zyngier
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Alexandre
Zyngier
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Director
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September
4, 2019
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/s/ Michael J. Graves
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Michael
J. Graves
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Director
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September
4, 2019
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EXHIBIT 4.1
NEITHER
THIS 8% UNSECURED CONVERTIBLE PROMISSORY NOTE (THE
“NOTE”) NOR THE SECURITIES ISSUABLE IN CONNECTION WITH
THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (“ACT”), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE IN CONNECTION WITH
THIS NOTE MAY BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT
REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS
OR DELIVERY TO TORCHLIGHT ENERGY RESOURCES, INC. OF AN OPINION OF
LEGAL COUNSEL SATISFACTORY TO TORCHLIGHT ENERGY RESOURCES, INC.
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY
APPLICABLE STATE SECURITIES LAWS
8%
UNSECURED CONVERTIBLE PROMISSORY NOTE
OF
TORCHLIGHT ENERGY
RESOURCES, INC.
NOTE NO.
________
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July ___,
2019
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FOR
VALUE RECEIVED, TORCHLIGHT ENERGY RESOURCES, INC., a Nevada
corporation with its principal office located at 5700 Plano
Parkway, Ste. 3600, Plano, Texas 75093 (the “Company” or “Debtor”), unconditionally promises
to pay to ___________ whose address is
______________________________________________________, or the
registered assignee, upon presentation of this 8% Unsecured
Convertible Promissory Note (the “Note”) by the registered holder
hereof (the “Registered
Holder” or “Holder”) at the office of the
Company, the principal amount of $__________ (“Principal Amount”), together with
the accrued and unpaid interest thereon and other sums as
hereinafter provided, subject to the terms and conditions as set
forth below. The effective date of execution and issuance of this
Note is July ____, 2019 (“Original Issue
Date”).
1.
Schedule for
Payment of Principal and Interest. The Principal Amount outstanding
hereunder shall be paid in one lump sum payment of $__________ on
or before May 31, 2021 (the “Maturity Date”), and the interest
on the Principal Amount outstanding hereunder shall be payable at
the rate of 8% per annum and shall be due and payable monthly, in
arrears, with the initial interest payment due July 1, 2019, and
continuing thereafter on the 1st day of each successive month
during the term of this Note. Accrual of interest on the
outstanding Principal Amount, payable in cash, shall commence on
the date of receipt of funds by the Company and shall continue
until payment in full of the outstanding Principal Amount has been
made hereunder. The interest so payable will be paid to the person
whose name is registered on the records of the Company regarding
registration and transfers of this Note (the “Note Register”).
2.
Payment.
Payment of any sums due to the Holder under the terms of this Note
shall be made in United States Dollars by check or wire transfer at
the option of the Company. Payment shall be made at the address
last appearing on the Note Register of the Company as designated in
writing by the Holder hereof from time to time. If any payment
hereunder would otherwise become due and payable on a day on which
commercial banks in Plano, Texas, are permitted or required to be
closed, such payment shall become due and payable on the next
succeeding day on which commercial banks in Plano, Texas, are not
permitted or required to be closed (“Business Day”) and, with respect to payments of
Principal Amount, interest thereon shall be payable at the then
applicable rate during such extension, if any. The forwarding of
such funds shall constitute a payment of outstanding principal and
interest hereunder and shall satisfy and discharge the liability
for principal and interest on this Note to the extent of the sum
represented by such payment. Except as provided in Section 3
hereof, this Note may not be prepaid without the prior written
consent of the Holder.
8% Unsecured
Convertible Promissory Note - Page 1 of 12
3.
Company’s
Option to Redeem Note. On or after the Original Issue Date,
up to 100%, in whole or in part, of the outstanding Principal
Amount of the Note, plus any accrued and unpaid interest, will be
subject to redemption at the option of the Company. If the Company
elects to redeem before the first anniversary of the Original Issue
Date, however, the Company shall pay the Holder all unpaid interest
on the portion of the Principal Amount redeemed that would have
been earned from the Redemption Payment Date (as defined below)
through the first anniversary of the Original Issue Date. Any
amount of the Note subject to redemption, as set forth herein (the
“Redemption
Amount”), may be redeemed by the Company at any time
and from time to time, upon not less than 10 nor more than 30 days
notice to the Holder. The Company shall deliver to the Holder a
written Notice of Redemption (the “Notice of Redemption”) specifying
the date for the redemption (the “Redemption Payment Date”), which
date shall be at least 10 but not more than 30 days after the date
of the Notice of Redemption (the “Redemption Period”). A Notice of
Redemption shall not be effective with respect to any portion of
this Note for which the Holder has previously delivered a Notice of
Conversion (as defined in Section 4(b) below) or for conversions
elected to be made by the Holder pursuant to Section 4 during the
Redemption Period. The Redemption Amount shall be determined as if
the Holder’s conversion elections had been completed
immediately prior to the date of the Notice of Redemption. On the
Redemption Payment Date, the Redemption Amount must be paid in good
funds to the Holder.
4.
Conversion
Rights.
(a)
Conversion. At any
time after the Original Issue Date, the Holder of this Note will
have the right, at the Holder's option, to convert all or any
portion of the Principal Amount hereof and any accrued but unpaid
interest thereon into shares of common stock, par value $.001 per
share, of the Company (“Common Stock”) in a manner and in
accordance with Section 4(b) below (unless earlier paid or
redeemed) at the conversion price as set forth below in Section
4(c) (subject to adjustment as described herein). The right to
convert the Principal Amount or interest thereon of this Note
called for redemption will terminate at the close of business on
the Business Day prior to the Redemption Payment Date for such
Note, unless the Company subsequently fails to pay the applicable
Redemption Amount. The shares of Common Stock to be issued upon
conversion under this Section 4 (or upon a conversion under Section
5 below) are hereinafter referred to as the “Conversion
Shares”.
8% Unsecured
Convertible Promissory Note - Page 2 of 12
(b)
Mechanics of
Holder’s Conversion. In the event that the Holder
elects to convert any portion of this Note into Common Stock, the
Holder shall give notice of such election by delivering an executed
and completed notice of conversion (“Notice of Conversion”) to the
Company. The Notice of Conversion will provide a breakdown in
reasonable detail of the Principal Amount and/or accrued interest
that is being converted and state the denominations in which such
Holder wishes the certificate or certificates for the Conversion
Shares to be issued. The Registered Holder must surrender this Note
to the Company with the Notice of Conversion, unless such Notice of
Conversion is only for accrued interest and no Principal Amount. On
each Conversion Date (as hereinafter defined) and in accordance
with its Notice of Conversion, the Company shall make the
appropriate reduction to the Principal Amount and/or accrued
interest as entered in its records and shall provide written notice
thereof to the Holder within five (5) Business Days after the
Conversion Date. Each date on which a Notice of Conversion is
delivered or telecopied to the Company in accordance with the
provisions hereof shall be deemed a Conversion Date (the
“Conversion
Date”). Pursuant to the terms of the Notice of
Conversion, the Company will issue instructions to its transfer
agent as soon as practicable thereafter, to cause to be issued and
delivered to the Holder certificates for the number of full shares
of Conversion Shares to which such Holder shall be entitled as
aforesaid and, if necessary, the Company shall cause to be issued
and delivered to the Holder a new promissory note representing any
unconverted portion of this Note. The Company shall not issue
fractional Conversion Shares upon conversion, but the number of
Conversion Shares to be received by any Holder upon conversion
shall be rounded down to the next whole number. In the case of the
exercise of the conversion rights set forth herein the conversion
privilege shall be deemed to have been exercised and the Conversion
Shares issuable upon such conversion shall be deemed to have been
issued upon the date of receipt by the Company of the Notice of
Conversion. The Holder shall be treated for all purposes as the
record holder of the Conversion Shares, unless the Holder provides
the Company written instructions to the contrary.
(c)
Conversion Price.
The Conversion Price of the Common Stock into which the Principal
Amount, or the then outstanding interest due thereon, of this Note
is convertible shall be $1.10 per share (subject to adjustment
as described herein).
(d) Adjustment
Provisions. The Conversion Price and number and kind of
shares or other securities to be issued upon conversion pursuant to
this Note shall be subject to adjustment from time to time upon the
happening of certain events while this conversion right remains
outstanding, as follows:
(i)
Reclassification.
In case of any reclassification, consolidation or merger of the
Company with or into another entity or any merger of another entity
with or into the Company, or in the case of any sale, transfer or
conveyance of all or substantially all of the assets of the Company
(computed on a consolidated basis), the Note then outstanding will,
without the consent of any Holder, become convertible only into the
kind and amount of securities, cash or other property receivable
upon such reclassification, consolidation, merger, sale, transfer
or conveyance by a Holder of the number of shares of Common Stock
into which the Note was convertible immediately prior thereto,
after giving effect to any adjustment event.
(ii)
Stock Split,
Dividend. If the number of shares of Common Stock
outstanding at any time after the date hereof is increased by a
subdivision or split of Common Stock, or by the declaration of a
dividend on the Common Stock, which dividend is wholly or partially
in the form of additional shares of Common Stock or any other
securities of the Company, then immediately after the effective
date of such subdivision or split-up, or the record date with
respect to such dividend, as the case may be, the Conversion Price
shall be appropriately reduced so that the holder of this Note
thereafter exchanged shall be entitled to receive the percentage of
shares of Common Stock which such holder would have owned
immediately following such action had this Note been exchanged
immediately prior thereto;
8% Unsecured
Convertible Promissory Note - Page 3 of 12
(iii)
Reverse Split. If
the number of Common Stock outstanding at any time after the date
hereof is decreased by a combination of the outstanding Common
Stock or reverse split, then, immediately after the effective date
of such combination, the Conversion Price shall be appropriately
increased so that the holder of this Note thereafter exchanged
shall be entitled to receive the percentage of shares of Common
Stock which such holder would have owned immediately following such
action had this Note been exchanged immediately prior
thereto.
(e) Issuance
of New Note. Upon any partial conversion of this Note, a new
promissory note containing the same date and provisions of this
Note shall be issued by the Company to the Holder for the principal
balance of this Note and interest which shall not have been
converted or paid. The Holder shall not pay any costs, fees or any
other consideration to the Company for the production and issuance
of a new promissory note.
(f)
Reservation of
Shares. The Company shall at all times reserve for issuance
and maintain available, out of its authorized but unissued Common
Stock, solely for the purpose of effecting the full conversion of
the Note, the full number of shares of Common Stock deliverable
upon the conversion of the Note from time to time outstanding. The
Company shall from time to time (subject to obtaining necessary
director and stockholder action), in accordance with the laws of
the State of Nevada, increase the authorized number of shares of
its Common Stock if at any time the authorized number of shares of
its Common Stock remaining unissued shall not be sufficient to
permit the conversion of the Note.
5.
Company’s
Option to Require Conversion. On or after the Original Issue
Date, if (i) there is an effective registration statement filed
with the Securities and Exchange Commission registering the
Conversion Shares to be issued upon conversion of the Note or such
Conversion Shares are eligible for resale under Rule 144 under the
Act, (ii) there is a 30-day average daily trading volume of 150,000
or more shares of common stock for the last 30 consecutive Trading
Days (as hereinafter defined), as reported by the NASDAQ Stock
Market and (iii) the closing price of the Common Stock on the
Trading Market (as hereinafter defined) is $1.75 (subject to
adjustment consistent with the adjustments set forth in Section
4(d) above) or more for 10 consecutive Trading Days while the
registration statement referred to in clause “(i)”
above is effective or while the Conversion Shares are eligible for
resale under Rule 144, then the Company may require the Registered
Holder to convert up to 100%, in whole or in part, of the
outstanding Principal Amount of the Note, plus any accrued and
unpaid interest. The Conversion Shares subject to such required
conversion are hereinafter referred to as the “Required Conversion
Shares”.
The
Company will have 10 Trading Days after all of the conditions set
forth in the preceding paragraph are met (subject to adjustment
consistent with the adjustments set forth in Section 4(d) above) to
deliver to the Registered Holder a written notice of required
conversion (the “Notice of
Required Conversion”). The Notice of Required
Conversion will also provide a breakdown in reasonable detail of
the Principal Amount and/or accrued interest that is being
converted. The date the Notice of Required Conversion is delivered
is deemed the “Required
Conversion Date,” on which date and in accordance with
its Notice of Required Conversion, the Company shall make the
appropriate reduction to the Principal Amount and/or accrued
interest as entered in its records. The Registered Holder must
surrender this Note to the Company within 5 Business Days of the
Required Conversion Date. Pursuant to the terms of the Notice of
Required Conversion, the Company will issue instructions to its
transfer agent as soon as practicable after receipt of the Note, to
cause to be issued and delivered to the Holder certificates for the
number of full shares of Conversion Shares to which such Holder
shall be entitled as aforesaid and, if necessary, the Company shall
cause to be issued and delivered to the Holder a new promissory
note representing any unconverted portion of this Note. The Company
shall not issue fractional Conversion Shares upon conversion, but
the number of Conversion Shares to be received by any Holder upon
conversion shall be rounded down to the next whole number and the
Holder shall be entitled to payment of the remaining principal
amount by a Company check. In the case of the exercise of the
Company’s option to require conversion set forth herein, the
conversion shall be deemed to have been effected and the Conversion
Shares issuable upon such conversion shall be deemed to have been
issued upon the Required Conversion Date.
8% Unsecured
Convertible Promissory Note - Page 4 of 12
“Trading Day” means a day on which
the principal Trading Market is open for business.
“Trading Market”
means the following markets or exchanges on which the Common Stock
is listed or quoted for trading on the date in question: The Nasdaq
Stock Market, the New York Stock Exchange, the NYSE MKT LLC or the
OTC Markets.
6. Representations
and Warranties of the Company. The Company represents and
warrants to the Holder that:
(a)
Organization. The
Company is validly existing and in good standing under the laws of
the state of Nevada and has the requisite power to own, lease and
operate its properties and to carry on its business as now being
conducted. The Company is duly qualified to do business and is in
good standing in each jurisdiction in which the character or
location of the properties owned or leased by the Company or the
nature of the business conducted by the Company makes such
qualification necessary or advisable, except where the failure to
do so would not have a material adverse effect on the
Company.
(b) Power
and Authority. The Company has the requisite power to
execute, deliver and perform this Note, and to consummate the
transactions contemplated hereby. The execution and delivery of
this Note by the Company and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company. This Note has been
duly executed and delivered by the Company and constitutes a legal,
valid and binding obligation of the Company and is enforceable
against the Company in accordance with its terms except (i) that
such enforcement may be subject to bankruptcy, insolvency,
moratorium or similar laws affecting creditors' rights and (ii)
that the remedy of specific performance and injunctive and other
forms of equitable relief are subject to certain equitable defenses
and to the discretion of the court before which any proceedings
therefor may be brought.
(c) Approvals.
No authorization, approval or consent of any court, governmental
body, regulatory agency, self-regulatory organization, or stock
exchange or market is required to be obtained by the Company for
the issuance and sale of the Notes and common stock as contemplated
by this Note, except such authorizations, approvals and consents
that have been obtained.
(d) SEC
Documents, Financial Statements. The Common Stock of the
Company is registered pursuant to Section l2(b) of the Securities
Exchange Act of 1934 (“Exchange Act”), and the Company,
to the best of its knowledge, has filed all reports, schedules,
forms, statements and other documents required to be filed by it
with the SEC pursuant to the reporting requirements of Section
13(a) or l5(d) (all of the foregoing including filings incorporated
by reference therein being referenced to herein as the “SEC
Documents”).
8% Unsecured
Convertible Promissory Note - Page 5 of 12
7.
Events
of Defaults and Remedies. The following are deemed to be an
event of default (“Event of
Default”) hereunder: (i) the failure by the Company to
pay any installment of interest on this Note as and when due and
payable and the continuance of any such failure for 10 days; (ii)
the failure by the Company to pay all or any part of the principal
on this Note when and as the same become due and payable as set
forth above, at maturity, by acceleration or otherwise; (iii) the
failure of the Company to perform any conversion of Notes required
under this Note and the continuance of any such failure for 10
days; (iv) the failure by the Company to observe or perform any
covenant or agreement contained in this Note, the Subscription
Agreement and the continuance of such failure for a period of 30
days after the written notice is given to the Company; (v) the
assignment by the Company for the benefit of creditors, or an
application by the Company to any tribunal for the appointment of a
trustee or receiver of a substantial part of the assets of the
Company, or the commencement of any proceedings relating to the
Company under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debts, dissolution or other liquidation
law of any jurisdiction; or the filing of such application, or the
commencement of any such proceedings against the Company and an
indication of consent by the Company to such proceedings, or the
appointment of such trustee or receiver, or an adjudication of the
Company bankrupt or insolvent, or approval of the petition in any
such proceedings, and such order remains in effect for 60 days;
(vi) the declaration of an event of default or default, occurring
after the Original Issue Date, under any other contract, agreement,
debt or obligation of the Company with a monetary amount in excess
of $1,000,000; or (vii) the entry of a judgment against the
Company, which is not otherwise appealable, or for which all
appeals have been exhausted and for which the Company has not
posted a bond to satisfy the amount of the judgment in excess of
$2,500,000.
8.
The
Holder’s Rights and Remedies upon the Occurrence of an Event
of Default. If an Event of Default occurs and is continuing
(other than an Event of Default specified in Section 7 (v) above
with respect to the Company), then in every such case, unless the
Principal Amount of the Note shall have already become due and
payable, the Holder of the Note then outstanding, by notice in
writing to the Company (an “Acceleration Notice”), may
declare all principal and accrued and unpaid interest thereon to be
due and payable immediately. If an Event of Default specified in
Section 7 (v) above occurs with respect to the Company, all
principal and accrued and unpaid interest thereon will be
immediately due and payable on the Note without any declaration or
other act on the part of the Holder. The Holder may rescind such
acceleration if the existing Event of Default has been cured or
waived.
9.
Default
Interest. The Company agrees that if the Company defaults in
the payment of any payment required hereunder, whether payment of
Principal Amount or interest, the Company promises to pay, on
demand, interest on any such unpaid amounts, from the date the
payment is due to the date of actual payment, at the rate (the
“Default Rate) of the
lessor of (i) 12% per annum; and (ii) the maximum nonusurious rate
permitted by applicable law.
8% Unsecured
Convertible Promissory Note - Page 6 of 12
10.
Limitation on
Merger, Sale or Consolidation. The Company may not, directly
or indirectly, consolidate with or merge into another person or
sell, lease, convey or transfer all or substantially all of its
assets (computed on a consolidated basis), whether in a single
transaction or a series of related transactions, to another person
or group of affiliated persons, unless either (i) in the case of a
merger or consolidation, the Company is the surviving entity or
(ii) the resulting, surviving or transferee entity expressly
assumes by supplemental agreement all of the obligations of the
Company in connection with the Notes. Upon any consolidation or
merger or any transfer of all or substantially all of the assets of
the Company in accordance with the foregoing, the successor entity
formed by such consolidation or into which the Company is merged or
to which such transfer is made, shall succeed to, and be
substituted for, and may exercise every right and power of the
Company under the Note with the same effect as if such successor
entity had been named therein as the Company, and the Company will
be released from its obligations under the Note, except as to any
obligations that arise from or as a result of such
transaction.
11.
Listing
of Registered Holder of Note. This Note will be registered
as to principal amount in the Holder’s name on the books of
the Company at its principal office in Plano, Texas (the
“Note
Register”), after which no transfer hereof shall be
valid unless made on the Company’s books at the office of the
Company, by the Holder hereof, in person, or by attorney duly
authorized in writing, and similarly noted hereon.
12.
Registered Holder
Not Deemed a Stockholder.No Holder, as such, of this Note shall
be entitled to vote or receive dividends or be deemed the holder of
shares of the Company for any purpose, nor shall anything contained
in this Note be construed to confer upon the Holder hereof, as
such, any of the rights of a stockholder of the Company or any
right to vote, give or withhold consent to any corporate action
(whether any reorganization, issue of stock, reclassification of
stock, consolidation, merger, conveyance or otherwise), receive
notice of meetings, receive dividends or subscription rights, or
otherwise.
13.
Waiver
of Demand, Presentment, Etc. The Company hereby expressly waives
demand and presentment for payment, notice of nonpayment, protest,
notice of protest, notice of dishonor, notice of acceleration or
intent to accelerate, bringing of suit and diligence in taking any
action to collect amounts called for hereunder and shall be
directly and primarily liable for the payment of all sums owing and
to be owing hereunder, regardless of and without any notice,
diligence, act or omission as or with respect to the collection of
any amount called for hereunder.
14.
Attorney’s
Fees. The Company
agrees to pay all costs and expenses, including without limitation
reasonable attorney’s fees, which may be incurred by the
Holder in collecting any amount due under this Note.
15.
Enforceability.
In case any provision of this Note is held by a court of competent
jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided,
if possible, so that it is enforceable to the maximum extent
possible, and the validity and enforceability of the remaining
provisions of this Note will not in any way be affected or impaired
thereby.
8% Unsecured
Convertible Promissory Note - Page 7 of 12
16. Intent
to Comply with Usury Laws. In no event will the interest to be
paid on this Note exceed the maximum rate provided by law. It is
the intent of the parties to comply fully with the usury laws of
the State of Texas; accordingly, it is agreed that notwithstanding
any provisions to the contrary in this Note, in no event shall such
Note require the payment or permit the collection of interest
(which term, for purposes hereof, shall include any amount which,
under Texas law, is deemed to be interest, whether or not such
amount is characterized by the parties as interest) in excess of
the maximum amount permitted by the laws of the State of Texas. If
any excess of interest is unintentionally contracted for, charged
or received under this Note, or in the event the maturity of the
indebtedness evidenced by the Note is accelerated in whole or in
part, or in the event that all of part of the Principal Amount or
interest of this Note shall be prepaid, so that the amount of
interest contracted for, charged or received under this Note, on
the amount of the Principal Amount actually outstanding from time
to time under this Note shall exceed the maximum amount of interest
permitted by the applicable usury laws, then in any such event (i)
the provisions of this paragraph shall govern and control, (ii)
neither the Company nor any other person or entity now or hereafter
liable for the payment thereof, shall be obligated to pay the
amount of such interest to the extent that it is in excess of the
maximum amount of interest permitted by such applicable usury laws,
(iii) any such excess which may have been collected shall be either
applied as a credit against the then unpaid principal amount
thereof or refunded to the Company at the Holder’s option,
and (iv) the effective rate of interest shall be automatically
reduced to the maximum lawful rate of interest allowed under the
applicable usury laws as now or hereafter construed by the courts
having jurisdiction thereof. It is further agreed that without
limitation of the foregoing, all calculations of the rate of
interest contracted for, charged or received under the Note which
are made for the purpose of determining whether such rate exceeds
the maximum lawful rate of interest, shall be made, to the extent
permitted by applicable laws, by amortizing, prorating, allocating
and spreading in equal parts during the period of the full stated
term of the Note evidenced thereby, all interest at any time
contracted for, charged or received from the Company or otherwise
by the Holders in connection with this Note.
17.
Governing Law;
Consent to Jurisdiction. This Note shall be governed by and
construed in accordance with the laws of the State of Texas without
regard to the conflict of laws provisions thereof. In any action
between or among any of the parties, whether rising out of this
Note or otherwise, each of the parties irrevocably consents to the
exclusive jurisdiction and venue of the federal and/or state courts
located in Collin County, Texas.
18.
Amendment and
Waiver. Any waiver or amendment hereto shall be in writing
signed by the Holder. No failure on the part of the Holder to
exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial
exercise by the Holder of any right hereunder preclude any other or
further exercise thereof or the exercise of any other rights. The
remedies herein provided are cumulative and not exclusive of any
other remedies provided by law.
19.
Restrictions
Against Transfer or Assignment. Neither this Note nor any of
the shares issuable in connection with this Note may be sold,
transferred, assigned, pledged, hypothecated or otherwise disposed
of by the Registered Holder hereof, in whole or in part, unless and
until either (i) the Note or the shares issuable in connection with
the Note have been duly and effectively registered for resale under
the Securities Act of 1933, as amended, and under any then
applicable state securities laws; or (ii) the Registered Holder
delivers to the Company a written opinion acceptable to the
Company’s counsel that an exemption from such registration
requirements is then available with respect to any such proposed
sale or disposition. Any transfer of this Note otherwise
permissible hereunder shall be made only at the principle office of
the Company upon surrender of this Note for cancellation and upon
the payment of any transfer tax or other government charge
connected therewith, and upon any such transfer a new Note will be
issued to the transferee in exchange therefor. The transferee of
this Note shall be bound by the provisions of this Note. The
register of the transfer of this Note shall occur upon the delivery
of this Note, endorsed by the registered Holder or his duly
authorized attorney, signature guaranteed, to the Company or its
transfer agent. Each Note instrument issued upon the transfer of
this Note shall have the restrictive legend contained herein
conspicuously imprinted on it.
8% Unsecured
Convertible Promissory Note - Page 8 of 12
20.
Entire
Agreement; Headings. This Note and Subscription Agreement
constitute the entire agreement between the Holder and the Company
pertaining to the subject matter hereof and supersedes all prior
and contemporaneous agreements, representations and understandings,
written or oral, of such parties. The headings are for reference
purposes only and shall not be used in construing or interpreting
this Note.
21.
No
Personal Liability of Shareholders, Officers, Directors. No
recourse shall be had for the payment of the Principal Amount or
the interest on this Note, or for any claim based thereon, or
otherwise in respect thereof, or based on or in respect of any Note
supplemental thereto, against any incorporator, stockholder,
officer, or director (past, present, or future) of the Company,
whether by virtue of any constitution, statute, or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all
such liability being by the acceptance hereof, and as part of the
consideration for the issue hereof, expressly waived and
released.
22.
Notices. Any
notices or other communications required or permitted hereunder
shall be sufficiently given if in writing and delivered in person,
or sent by registered or certified mail (return receipt requested)
or recognized overnight delivery service, postage pre-paid, or sent
by email addressed as follows, or to such other address as such
party may notify to the other parties in writing:
(a)
If to the Company, to it at the following address:
5700
Plano Parkway, Ste. 3600
Plano,
Texas 75093
Attn:
John Brda, CEO
Email:
(b) If
to Registered Holder, then to the address listed on the front of
this Note, unless changed, by notice in writing as provided for
herein.
A
notice or communication will be effective (i) if delivered in
person or by overnight courier, on the Business Day it is
delivered, (ii) if sent by registered or certified mail, the
earlier of the date of actual receipt by the party to whom such
notice is required to be given or three (3) days after deposit in
the United States mail and (iii) if sent by email, on the date
sent. If any notice or other communication is sent by email, the
party providing such notice shall, no later than the next business
day after such emailed notice is sent, send a written notice by
registered or certified mail (return receipt requested) or
recognized overnight delivery service, postage
pre-paid.
8% Unsecured
Convertible Promissory Note - Page 9 of 12
23.
Use of
Proceeds. The Company intends to use the net proceeds from
the funds received hereunder to finance the acquisition,
exploration, drilling or improvements of the Company or its
subsidiaries’ oil and gas properties or for other customary
general corporate purposes.
24.
Survival.
The representations, warranties, obligations and covenants of the
Company shall survive execution of this Note.
[Remainder of page
intentionally left blank. Signature page follows.]
8% Unsecured
Convertible Promissory Note - Page 10 of 12
IN WITNESS WHEREOF, Torchlight Energy
Resources, Inc. has caused this Note to be duly executed in its
corporate name by the manual signature of its
President/CEO.
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TORCHLIGHT ENERGY RESOURCES,
INC.
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By:
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John
Brda, CEO
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8% Unsecured
Convertible Promissory Note - Page 11 of 12
ANNEX
A
NOTICE
OF CONVERSION
The
undersigned hereby elects to convert principal and/or accrued
interest under the 8% Unsecured Convertible Promissory Note due May
31, 2021 of Torchlight Energy Resources, Inc., a Nevada corporation
(the “Company”), into shares of common stock, par value
$0.001 per share (the “Common Stock”) of the Company,
according to the conditions hereof, as of the date written below.
If shares of Common Stock are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer
taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Company in
accordance therewith. No fee will be charged to the Holder for any
conversion, except for such transfer taxes, if any.
Conversion Calculations:
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Date to Effect Conversion:
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Principal Amount of 8% Unsecured Convertible Promissory Note to be
Converted:
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Accrued Interest Amount of 8% Unsecured Convertible Promissory Note
to be Converted:
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Number of Shares of Common Stock to be Issued:
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Signature:
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Name:
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Address:
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8% Unsecured
Convertible Promissory Note - Page 12 of 12
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “1933 ACT”), OR APPLICABLE STATE SECURITIES LAWS
AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR SUCH SECURITIES UNDER THE 1933 ACT, OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER HEREOF, TO THE EFFECT THAT REGISTRATION
IS NOT REQUIRED UNDER THE 1933 ACT AS SOME OTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE 1933 ACT AND APPLICABLE LAWS IS
AVAILABLE.
WARRANT
TO PURCHASE
COMMON
STOCK OF
TORCHLIGHT
ENERGY RESOURCES, INC.
Date of Issuance: July ___,
2019
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Warrant No. E-______
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This
certifies that, for value received, TORCHLIGHT ENERGY RESOURCES,
INC., a Nevada corporation (the “Company”), grants
__________, an _________ or ____ registered assigns (the
“Registered Holder”), the right to subscribe for and
purchase from the Company, at the Exercise Price (as defined
herein), from and after 9:00 a.m. Central Standard Time on July
____, 2019 (the “Exercise Date”) and to and including
5:00 p.m., Central Standard Time, on July ____, 2022 (the
“Expiration Date”), _________________________ shares,
as such number of shares may be adjusted from time to time as
described herein (the “Warrant Shares”), of the
Company’s common stock, par value $.001 per share (the
“Common Stock”), subject to the provisions and upon the
terms and conditions herein set forth. The “Exercise
Price” per share of Common Stock will be $1.35 per
share.
This
Warrant is issued in connection with the issuance to the Registered
Holder of an 8% Unsecured Convertible Promissory Note and in
connection with that certain Subscription Agreement between the
Company and the Registered Holder dated as of July ____, 2019 (the
“Subscription
Agreement”). The Registered Holder of this Warrant is
subject to the terms and conditions set forth in the Subscription
Agreement.
Section
1.
Recordation on Books of the
Company. The Company shall record this Warrant, upon records
to be maintained by the Company for that purpose (the
“Warrant
Records”), in the name of the Registered Holder. The
Company may deem and treat the Registered Holder as the absolute
owner of this Warrant for the purpose of any exercise hereof or any
distribution to the Registered Holder.
Section
2.
Registration of Transfers and Exchanges.
(a)
Subject to Section 9 hereof, the Company shall register the
transfer of this Warrant, in whole or in part, upon records to be
maintained by the Company for that purpose, upon surrender of this
Warrant, with the Form of Assignment attached hereto completed and
duly endorsed by the Registered Holder, to the Company at the
office specified in or pursuant to Section 3(b). Upon any such
registration of transfer, a new Warrant, in substantially the form
of this Warrant, evidencing the Common Stock purchase rights so
transferred shall be issued to the transferee and a new Warrant, in
similar form, evidencing the remaining Common Stock purchase rights
not so transferred, if any, shall be issued to the Registered
Holder.
(b)
This Warrant is exchangeable, upon the surrender hereof by the
Registered Holder at the office of the Company specified in or
pursuant to Section 3(b) hereof, for new Warrants, in substantially
the form of this Warrant evidencing, in the aggregate, the right to
purchase the number of Warrant Shares which may then be purchased
hereunder, each of such new Warrants to be dated the date of such
exchange and to represent the right to purchase such number of
Warrant Shares as shall be designated by the Registered Holder at
the time of such surrender.
Section
3. Duration
and Exercise of this Warrant.
(a)
This Warrant shall be exercisable by the Registered Holder as to
the Warrant Shares at any time during the period commencing on the
Exercise Date and ending on the Expiration Date. At 5:00 p.m.,
Central Standard Time, on the Expiration Date, this Warrant, to the
extent not previously exercised, shall become void and of no
further force or effect.
(b)
Subject to Section 7 hereof, upon exercise or surrender of this
Warrant, with the Form of Election to Purchase attached hereto
completed and duly endorsed by the Registered Holder, to the
Company at 5700 W. Plano Parkway, Suite 3600, Plano, Texas 75093,
Attention: John Brda, President, or at such other address as the
Company may specify in writing to the Registered Holder, and upon
payment of the Exercise Price multiplied by the number of Warrant
Shares then issuable upon exercise of this Warrant in lawful money
of the United States of America, all as specified by the Registered
Holder in the Form of Election to Purchase, the Company shall
promptly issue and cause to be delivered to or upon the written
order of the Registered Holder, and in such name or names as the
Registered Holder may designate, a certificate for the Warrant
Shares issued upon such exercise. Any person so designated in the
Form of Election to Purchase, duly endorsed by the Registered
Holder, as the person to be named on the certificates for the
Warrant Shares, shall be deemed to have become holder of record of
such Warrant Shares, evidenced by such certificates, as of the Date
of Exercise (as hereinafter defined) of such Warrant.
(c)
The Registered Holder may pay the applicable Exercise Price
pursuant to Section 3(b), at the option of the Registered Holder,
either (i) by cashier’s or certified bank check payable to
the Company, or (ii) by wire transfer of immediately available
funds to the account which shall be indicated in writing by the
Company to the Registered Holder, in either case, in an amount
equal to the product of the Exercise Price multiplied by the number
of Warrant Shares being purchased upon such exercise (the
“Aggregate Exercise
Price”).
(d)
The “Date of
Exercise” of any Warrant means the date on which the
Company shall have received (i) this Warrant, with the Form of
Election to Purchase attached hereto appropriately completed and
duly endorsed, and (ii) payment of the Aggregate Exercise Price as
provided herein.
(e)
This Warrant will be exercisable either in its entirety or, from
time to time, for part, only of the number of Warrant Shares which
are issuable hereunder. If this Warrant shall have been exercised
only in part, the Company shall, at the time of delivery of the
certificates for the Warrant Shares issued pursuant to such
exercise, deliver to the Registered Holder a new Warrant evidencing
the rights to purchase the remaining Warrant Shares, which Warrant
shall be substantially in the form of this Warrant.
Section
4.
Payment of Expenses. The
Company will pay all expenses (other than any federal or state
taxes, including without limitation income taxes, or similar
obligations of the Registered Holder) attributable to the
preparation, execution, issuance and delivery of this Warrant, any
new Warrant and the Warrant Shares.
Section
5.
Mutilated or Missing Warrant
Certificate. If this Warrant is mutilated, lost, stolen or
destroyed, upon request by the Registered Holder, the Company will
issue, in exchange for and upon cancellation of the mutilated
Warrant, or in substitution for the lost, stolen or destroyed
Warrant, a substitute Warrant, in substantially the form of this
Warrant, of like tenor, but, in the case of loss, theft or
destruction, only upon receipt of evidence reasonably satisfactory
to the Company of such loss, theft or destruction of this Warrant
and, if requested by the Company, indemnity also reasonably
satisfactory to it.
Section
6.
Reservation, Listing and Issuance of Warrant Shares.
(a)
The Company will at all times have authorized, and reserve and keep
available, free from preemptive rights, for the purpose of enabling
it to satisfy any obligation to issue Warrant Shares upon the
exercise of the rights represented by this Warrant, the number of
Warrant Shares deliverable upon exercise of this Warrant. The
Company will, at its expense, use it best efforts to cause such
shares to be included in or listed on (subject to issuance or
notice of issuance of Warrant Shares) all markets or stock
exchanges in or on which the Common Stock is included or listed not
later than the date on which the Common Stock is first included or
listed on any such market or exchange and will thereafter maintain
such inclusion or listing of all shares of Common Stock from time
to time issuable upon exercise of this Warrant.
(b)
Before taking any action which could cause an adjustment pursuant
to Section 7 hereof reducing the Exercise Price below the par value
of the Warrant Shares, the Company will take any corporate action
which may be necessary in order that the Company may validly and
legally issue at the Exercise Price, as so adjusted, Warrant Shares
that are fully paid and non-assessable.
(c)
The Company covenants that all Warrant Shares will, upon issuance
in accordance with the terms of this Warrant, be (i) duly
authorized, fully paid and nonassessable, and (ii) free from all
liens, charges and security interests.
Section
7.
Adjustment of Number of Warrant Shares.
(a)
The number of Warrant Shares to be purchased upon exercise hereof
is subject to change or adjustment from time to time as hereinafter
provided:
(i)
Stock Dividends; Stock Splits; Reverse
Stock Splits; Reclassifications. In case the Company shall
(a) pay a dividend with respect to its Common Stock in shares of
capital stock, (b) subdivide its outstanding shares of Common
Stock, (c) combine its outstanding shares of Common Stock into a
smaller number of shares of any class of Common Stock or (d) issue
any shares of its capital stock in a reclassification of the Common
Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing
corporation), other than elimination of par value, a change in par
value, or a change from par value to no par value (any one of which
actions is herein referred to as an “Adjustment Event”), the number of
Warrant Shares purchasable upon exercise of the Warrant immediately
prior to the record date for such Adjustment Event shall be
adjusted so that the Registered Holder shall thereafter be entitled
to receive the number of shares of Common Stock or other securities
of the Company (such other securities thereafter enjoying the
rights of shares of Common Stock under this Warrant) that such
Registered Holder would have owned or have been entitled to receive
after the happening of such Adjustment Event, had such Warrant been
exercised immediately prior to the happening of such Adjustment
Event or any record date with respect thereto. An adjustment made
pursuant to this Section 7(a)(i) shall become effective immediately
after the effective date of such Adjustment Event retroactive to
the record date, if any, for such Adjustment Event.
(ii) Adjustment
of Exercise Price. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant is adjusted pursuant
to Section 7(a)(i), the Exercise Price for each Warrant Share
payable upon exercise of each Warrant shall be adjusted by
multiplying such Exercise Price immediately prior to such
adjustment by a fraction, the numerator of which shall be the
number of shares of Common Stock purchasable upon the exercise of
each Warrant immediately prior to such adjustment, and the
denominator of which
shall be the number of shares of Common Stock so purchasable
immediately thereafter.
(iii)
Adjustments for
Consolidation, Merger, Sale of Assets, Reorganization, etc.
In case the Company (a) consolidates with or merges into any other
corporation and is not the continuing or surviving corporation of
such consolidation of merger, or (b) permits any other corporation
to consolidate with or merge into the Company and the Company is
the continuing or surviving corporation but, in connection with
such consolidation or merger, the Common Stock is changed into or
exchanged for stock or other securities of any other corporation or
cash or any other assets, or (c) transfers all or substantially all
of its properties and assets to any other corporation, or (d)
effects a capital reorganization or reclassification of the capital
stock of the Company in such a way that holders of Common Stock
shall be entitled to receive stock, securities, cash and/or assets
with respect to or in exchange for Common Stock, then, and in each
such case, proper provision shall be made so that, upon the basis
and upon the terms and in the manner provided in this subsection
7(a)(iii), the Registered Holder, upon the exercise of this Warrant
at any time after the consummation of such consolidation, merger,
transfer, reorganization or reclassification, shall be entitled to
receive (at the aggregate Exercise Price in effect for all shares
of Common Stock issuable upon such exercise immediately prior to
such consummation as adjusted to the time of such transaction), in
lieu of shares of Common Stock issuable upon such exercise prior to
such consummation, the stock and other securities, cash and/or
assets to which such holder would have been entitled upon such
consummation if the Registered Holder had so exercised this Warrant
immediately prior thereto (subject to adjustments subsequent to
such corporate action as nearly equivalent as possible to the
adjustments provided for in this Section).
(iv) De
Minimis Adjustments. No adjustment in the Exercise Price and
number of Warrant Shares purchasable hereunder shall be required
unless such adjustment would require an increase or decrease of at
least $0.05 in the Exercise Price; provided, however, that any
adjustments which by reason of this Section 7(a)(iv) are not
required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest full share.
(b) Notice
of Adjustment. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price
is adjusted, as herein provided, the Company shall promptly notify
the Registered Holder in writing (such writing referred to as an
“Adjustment
Notice”) of such adjustment or adjustments and shall
deliver to such Registered Holder a statement setting forth the
number of shares of Common Stock purchasable upon the exercise of
each Warrant and the Exercise Price after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was
made.
(c)
Other Notices. In
case at any time:
(i)
the Company shall declare any cash dividend on its Common
Stock;
(ii)
the Company shall pay any dividend payable in stock upon its Common
Stock or make any distribution (other than regular cash dividends)
to the holders of its Common Stock;
(iii)
the Company shall offer for subscription pro rata to all of the holders of its
Common Stock any additional shares of stock of any class or other
rights;
(iv)
the Company shall authorize the distribution to all holders of its
Common Stock of evidences of its indebtedness or assets (other than
cash dividends or cash distributions payable out of earnings or
earned surplus or dividends payable in Common Stock);
(v)
there shall be any capital reorganization, or reclassification of
the capital stock of the Company, or consolidation or merger of the
Company with another corporation (other than a subsidiary of the
Company in which the Company is the surviving or continuing
corporation and no change occurs in the Company’s Common
Stock), or sale of all or substantially all of its assets to
another corporation; or
(vi)
there shall be a voluntary or involuntary dissolution, liquidation,
bankruptcy, assignment for the benefit of creditors, or winding up
of the Company;
then,
in any one or more of said cases the Company shall give written
notice, addressed to the Registered Holder at the address of such
Registered Holder as shown on the books of the Company, of (1) the
date on which the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription
rights, or (2) the date (or, if not then known, a reasonable
approximation thereof by the Company) on which such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors,
winding up or other action, as the case may be, shall take place.
Such notice shall also specify (or, if not then known, reasonably
approximate) the date as of which the holders of Common Stock of
record shall participate in such dividend, distribution or
subscription rights, or shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, bankruptcy, assignment for the benefit of
creditors, winding up, or other action, as the case may be. Such
written notice shall be given (except as to any bankruptcy
proceeding) at least five (5) days prior to the action in question
and not less than five (5) days prior to the record date or the
date on which the Company’s transfer books are closed in
respect thereto. Such notice shall also state that the action in
question or the record date is subject to the effectiveness of a
registration statement under the 1933 Act, or to a favorable vote
of stockholders, if either is required.
(d) Statement
on Warrants. The form of this Warrant need not be changed
because of any change in the Exercise Price or in the number or
kind of shares purchasable upon the exercise of a Warrant. However,
the Company may at any time in its sole discretion make any change
in the form of the Warrant that it may deem appropriate and that
does not affect the substance thereof and any Warrant thereafter
issued, whether in exchange or substitution for any outstanding
Warrant or otherwise, may be in the form so changed.
(e) Fractional
Interest. The Company will not be required to issue
fractional Warrant Shares on the exercise of the Warrants. The
number of full Warrant Shares which shall be issuable upon such
exercise shall be computed on the basis of the aggregate number of
whole shares of Common Stock purchasable on the exercise of the
Warrants so presented. If any fraction of a share of Common Stock
would, except for the provisions of this Section 7(e) be issuable
on the exercise of the Warrants (or specified proportion thereof),
the Company shall pay an amount in cash calculated by it to be
equal to the then fair value of one share of Common Stock, as
determined by the Board of Directors of the Company in good faith,
multiplied by such fraction computed to the nearest whole
cent.
Section
8.
No Rights or Liabilities as a
Stockholder. The Registered Holder shall not be entitled to
vote or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained herein be construed
to confer upon the holder of this Warrant, as such, the rights of a
stockholder of the Company or the right to vote for the election of
directors or upon any matter submitted to stockholders at any
meeting thereof, or give or withhold consent to any corporate
action or to receive notice of meetings or other actions affecting
stockholders (except as provided herein), or to receive dividends
or subscription rights or otherwise, until the Date of Exercise
shall have occurred. No provision of this Warrant, in the absence
of affirmative action by the Registered Holder hereof to purchase
shares of Common Stock, and no mere enumeration herein of the
rights and privileges of the Registered Holder, shall give rise to
any liability of such holder for the Exercise Price or as a
stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
Section
9.
Transfer Restrictions; Registration of the Warrant and Warrant
Shares.
(a)
Neither the Warrant nor the Warrant Shares have been registered
under the 1933 Act. The Registered Holder, by acceptance hereof,
represents that it is acquiring this Warrant to be issued to it for
its own account and not with a view to the distribution thereof,
and agrees not to sell, transfer, pledge or hypothecate this
Warrant, any purchase rights evidenced hereby or any Warrant Shares
unless a registration statement is effective for this Warrant or
the Warrant Shares under the 1933 Act, or in the opinion of such
Registered Holder’s counsel reasonably satisfactory to the
Company, a copy of which opinion shall be delivered to the Company,
such registration is not required as some other exemption from the
registration requirement of the 1933 Act and applicable laws is
available.
(b)
Subject to the provisions of the following paragraph of this
Section 9, each Certificate for Warrant Shares shall be stamped or
otherwise imprinted with a legend in substantially the following
form:
THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933
ACT”), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES
UNDER THE 1933 ACT, AN OPINION OF COUNSEL, SATISFACTORY TO THE
ISSUER HEREOF, TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED
UNDER THE 1933 ACT AS SOME OTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE 1933 ACT AND APPLICABLE LAWS IS
AVAILABLE.
(c)
The restrictions and requirements set forth in the foregoing
paragraph shall apply with respect to Warrant Shares unless and
until such Warrant Shares are sold or otherwise transferred
pursuant to an effective registration statement under the 1933 Act
or are otherwise no longer subject to the restrictions of the 1933
Act, at which time the Company agrees to promptly cause such
restrictive legends to be removed and stop transfer restrictions
applicable to such Warrant Shares to be rescinded.
Section
10.
Company’s Option to Require
Exercise. On or after the Exercise Date and until the
Expiration Date, if (i) there is an effective Registration
Statement filed with the Securities and Exchange Commission
registering the Warrant Shares to be issued upon exercise of the
Warrant and (ii) the closing price of the Common Stock on the
Trading Market (as hereinafter defined) is $2.00 (subject to adjustment consistent
with the adjustments set forth in Section 7(a) above) for more for
20 consecutive Trading Days (as hereinafter defined) while the
Registration Statement referred to in clause (i) above is
effective, then the Company may require the Registered Holder to
subscribe for and purchase from the Company up to 100%, in whole or
in part, of the outstanding Warrant Shares, at the option of the
Company. Any Warrant Shares subject to such required exercise upon
notice from the Company (the “Required Exercise
Shares”), must be subscribed for and purchased from the
Company within 10 Trading Days from such notice to the Registered
Holder.
The
Company will have 10 Trading Days after the 20th consecutive Trading
Day when the closing price of the Common Stock is $2.00 (subject to adjustment consistent
with the adjustments set forth in Section 7(a) above) to deliver to
the Registered Holder a written Notice of Required Exercise (the
“Notice of Required Exercise”) specifying the date by
which the Required Exercise Shares must be purchased (the
“Required Exercise Payment Date”), which date will be
10 Trading Days after the date of the Notice of Required Exercise
(the “Required Exercise Period”). The Registration
Statement registering the Required Exercise Shares must remain
effective throughout the Required Exercise Period. On or before the
Required Exercise Payment Date, the Required Exercise Shares must
be purchased from the Company at the Exercise Price. In the event
the Registered Holder fails to purchase the Required Exercise
Shares by the Required Exercise Payment Date as set forth herein,
then the Registered Holder’s right to purchase all such
Warrant Shares specified as Required Exercise Shares in the Notice
of Required Exercise shall be automatically terminated, and as
such, the Registered Holder will no longer have the right to
purchase any such Warrant Shares pursuant to this
Warrant.
“Trading
Day” means a day on which the principal Trading Market is
open for business. “Trading Market” means the following
markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: The Nasdaq Stock Market, the
New York Stock Exchange, the NYSE MKT LLC or the OTC
Markets.
Section
11.
Notices. All notices and
other communications relating to this Warrant shall be in writing
and shall be deemed to have been duly given if delivered personally
or sent by United States certified or registered first-class mail,
postage prepaid, return receipt requested, or overnight air courier
guaranteeing next day delivery to the parties hereto at the
following addresses or at such other address as any party hereto
shall hereafter specify by notice to the other party
hereto:
(a)
If to the Registered Holder of this Warrant or the holder of the
Warrant Shares, addressed to the address of such Registered Holder
or holder as set forth on books of the Company or otherwise
furnished by the Registered Holder or holder to the
Company.
(b)
If to the Company, addressed to:
Torchlight Energy
Resources, Inc.
5700 W.
Plano Parkway, Suite 3600
Plano,
Texas 75093
Attn:
John Brda, CEO
A
notice or communication will be effective (i) if delivered in
person or by overnight courier, on the business day it is received,
and (ii) if sent by registered or certified mail, the earlier of
the date of actual receipt by the party to whom such notice is
required to be given or three (3) days after deposit in the United
States mail.
Section
12.
Binding Effect. This Warrant
shall be binding upon and inure to the sole and exclusive benefit
of the Company, its successors and assigns, and the holder or
holders from time to time of this Warrant and the Warrant
Shares.
Section
13.
Survival of Rights and
Duties. This Warrant shall terminate and be of no further
force and effect on the earlier of (i) 5:00 p.m., Central Standard
Time, on the Expiration Date and
(ii)
the date on which this Warrant and all purchase rights evidenced
hereby have been exercised, except that the provisions of Sections
6(c) and 9 hereof shall continue in full force and effect after
such termination date.
Section
14.
Governing Law. This Warrant
shall be governed and controlled as to the validity, enforcement,
interpretations, construction and effect and in all other aspects
by the substantive laws of the State of Texas. In any action
between or among any of the parties, whether arising out of this
Warrant or otherwise, each of the parties irrevocably consents to
the exclusive jurisdiction and venue of the federal and state
courts located in Collin County, Texas.
Section
15.
Section Headings. The
Section headings in this Warrant are for purposes of convenience
only and shall not constitute a part hereof.
[Signature
page follows.]
IN
WITNESS WHEREOF, Torchlight Energy Resources, Inc. has caused this
Warrant to be duly executed in its corporate name by the manual
signature of its President.
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TORCHLIGHT ENERGY RESOURCES,
INC.
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Date
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By:
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John
Brda, CEO
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Date:
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FORM
OF ELECTION TO PURCHASE
(To Be
Executed Upon Exercise of this Warrant)
To
Torchlight Energy Resources, Inc.:
The
undersigned, the record holder of this Warrant (Warrant No. _____),
hereby irrevocably elects to exercise the right, represented by
this Warrant, to purchase ___________ of the Warrant Shares and
herewith and hereby tenders payment for such Warrant Shares to the
order of Torchlight Energy Resources, Inc. of $_________________,
representing the full purchase price for such shares at the price
per share provided for in such Warrant and the delivery of any
applicable taxes payable by the undersigned pursuant to such
Warrant.
The
undersigned requests that certificates for such shares be issued in
the name of:
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(Please print name
and address)
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Social Security or
Tax Identification No.
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In the
event that not all of the purchase rights represented by the
Warrant are exercised, a new Warrant, substantially identical to
the attached Warrant, representing the rights formerly represented
by the attached Warrant which have not been exercised, shall be
issued in the name of and delivered to:
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(Please print name
and address)
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Social Security or
Tax Identification No.
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Dated:
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Name of Holder (Print):
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By:
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Name:
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Title:
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Form of Election to Purchase
FORM OF ASSIGNMENT
FOR
VALUE RECEIVED, ________________ hereby sells, assigns and
transfers to each assignee set forth below all of the rights of the
undersigned under the attached Warrant (Warrant No. ___) with
respect to the number of shares of Common Stock covered thereby set
forth opposite the name of such assignee unto:
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Number of Shares of
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Name of Assignee
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Address
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Common Stock
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If the
total of said purchase rights represented by the Warrant shall not
be assigned, the undersigned requests that a new Warrant
Certificate evidencing the purchase rights not so assigned be
issued in the name of and delivered to the
undersigned.
Dated:
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Name of Holder (Print):
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(Signature
of Holder)
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