trch_424b5-17991
Filed Pursuant
to Rule 424(b)(5)
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Registration No. 333-220181
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The
information in this preliminary prospectus supplement and the
accompanying prospectus is not complete and may be changed. This
preliminary prospectus supplement and the accompanying
prospectus are part of an effective registration statement filed
with the Securities and Exchange Commission. This preliminary
prospectus supplement and the accompanying prospectus are not an
offer to sell, nor do they seek an offer to buy,
these securities in any jurisdiction where the offer or sale
is not permitted.
PRELIMINARY PROSPECTUS
SUPPLEMENT
SUBJECT TO
COMPLETION DATED
MAY 13, 2020
(To
Prospectus dated September 28, 2017)
Shares
Common Stock
Torchlight Energy
Resources, Inc.
We are
offering
shares of our common stock. Our common stock is listed on The
NASDAQ Capital Market under the symbol “TRCH.” On May
11, 2020, the last reported sale price for our common stock on The
NASDAQ Capital Market was $0.445 per share.
As of May 11, 2020, the aggregate market value of our outstanding
common stock held by non-affiliates was $31,578,860 based on
81,824,047 shares of common stock outstanding as of that date, of
which 65,789,291 shares are held by non-affiliates, and a closing
sale price on The NASDAQ Capital Market of $0.48 on April 9, 2020.
During the 12 calendar month period that ends on, and includes, the
date of this prospectus supplement (excluding this offering), we
have offered and sold shares of our common stock at an aggregate
sales price of $2,300,000. Pursuant to General Instruction I.B.6 of
Form S-3, in no event will we sell securities registered on the
registration statement, of which this prospectus supplement is a
part, in a public primary offering with a value exceeding more than
one-third of our public float in any 12 month period so long as our
public float remains below $75.0 million.
Investing in our common stock involves risks. See “Risk
Factors” beginning on page S-9 of this prospectus supplement,
on page 5 of the accompanying prospectus and in the documents
incorporated by reference into this prospectus
supplement.
Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus supplement or the accompanying
prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
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Per Share
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Total
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Public
Offering Price
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$
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$
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Underwriting discounts and
commissions(1)
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$
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$
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Proceeds
to us, before expenses
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$
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$
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(1)
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Underwriting discounts and commissions do not include a
non-accountable expense allowance equal to 1% of the public
offering price payable to the underwriters. We refer you to
“Underwriting” beginning on page S-29 for additional
information regarding underwriters’
compensation.
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We have granted an option to the representative of the underwriters
to purchase up to an
additional
shares of common stock solely to cover over-allotments, if
any.
The underwriters expect to deliver the shares to purchasers on or
about May , 2020.
ThinkEquity
a division of Fordham Financial Management, Inc.
The
date of this prospectus supplement is May ,
2020.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
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Page
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ABOUT THIS PROSPECTUS SUPPLEMENT
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S-ii
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PROSPECTUS SUPPLEMENT SUMMARY
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S-1
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THE OFFERING
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S-8
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RISK FACTORS
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S-9
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
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S-24
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USE OF PROCEEDS
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S-26
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DIVIDEND POLICY
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S-27
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DILUTION
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S-28
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UNDERWRITING
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S-29
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LEGAL MATTERS
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S-36
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EXPERTS
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S-36
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
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S-37
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
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S-37
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PROSPECTUS
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Page
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ABOUT THIS PROSPECTUS
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3
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
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3
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
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3
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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4
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THE COMPANY
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5
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RISK FACTORS
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5
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USE OF PROCEEDS
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5
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PLAN OF DISTRIBUTION
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6
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DESCRIPTION OF COMMON AND PREFERRED STOCK
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7
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DESCRIPTION OF WARRANTS
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9
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DESCRIPTION OF UNITS
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9
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DESCRIPTION OF RIGHTS
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10
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EXPERTS
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11
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LEGAL MATTERS
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11
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You should rely only on the information contained or incorporated
by reference in this prospectus supplement, the accompanying
prospectus and any free writing prospectuses we may provide to you
in connection with this offering. We have not, and the underwriter
has not, authorized any other person to provide you with any
information that is different. If anyone provides you with
different or inconsistent information, you should not rely on it.
We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The
information contained in this prospectus supplement, the
accompanying prospectus, the documents incorporated by reference
herein and any free writing prospectuses we may provide to you in
connection with this offering is accurate only as of their
respective dates. Our business, financial condition, results of
operations and prospects may have changed since those dates. You
should not consider this prospectus supplement or the accompanying
prospectus to be an offer or solicitation relating to the
securities in any jurisdiction in which such anoffer or
solicitation relating to the securities is not authorized. Persons
outside the United States who come into possession of this
prospectus supplement must inform themselves about, and observe any
restrictions relating to, the offering of the securities and the
distribution of this prospectus supplement outside the United
States. Furthermore, you should not consider this prospectus
supplement or the accompanying prospectus to be an offer or
solicitation relating to the securities if the person making the
offer or solicitation is not qualified to do so, or if it is
unlawful for you to receive such an offer or
solicitation.
ABOUT
THIS PROSPECTUS SUPPLEMENT
This prospectus supplement and the accompanying prospectus are part
of a registration statement that we filed with the U.S. Securities
and Exchange Commission, or SEC, utilizing a “shelf”
registration process. This document is in two parts. The first part
is this prospectus supplement, which describes the terms of the
offering of the common stock offered hereby and also adds to and
updates the information contained in the accompanying prospectus
and the documents incorporated by reference into this prospectus
supplement and the accompanying prospectus. The second part is the
accompanying prospectus dated September 28, 2017 (included in our
Registration Statement on Form S-3 (File No. 333-220181)), which
provides more general information, some of which may not apply to
this offering and some of which may have been supplemented or
superseded by information in this prospectus supplement or
documents incorporated or deemed to be incorporated by reference in
this prospectus supplement that we filed with the SEC subsequent to
the date of the prospectus. To the extent that there is any
conflict between the information contained in this prospectus
supplement, on the one hand, and the information contained in the
accompanying prospectus or any document incorporated by reference
herein or therein, on the other hand, you should rely on the
information in this prospectus supplement.
You should rely only on the information contained in this
prospectus supplement, contained in the accompanying prospectus or
incorporated herein or therein by reference. We have not, and the
underwriter has not, authorized anyone to provide you with
information that is different. We are offering to sell, and seeking
offers to buy, the common stock offered hereby only in
jurisdictions where offers and sales are permitted. The information
contained, or incorporated by reference, in this prospectus
supplement and contained, or incorporated by reference, in the
accompanying prospectus is accurate only as of the respective dates
thereof, regardless of the time of delivery of this prospectus
supplement and the accompanying prospectus, or of any sale of our
shares of common stock. It is important for you to read and
consider all information contained in this prospectus supplement
and the accompanying prospectus, including the documents we have
referred you to in the section entitled “Where You Can Find
Additional Information” and “Incorporation of Certain
Information by Reference” below.
We own or have rights to trademarks or trade names that we use in
conjunction with the operation of our business. Each trademark,
trade name or service mark of any other company appearing in this
prospectus supplement or the accompanying prospectus belongs to its
holder. Use or display by us of other parties’ trademarks,
trade names or service marks is not intended to and does not imply
a relationship with, or endorsement or sponsorship by us of, the
trademark, trade name or service mark owner.
All references in this prospectus supplement or the accompanying
prospectus to “Torchlight,” the “Company,”
“we,” “us,” or “our” mean
Torchlight Energy Resources, Inc. and our consolidated
subsidiaries, unless we state otherwise or the context indicates
otherwise.
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PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights certain information about this offering and
selected information contained elsewhere in or incorporated by
reference into this prospectus supplement. This summary is not
complete and does not contain all of the information that you
should consider before deciding whether to invest in our shares of
common stock. You should read this entire prospectus
supplement and the accompanying prospectus carefully, including
the “Risk Factors” section contained in this
prospectus supplement and the other documents incorporated
by reference into this prospectus supplement and in the
accompanying prospectus.
Overview
We are
an energy company engaged in the acquisition, exploration,
exploitation and/or development of oil and natural gas properties
in the United States. We are primarily focused on the acquisition
of early stage projects, the development and delineation of these
projects, and then the monetization of those assets once these
activities are completed.
Since
2010, our primary focus has been the development of interests in
oil and gas projects we hold in the Permian Basin in West Texas,
including the Orogrande Project in Hudspeth County, Texas, the
Hazel Project in the Midland Basin and the project in Winkler
County, Texas in the Delaware Basin. We also hold interests in
certain other oil and gas projects that we are in the process of
divesting, including the Hunton wells project as part of a
partnership with Husky Ventures, Inc., or Husky, in Central
Oklahoma.
We
employ a private equity model within a public platform, with the
goal to (i) enter into a play at favorable valuations, (ii)
“prove up” and delineate the play through committed
capital and exhaustive geologic and engineering review, and (iii)
monetize our position through an exit to public and private
independents that can continue full-scale development. Rich
Masterson, our consulting geologist, has originated several of our
current plays, as discussed below, based on his tenure as a
geologist since 1974. He is credited with originating the Wolfbone
shale play in the Southern Delaware Basin of West Texas and has
prepared prospects totaling over 150,000 acres that have been
leased, drilled and are currently being developed by Devon Energy
Corp., Occidental Petroleum Corporation, Noble Energy, and Samson
Oil & Gas Ltd., among others.
In
April 2018, we announced that we have commenced a process that
could result in the monetization of the Hazel Project. Pursuant to
our corporate strategy, in our opinion the development activity at
the Hazel Project, coupled with nearby activities of other oil and
gas operators, is indicative of this project having achieved a
level of value that suggests monetization. We believe that the
liquidity that would be provided from selling the Hazel Project
could be redeployed into the Orogrande Project.
We are
also currently marketing the Orogrande Project for an outright sale
or farm in partner and are taking measures on our own to market the
Winkler Project. These efforts are continuing.
We
operate our business through five wholly-owned subsidiaries,
Torchlight Energy, Inc., a Nevada corporation, or TEI, Torchlight
Energy Operating, LLC, a Texas limited liability company, Hudspeth
Oil Corporation, a Texas corporation, or Hudspeth, Torchlight
Hazel, LLC, a Texas limited liability company, and Warwink
Properties, LLC, a Texas limited liability company, or Warwink
Properties. We currently have two full-time employees and we employ
consultants for various tasks as needed.
Our
principal executive offices are located at 5700 W. Plano Parkway,
Suite 3600, Plano, Texas 75093. The telephone number of our
principal executive offices is (214) 432-8002.
Current Projects
As of
December 31, 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 Winkler
Project in Winkler County, Texas and the Hunton wells in
partnership with Husky Ventures in central Oklahoma.
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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 December
31, 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 27, 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
133,000 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 of 2019.
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 wereperformed 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.
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During
the fourth quarter of 2017, the Company 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 andus,
with each contributing 50% of such capital spend, under the
existing agreement. The Company estimates that there is still
approximately $27.1 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.
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, the Company 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 $27.1 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 was $1,250,000), Hudspeth’s working interest
increased to 72.5%.
The
Orogrande Project ownership as of March 31, 2020 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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49.875%
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66.500%
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Energy
Resources Inc.
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Wolfbone
Investments LLC, an entity controlled
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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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Conversion
by Note Holders in March, 2020
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4.50%
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6.000%
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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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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
intothe nine months ended September 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.
Thismarketing process has been long and arduous 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. We drilled to test the two obligation wells described
above. The first well, the A35 1H, has been drilled and cased in
the PennSection and tested with positive results of oil and gas
production to the surface. This first well is a short horizontal in
the proven Penn Section where we will be looking to break through
the dual porosity system in place with a larger frac designed to
open up the oil bearing pores. We are also drilled and cased the
A25 #2 which targeted an identified structure. This well is
designed to test both conventional zones and potentially the
unconventional Barnett and Woodford Zones ultimately drilling down
to the cellar around 7600 feet. Testing is ongoing.
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, 2019, 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 December 31, 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.
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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 approximately40.66% 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 inLine
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 year ended December 31, 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.
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During
the year ended December 31, 2019 the Company deepened the Flying B
#4 and took whole cores through all of the Wolfcamp A and the upper
portion of the Wolfcamp B. 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. At
December 31, 2019 we were 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. We have finished that obligation well and are awaiting
results. This well is targeting a shallow zone that is showing oil
potential.
The
marketing process is ongoing for the Hazel project. We continue to
encounter, as does the entire industry, a soft market for
acquisitions and divestitures transactions. We will continue to
look to sell the property or joint venture the property via farm in
or a drillco transaction.
Winkler Project, Winkler County, Texas
On
December 1, 2017, the Agreement and Plan of Reorganization that we
and our then wholly-owned subsidiary, Torchlight Wolfbone
Properties, Inc., a Texas corporation (“TWP”), entered
into with MPC and Warwink Properties, LLC (“Warwink
Properties”) on November 14, 2017 closed. Under the
agreement, TWP merged with and into Warwink Properties and the
separate existence of TWP ceased, with Warwink Properties being the
surviving entity and becoming our wholly-owned subsidiary. Warwink
Properties was wholly owned by MPC. Warwink Properties owns certain
assets, including a 10.71875% working interest in approximately 640
acres in Winkler County, Texas. Upon the closing of the merger, all
of the issued and outstanding shares ofcommon 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 Winkler Project
As of
May 7, 2018 our Winkler project in the Delaware Basin had begun the
drilling phase of the first Winkler Project well, the UL 21
War-Wink 47 #2H. Our operating partner, MECO had begun the pilot
hole on the project. The plan is to evaluate the various potential
zones for a lateral leg to be drilled once logging is completed. We
expect the most likely target to be the Wolfcamp A interval. The
well is on 320 newly acquired acres offsetting the original
leasehold we entered into in December, 2017. The additional acreage
was leased by our operating partner under the Area of Mutual
Interest Agreement (AMI) and we exercised its right to participate
for its 12.5% in the additional 1,080 gross acres at a cash cost of
$447,847 in July, 2018. Our carried interest in the first well, as
outlined in the agreement, was originally planned to be on the
first acreage acquired. That carried interest is being applied to
this new well and will allow MECO to drill and produce potential
revenues sooner than originally planned. The primary leasehold is a
320-acre block directly west of the current position and will allow
for 5,000-foot lateral wells to be drilled. The well was completed
and began production in October, 2018 and is producing currently.
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.
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In
December 2018, the Company began to take measures on its own to
market the Winkler Project in an effort to focus on the Orogrande.
This process is ongoing.
Hunton Play, Central Oklahoma
Presently, we are
producing from one well in the Viking Area of Mutual Interest and
one well in Prairie Grove.
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 December 31, 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
December 31, 2019. As of May 11, 2020, we had cash and cash
equivalents of approximately $75,000.
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THE
OFFERING
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Shares
of common stock to be offered
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shares
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Over-Allotment
Option to purchase shares of common stock
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We have
granted the representative of the underwriters an option to
purchase up to
an
additional shares of common stock at the public offering price less
the underwriting discounts and commissions, which option may be
exercised at any time in whole, or from time to time in part, on or
before the 45th day following the
date of this prospectus supplement.
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Shares
of common stock to be outstanding immediately after this
offering
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shares
of common stock (or shares of common stock if the underwriter
exercises its over-allotment option to purchase additional shares
in full).
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The net
proceeds from this offering are expected to be approximately $
million (or
$ million if the
underwriter exercises in full its over-allotment option to purchase
additional shares) after deducting underwriting discounts and
commissions and estimated offering expenses. We currently intend to
use the net proceeds primarily to meet our drilling obligations at
our Hazel Project and Orogrande Project and for general corporate
purposes. See “Use of Proceeds” on page S-26 of this
prospectus supplement.
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Risk
factors
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See
“Risk Factors” beginning on page S-9 of this prospectus
supplement, on page 5 of the accompanying prospectus and in the
documents incorporated by reference into this prospectus supplement
for a discussion of factors you should consider carefully before
investing in our common stock.
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NASDAQ
Capital Market symbol
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“TRCH”
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Unless we indicate
otherwise, all information in this prospectus supplement is based
on 81,824,047 shares of common stock issued and outstanding as of
May 11, 2020 and excludes as of that date:
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6,917,768 shares of
our common stock issuable upon the exercise of outstanding stock
options under our 2015 Stock Option Plan (the “2015
plan”) at a weighted-average exercise price of $1.39 per
share;
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6,848,760 shares of
our common stock issuable upon the exercise of outstanding
warrants, at a weighted-average exercise price of $1.21 per
share;
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shares issuable
upon exercise of warrants issuable to the representative of the
underwriters (the “Representative Warrants“) with an
exercise price of
$ ;
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2,510,705 shares of
our common stock reserved for future issuance under our 2015 plan;
and
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15,486,314 shares
of our common stock issuable upon the conversion of the principal
of outstanding convertible promissory notes, at a weighted-average
conversion price of $1.10 per share.
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Unless otherwise
indicated, all information in this prospectus supplement assumes no
exercise by the representative of the underwriters of its option to
purchase up
to
additional shares of our common stock.
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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 this Offering
You will experience immediate and substantial dilution in the book
value per share of the shares of common stock you purchase and may
experience further dilution in the future.
The public offering price of our common stock offered pursuant to
this prospectus supplement is substantially higher than the net
tangible book value per share of our common stock. Therefore, if
you purchase shares of common stock in this offering, you will
incur immediate and substantial dilution in the pro forma net
tangible book value per share of common stock from the price per
share that you pay for the common stock. See the section entitled
“Dilution” below for a more detailed discussion of the
dilution you will incur if you purchase shares in this offering.
Furthermore, we expect that we will seek to raise additional
capital from time to time in the future. Such financings may
involve the issuance of equity and/or securities convertible into
or exercisable or exchangeable for our equity securities. We also
expect to continue to utilize equity-based compensation. To the
extent the warrants and options are exercised or we issue common
stock, preferred stock, or securities such as warrants that are
convertible into, exercisable or exchangeable for, our common stock
or preferred stock in the future, you may experience further
dilution.
We will have broad discretion in the use of the proceeds from this
offering and may apply the proceeds in ways with which you do not
agree and in ways that may not yield a return.
We
currently intend to use the net proceeds primarily to meet our
drilling obligations at our Hazel Project and Orogrande Project and
for general corporate purposes. You may not agree with our decisions,
and our use of the proceeds may not yield any return on your
investment in us. The failure of our management to apply these
funds effectively could harm our business. You will not have the
opportunity, as part of your investment decision, to assess whether
our proceeds are being used appropriately. Pending application of
our proceeds, they may be placed in investments that do not produce
income or that lose value.
Risks Related 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 supplement, 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 Annual Report on Form 10-K for the
year ended December 31, 2019 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 $9.8 million for the year ended
December 31, 2019 and an accumulated deficit in aggregate of
approximately $99.2 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, 2019, 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 accompanying financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
We have $12.5 million in secured debt obligations coming due in
April of 2021; if we were unable to pay off, extend or refinance
these debt obligations when due, such a default may result in the
foreclosure on most of our assets.
On
April 10, 2017, we sold two 12% unsecured promissory notes with a
total of $8,000,000 in principal amount (the “2017
Notes”) to David A. Straz, Jr. Foundation (the “Straz
Foundation”) and the David A. Straz, Jr. Irrevocable Trust
DTD 11/11/1986 (the “Straz Trust”) in a private
transaction. In addition, on February 6, 2018, we sold to the Straz
Trust in a private transaction a 12% unsecured promissory note with
a principal amount of $4,500,000 (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. The holders of
the Notes also receive annual payments of common stock at the rate
of 2.5% of principal amount outstanding, based on a volume-weighted
average price.
On
April 24, 2020, we entered into a Note Amendment Agreement with
each of the Straz Foundation and the Straz Trust, and The Northern
Trust Company and Christopher M. Straz, as co-trustees of the Straz
Trust. Under the Note Amendment Agreements, the parties agreed to
amend and restate the two promissory notes issued to the Straz
Trust that have a total outstanding principal amount of $8,500,000,
along with the promissory note issued to the Straz Foundation which
has an outstanding principal amount of $4,000,000. Under the Note
Amendment Agreements, the maturity dates of the two promissory
notes held by the Straz Trust were extended to April 10, 2020 to
April 10, 2021. We had previously extended the maturity date of the
promissory note held by the Straz Foundation to April 10, 2021 and
paid it a fee of $80,000 under the terms of the
extension.
Under
the Note Amendment Agreements, we and our subsidiaries provided a
first priority lien on certain collateral in favor of the
collateral agent (the Straz Trust) for the benefit of the lenders.
The collateral includes all assets and property held by Hudspeth
Oil Corporation and Torchlight Hazel, LLC, which includes without
limitation our working interest in certain oil and gas leases in
Hudspeth County, Texas, known as the “Orogrande
Project” and our working interest in certain oil and gas
leases in the Midland Basin in West Texas, known as the
“Hazel Project.” Further, these subsidiaries, along
with Torchlight Energy, Inc., provided guaranties with respect to
payment of the three promissory notes. The Note Amendment
Agreements also provide that (a) upon any disposition of less than
100% of Borrower’s right, title and interest in and to the
Orogrande Project or the Hazel Project, we must prepay an amount
equal to 75% of the proceeds thereof (up to the outstanding amount
due under the Notes), unless such disposition results in us owning
less than a 45% working interest (on an 8/8ths basis) in the
Orogrande Project or the Hazel Project, in which case the
prepayment amount is to be equal to 100% of such proceeds (up to
the outstanding amount due under the Notes); and (b) upon any
disposition of 100% of our right, title and interest in and to the
Orogrande Project or the Hazel Project, we must prepay an amount
equal to 100% of the proceeds thereof (up to the outstanding amount
due under the Notes).
Additionally, the
Notes, as amended, now provide conversion rights whereby the
lenders will have the right, at each such lender’s option, to
convert any portion of principal and interest into shares of common
stock of Torchlight Energy Resources, Inc. at a conversion price of
$1.50 per share.
The
Note Amendment Agreements also provided that no later than 20 days
following closing (subsequently extended to the earlier of May 25,
2020 or one day after the closing of this offering), we must pay:
(a) to the lenders all past due interest that has accrued on the
existing promissory notes, and (b) to the Straz Trust a fee of
$170,000. Further, the agreements have certain typical affirmative
covenants regarding legal compliance and payment of taxes. The
agreements also provide certain notice and disclosure requirements,
including notice of material events, such as defaults under other
obligations and litigation.
Our
present plan is to monetize existing assets and/or raise additional
capital to pay off the $12.5 million in principal due under the
Notes on or before maturity on April 10, 2021. If we are unable to
timely pay off, extend or refinance the Notes, we would be in
default and the holders would have the right to foreclose on the
Orogrande Project and Hazel Project assets, which would have a
material adverse impact on our financial condition.
We must pay the holders of the 2017 Notes and the 2018 Note the
past due interest and extension fee by May 25, 2020; the failure to
do this will result in default and the foreclosure on most of our
assets.
The Note Amendment Agreements
provided that no later than 20 days following closing, we must pay:
(a) to the lenders an aggregate of $378,082, representing all past
due interest that has accrued on the Notes, and (b) to the Straz
Trust a fee of $170,000. Subsequently, this date was extended to
the earlier of May 25, 2020 or the closing of the offering. We
intend to use proceeds from this offering to pay the past due
interest and extension fee. If we are unable to pay the past due
interest and extension fee by May 25, 2020, we would be in default
and the holders would have the right to foreclose on the Orogrande
Project and Hazel Project assets, which would have a material
adverse impact on our financial condition.
The negative covenants contained in the Note Amendment Agreements
to the 2017 Notes and the 2018 Note may limit our activities and
make it difficult to run our business.
The
Note Amendment Agreements to the 2017 Notes and the 2018 Note
contain negative covenants which may make it difficult for us to
run our business. Under the Note Amendment Agreements, we may not
create new indebtedness, unless such indebtedness is not secured by
any lien on the Orogrande Project or Hazel Project (the
“Collateral”) and such indebtedness does not have a
maturity date on or before 90 days after the maturity date of the
Notes. The Note Amendment Agreements also prohibit the creation of
new liens on the Collateral, except under certain circumstances.
Additionally, the Note Amendment Agreements restrict our ability to
declare or pay dividends, enter into transactions with affiliates
of ours, or change the nature of our business.
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 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 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.
The
recent global downturn in the price of oil may materially and
adversely affected our results of operations, cash flows and
financial condition, and this trend could continue during 2020 and
potentially beyond.
In
early March of 2020, the market has experienced a precipitous
decline in oil prices in response to oil demand concerns due to the
economic impacts of the a highly transmissible and pathogenic
coronavirus known as COVID-19 and anticipated increases in supply
from Russia and OPEC, particularly Saudi Arabia. Generally, demand
for oil has declined substantially. These trends materially and
adversely affect our results of operations, cash flows and
financial condition, and, unless conditions in our industry
improve, this trend will continue during 2020 and potentially
beyond. See also “Risks Related the COVID-19 Pandemic”
below.
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 recognized an impairment charge of $1,494,769 in 2019 and
$139,891 in 2018.
During
the year ended December 31, 2017 the Company performed assessments
of evaluated and unevaluated costs in the cost pool to conform the
cumulative value of the Full Cost Pool to the combined amount of
Reserve Value of evaluated, producing properties (as determined by
independent analysis at December 31, 2017), plus the lesser of
cumulative historical cost or estimated realizable value of
unevaluated leases and projects expected to commence production in
future operating periods. The Company identified impairment of
$2,300,626 in 2017 related to its unevaluated properties. Although
we had no recognized impairment expense in 2017, the Company has
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 will be 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 Statement of Operations
over future periods. The $2,300,626 has also become an evaluated
cost for purposes of future period’s Ceiling Tests and which
may further recognize the impairment expense recognized in future
periods. At December 31, 2019 an additional impairment of
unevaluated costs of $756,964 was added to the basis for future
period’s depletion.
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 growth, which could lead
to our inability to implement our business plan.
Any
growth of the company may place a significant strain on our
managerial, operational and financial resources, especially
considering that we currently only have a small number of executive
officers, employees and advisors. Further, as we enter into
additional contracts, we will be required to manage multiple
relationships with various consultants, businesses and other third
parties. These requirements will be exacerbated in the event of our
further growth or in the event that the number of our drilling
and/or extraction operations increases. Our systems, procedures
and/or controls may not be adequate to support our operations or
that our management will be able to achieve the rapid execution
necessary to successfully implement our business plan. If we are
unable to manage our growth effectively, our business, results of
operations and financial condition will be adversely affected,
which could lead to us being forced to abandon or curtail our
business plan and operations.
The due diligence undertaken by us in connection with all of our
acquisitions may not have revealed all relevant considerations or
liabilities related to those assets, which could have a material
adverse effect on our financial condition or results of
operations.
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 be required in
the future, and our estimated reserves may not represent
commercially extractable petrocarbons. 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:
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the
possibility that such third parties may not be available to us as
and when needed; and
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the
risk that we may not be able to properly control the timing and
quality of work conducted with respect to its
projects.
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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 supplement, our executive officers and
directors collectively and beneficially own approximately 26% 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,
2019. 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.
Risks Related the COVID-19 Pandemic
We were unable to meet the filing deadline for our Form 10-Q for
the quarter ended March 31, 2020 due to circumstances related to
COVID-19 and are relying on the SEC’s recent order for a
45-day extension
We
were unable to meet the filing deadline for our Form 10-Q for the
quarter ended March 31, 2020 due to circumstances related to
COVID-19. Our operations and business have experienced disruption
due to the unprecedented conditions surrounding the COVID-19
pandemic, which has resulted in limited availability of key
personnel required to assist in the preparation of the Form 10-Q
due to suggested and mandated social quarantining and work from
home orders and the need to look after family members including
small children who are no longer in school and day care. We have
also had to modify our business practices, including employee work
locations and cancellation of physical participation in
meetings.
We
are relying on the Securities and Exchange Commission Release No.
34-88465 dated March 25, 2020 to delay the filing of our Form 10-Q
for the quarter ended March 31, 2020 for up to 45 days after the
original due date. We intend to work diligently to file the Form
10-Q as soon as practicable, and in no event later than the end of
the 45-day extension period on June 25, 2020. If we are unable to
file our Form 10-Q within the 45-day extension period, there will
likely be a negative impact on our business and the market price of
our common stock.
An occurrence of an uncontrollable event such as the COVID-19
pandemic is likely to negatively affect, and has to date negatively
affected, our operations.
The
occurrence of an uncontrollable event such as the COVID-19 pandemic
is likely to, and has already, negatively affect our operations. A
pandemic typically results in social distancing, travel bans and
quarantine, and the effects of, and response to, the COVID-19
pandemic has limited access to our facilities, properties,
management, support staff and professional advisors. These, in
turn, have not only negatively impacted our operations and
financial condition, but our overall ability to react timely to
mitigate the impact of this event. Further, the COVID-19 pandemic
has resulted in declines in the demand for, and the price of, oil
and gas, and it is unclear how long this decline will last. The
full effect on our business and operation is currently unknown. In
the event that the effects of COVID-19 continue in the future
and/or the economy continues to deteriorate, we may be forced to
curtail our operations and may be unable to pay our debt
obligations as they come due.
The coronavirus/COVID-19 pandemic has had a negative effect on oil
and gas prices, and depending on the severity and longevity of the
pandemic, it may result in a major economic recession which will
continue to depress oil and gas prices and cause our business and
results of operations to suffer.
The inability and/or
unwillingness of individuals to congregate in large groups, travel
and/or visit retail businesses or travel outside of their homes
will, and has to date, had a negative effect on the demand for, and
the current prices of, oil and gas. Additionally, the demand for
oil and gas is based partially on global economic conditions. If the COVID-19
pandemic results in a global economic recession,
there will be a continued negative effect on the demand for oil and
gas and this will have a negative effect on our operating results.
All of the above may be exacerbated in the future as the COVID-19
outbreak and the governmental responses thereto continue.
Concerns about global economic growth
have had a significant adverse impact on global financial markets
and commodity prices. If the economic climate in the United States
or abroad continues to deteriorate, demand for petroleum products
could further diminish, which will impact the price at which we can
sell our oil and gas, impact the value of our working interests and
other oil and gas assets, affect the ability of our vendors,
suppliers and customers to continue operations, affect our
operations and ultimately adversely impact our results of
operations, liquidity and financial condition.
Risks Related to Our Common Stock
There presently is a limited market for our common stock, and the
price of our common stock may be volatile.
Our
common stock is currently quoted on The NASDAQ Stock Market LLC.
There has been and may continue to be volatility in the volume and
market price of our common stock moving forward. This volatility
may be caused by a variety of factors, including the lack of
readily available quotations, the absence of consistent
administrative supervision of “bid” and
“ask” quotations, and generally lower trading volume.
In addition, factors such as quarterly variations in our operating
results, changes in financial estimates by securities analysts, or
our failure to meet our or their projected financial and operating
results, litigation involving us, factors relating to the oil and
gas industry, actions by governmental agencies, national economic
and stock market considerations, as well as other events and
circumstances beyond our control could have a significant impact on
the future market price of our common stock and the relative
volatility of such market price.
Securities analysts may not initiate coverage or continue to cover
our shares of common stock and this may have a negative impact on
the market price of our shares of common stock.
The
trading market for our shares of common stock will depend, in part,
on the research and reports that securities analysts publish about
our business and our shares of common stock. We do not have any
control over these analysts. If securities analysts do not cover
our shares of common stock, the lack of research coverage may
adversely affect the market price of those shares. If securities
analysts do cover our shares of common stock, they could issue
reports or recommendations that are unfavorable to the price of our
shares of common stock, and they could downgrade a previously
favorable report or recommendation, and in either case our share
prices could decline as a result of the report. If one or more of
these analysts does not initiate coverage, ceases to cover our
shares of common stock or fails to publish regular reports on our
business, we could lose visibility in the financial markets, which
could cause our share prices or trading volume to
decline.
Offers or availability for sale of a substantial number of shares
of our common stock may cause the price of our common stock to
decline.
Our
stockholders could sell substantial amounts of common stock in the
public market, including shares sold under the registration
statement on Form S-3 (File No. 333-233653) we filed regarding
shares of common stock issued in several private offerings in 2019
and shares of common stock issuable upon conversion of the Notes or
upon the filing of any additional registration statements that
register 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; further, we are presently not in compliance with
NASDAQ’s minimum bid price rule.
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.
Further, on
November 21, 2019 we received a letter from the Listing
Qualifications Staff of The Nasdaq Stock Market advising us that
the staff had determined that we no longer meet the requirement of
Listing Rule 5550(a)(2) which requires us to maintain a minimum bid
price of $1 per share. The Listing Rules provide us with a
compliance period of 180 calendar days in which to regain
compliance. On April 17, 2020, we received a letter from Listing
Qualifications Staff advising us that, because of the unprecedented
turmoil in U.S. and world financial markets over the last few weeks
prior to the letter, Nasdaq has determined to toll the compliance
periods for bid price and market value of publicly held shares
requirements (collectively, the “Price-based
Requirements”) through June 30, 2020. In that regard, on
April 16, 2020, Nasdaq filed an immediately effective rule change
with the Securities and Exchange Commission. As a result, since we
had 33 calendar days remaining in our bid compliance period as of
April 16, 2020, we will, upon reinstatement of the Price-based
Requirements, still have 33 calendar days from July 1, 2020, or
until August 3, 2020, to regain compliance. We can regain
compliance, either during the suspension or during the compliance
period resuming after the suspension, if the closing bid price of
our common stock is at least $1 for a minimum of 10 consecutive
trading days. In the event we do not regain compliance by August 3,
2020, we may be eligible for additional time. We are currently
reviewing our options to regain compliance with the Nasdaq Listing
Rules, but we have made no decisions at this time.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus supplement, the accompanying prospectus, and the
documents incorporated by reference in this prospectus supplement
include “forward-looking statements” within the meaning
of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act.
Forward-looking statements include, but are not limited to,
statements regarding our or our management’s expectations,
hopes, beliefs, intentions or strategies regarding the future and
other statements that are other than statements of historical fact.
In addition, any statements that refer to projections, forecasts or
other characterizations of future events or circumstances,
including any underlying assumptions, are forward-looking
statements. The words “anticipate,”
“believe,” “continue,” “could,”
“estimate,” “expect,” “intend,”
“may,” “might,”
“plan,”“possible,” “potential,”
“predict,” “project,” “should,”
“would” and similar expressions may identify
forward-looking statements, but the absence of these words does not
mean that a statement is not forward-looking.
The forward-looking statements in this prospectus supplement are
based upon various assumptions, many of which are based, in turn,
upon further assumptions, including without limitation,
management’s examination of historical operating trends, data
contained in our records and other data available from third
parties. Although we believe that these assumptions were reasonable
when made, because these assumptions are inherently subject to
significant uncertainties and contingencies which are difficult or
impossible to predict and are beyond our control, we cannot assure
you that we will achieve or accomplish these expectations, beliefs
or projections. As a result, you are cautioned not to rely on any
forward-looking statements.
In addition to these important factors and matters discussed
elsewhere herein and in the documents incorporated by reference
herein, important factors that, in our view, could cause actual
results to differ materially from those discussed in the
forward-looking statements include among other things:
●
our future operating or financial results;
●
our financial condition and liquidity, including our ability to pay
amounts that we owe, obtain additional financing in the future to
fund capital expenditures, acquisitions and other general corporate
activities;
●
our ability to continue as a going concern;
●
our development of successful operations;
●
the speculative nature of oil and gas exploration;
●
the volatile price of oil and natural gas;
●
the demand for oil
and natural gas which demand could be materially affected by the
economic impacts of COVID-19 and anticipated increases in supply
from Russia and OPEC;
●
the risk of incurring liability or damages as we conduct business
operations due to the inherent dangers involved in oil and gas
operations;
●
our ability to rely on strategic relationships which are subject to
change;
●
the competitive nature of the oil and gas market;
●
changes in governmental rules and regulations;
●
the amount, and our expected uses, of the net proceeds from this
offering; and
●
other factors listed from time to time in registration statements,
reports or other materials that we have filed with or furnished to
the SEC, including our most recent Annual Report on Form 10-K,
which is incorporated by reference in this prospectus
supplement.
These factors and the other risk factors described in this
prospectus supplement are not necessarily all of the important
factors that could cause actual results or developments to differ
materially from those expressed in any of our forward-looking
statements. Other unknown or unpredictable factors also could harm
our results. Consequently, actual results or developments
anticipated by us may not be realized or, even if substantially
realized, that they may not have the expected consequences to, or
effects on, us. Given these uncertainties, prospective investors
are cautioned not to place undue reliance on such forward-looking
statements.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law. If one or
more forward-looking statements are updated, no inference should be
drawn that additional updates will be made with respect to those or
other forward-looking statements.
USE OF PROCEEDS
We
expect to receive net proceeds of approximately $
million from this offering (or approximately
$ million if the representative of
the underwriters exercises in full its over-allotment option to
purchase additional shares), based on the public offering price of
$ per share and after deducting underwriting
discounts and commissions and estimated offering expenses. We
currently intend to use the net proceeds primarily to meet our
drilling obligations at our Hazel Project and Orogrande Project, to
pay all past due interest that has accrued on the 2017 Notes and
2018 Note along with the extension fee owed to the Straz Trust, and
for general corporate purposes. We may also use a portion of the
net proceeds from this offering for potential acquisitions,
although we have no commitments or agreements with respect to any
acquisitions as of the date of this prospectus supplement. We
cannot specify with certainty all of the particular uses for the
net proceeds that we will have from the sale of the shares of
common stock. Accordingly, our management will have broad
discretion in the application of the net proceeds. We may use the
proceeds for purposes that are not contemplated at the time of the
offering. Pending the application of the net proceeds, we may
invest the proceeds in investment grade, interest bearing
securities or money market funds.
DIVIDEND POLICY
We
have never declared or paid cash dividends on our common stock. We
intend to employ all available funds for the development of our
business and, accordingly, do not intend to pay any cash dividends
in the foreseeable future. Any future determination to pay cash
dividends on our common stock will be at the discretion of our
board of directors and will be dependent upon our financial
condition, results of operations, capital requirements and other
factors as the board of directors deems relevant.
In
addition, so long as the Notes remain outstanding, we and our
subsidiaries are prohibited from distributing any cash or other
assets to any holders of common stock in the form of dividends and
other distributions (including repurchase of equity) prior to the
payment in full of the Notes.
DILUTION
If you purchase shares of our common stock in this offering, your
interest will be diluted to the extent of the difference between
the public offering price per share and the net tangible book value
per share of our common stock after this offering. We calculate net
tangible book value per share by dividing our net tangible assets
(tangible assets less total liabilities) by the number of shares of
our common stock issued and outstanding as of December 31,
2019.
Our net
tangible book value at December 31, 2019 was $15.07 million or
approximately $0.20 per share. After giving effect to the sale
of shares of
common stock in this offering at an offering price of
$ per
share, and after deducting underwriting discounts and commissions
and estimated offering expenses, our adjusted net tangible book
value as of December 31, 2019 would have been approximately
$ million, or
approximately
$ per
share. This represents an immediate increase in the net tangible
book value of $ per share
of our common stock to our existing shareholders and an immediate
dilution in net tangible book value of approximately
$ per share to investors
purchasing our common stock in this offering at the public offering
price.
The
following table illustrates this per share dilution to investors
purchasing shares of common stock in this offering:
Public
offering price per share
|
|
$
|
Net
tangible book value per share as of December 31, 2019
|
$0.20
|
|
Increase
in net tangible book value per share attributable to this
offering
|
$
|
|
As
adjusted net tangible book value per share as of December 31, 2019,
after giving effect to this offering
|
|
$
|
Dilution
in net tangible book value per share to investors in this
offering
|
|
$
|
If the
underwriter exercises in full its over-allotment option to
purchase additional
shares of our common stock at a public offering price of
$ per share,
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, our as adjusted net
tangible book value as of December 31, 2019 would have been
approximately
$ million or
approximately $ per
share of common stock. This represents an immediate increase in net
tangible book value per share of approximately
$ per share to
existing shareholders, and an immediate dilution of approximately
$ per share to
investors participating in this offering.
The
above discussion and table are based on 76,222,042 shares of our
common stock issued and outstanding as of December 31, 2019, and
excludes as of that date:
●
6,917,768 shares of
our common stock issuable upon the exercise of outstanding stock
options under our 2015 plan, at a weighted-average exercise price
of $1.39 per share;
●
5,703,760 shares of
our common stock issuable upon the exercise of outstanding
warrants, at a weighted-average exercise price of $1.30 per
share;
●
2,510,705 shares of
our common stock reserved for future issuance under our 2015 plan;
and
●
7,152,981 shares of
our common stock issuable upon the conversion of the principal of
outstanding convertible promissory notes, at a weighted-average
conversion price of $0.63 per share.
In
addition, you should note that we have issued additional equity
securities subsequent to December 31, 2019, as disclosed in the
documents incorporated herein by reference. As a result, as of May
11, 2020 there were 81,824,047 shares of our common stock issued
and outstanding, excluding as of that date:
●
6,917,768 shares of
our common stock issuable upon the exercise of outstanding stock
options under our 2015 plan, at a weighted-average exercise price
of $1.39 per share;
●
6,848,760 shares of
our common stock issuable upon the exercise of outstanding
warrants, at a weighted-average exercise price of $1.21 per
share;
●
shares
issuable upon exercise of the Representative’s Warrants (
if the
underwriters’ option to purchase additional securities is
exercised in full), with an exercise price of
$
;
●
2,510,705 shares of
our common stock reserved for future issuance under our 2015 plan;
and
●
15,486,314 shares
of our common stock issuable upon the conversion of the principal
of outstanding convertible promissory notes, at a weighted-average
conversion price of $1.10 per share.
To the
extent that outstanding options or warrants are exercised, or other
shares are issued, investors purchasing shares in this offering
could experience further dilution. In addition, we may choose to
raise additional capital due to market conditions or strategic
considerations, even if we believe we have sufficient funds for our
current or future operating plans. To the extent that additional
capital is raised through the sale of equity or convertible debt
securities, the issuance of those securities could result in
further dilution to our shareholders.
UNDERWRITING
ThinkEquity, a
division of Fordham Financial Management, Inc., is acting as the
representative of the underwriters of the offering. We have entered
into an underwriting agreement dated
, 2020 with the
representative. Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to each underwriter
named below, and each underwriter named below has severally agreed
to purchase, at the public offering price less the underwriting
discounts set forth on the cover page of this prospectus
supplement, the number of shares of common stock at the initial
public offering price, less the underwriting discounts and
commissions, as set forth on the cover page of this prospectus
supplement, the number of shares of common stock listed next to its
name in the following table:
Underwriter
|
Number
of Shares
|
ThinkEquity,
a division of Fordham Financial Management, Inc.
|
|
|
|
Total
|
|
The
underwriters are committed to purchase all the shares of common
stock offered by us, other than those covered by the over-allotment
option to purchase additional shares of common stock described
below. The obligations of the underwriters may be terminated upon
the occurrence of certain events specified in the underwriting
agreement. Furthermore, the underwriting agreement provides that
the obligations of the underwriters to pay for and accept delivery
of the shares offered by us in this prospectus supplement are
subject to various representations and warranties and other
customary conditions specified in the underwriting agreement, such
as receipt by the underwriters of officers’ certificates and
legal opinions.
We have
agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect
thereof.
The
underwriters are offering the shares of common stock subject to
prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by their counsel and other conditions
specified in the underwriting agreement. The underwriters reserve
the right to withdraw, cancel or modify offers to the public and to
reject orders in whole or in part.
We have
granted the underwriters an over-allotment option. This option,
which is exercisable for up to 45 days after the date of this
prospectus, permits the underwriters to purchase up to an aggregate
of additional shares of common stock (equal to 15% of the total
number of shares of common stock sold in this offering) at the
public offering price per share, less underwriting discounts and
commissions, solely to cover over-allotments, if any. If the
underwriters exercise this option in whole or in part, then the
underwriters will be severally committed, subject to the conditions
described in the underwriting agreement, to purchase the additional
shares of common stock in proportion to their respective
commitments set forth in the prior table.
Discounts, Commissions and Reimbursement
The
representative has advised us that the underwriters propose to
offer the shares of common stock to the public at the initial
public offering price per share set forth on the cover page of this
prospectus. The underwriters may offer shares to securities dealers
at that price less a concession of not more than
$ per
share of which up to
$ per
share may be reallowed to other dealers. After the initial offering
to the public, the public offering price and other selling terms
may be changed by the representative.
The
following table summarizes the underwriting discounts and
commissions and proceeds, before expenses, to us assuming both no
exercise and full exercise by the underwriters of their
over-allotment option:
|
|
|
|
|
|
|
Public offering
price
|
$
|
$
|
$
|
Underwriting
discounts and commissions (7.5%)
|
$
|
$
|
$
|
Non-accountable
expense allowance (1%)
|
$
|
$
|
$
|
Proceeds, before
expenses, to us
|
$
|
$
|
$
|
We have
agreed to pay an expense deposit of $10,000 to (or on behalf of)
the representative, which will be applied against the actual
out-of-pocket accountable expenses that will be paid by us to the
underwriters in connection with this offering, and will be
reimbursed to us to the extent not incurred, which deposit has been
paid as of the date hereof.
In
addition, we have also agreed to pay the following expenses of the
underwriters relating to the offering: (a) all fees, expenses and
disbursements relating to background checks of our officers and
directors in an amount not to exceed $15,000 in the aggregate; (b)
all filing fees and communication expenses associated with the
review of this offering by FINRA; (c) all fees, expenses and
disbursements relating to the registration, qualification or
exemption of securities offered under the securities laws of
foreign jurisdictions designated by the underwriter, including the
reasonable fees and expenses of the underwriter’s blue sky
counsel; (d) $29,500 for costs associated with the
underwriters’ use of Ipreo’s book-building, prospectus
tracking and compliance software for this offering; (e) the costs
associated with bound volumes of the public offering materials as
well as commemorative mementos and lucite tombstones, (f) the fees
and expenses of the representatives’ legal counsel incurred
in connection with this offering; (g) $10,000 for data services and
communication services; and (h) up to $20,000 for the
representative’s actual accountable road show expenses for
the offering. The aggregate of such reimbursement of the
underwriters’ expenses shall not exceed $100,000, which limit
shall not include any amount relating to the non-accountable
expense allowance described above.
We
estimate the expenses of this offering payable by us, not including
underwriting discounts and commissions, will be approximately
$
..
Representative Warrants
Upon
the closing of this offering, we have agreed to issue to the
representative warrants, or the Representative’s Warrants, to
purchase a number of shares of common stock equal to 5% of the
total number of shares sold in this public offering. The
Representative’s Warrants will be exercisable at a per share
exercise price equal to 125% of the public offering price per share
of common stock sold in this offering. The Representative’s
Warrants are exercisable at any time and from time to time, in
whole or in part, during the four and one-half year period
commencing six months from the commencement of the sale in this
offering. The Representative’s Warrants also provide for one
“piggyback” registration right with respect to the
registration of the shares of common stock underlying the
Representative’s Warrants and customary antidilution
provisions. The piggyback registration right provided will not be
greater than four and one half years from the date of the
underwriting agreement related to this offering in compliance with
FINRA Rule 5110(f)(2)(G).
The
Representative’s Warrants and the shares of common stock
underlying the Representative’s Warrants have been deemed
compensation by the Financial Industry Regulatory Authority, or
FINRA, and are therefore subject to a 180-day lock-up pursuant to
Rule 5110(g)(1) of FINRA. The representative, or permitted
assignees under such rule, may not sell, transfer, assign, pledge,
or hypothecate the Representative’s Warrants or the
securities underlying the Representative’s Warrants, nor will
the representative engage in any hedging, short sale, derivative,
put, or call transaction that would result in the effective
economic disposition of the Representative’s Warrants or the
underlying shares for a period of 180 days from the effective
date of the registration statement. Additionally, the
Representative’s Warrants may not be sold transferred,
assigned, pledged or hypothecated for a 180-day period following
the effective date of the registration statement except to any
underwriter and selected dealer participating in the offering and
their bona fide officers or partners. The Representative’s
Warrants will provide for adjustment in the number and price of the
Representative’s Warrants and the shares of common stock
underlying such Representative’s Warrants in the event of
recapitalization, merger, stock split or other structural
transaction, or a future financing undertaken by us.
Lock-Up Agreements
Each of
our directors, officers and any other 5% or greater holders of our
outstanding shares of common stock have agreed for a period of
90-days after the date of this prospectus supplement, without the
prior written consent of the representative, not to directly or
indirectly, offer, sell, contract to sell, encumber, grant any
option for sale of or otherwise dispose of our securities, and
provided this offering consists of the sale of at least $4.4
million shares of our common stock, we and any of our successors
have agreed for a period of 90-days from the date of this
prospectus supplement not to (a) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or other capital stock or
any securities convertible into or exercisable or exchangeable for
our common stock or other capital stock in a public offering,
unless we provide the representative the opportunity to participate
in such public offering, (b) other than as has been disclosed to
the representative, in the case of us, file or cause the filing of
any registration statement under the Securities Act with respect to
any shares of common stock or other capital stock or any securities
convertible into or exercisable or exchangeable for our common
stock or other capital stock; or (c) complete any public offering
of debt securities of the Company, whether any such transaction
described in the foregoing clauses (a), (b) or (c) is to be settled
by delivery of shares of our capital stock or such other
securities, in cash or otherwise.
Electronic Offer, Sale and Distribution of Securities
A
prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters or selling
group members. The representative may agree to allocate a number of
securities to underwriters and selling group members for sale to
its online brokerage account holders. Internet distributions will
be allocated by the underwriters and selling group members that
will make internet distributions on the same basis as other
allocations. Other than the prospectus in electronic format, the
information on these websites is not part of, nor incorporated by
reference into, this prospectus or the registration statement of
which this prospectus forms a part, has not been approved or
endorsed by us, and should not be relied upon by
investors.
Stabilization
In
connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions,
syndicate-covering transactions, penalty bids and purchases to
cover positions created by short sales.
Stabilizing
transactions permit bids to purchase shares so long as the
stabilizing bids do not exceed a specified maximum, and are engaged
in for the purpose of preventing or retarding a decline in the
market price of the shares while the offering is in
progress.
Over-allotment
transactions involve sales by the underwriters of shares in excess
of the number of shares the underwriters are obligated to purchase.
This creates a syndicate short position which may be either a
covered short position or a naked short position. In a covered
short position, the number of shares over-allotted by the
underwriters is not greater than the number of shares that they may
purchase in the over-allotment option. In a naked short position,
the number of shares involved is greater than the number of shares
in the over-allotment option. The underwriters may close out any
short position by exercising their over-allotment option and/or
purchasing shares in the open market.
Syndicate covering
transactions involve purchases of shares in the open market after
the distribution has been completed in order to cover syndicate
short positions. In determining the source of shares to close out
the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared with the price at which they may purchase shares
through exercise of the over-allotment option. If the underwriters
sell more shares than could be covered by exercise of the
over-allotment option and, therefore, have a naked short position,
the position can be closed out only by buying shares in the open
market. A naked short position is more likely to be created if the
underwriters are concerned that after pricing there could be
downward pressure on the price of the shares in the open market
that could adversely affect investors who purchase in the
offering.
Penalty
bids permit the representative to reclaim a selling concession from
a syndicate member when the shares originally sold by that
syndicate member are purchased in stabilizing or syndicate covering
transactions to cover syndicate short positions.
These
stabilizing transactions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the
market price of our shares of common stock or preventing or
retarding a decline in the market price of our shares of common
stock. As a result, the price of our common stock in the open
market may be higher than it would otherwise be in the absence of
these transactions. Neither we nor the underwriters make any
representation or prediction as to the effect that the transactions
described above may have on the price of our common stock. These
transactions may be effected in
the over-the-counter market or otherwise and, if
commenced, may be discontinued at any time.
Other Relationships
Certain
of the underwriters and their affiliates may in the future provide
various investment banking, commercial banking and other financial
services for us and our affiliates for which they may in the future
receive customary fees.
Offer restrictions outside the United States
Other
than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the securities
offered by this prospectus in any jurisdiction where action for
that purpose is required. The securities offered by this prospectus
may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements in
connection with the offer and sale of any such securities be
distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable
rules and regulations of that jurisdiction. Persons into whose
possession this prospectus comes are advised to inform themselves
about and to observe any restrictions relating to the offering and
the distribution of this prospectus. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy
any securities offered by this prospectus in any jurisdiction in
which such an offer or a solicitation is unlawful.
Australia
This
prospectus is not a disclosure document under Chapter 6D of the
Australian Corporations Act, has not been lodged with the
Australian Securities and Investments Commission and does not
purport to include the information required of a disclosure
document under Chapter 6D of the Australian Corporations Act.
Accordingly, (i) the offer of the securities under this
prospectus is only made to persons to whom it is lawful to offer
the securities without disclosure under Chapter 6D of the
Australian Corporations Act under one or more exemptions set out in
section 708 of the Australian Corporations Act, (ii) this
prospectus is made available in Australia only to those persons as
set forth in clause (i) above, and (iii) the offeree must
be sent a notice stating in substance that by accepting this offer,
the offeree represents that the offeree is such a person as set
forth in clause (i) above, and, unless permitted under the
Australian Corporations Act, agrees not to sell or offer for sale
within Australia any of the securities sold to the offeree within
12 months after its transfer to the offeree under this
prospectus.
China
The
information in this document does not constitute a public offer of
the securities, whether by way of sale or subscription, in the
People’s Republic of China (excluding, for purposes of this
paragraph, Hong Kong Special Administrative Region, Macau Special
Administrative Region and Taiwan). The securities may not be
offered or sold directly or indirectly in the PRC to legal or
natural persons other than directly to “qualified domestic
institutional investors.”
European Economic Area—Belgium, Germany, Luxembourg and
Netherlands
The
information in this document has been prepared on the basis that
all offers of securities will be made pursuant to an exemption
under the Directive 2003/71/EC (“Prospectus
Directive”), as implemented in Member States of the European
Economic Area (each, a “Relevant Member State”), from
the requirement to produce a prospectus for offers of
securities.
An
offer to the public of securities has not been made, and may not be
made, in a Relevant Member State except pursuant to one of the
following exemptions under the Prospectus Directive as implemented
in that Relevant Member State:
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to
legal entities that are authorized or regulated to operate in the
financial markets or, if not so authorized or regulated, whose
corporate purpose is solely to invest in securities;
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to any
legal entity that has two or more of (i) an average of at
least 250 employees during its last fiscal year; (ii) a total
balance sheet of more than €43,000,000 (as shown on its last
annual unconsolidated or consolidated financial statements) and
(iii) an annual net turnover of more than €50,000,000
(as shown on its last annual unconsolidated or consolidated
financial statements);
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to
fewer than 100 natural or legal persons (other than qualified
investors within the meaning of Article 2(1)(e) of the Prospectus
Directive) subject to obtaining the prior consent of the Company or
any underwriter for any such offer; or
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in any
other circumstances falling within Article 3(2) of the Prospectus
Directive, provided that no such offer of securities shall result
in a requirement for the publication by the Company of a prospectus
pursuant to Article 3 of the Prospectus Directive.
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France
This
document is not being distributed in the context of a public
offering of financial securities (offre au public de titres
financiers) in France within the meaning of
Article L.411-1 of the French Monetary and Financial Code
(Code Monétaire et Financier) and Articles 211-1 et seq.
of the General Regulation of the French Autorité des
marchés financiers (“AMF”). The securities have
not been offered or sold and will not be offered or sold, directly
or indirectly, to the public in France.
This
document and any other offering material relating to the securities
have not been, and will not be, submitted to the AMF for approval
in France and, accordingly, may not be distributed or caused to
distributed, directly or indirectly, to the public in
France.
Such
offers, sales and distributions have been and shall only be made in
France to (i) qualified investors (investisseurs qualifiés)
acting for their own account, as defined in and in accordance with
Articles L.411-2-II-2° and D.411-1 to D.411-3, D.744-1,
D.754-1; and D.764-1 of the French Monetary and Financial Code and
any implementing regulation and/or (ii) a restricted number of
non-qualified investors (cercle restreint d’investisseurs)
acting for their own account, as defined in and in accordance with
Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1; and
D.764-1 of the French Monetary and Financial Code and any
implementing regulation.
Pursuant to Article
211-3 of the General Regulation of the AMF, investors in France are
informed that the securities cannot be distributed (directly or
indirectly) to the public by the investors otherwise than in
accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to
L.621-8-3 of the French Monetary and Financial Code.
Ireland
The
information in this document does not constitute a prospectus under
any Irish laws or regulations and this document has not been filed
with or approved by any Irish regulatory authority as the
information has not been prepared in the context of a public
offering of securities in Ireland within the meaning of the Irish
Prospectus (Directive 2003/71/EC) Regulations 2005 (the
“Prospectus Regulations”). The securities have not been
offered or sold, and will not be offered, sold or delivered
directly or indirectly in Ireland by way of a public offering,
except to (i) qualified investors as defined in Regulation
2(l) of the Prospectus Regulations and (ii) fewer than 100
natural or legal persons who are not qualified
investors.
Israel
The
securities offered by this prospectus have not been approved or
disapproved by the Israeli Securities Authority (the ISA), or ISA,
nor have such securities been registered for sale in Israel. The
shares may not be offered or sold, directly or indirectly, to the
public in Israel, absent the publication of a prospectus. The ISA
has not issued permits, approvals or licenses in connection with
the offering or publishing the prospectus; nor has it authenticated
the details included herein, confirmed their reliability or
completeness, or rendered an opinion as to the quality of the
securities being offered. Any resale in Israel, directly or
indirectly, to the public of the securities offered by this
prospectus is subject to restrictions on transferability and must
be effected only in compliance with the Israeli securities laws and
regulations.
Italy
The
offering of the securities in the Republic of Italy has not been
authorized by the Italian Securities and Exchange Commission
(Commissione Nazionale per le Societ—$$—Aga e la Borsa,
“CONSOB” pursuant to the Italian securities legislation
and, accordingly, no offering material relating to the securities
may be distributed in Italy and such securities may not be offered
or sold in Italy in a public offer within the meaning of Article
1.1(t) of Legislative Decree No. 58 of 24 February 1998
(“Decree No. 58”), other than:
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to
Italian qualified investors, as defined in Article 100 of Decree
no.58 by reference to Article 34-ter of CONSOB Regulation
no. 11971 of 14 May 1999 (“Regulation no. 1197l”)
as amended (“Qualified Investors”); and
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in
other circumstances that are exempt from the rules on public offer
pursuant to Article 100 of Decree No. 58 and
Article 34-ter of Regulation No. 11971 as
amended.
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Any
offer, sale or delivery of the securities or distribution of any
offer document relating to the securities in Italy (excluding
placements where a Qualified Investor solicits an offer from the
issuer) under the paragraphs above must be:
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made by
investment firms, banks or financial intermediaries permitted to
conduct such activities in Italy in accordance with Legislative
Decree No. 385 of 1 September 1993 (as amended), Decree
No. 58, CONSOB Regulation No. 16190 of 29 October
2007 and any other applicable laws; and
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in
compliance with all relevant Italian securities, tax and exchange
controls and any other applicable laws.
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Any
subsequent distribution of the securities in Italy must be made in
compliance with the public offer and prospectus requirement rules
provided under Decree No. 58 and the Regulation No. 11971
as amended, unless an exception from those rules applies. Failure
to comply with such rules may result in the sale of such securities
being declared null and void and in the liability of the entity
transferring the securities for any damages suffered by the
investors.
Japan
The
securities have not been and will not be registered under Article
4, paragraph 1 of the Financial Instruments and Exchange Law of
Japan (Law No. 25 of 1948), as amended (the
“FIEL”) pursuant to an exemption from the registration
requirements applicable to a private placement of securities to
Qualified Institutional Investors (as defined in and in accordance
with Article 2, paragraph 3 of the FIEL and the regulations
promulgated thereunder). Accordingly, the securities may not be
offered or sold, directly or indirectly, in Japan or to, or for the
benefit of, any resident of Japan other than Qualified
Institutional Investors. Any Qualified Institutional Investor who
acquires securities may not resell them to any person in Japan that
is not a Qualified Institutional Investor, and acquisition by any
such person of securities is conditional upon the execution of an
agreement to that effect.
Portugal
This
document is not being distributed in the context of a public offer
of financial securities (oferta pública de valores
mobiliários) in Portugal, within the meaning of Article 109 of
the Portuguese Securities Code (Código dos Valores
Mobiliários). The securities have not been offered or sold and
will not be offered or sold, directly or indirectly, to the public
in Portugal. This document and any other offering material relating
to the securities have not been, and will not be, submitted to the
Portuguese Securities
Market Commission (Comissăo do Mercado de Valores
Mobiliários) for approval in Portugal and, accordingly,
may not be distributed or caused to distributed, directly or
indirectly, to the public in Portugal, other than under
circumstances that are deemed not to qualify as a public offer
under the Portuguese Securities Code. Such offers, sales and
distributions of securities in Portugal are limited to persons who
are “qualified investors” (as defined in the Portuguese
Securities Code). Only such investors may receive this document and
they may not distribute it or the information contained in it to
any other person.
Sweden
This
document has not been, and will not be, registered with or approved
by Finansinspektionen (the Swedish Financial Supervisory
Authority). Accordingly, this document may not be made available,
nor may the securities be offered for sale in Sweden, other than
under circumstances that are deemed not to require a prospectus
under the Swedish Financial Instruments Trading Act (1991:980) (Sw.
lag (1991:980) om handel med finansiella instrument). Any offering
of securities in Sweden is limited to persons who are
“qualified investors” (as defined in the Financial
Instruments Trading Act). Only such investors may receive this
document and they may not distribute it or the information
contained in it to any other person.
Switzerland
The
securities may not be publicly offered in Switzerland and will not
be listed on the SIX Swiss Exchange (“SIX”) or on any
other stock exchange or regulated trading facility in Switzerland.
This document has been prepared without regard to the disclosure
standards for issuance prospectuses under art. 652a or art. 1156 of
the Swiss Code of Obligations or the disclosure standards for
listing prospectuses under art. 27 ff. of the SIX Listing Rules or
the listing rules of any other stock exchange or regulated trading
facility in Switzerland. Neither this document nor any other
offering material relating to the securities may be publicly
distributed or otherwise made publicly available in
Switzerland.
Neither
this document nor any other offering material relating to the
securities have been or will be filed with or approved by any Swiss
regulatory authority. In particular, this document will not be
filed with, and the offer of securities will not be supervised by,
the Swiss Financial Market Supervisory Authority
(FINMA).
This
document is personal to the recipient only and not for general
circulation in Switzerland.
United Arab Emirates
Neither
this document nor the securities have been approved, disapproved or
passed on in any way by the Central Bank of the United Arab
Emirates or any other governmental authority in the United Arab
Emirates, nor has the Company received authorization or licensing
from the Central Bank of the United Arab Emirates or any other
governmental authority in the United Arab Emirates to market or
sell the securities within the United Arab Emirates.
This
document does not constitute and may not be used for the purpose of
an offer or invitation. No services relating to the securities,
including the receipt of applications and/or the allotment or
redemption of such shares, may be rendered within the United Arab
Emirates by the Company.
No
offer or invitation to subscribe for securities is valid or
permitted in the Dubai International Financial Centre.
United Kingdom
Neither
the information in this document nor any other document relating to
the offer has been delivered for approval to the Financial Services
Authority in the United Kingdom and no prospectus (within the
meaning of section 85 of the Financial Services and Markets Act
2000, as amended (“FSMA”) has been published or is
intended to be published in respect of the securities. This
document is issued on a confidential basis to “qualified
investors” (within the meaning of section 86(7) of FSMA) in
the United Kingdom, and the securities may not be offered or sold
in the United Kingdom by means of this document, any accompanying
letter or any other document, except in circumstances which do not
require the publication of a prospectus pursuant to section 86(1)
FSMA. This document should not be distributed, published or
reproduced, in whole or in part, nor may its contents be disclosed
by recipients to any other person in the United
Kingdom.
Any
invitation or inducement to engage in investment activity (within
the meaning of section 21 of FSMA) received in connection with the
issue or sale of the securities has only been communicated or
caused to be communicated and will only be communicated or caused
to be communicated in the United Kingdom in circumstances in which
section 21(1) of FSMA does not apply to the Company.
In the
United Kingdom, this document is being distributed only to, and is
directed at, persons (i) who have professional experience in
matters relating to investments falling within Article 19(5)
(investment professionals) of the Financial Services and Markets
Act 2000 (Financial Promotions) Order 2005 (“FPO”),
(ii) who fall within the categories of persons referred to in
Article 49(2)(a) to (d) (high net worth companies, unincorporated
associations, etc.) of the FPO or (iii) to whom it may
otherwise be lawfully communicated (together “relevant
persons”). The investments to which this document relates are
available only to, and any invitation, offer or agreement to
purchase will be engaged in only with, relevant persons. Any person
who is not a relevant person should not act or rely on this
document or any of its contents.
Canada
The
securities may be sold in Canada only to purchasers purchasing, or
deemed to be purchasing, as principal that are accredited
investors, as defined in National
Instrument 45-106 Prospectus Exemptions or subsection
73.3(1) of the Securities Act (Ontario), and are permitted clients,
as defined in National Instrument 31-103 Registration
Requirements, Exemptions and Ongoing Registrant Obligations. Any
resale of the securities must be made in accordance with an
exemption from, or in a transaction not subject to, the prospectus
requirements of applicable securities laws. Securities legislation
in certain provinces or territories of Canada may provide a
purchaser with remedies for rescission or damages if this
prospectus (including any amendment thereto) contains a
misrepresentation, provided that the remedies for rescission or
damages are exercised by the purchaser within the time limit
prescribed by the securities legislation of the purchaser’s
province or territory. The purchaser should refer to any applicable
provisions of the securities legislation of the purchaser’s
province or territory for particulars of these rights or consult
with a legal advisor. Pursuant to section 3A.3 of National
Instrument 33-105 Underwriting Conflicts (NI 33-105), the
underwriters are not required to comply with the disclosure
requirements of NI33-105 regarding underwriter conflicts of
interest in connection with this offering.
LEGAL MATTERS
Certain
legal matters in connection with the sale of the common stock
offered hereby will be passed upon for us by Axelrod & Smith,
Houston, Texas. Loeb & Loeb LLP, New York, New York, is acting
as counsel to the underwriters in connection with this
offering.
EXPERTS
The consolidated financial statements of Torchlight Energy
Resources, Inc. appearing in its Annual Report on Form 10-K for the
year ended December 31, 2019, and the effectiveness of its internal
control over financial reporting as of December 31, 2019, have been
audited by Briggs & Veselka Co., an independent registered
public accounting firm, as set forth in reports thereon, included
therein, and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon
such reports given on the authority of such firm as experts in
accounting and auditing.
Certain
information contained in the documents we incorporate by reference
in this prospectus supplement 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 supplement upon the
authority of said firm as an expert with respect to the matters
covered by such reports and in giving such reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have
filed with the SEC a registration statement on Form S-3 under the
Securities Act, of which this prospectus supplement and the
accompanying prospectus form a part. The rules and regulations of
the SEC allow us to omit from this prospectus supplement certain
information included in the registration statement. For further
information about us and the securities we are offering under this
prospectus supplement, you should refer to the registration
statement and the exhibits and schedules filed with the
registration statement. With respect to the statements contained in
this prospectus supplement regarding the contents of any agreement
or any other document, in each instance, the statement is qualified
in all respects by the complete text of the agreement or document,
a copy of which has been filed as an exhibit to the registration
statement.
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 make
available free of charge on our website our annual, quarterly and
current reports, including amendments to such reports, as soon as
reasonably practicable after we electronically file such material
with, or furnish such material to, the SEC. Please note, however,
that we have not incorporated any other information by reference
from our website, other than the documents listed under the heading
“Incorporation of Certain Information by Reference”
below.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC
allows us to incorporate by reference information that we file with
it. Incorporation by reference allows us to disclose important
information to you by referring you to those other documents. The
information incorporated by reference is an important part of this
prospectus supplement and the accompanying prospectus, and
information that we file later with the SEC will automatically
update and supersede information contained in this prospectus
supplement. We incorporate by reference the documents listed below
that we have previously filed with the SEC:
● our
Annual Report on Form 10-K for the fiscal year ended December 31,
2019, filed with the SEC on March 16, 2020;
● our
Current Reports on Form 8-K, as filed with the SEC on January 3,
2020, January 14, 2020, January 16, 2020, February 20, 2020, March
10, 2020, April 7, 2020, April 27, 2020, April 29, 2020 and May 12,
2020; 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.
In
addition, all documents (other than current reports furnished under
Item 2.02 or Item 7.01 of Form 8-K and exhibits filed in such forms
that are related to such items unless such Form 8-K expressly
provides to the contrary) subsequently filed by us pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act before the
date our offering is terminated or completed are deemed to be
incorporated by reference into, and to be a part of, this
prospectus supplement and the accompanying prospectus.
Any
statement contained in this prospectus supplement and the
accompanying prospectus, or any free writing prospectus provided in
connection with this offering or in a document incorporated or
deemed to be incorporated by reference into this prospectus
supplement and the accompanying prospectus will be deemed to be
modified or superseded for purposes of this prospectus supplement
and the accompanying prospectus to the extent that a statement
contained in this prospectus supplement and the accompanying
prospectus, or any free writing prospectus provided in connection
with this offering or any other subsequently filed document that is
deemed to be incorporated by reference into this prospectus
supplement and the accompanying prospectus modifies or supersedes
the statement. Any statement so modified or superseded will not be
deemed, except as so modified or superseded, to constitute a part
of this prospectus supplement and the accompanying
prospectus.
To
obtain copies of these filings, see “Where You Can Find
Additional Information” on page S-37 of this prospectus
supplement.
We will
provide to each person, including any beneficial holder, to whom a
prospectus supplement is delivered, at no cost, upon written or
oral request, a copy of any or all of the information that has been
incorporated by reference in the prospectus supplement but not
delivered with the prospectus supplement. You should direct any
requests for documents to:
Torchlight
Energy Resources, Inc.
5700 W.
Plano Parkway, Suite 3600
Plano,
Texas 75093
Attention:
John A. Brda, President
Telephone:
(214) 432-8002
Prospectus
Torchlight Energy Resources, Inc.
$75,000,000
COMMON STOCK
PREFERRED STOCK
WARRANTS
UNITS
RIGHTS
We
may offer and sell the following securities from time to time in
one or more classes or series and in amounts, at prices and on
terms that we will determine at the time of the offering, with an
aggregate offering price not to exceed $75,000,000:
●
shares
of common stock;
●
shares
of preferred stock;
●
units
consisting of combinations of any of the foregoing;
and/or
●
rights
to purchase any of the foregoing.
This
prospectus provides you with a general description of these
securities. Each time we will offer and sell them, we will provide
their specific terms in a supplement to this prospectus. Such
prospectus supplement may add, update, or change information
contained in this prospectus. You should read this prospectus and
the applicable prospectus supplement, as well as all documents
incorporated by reference in this prospectus and any accompanying
prospectus supplement, carefully before you invest in our
securities. This prospectus may not be used to offer and sell
securities, unless accompanied by a prospectus
supplement.
We
may offer the securities directly, through agents designated from
time to time, to or through underwriters or dealers, or through a
combination of these methods. If any agents or underwriters are
involved in the sale of any of the securities, their names, and any
applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable
from the information set forth, in the applicable prospectus
supplement. For more information on this topic, please see
“Plan of Distribution.”
Our
common stock is listed on the NASDAQ Capital Market under the
symbol “TRCH.”
Investing in any of our securities involves risk. Please see the
“Risk Factors” sections beginning on page 5 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 September 28, 2017.
TABLE OF CONTENTS
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Page
|
|
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ABOUT
THIS PROSPECTUS
|
3
|
|
|
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
|
3
|
|
|
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
|
3
|
|
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
4
|
|
|
THE
COMPANY
|
5
|
|
|
RISK
FACTORS
|
5
|
|
|
USE OF
PROCEEDS
|
5
|
|
|
PLAN OF
DISTRIBUTION
|
6
|
|
|
DESCRIPTION
OF COMMON AND PREFERRED STOCK
|
7
|
|
|
DESCRIPTION
OF WARRANTS
|
9
|
|
|
DESCRIPTION
OF UNITS
|
9
|
|
|
DESCRIPTION
OF RIGHTS
|
10
|
|
|
EXPERTS
|
11
|
|
|
LEGAL
MATTERS
|
11
|
ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission (“SEC”)
utilizing what is commonly referred to as a shelf registration
process. Under this shelf registration process, we may offer and
sell any combination of the securities described in this prospectus
in one or more offerings. This prospectus provides you with a
general description of the securities we may offer. Each time we
offer to sell securities, we will provide a prospectus supplement
thatwill contain specific information about the terms of that
offering and the securities offered by us in that offering. The
prospectus supplement may also add, update, or change information
contained in this prospectus. If there is any inconsistency
betweenthe information in this prospectus and a prospectus
supplement, you should rely on the information provided in the
prospectus supplement. This prospectus does not contain all of the
information included in the registration statement. The
registration statement filed with the SEC includes exhibits that
provide more details about the matters discussed in this
prospectus. You should carefully read this prospectus, the related
exhibits filed with the SEC, and any prospectus supplement,
together with the additional information described below under the
heading “Where You Can Find Additional
Information.”
You should rely only on the information contained, or incorporated
by reference, in this prospectus and in any accompanying prospectus
supplement. We have not authorized any other person to provide you
with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not
making an offer of the securities covered by this prospectus in any
state wherethe offer is not permitted. You should assume that the
information appearing in this prospectus, any prospectus
supplement, and any other document incorporated by reference is
accurate only as of the date on the front cover of the respective
document. Our business, financial condition, results of operations,
and prospects may have changed since those dates.
Under no circumstances should the delivery of this prospectus to
you create any implication that the information contained in this
prospectus is correct as of any time after the date of this
prospectus.
Unless
otherwise indicated, or unless the context otherwise requires, all
references in this prospectus to “Torchlight,”
“we,” “us,” and “our” mean
Torchlight Energy Resources, Inc. and our consolidated
subsidiaries. In this prospectus, we sometimes refer to the shares
of common stock, shares of preferred stock, warrants, units and
rights consisting of combinations of any of the foregoing
collectively as the “securities.”
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and current reports,
proxy statements and other documents with the SEC. You may read and
copy, at prescribed rates, any documents we have filed with the SEC
at its Public Reference Room located at 100 F Street, N.E.,
Washington, DC 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We also file these documents with the SEC electronically. 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 Public Reference Room in
Washington, D.C., as well as on 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,
2016, filed with the SEC on March 31, 2017;
●
Our
Quarterly Reports on Form 10-Q filed for the quarter ended March
31, 2017, filed with the SEC on May 12, 2017, and the quarter ended
June 30, 2017, as filed with the SEC on August 8,
2017;
●
Our
Current Reports on Form 8-K, as filed with the SEC on January 10,
2017, February 3, 2017, April 14, 2017 and August 22, 2017;
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 effectivenessof 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, President
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, 2016 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: oil and
natural gas prices; 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
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 have been in business since
2010.
Our
primary focus is on the development of interests in oil and gas
projects we hold in West Texas, including the Orogrande Project in
Hudspeth County, Texas and the Hazel Project in the Midland Basin.
We are in the process of divesting our interests in all other oil
and gas projects other than the Orogrande Project and the Hazel
Project. We may be involved in other oil and gas projects moving
forward, pending adequate funding.
Torchlight
Energy Resources, Inc. is a Nevada corporation. We operate our
business through four wholly-owned subsidiaries, Torchlight Energy,
Inc., also a Nevada corporation, Torchlight Energy Operating, LLC,
a Texas limited liability company, Hudspeth Oil Corporation, a
Texas corporation, and Torchlight Hazel, LLC, a Texas limited
liability company. We currently have four full time
employees.
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.
RISK FACTORS
Investing
in our securities involves a high degree of risk. Before deciding
to purchase any of our securities, you should carefully consider
the discussion of risks and uncertainties:
●
under
the heading “Risk Factors” contained in our Annual
Report on Form 10-K for the fiscal year that ended December 31,
2016, which is incorporated by reference in this prospectus;
and
●
in
any other place in this prospectus, any applicable prospectus
supplement as well as in any document that is incorporated by
reference in this prospectus.
See
the section entitled “Where You Can Find Additional
Information” in this prospectus. The risks and uncertainties
we discuss in the documents incorporated by reference in this
prospectus are those we currently believe may materially affect us.
Additional risks and uncertainties that we do not presently know
about or that we currently believe are not material may also
adversely affect our business. If any of the risks and
uncertainties described in this prospectus or the documents
incorporated by reference herein actually occur, our business,
financial condition and results of operations could be adversely
affected in a material way. This could cause the trading price of
the common stock to decline, perhaps significantly, and you may
lose part or all of your investment.
USE OF PROCEEDS
Unless
otherwise specified in an accompanying prospectus supplement, we
expect to use the net proceeds from the sale of the securities
offered by this prospectus and any accompanying prospectus
supplement for general corporate purposes, which may include, among
other things:
●
reduction
or refinancing of debt or other corporate obligations;
●
additions
to our working capital;
●
capital
expenditures; and
●
potential
future acquisitions.
Any
specific allocation of the net proceeds of an offering of
securities to a specific purpose will be determined at the time of
the offering and will be described in an accompanying prospectus
supplement. We may invest funds not required immediately for these
purposes in marketable securities and short-term investments. The
precise amount and timing of the application of these proceeds will
depend upon our funding requirements and the availability and cost
of other funds. We have not determined the amounts we plan to spend
on the areas listed above or the timing of these expenditures. As a
result, our management will have broad discretion to allocate the
net proceeds of any offering.
PLAN OF DISTRIBUTION
We
may sell the securities offered by this prospectus and applicable
prospectus supplements in one or more of the following ways from
time to time:
●
through
underwriters or dealers;
●
directly
to purchasers, including institutional investors and our
affiliates;
●
through
a combination of any such methods of sale; or
●
through
any other methods described in a prospectus
supplement.
Any
such underwriter, dealer, or agent may be deemed to be an
underwriter within the meaning of the Securities Act.
The
applicable prospectus supplement relating to the securities will
set forth:
●
the
offering terms, including the name or names of any underwriters,
dealers, or agents;
●
the
purchase price of the securities and the estimated net proceeds to
us from such sales;
●
any
underwriting discounts, commissions, and other items constituting
compensation to underwriters, dealers, or agents;
●
any
initial public offering price, if applicable;
●
any
discounts or concessions allowed or reallowed or paid by
underwriters or dealers to other dealers;
●
any
delayed delivery arrangements; and
●
any
securities exchanges on which the securities may be
listed.
If
underwriters or dealers are used in the sale, the securities will
be acquired by the underwriters or dealers for their own account
and may be resold from time to time in one or more
transactions:
●
at
a fixed price or prices, which may be changed;
●
at
market prices prevailing at the time of sale;
●
at
prices related to such prevailing market prices; or
The
securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or
directly by one or more of such firms. Unless otherwise stated in
an applicable prospectus supplement, the obligations of
underwriters or dealers to purchase the securities will be subject
to certain customary closing conditions and the underwriters or
dealers will be obligated to purchase all the securities if any of
the securities are purchased. Any public offering price and any
discounts or concessions allowed or reallowed or paid by
underwriters or dealers to other dealers may be changed from time
to time.
Securities
may be sold directly by us, or through agents designated by us,
from time to time. Any agent involved in the offer or sale of the
securities in respect of which this prospectus and a prospectus
supplement is delivered will be named, and any commissions payable
by us to such agent will be set forth, in the prospectus
supplement. Unless otherwise indicated inthe prospectus supplement,
any such agent will be acting on a best efforts basis for the
period of its appointment. Any agent selling the securities covered
by this prospectus may be deemed to be an underwriter as that term
is defined in the Securities Act.
If
so indicated in the prospectus supplement, we will authorize
underwriters, dealers, or agents to solicit offers from certain
specified institutions to purchase securities from us at the public
offering price set forth in the prospectus supplement pursuant to
delayed delivery contracts providing for payment and delivery on a
specified date in the future. Such contracts will be subject to any
conditions set forth in the prospectus supplement and the
prospectus supplement will set forth the commission payable for
solicitation of such contracts. The underwriters and other persons
soliciting such contracts will have no responsibility for the
validity or performance of any such contracts.
Underwriters,
dealers, and agents may be entitled under agreements entered into
with us to be indemnified by us against certain civil liabilities,
including liabilities under the Securities Act, or to contribution
by us to payments which they may be required to make. The terms and
conditions of such indemnification will be described in an
applicable prospectus supplement. Underwriters, dealers, and agents
may be customers of, engage in transactions with, or perform
services for us in the ordinary course of business.
Each
class or series of securities will be a new issue of securities
with no established trading market, other than the common stock,
which is listed on NASDAQ. We may elect to list any other class or
series of securities on any exchange, other than the common stock,
but we are not obligated to do so. Any underwriters to whom
securities are sold by us for public offering and sale may make a
market in such securities, but such underwriters will not be
obligated to do so and may discontinue any market making at any
time without notice. No assurance can be given as to the liquidity
of the trading market for any securities.
Certain
persons participating in any offering of securities may engage in
transactions that stabilize, maintain or otherwise affect the price
of the securities offered in accordance with Regulation M under the
Exchange Act. In connection with any such offering, the
underwriters or agents, as the case may be, may purchase and sell
securities in the open market. These transactions may include
over-allotment and stabilizing transactions andpurchases to cover
syndicate short positions created in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for
the purpose of preventing or retarding a decline in the market
price of the securities; and syndicate short positions involve the
sale by the underwriters or agents, as the case may be, of a
greater number of securities than they are required to purchase
from us, as the case may be, in the offering. The underwriters may
also impose a penalty bid, whereby selling concessions allowed to
syndicate members or other broker-dealers for the securities sold
for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or
covering transactions. These activitiesmay stabilize, maintain, or
otherwise affect the market price of the securities, which may be
higher than the price that might otherwise prevail in the open
market, and if commenced, may be discontinued at any time. These
transactions may be effected on NASDAQ, in the over-the-counter
market or otherwise. These activities will be described in more
detail in the sections entitled “Plan of Distribution”
or “Underwriting” in the applicable prospectus
supplement.
The
prospectus supplement or pricing supplement, as applicable, will
set forth the anticipated delivery date of the securities being
sold at that time.
DESCRIPTION OF COMMON AND PREFERRED STOCK
The
following is a description of certain provisions relating to our
capital stock. For additional information regarding our stock,
please refer to our Articles of Incorporation (as amended), our
Amended and Restated Bylaws (“Bylaws”), and the
certificates of designation for each of our two outstanding series
of preferred stock, 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. As of
August 23, 2017, there were approximately 59,549,375 shares of
common stock outstanding, and no shares of preferred stock
designated or outstanding. Additionally, we currently have warrants
and stock options outstanding to purchase a total of approximately
23,487,409 shares of common stock.
The
Board of Directors previously authorized three different series of
preferred stock—Series A Convertible Preferred Stock, Series
B Convertible Preferred Stock and Series C Convertible Preferred
Stock—but the Board withdrew these designations effective
August 18, 2017. Presently, we have no shares of preferred stock
designated or outstanding.
Common Stock
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.
First
American Stock Transfer, Inc. is transfer agent and registrar for
our common stock.
Our
common stock is listed on the NASDAQ Capital Market under the
symbol “TRCH.”
Preferred Stock
Our
Board of Directors can, without approval of our stockholders, issue
one or more series of preferred stock and determine the number of
shares of each series and the rights, preferences, and limitations
of each series. The following description of the terms of the
preferred stock sets forth certain general terms and provisions of
our authorized preferred stock. If we offer preferred stock, a more
specific description will be filed with the SEC, and the
designations and rights of such preferred stock will be described
in a prospectus supplement, including the following
terms:
●
the
series, the number of shares offered, and the liquidation value of
the preferred stock;
●
the
price at which the preferred stock will be issued;
●
the
dividend rate, the dates on which the dividends will be payable,
and other terms relating to the payment of dividends on the
preferred stock;
●
the
liquidation preference of the preferred stock;
●
the
voting rights of the preferred stock;
●
whether
the preferred stock is redeemable, or subject to a sinking fund,
and the terms of any such redemption or sinking fund;
●
whether
the preferred stock is convertible, or exchangeable for any other
securities, and the terms of any such conversion or exchange;
and
●
any
additional rights, preferences, qualifications, limitations, and
restrictions of the preferred stock.
The
description of the terms of the preferred stock that will be set
forth in an applicable prospectus supplement will not be complete
and will be subject to and qualified in its entirety by reference
to the certificate of designation relating to the applicable series
of preferred stock. The registration statement, of which this
prospectus forms a part, will include the certificate of
designation as an exhibit or incorporate it by
reference.
Undesignated
preferred stock may enable our board of directors to render more
difficult or to discourage an attempt to obtain control of us by
means of a tender offer, proxy contest, merger, or otherwise and to
thereby protect the continuity of our management. The issuance of
shares of preferred stock may adversely affect the rights of the
holders of our common stock. For example, any preferred stock
issued may:
●
rank
prior to our common stock as to dividend rights, liquidation
preference, or both;
●
have
full or limited voting rights; and
●
be
convertible into shares of common stock.
As
a result, the issuance of shares of preferred stock
may:
●
discourage
bids for our common stock; or
●
otherwise
adversely affect the market price of our common stock or any then
existing preferred stock.
Any
preferred stock will, when issued, be fully paid and
non-assessable.
Anti-Takeover Provisions
Our
Bylaws and Nevada law include certain provisions which may have the
effect of delaying or deterring a change in control or in our
management or encouraging persons considering unsolicited tender
offers or other unilateral takeover proposals to negotiate with our
board of directors rather than pursue non-negotiated takeover
attempts. These provisions include authorized blank check preferred
stock, restrictions on business combinations, and the availability
of authorized but unissued common stock.
DESCRIPTION OF WARRANTS
We
may issue warrants to purchase equity securities. Warrants may be
issued independently or together with any other securities and may
be attached to, or separate from, such securities. Each series of
warrants will be issued under a separate warrant agreement to be
entered into between us and any warrant agent. The terms of any
warrants to be issued and a description of the material provisions
of the applicable warrant agreement will be set forth in the
applicable prospectus supplement.
The
applicable prospectus supplement will specify the following terms
of any warrants in respect of which this prospectus is being
delivered:
●
the
title of such warrants;
●
the
aggregate number of such warrants;
●
the
price or prices at which such warrants will be issued;
●
any
changes or adjustments to the exercise price;
●
the
securities or other rights, including rights to receive payment in
cash or securities based on the value, rate, or price of one or
more specified commodities, currencies, securities, or indices, or
any combination of the foregoing, purchasable upon exercise of such
warrants;
●
the
price at which, and the currency or currencies in which the
securities or other rights purchasable upon exercise of, such
warrants may be purchased;
●
the
date on which the right to exercise such warrants shall commence
and the date on which such right shall expire;
●
if
applicable, the minimum or maximum amount of such warrants that may
be exercised at any one time;
●
if
applicable, the designation and terms of the securities with which
such warrants are issued and the number of such warrants issued
with each such security;
●
if
applicable, the date on and after which such warrants and the
related securities will be separately transferable;
●
information
with respect to book-entry procedures, if any;
●
if
applicable, a discussion of any material United States federal
income tax considerations; and
●
any
other terms of such warrants, including terms, procedures and
limitations relating to the exchange and exercise of such
warrants.
DESCRIPTION OF UNITS
As
specified in the applicable prospectus supplement, we may issue
units consisting of one or more shares of common stock, shares of
preferred stock, or warrants or any combination of such
securities.
The
applicable prospectus supplement will specify the following terms
of any units in respect of which this prospectus is being
delivered:
●
the
terms of the units and of any of the common stock, preferred stock,
and warrants comprising the units, including whether and under what
circumstances the securities comprising the units may be traded
separately;
●
a
description of the terms of any unit agreement governing the units;
and
●
a
description of the provisions for the payment, settlement,
transfer, or exchange of the units.
DESCRIPTION OF RIGHTS
We
may issue rights to purchase our common stock, preferred stock,
warrants or units. These rights may be issued independently or
together with any other security offered hereby and may or may not
be transferable by the person receiving the rights in such
offering. In connection with any offering of such rights, we may
enter into a standby arrangement with one or more underwriters or
other purchasers pursuant to which the underwriters or other
purchasers may be required to purchase any securities remaining
unsubscribed for after such offering.
Each
series of rights will be issued under a separate rights agreement
that we will enter into with a bank or trust company, as rights
agent, all as set forth in the applicable prospectus supplement.
The rights agent will act solely as our agent in connection with
the certificates relating to the rights and will not assume any
obligation or relationship of agency or trust with any holders of
rights certificates or beneficial owners of rights. We will file
the rights agreement and the rights certificates relating to each
series of rights with the SEC, and incorporate them by reference as
an exhibit to the registration statement of which this prospectus
is a part on or before the time we issue a series of
rights.
The
applicable prospectus supplement will describe the specific terms
of any offering of rights for which this prospectus is being
delivered, including the following:
●
the
date of determining the stockholders entitled to the rights
distribution;
●
the
number of rights issued or to be issued to each
stockholder;
●
the
exercise price payable for each share of preferred stock, common
stock or other securities upon the exercise of the
rights;
●
the
number and terms of the shares of preferred stock, common stock or
other securities which may be purchased per each
right;
●
the
extent to which the rights are transferable;
●
the
date on which the holder's ability to exercise the rights shall
commence, and the date on which the rights shall
expire;
●
the
extent to which the rights may include an over-subscription
privilege with respect to unsubscribed securities;
●
if
applicable, the material terms of any standby underwriting or
purchase arrangement entered into by us in connection with the
offering of such rights;
●
any
other terms of the rights, including the terms, procedures,
conditions and limitations relating to the exchange and exercise of
the rights; and
●
any
other information we think is important about the
rights.
The
description in the applicable prospectus supplement of any rights
that we may offer will not necessarily be complete and will be
qualified in its entirety by reference to the applicable rights
certificate, which will be filed with the SEC. To the extent the
information contained in the prospectus supplement differs from
this summary description, you should rely on the information in the
prospectus supplement.
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, 2016 have been
audited by Briggs & Veselka Co., our
independent registered public accounting firm (with respect to
the financial statements for the year ended December 31, 2016), and
by Calvetti Fergusson, our previous independent registered
public accounting firm (with respect to the financial statements
for the year ended December 31, 2015), as stated in their reports
included in such consolidated financial statements, and have been
so incorporated in reliance upon the reports of such firms given
upon their 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
Certain
legal matters in connection with the offering described in this
prospectus will be passed upon for us by Axelrod, Smith &
Kirshbaum. Any underwriters will be advised about legal matters by
their own counsel, who will be named in the applicable prospectus
supplement.
Shares
of Common Stock
Torchlight Energy Resources, Inc.
ThinkEquity
a division of Fordham Financial Management, Inc.
May , 2020