META MATERIALS INC. - Quarter Report: 2011 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarter Ended March 31, 2011.

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

For the transition period from _______ to _______.

Commission file number: 000-53473

TORCHLIGHT ENERGY RESOURCES, INC.
(Name of registrant in its charter)

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

2007 Enterprise Avenue

League City, Texas 77573
(Address of Principal Executive Offices)

(281) 538-5938
(Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(g) of the Exchange Act:

Common Stock ($0.001 Par Value)

(Title of Each Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.        .

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

Large accelerated filer	.	Accelerated filer	.
Non-accelerated filer	. (Do not check if a smaller reporting company)	Smaller reporting company	X .

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

As of May 4, 2011, there were 17,403,396 shares of the registrant’s common stock outstanding (the only class of voting common stock).

DOCUMENTS INCORPORATED BY REFERENCE

None.

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FORM 10-Q

TABLE OF CONTENTS

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ITEM 1.  FINANCIAL STATEMENTS

TORCHLIGHT ENERGY RESOURCES, INC.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

				MARCH 31,		DECEMBER 31,
				2011		2010
				(Unaudited)		(Audited)
ASSETS
Current assets:
	Cash		$	898,452	$	278,191
	Prepaid costs			25,785		1,000
		Total current assets		924,237		279,191
Investment in oil and gas properties				1,196,418		1,114,958
Goodwill				447,084		447,084
		TOTAL ASSETS	$	2,567,739	$	1,841,233
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	192,310	$	291,950
	Convertible promissory note, net of discount of			216,000		184,750
		$65,250 and $34,000 at March 31,2011 and December 31, 2010 respectively
	Interest payable			6,164		-
		Total current liabilities		414,474		476,700
Commitments and contingencies				-		-
Stockholders equity:
	Preferred stock, no par value, 5,000,000 shares authorized; no shares issued or outstanding			-		-
	Common stock, par value $0.001 per share; 70,000,000 shares authorized;			3,893		3,213
		13,381,134 issued and outstanding at March 31, 2011
		12,701,420 issued and outstanding at December 31, 2010
	Additional paid-in capital			3,382,441		2,006,622
	Accumulated deficit			(1,233,069)		(645,302)
		Total stockholders' equity		2,153,265		1,364,533
		TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,567,739	$	1,841,233

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

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TORCHLIGHT ENERGY RESOURCES, INC.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

						JUNE 25, 2010
				THREE MONTHS		(Inception)
				ENDING		TO
				MARCH 31, 2011		DECEMBER 31, 2010
				(Unaudited)		(Audited)
Revenue
	Oil and gas sales		$	-	$	-
Cost of revenue				-		-
Gross profit				-		-
Operating expenses:
	General and administrative expenses			550,429		645,302
		Total operating expenses		550,429		645,302
Other income (expense)
	Interest income			76		-
	Interest expense			(37,414)		-
		Total other income (expense)		(37,338)		-
Net loss before taxes				587,767		645,302
Provision for income taxes				-		0
Net loss			$	587,767	$	645,302
Loss per share:
	Basic and Diluted		$	(0.046)	$	(0.069)
Weighted average shares outstanding:
	Basic and Diluted			12,924,814.00		9,402,818

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

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TORCHLIGHT ENERGY RESOURCES, INC.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE PERIOD FROM JUNE 25, 2010 (INCEPTION) TO MARCH 31, 2011

							Deficit
							accumulated
				Common	Common	Additional	during the
			Preferred	Stock	Stock	Paid-in	Exploration
			Stock	Shares	Amount	Capital	Stage	Total
Balance, June 25, 2010			$               -	-	$            -	$               -	$                  -	$               -
	Shares issued to management		-	2,000,000	2,000	8,000	-	10,000
	Shares issued for private placement		-	361,125	361	1,444,140	-	1,444,501
	Reverse merger transaction:
		Recapitalization on reverse merger	-	4,301,730	4,302	442,782	-	447,084
		Cancellation of common shares	-	(3,600,000)	(3,600)	(266,400)	-	(270,000)
	Issuance of common stock for services		-	100,000	100	162,900	-	163,000
	Forward stock split (4 for 1)		-	9,488,565	-	-	-	-
	Issuance of common stock for services		-	50,000	50	149,950	-	150,000
	Discount on convertible promissory note		-	-	-	65,250	-	65,250
	Net loss		-	-	-	-	(645,302)	(645,302)
Balance, December 31, 2010 (audited)			$               -	12,701,420	$     3,213	$ 2,006,622	$    (645,302)	$ 1,364,533
	Issuance of common stock for services		-	140,000	140	431,860	-	432,000
	Shares issued for private placement		-	539,714	540	914,352	-	914,892
	Fair value of warrants issued		-	-	-	29,607	-	29,607
	Net loss		-	-	-	-	(587,767)	(587,767)
Balance, March 31, 2011 (unaudited)			$               -	13,381,134	$     3,893	$ 3,382,441	$ (1,233,069)	$ 2,153,265

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

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TORCHLIGHT ENERGY RESOURCES, INC.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOW

							JUNE 25, 2010
					THREE MONTHS		(Inception)
					ENDING		TO
					MARCH 31, 2011		DECEMBER 31, 2010
					(Unaudited)		(Audited)
Cash Flows From Operating Activities
	Net loss			$	(587,767)	$	(645,302)
	Adjustments to reconcile net loss to net cash
	from operating activities:
		Stock based compensation			432,000		313,000
		Accretion of convertible note discount			31,250		-
		Change in:
			Prepaid expenses		(24,785)		(1,000)
			Accounts payable		(99,640)		291,950
			Interest payable		6,164		-
Net cash used in operating activities					(242,778)		(41,352)
Cash Flows From Investing Activities
	Investment in oil and gas properties - unevaluated				(81,460)		(1,114,958)
Cash Flows From Financing Activities
	Issuance of convertible note				-		250,000
	Shares issued to management				-		10,000
	Units issued for private placement				944,499		1,444,501
	Cancellation of common shares				-		(270,000)
Net cash provided by financing activities					944,499		1,434,501
Net increase in cash					620,261		278,191
Cash - beginning of period					278,191		-
Cash - end of period				$	898,452	$	278,191
Supplemental disclosure of cash flow information:
	Non cash transactions:
		Recapitalization on reverse merger		$	-	$	447,084
		Discount on warrants issued in conjunction with convertible note		$	-	$	65,250

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1.

NATURE OF BUSINESS

Torchlight Energy, Inc. (“TEI”) was formed in the state of Nevada on June 25, 2010. TEI’s operations commenced with initial funding on July 8, 2010.  TEI is an Exploration Stage energy company formed as a corporation to engage in the acquisition, exploration, exploitation and/or development of oil and natural gas properties in the United States.  

On November 23, 2010 Torchlight Energy Resources, Inc. (“we,” “us” and the “Company”), formerly, Pole Perfect Studios, Inc. (“Pole Perfect”), entered into a Share Exchange Agreement (the “Exchange Agreement”) with its major stockholders, TEI, and the persons owning 100% of the outstanding capital stock of TEI (the “TEI Stockholders”).   At closing, the TEI Stockholders transferred 9,444,501 shares of TEI common stock, representing 100% of the common stock of TEI, to the Company in exchange for an aggregate of 2,361,125 shares (pre stock split) of newly issued common stock of the Company.  Also at closing of the Exchange Agreement, the Pole Perfect shareholders transferred to the Company an aggregate of 3,600,000 shares of common stock of the Company for cancellation in exchange for an aggregate consideration of $270,000.  This transaction was recorded as a reverse acquisition for accounting purposes where TEI is the accounting acquirer.   The assets and liabilities of Pole Perfect were recorded at a fair value of $0. The Company recorded $447,084 of goodwill which represents the estimated fair value of the consideration exchanged.  In addition, at closing (i) TEI became the Company’s wholly-owned subsidiary, (ii) the Company abandoned all of its previous business plans within the health and fitness industries, including opening and operating dance studios, and (iii) the business of TEI became its sole business.  Descriptions of its business hereinafter refer to the business of TEI.

On December 10, 2010, the Company effected a 4-for-1 forward split of its shares of common stock outstanding.  All owners of record at the close of business on December 10, 2010 (record date) received three additional shares for every one share they owned.  

Effective February 8, 2011 the Company changed its name from “Pole Perfect Studios, Inc.” to “Torchlight Energy Resources, Inc.”  In connection with the name change, the Company’s ticker symbol changed from “PPFT” to “TRCH.”.

In an Exploration Stage company, management devotes most of its activities to establishing a new business, including raising capital to acquire interests in oil and gas properties. Planned principle activities have not yet produced any revenues, and the Company has incurred operating losses as is normal in exploration stage companies.

The Company desires to be engaged in the acquisition, exploration, development and producing of oil and gas properties.  The Company is interested in programs that have a short window of payback, a high internal rate of return and proven and bookable reserves.  The Company’s success will depend in large part on its ability to obtain and develop oil and gas interests within the United States.  

2.

GOING CONCERN

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.  

At March 31, 2011, the Company had not yet achieved profitable operations, has accumulated losses of $1,233,069 since its inception and expects to incur further losses in the development of its business, which casts substantial doubt about the Company’s ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.  Management’s plan to address the Company’s ability to continue as a going concern includes:  (1) obtaining debt or equity funding from private placement or institutional sources; (2) obtain loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties.  Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

3.

SIGNIFICANT ACCOUNTING POLICIES

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

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

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Basis of Presentation—The financial statements are presented on a consolidated basis and include all of the accounts of Torchlight Energy Resources Inc. and its wholly owned subsidiary Torchlight Energy, Inc.   All significant intercompany balances and transactions have been eliminated.

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

Concentration of risks – The Company’s cash is placed with a highly rated financial institution and the Company conducts ongoing evaluations of the credit worthiness of the financial institutions with which it does business.  At times during the three months ended March 31, 2011and the period from June 25, 2010 (inception) to December  31, 2010, cash balances were in excess of amounts guaranteed by the Federal Deposit Insurance Corporation (”FDIC”).  

Fair value of financial instruments – Financial instruments consist of cash, accounts payable and a convertible promissory note. The estimated fair values of cash and accounts payable approximate the carrying amount due to the relatively short maturity of these instruments.  The carrying amount of the convertible promissory note approximates its fair value giving affect for a discount relative to the fair value of warrants issued in conjunction with the promissory note.  See note 10.

Unevaluated oil and gas properties – Unevaluated oil and gas properties consist principally of the Company’s acquisition costs in undeveloped leases.  When leases are developed, expire or are abandoned, the related costs are transferred from unevaluated oil and gas properties to depletable oil and gas properties.  Additionally, the Company reviews the carrying costs of unevaluated oil and gas properties for the purpose of determining probable future lease expirations and abandonments, and prospective discounted future economic benefit attributable to the leases.  When necessary, the Company records an allowance for impairment based on the review with the corresponding charge being made to depletable oil and gas properties.

Oil and gas properties – The Company follows the full cost method of accounting for oil and gas property acquisition, exploration and development activities.  Under this method, all costs associated with property acquisition, exploration and development activities are capitalized into a cost center (the amortization base), whether or not the activities to which they apply are geophysical costs, direct overhead related to exploration and development activities and other employees directly involved in the exploration and development of oil and gas properties as well as other internal costs that can be specifically identified with acquisition, exploration, and development activities are also capitalized.

Oil and gas properties include costs that are excluded from costs being depleted or amortized.  Oil and natural gas property costs excluded represent investments in unevaluated properties and include non-producing leasehold, geological and geophysical costs associated with costs until the property has been evaluated.  The Company allocates a portion of its acquisition costs to unevaluated properties based on relative value.  Costs are transferred to the full cost pool as the properties are evaluated over the life of the reservoir.

Depreciation, depletion and amortization – The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves are amortized on a unit-of-production method over estimated total proved oil and gas reserves.   The depreciable base for oil and natural gas properties includes the sum of all capitalized costs net of accumulated depreciation, depletion and amortization (“DD&A”), estimated future development costs and asset retirement costs not included in oil and natural gas properties, less unevaluated oil and gas properties, which are excluded from these calculations.  During the three months ended March 31, 2011and the period from June 25, 2010 (inception) to December 31, 2010, the Company held only unevaluated oil and gas properties; therefore, no depreciation, depletion or amortization has been recognized.

Ceiling test – Future production volumes from oil and gas properties are a significant factor in determining the full cost ceiling limitation of capitalized costs.  Under the full cost method of accounting, the Company is required to periodically perform a “ceiling test” that determines a limit on the book value of oil and gas properties.  If the net capitalized cost of proved oil and gas properties, plus the cost of unproved oil and gas properties, exceeds the present value of estimated future net cash flows discounted at 10 percent, plus the cost of unproved oil and gas properties, the excess is charged to expense and reflected as additional accumulated DD&A.  The ceiling test calculation uses a commodity price assumption which is based on the un-weighed arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes future cash outflows related to estimated abandonment costs.  The Company did not recognize impairment on its oil and gas properties during the three months ended March 31, 2011and the period from June 25, 2010 (inception) to December 31, 2010.  Due to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is possible that a write-down could occur.

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Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions.  The independent engineering estimates include only those amounts considered to be proved reserves and do not include additional amounts which may result from new discoveries in the future,  or from application of secondary and tertiary recovery processes where facilities are not in place or for which transportation and/or marketing contracts are not in place.  Estimated reserves to be developed through secondary or tertiary recovery processes are classified as unevaluated properties.  As of March 31, 2011 and December 31, 2010, the Company did not have any proved oil or gas reserves.

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

Gains and losses on the sale of oil and gas properties are generally reflected in income.  Sales of less than 100% of the Company’s interest in the oil and gas property are treated as a reduction of the capital cost of the field, with no gain or loss recognized, as long as doing so does not significantly affect the unit-of-production depletion rate.  Costs of retired equipment, net of salvage value, are usually charged to accumulated depreciation.  During the three months ended March 31, 2011and the period from June 25, 2010 (inception) to December 31, 2010 there were no gains or losses recognized from the sale of oil and gas properties.

Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets of acquired companies. Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist. Goodwill was $447,084 as of March 31, 2011and December 31, 2010 and was acquired on November 23, 2010 in connection with the Company’s reverse acquisition (Note 1).

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

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

Revenue recognition – The Company recognizes oil and gas revenues when production is sold at a fixed or determinable price, persuasive evidence of an arrangement exists, delivery has occurred and title has transferred, and collectability is reasonably assured.

Basic and Diluted Earnings (Loss) Per Share - Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) per common share is computed in the same way as basic earnings (loss) per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive.

Environmental laws and regulations – The Company is subject to extensive federal, state and local environmental laws and regulations.  Environmental expenditures are expensed or capitalized depending on their future economic benefit.  The Company believes that it is in compliance with existing laws and regulations.

Recent accounting pronouncements – The Securities Exchange Commission’s rule, Modernization of the Oil and Gas Reporting Requirements is intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves to help investors evaluate their investments in oil and gas companies.  The amendments are also designed to modernize the oil and gas disclosure requirements to align them with current practices and changes in technology.  Revised requirements in this guidance include, but are not limited to:

·

Oil and gas reserves must be reported using the average price over the prior 12-month period, determined as an un-weighted arithmetic average of the first-day-of-the-month price for each month within such period, rather than year-end prices;

·

Companies are allowed to report, on an optional basis, probable and possible reserve;

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·

Non-traditional reserves, such as oil and gas extracted from coal and shales, are included in the definitions of “oil and gas producing activities”

·

Companies are permitted to use new technologies to determine proved reserves, as long as those technologies have been demonstrated empirically to lead to reliable conclusions with respect to reserve volumes;

·

Companies are required to disclose, in narrative form, additional details on their proved undeveloped reserves (PUDs), including the total quantity of PUDs at year end, any material changes to PUDs to developed oil and gas reserves and an explanation of the reasons why material concentrations of PUDs in individual fields or countries have remained undeveloped for five years or more after disclosure as PUDs;

·

Companies are required to report the qualifications and measures taken to assure the independence and objectivity of any business entity or employee primarily responsible for preparing or auditing the reserves estimates.

The Company adopted this guidance effective June 25, 2010 (inception).  As of March 31, 2011 and December 31, 2010, the Company did not have any proved reserves.

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

Subsequent Events – The Company evaluated all subsequent events through May 16, 2011, the date of issuance of the financial statements.  Also see note 11.

4.

RELATED PARTY TRANSACTIONS

In exchange for management services provided to the Company, Opal Marketing & Consulting, Inc. (“Opal”) charges the Company a management fee of $240,000 per year.  The Company’s Chief Executive Officer is the President of Opal.  The Company recognized payments due Opal of $60,000 for the three months ended March 31, 2011.  The Company paid Opal $120,000 for the period from June 25, 2010 (inception) through December 31, 2010.

On December 1, 2010, the Company entered into a Business Consultant Agreement with a former Director and Chief Executive Officer.  The agreement provides that in consideration for consulting services, the Company will pay $4,000 per month for the term of the agreement (three months) and issue 50,000 restricted shares of common stock.  On December 17, 2010, the Company issued the 50,000 shares of common stock which were valued at $150,000 on that date.  For the year ended December 31, 2010, the Company paid the former Director and CEO a total of $4,000 in cash under the agreement.  For the quarter ended March 31, 2011 a total of $8,000 in cash was paid under the agreement.  This agreement terminated in early 2011.

In connection with the issuance of the convertible promissory note (see note 10) a related party pledged 750,000 shares of Company common stock as collateral.

5.

COMMITMENTS AND CONTINGENCIES

The Company is subject to contingencies as a result of environmental laws and regulations.  Present and future environmental laws and regulations applicable to the Company’s operations could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time.  As of March 31, 2011 and December 31, 2010, no amounts had been recorded because no specific liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts.

6.

OIL AND GAS PROPERTIES

In July 2010, the Company entered into an Agreement to participate in an Oil and Gas Development Joint Venture (the “Participation Agreement”) with Bayshore Operating Corporation, LLC (“Bayshore”).  Bayshore is currently the holder of an oil, gas and mineral lease covering approximately 1,045 acres in Wilson County, Texas, known as the Marcelina Creek Field Development.  The Participation Agreement provides for the drilling of four wells.  Upon execution of the agreement, the Company paid Bayshore an initial deposit of $50,000, which was credited by Bayshore to the initial $50,000 payment for the first well in exchange for a 50% working interest in the first well.  The Company will pay 100% of the total drilling and completion costs.

In December 2010 the Company entered into an Addendum to the Participation Agreement (the “Addendum”) with Bayshore, which provided for the Company to pay Bayshore a penalty (in addition to other consideration) as consideration for Bayshore agreeing to certain time extensions under the Participation Agreement.  The penalty included a payment of  $50,000 of cash on or before January 6, 2011 and $25,000 in shares of the Company’s common stock and $25,000 cash payable concurrent with the approval and delivery of the Authority For Expenditure (“AFE”) for the Johnson #2.  Upon receipt of the aforementioned penalty described above, the Company was given until April 15, 2011 to approve the said AFE.  At March 31, 2011 and December 31, 2010 the Company accrued a liability of $100,000 in relation to this Addendum.

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After mutual agreement as to the location, the second well is to be drilled within six months of the effective date of the Addendum.  For the second well, the Company will pay Bayshore $50,000 at rig move-in and $200,000 when the well is completed or plugged and abandoned, whichever comes first.  Further, the Company will pay 100% of the total drilling and completion costs for a 75% working interest.

For the third and fourth wells, the Company will pay Bayshore $50,000 at rig move-in and $150,000 when the well is completed or plugged and abandoned, whichever comes first. Further, the Company will pay 100% of the total drilling costs and 75% of the completion costs for a 75% working interest with Bayshore to pay 25% of the completion costs.

7.

STOCKHOLDERS’ EQUITY

On November 22, 2010, the Company effected a reverse merger and recapitalization.  See note 1. On December 3, 2010, the Company issued 100,000 shares (pre stock split) of common stock (par value $.001) as compensation for work performed by two separate individuals.

On December 10, 2010, the Company effected a 4-for-1 forward split of common stock outstanding.  All owners of record at the close of business on December 10, 2010 received three additional shares for every one share they owned.

On December 17, 2010, the Company issued 50,000 shares (post stock split) of common stock to the former executive officer and director of Pole Perfect Studios, Inc. as compensation for services.

On January  6, 2011 and January 10, 2011, the Company issued 10,000 and 100,000 shares, respectively of common stock to two individuals as compensation for services.  On March 23, 2011 the Company issued a total of 30,000 shares of common stock to two individuals as compensation for services.

The Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series, to fix the number of shares constituting any such series, and to fix the rights and preferences of the shares constituting any series, without any further vote or action by the stockholders. There are no issued and outstanding shares of preferred stock; there are no agreements or understandings for the issuance of preferred stock, and the Board of Directors has no present intention to issue preferred stock.

During February and March 2011, through subscription agreements, the Company received $944,499 for the issuance of 269,857 Units.  Each Unit consisted of two restricted shares of common stock and one three year warrant to purchase a share of restricted common stock at the price of $5.00.  The estimated fair value of the warrants issued was $29,607 at the date of issuance.  At March 31, 2011 the shares from the potential exercise of the warrants were excluded from the calculation of earnings per share as the shares were anti-dilutive.

As noted in note 10, in December 2010 the Company issued convertible debt with warrants attached.  The warrant is exercisable into 225,000 shares of common stock.  At December 31, 2010 and at March 31, 2011 these shares were excluded from the calculation of earnings per share as the shares were anti-dilutive.

A summary of warrant activity for the three months ended March 31, 2011and the period from June 25, 2010 (inception) to December 31, 2010 is presented below:

						Weighted		Weighted
						Average		Average
				Number of		Exercise		Remaining
				Warrants		Price		Contract
Outstanding June 25, 2010				-		-
	Issued	12/30/2010		225,000	$	2.50		3.75 years
	Issued	02/18/2011		30,000	$	5.00		3.00 years
	Issued	03/08/2011		30,000	$	5.00		3.00 years
	Issued	03/08/2011		30,000	$	5.00		3.00 years
	Issued	03/14/2011		25,000	$	5.00		3.00 years
	Issued	03/15/2011		154,857	$	5.00		3.00 years
	Exercised			-	$	-
Outstanding March 31, 2011				494,857

At December 31, 2010, the Company has reserved 225,000 shares for future exercise of warrants.  At March 31, 2011 the Company has reserved an additional 269,857 shares for future exercise of warrants.

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8.

FAIR VALUE MEASUREMENTS

Assets and liabilities that require measurement to fair value on a recurring basis are categorized in a three-level fair value hierarchy as follows:

·

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

·

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

·

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

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.  At March 31, 2011 and December 31, 2010, there were no financial assets or liabilities measured on a recurring or a nonrecurring basis.

9.

INCOME TAXES

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

Authoritative guidance for uncertainty in income taxes requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an examination.  Management has reviewed the Company’s tax positions and determined there were no uncertain tax positions requiring recognition in the consolidated financial statements.  The Company’s tax returns remain subject to Federal and State tax examinations for all tax years since inception as none of the statutes have expired.  Generally, the applicable statutes of limitation are three to four years from their respective filings.

Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of operation.  The Company has not recorded any interest or penalties associated with unrecognized tax benefits during the three months ended March 31, 2011and the period from June 25, 2010 (inception) to December 31, 2010.

The following is a reconciliation between the federal income tax benefit computed at the statutory federal income tax rate of 34% and actual income tax provision for the three months ended March 31, 2011and the period from June 25, 2010 (inception) to December 31, 2010:

					March 31, 2011		December 31, 2010
Federal income tax benefit at statutory rate					(199,841)		(219,403)
Permanent differences					10,625		-
Less valuation allowance					189,216		219,403
Provision for income taxes					-		-

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities are as follows:

			March 31, 2011		December 31, 2010
Deferred tax assets:
	Net operating loss carryforward		543,980		336,835
	Accruals		3,740		7,820
Deferred tax liabilities:
	Intangible drilling costs for oil and gas properties		(139,101)		(125,252)
Net deferred tax assets and liabilities			408,619		219,403
Less valuation allowance			(408,619)		(219,403)
Total deferred tax assets and liabilities			-		-

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The Company had a net deferred tax asset related to federal net operating loss carryforwards of $1,599,939 and $990,691 at March 31, 2011 and December 31, 2010, respectively. The federal net operating loss carryforward will begin to expire in 2030. Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.  The increase in the valuation allowance for the three months ended March 31, 2011 was $189,216.

10.

CONVERTIBLE PROMISSORY NOTE

On December 28, 2010, the Company issued a 10% Convertible Promissory Note and a warrant to purchase 225,000 shares of common stock to an accredited investor who paid $250,000 in aggregate consideration for the securities.  The 10% Convertible Promissory Note bears interest at the rate of 10% per annum, had a principal amount of $250,000 and is convertible into shares of common stock in the event the Company undertakes a private offering of securities to one or more third parties.  The note is convertible on the identical terms and conditions offered to such third parties.  The warrant is exercisable into 225,000 shares of common stock as of December 28, 2010 at a price of $2.50 per share and expires on December 28, 2014.   The note is collateralized by 750,000 shares of pledged securities of a related party.  The convertible note was recorded net of discount that includes the relative fair value of the warrants amounting to $62,250.  The discount is accreted over the life of the debt using the effective interest method.  Accretion expense was $31,250 and 0 for the three months ended March 31, 2011and the period from June 25, 2010 (inception) to December 31, 2010, respectively. The initial value of the warrants was calculated using the Black Scholes Option Pricing Model.  The assumptions were as follows:

Risk-free interest rate	0.64%
Expected volatility of common stock	40.00%
Dividend yield	0.00%
Discount due to lack of marketability	30.00%
Expected life of warrant	2 years
Weighted average warrant	225,000

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

The information set forth and discussed in this Management’s Discussion and Analysis and Results of Operations is derived from the historical financial statements and the related notes thereto of the Company which are included in this Form 10-Q.  The following information and discussion should be read in conjunction with such financial statements and notes. Additionally, this Management’s Discussion and Analysis and Plan of Operations contains certain statements that are not strictly historical and are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a high degree of risk and uncertainty. Actual results may differ materially from those projected in the forward-looking statements due to other risks and uncertainties that exist in the Company’s operations, development efforts and business environment, and due to other risks and uncertainties relating to the Company’s ability to obtain additional capital in the future to fund its planned expansion, the demand for oil and natural gas, and other general economic factors.  All forward-looking statements included herein are based on information available to the Company as of the date hereof, and we assume no obligation to update any such forward-looking statement.

Basis of Presentation of Financial Information

On November 23, 2010, the Share Exchange Agreement (the “Exchange Agreement” or “Transaction”) between Torchlight Energy Resources, Inc. (the “Company”) (which at the time was named “Pole Perfect Studios, Inc.”) and Torchlight Energy, Inc. (“TEI”) was entered into and closed, through which the former shareholders of TEI became shareholders of the Company.  At closing, the Company abandoned its previous business.  Consequently, as a result of the Transaction, the business of TEI commenced.  Because TEI became the successor business to the Company and because the operations and assets of TEI represent the Company’s entire business and operations from the closing date of the Exchange Agreement, the Management’s Discussion and Analysis and unaudited financial statements are based on the consolidated financial results of the Company and its wholly owned subsidiary TEI for the relevant periods.

Summary of Key Results

Overview

Our sole business is that of Torchlight Energy, Inc., an exploration stage company formed as a corporation in the state of Nevada on June 25, 2010.  We are engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas properties in the United States.

Results of Operations

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

The Company had no active operations prior to the inception of TEI on June 25, 2010.  Due to this fact, comparisons to previous years are not necessarily indicative of actual operating results.  Revenue and expenses listed below reflect the operations of TEI.

Historical Results for the Three Months Ended March 31, 2011 and the Period from June 25, 2010 (Inception) to December 31, 2010.

Revenues and Cost of Revenues

The Company had no revenue or cost of revenues during either the three months ended March 31, 2011 or during the period from June 25, 2010 (Inception) to December 31, 2010.

General and Administrative Expenses

The Company’s total operating expenses for both the three months ended March 31, 2011and the period from June 25, 2010 (Inception) to December 31, 2010 consisting of entirely of general and administrative expenses, which were $550,429 and $645,302, respectively.  The Company’s general and administrative expenses consisted of accounting and administrative costs, professional fees and other general corporate expenses.

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Liquidity and Capital Resources

As of March 31, 2011, the Company had total current assets of $924,237, consisting of $898,452 in cash and $25,785 in prepaid costs.  As of December 31, 2010, the Company had total current assets of $279,191, consisting of $278,191 in cash and $1,000 in prepaid costs.  The $620,261 increase in cash from December 31, 2010 to March 31, 2011 is primarily attributable to cash the Company received through a private placement.  As of March 31, 2011, the Company had $1,196,418 in investment in oil and gas properties and $447,084 in goodwill.  For the year ended December 31, 2010, the Company had $1,114,958 in investment in oil and gas properties and $447,084 in goodwill.

For the three months ended March 31, 2011, the Company had net cash used in operating activities of $242,778, which was comprised of a net loss of $587,767, a change in prepaid expenses of $24,785 and a change in accounts payable of $99,640, partially offset by $432,000 in stock based compensation, $31,250 in accretion of convertible note discount and $6,164 in change in interest payable.

For the three months ended March 31, 2011, the Company’s cash flows from investing activities consisted entirely of $81,460 in investment in oil and gas properties – unevaluated.

The Company had $944,499 in net cash provided by financing activities that was entirely attributable to Units, comprised of two shares of common stock and one warrant each, issued for private placement.   

Commitments and Contingencies

The Company is subject to contingencies as a result of environmental laws and regulations.  Present and future environmental laws and regulations applicable to the Company’s operations could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time.  As of December 31, 2010 and March 31, 2011, no amounts had been recorded because no specific liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts.

In July 2010, TEI entered into an Agreement to participate in an Oil and Gas Development Joint Venture (the “Participation Agreement”) with Bayshore Operating Corporation, LLC (“Bayshore”).  Bayshore is currently the holder of an oil, gas and mineral lease covering approximately 1,045 acres in Wilson County, Texas, known as the Marcelina Creek Field Development. The Participation Agreement provides for the drilling of four (4) wells. Upon execution of the agreement, we paid Bayshore an initial deposit of $50,000, which amount was credited to the initial $50,000 payment due for the first well, in exchange for a 50% working interest in the first well. We are to pay 100% of total drilling and completion costs.

After mutual agreement as to the location, the second well is to be drilled within six months of the effective date of the Participation Agreement. For the second well, we are to pay Bayshore $50,000 at rig move-in and $200,000 when the well is completed or plugged and abandoned, whichever comes first.  Further, we are to pay 100% of the total drilling and completion costs for a 75% working interest.

For the third and fourth wells, we are to pay Bayshore $50,000 at rig move-in and $150,000 when the well is completed or plugged and abandoned, whichever comes first.  Further, we are to pay 100% of the total drilling costs and 75% of the completion costs for a 75% working interest with Bayshore to pay 25% of the completion costs.

On December 31, 2010 we executed an agreement with Bayshore for an extension of our drilling obligation deadline from January 6, 2011 to April 15, 2011.  As a condition for the extension we paid to Bayshore $50,000 and issued it 10,000 shares of our common stock.  Further a $25,000 cash payment is to be made concurrent with the approval of the Authority for Expenditure (AFE) for the Johnson #2 well.  As additional consideration, Bayshore is no longer obligated to pay its proportionate share of completion costs on the second vertical well.

 

Going Concern

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.  

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At March 31, 2011, the Company had not yet achieved profitable operations, has accumulated losses of $1,233,069 since its inception and expects to incur further losses in the development of its business, which casts substantial doubt about the Company’s ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.  Management’s plan to address the Company’s ability to continue as a going concern includes:  (1) obtaining debt or equity funding from private placement or institutional sources; (2) obtain loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties.  Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4.   CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2011.  Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our principal executive officer and principal financial officer, in a manner that allowed for timely decisions regarding disclosure.

Our principal executive officer and principal financial officer have also indicated that, upon evaluation, there were no changes in our internal control over financial reporting or other factors during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

PART II   OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

None.

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

Other than the issuances described below, all equity securities that we have sold during the period covered by this report that were not registered under the Securities Act have previously been included in a Current Report on Form 8-K:

On January 6, 2011, we issued 10,000 shares of common stock to a party as consideration for agreeing to amend the terms of an oil and gas participation agreement.  The securities were issued under the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.  The issuance of securities did not involve a “public offering” based upon the following factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited number of securities were issued to a single offeree; (iii) there was no public solicitation; (iv) the investment intent of the offeree; and (v) the restriction on transferability of the securities issued.

On January 10, 2011, we issued 100,000 shares of common stock to a party as consideration for professional services rendered.  The securities were issued under the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.  The issuance of securities did not involve a “public offering” based upon the following factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited number of securities were issued to a single offeree; (iii) there was no public solicitation; (iv) the investment intent of the offeree; and (v) the restriction on transferability of the securities issued.

On March 23, 2011, we issued and aggregate of 30,000 shares of common stock to two parties pursuant to the terms of a settlement agreement and mutual release.  The securities were issued under the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.  The issuance of securities did not involve a “public offering” based upon the following factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited number of securities were issued to a limited number of offerees; (iii) there was no public solicitation; (iv) the investment intent of the offerees; and (v) the restriction on transferability of the securities issued.

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ITEM 6.  EXHIBITS

 

Exhibit No.		Description
2.1		Share Exchange Agreement dated November 23, 2010.  (Incorporated by reference from Form 8-K filed with the SEC on November 24, 2010.) *
3.1		Articles of Incorporation.  (Incorporated by reference from Form S-1 filed with the SEC on May 2, 2008.) *
3.2		Amended and Restated Bylaws (Incorporated by reference from Form 8-K filed with the SEC on January 12, 2011.) *
10.1		Employment Agreement between Thomas Lapinski and Torchlight Energy, Inc. (Incorporated by reference from Form 8-K filed with the SEC on November 24, 2010.) *
10.2		Agreement to Participate in Oil and Gas Development Joint Venture between Bayshore Operating Corporation, LLC and Torchlight Energy, Inc. (Incorporated by reference from Form 8-K filed with the SEC on November 24, 2010) *
14.1		Code of Ethics (Incorporated by reference from Form S-1 filed with the SEC on May 2, 2008.) *
31.1		Certification of principal executive officer required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of principal financial officer required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
32.2		Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.

 

* Incorporated by reference from our previous filings with the SEC

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SIGNATURES

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

 

	Torchlight Energy Resources, Inc.
Date: May 16, 2011	/s/ Thomas Lapinski
	By: Thomas Lapinski
	Chief Executive Officer and Principal Financial Officer

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