UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 333-160517
PETRON ENERGY II, INC.
(Exact name of registrant as specified in its charter)
| Nevada | | 26-3121630 |
| (State of incorporation) | | (I.R.S. Employer Identification No.) |
17950 Preston Road, Suite 960
Dallas, Texas 75252
(Address of principal executive offices)
(972) 272-8190
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☑ Yes ☐No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑Yes ☐No (Not required)
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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☐ | Smaller reporting company ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
As of October 31, 2013, there were 222,382,437 shares of the registrant’s $0.001 par value common stock issued and outstanding.
PETRON ENERGY II, INC.
TABLE OF CONTENTS
| | | | Page No. |
| | | PART I - FINANCIAL INFORMATION | |
| Item 1. | | Financial Statements | 3 |
| Item 2. | | Management's Discussion and Analysis of Financial Condition and Results of Operations | 9 |
| Item 3. | | Quantitative and Qualitative Disclosures About Market Risk | 10 |
| Item 4. | | Controls and Procedures | 10 |
| | | PART II - OTHER INFORMATION | |
| Item 1. | | Legal Proceedings | 11 |
| Item1A. | | Risk Factors | 11 |
| Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds | 11 |
| Item 3. | | Defaults Upon Senior Securities | 11 |
| Item 4. | | Mine Safety Disclosures | 11 |
| Item 5. | | Other Information | 11 |
| Item 6. | | Exhibits | 12 |
| | | Signatures | |
Special Note Regarding Forward-Looking Statements
Information included in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Petron Energy II, Inc. (the “Company”), to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Actual results of the Company could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, the Company has no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
*Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," "PEII," or “Petron” is in reference to Petron Energy II, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PETRON ENERGY II, INC.
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| Contents | Page(s) |
| Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 | F-2 |
| Consolidated Statements of Operations for the three month and nine month periods ended September 30, 2013 and 2012 | F-3 |
| Consolidated Statements of Cash Flows for the periods of nine months ended September 30, 2013 and 2012 | F-4 |
| Notes to Unaudited Consolidated Financial Statements | F-5 |
F-1
PETRON ENERGY II, INC.
CONSOLIDATED BALANCE SHEETS
| | | September 30, | | December 31, |
| | | 2013 | | 2012 |
| ASSETS | | (unaudited) | | (audited) |
| Current Assets | | | | | | | | |
| Cash | | $ | 8,600 | | | $ | 17,089 | |
| Accounts Receivable | | | 48,915 | | | | 18,332 | |
| Total Current Assets | | | 57,515 | | | | 35,421 | |
| Pipeline, net of accumulated depreciation of $330,572 and $245,156, respectively | | | 778,428 | | | | 742,844 | |
| Producing Oil & Gas Properties, net of accumulated depletion of $836,195 and $731,795, respectively | | | 1,773,278 | | | | 1,424,729 | |
| Other Depreciable Equipment, net of accumulated depreciation of $88,693 and $45,361, respectively | | | 638,599 | | | | 71,915 | |
| Other Assets | | | 31,531 | | | | 34,790 | |
| TOTAL ASSETS | | $ | 3,279,351 | | | $ | 2,309,699 | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Bank Overdraft | | $ | 61,737 | | | $ | — | |
| Accounts Payable--Trade | | | 1,382,699 | | | | 716,140 | |
| Accounts Payable--Related Party | | | 214,239 | | | | 18,082 | |
| Accrued Liabilities | | | 544,690 | | | | 375,284 | |
| Derivative Liability | | | 85,926 | | | | — | |
| Notes Payable--short-term | | | 484,679 | | | | 170,500 | |
| Total Current Liabilities | | | 2,773,970 | | | | 1,280,006 | |
| Asset Retirement Obligation | | | 222,000 | | | | 40,278 | |
| Stock Issuance Liability | | | 1,525,829 | | | | 5,904,090 | |
| Notes Payable--long-term | | | 275,000 | | | | 250,000 | |
| TOTAL LIABILITIES | | | 4,796,799 | | | | 7,474,374 | |
| STOCKHOLDERS' DEFICIT | | | | | | | | |
| Preferred Stock, 10,000,000 authorized, 5,911,000 designated as follows: | | | | | | | | |
| Series A, $0.001 par value, 1,000 shares designated, issued and outstanding | | | 1 | | | | 1 | |
| Series B, $0.001 par value, 5,910,000 shares designated, 1,389,218 and 5,910,000 shares issued and outstanding, respectively | | | 1,389 | | | | 5,910 | |
| Common Stock, $0.001 par value, 1,000,000,000 shares authorized, 164,190,038 and 11,976,942 issued and outstanding, respectively | | | 164,190 | | | | 11,977 | |
| Additional Paid-In Capital | | | 20,313,750 | | | | 14,638,660 | |
| Accumulated Deficit | | | (21,996,778 | ) | | | (19,821,223 | ) |
| Total Stockholders' Deficit | | | (1,517,448 | ) | | | (5,164,675 | ) |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 3,279,351 | | | $ | 2,309,699 | |
The accompanying notes are an integral part of these financial statements.
F-2
PETRON ENERGY II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | | | |
| Revenues | | | | | | | | | | | | | | | | |
| Oil & Gas Sales | | $ | 76,403 | | | $ | 78,808 | | | $ | 204,037 | | | $ | 274,384 | |
| Costs and Expenses | | | | | | | | | | | | | | | | |
| Cost of Revenue | | | 133,753 | | | | 42,287 | | | | 475,750 | | | | 189,266 | |
| Depletion and Depreciation | | | 108,904 | | | | 50,725 | | | | 233,149 | | | | 143,174 | |
| Impairment Charge | | | — | | | | — | | | | — | | | | 5,903,000 | |
| Derivative Expense | | | 42,052 | | | | — | | | | 283,352 | | | | — | |
| General and Administrative | | | 138,497 | | | | 310,221 | | | | 1,120,675 | | | | 1,388,514 | |
| Interest | | | 122,118 | | | | 5,798 | | | | 266,666 | | | | 5,798 | |
| Total Expenses | | | 545,324 | | | | 409,031 | | | | 2,379,592 | | | | 7,629,752 | |
| Loss from Operations Before Income Taxes | | | (468,921 | ) | | | (330,223 | ) | | | (2,175,555 | ) | | | (7,355,368 | ) |
| Income Taxes | | | — | | | | — | | | | — | | | | — | |
| Net Loss | | $ | (468,921 | ) | | $ | (330,223 | ) | | $ | (2,175,555 | ) | | $ | (7,355,368 | ) |
| Loss per share--basic and diluted | | $ | (0.00 | ) | | $ | (0.03 | ) | | $ | (0.04 | ) | | $ | (0.65 | ) |
| Weighted average number of shares--basic and diluted | | | 108,475,130 | | | | 11,339,587 | | | | 60,440,132 | | | | 11,347,341 | |
The accompanying notes are an integral part of these financial statements.
F-3
PETRON ENERGY II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | | Nine Months Ended September 30, |
| | | 2013 | | 2012 |
| OPERATING ACTIVITIES | | | | | | | | |
| Net Loss | | $ | (2,175,555 | ) | | $ | (7,355,368 | ) |
| Adjustments to reconcile net loss to cash used by operating activities: | | | | | | | | |
| Depletion and depreciation | | | 233,148 | | | | 143,174 | |
| Amortization of debt discount | | | 155,760 | | | | — | |
| Derivative expense | | | 283,352 | | | | — | |
| Impairment charge | | | — | | | | 5,903,000 | |
| Penalty interest | | | 45,250 | | | | — | |
| Common stock issued for services | | | 95,198 | | | | 149,483 | |
| Imputed interest on shareholders' notes payable | | | 22,891 | | | | — | |
| Common stock issued for lawsuit settlement | | | 138,000 | | | | — | |
| Note payable issued for services | | | 25,000 | | | | — | |
| Change in other asset and liabilities: | | | | | | | | |
| (Increase) Decrease in oil and gas receivables | | | (30,583 | ) | | | 29,704 | |
| Decrease in other assets | | | 3,259 | | | | — | |
| Increase in accounts payable | | | 243,715 | | | | 284,266 | |
| Increase in accrued liabilities | | | 173,626 | | | | 43,612 | |
| Decrease in asset retirement obligation | | | (3,900 | ) | | | — | |
| Cash used in operating activities | | | (790,839 | ) | | | (802,129 | ) |
| INVESTING ACTIVITIES | | | | | | | | |
| Investment in oil and gas properties | | | (267,326 | ) | | | (215,923 | ) |
| Pipeline investment | | | (121,000 | ) | | | — | |
| Purchase of other equipment | | | (610,016 | ) | | | (7,810 | ) |
| Accounts payable specifically for fixed asset purchases | | | 619,000 | | | | — | |
| Cash used in investing activities | | | (379,342 | ) | | | (223,733 | ) |
| FINANCING ACTIVITIES | | | | | | | | |
| Bank overdraft | | | 61,737 | | | | 66,433 | |
| Proceeds from sales of common stock | | | 505,150 | | | | 813,000 | |
| Proceeds from notes payable | | | 674,630 | | | | 63,000 | |
| Loan fees | | | (79,825 | ) | | | — | |
| Cash from financing activities | | | 1,161,692 | | | | 942,433 | |
| | | | | | | | | |
| Decrease in cash | | | (8,489 | ) | | | (83,429 | ) |
| Cash at beginning of the period | | | 17,089 | | | | 106,850 | |
| Cash at end of the period | | $ | 8,600 | | | $ | 23,421 | |
| Supplemental Disclosure of Cash Flow Information | | | | | | | | |
| Non-Cash Investing and Financing Activities: | | | | | | | | |
| Oil & gas properties | | $ | (185,622 | ) | | $ | (5,910,000 | ) |
| Note payable | | | (221,336 | ) | | | — | |
| Common stock | | | 107,436 | | | | — | |
| Preferred stock | | | (4,521 | ) | | | 5,910 | |
| Additional paid-in capital | | | 4,996,628 | | | | — | |
| Derivative liability | | | (197,426 | ) | | | — | |
| Common stock issuance liability | | | (4,416,261 | ) | | | 5,904,090 | |
| Accrued Interest | | | (4,220 | ) | | | — | |
| Asset Retirement Obligation | | | 185,622 | | | | — | |
| Loan Fees | | | (260,300 | ) | | | — | |
| | | $ | — | | | $ | — | |
The accompanying notes are an integral part of these financial statements.
F-4
PETRON ENERGY II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013 and 2012
1. INCORPORATION AND NATURE OF OPERATIONS
Petron Energy II, Inc. (“Petron” or the “Company”) was formerly known as Petron Energy Special Corp. and was incorporated in September 2007 under the laws of the State of Texas; and, on April 2011, was reincorporated in the state of Nevada. Pursuant to a Plan of Merger, the parent company, Petron Energy Special Corp. was merged into its wholly owned subsidiary, Petron Energy II, Inc. The surviving entity was Petron Energy II, Inc. The effective date of the Plan of Merger was January 3, 2012.
The Company is engaged primarily in the acquisition, development, production, exploration for and the sale of oil, gas and gas liquids in the United States. As of September 30, 2013 the Company is operating in the states of Texas and Oklahoma. In addition, the Company operates two gas gathering systems located in Tulsa, Wagoner, Rogers and Mayes counties of Oklahoma. The pipeline consists of approximately 132 miles of steel and poly pipe, a gas processing plant and other ancillary equipment. The Company sells its oil and gas products primarily to a domestic pipeline and to another oil company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries:
| Subsidiary Name | Organization Date |
| Petron Energy II Pipeline, Inc. | April 1, 2008 |
| Petron Energy II Well Service, Inc. | July 1, 2008 |
The interim consolidated financial statements as of September 30, 2013 and 2012 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, these consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. These interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2012. In the opinion of management, the interim unaudited consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.
The consolidated statements of operations reflect the results of operations of the Company for the three month and nine month periods ended September 30, 2013 and 2012. Operating results for the nine month period ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
Going concern uncertainty
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred a net loss of $2,175,555 for the nine month period ended September 30, 2013 (2012 - $7,355,368) and at September 30, 2013 had an accumulated deficit of $21,996,778 (2012 – $18,850,528). While the Company has recognized revenues from operations, the revenues generated are not sufficient to sustain operations. The Company does not have sufficient funds to acquire new business assets or maintain its existing operations at this time. Management’s plan is to raise equity and/or debt financing as required but there is no certainty that such financing will be available or that it will be available at acceptable terms. The outcome of these matters cannot be predicted at this time.
These financial statements do not include any adjustments to reflect the future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Subsequent events
Subsequent to September 30, 2013 the Company entered into 2 convertible notes payable in the total amount of $145,000 with a financial institution. The notes bear interest at 8% and the conversion terms are a 50% discount of the stock market price based on the average of the three lowest closing prices for the ten trading days before conversion. The Company also entered into 3 convertible notes payable in the total amount of $149,000 with another financial institution. These notes bear interest at 9% and the conversion terms are a 50% discount from the lowest closing bid price during the ten trading days before conversion.
F-5
[End Notes to Financial Statements]
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION |
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements. You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms. These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements. Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Results of Operations
For the Three Month Period Ended September 30, 2013 versus September 30, 2012
Revenue for the three month period ended September 30, 2013 was $76,403 compared to $78,808 for the three month period ended September 30, 2012. This was a decrease of $1,405. This decrease is due chiefly to a suspension of activity of our Knox county leases pending approval of plugging work from the Texas Railroad Commission which has been offset by production from the Edwards leases which were brought on-line in the three month period ended September 30, 2013. As of the date of this report, the plugging work required by the Texas Railroad Commission has started and we expect production to resume before the end of the year.
Net loss for the three month period ended September 30, 2013 was $468,921 compared to $330,223 for the three month period ended September 30, 2012. We incurred derivative expense of $42,052 for which we had none last year and we also incurred $122,118 in interest expense (including amortized loan fees) that the Company did not have last year. General and Administrative costs for the three month period ended September 30, 2013 were $138,497 compared to $310,221 for the three month period ended September 30, 2012. This was a decrease of $171,724. This decrease is attributable chiefly to a change in legal and consulting expenses. Other significant changes that contributed to the increase in the net loss were and increase in depreciation and depletion ($58,178) due to asset acquisitions and an increase in the cost of revenue due to the finalization of an administrative services agreement.
For the Nine Month Period Ended September 30, 2013 versus September 30, 2012
Revenue for the nine month period ended September 30, 2013 was $204,037 compared to $274,384 for the nine month period ended September 30, 2012. This was a decrease of $70,347. This decrease is due chiefly to a suspension of activity of our Knox county leases pending sending completion of plugging work required by the Texas Rail Road Commission. As of the date of this report, the plugging work required by the Texas Railroad Commission has started and we expect production to resume before the end of the year. The decrease was not as great since we put the Edwards leases into production in September of 2013.
Net loss for the nine month period ended September 30, 2013 was $2,175,555 compared to $7,355,368 net loss for the nine month period ended September 30, 2012. The loss is less in 2013 due to the $5,903,000 impairment recorded in 2012 for which there was no additional amount in 2013, plus a decrease in legal and consulting fees (recorded in General and Administrative expenses), offset to a certain extent by derivative expense of $283,352, which the Company did not have last year, and an increase in interest expense of 260,868 which reflects the cost of the financings entered into in 2013.
Liquidity and Capital Resources
As of September 30, 2013, the total liabilities were $3,270,970, excluding the stock issuance liability, compared to $1,570,284 as of December 31, 2012. The major reasons for the increase in the liabilities is the $450,000 draw on the line-of-credit, the increase in accruals for the litigation settlement, and an increase of over $900,000 in accounts payable. The Company’s assets were $3,279,351 at September 30, 2013 compared to $2,309,699 at December 31, 2012. The increase in the assets is from fixed asset purchases funded by the increase in accounts payable.
Cash Requirements
Our cash on hand as of September 30, 2013 was $8,600 compared to $17,089 as of December 31, 2012. The Company has incurred a net loss of $2,175,555 for the nine month period ended September 30, 2013 compared to a net loss of $7,355,368 for the nine month period ended September 30, 2012 and at September 30, 2013 had an accumulated deficit of $21,996,778 as compared to $19,821,223 at December 31, 2012. While the Company has recognized revenues from operations, the revenues generated are not sufficient to sustain operations. The Company does not have sufficient funds to acquire new business assets or maintain its existing operations at this time. Management’s plan is to raise equity and/or debt financing as required but there is no certainty that such financing will be available or that it will be available at acceptable terms. The outcome of these matters cannot be predicted at this time.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Contractual Obligations
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Future Financings
We will continue to rely on equity sales of our common shares and debt proceeds in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund our operations and other activities.
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience, information from third party professionals, and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Recently Issued Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934, as amended (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report (the "Evaluation Date"), has concluded that as of the Evaluation Date, our disclosure controls and procedures were effective enough to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter, other than the hiring of a Chief Financial Officer, 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
From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Company cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.
We know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which our director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following sales and issuances of the Company’s common stock have been made since July 1, 2013 pursuant to the rule 506 exemption. All proceeds were used for general corporate purposes.
Quarterly Issuances:
Issuance to Daniel Vesco and Others Pursuant to Conversion of Series B Preferred Convertible Stock
During the quarter ended September 30, 2013, 952,762 shares of its Series B Preferred Convertible Stock were converted into 42,605,570 shares of the Company’s common stock.
Issuance to AGS Capital Group, LLC
During the quarter ended September 30, 2013, the Company issued 7,178,925 shares of its common stock to AGS Capital Group, LLC in connection with a convertible promissory note entered into by and between the Company and AGS Capital Group, LLC.
Issuance to ASC Recap, LLC
During the quarter ended September 30, 2013, the Company issued 7,593,037 shares of its common stock to ASC Recap, LLC in connection with a convertible promissory note entered into by and between the Company and ASC Recap, LLC.
Issuance to Asher Enterprises
During the quarter ended September 30, 2013, the Company issued 23,991,370 shares of its common stock to Asher Enterprises (“Asher”) in connection with two convertible promissory notes entered into by and between the Company and Asher.
Issuances to Certain Vendors
During the quarter ended September 30, 2013, the Company issued 2,489,283 shares of its common stock to certain vendors for services rendered.
Private Placement Issuances
During the quarter ended September 30, 2013, the Company sold an aggregate of 20,720,820 shares of the Company’s restricted common stock to 23 “accredited investors” in private transactions.
Subsequent Issuances:
Issuance to Daniel Vesco Pursuant to Conversion of Series B Preferred Convertible Stock
Subsequent to September 30, 2013, 304,520 Preferred Series B shares were converted into 35,500,000 shares of the Company’s common stock.
Issuance to Directors
Subsequent to September 30, 2013, the Company issued 1,089,100 shares to two of the Company’s directors for their fees.
Issuance to AGS Capital Group, LLC
Subsequent to September 30, 2013, the Company issued 16,650,668 shares of its common stock to AGS Capital Group, LLC in connection with a convertible promissory note entered into by and between the Company and AGS Capital Group, LLC.
Private Placement Issuances
Subsequent to September 30, 2013, the Company sold an aggregate of 833,332 shares of the Company’s restricted common stock to 2 “accredited investors” in private transactions.
Subsequent to September 30, 2013, we did not issue any unregistered securities other than as previously disclosed.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. MINE SAFETY DISCLOSURES
NONE.
ITEM 5. OTHER INFORMATION
On July 1, 2013, the Company issued a press release in which it announced that Mr. Smith, the CEO of the Company, will be interviewed by The Wall Street Analyst
On July 2, 2013, the Company issued a press release in which it announced early production progress from rework operations in Oklahoma.
On July 24, 2013 the Company issued a press release in which it announced an additional 15% production increase from several wells in its Oklahoma properties.
On July 26, 2013 the Company issued a press release in which it announced the Company had obtained a new oil and gas lease in Oklahoma.
On August 1, 2013 the Company issued a press release in which it gave an update on the LaNina and Covenant wells in Oklahoma.
On August 6, 2013 the Company issued a press release in which it announced a 50% increase in gas production from rework operations.
On August 13, 2013 the Company announced that it will likely become profitable in the second quarter of 2014.
On August 22, 2013 the Company gave an update on the press release dated August 1, 2013.
On September 4, 2013, the Company announced a 15% increase in production from its Edwards lease in Oklahoma.
On September 24, 2013 the Company announced a 30% increase in production from its Edwards Leases in Oklahoma.
Subsequent Events
On October 30, 2013 the Company announced the signing of a letter of intent to acquire a 5% non-operating interest in six wells in the Bakken shale in North Dakota from Phoenix Energy, Inc. The Company also reported successful fracture stimulations on the Covenant #5 and Gerner #2 wells.
Subsequent to September 30, 2013 the Company entered into 2 convertible notes payable in the total amount of $145,000 with a financial institution. The notes bear interest at 8% and the conversion terms are a 50% discount of the stock market price based on the average of the three lowest closing prices for the ten trading days before conversion. The Company also entered into 3 convertible notes payable in the total amount of $149,000 with another financial institution. These notes bear interest at 9% and the conversion terms are a 50% discount from the lowest closing bid price during the ten trading days before conversion.
ITEM 6. EXHIBITS
| Exhibit Number | Description of Exhibit |
| Exhibit 3.1(1) | Articles of Incorporation |
| Exhibit 3.2(2) | Certificate of Amendment to Articles of Incorporation (100:1 Forward Split) |
| Exhibit 3.3(2) | Series A Preferred Stock Designation |
| Exhibit 3.4(1) | Bylaws |
| Exhibit 3.5(3) | Series B Preferred Stock Designation |
| Exhibit 3.6(3) | Plan of Reorganization and Asset Purchase Agreement with One Energy |
| Exhibit 10.23(2) | Oil and Gas Lease – Wagoner, Oklahoma |
| Exhibit 10.24(2) | Independent Petroleum Engineer Report |
| Exhibit 31.01 | Certificate of the Chief Executive Officer and the Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith. |
| Exhibit 31.02 | Certificate of the Chief Executive Officer and the Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith. |
| Exhibit 32.01 | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act filed herewith. |
| Exhibit 32.02 | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act filed herewith. |
| 101.INS | XBRL Instance Document Filed herewith. |
| 101.SCH | XBRL Taxonomy Extension Schema Document filed herewith. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document filed herewith. |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document filed herewith. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document filed herewith. |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document filed herewith. |
Pursuant to Regulation S-T, this interactivedata file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
(1) Filed as exhibits to the Company’s Form S-1 Registration Statement filed with the Commission on July 10, 2009, and incorporated herein by reference.
(2) Filed as an exhibit to the Company’s Report on Form 8-K, filed with the Commission on October 18, 2011, and incorporated herein by reference.
(3) Filed as an exhibit to the Company’s Report on Form 8-K, filed with the Commission on February 17, 2012, and incorporated herein by reference.
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | PETRON ENERGY II, INC. |
| | |
| Dated: November 6, 2013 | By:/s/ Floyd L. Smith |
| | Floyd L. Smith |
| | Chief Executive Officer |
| | President, and Treasurer |
| | PETRON ENERGY II, INC. |
| | |
| Dated: November 6, 2013 | By:/s/ Bob Currier |
| | Bob Currier |
| | Chief Financial Officer |
