UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No.1
☑ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
☐ 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 August 5, 2014, there were 59,014,774 shares of the registrant’s $0.00001 par value common stock issued and outstanding.
EXPLANATORY NOTE
The purpose of this Amendment No. 1 to the Quarterly Report of Petron Energy II, Inc. (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2014, filed with the Securities and Exchange Commission on August 7, 2014 (the “Form 10-Q”), is to make certain changes to the disclosures related to common stock and preferred stock in the financial statements set forth therein.
PETRON ENERGY II, INC.
TABLE OF CONTENTS
| Page No. | |||
| PART I - FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements | F-1 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 2 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 7 | |
| Item 4. | Controls and Procedures | 7 | |
| PART II - OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 8 | |
| Item1A. | Risk Factors | 8 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 8 | |
| Item 3. | Defaults Upon Senior Securities | 10 | |
| Item 4. | Mine Safety Disclosures | 10 | |
| Item 5. | Other Information | 10 | |
| Item 6. | Exhibits | 11 | |
| Signatures | 12 |
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.
| 1 |
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| PETRON ENERGY II, INC. | |||
| INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS | |||
| CONSOLIDATED BALANCE SHEETS as of June 30, 2014 (unaudited) | |||
| and December 31, 2013 | F-2 | ||
| CONSOLIDATED STATEMENTS OF OPERATIONS for the three months | |||
| and six months ended June 30, 2014 and 2013 (unaudited) | F-3 | ||
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT for the | |||
| year ended December 31, 2013 and the six months ended June 30, 2014 (unaudited) | F-4 | ||
| CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months | |||
| ended June 30, 2014 and 2013 (unaudited) | F-5 | ||
| NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS | F-6 | ||
| F-1 |
| PETRON ENERGY II, INC. | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| June 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| ASSETS | (unaudited) | (audited) | ||||||
| Current Assets | ||||||||
| Cash | $ | — | $ | 105 | ||||
| Accounts Receivable | 25,384 | 24,342 | ||||||
| Total Current Assets | 25,384 | 24,447 | ||||||
| Pipeline, net of accumulated depreciation of $354,373 | ||||||||
| and $320,452, respectively | 663,627 | 697,548 | ||||||
| Producing Oil & Gas Properties, net of accumulated depletion | ||||||||
| of $884,795 and $837,759, respectively | 2,174,752 | 1,803,632 | ||||||
| Other Depreciable Equipment, net of accumulated | ||||||||
| depreciation of $196,183 and $125,309, respectively | 513,422 | 609,732 | ||||||
| Other Assets | 6,147 | 1,532 | ||||||
| TOTAL ASSETS | $ | 3,383,332 | $ | 3,136,891 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Bank Overdraft | $ | 8,589 | $ | 57,942 | ||||
| Accounts Payable--Trade | 568,894 | 1,282,779 | ||||||
| Accounts Payable--Related Party | — | 224,425 | ||||||
| Accrued Liabilities | 384,491 | 219,649 | ||||||
| Derivative Liability | 1,650,758 | 960,047 | ||||||
| Notes Payable--current | 1,863,500 | 1,432,731 | ||||||
| Total Current Liabilities | 4,476,232 | 4,177,573 | ||||||
| Asset Retirement Obligation | 353,502 | 220,347 | ||||||
| Stock Issuance Liability | 568,869 | 946,551 | ||||||
| TOTAL LIABILITIES | 5,398,603 | 5,344,471 | ||||||
| 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, 569,438 and | ||||||||
| 947,498 shares issued and outstanding, respectively | 569 | 947 | ||||||
| Common Stock, $0.00001 par value, 2,000,000,000 shares authorized, | ||||||||
| 20,648,147 and 884,172 issued and outstanding, respectively | 206 | 9 | ||||||
| Additional Paid-In Capital | 28,677,473 | 21,913,781 | ||||||
| Accumulated Deficit | (30,693,520 | ) | (24,122,318 | ) | ||||
| Total Stockholders' Deficit | (2,015,271 | ) | (2,207,580 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 3,383,332 | $ | 3,136,891 | ||||
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 June 30, | Six Months Ended June 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Revenues | ||||||||||||||||
| Oil and Gas Sales | $ | 33,201 | $ | 20,760 | $ | 111,527 | $ | 127,634 | ||||||||
| Costs and Expenses | ||||||||||||||||
| Cost of Revenue | 149,241 | 238,697 | 321,936 | 341,997 | ||||||||||||
| Depletion and Depreciation | 70,485 | 74,265 | 151,795 | 124,245 | ||||||||||||
| Derivative Expense | 3,126,054 | 159,000 | 4,460,027 | 241,300 | ||||||||||||
| General and Administrative | 832,515 | 781,857 | 1,430,803 | 982,178 | ||||||||||||
| Interest | 177,152 | 89,985 | 318,168 | 144,548 | ||||||||||||
| Total Expenses | 4,355,447 | 1,343,805 | 6,682,729 | 1,834,268 | ||||||||||||
| Loss from Operations Before Income Taxes | (4,322,246 | ) | (1,323,045 | ) | (6,571,202 | ) | (1,706,634 | ) | ||||||||
| Income Taxes | — | — | — | — | ||||||||||||
| Net Loss | $ | (4,322,246 | ) | $ | (1,323,045 | ) | $ | (6,571,202 | ) | $ | (1,706,634 | ) | ||||
| Loss per share--basic and diluted | $ | (0.43 | ) | $ | (15.26 | ) | $ | (1.02 | ) | $ | (25.96 | ) | ||||
| Weighted average number of shares--basic and diluted | 10,107,233 | 86,692 | 6,465,911 | 65,746 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
| F-3 |
| PETRON ENERGY II, INC. | |||||||||
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT | |||||||||
| For the year ended December 31, 2013 and the six months ended June 30, 2014(unaudited) | |||||||||
| Preferred Stock | |||||||||
| Series A | Series B | Common Stock | Additional | ||||||
| Number | Number | Number | Paid-in | Accumulated | |||||
| of Shares | Amount | of Shares | Amount | of Shares | Amount | Capital | Deficit | Total | |
| Balance December 31, 2012 as originally reported | 1,000 | $ 1 | 5,910,000 | 5,910 | 11,976,942 | $ 1,198 | $ 14,649,439 | $ (19,821,223) | $ (5,164,675) |
| Reverse Stock Split | (11,952,988) | (1,198) | 1,198 | ||||||
| Balance December 31, 2012 (Restated) | 1,000 | 1 | 5,910,000 | 5,910 | 23,954 | - | 14,650,637 | (19,821,223) | (5,164,675) |
| Common Stock and Warrants Issued for Services | 16,844 | - | 137,075 | 137,075 | |||||
| Common Stock Issued in Lawsuit Settlement | 5,901 | - | 138,000 | 138,000 | |||||
| Common Stock Issued for Loan Fees | 6,667 | - | 160,300 | 160,300 | |||||
| Common Stock Sales | 82,283 | 1 | 525,149 | 525,150 | |||||
| Conversion of Notes Payable | 463,216 | 5 | 586,771 | 586,776 | |||||
| Derivative Expense | 731,266 | 731,266 | |||||||
| Conversion of Preferred Stock | (4,962,502) | (4,963) | 285,307 | 3 | 4,962,499 | 4,957,539 | |||
| Imputed Interest on Shareholder Notes | 22,084 | 22,084 | |||||||
| Net Loss | (4,301,095) | (4,301,095) | |||||||
| Balance December 31, 2013 | 1,000 | 1 | 947,498 | 947 | 884,172 | 9 | 21,913,781 | (24,122,318) | (2,207,580) |
| Common Stock for Services | 293,651 | 3 | 217,597 | 217,600 | |||||
| Common Stock Sales | 594,850 | 6 | 353,404 | 353,410 | |||||
| Issuances Related to Equity Purchase Line | 600,000 | 6 | 119,114 | 119,120 | |||||
| Conversion of Notes Payable | 17,667,340 | 176 | 1,922,492 | 1,922,668 | |||||
| Derivative Expense | 3,769,316 | 3,769,316 | |||||||
| Conversion of Preferred Stock | (378,060) | (378) | 608,134 | 6 | 378,051 | 377,679 | |||
| Imputed Interest on Shareholder Notes | 3,718 | 3,718 | |||||||
| Net Loss | (6,571,202) | (6,571,202) | |||||||
| Balance June 30, 2014 (unaudited) | 1,000 | $ 1 | 569,438 | $ 569 | 20,648,147 | $ 206 | $ 28,677,473 | $ (30,693,520) | $ (2,015,271) |
The accompanying notes are an integral part of these financial statements.
| F-4 |
| PETRON ENERGY II, INC. | ||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOW | ||||||||
| (unaudited) | ||||||||
| Six Months Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | (6,571,202 | ) | $ | (1,706,634 | ) | ||
| Adjustments to reconcile net loss to | ||||||||
| cash used by operating activities: | ||||||||
| Depletion and depreciation | 151,795 | 124,245 | ||||||
| Accretion of asset retirement obligation | 8,710 | — | ||||||
| Amortization of debt discount | 87,125 | 70,800 | ||||||
| Imputed interest on shareholder loans | 3,718 | — | ||||||
| Derivative expense | 4,460,027 | 241,300 | ||||||
| Penalty interest | — | 45,250 | ||||||
| Common stock issued for services | 217,600 | 46,500 | ||||||
| Common stock issued for lawsuit settlement | — | 138,000 | ||||||
| Change in other assets and liabilities: | ||||||||
| Increase in oil and gas receivables | (1,042 | ) | (19,994 | ) | ||||
| (Increase) Decrease in other assets | (4,615 | ) | 3,237 | |||||
| (Decrease) Increase in accounts payable | (961,894 | ) | 169,597 | |||||
| Increase in accrued liabilities | 174,717 | 203,443 | ||||||
| Cash used in operating activities | (2,435,062 | ) | (684,256 | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Investment in oil and gas properties | (211,261 | ) | — | |||||
| Proceeds from the sale of equipment | 24,500 | — | ||||||
| Pipeline investment | — | (121,000 | ) | |||||
| Accounts payable dedicated for asset purchase | — | 121,000 | ||||||
| Purchase of other equipment | (7,563 | ) | (2,516 | ) | ||||
| Cash used in investing activities | (194,324 | ) | (2,516 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Increase in bank overdraft | (49,352 | ) | 63,295 | |||||
| Proceeds from sales of common stock | 353,410 | 256,500 | ||||||
| Proceeds from equity line | 119,120 | — | ||||||
| Proceeds from notes payable | 3,050,823 | 431,811 | ||||||
| Repayment of notes payable | (925,906 | ) | — | |||||
| Decrease in deposit to lender | 81,187 | — | ||||||
| Loan fees | — | (79,825 | ) | |||||
| Cash from financing activities | 2,629,282 | 671,781 | ||||||
| Decrease in cash | (105 | ) | (14,991 | ) | ||||
| Cash at beginning of period | 105 | 17,089 | ||||||
| Cash at end of period | $ | — | $ | 2,098 | ||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Non-Cash Investing and Financing Activities: | ||||||||
| Notes payable | $ | (1,560,658 | ) | $ | (20,800 | ) | ||
| Common stock | 1,517,931 | 26,067 | ||||||
| Preferred stock | (378 | ) | (3,692 | ) | ||||
| Additional paid-in capital | 3,298,215 | 3,869,515 | ||||||
| Derivative liability | (2,790,514 | ) | (22,300 | ) | ||||
| Common stock issuance liability | (377,681 | ) | (3,588,490 | ) | ||||
| Accrued liabilities | (40,557 | ) | — | |||||
| Loan fees | — | (260,300 | ) | |||||
| Oil and gas properties | 231,359 | — | ||||||
| Asset retirement obligation | (231,359 | ) | — | |||||
| Other assets | (46,358 | ) | — | |||||
| $ | — | $ | — | |||||
The accompanying notes are an integral part of these financial statements.
| F-5 |
PETRON ENERGY II, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 and 2013
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 June 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 June 30, 2014 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
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 June 30, 2014 and 2013 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, 2013. 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 six month periods ended June 30, 2014 and 2013. Operating results for the six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
3. CAPITAL STRUCTURE
On May 30, 2014, the Company, by and through its Board of Directors and with written consent of a majority of its shareholders entitle to vote, filed an amendment to the Company’s Articles of Incorporation effectuating an increase in the total number of authorized stock of the Company from 15,010,000,000 to 25,010,000,000 shares consisting of 25,000,000,000 shares of common stock, par value $0.0001 per share and 10,000,000 shares of preferred stock with a par value of $0.001 per share.
On June 20, 2014, the Company, by and through its Board of Directors and with written consent of a majority of its shareholders entitled to vote, effectuated an amendment to the Company’s Articles of Incorporation regarding a change in the par value of the Company’s common stock from $0.0001 per common stock share to $0.00001 per common stock share.
4. SUBSEQUENT EVENTS
On July 3, 2014, the Company effectuated a reverse stock split of its common shares whereby every five hundred (500) pre-split shares of common stock were exchanged for one (1) post-split share of the Company’s common stock. . All shares of common stock in the financial statements have been adjusted to reflect this reverse stock split.
On July 14, 2014 the Company amended its Articles of Incorporation to reduce the number of authorized shares of common stock from 25,000,000,000 to 2,000,000,000.
[End Notes to Financial Statements]
| F-6 |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 June 30, 2014 versus June 30, 2013
Our net loss for the three month period ended June 30, 2014 was $4,322,346 as compared to a loss for the three month period ended June 30, 2013 of $1,323,045. The most significant factor contributing to this loss was our effort to satisfy our accounts payable through the issuance of convertible debt. The significance of this effort can be seen in the following condensed comparison of the results of operations for the three month periods ended June 30, 2014 and 2013:
| For the Three Months Ended | ||||||||||||||||
| Increase or | ||||||||||||||||
| June 2014 | June 2013 | (Decrease) | % Change | |||||||||||||
| Revenue | $ | 33,201 | $ | 20,760 | $ | 12,441 | 60 | % | ||||||||
| Cost of Revenue | 149,241 | $ | 238,693 | $ | (89,452 | ) | -37 | % | ||||||||
| Depletion and Depreciation | 70,485 | 74,265 | (3,780 | ) | -5 | % | ||||||||||
| Derivative Expense | 3,126,054 | 159,000 | 2,967,054 | 1866 | % | |||||||||||
| General and Administrative Expense | 832,515 | 781,857 | 50,658 | 6 | % | |||||||||||
| Interest Expense | 177,152 | 89,986 | 87,166 | 97 | % | |||||||||||
| 4,355,447 | 1,343,801 | |||||||||||||||
| Net Loss | $ | (4,322,246 | ) | $ | (1,323,045 | ) | ||||||||||
In 2013 we were able to amicably settle a lease issue with a company related to one of our oil and gas leases in Oklahoma. We made an adjustment to reduce revenue by $22,610. After removing the impact of this adjustment, the revenue for the three month period ended June 2014 was approximately $10,000 lower than that of the comparable period in 2013. The reason for this decrease is that the largest producing lease, Simon, was shut down in April of 2014 to allow the Company to complete a secondary recovery workover project on the lease. The production decrease due to this project was offset somewhat by production from the Edwards lease that began in July 2013.
| 2 |
In 2013 the Company did not capitalize workover related expenditures since the Company was unsure of the reserve impact of the work and if the reserves did not show an adequate increase, the expenditures would have to be expensed as the result of the ceiling test. In 2014 the Company began to capitalize significant workover projects since the Company believes the increase in reserves will be enough to avoid being required to expense these items as the result of the ceiling test.
The Company obtained approximately $2,100,000 of convertible debt during three month period ended June 30, 2014. The cost of the original issue discount is the reason for the increase in the derivative expense. The increase in debt accounted for approximately $27,000 of interest. In June of 2014, the Company refinanced a loan and incurred a pre-payment penalty of $53,994 that was recorded in the interest expense category since it is financing related.
The following table shows the major changes in the components of the General and Administrative expenses for the three month period ended June 2014 as compared to the three month period ended June 2013:
| For the Three Months Ended | |||||||||||||
| Increase or | |||||||||||||
| June 2014 | June 2013 | (Decrease) | |||||||||||
| Debt issuance costs--TCA | $ | - | $ | 196,500 | $ | (196,500) | Fees associated with new debt in 2013 were not repeated in 2014 | ||||||
| Lawsuit accrual | - | 205,100 | (205,100) | Lawsuit was settled in 2013, therefor, no further accrual needed in 2014 | |||||||||
| Convertible debt fees | 222,000 | 50,000 | 172,000 | Fees associated with the convertible debt issuances which were much higher in 2014 | |||||||||
| S-1 fees | 13,500 | - | 13,500 | No S-1 was file in 2013 | |||||||||
| Directors' fees | 45,000 | - | 45,000 | Director fees did not start until August 2013 | |||||||||
| Payroll | 30,000 | - | 30,000 | CFO was added to payroll in July 2013. The amount represents net increase over CFO costs in professional fees. | |||||||||
| Investor relations | 200,000 | 15,000 | 185,000 | Significantly more investor relations activity in 2014 | |||||||||
| Working interest receivable write-off | 9,000 | - | 9,000 | Instead of trying to collect currently, we will collect from production, if adequate | |||||||||
| All other items | 313,015 | 315,257 | (2,242) | ||||||||||
| Total | $ | 832,515 | $ | 781,857 | $ | 50,658 | |||||||
For the Six Month Period Ended June 30, 2014 and June 30, 2013
Our net loss for the six month period ended June 30, 2014 was $4,322,246 as compared to a loss for the six month period ended June 30, 2013 of $1,323,045. For the three months ended June 30, 2014, the most significant factor that contributed to the loss was our efforts to satisfy our accounts payable through the issuance of convertible debt. The significance of this effort can be seen in the following condensed comparison of the results of operations for the six month periods ended June 30, 2014 and 2013:
| 3 |
| For the Six Months Ended | ||||||||||||||||
| Increase or | ||||||||||||||||
| June 2014 | June 2013 | (Decrease) | % Change | |||||||||||||
| Revenue | $ | 111,527 | $ | 127,634 | $ | (16,107 | ) | -13 | % | |||||||
| Cost of Revenue | 321,936 | 341,997 | (20,061 | ) | -6 | % | ||||||||||
| Depletion and Depreciation | 151,795 | 124,245 | 27,550 | 22 | % | |||||||||||
| Derivative Expense | 4,460,027 | 241,300 | 4,218,727 | 1748 | % | |||||||||||
| General and Administrative Expense | 1,430,803 | 982,178 | 448,625 | 46 | % | |||||||||||
| Interest Expense | 318,168 | 144,548 | 173,620 | 120 | % | |||||||||||
| Net Loss | $ | (6,571,202 | ) | $ | (1,706,634 | ) | ||||||||||
The biggest operating difference that affected revenue when comparing 2013 and 2014, in addition to the items mentioned above, was the forced stoppage of production in Knox County Texas as of the end of March 2013. The Texas Railroad Commission required us to cease production until some plugging work and other items were completed to their satisfaction. Production did not resume in Knox County until July of 2014. The value of production for the first three months of 2013 was approximately $26,700.
The cost of revenue change for the six months ended June 30, 2013 compared to the six months ended June 30, 2014 is due to fees related to a Consulting and Operating Agreement with Petron Energy, Inc. of $25,000 that started in May 2013 being offset by capitalized workover projects in 2014.
The increase in depletion and depreciation reflects the depreciation recorded in the first quarter of 2014 related to a significant equipment purchase made in the third quarter of 2013.
We have raised approximately $3,020,000 of convertible debt in the six month period ended June 30, 2014 as compared to $88,000 of convertible debt raised as of June 30, 2013. There are beneficial conversion options included in the convertible debt. The value of these beneficial conversion options is the reason for the increase in the derivative expense.
The following table shows the major changes in the components of the General and Administrative expenses for the period of six months ended June 2014 as compared to the period of six months ended June 2013:
| For the Six Months Ended | |||||||||||||
| Increase or | |||||||||||||
| June 2014 | June 2013 | (Decrease) | |||||||||||
| Debt issuance costs--TCA | $ | - | $ | 196,500 | $ | (196,500) | Fees associated with new debt in 2013 were not repeated in 2014 | ||||||
| Lawsuit accrual | - | 205,100 | (205,100) | Lawsuit was settled in 2013, therefore, no further accrual needed in 2014 | |||||||||
| Convertible debt fees | 395,000 | 75,000 | 320,000 | Fees associated with the convertible debt issuances which were much higher in 2014 | |||||||||
| S-1 fees | 13,500 | - | 13,500 | No S-1 was file in 2013 | |||||||||
| Directors' fees | 90,000 | - | 90,000 | Director fees did not start until August 2013 | |||||||||
| Payroll | 60,000 | - | 60,000 | CFO was added to payroll in July 2013. The amount represents net increase over CFO costs in professional fees. | |||||||||
| Investor relations | 345,900 | 27,000 | 318,900 | Significantly more investor relations activity in 2014 | |||||||||
| Working interest receivable write-off | 41,000 | - | 41,000 | Instead of trying to collect currently, we will collect from production, if adequate | |||||||||
| All other items | 485,403 | 478,578 | 6,825 | ||||||||||
| Total | $ | 1,430,803 | $ | 982,178 | $ | 448,625 | |||||||
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Liquidity and Capital Resources
As of June 30, 2014, we had a working capital deficit of approximately $4,450,000 as compared to a deficit in working capital of approximately $4,153,000 at December 31, 2013. The increase in the working capital deficit is due the combination of an increase in the derivative liability and current notes payable of approximately $1,121,000 which more than offset a decrease in accounts payable and accrued expenses of approximately $814,000. We intend to fund ongoing operations by continuing to raise capital from debt and equity sources. Our efforts for the quarter ended June 30, 2014 resulted in capital being raised in the amount of approximately $2,201,000. A significant part of our capital plan is to continue to draw down from the $10,000,000 investment agreement with CPUS Investment Group, LLC dated December 13, 2013 (the “Investment Agreement”) that is in place. During the period of three months ended June 30, 2014 we drew down approximately $119,000. Pursuant to the terms of the Investment Agreement, the investor must fund requests made by the Company to purchase stock as long as the ownership limits are met. The purchase price of the stock per the Investment Agreement is 70% of the lowest closing bid price in the 10 days immediately before a funding request. In addition, management plans to continue to raise additional funds through equity and/or debt financing, but there is no certainty that such financing will be available or that it will be available at acceptable terms.
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.
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Future Financings
We will continue to rely on equity sales of our common shares 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.
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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
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 not effective 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.
Based on this evaluation, our principal executive and principal financial and accounting officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not effective.
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 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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.
Other than the foregoing, 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
| 1. | Quarterly Issuances—All amounts have been adjusted to reflect the impact of the 1 for 500 reverse stock split that was effective July 3, 2014: |
The Company issued its common stock during the quarter ended June 30, 2014 in the following transactions:
| • | Sold an aggregate of 115,167 shares of the Company’s restricted common stock to 7 “accredited investors” in private transactions for aggregate consideration of $65,600. |
| • | 60,000 shares of the Company’s Series B Convertible Preferred Stock converted into an aggregate of 300,000 shares of the common stock of the Company. |
| • | Issued 125,984 shares of the Company’s restricted common stock to the Company’s directors for their fees. |
| • | Issued 167,667 shares of the Company’s restricted common stock to vendors for services rendered. |
| • | Issued 2,390,173 shares of its common stock to AGS Capital Group, LLC in connection with convertible promissory notes entered into by and between the Company and AGS Capital Group, LLC related to 3(a)(9) transactions. |
| • | Issued 1,238,957 shares of its common stock to WHC Capital, LLC in connection with convertible promissory notes entered into by and between the Company and WHC Capital, LLC related to 3(a)(9) transactions. |
| • | Issued 359,451 shares of its common stock to Asher Enterprises, Inc. Capital, LLC in connection with convertible promissory notes entered into by and between the Company and Asher Enterprises, Inc. |
| • | Issued 1,556,542 shares of its common stock to LG Capital Funding, LLC in connection with convertible promissory notes entered into by and between the Company and LG Capital Funding, LLC related to 3(a)(9) transactions. |
| 8 |
| • | Issued 853,884 shares of its common stock to Union Capital, LLC in connection with convertible promissory notes entered into by and between the Company and Union Capital, LLC related to 3(a)(9) transactions. |
| • | Issued 2,537,736 shares of its common stock to Darling Capital, LLC in connection with convertible promissory notes entered into by and between the Company and Darling Capital, LLC related to 3(a)(9) transactions. |
| • | Issued 332,195 shares of its common stock to Auctus Private Equity Fund, LLC in connection with a convertible promissory note entered into by and between the Company and Auctus Private Equity Fund, LLC. |
| • | Issued 687,749 shares of its common stock to an Institutional Investor in connection with a debt exchange agreement entered into by and between the Company and the Institutional Investor related to a 3(a)(9) transaction. |
| • | Issued 698,000 shares of its common stock to JMJ Financial in connection with a convertible promissory note entered into by and between the Company and JMJ Financial. |
| • | Issued 557,192 shares of its common stock to May Davis Partners Acquisition Company, LLC in connection with a convertible promissory note entered into by and between the Company and Continental Equities, LLC and assigned to May Davis Partners Acquisition Company, LLC by Continental Equities, LLC related to a 3(a)(9) transaction. |
| • | Issued 1,986,892 shares of its common stock to Tangiers Investment Group, LLC in connection with a convertible promissory note entered into by and between the Company and Tangiers Investment Group, LLC related to 3(a)(10) transaction. |
| • | Issued 2,803,843 shares of its common stock to Redwood Management, LLC in connection with convertible promissory notes entered into by and between the Company and Redwood Management, LLC related to 3(a)(9) transactions. |
| • | Issued 175,612 shares of its common stock to Lotus Capital Markets, LLC in connection with a convertible promissory note entered into by and between the Company and Continental Equities, LLC and assigned to Lotus Capital Markets, LLC by Continental Equities, LLC related to a 3(a)(9) transaction. |
| 2. | Subsequent Issuances—All amounts have been adjusted to reflect the impact of the 1 for 500 reverse stock split that was effective July 3, 2014: |
Subsequent to the quarter ended June 30, 2014, the Company issued shares of common stock in the following transactions:
| • | Issued 114,545 shares of the Company’s restricted common stock to the Company’s directors for their fees. |
| • | Issued 668,209 shares of its common stock to Redwood Management, LLC in connection with convertible promissory notes entered into by and between the Company and Redwood Management, LLC related to 3(a)(9) transactions. |
| • | Issued 604,734 shares of its common stock to LG Capital Funding, LLC in connection with convertible promissory notes entered into by and between the Company and LG Capital Funding, LLC related to 3(a)(9) transactions. |
| 9 |
| • | Issued 1,015,866 shares of its common stock to Union Capital, LLC in connection with convertible promissory notes entered into by and between the Company and Union Capital, LLC related to 3(a)(9) transactions. |
| • | Issued 109,603 shares of its common stock to AGS Capital Group, LLC in connection with convertible promissory notes entered into by and between the Company and AGS Capital Group, LLC related to 3(a)(9) transactions. |
We believe that the issuance and sale of the above securities were exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2), Regulation D and/or Regulation S. The securities were issued directly by us and did not involve a public offering or general solicitation. The recipient of the securities was afforded an opportunity for effective access to files and records of our company that contained the relevant information needed to make their investment decision, including our financial statements and 34 Act reports. We reasonably believed that the recipient, immediately prior to issuing the securities, had such knowledge and experience in our financial and business matters that she was capable of evaluating the merits and risks of its investment. The recipient had the opportunity to speak with our management on several occasions prior to her investment decision. There were no commissions paid on the issuance and sale of the shares
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. MINE SAFETY DISCLOSURES
NONE.
ITEM 5. OTHER INFORMATION
Quarterly Events
NONE
Subsequent Events
NONE
| 10 |
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 |
| Exhibit 3.2a(4) | Certificate of Amendment to Articles of Incorporation dated December 5, 2013 increasing authorized common stock to 2,989,999,999 shares |
| Exhibit 3.2b(5) | Certificate of Amendment to Articles of Incorporation dated February 4, 2014 increasing authorized common stock to 6,000,000,000 shares |
| Exhibit 3.2c(5) | Certificate of Amendment to Articles of Incorporation dated February 27, 2014 increasing authorized common stock to 15,000,000,000 shares |
| Exhibit 3.2d(6) | Certificate of Amendment to Articles of Incorporation dated March 27, 2014 changing the par value of the common stock from $0.001 to $0.0001 |
| Exhibit 3.2e(8) | Certificate of Amendment to Articles of Incorporation dated May 30, 2014 increasing authorized common stock to 25,000,000,000 shares |
| Exhibit 3.2f(9) | Certificate of Amendment to Articles of Incorporation dated June 20, 2014 changing the par value of the common stock from $0.0001 to $0.00001 |
| 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(7) | Reserve Report of Forrest A. Garb & Associates, Inc., Independent Petroleum Engineers for the Year Ended December 31, 2013 |
| 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.
(4) Filed as an exhibit to the Company’s S-1 Registration Statement filed with the Commission on December 16, 2013 and incorporated herein by reference.
(5) Filed as an exhibit to the Company’s Amendment 2 to its S-1 Registration Statement filed with the Commission on March 3, 2014 and incorporated herein by reference.
(6) Filed as an exhibit to the Company’s Report on Form 8-K filed with the Commission on April 3, 2014 and incorporated herein by reference.
(7) Filed as an exhibit to the Company’s Report on Form 10-K filed with the Commission on April 9, 2014, and incorporated herein by reference.
(8) Filed as an exhibit to the Company’s Report on Form 8-K filed with the Commission on June 3, 2014, and incorporated herein by reference.
(9) Filed as an exhibit to the Company’s Report on Form 8-K filed with the Commission on June 20, 2014, and incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Petron Energy II, Inc. | |
| Dated: August 8, 2014 | By: /s/ Floyd L. Smith |
| Floyd L. Smith | |
| Chief Executive Officer |
Petron Energy II, Inc. | |
| Dated: August 8, 2014 | By: /s/ Bob Currier |
| Bob Currier | |
| Chief Financial Officer |
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