UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
SCHEDULE 14A INFORMATION
Proxy Statement
Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
þ |
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Preliminary Proxy Statement |
o |
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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Definitive Additional Materials |
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Soliciting Material under Rule 14a-12
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PETRON ENERGY II, INC.
](Name of Registrant as Specified In
Its Charter)
(Name of Person(s) Filing Proxy Statement, if
other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
þ |
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No fee required. |
o |
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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(1) |
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Title of each class of securities
to which transaction applies: |
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(2) |
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Aggregate number of securities
to which transaction applies: |
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(3) |
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Per unit
price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined): |
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(4) |
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Proposed maximum aggregate value
of transaction: |
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(5) |
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Total fee paid: |
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
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(1) |
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Amount Previously Paid: |
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Form, Schedule or Registration
Statement No.: |
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Filing Party: |
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Date Filed: |
PETRON ENERGY II, INC.
17950 Preston Road, Suite 960, Dallas,
Texas 75252
Telephone: (972) 272-8190
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held
on December 19, 2014
TO OUR SHAREHOLDERS:
Notice is hereby given
that the 2014 Annual Meeting (the “Annual Meeting”) of Petron Energy II, Inc. (“Petron” or the “Company”)
will be held at 17950 Preston Road, Suite 960, Dallas, Texas 75252, at 10:00am local time on December 19, 2014, for the following
purposes:
| 1. | To elect the Directors of the Company to serve for a term of one (1) year until the next annual
meeting of shareholders or until their successors are duly appointed and qualified; |
| 2. | To confirm and ratify the appointment of the executive officers of the Company; |
| 3. | To confirm and ratify the appointment of KWCO, PC (“KWCO”) as the independent auditor
of the Company for the year ended December 31, 2015; and |
| 4. | To transact such other business as may properly come before the Annual Meeting or any adjournments
or postponements thereof. |
The Board of Directors
has fixed the close of business on November 7, 2014, as the Record Date for the determination
of shareholders that are entitled to notice of and to vote at the Annual Meeting and any adjournment thereof. Only shareholders
of record, and holders of shares in street name as represented by a bank statement certifying the number of shares in their possession,
as of the close of business on the Record Date are entitled to notice and to vote at this Annual Meeting or any postponements or
adjournments. A complete list of the shareholders entitled to vote at the meeting will be open to examination by any shareholder
for any purpose germane to the meeting, during normal business hours for ten (10) days prior to the date of the Annual Meeting
at the Company’s offices at 17950 Preston Road, Suite 960, Dallas, Texas 75252. We intend to mail this Proxy Statement and
accompanying Proxy Card to our shareholders on or about November *, 2014.
Attendance at the Annual
Meeting will be limited to shareholders of the Company. Shareholders will be required to furnish proof of ownership of the Company’s
Common Stock before being admitted to the meeting. Shareholders holding shares in the name of a broker or other nominee are requested
to bring a statement from the broker or nominee confirming their ownership in the Company’s Stock.
Whether or not you expect
to attend in person, we urge you to sign, date and return the enclosed Proxy Card at your earliest convenience. This will ensure
the presence of a quorum and your representation at the Annual Meeting; promptly signing, dating and returning the Proxy Card
will save the Company the expense and extra work of additional solicitation.
All properly executed proxies
will be voted as directed by the shareholder on the Proxy Card. If no direction is given, Proxies will be voted in accordance with
the Board of Directors’ recommendations and, in the discretion of the proxy holders, in the transaction of such other business
as may properly come before the Annual Meeting and any adjournments or postponements thereof. Any proxy may be revoked by a shareholder
by delivering a later dated proxy to the Company, delivering written notice of revocation to the Company or giving notice of revocation
in person at the Annual Meeting at any time prior to the voting thereof.
By order of the Board of Directors,
Date: November 12, 2014 |
/s/ Floyd Smith |
|
Floyd Smith, Director |
|
/s/ David Knepper |
|
David Knepper, Director |
PETRON ENERGY II, INC.
17950 Preston Road, Suite 960, Dallas,
Texas 75252
Telephone: (972) 272-8190
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHARESHOLDERS
To Be Held on December 19, 2014
GENERAL INFORMATION
We are providing these
proxy materials to you in connection with the solicitation of proxies by the Board of Directors of Petron Energy II, Inc. for the
2014 Annual Meeting (the “Annual Meeting”) of our shareholders to be held on December 19, 2014, and any adjournment
or postponement of the Annual Meeting. In this Proxy Statement, we refer to Petron Energy II, Inc. as “Petron,” the
“Company,” “we,” or “us.”
We are holding our Annual
Meeting at 17950 Preston Road, Suite 960, Dallas, Texas 75252, on December 19, 2014, at 10:00 am local time. We intend to mail
this Proxy Statement and accompanying Proxy Card to our shareholders on or about November *, 2014. A proposed form of the Proxy
Card is attached hereto as Appendix A.
We file annual, quarterly
and current reports, proxy statements and other information with the SEC. The Company’s reports or other filings made with
the SEC may be read or photocopied at the SEC’s Public Reference Room, located at 100 F Street, N.W., Washington, DC 20549.
Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. These reports and
other filings may be accessed electronically on the SEC’s web site, www.sec.gov. The Company will also provide upon request
and without charge to each stockholder receiving this Proxy Statement a copy of the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2013, including the financial statements and financial statement schedule information included
therein, as filed with the Securities and Exchange Commission. The Annual Report is incorporated in this Information Statement.
You are encouraged to review the Annual Report together with subsequent information filed by the Company with the Securities and
Exchange Commission and other publicly available information. A copy of any public filing is also available, at no charge, by contacting
the Company at (972) 272-8190.
ABOUT THE MEETING
At our Annual Meeting,
our shareholders will act upon the matters outlined in the accompanying notice of meeting. In addition, our management will report
on our performance during the 2014 year and respond to questions from shareholders.
ABOUT THE COMPANY
The
Company was incorporated in Nevada in June 2007 as a development stage company. Since August 2011, our business has been focused
on oil and gas exploration and production and related operations. The Company’s oil and gas activities are all in
the United States. The Company operates 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 an oil company.
VOTING INFORMATION
All shares represented
by properly executed proxies received by the Board of Directors pursuant to this solicitation will be voted in accordance with
the holder’s directions specified on the proxy. If no directions have been specified by marking the appropriate places on
the accompanying Proxy Card, the shares will be voted in accordance with the Board’s recommendations which are:
| 1. | FOR the election of Floyd Smith and David Knepper as Directors of the Company to serve for
a term of one (1) year until the next annual meeting of shareholders or until their successors are duly appointed and qualified. |
| 2. | FOR confirmation and ratification of the appointment of the executive officers of the Company. |
| 3. | FOR ratification of the appointment of KWCO, PC (“KWCO”) as the independent
auditor of the Company for the year ended December 31, 2015. |
A shareholder signing and
returning the accompanying proxy has power to revoke it at any time prior to its exercise by delivering to the Company a later
dated proxy or by giving notice to the Company in writing or at the Annual Meeting, but without affecting any vote previously taken.
Record Date
You may vote all shares
that you owned as of November 7, 2014, which is the Record Date for the Annual Meeting. The Company has three classes of stock
outstanding, Common Stock, valued at $0.00001 par value per share, Series A Preferred Stock, valued at $0.001 par value per share,
and Series B Preferred Stock, valued at $0.001 par value per share. The Company is currently authorized to issue up to five billion
(5,000,000,000) shares of Common Stock and ten million (10,000,000) shares of Preferred Stock, of which 1000 shares have been designated
as Series A Preferred Stock and 6,000,000 shares have been designated as Series B Preferred Stock.
As of November 7, 2014,
we had 3,547,866,399 shares of Common Stock outstanding held of record by approximately 536 shareholders, 1,000 shares of Series
A Preferred Stock outstanding held of record by 1 shareholder and 489,440 shares of Series B Preferred Stock held by 2 shareholders.
Each share of Common Stock is entitled to one vote on each matter properly brought before the meeting. The holders of the Series
A Preferred Stock, voting separately as a class, have the right to vote on all shareholder matters equal to fifty-one (51%) of
the total shareholder vote. Each share of Series B Preferred Stock is entitled to one-hundredth (1/100) of one voting share, rounded
up to the nearest whole voting share.
Ownership of Shares
If your shares are registered
directly in your name, you are the holder of record of these shares, and we are sending these proxy materials directly to you.
As the holder of record, you have the right to give your proxy directly to us or to vote in person at the Annual Meeting. If you
hold your shares in a brokerage account or through a bank or other holder of record, you hold the shares in “street name,”
and your broker, bank or other holder of record is sending these proxy materials to you. As a holder in street name, you have the
right to direct your broker, bank or other holder of record how to vote by filling out a voting instruction form that accompanies
your proxy materials. Regardless of how you hold your shares, we invite you to attend the Annual Meeting.
How to Vote
Your Vote Is Important.
We encourage you to vote promptly. You may vote in the following way:
By Mail: If you
are a holder of record, you can vote by marking, dating, and signing your Proxy Card and returning it by mail in the enclosed postage-paid
envelope. If you hold your shares in street name, please complete and mail the voting instruction card.
At the Annual Meeting:
If you vote your shares now it will not limit your right to change your vote at the Annual Meeting if you attend in person. If
you hold your shares in street name, you must obtain a proxy, executed in your favor, from the holder of record if you wish to
vote your shares at the Annual Meeting.
All shares that have been
properly voted and not revoked will be voted at the meeting. If you sign and return your Proxy Card without any voting instructions,
your shares will be voted as the Board of Directors recommends.
Revocation Of Proxies:
You can revoke your proxy at any time before your shares are voted if you: (1) send a written notice to our Secretary indicating
that you want to revoke your proxy; or (2) deliver to our Secretary a duly executed proxy (or voting instructions if you hold
your shares in street name) bearing a later date, which revokes all previous proxies; or (3) attend the Annual Meeting in
person, give written notice of revocation to the Secretary of the Annual Meeting prior to the voting of your proxy and vote your
shares in person, although your attendance at the meeting will not by itself revoke your proxy.
Quorum and Required Vote
Quorum: We will
have a quorum and will be able to conduct the business of the Annual Meeting if the holders of a majority of the votes that shareholders
are entitled to cast are present at the meeting, either in person or by proxy.
Vote Required for Proposals:
Directors are elected by
a plurality of the Common Stock and Preferred Stock entitled to vote that are present in person or represented by proxy, meaning
the nominees receiving the highest number of votes will be elected to the Board of Directors.
The ratification of the
appointment of the Company’s executive officers requires the approval of a majority of the outstanding shares of Common Stock
and Preferred Stock entitled to vote.
The ratification of KWCO
as the Company’s independent auditor for the year ended December 31, 2015 requires the approval of a majority of the outstanding
shares of Common Stock and Preferred Stock entitled to vote.
How We Count Votes:
In determining whether we have a quorum, we count abstentions and broker non-votes as present and entitled to vote.
In counting votes on the
proposals:
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• |
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Because directors are elected by a plurality, this means that the nominees receiving the highest number of “FOR” votes will be elected. Neither abstentions nor broker non-votes will have any effect in determining the outcome of the election of directors. |
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In tabulating whether the other proposals are ratified by a majority of votes of the Company’s outstanding shares, it should be noted that abstentions are counted in tabulations of the votes cast and thus have the same effect as a vote against a proposal, whereas broker non-votes are not counted for purposes of determining whether a proposal has been approved. |
Dissenter's Rights
Under Nevada law, shareholders
are not entitled to dissenter's rights of appraisal on any proposal referred to herein.
Cumulative Voting
With
respect to voting on the election of directors, shareholders shall not be entitled to cumulate votes.
Solicitation
The cost of solicitation
will be borne by the Company. In addition, the Company may reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation materials to such beneficial owners. Proxies may be solicited by
the Company’s directors, officers and employees, without additional compensation, personally or by telephone, facsimile or
telegram.
INFORMATION CONCERNING THE BOARD OF DIRECTORS
AND THE CORPORATE GOVERNANCE OF THE COMPANY
Our business is managed
by the Company’s Board of Directors. Our Board members are informed of our business through discussions with management,
materials provided to them, visits to the Company’s offices and facilities, and their participation in Board and committee
meetings. Directors are not reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors and
the committees.
Corporate Governance Practices and Policies
Our Board of Directors
has been carefully following the corporate governance developments that have been taking place as a result of the adoption of the
Sarbanes-Oxley Act of 2002, the rules adopted thereunder by the Securities and Exchange Commission (SEC), and other corporate governance
recommendations. Our Board addresses, among other things, the Board’s composition, qualifications and responsibilities, director
education and shareholder communication with directors.
Nominating Procedures
The Board will consider
candidates for the Board of Directors from any reasonable source, including shareholder recommendations. The Board will not evaluate
candidates differently based on who has made the proposal. The Board has the authority under its charter to hire and pay a fee
to consultants or search firms to assist in the process of identifying and evaluating candidates. No such consultants or search
firms have been used to date and, accordingly, no fees have been paid to consultants or search firms in the past fiscal year. The
Board will consider many factors when considering candidates for election to the Board of Directors, including that the proper
skills and experiences are represented on the Board of Directors and its committees and that the composition of the Board of Directors
and each such committee satisfies applicable legal requirements. Depending upon the current needs of the Board of Directors, certain
factors may be weighed more or less heavily by the Board.
Shareholders who wish to
suggest qualified candidates should write to the Board at 17950 Preston Road, Suite 960, Dallas, Texas 75252, specifying the name
of the candidates and stating in detail the qualifications of such persons for consideration by the Board. A written statement
from the candidate consenting to be named as a candidate and, if nominated and elected, to serve as a director should accompany
any such recommendation.
Shareholder Communications
The Board of Directors
encourages shareholders to send communications to the Board or to individual members of the Board. Such communications, whether
by letter, e-mail or telephone, should be directed to the Chairman of the Company who will forward them to the intended recipients.
However, unsolicited advertisements or invitations to conferences or promotional material, in the discretion of the Chairman or
his designee, may not be forwarded to the directors.
If a shareholder wishes
to communicate to the Board about a concern relating to the Company’s financial statements, accounting practices or internal
controls, the concern should be submitted in writing to the Board in care of the Chairman at the Company’s headquarters.
If the concern relates to the Company’s governance practices, business ethics or corporate conduct, the concern likewise
should be submitted in writing to the Chairman at the Company’s headquarters address. If the shareholder is unsure as to
which category his or her concern relates, he or she may communicate it to any one of the directors in care of the Company’s
Secretary. The Company’s “whistleblower” policy prohibits the Company or any of its employees from retaliating
or taking any adverse action against anyone for raising a concern. If a shareholder or employee nonetheless prefers to raise his
or her concern in a confidential or anonymous manner, the concern may be directed to the Chairman at the Company’s headquarters.
Shareholders who wish to
contact our Board members either individually or as a group may do so by writing to c/o Corporate Secretary, Petron Energy II,
Inc., 17950 Preston Road, Suite 960, Dallas, Texas 75252, or by telephone at (972) 272-8190 specifying whether the communication
is directed to the entire Board or to a particular director. Shareholder letters are screened by Company personnel to filter out
improper or irrelevant topics, such as solicitations, and to confirm that that such communications relate to matters that are within
the scope of responsibilities of the Board or a Committee.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
The following table sets
forth certain information concerning the number of shares of our Common Stock, owned beneficially as of November 7, 2014 by: (i)
each of our directors; (ii) each of our named executive officers; and (iii) each person or group known by us to beneficially own
more than 5% of our outstanding shares of common stock, and includes the 1,000 shares of
Series A Preferred Stock and Super Majority Voting Rights associated with such Series A Preferred Stock which the Company agreed
to issue to Mr. Smith pursuant to the Employment Agreement. Unless otherwise indicated, the shareholders listed
below possess sole voting and investment power with respect to the shares they own.
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Percentage |
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Preferred |
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of |
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Stock Voting |
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Common |
|
Common |
|
Rights |
|
Total Voting |
|
|
|
|
Stock |
|
Stock |
|
(Represented |
|
Shares |
|
Total |
Name and Address of |
|
Beneficially |
|
Beneficially |
|
in Voting |
|
Beneficially |
|
Voting |
Beneficial Owner (1) |
|
Owned |
|
Owned |
|
Shares) (2) |
|
Owned (3) |
|
Percentage (4) |
|
|
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Floyd L. Smith CEO, President, |
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Secretary, Treasurer and Director |
|
|
35,196,256 |
|
|
|
0.992 |
% |
|
|
3,692,728,215 |
|
|
|
3,727,924,471 |
|
|
|
51.4 |
86% |
David Knepper, Director |
|
|
34,985,341 |
|
|
|
0.986 |
% |
|
|
— |
|
|
|
34,985,341 |
|
|
|
0.4 |
83% |
Bob Currier, CFO |
|
|
— |
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— |
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— |
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— |
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— |
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All Officers and Directors as |
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a Group (3 persons) |
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|
70,181,597 |
|
|
|
1.978 |
% |
|
|
3,692,728,215 |
|
|
|
3,762,909,812 |
|
|
|
51.969 |
% |
(1) The
address for each officer and Director of the Company, unless otherwise stated, is the Company’s principal address, 17950
Preston Road, Suite 960, Dallas, Texas 75252.
(2) The
Series A Preferred Stock is not entitled to any dividends, liquidation preference, conversion rights, or redemption rights. The
Series A Preferred Stock does however have the right, voting as a separate class, at any annual or special meeting of shareholders
to vote in aggregate 51% of our outstanding voting shares on any and all shareholder matters (the “Super Majority Voting
Rights”). None of the
(3) Not
including any options, warrants or non-voting securities held by the named shareholders above.
(4) Based
on an aggregate of 7,240,643,558 outstanding voting shares, calculated based on 3,547,866,399 shares of common stock issued and
outstanding, 48,944 voting shares attributable to the Series B Preferred Stock, and 3,692,728,215 voting shares attributable to
the Series A Preferred Stock
Changes in Control
There are no present arrangements or pledges
of the Company’s securities which may result in a change in control of the Company.
Compliance with Section 16(a) of the Exchange
Act
Section 16(a) of the Securities
Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership
of common stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required
by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4
and amendments thereto furnished to us under Rule 16a-3(e) during the year ended December 31, 2013, Forms 5 and any amendments
thereto furnished to us with respect to the year ended December 31, 2013, and the representations made by the reporting persons
to us, we believe that during the year ended December 31, 2013, our executive officers and directors and all persons who own more
than ten percent of a registered class of our equity securities complied with all Section 16(a) filing requirements.
Code of Ethics
Our Board of Directors
has not adopted a code of ethics due to the fact that we presently only have two directors and we are in the development stage
of our operations. We anticipate that we will adopt a code of ethics when we increase either the number of our directors and officers
or the number of our employees.
Audit Committee
The Company does not have
a separately designated standing audit committee or an audit committee financial expert (as defined in Item 407 of Regulation S-K).
Pursuant to Section 3(a)(58)(B) of the Exchange Act, the entire Board of Directors acts as an audit committee for the purpose of
overseeing the accounting and financial reporting processes, and audits of the financial statements of the Company. The Commission
recently adopted new regulations relating to audit committee composition and functions, including disclosure requirements relating
to the presence of an “audit committee financial expert” serving on its audit committee. In connection with these new
requirements, the Company’s Board of Directors examined the Commission’s definition of “audit committee financial
expert” and concluded that the Company does not currently have a person that qualifies as such an expert. Presently, there
are only two (2) directors serving on the Company’s Board, and the Company is not in a position at this time to attract,
retain and compensate additional directors in order to acquire a director who qualifies as an “audit committee financial
expert”, but the Company intends to retain an additional director who will qualify as such an expert, as soon as reasonably
practicable. While neither of our current directors meets the qualifications of an “audit committee financial expert”,
each of the Company’s directors, by virtue of his past employment experience, has considerable knowledge of financial statements,
finance, and accounting, and has significant employment experience involving financial oversight responsibilities. Accordingly,
the Company believes that its current directors capably fulfill the duties and responsibilities of an audit committee in the absence
of such an expert.
Director Independence
For purposes of determining
director independence, we have applied the definitions set forth in NASDAQ Rule 5605(a)(2). The OTCQB on which shares of our Common
Stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Officer”
means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which,
in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director.
According to the NASDAQ
definition, David Knepper is an independent director because he is not also an executive officer of the Company.
Related Party Transactions
Other than previously reported
in our annual report for the period ended December 31, 2014 filed on April 10, 2014 and our quarterly report for the period ended
June 30, 2014, filed with the Commission on August 8, 2014, which are incorporated by reference herein, none of the directors or
executive officers of the Company, nor any person who owned of record or was known to own beneficially more than 5% of the Company’s
outstanding shares of its Common Stock, nor any associate or affiliate of such persons or companies, has any material interest,
direct or indirect, in any transaction that has occurred during the past fiscal year, or in any proposed transaction, which has
materially affected or will affect the Company.
With regard to any future
related party transaction, we plan to fully disclose any and all related party transactions in the following manner:
| · | disclosing such transactions in reports where required; |
| · | disclosing in any and all filings with the SEC, where required; |
| · | obtaining disinterested directors consent; and |
| · | obtaining shareholder consent where required. |
Review, Approval or Ratification of Transactions with Related
Persons
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 this information.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Summary Compensation Table
The following table sets
forth the compensation paid to our executive officers during the twelve month periods ended December 31, 2013 and 2012 (collectively,
the “Named Executive Officers”):
Name and principal position |
|
Year ended December 31 |
|
Salary
($) |
|
Bonus ($) |
|
Stock Awards ($) |
|
Option Awards
($) |
|
Non-Equity Incentive Plan Compensation ($) |
|
Nonqualified Deferred Compensation Earnings
($) |
|
All Other Compensation ($) |
|
Total ($) |
Floyd L. Smith (1)
CEO, President, Secretary, Treasurer and Director |
|
|
2013 |
|
|
$ |
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$200,000 |
|
|
|
|
2012 |
|
|
$ |
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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$200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
Bob Currier, CFO (2) |
|
|
2013 |
|
|
$ |
79,750 |
|
|
|
— |
|
|
|
— |
|
|
$ |
11,400 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
$91,150 |
|
|
|
|
2012 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
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— |
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— |
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— |
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The table
above does not include prerequisites and other personal benefits in amounts less than 10% of the total annual salary and other
compensation. There have been no changes in the Company’s compensation policy since the end of the Company’s last fiscal
year, December 31, 2013.
(1) Mr. Smith was appointed as the Chief Executive
Officer, Chief Financial Officer, President, Secretary, Treasurer and Director on August 10, 2011.
(2) Bob
Currier was appointed as the Company’s Chief Financial Officer on July 15, 2013.
Narrative Disclosure to Summary Compensation Table
Effective
August 31, 2011, the Company entered into an Executive Employment Agreement with Floyd L. Smith. Pursuant to the employment agreement,
Mr. Smith agreed to serve as President and Chief Executive Officer of the Company for a term of five years, renewable thereafter
for additional one year periods if not terminated by either party, and we agreed to provide Mr. Smith consideration of $200,000
per year; reimbursement for reasonable business expenses; the ability to earn a yearly bonus in the sole discretion of the Board
of Directors of the Company; co-investment rights, providing Mr. Smith the right to participate in the amount of up to 20% of any
acquisition, transaction or funding undertaken by the Company during the term of the employment agreement; stock options to purchase
12,000,000 shares of the Company’s common stock at an exercise price of $0.0039 per share, with cashless exercise rights
and a five year term, which vested immediately upon the parties’ entry into the employment agreement; and 1,000 shares of
Series A Preferred Stock which give Mr. Smith Super Majority Voting Rights. The employment
agreement includes a non-competition provision, prohibiting Mr. Smith from competing against the Company in Texas, Louisiana, Oklahoma
or New Mexico for a term of 12 months following the termination of the employment agreement. The employment agreement can be terminated
by the Company for cause (as defined in the agreement), without cause, or by Mr. Smith for good reason (as defined in the agreement)
or without good reason. If the employment agreement is terminated due to Mr. Smith’s death, disability, with cause by the
Company or without good reason by Mr. Smith, he is due the consideration earned by him up until the date of termination of the
agreement. If the employment agreement is terminated by the Company without cause or by Mr. Smith for good reason, Mr. Smith is
due the consideration earned by him up until the date of termination, plus the lesser of six months of salary due to Mr. Smith
under the employment agreement and the remaining amount of consideration due pursuant to the terms of the employment agreement
in a lump sum. Mr. Smith also agreed to assign the Company rights to any intellectual property and inventions which he creates
or conceives during the term of the employment agreement relating to the Company’s business pursuant to the employment agreement.
Other than as described
herein, we do not have any other written employment agreements and the Company has no plans to provide for group health insurance
to employees, the payment of retirement benefits, or benefits that will be paid primarily following retirement.
The Company has no plans
that provides for the payment of retirement benefits, or benefits that will be paid primarily following retirement.
Other than as described
herein, the Company has no agreement that provides for payment to executive officers at, following, or in connection with the resignation,
retirement or other termination, or a change in control of Company or a change in any executive officer's responsibilities following
a change in control.
Other than as described
herein, there are no other employment contracts, compensatory plans or arrangements, including payments to be received from the
Company with respect to any executive officer, that would result in payments to such person because of his or her resignation,
retirement or other termination of employment with the Company, or its subsidiaries, any change in control, or a change in the
person’s responsibilities following a change in control of the Company.
Outstanding Equity Awards at Fiscal Year-End
No Named Executive Officer
received any equity awards, or holds exercisable or exercisable options, as of the years ended December 31, 2013 and 2012.
|
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END |
OPTION AWARDS |
|
STOCK AWARDS |
|
|
|
Equity |
|
|
|
|
|
|
|
Incentive |
|
|
|
|
|
|
|
Plan |
|
|
|
|
|
|
|
Awards: |
|
|
|
|
|
Number of |
Number of |
Number of |
|
|
|
|
|
Securities |
Securities |
Securities |
|
|
|
|
|
Underlying |
Underlying |
Underlying |
|
|
|
|
|
Unexercised |
Unexercised |
Unexercised |
Option |
Option |
|
Number |
|
Options |
Options |
Unearned |
Exercise |
Expiration |
|
of Shares |
Name |
Exercisable (#) |
Unexercisable (#) |
Options (#) |
Price ($) |
Date |
|
Awarded (#) |
|
|
|
|
|
|
|
|
Floyd L. Smith |
2,400 |
- |
- |
$ 19.50 |
August 31, 2016 |
|
83,031 |
Bob Currier |
1,616 |
- |
- |
$ 6.25 |
June 1, 2016 |
|
- |
David Knepper |
- |
- |
- |
$ - |
n/a |
|
83,031 |
Compensation Discussion
and Analysis
Director Compensation
As of
August 2013, each member of the Board of Directors receives $5,000 per month in fees paid by the issuance of our common stock as
consideration for their services as members of the Board of Directors. The Board of Directors reserves the right in the future
change the consideration awarded to the members of the Board of Directors for their services to the Company, which awards, if granted
shall be in the sole determination of the Board of Directors.
Executive
Compensation Philosophy
Our Board
of Directors determines the compensation given to our executive officers in their sole determination. Our Board of Directors also
reserves the right to pay our executives a salary, and/or issue them shares of common stock issued in consideration for services
rendered and/or to award incentive bonuses which are linked to our performance, as well as to the individual executive officer’s
performance. This package may also include long-term stock based compensation to certain executives which is intended to align
the performance of our executives with our long-term business strategies. Additionally, the Board of Directors reserves the right
to grant stock options in the future (similar to those options granted to Mr. Smith in August 2011), if the Board in its sole determination
believes such grants would be in the best interests of the Company.
Incentive Bonus
The Board
of Directors may grant incentive bonuses to our executive officers in its sole discretion, if the Board of Directors believes such
bonuses are in the Company’s best interest, after analyzing our current business objectives and growth, if any, and the amount
of revenue we are able to generate each month, which revenue is a direct result of the actions and ability of such executives.
Long-term, Stock Based
Compensation
In order
to attract, retain and motivate executive talent necessary to support the Company’s long-term business strategy we may award
certain executives with long-term, stock-based compensation in the future, in the sole discretion of our Board of Directors, which
we do not currently have any immediate plans to award, other than the stock options previously granted to Mr. Smith, as described
above.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company’s independent
accountants for the fiscal year ended December 31, 2014 was KWCO, PC. As set forth below in Proposal
3, the Company has appointed KWCO, PC as the Company's independent accountants for the fiscal year ending December 31, 2015.
PROPOSAL 1.
ELECTION OF DIRECTORS
Nominees
Our current Bylaws provide
for a Board of Directors consisting of not less than one (1), nor more than ten (10), directors. The number of directors has been
set as two (2) who will be elected at the Annual Meeting. The elected directors will hold offices for a term of one (1) year or
until their successors are elected (which should occur at the next Annual Meeting) and qualified, unless they die, resign or are
removed from office prior to that time. In the absence of specific instructions, executed proxies which do not indicate for whom
votes should be cast will be voted “FOR” the election of the nominees named below as directors. Votes withheld will
be counted for the purpose of determining the presence or absence of a quorum for the transaction of business at the meeting but
have no other legal effect upon the election of directors under Nevada law. In the event that any nominee is unable or declines
to serve as a director (which is not anticipated), the proxyholders will vote for such substitute nominee as the Board of Directors
recommends or vote to allow the vacancy to remain open until filled by the Board of Directors, as the Board of Directors recommends.
Set forth below is information as to each nominee
for director.
DIRECTORS WHO ARE NOMINEES FOR ELECTION
Name of Nominee |
Age |
Position
(Proposed Term as Director)
|
Floyd Smith |
52 |
Director – 1 Year |
David Knepper |
62 |
Director – 1 Year |
Floyd Smith has
served as a Director and as the Chief Executive Officer, President, Secretary, and Treasurer of the Company since August 2011 and
as the President of its predecessor-in-interest, Petron Special Energy Corp., an oil and gas exploration company since October
1998. Since May 2004, Mr. Smith has served as President of Petron Properties, LLP, a real estate company. From January 2004 to
August 2008, Mr. Smith served as the President and owner of Murray Mortgage. From July 1992 to April 1998, Mr. Smith served as
a broker at Grand Energy, Inc., working in sales. From August 1984 to July 1992, Mr. Smith served as the Manager of a Wal-Mart
in Garland, Texas. Mr. Smith obtained his Bachelor’s Degree from Harding University, in Searcy, Arkansas in Business Administration
in 1984. Mr. Smith has deep knowledge of the Company’s history, strategies, technologies and culture. Having led Petron Special
as Chief Executive Officer and as a Director since 2007, Mr. Smith has been the driving force behind the strategies and operations
of Petron Special. His leadership of diverse business units and functions before becoming Chief Executive Officer gives Mr. Smith
insight into the marketing, finance, and operations aspects of the Company.
David Knepper has
served as a Director of the Company since August 2011. Mr. Knepper has held multiple positions
in the oil and gas industry over the course of the last 36 years. Mr. Knepper has served as President of Dogwood Operating Company,
Inc., since July 2011. From June 2009 to June 2011, Mr. Knepper served as a Manager and as reorganization officer of MSB Energy.
From May 2006 to May 2009, Mr. Knepper served as the Vice President of Engineering of Striker Petroleum. From June 2002 to May
2006, Mr. Knepper served as a private consultant to various oil and gas clients. From February 2000 to June 2002, Mr. Knepper served
as a Manager – Special Projects, at Tribo Companies. From October 1993 to February 2000, Mr. Knepper served as Executive
Director of Probe Resources. From August 1991 to October 1993, Mr. Knepper served as a Consultant to STZ Petroleum. From February
1990 to August 1991, Mr. Knepper served as Vice President of Acquisitions of DKM Resources. From August 1984 to December 1989,
Mr. Knepper served as Manager of Acquisitions of Transco Exploration. From September 1982 to July 1984, Mr. Knepper served as Vice
President of Engineering of L&A Energy. From May 1979 to September 1982, Mr. Knepper served as Acquisition Manager for Damson
Oil. From May 1975 to May 1979, Mr. Knepper served as Production Engineer, Reservoir Engineer and the chairman of multiple committees
at Amoco Production. Mr. Knepper obtained his Bachelor’s Degree from Texas A&M
University in 1975. Mr. Knepper is a member of the Society of Petroleum Engineers, the Texas Society of Professional Engineers
and the Student Engineers Council – Texas A&M University. Mr. Knepper has
had a long and successful career in the oil and gas industry. He has significant experience in the operations of public and private
companies. As evidenced by his broad network of resources developed over many years of involvement in the energy industry. Mr.
Knepper understands how to locate, evaluate and negotiate oil and gas properties. Mr. Knepper’s depth of experience and expansive
network as a board member makes him a significant asset to the Company.
VOTE REQUIRED
Directors are elected by
a plurality of the votes cast by the shares of Common Stock and Preferred Stock represented at the Annual Meeting, meaning
the nominees receiving the highest number of votes will be elected to the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS
VOTE “FOR”
THE NOMINEES
AS SET FORTH ABOVE.
PROPOSAL 2.
CONFIRMATION AND RATIFICATION OF APPOINTMENT
OF EXECUTIVE OFFICERS
Each of our officers is
elected by the Board of Directors to a term of one (1) year and serves until his or her successor is duly elected and qualified,
or until he or she dies, resigns or is removed from office.
Identification of Executive Officers of the Company
Our current executive officers are as follows:
Name |
Age |
Position |
Floyd L. Smith |
52 |
Chief Executive Officer, President, Secretary, Treasurer and Director |
Bob Currier |
63 |
Chief Financial Officer |
Background and Business Experience
The business experience
during the past five years of each of the persons presently listed above as an Officer of the Company is as follows:
Floyd Smith has
served as a Director and as the Chief Executive Officer, President, Secretary, and Treasurer of the Company since August 2011 and
as the President of its predecessor-in-interest, Petron Special Energy Corp., an oil and gas exploration company since October
1998. Since May 2004, Mr. Smith has served as President of Petron Properties, LLP, a real estate company. From January 2004 to
August 2008, Mr. Smith served as the President and owner of Murray Mortgage. From July 1992 to April 1998, Mr. Smith served as
a broker at Grand Energy, Inc., working in sales. From August 1984 to July 1992, Mr. Smith served as the Manager of a Wal-Mart
in Garland, Texas. Mr. Smith obtained his Bachelor’s Degree from Harding University, in Searcy, Arkansas in Business Administration
in 1984. Mr. Smith has deep knowledge of the Company’s history, strategies, technologies and culture. Having led Petron Special
as Chief Executive Officer and as a Director since 2007, Mr. Smith has been the driving force behind the strategies and operations
of Petron Special. His leadership of diverse business units and functions before becoming Chief Executive Officer gives Mr. Smith
insight into the marketing, finance, and operations aspects of the Company.
Bob Currier has
been our Chief Financial Officer since July 2013. Mr. Currier has a CPA certificate and has over 35 years of experience both in
the public accounting and corporate sectors. Since 1987, Mr. Currier has been involved with entrepreneurial ventures in industries
ranging from medical to real estate to oil and gas. With these companies, he has been responsible for developing financial reporting
systems, helping raise capital, implementing internal controls and budget preparation. His experience has included both public
and private entrepreneurial companies. He has also worked on SEC reporting engagements on a contract basis. Mr. Currier started
his professional career in 1971 with the audit staff at Ernst & Ernst in Kansas City. After six years, he transferred to the
Paris, France office where he spent six years working on the audit of the French national oil company (Elf Aquitaine) and U. S.
companies such as Eli Lilly and Harris Corporation. On the French national oil company audit, he was responsible for the exploration
and production subsidiaries, the consolidation and joint venture audits. From Paris, he moved to the Dallas office and transitioned
from oil and gas auditing to entrepreneurial services and was named the Vice Chairman of the entrepreneurial services group. Mr.
Currier’s experience with the entrepreneurial services group included working with business plans and financial projections
for various start-up companies.
Significant Employees
Other than the officers
and directors described above, we do not expect any other individuals to make a significant contribution to our business.
Family Relationships
There are no family relationships among our
officers, directors or persons nominated for such positions.
Involvement in Certain Legal Proceedings
During the past ten years
no director, executive officer, promoter or control person of the Company has been involved in the following:
| (1) | A petition under the Federal bankruptcy laws or any state insolvency law which was filed by or
against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or
any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or
business association of which he was an executive officer at or within two years before the time of such filing; |
| (2) | Such person was convicted in a criminal proceeding or is a named subject of a pending criminal
proceeding (excluding traffic violations and other minor offenses); |
| (3) | Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following
activities: |
| i. | Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity
pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission,
or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as
an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company,
or engaging in or continuing any conduct or practice in connection with such activity; |
| ii. | Engaging in any type of business practice; or |
| iii. | Engaging in any activity in connection with the purchase or sale of any security or commodity or
in connection with any violation of Federal or State securities laws or Federal commodities laws; |
| (4) | Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such
person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in
any such activity; |
| (5) | Such person was found by a court of competent jurisdiction in a civil action or by the Commission
to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not
been subsequently reversed, suspended, or vacated; |
| (6) | Such person was found by a court of competent jurisdiction in a civil action or by the Commodity
Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated; |
| (7) | Such person was the subject of, or a party to, any Federal or State judicial or administrative
order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: |
| i. | Any Federal or State securities or commodities law or regulation; or |
| ii. | Any law or regulation respecting financial institutions or insurance companies including, but not
limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent
cease-and-desist order, or removal or prohibition order; or |
| iii. | Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity;
or |
| (8) | Such person was the subject of, or a party to, any sanction or order, not subsequently reversed,
suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))),
any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange,
association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
VOTE REQUIRED
The confirmation and ratification
of the appointment of the Company’s executive officers requires the approval of a majority of the outstanding shares of Common
Stock and Preferred Stock entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS
VOTE “FOR”
THE RATIFICATION
OF THE EXECUTIVE OFFICERS OF THE COMPANY AS SET FORTH ABOVE.
PROPOSAL 3.
RATIFICATION OF APPOINTMENT OF AUDITOR
The Company has appointed
KWCO, PC (“KWCO”) as the independent auditor of the Company for the year ending December 31, 2015. KWCO has served
as the Company’s independent auditor since February 4, 2012. KWCO provides services to the Company including examination
of the Company’s annual and quarterly financial statements.
The following table represents
the aggregate fees billed for professional audit services rendered by the independent auditor for our audit of the annual financial
statements for the years ended December 31, 2013 and 2012. Audit fees and other fees of auditors are listed as follows:
|
|
Year Ended December 31, |
|
|
2013 |
|
2012 |
|
|
|
|
|
Audit fees |
|
$ |
111,823 |
|
|
$ |
116,812 |
|
Audit-related fees |
|
|
— |
|
|
|
— |
|
Tax fees |
|
|
— |
|
|
|
— |
|
All other fees |
|
|
— |
|
|
|
— |
|
Total |
|
$ |
111,823 |
|
|
$ |
116,812 |
|
Audit
Fees
During the fiscal year
ended December 31, 2013, we incurred approximately $111,823 in
fees to our principal independent accountants for professional services rendered in connection with the audit and review of our
financial statements for fiscal year ended December 31, 2013.
During the fiscal year
ended December 31, 2012, we incurred approximately $116,812 in
fees to our principal independent accountants for professional services rendered in connection with the audit and review of our
financial statements for fiscal year ended December 31, 2012.
Audit-Related Fees
There were no fees
billed during the fiscal years ended December 31, 2013 and 2012 for assurance and related services by our principal independent
accountants that are reasonably related to the performance of the audit or review of our financial statements (and are not reported
under Item 9(e)(1) of Schedule 14A).
Tax Fees
There were no fees billed
during the fiscal years ended December 31, 2013 and 2012 for professional services rendered by our principal accountant related
to tax compliance, tax advice and tax planning.
All Other Fees
There were no fees
billed during the fiscal years ended December 31, 2013 and 2012 for products and services provided by our principal independent
accountants (other than the services reported in Items 9(e)(1) through 9(e)(3) of Schedule 14A).
|
Work Performance by Others |
The percentage of hours
expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year
that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less
than 50 percent.
As of December 31, 2013,
the Company did not have a formal documented pre-approval policy for the fees of the principal accountant. The Company does not
have an audit committee. The percentage of hours expended on the principal accountant's engagement to audit our financial statements
for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time,
permanent employees was 0%.
VOTE REQUIRED
The ratification of KWCO
as the Company’s independent auditors for the year ended December 31, 2015 requires the approval of a majority of the outstanding
shares of Common Stock and Preferred Stock entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS VOTING
“FOR” THE RATIFICATION OF THE INDEPENDENT AUDITORS FOR THE YEAR ENDED DECEMBER 31, 2015 AS SET FORTH ABOVE.
INTEREST OF CERTAIN PERSONS IN MATTERS TO
BE ACTED UPON
No director or officer
of the Company, proposed nominee for election as a director of the Company or associate or affiliate of any of the foregoing persons,
has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted
upon at the Annual Meeting other than the election of directors, except as otherwise disclosed herein.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
FOR THE NEXT ANNUAL MEETING
Shareholders are hereby
notified that if they wish for a proposal to be included in our Proxy Statement and form of proxy relating to the 2015 annual meeting
of shareholders, they must deliver a written copy of their proposal not less than 50 days nor more than 90 days prior to the date
of the next annual meeting. If the date of next year’s annual meeting is changed by more than 30 days from the date
of this year’s meeting, then the deadline is a reasonable time before we begin to print and mail proxy materials. Proposals
must comply with the proxy rules relating to shareholder proposals, in particular Rule 14a-8 under the Securities Exchange
Act of 1934, in order to be included in our proxy materials.
Mailing Instructions
Proposals should be delivered
to Petron Energy II, Inc., 17950 Preston Road, Suite 960, Dallas, Texas 75252, Attention: Floyd Smith, Corporate Secretary. To
avoid controversy and establish timely receipt by the Company, it is suggested that shareholders send their proposals by certified
mail, return receipt requested.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to “incorporate
by reference” information into this Proxy Statement. This means that the Company can disclose important information to you
by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to
be a part of this Proxy Statement, except for any information that is superseded by information that is included directly in this
document or in any other subsequently filed document that also is incorporated by reference herein.
This Proxy Statement incorporates
by reference our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as amended, which was filed previously
with the SEC on April 10, 2014 and contains important information about the Company and its financial condition, including information
contained in our 2013 Annual Report under the captions “Financial Statements and Supplementary Data,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and “Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.” A copy of the 2013 Annual Report is attached hereto as Appendix B.
Additionally, this Proxy
Statement incorporates by reference our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2014, which was
filed previously with the SEC on November 7, 2014 and contains important information about the Company and its financial condition,
including information contained in our Quarterly Report under the captions “Financial Statements,” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” A copy of the Quarterly Report is attached hereto
as Appendix C.
The Company will provide,
without charge, to each person to whom this Proxy Statement is delivered, upon written or oral request of such person and by first
class mail or other equally prompt means within one business day of receipt of such request, a copy of any and all information
that has been incorporated by reference in this Proxy Statement (not including exhibits). You may obtain a copy of these documents
and any amendments thereto by writing to Petron Energy II, Inc., 17950 Preston Road, Suite 960, Dallas, Texas 75252, Attention:
Floyd Smith, Corporate Secretary. These documents are also included in our SEC filings, which you can access electronically
at the SEC’s web site, www.sec.gov.
WHERE YOU CAN GET ADDITIONAL INFORMATION
We file annual, quarterly
and current reports, proxy statements and other information with the SEC. You may read and copy our reports or other filings
made with the SEC at the SEC’s Public Reference Room, located at 100 F Street, N.W., Washington, DC 20549. You can
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also access
these reports and other filings electronically on the SEC’s web site, www.sec.gov.
OTHER BUSINESS
The Company knows of no
other matters to be submitted at this Annual Meeting. If any other matters properly come before the meeting or any adjournment
or postponement thereof, it is the intention of the persons named in the enclosed form of proxy to vote the shares they represent
as the Board of Directors may recommend.
APPENDIX
Appendix A – Proposed Form of Proxy Card
Appendix B – Copy of Annual Report on Form
10-K for the Year Ended December 31, 2013
Appendix C – Copy of Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 2014
By order of the Board of Directors,
Date: November 12, 2014 |
/s/ Floyd Smith |
|
Floyd Smith |
|
Chairman of the Board of Directors |
|
/s/ David Knepper |
|
David Knepper |
|
Director |
APPENDIX
A: Petron Energy II, Inc. Proxy Card
Petron
Energy II, Inc. Proxy Card
Annual Meeting of Shareholders
December
19, 2014
The undersigned hereby appoints the Board of
Directors, as Proxies, each with the power to appoint his or her substitute, and hereby authorizes them to represent and to vote
ALL of the shares of the Common Stock and/or Preferred Stock in Petron Energy II, Inc. (the “Company”), standing in
the name of the undersigned at the Annual Meeting of Shareholders to be held on December 19, 2014, and upon such other matters
as may properly come before the meeting. Any prior proxy or voting instructions are hereby revoked.
The Directors recommend a vote FOR
all Proposals.
1. Election
of Directors to hold office until the next Annual Meeting of the Company or until his or her respective successor is duly qualified
and elected.
NOMINEES:
a. Floyd Smith
FOR
[_] AGAINST [_]
b. David Knepper
FOR
[_] AGAINST [_]
2. Ratification
of the appointment of the executive officers of the Company to hold office until the next Annual Meeting of the Company or until
his or her respective successor is duly qualified and elected.
FOR
[_] AGAINST [_] ABSTAIN [_]
3. Ratification
of the appointment of KWCO PC as the registered independent public accountant of the Company for the year ending December 31, 2015.
FOR
[_] AGAINST [_] ABSTAIN [_]
PROXY/VOTING INSTRUCTIONS
Annual Meeting of Shareholders
December 19, 2014
The shares represented
by this proxy will be voted as directed by the Shareholder. If no specification is made, the shares will be voted FOR
ALL proposals. When signing as attorney, executor, administrator, trustee or guardian, give full title as such, and when stock
has been issued in the names of two or more persons, all should sign unless evidence of authority to sign on behalf of the others
is attached.
Dated: |
|
|
|
|
Number of Shares Represented by this Proxy: |
|
|
|
|
|
|
Signatures |
|
Signatures |
|
|
|
|
|
|
Name of Shareholder |
|
Name of Shareholder |
|
|
|
PLEASE RETURN ALL PROXIES TO: |
|
Petron Energy II, Inc.,
17950 Preston Road, Suite 960
Dallas, Texas 75252
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APPENDIX
B: Petron Energy II, Inc. 2013 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
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PETRON ENERGY II, INC. |
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(Name of registrant in its charter) |
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Nevada |
333-160517 |
26- 3121630 |
(State or other jurisdiction |
(Commission File Number) |
(IRS Employer |
of Incorporation) |
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Identification Number) |
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17950 Preston Road, Suite 960
Dallas, Texas 75252
(Address of principal executive offices)
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(972) 272-8190 |
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(Registrant’s Telephone Number) |
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B)
OF THE EXCHANGE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G)
OF THE EXCHANGE ACT:
None
Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☐
No☑.
Check whether the issuer is not required to
file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes☐
No☑
Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter
periods 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☐
Check if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will 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 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☑.
The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant was $1,526,991, based upon the restated price ($0.0275) at which
the common stock was sold as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal
quarter, multiplied by the approximate number of shares of common stock held by persons other than executive officers, directors
and five percent stockholders of the registrant without conceding that any such person is an “affiliate” of the registrant
for purposes of the federal securities laws.
At April 7, 2014, there were 1,859,948,597 shares of the registrant's
$0.0001 par value common stock issued and outstanding.
Documents Incorporated By Reference: None
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this
“Amendment No. 1”) amends Petron Energy II, Inc.’s (the “Company”) Annual Report on Form 10-K for
the fiscal year ended December 31, 2013 (“Original Filing”) originally filed on April 10, 2014 with the U.S. Securities
and Exchange Commission (the “Commission”). We are filing this Amendment No. 1 for the purpose of revising the Company’s
consolidated financial statements and related notes to correct non-material scrivener’s errors.
Except for the changes effected by this
Amendment No. 1 on Form 10-K/A, no modification or update is otherwise made to any other disclosures or exhibits to the
Original Filing.
PLEASE NOTE THAT THE INFORMATION CONTAINED
IN THIS FORM 10-K/A DOES NOT REFLECT EVENTS OCCURRING AFTER THE DATE OF THE ORIGINAL FILING OF THE COMPANY’S ANNUAL
REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013 AND WE HAVE NOT UPDATED OR AMENDED ANY OTHER DISCLOSURE TO REFLECT SUBSEQUENT
EVENTS SINCE THE ORIGINAL FILING DATE.
PETRON ENERGY II, INC.
TABLE OF CONTENTS
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Page No. |
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PART I |
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Item 1. |
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Business |
1 |
Item 1A. |
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Risk Factors |
7 |
Item 1B. |
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Unresolved Staff Comments |
18 |
Item 2. |
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Properties |
19 |
Item 3. |
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Legal Proceedings |
19 |
Item 4. |
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Mine Safety Disclosures |
19 |
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PART II |
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Item 5. |
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
20 |
Item 6. |
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Selected Financial Data |
23 |
Item 7. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 |
Item 7A. |
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Quantitative and Qualitative Disclosures About Market Risk |
29 |
Item 8. |
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Financial Statements and Supplementary Data |
F-1 |
Item 9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
30 |
Item 9A. |
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Controls and Procedures |
30 |
Item 9B. |
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Other Information |
32 |
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Part III |
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Item 10. |
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Directors, Executive Officers and Corporate Governance |
33 |
Item 11. |
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Executive Compensation |
38 |
Item 12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
41 |
Item 13. |
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Certain Relationships and Related Transactions, and Director Independence |
43 |
Item 14. |
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Principal Accounting Fees and Services |
45 |
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Part IV |
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Item 15. |
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Exhibits and Financial Statement Schedules |
46 |
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Signatures |
47 |
FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties, principally in the sections
entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations. “All statements other than statements of historical fact contained in this Annual Report
on Form 10-K, including statements regarding future events, our future financial performance, business strategy and plans and objectives
of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by
terminology including “anticipates,” “believes,” “can,” “continue,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” or “should,” or the negative of these terms or other comparable terminology. We do not make
forward-looking statements unless we believe we have a reasonable basis for doing so. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Risk Factors”
or elsewhere in this Annual Report on Form 10-K, which may cause our or our industry’s actual results, levels of activity,
performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a very competitive
and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors,
nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may
cause our actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements
included in this document are based on information available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements, except as expressly required by law.
You
should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this Annual Report
on Form 10-K. Before you invest in our securities, you should be aware that the occurrence of the events described in the section
entitled “Risk Factors” and elsewhere in this Current Report on Form 8-K could negatively affect our business, operating
results, financial condition and stock price. Except as required by law, we undertake no obligation to update or revise publicly
any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform our statements to actual results
or changed expectations.
Use of Term
Except as otherwise
indicated by the context, references in this report to “Company”, “PEII”, “we”, “us”
and “our” are references to Petron Energy II, Inc. All references to “USD” or United States
Dollars refer to the legal currency of the United States of America.
PART I
Corporate History
The
Company was incorporated in Nevada in August 2008 as a development stage company which planned to operate as a restaurant holding
company, specializing in the development and expansion of proven independent restaurant concepts into multi-unit locations through
corporate-owned stores, licensing, and franchising opportunities, funding permitting.
In
August 2011, the Company entered into an asset purchase agreement with Petron Special (“Petron Asset Purchase Agreement”).
Under the Petron Asset Purchase Agreement, the Company agreed to purchase substantially all of Petron Special’s assets (which
consisted of various oil and gas interests, including Tulsa leases, two pipelines, and equipment).
In
August 2011, before the Petron Asset Purchase Agreement was executed, Petron Special entered into an asset acquisition agreement
with ONE Energy Capital Corp., ONE Energy International Corp. and their affiliated parties (the “One Energy Asset Acquisition
Agreement”) to acquire certain leases in Knox County, Texas.
In
September 2011, the Company entered into two oil and gas leases and obtained rights to conduct oil and gas development and production
activities on an aggregate of 320 acres (160 acres pursuant to each lease) located in Wagoner County, Oklahoma (the “Wagoner
County Leases”). The terms of these leases vary but in all cases they remain in effect after the initial term as long as
there is oil or gas production.
On
September 9, 2011 the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation to change the Company’s
name to Petron Energy II, Inc. and increase the Company’s authorized shares of stock to 1,000,000,000 shares of common stock,
$0.001 par value per share and 10,000,000 shares of preferred stock, $0.001 par value per share, effective as of October 15, 2011.
In
February 2012, the Company entered into the “Plan of Reorganization and Asset Purchase Agreement” with ONE Energy
International Corp, (“OEI”), and its Affiliated Companies, which was intended to represent the final definitive agreement
contemplated by the One Energy Asset Acquisition Agreement. Pursuant to the terms of the
Plan of Reorganization and Asset Purchase Agreement, the Company assumed Petron Special’s
rights and obligations under the One Energy Asset Acquisition Agreement.
In
connection with the closing of the Petron Asset Purchase Agreement and the Plan of Reorganization and Asset Purchase Agreement,
we changed our business focus to oil and gas development and production and related operations and ceased undertaking any restaurant
related operations.
On December 5, 2013, the
company filed a Certificate of Amendment to the Company’s Articles of Incorporation to increase the number of authorized
shares of the Company’s common stock from 1,000,000,000 to 2,989,999,999. The Company filed a Certificate of Amendment to
the Company’s Articles of Incorporation on February 4, 2014 to increase the number of authorized shares of the Company’s
common stock from 2,989,999,999 to 6,010,000,000.
On February 27, 2014 the
Company filed a Certificate of Amendment to increase the total number of authorized stock of the Corporation from 6,010,000,000
to 15,010,000,000 shares consisting of: (i) 15,000,000,000 shares of common stock, par value $0.001 per share; and (ii) 10,000,000
shares of preferred stock par value $0.001 per share.
On March 27, 2014 the Company
filed a Certificate of Amendment to change the par value of its common stock from $0.001 per share to $0.0001 per share.
Business
Operations
The Company is engaged
primarily in the acquisition, development, production, and sale of oil, gas and gas liquids in the United States. As of December
31, 2013, the Company is operating in the states of Texas and Oklahoma. In addition, the Company operates two gas gathering systems
located in the Tulsa, Wagoner, Rogers and Mayes counties of Oklahoma. The pipelines consist 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 other oil companies.
We plan to concentrate
our development efforts in Texas and Oklahoma. The Petron Asset Purchase Agreement relates to our acquisition from Petron Special
of approximately 1,500 leased acres (20 leases), on which the individual leases will need to be reworked in an effort to attempt
to re-establish commercial production. We estimate the costs of reworking these leases at approximately $400,000 per lease and
estimate that it will take approximately two months to rework each lease, funding permitting. We also assumed the One Energy Asset
Acquisition Agreement, described above, located in Texas, including an additional 2,800 leased acres.
Our operations are focused
in the United States (Texas and Oklahoma) because we believe focusing our operations in the United States offers us the following
advantages:
• Low risk opportunities;
• Growth opportunities;
• Upside profit potential in connection with oil
and unconventional gas reserves; and
• Availability of technological improvements which
may increase oil and gas reserves.
Our target development
market is the Woodford Shale in Oklahoma and the Tannehill Sand in North Texas. We believe both of these formations offer a high
success rate with respect to developing productive leases and long-term cash flow. The properties and rights we acquired through
the Petron Asset Purchase Agreement and the Plan of Reorganization and Asset Purchase Agreement as well as the Wagoner County leases
are all located in the areas described in the Woodford Shale in Oklahoma and the Tannehill Sand in North Texas.
The Woodford Shale, also
known as the Devonian Woodford Shale is located in south and north eastern Oklahoma. The Tannehill Sand field is located in Knox
County in north central Texas.
The production life of
a lease in each area noted above typically is 10 - 25 years. The Woodford Shale is primarily a natural gas trend; however some
wells provide oil production along with gas production. In addition to the Woodford Shale, there are 4 separate pay zones (the
Tyner, Misner, Burgen and Dutcher) which are oil pay zones, while the Tannehill pay zone in Knox County, Texas is primarily an
oil pay zone.
The Company plans to engage
primarily in the development and production of oil and gas leases in Oklahoma, East and North Texas and Western Louisiana over
the next two years through one or more of the following activities: (i) acquisition of oil and gas leases (similar to the Wagoner
County Leases); (ii) contract drilling on leases owned by the Company through investment partnerships and banking relationships
sponsored by the Company; (iii) acquisition or oil and gas producing properties; and (iv) acquisition of oil and gas companies
having properties (producing and non-producing). The Company will undertake workover projects based on engineering data on a lease
by lease basis. At this time, we estimate the cost per lease to complete a workover project to be approximately $400,000.
We plan to continue to
operate the natural gas pipelines which we acquired as part of the Petron Asset Purchase Agreement and to undertake workover activities
on our oil and natural gas leases. Our currently planned workover activities include “water/CO2 gas flooding”
and “hydraulic fracking,” as elaborated below.
Water/CO2 gas flooding
In primary natural resource
recovery, the initial approach to produce oil is generally via natural reservoir pressure or simple mechanical pumps used to raise
oil to the surface. Most shallow oil wells today have to be placed on a pump jack. Primary oil recovery can produce roughly 15-20%
of the reservoir oil before the reservoir begins to experience pressure depletion problems. Secondary oil recovery methods are
essential when we seek to reestablish commercial production from a reservoir. CO2-EOR secondary completion is our chosen
procedure because it can be both effective and economical.
Recovering remaining oil
from proven reservoirs can be achieved by injecting salt water and CO2 gas. The CO2-EOR method allows us
to maintain reservoir pressure and push oil out of the reservoir rock to be collected. Prolonged oil production can be achieved
effectively once primary production has tapered off by implementing an effective secondary recovery plan.
An efficiently designed
CO2-EOR secondary completion plan can be a reliable and cost effective flooding project. The CO2-EOR method
uses centrally located injection wells to re-pressurize the reservoir effectively creating a drive to move the in place oil.
These injection wells use
a combination of saltwater and CO2 gas to force the remaining oil reserves toward the extremities of the
oil field. By forcing Saltwater and CO2 gas into the crevices of an oil reservoir, oil can be ‘moved’ toward
the producing wells and collected. Such techniques can raise production on these outer wells to near initial production numbers
as well as allow for a total recovery of up to 15-20% of the remaining reserves.
Oil reservoirs suitable
for CO2-EOR secondary recovery have gone on to produce for several years after implementation of the plan.
Hydraulic fracturing ("fracking")
When sandstone rocks contain
oil or gas in commercial quantities, recovery can be vastly improved by a process called fracturing (“fracking”) which
is used to increase permeability to its optimum level. Basically, to fracture a formation, a fracturing service company pumps a
specifically blended fluid down the well and into the formation under great pressure. Pumping continues until the formation literally
cracks open. Meanwhile, a special type of frack sand is mixed into the fracturing fluid. These materials are called proppants.
The proppant enters the fractures in the formation and when pumping is stopped and the pressure is allowed to dissipate, the
proppant remains in the fractures. Since the fractures try to close back together after the pressure on the well is released, the
proppant is needed to hold or prop the fractures open. These propped-open fractures provide passages for oil or gas to flow into
the well.
In addition to new technology
and fracking mixtures, a myriad of other technologies can be applied to produce increased production results. We plan to constantly
track different well completion strategies and production results to generate an approach that will yield:
• Higher initial flow rates;
• Slower decline rates;
and
• Improved recoverability.
Projects
The chart below shows the
location of the Company’s leases in the three counties in which we operate. The leases are in Tulsa County and Wagoner County
in Oklahoma, and Knox County in Texas. All of these areas are described in more detail below.
Tulsa County Leases
The Company’s interest
in Tulsa County consists of three leases that encompass 280 acres. The Company has a 75% working interest and a 60.0% net revenue
interest. The production from these leases consists of 100% oil.
Wagoner County Leases
The Wagoner County leases
consist of 820 acres with 9 individual leases. The Company has a 75% working interest in the leases and a 60.9% net revenue interest.
The production from these leases consists of 55% oil. These leases have recompletion opportunities for water and natural gas injection.
Knox County Leases
The Company has a 100%
working interest in the Knox County leases and an 81.25% net revenue interest. The leases include 2,315 acres (as depicted below)
and an additional option on 500 acres. There are 8 leases in this group. The production from these leases consists of 100% oil.
There are recompletion opportunities for water and natural gas injection.
Dependence on one or a
few major customers
The
nature of the oil and natural gas industry is not based on individual customers. Crude oil and natural gas products are sold to
local and international brokers as well as to refineries.
Employees
The
Company currently has four (4) employees, including Floyd L. Smith, its Chief Executive Officer, President and Director and Bob
Currier, Chief Financial Officer.
Intellectual Property
The
Company does not currently hold any intellectual property, patent rights, trademarks or copyrights. The Company does however maintain
a website at www.petronenergy.net. The information on, or that may be accessed through, our website is not incorporated by reference
into this filing and should not be considered a part of this filing.
WHERE YOU CAN GET ADDITIONAL INFORMATION
We file annual, quarterly
and current reports, proxy statements and other information with the SEC. You may read and copy our reports or other filings made
with the SEC at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, DC 20549. You can obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also access these reports and other
filings electronically on the SEC’s web site, www.sec.gov.
ITEM 1A. RISK FACTORS.
Our
securities are highly speculative and should only be purchased by persons who can afford to lose their entire investment in our
Company. If any of the following risks actually occur, our business and financial results could be negatively affected to a significant
extent. The Company's business is subject to many risk factors, including the following:
General
Risks Related To The Company
There is substantial doubt as to whether
we will continue operations. If we discontinue operations, you could lose your investment.
The following factors raise
substantial doubt regarding the ability of our business to continue as a going concern: (i) the losses we have incurred since our
inception; (ii) our low level of operating revenues since inception, and (iii) our dependence on the sale of equity securities
to continue in operation. We have signed an Investment Agreement for up to $10.0 million through sales of our common stock.
We anticipate that we will incur increased expenses without realizing enough revenues from operations in the near future. We therefore
expect to incur significant losses in the near future. The financial statements do not include any adjustments that might result
from the uncertainty about our ability to continue our business. If we are unable to obtain adequate additional financing from
outside sources and eventually produce enough revenues, we may be forced to curtail or cease our operations. If this happens, you
could lose all or part of your investment.
Moving
forward we plan to rely on financing and additional funds from current investors of the Company and third party investors in order
to support our operations and pay our expenses. Additional funding will likely come from debt and/or equity financing from the
sale of our common stock. If we are successful in completing an equity financing, existing shareholders will experience dilution
of their interest in our Company. There are no assurances that we will be able to achieve further sales of our common stock or
any other form of additional financing. If we are unable to achieve the financing necessary to continue our plan of operations,
then we will not be able to continue our business operations. If we are unable to raise the funds we require, your investment could
become worthless.
Shareholders
may be diluted significantly through our efforts to obtain financing, satisfy obligations, and/or complete acquisitions through
the issuance of additional shares of our common stock or other securities.
Wherever
possible, our Board of Directors will attempt to use non-cash consideration to satisfy the Company’s obligations. In many
instances, we believe that the non-cash consideration will consist of restricted shares of our common stock or other securities
(including the shares of convertible preferred stock that have been issued to shareholders of ONE Energy Capital Corp., ONE Energy
International Corp. and their affiliated parties in connection with the Asset Acquisition Agreement described above).
We have signed an Investment
Agreement for up to $10.0 million through sales of our common stock. The Investment Agreement grants the investor the ability to
buy a substantial number of shares of common stock in a series of private placement transactions at a price that is at a discount
to the market price. If common stock is issued in return for additional funds, the price per share could be lower than that
paid by our current stockholders. We anticipate continuing to rely on equity sales of our common stock in order to fund
our business operations. If we issue additional stock, investors' percentage interests in us will be diluted. The
result of this could reduce the value of current investors' stock.
Additionally,
moving forward, we may attempt to conduct acquisitions and/or mergers of other entities or assets using our common stock or other
securities as payment for such transactions. Our Board of Directors has authority, without action or vote of the shareholders,
to issue all or part of the authorized but unissued shares of common stock and preferred stock with various preferences and other
rights. If such transactions occur, this may result in substantial dilution of the ownership interests of existing shareholders,
and dilute the book value of the Company’s common stock.
We
are party to a Plan of Reorganization and Asset Purchase Agreement pursuant to which we paid significant consideration for the
acquisition of certain oil and gas assets, which consideration caused substantial dilution to our existing shareholders and may
cause dilution in the future.
Pursuant
to the Plan of Reorganization and Asset Purchase Agreement, the Company agreed to acquire the assets of ONE Energy Capital Corp.,
ONE Energy International Corp. and their affiliated parties in aggregate consideration for 5,910,00 shares of the Company’s
Series B Convertible Preferred stock. Under the Plan of Reorganization and Asset Purchase Agreement, these shares of Series B Convertible
preferred stock convert into common shares of the Company having a total value of $5,910,000. In accordance with the Amended and
Restated Certificate of Designation of Series B Convertible Preferred Stock, the conversion price was $0.188 per common share or,
if conversion could not take place due to the Ownership Limitation as described below, the conversion price is the average trading
price of the Company’s common stock on the five days prior to the date of conversion; have a vote of 1/100th of
a common share; and cannot be converted by the holders thereof if such conversion would result in the acquisition by such holder
of more than 9.99% of the Company’s outstanding stock (the “Ownership Limitation”).
5,199,562
shares of the Series B Convertible stock have been converted into an aggregate of 253,768,320 shares of the common stock of the
Company. At March 14, 2014, we had 710,438 shares of Series B Convertible Preferred Stock issued and outstanding which had not
converted because of the Ownership Limitation. The shareholders receiving the convertible preferred stock described above also
received warrants to purchase an aggregate of 1,000,000 shares of the Company’s common stock with an exercise price of $0.08
per share.
Our
Chief Executive Officer, Floyd L. Smith, holds Series A Preferred Stock which will provide him continuing voting control over the
Company and, as a result, he will exercise significant control over corporate decisions.
Floyd
L. Smith, our President and Director, has beneficial ownership of the entire class of the Company’s Series A Preferred Stock,
which voting together as a class, have the right to vote 51% of the Company’s voting shares on any and all shareholder matters.
Additionally, the Company shall not adopt any amendments to the Company's Bylaws, Articles of Incorporation, as amended, make any
changes to the Certificate of Designations establishing the Series A Preferred Stock, or effect any reclassification of the Series
A Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of Series A Preferred Stock. However,
the Company may, by any means authorized by law and without any vote of the holders of shares of Series A Preferred Stock, make
technical, corrective, administrative or similar changes to such Certificate of Designations that do not, individually or in the
aggregate, adversely affect the rights or preferences of the holders of shares of Series A Preferred Stock.
Other
than the Super Majority Voting Rights, the Series A Preferred Stock does not have any other dividend, liquidation, conversion,
or redemption rights, whatsoever.
As
a result of the above, Mr. Smith exercises control in determining the outcome of corporate transactions or other matters, including
the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent
or cause a change in control. Any investors who purchase shares will be minority shareholders and as such will have no say in the
direction of the Company and the election of Directors. Investors in the Company should keep in mind that even if you own shares
of the Company's common stock and wish to vote them at annual or special shareholder meetings, your shares will have no effect
on the outcome of corporate decisions or the election of Directors. Furthermore, investors should be aware that Mr. Smith may choose
to elect new Directors to the Board of Directors of the Company and/or take the Company in a new business direction altogether,
and, as a result, current shareholders of the Company will have little to no say in such matters.
Shareholders
who hold unregistered shares of our common stock are subject to resale restrictions pursuant to Rule 144, due to our previous status
as a “Shell Company.”
Pursuant
to Rule 144 of the Securities Act of 1933, as amended (“Rule 144”), a “shell company” is defined as a company
that has no or nominal operations; and, either no or nominal assets; assets consisting solely of cash and cash equivalents; or
assets consisting of any amount of cash and cash equivalents and nominal other assets. As such, prior to the completion of the
Asset Purchase Agreement and our related Form 8-K filing, we had been considered a “ shell company” pursuant to Rule
144, and as such, sales of our securities pursuant to Rule 144 were not able to be made until: 1) we had ceased to be a “
shell company,” which occurred after the closing the Asset Purchase Agreement); 2) we are subject to Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, and have filed all of our required periodic reports for at least the previous
one year period prior to any sale pursuant to Rule 144; and a period of at least twelve months has elapsed from that date. “Form
10 information” has been filed with the Commission reflecting the Company’s status as a “non-shell company,”
incorporated by reference as filed with the Commission on Form 8-K on January 6, 2012.
Pursuant
to Rule 144, a one year waiting period from the time of filing was required to “cure” the Company’s previous
“shell” status. Our “shell” status was thus cured on January 6, 2013 and shareholders of the Company who
hold and purchase in the future any restricted securities of the Company will have Rule 144 available if all other requirements
of the rule are met.
We
rely upon key personnel and if they leave us, our business plan and results of operations could be adversely affected.
We
rely heavily on our Chief Executive Officer, President, Treasurer and Director, Floyd L. Smith (“Mr. Smith”). His experience
and input creates the foundation for our business and he is responsible for the directorship and control over our operations. We
do currently have an employment agreement with Mr. Smith (as described above), and we put into place a "key man" insurance
policy on Mr. Smith in the amount of $3,000,000. Moving forward, should we lose the services of Mr. Smith, for any reason, we will
incur costs associated with recruiting a replacement and delays in our operations. If we are unable to replace Mr. Smith with another
suitably trained individual or individuals, we may be forced to scale back or curtail our business plan. As a result of this, your
investment in us could become devalued or worthless and we may be forced to abandon or change our business plan.
We
may not be able to successfully manage our growth, which could lead to our inability to implement our business plan.
Our
growth is expected to place a significant strain on our managerial, operational and financial resources, especially considering
that we currently only have three Directors and two executive officers. Further, as we enter into additional contracts, we will
be required to manage multiple relationships with various consultants, businesses and other third parties. These requirements will
be exacerbated in the event of our further growth. There can be no assurance that our systems, procedures and/or controls will
be adequate to support our operations or that our management will be able to achieve the rapid execution necessary to successfully
implement our business plan. If we are unable to manage our growth effectively, our business, results of operations and financial
condition will be adversely affected, which could lead to us being forced to abandon or curtail our business plan and operations.
We
have a limited operating history in our current business focus of oil and gas production and, because of this, it may be difficult
to evaluate our chances for success.
We
were formed in August 2008 as a company specializing in restaurant consulting and investment activities. We only generated limited
revenues in connection with such operations, and changed our business focus to oil and gas development activities in connection
with our acquisition by Petron Special in August 2011 (described above). As such, we have a limited history in our current business
of oil and gas development. We are a relatively new company and, as such, run a risk of not being able to compete in the marketplace
because of our relatively short existence. New companies in the competitive environment of oil and gas development may face significant
competition, and as a result, we may be forced to abandon or curtail our business plan. Under such a circumstance, the value of
any investment in us may become worthless.
Our Articles of Incorporation,
as amended, and Bylaws limit the liability of, and provide indemnification for, our officers and directors.
Our
Articles of Incorporation, as amended, generally limit our officers' and Directors' personal liability to the Company and its stockholders
for breach of fiduciary duty as an officer or Director except for breach of the duty of loyalty or acts or omissions not made in
good faith or which involve intentional misconduct or a knowing violation of law. Our Articles of Incorporation, as amended, and
Bylaws provide indemnification for our officers and Directors to the fullest extent authorized by the Nevada General Corporation
Law against all expense, liability, and loss, including attorney's fees, judgments, fines excise taxes or penalties and amounts
to be paid in settlement reasonably incurred or suffered by an officer or Director in connection with any action, suit or proceeding,
whether civil or criminal, administrative or investigative (hereinafter a " Proceeding ") to which the officer or Director
is made a party or is threatened to be made a party, or in which the officer or Director is involved by reason of the fact that
he is or was an officer or Director of the Company, or is or was serving at the request of the Company as an officer or director
of another corporation or of a partnership, joint venture, trust or other enterprise whether the basis of the Proceeding is an
alleged action in an official capacity as an officer or Director, or in any other capacity while serving as an officer or Director.
Thus, the Company may be prevented from recovering damages for certain alleged errors or omissions by the officers and Directors
for liabilities incurred in connection with their good faith acts for the Company. Such an indemnification payment might deplete
the Company's assets. Stockholders who have questions regarding the fiduciary obligations of the officers and Directors of the
Company should consult with independent legal counsel. It is the position of the Securities and Exchange Commission that exculpation
from and indemnification for liabilities arising under the Securities Act of 1933, as amended, and the rules and regulations thereunder
is against public policy and therefore unenforceable.
Risks
Relating To The Oil And Gas Operations Of The Company
Oil, gas and natural
gas liquid prices are volatile
We
anticipate that our future financial results will be highly dependent on the general supply and demand for oil, gas and natural
gas liquids (“NGLs”), which will impact the prices we ultimately realize on our future sales of these commodities.
A significant downward movement of the prices for these commodities could have a material adverse effect on our future revenues,
operating cash flows and profitability. Such a downward price movement could also have a material adverse effect on our future
estimated proved reserves, the carrying value of our future oil and gas properties, the level of planned drilling activities and
future growth. Historically, market prices have been volatile and are likely to continue to be volatile in the future due to numerous
factors beyond our control. These factors include, but are not limited to:
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consumer demand for oil, gas and NGLs; |
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conservation efforts; |
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OPEC production levels; |
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weather; |
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regional pricing differentials; |
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differing quality of oil produced (i.e., sweet crude versus heavy or sour crude); |
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differing quality and NGL content of gas produced; |
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the level of imports and exports of oil, gas and NGLs; |
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the price and availability of alternative fuels; |
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the overall economic environment; and |
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governmental regulations and taxes. |
Estimates
of oil, gas, and NGL reserves are uncertain.
The
process of estimating oil, gas and NGL reserves is complex and requires significant judgment in the evaluation of available geological,
engineering and economic data for each reservoir, particularly for new discoveries. Because of the high degree of judgment involved,
different reserve engineers may develop different estimates of reserve quantities and related revenue based on the same data. In
addition, the reserve estimates for a given reservoir may change substantially over time as a result of several factors including
additional development activity, the viability of production under varying economic conditions and variations in production levels
and associated costs. Consequently, material revisions to our future reserve estimates may occur as a result of changes in any
of these factors. Such revisions to reserves could have a material adverse effect on our future estimates of future net revenue,
as well as our financial condition and profitability.
Discoveries
or acquisitions of additional reserves will be needed to avoid a material decline in future reserves and production.
The
production rates from oil and gas properties generally decline as reserves are depleted, while related per unit production costs
generally increase, due to decreasing reservoir pressures and other factors. Therefore, we anticipate our future estimated proved
reserves and future oil, gas and NGL production will decline materially as future reserves are produced unless we conduct successful
exploration and development activities or, unless we identify additional producing zones in existing wells, secondary or tertiary
recovery techniques, or acquire additional properties containing proved reserves. Consequently, our future oil, gas and NGL production
and related per unit production costs will be highly dependent upon our level of success in finding or acquiring additional reserves.
Future drilling results
are uncertain and involve substantial costs.
Substantial
costs are often required to locate and acquire properties and drill wells. Such activities are subject to numerous risks, including
the risk that we will not encounter commercially productive oil or gas reservoirs. The costs of drilling and completing wells are
often uncertain. In addition, oil and gas properties can become damaged or drilling operations may be curtailed, delayed or canceled
as a result of a variety of factors including, but not limited to:
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unexpected drilling conditions; |
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pressure or irregularities in reservoir formations; |
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equipment failures or accidents; |
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fires, explosions, blowouts and surface cratering; |
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adverse weather conditions; |
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lack of access to pipelines or other transportation methods; |
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environmental hazards or liabilities; and |
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shortages or delays in the availability of services or delivery of equipment. |
A
significant occurrence of one of these factors could result in a partial or total loss of our future investment in a particular
property. In addition, drilling activities may not be successful in establishing proved reserves. Such a failure could have an
adverse effect on our future results of operations and financial condition.
Industry
competition for leases, materials, people and capital can be significant.
Strong
competition exists in all sectors of the oil and gas industry. We plan to compete with major integrated and other independent oil
and gas companies for the acquisition of oil and gas leases and properties. We also plan to compete for the equipment and personnel
required to explore, develop and operate properties. Competition is also prevalent in the marketing of oil, gas and NGLs. Typically,
during times of high or rising commodity prices, drilling and operating costs will also increase. Higher prices will also generally
increase the costs of properties available for acquisition. Our competitors have financial and other resources substantially larger
than ours. They also may have established strategic long-term positions and relationships in areas in which we may seek new entry.
As a consequence, we may be at a competitive disadvantage in bidding for properties. In addition, many of our larger competitors
may have a competitive advantage when responding to factors that affect demand for oil and gas production, such as changing worldwide
price and production levels, the cost and availability of alternative fuels, and the application of government regulations.
Public
policy, which includes laws, rules and regulations, can change.
Our
planned operations are subject to federal laws, rules and regulations in the United States. In addition, we will also be subject
to the laws and regulations of various states and local governments. Pursuant to public policy changes, numerous government departments
and agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of
which carry substantial penalties for failure to comply. Changes in such public policies could affect our planned operations. Political
developments can restrict production levels, enact price controls, change environmental protection requirements, and increase taxes,
royalties and other amounts payable to governments or governmental agencies. Existing laws and regulations can also require us
to incur substantial costs to maintain regulatory compliance. Our future projected operating and other compliance costs could increase
if existing laws and regulations are revised or reinterpreted or if new laws and regulations become applicable to our operations.
Although we are unable to predict changes to existing laws and regulations, such changes could significantly impact our future
profitability, financial condition and liquidity, particularly changes related to hydraulic fracturing, income taxes and climate
change as discussed below.
Hydraulic
Fracturing— The U.S. Congress is currently considering legislation to amend the federal Safe Drinking Water
Act to require the disclosure of chemicals used by the oil and natural-gas industry in the hydraulic-fracturing process. Currently,
regulation of hydraulic fracturing is primarily conducted at the state level through permitting and other compliance requirements.
This legislation, if adopted, could establish an additional level of regulation and permitting at the federal level.
Income
Taxes— The U.S. Congress could make significant changes to United States tax laws. Among potential significant
changes would be the elimination of the immediate deduction for intangible drilling and development costs.
Climate
Change— Policy makers in the United States are increasingly focusing on whether the emissions of greenhouse gases,
such as carbon dioxide and methane, are contributing to harmful climatic changes. Policy makers at both the United States federal
and state level have introduced legislation and proposed new regulations that are designed to quantify and limit the emission of
greenhouse gases through inventories and limitations on greenhouse gas emissions. Legislative initiatives to date have focused
on the development of cap-and-trade programs. These programs generally would cap overall greenhouse gas emissions on an economy-wide
basis and require major sources of greenhouse gas emissions or major fuel producers to acquire and surrender emission allowances.
Cap-and-trade programs would be relevant to our planned operations because the equipment we plan to use to explore for, develop,
produce and process oil and natural gas emits greenhouse gases. Additionally, the combustion of carbon-based fuels, such as the
oil, gas and NGLs we plan to sell, emits carbon dioxide and other greenhouse gases.
We will incur certain costs to comply
with government regulations, particularly regulations relating to environmental protection and safety, and could incur even greater
costs in the future.
Our development, production
and marketing operations are regulated extensively at the federal, state and local levels and are subject to interruption or termination
by governmental and regulatory authorities based on environmental or other considerations. Moreover, we have incurred and will
continue to incur costs in our efforts to comply with the requirements of environmental, safety and other regulations. Further,
the regulatory environment in the oil and gas industry could change in ways that we cannot predict and that might substantially
increase our costs of compliance and, in turn, materially and adversely affect our business, results of operations and financial
condition.
Specifically, as an owner
or lessee and operator of crude oil and natural gas properties, we are subject to various federal, state, and local regulations
relating to the discharge of materials into, and the protection of, the environment. These regulations may, among other things,
impose liability on us for the cost of pollution cleanup resulting from operations, subject us to liability for pollution damages
and require suspension or cessation of operations in affected areas. Moreover, we are subject to the United States (U.S.) Environmental
Protection Agency's (U.S. EPA) rule requiring annual reporting of greenhouse gas (GHG) emissions. Changes in, or additions to,
these regulations could lead to increased operating and compliance costs and, in turn, materially and adversely affect our business,
results of operations and financial condition.
We are aware of the increasing
focus of local, state, national and international regulatory bodies on GHG emissions and climate change issues. In addition to
the U.S. EPA's rule requiring annual reporting of GHG emissions, we are also aware of legislation proposed by U.S. lawmakers to
reduce GHG emissions.
Additionally, there have
been various proposals to regulate hydraulic fracturing at the federal level. Currently, the regulation of hydraulic fracturing
is primarily conducted at the state level through permitting and other compliance requirements. Any new federal regulations that
may be imposed on hydraulic fracturing could result in additional permitting and disclosure requirements (such as the reporting
and public disclosure of the chemical additives used in the fracturing process) and in additional operating restrictions. In addition
to the possible federal regulation of hydraulic fracturing, some states and local governments have considered imposing various
conditions and restrictions on drilling and completion operations, including requirements regarding casing and cementing of wells,
testing of nearby water wells, restrictions on the access to and usage of water and restrictions on the type of chemical additives
that may be used in hydraulic fracturing operations. Such federal and state permitting and disclosure requirements and operating
restrictions and conditions could lead to operational delays and increased operating and compliance costs and, moreover, could
delay or effectively prevent the development of crude oil and natural gas from formations which would not be economically viable
without the use of hydraulic fracturing.
We will continue to monitor
and assess any new policies, legislation, regulations and treaties in the areas where we operate to determine the impact on our
operations and take appropriate actions, where necessary. We are unable to predict the timing, scope and effect of any currently
proposed or future laws, regulations or treaties, but the direct and indirect costs of such laws, regulations and treaties (if
enacted) could materially and adversely affect our business, results of operations and financial condition.
Environmental
matters and costs can be significant.
As
an owner, lessee or operator of oil and gas properties, we will be subject to various federal, state, provincial, tribal and local
laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may,
among other things, impose liability on us for the cost of pollution clean-up resulting from our operations in affected areas.
Any future environmental costs of fulfilling our commitments to the environment are uncertain and will be governed by several factors,
including future changes to regulatory requirements. There is no assurance that changes in or additions to public policy regarding
the protection of the environment will not have a significant impact on our planned operations and profitability.
Insurance
does not cover all risks.
Development,
production and processing of oil, gas and NGLs can be hazardous and involve unforeseen occurrence including, but not limited to
blowouts, cratering, fires and loss of well control. These occurrences can result in damage to or destruction of wells or production
facilities, injury to persons, loss of life, or damage to property or the environment. We plan to maintain insurance against certain
losses or liabilities in accordance with customary industry practices and in amounts that management believes to be prudent. However,
insurance against all operational risks will not be available to us.
Because
of the inherent dangers involved in oil and gas operations, there is a risk that we may incur liability or damages as we conduct
our business operations, which could force us to expand a substantial amount of money in connection with litigation and/or settlements.
The
oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires, spills, pollution, releases of toxic gas and other
environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury
or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental
damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be liable
for environmental damages caused by previous owners of property purchased and/or leased by us. As a result, substantial liabilities
to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for
the purchase of properties and/or property interests, exploration, development or acquisitions or result in the loss of properties
and/or force us to expend substantial monies in connection with litigation or settlements. As such, there can be no assurance that
any insurance obtained by us in the future will be adequate to cover any losses or liabilities. We cannot predict the availability
of insurance or the availability of insurance at premium levels that justify our purchase. The occurrence of a significant event
not fully insured or indemnified against could materially and adversely affect our financial condition and operations. We may elect
to self-insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented.
In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered
by insurance could have a material adverse effect on our financial condition and results of operations, which could lead to any
investment in us becoming worthless.
Risks
Relating To Our Securities
Our common stock is subject to price
volatility unrelated to our operations.
The market price of our
common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our
planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes
in general conditions in the economy and the financial markets or other developments affecting our competitors or ourselves. In
addition, the OTCBB is subject to extreme price and volume fluctuations in general. This volatility has had a significant
effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could
have the same effect on our common stock.
We do not expect to pay dividends in
the foreseeable future.
We
have paid no cash dividends on our common stock to date and it is not anticipated that any cash dividends will be paid to holders
of our common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs
of our business operations, it is anticipated that any earnings will be retained to finance our business operations and future
expansion. Therefore, our stockholders will not receive any funds unless they sell their common stock, and stockholders
may be unable to sell their shares on favorable terms or at all.
Trading in our common stock on the OTC
Bulletin Board is limited and sporadic and fluctuates, making it difficult for our shareholders to sell their shares or liquidate
their investments.
Our
common stock is quoted on the Over-The-Counter Bulletin Board (the “OTCBB”) under the symbol “PEII”. We
anticipate the market for our common stock on the OTCBB to be subject to fluctuations in response to several factors, including,
but not limited to:
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actual or anticipated variations in our results of operations; |
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our ability to generate revenues; |
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conditions and trends in the market for oil and natural gas; and |
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future acquisitions we may make. |
Furthermore,
our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations,
as well as general economic, political and market conditions, such as recessions, interest rates, or government regulations may
adversely affect the market price and liquidity of our common stock.
If
we are late in filing our quarterly or annual reports with the SEC or a Market Maker fails to quote our common stock on the OTCBB
for a period of more than four days, we may be de-listed from the OTCBB.
Pursuant
to OTCBB rules relating to the timely filing of periodic reports with the SEC, any OTCBB issuer which fails to file a periodic
report (Form 10-Q or 10-K) by the due date of such report (not withstanding any extension granted to the issuer by the filing of
a Form 12b-25), three times during any 24 month period is automatically de-listed from the OTCBB. Such removed issuer would not
be re-eligible to be listed on the OTCBB for a period of one year, during which time any subsequent late filing would reset the
one-year period of de-listing. Additionally, if a market maker fails to quote our common stock on the OTCBB for a period of more
than four consecutive days, we will be automatically delisted from the OTCBB. If we are late in our filings three times in any
24 month period and are de-listed from the OTCBB or are automatically delisted for failure of a market maker to quote our stock,
our securities may become worthless and we may be forced to curtail or abandon our business plan.
We are subject to penny stock regulations
and restrictions and you may have difficulty selling shares of our common stock.
Our common stock is subject
to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934 (the “Exchange Act”), commonly
referred to as the “penny stock rule.” Section 15(g) sets forth certain requirements for transactions in
penny stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange
Act. The SEC generally defines a penny stock to be any equity security that has a market price less than $5.00 per share,
subject to certain exceptions. We are subject to the SEC’s penny stock rules.
Since our common stock
is deemed to be penny stock, trading in the shares of our common stock is subject to additional sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers and accredited investors. “Accredited
investors” are persons with assets in excess of $1,000,000 (excluding the value of such person’s primary residence)
or annual income exceeding $200,000 or $300,000 together with their spouse. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of such security and must have the purchaser’s written consent
to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt the rules require
the delivery, prior to the first transaction of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A
broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the
penny stocks held in an account and information to the limited market in penny stocks. Consequently, these rules may
restrict the ability of broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of our stockholders
to sell their shares of common stock.
There can be no assurance
that our shares of common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock was
exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority
to restrict any person from participating in a distribution of penny stock if the SEC finds that such a restriction would be in
the public interest.
State
securities laws may limit secondary trading, which may restrict the state in which and conditions under which you can sell shares.
Secondary
trading in our common stock may not be possible in any state until the common stock is qualified for sale under the applicable
securities laws of the state or there is confirmation that an exemption, such as listing in certain recognized securities manuals,
is available for secondary trading in the state. If we fail to register or qualify, or to obtain or verify an exemption for the
secondary trading of, the common stock in any particular state, the common stock could not be offered or sold to, or purchased
by, a resident of that state. In the event that a significant number of states refuse to permit secondary trading in our common
stock, the liquidity for the common stock could be significantly impacted.
Because
we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have
limited protections against interested director transactions, conflicts of interest, and similar matters.
The
Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges
and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate
governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to
securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with
many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated
with such compliance any sooner than legally required, we have not yet adopted these measures.
We
do not currently have an independent audit or compensation committee. As a result, our Directors have the ability to, among other
things; determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether
such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections
against interested director transactions, conflicts of interest, if any, and similar matters and any potential investors may be
reluctant to provide us with funds necessary to expand our operations.
We
intend to comply with all corporate governance measures relating to Director independence as and when required. However, we may
find it very difficult or be unable to attract and retain qualified officers, Directors and members of board committees required
to provide for our effective management as a result of the Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act
of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of Directors
and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter
qualified individuals from accepting these roles.
Your ownership interest may be diluted
and the value of our common stock may decline by exercising the put right pursuant to the Investment Agreement.
Pursuant to the Investment
Agreement, when we deem it necessary, we may raise capital through the private sale of our common stock to an investor at a price
equal to a discount of 30% to the lowest closing price of our Common Stock for the ten (10) consecutive trading days immediately
before the investor receives our notice of sale. The investor has a financial incentive to sell our common stock immediately upon
receiving the shares to realize the profit equal to the difference between the discounted price and the market price. If
the investor sells the shares, the price of our Common Stock could decrease. If our stock price decreases, the investor
may have a further incentive to sell the shares of our Common Stock that it holds. These sales may have a further impact
on our stock price as well as a dilutive impact on your ownership interest.
Nevada
law and our Articles of Incorporation authorize us to issue shares of stock, which shares may cause substantial dilution to our
existing shareholders.
We
have authorized capital stock consisting of 15,000,000,000 shares of common stock, $0.0001 par value per share and 10,000,000 shares
of preferred stock, $0.001 par value per share. As of March 14, 2014, we had 1,368,493,108 shares
of common stock outstanding, 1,000 shares of Series A Preferred Stock issued and outstanding, and 710,438 shares of Series B Convertible
Preferred stock issued and outstanding. As a result, our Board of Directors has the ability to issue a large number of additional
shares of common stock without shareholder approval, which if issued could cause substantial dilution to our then shareholders.
Additionally, shares of preferred stock may be issued by our Board of Directors without shareholder approval with voting powers,
and such preferences and relative, participating, optional or other special rights and powers as determined by our Board of Directors,
which may be greater than the shares of common stock currently outstanding. As a result, shares of preferred stock may be issued
by our Board of Directors which cause the holders to have super majority voting power over our shares (similar to the Shares A
Preferred Stock previously issued by the Board of Directors), provide the holders of the preferred stock the right to convert the
shares of preferred stock they hold into shares of our common stock, which may cause substantial dilution to our then common stock
shareholders and/or have other rights and preferences greater than those of our common stock shareholders. Investors should keep
in mind that the Board of Directors has the authority to issue additional shares of common stock and preferred stock, which could
cause substantial dilution to our existing shareholders. Additionally, the dilutive effect of any preferred stock, which we may
issue may be exacerbated given the fact that such preferred stock may have super majority voting rights (similar to the Series
A Preferred Stock already issued and outstanding) and/or other rights or preferences which could provide the preferred shareholders
with voting control over us subsequent to this filing and/or give those holders the power to prevent or cause a change in control.
As a result, the issuance of shares of common stock and/or Preferred Stock may cause the value of our securities to decrease and/or
become worthless.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As a “smaller reporting company,”
as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide the information called for by this Item.
ITEM 2. PROPERTIES
We currently lease office
space under a lease encompassing approximate 2,100 feet of space. Our offices are at 17950 Preston Road, Suite 960, Dallas, Texas
75252.
In September 2011, we obtained rights to the
Wagoner County Leases, encompassing a total of 360 acres, as described above, and in February 2012, we obtained rights to the Tulsa
County and Knox County Leases, as described above.
In addition the Company obtained rights to a
75% equity stake in two natural gas pipelines that, combined are 132 miles long in connection with the closing of various agreements
as described herein.
ITEM 3. 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 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock
is considered a "penny stock" as defined in the Commission's rules promulgated under the Exchange Act. The Commission's
rules regarding penny stocks impose additional sales practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally persons with net worth in excess of $1,000,000 (excluding
their principal residence) or an annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered
by the rules, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Thus the Rules affect the ability of broker-dealers to sell the Company's shares
should they wish to do so because of the adverse effect that the Rules have upon liquidity of penny stocks. Unless the transaction
is exempt under the Rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting
customer transactions in penny stocks are required to provide their customers with (i) a risk disclosure document; (ii) disclosure
of current bid and ask quotations if any; (iii) disclosure of the compensation of the broker-dealer and its sales personnel in
the transaction; and (iv) monthly account statements showing the market value of each penny stock held in the customer's account.
As a result of the penny stock rules, the market liquidity for the Company's securities may be severely adversely affected by limiting
the ability of broker-dealers to sell the Company's securities and the ability of purchasers of the securities to resell them.
Market Information
Our common stock is currently
quoted on the OTC Bulletin Board. In October 2009, we obtained quotation for our common stock
on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol RCNC.OB; however, our common stock was subsequently
delisted from the OTCBB due to our failure to timely file our Quarterly Report on Form 10-Q for the period ended February 28, 2011
on May 23, 2011.Our common stock was re-quoted on the OTCBB effective on August 9, 2011.On October 17, 2011, in connection with
the effectiveness of the 100:1 forward stock-split affected pursuant to the Amendment described above, the Company’s trading
symbol on the Over-The-Counter Bulletin Board changed to RCNCD.OB.
On November 29, 2011 our
symbol was changed to “PEII.OB” to reflect our Company’s name change to Petron Energy II, Inc. Because we are
quoted on the OTC Bulletin Board, our securities may be less liquid, receive less coverage by security analysts and news media,
and generate lower prices than might otherwise be obtained if they were listed on a national securities exchange.
The following table sets
forth the high and low bid prices for our Common Stock per quarter as reported by the OTCBB for the period from January 1, 2012
through December 31, 2013, based on our fiscal year end December 31. These prices represent quotations between dealers without
adjustment for retail mark-up, markdown or commission and may not represent actual transactions.
|
Quarter |
|
First |
Second |
Third |
Fourth |
|
|
|
|
|
2012 |
|
|
|
|
High |
n/a (1) |
n/a (1) |
n/a (1) |
$ 0.1500 |
Low |
n/a (1) |
n/a (1) |
n/a (1) |
$ 0.1500 |
2013 |
|
|
|
|
High |
$ 0.2450 |
$ 0.0960 |
$ 0.1000 |
$ 0.0290 |
Low |
$ 0.1000 |
$ 0.0100 |
$ 0.0069 |
$ 0.0020 |
(1) - A trading market for our stock did not
exist prior to December 27, 2012.
Description of Capital
Stock
We
have authorized capital stock consisting of 15,000,000,000 shares of common stock, $0.0001 par value per share (“Common Stock”)
and 10,000,000 shares of preferred stock, $0.001 par value per share (“Preferred Stock”).
Common
Stock
The
holders of outstanding shares of common stock are entitled to receive dividends out of assets or funds legally available for the
payment of dividends of such times and in such amounts as the board from time to time may determine. Holders of common stock are
entitled to one vote for each share held on all matters submitted to a vote of shareholders. There is no cumulative voting of the
election of directors then standing for election. The common stock is not entitled to pre-emptive rights and is not subject to
conversion or redemption. Upon liquidation, dissolution or winding up of our company, the assets legally available for distribution
to stockholders are distributable ratably among the holders of the common stock after payment of liquidation preferences, if any,
on any outstanding payment of other claims of creditors. Each outstanding share of common stock is duly and validly issued, fully
paid and non-assessable.
Preferred
Stock
Shares
of preferred stock may be issued from time to time in one or more series, each of which shall have such distinctive designation
or title as shall be determined by our Board of Directors (“Board of Directors”) prior to the issuance of any shares
thereof. Preferred stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative,
participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated
in such resolution or resolutions providing for the issue of such class or series of preferred stock as may be adopted from time
to time by the Board of Directors prior to the issuance of any shares thereof. The number of authorized shares of preferred stock
may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders
of a majority of the voting power of all the then outstanding shares of our capital stock entitled to vote generally in the election
of the directors, voting together as a single class, without a separate vote of the holders of the preferred stock, or any series
thereof, unless a vote of any such holders is required pursuant to any preferred stock designation.
Series
“A” Preferred Stock
The
designation of 1,000 shares of the Company’s Series A Preferred Stock was approved by the Company’s Board of Directors
on September 7, 2011 and a Certificate of Designations reflecting such Series A Preferred Stock was filed with the Secretary of
State of Nevada on September 8, 2011. The Series A Preferred Stock provides the holder thereof, Floyd L. Smith, the right, voting
separately as a class, to vote in aggregate 51% of our outstanding voting shares on any and all shareholder matters (the “Super
Majority Voting Rights”).
Additionally,
the Company shall not adopt any amendments to the Company's Bylaws, Articles of Incorporation, as amended, make any changes to
the Certificate of Designations establishing the Series A Preferred Stock, or effect any reclassification of the Series A Preferred
Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of Series A Preferred Stock. However, the Company
may, by any means authorized by law and without any vote of the holders of shares of Series A Preferred Stock, make technical,
corrective, administrative or similar changes to such Certificate of Designations that do not, individually or in the aggregate,
adversely affect the rights or preferences of the holders of shares of Series A Preferred Stock.
The
Series A Preferred Stock and the rights associated therewith could act to prevent or delay a change in control.
Series
“B” Preferred Stock
The Certificate of Designation
designating 6,000,000 shares of the Company’s Series B Preferred Stock was filed with the Secretary of State of Nevada on
February 17, 2012. 5,910,000 shares of the Company’s Series B Preferred Stock were issued pursuant to the Plan of Reorganization
and Asset Purchase Agreement, described above. A total of 5,199,562 shares of the Series B Convertible Preferred Stock have been
converted into an aggregate of 142,653,320 shares of the Common Stock of the Company. At March 14, 2014, we had 710,438 shares
of Series B Convertible Preferred Stock issued and outstanding which had not been converted because of the 9.99% ownership limitation
set forth in the Certificate of Designation (the “Ownership Limitation”). The Series B Convertible Preferred Stock
shares have a vote equal to 1/100th of a common share vote.
Warrants,
Options and Convertible Securities
Floyd
L. Smith, the Company’s Chief Executive Officer, President and Director, owns Stock Options to purchase 1,200,000 shares
of the Company’s common stock at an exercise price of $0.039 per share, which have a term of five years, expiring on August
31, 2016, which were issued to in connection with his entry into an Executive Employment Agreement with the Company (described
above).
The
shareholders receiving the Series B Preferred Stock pursuant to the Plan of Reorganization and Asset Purchase Agreement received
warrants to purchase an aggregate of 1,000,000 shares of the Company’s common stock with an exercise price of $0.80 per share.
An
investor was granted a common stock warrant for 100,000 shares. The exercise price is $1.40 per share and the warrant expires on
August 9, 2015.
Record Holders
As of
March 14, 2014, an aggregate of 1,368,493,108 shares of our common stock were issued
and outstanding and were owned by approximately 635 holders of record, based on information provided by our transfer agent.
Additionally, there were 1,000 shares of Series A Preferred Stock issued and outstanding,
and 710,438 shares of Series B Convertible Preferred stock issued and outstanding.
Dividends
On
December 27, 2012, the Company effectuated a reverse split (the “Reverse Split”) of its issued common shares whereby
every ten (10) pre-split shares of common stock were exchanged for one (1) post-split share of the Company's common stock. As
a result, the total issued shares of common stock of the Company decreased from One Hundred Twenty Million Two Hundred Thirty Thousand
Six Hundred and Eighty Eight (120,230,688) shares prior to the Reverse Split to Twelve Million Twenty Three Thousand and Sixty
Nine (12,023,069) shares following the Reverse Split. FINRA confirmed approval of the Reverse Split on December 20, 2012
and the Reverse Split became effective on December 27, 2012.
Other
than the foregoing, we have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any
dividends in the foreseeable future. We intend to devote any earnings to fund the operations and the development of our business.
Securities
Authorized for Issuance Under Equity Compensation Plans
The Company
does not have any equity compensation plans in place, whether approved by the shareholders or not.
Recent Sales of Unregistered Securities
On April 18, 2013,
in connection with the TCA credit agreement, the Company issued 3,333,334 shares of its common stock to TCA.
During 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.
During 2013, the Company
issued 26,140,220 shares of its common stock to Asher in connection with convertible promissory notes entered into by and between
the Company and Asher.
During 2013, the Company
sold an aggregate of 41,141,643 shares of the Company’s restricted common stock to 62 “accredited investors”
in private transactions for aggregate consideration of $525,150.
During 2013 4,962,502 shares
of its Series B Preferred Convertible Stock were converted into 142 ,653,320 shares of the Company’s common stock.
During 2013 the Company
issued 65,539,280 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.
During 2013, the Company
issued 63,553,210 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.
During 2013, the Company
issued 68,782,347 shares of its common stock to Continental Equities, LLC in connection with convertible promissory notes entered
into by and between the Company and Continental Equities, LLC.
During 2013, the Company
issued 4,148,806 shares of its common stock to certain vendors and individuals for services rendered.
During 2013, the Company
issued 2,950,477 shares of its common stock to an individual in connection with a settlement agreement.
During 2013, the Company
issued 4,273,324 shares to two of the Company’s directors for their fees.
ITEM 6. SELECTED FINANCIAL DATA
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
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on
Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections.
We may use words such as “anticipate,” “expect,” “intend,” “plan,” “believe,”
“foresee,” “estimate” and variations of these words and similar expressions to identify forward-looking
statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other
factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from
those expressed or forecasted. You should read this report completely and with the understanding that actual future results may
be materially different from what we expect. The forward looking statements included in this report are made as of the date of
this report and should be evaluated with consideration of any changes occurring after the date of this Report. We will not update
forward-looking statements even though our situation may change in the future and we assume no obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise. We encourage you to review our “Risk Factors”
set forth above.
PLAN OF OPERATIONS
The
Company initially acquired pipelines, equipment and oil and gas rights in Tulsa County, Oklahoma from Petron Special Corporation
pursuant to the Petron Asset Purchase Agreement. The Company also acquired certain oil and gas properties in Knox County Texas
owned by ONE Energy Capital Corp., ONE Energy International Corp. and their affiliated parties, pursuant to the Plan of Reorganization
and Asset Purchase Agreement. We have also separately acquired rights to the Wagoner County Leases.
All existing leases
which we acquired through the Petron Asset Purchase Agreement and the Plan of Reorganization and Asset Purchase Agreement will
need to be reworked to reestablish production. Although there are several targets available within these existing wells, oil pay
zones will be our primary focus considering the higher price point in the oil market currently. The second priority will be gas
pay zones, primarily because of very soft price points in the gas market.
Our long-term plan is to
grow the Company at an aggressive rate via three approaches, 1) lease acquisition and development, 2) industry level participation
through current industry partners, and 3) acquisitions of small operators primarily in Texas and Oklahoma.
RESULTS OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 2013
The following is a comparative
summary statement of operations for the years ended December 31, 2013 and 2012:
|
|
2013 |
|
2012 |
Revenues |
|
|
|
|
|
|
|
|
Oil & Gas Sales |
|
$ |
276,421 |
|
|
$ |
326,343 |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
Cost of Revenue |
|
|
634,945 |
|
|
|
538,616 |
|
Depletion and Depreciation |
|
|
261,244 |
|
|
|
186,014 |
|
Impairment Charge |
|
|
48,000 |
|
|
|
6,046,000 |
|
Derivative Expense |
|
|
1,691,313 |
|
|
|
— |
|
General and Administrative |
|
|
1,547,774 |
|
|
|
1,736,427 |
|
Interest |
|
|
394,240 |
|
|
|
145,349 |
|
Total Expenses |
|
|
4,577,516 |
|
|
|
8,652,406 |
|
Net Loss |
|
$ |
(4,301,095 |
) |
|
$ |
(8,326,063 |
) |
Revenue
The decrease
in revenue in 2013 compared to 2012 was due to the net impact of the following events:
|
· |
Due to a plugging requirement by the State of Texas, the Texas production was suspended until the plugging work was completed. This work was finished in 2014. The impact of this was a decrease in revenue in 2013 of approximately $31,000 compared to 2012. |
|
· |
Approximately $44,000 of revenue was recorded in 2012 that applied to 2011 production. This type of item did not occur in 2013. Due to questions concerning division of interests, the Company did not receive payment until April of 2012. This revenue was not recorded in 2011 due to the contingent nature of the amount. |
|
· |
In 2013 the Company brought a lease into production that did not produce in 2012. The revenue from the production on this lease was approximately $43,000. |
|
· |
Gas production was lower in 2013 due to well and pipeline repairs resulting in shutdowns. The revenue impact was a decrease of approximately $11,000. |
Expenses
The Company began recording
fees in costs of revenue, according to a Consulting and Operating Agreement with Petron Energy, Inc. in May of 2013. The increase
in cost due to the fee of $25,000 per month offset reduced costs due to the lower production.
The increase in depletion
and depreciation is related to the depreciation on approximately $996,047 of equipment purchased during 2013.
We recorded an impairment
of $48,000 as a result of the ceiling test. In 2013 we started issuing convertible debt that included discounts from the market
price for the common stock that is subject to issuance upon conversion. These agreements are the source of the derivative expense.
The Company did not have these types of agreements in 2012.
Interest has increased
due to the interest cost related to the TCA note that was executed in April 2013. In addition to the interest rate of the note,
there is amortization of loan fees that have been recorded in interest expense.
LIQUIDITY
AND CAPITAL RESOURCES
As of December 31, 2013,
the current liabilities other than the derivative liability were $3,217,526 and the Company’s current assets were $24,447.
Cash for the period ended December 31, 2013 was $105, compared to $17,089 on December 31, 2012. Effective April 16,
2013, we entered into a Credit Agreement with TCA Global Master Fund, LP (“TCA”). Under the terms of a credit agreement
the Company has pledged all of its oil and gas assets as collateral. The Company makes requests for drawdowns periodically and
the lender, in its sole discretion, will approve the requests. The funds are to be used for operations and enhancing the oil and
gas producing assets of the Company. The first draw, under terms of an 11% note payable due October 17, 2013 was received April
17, 2013 for $450,000. This debt was refinanced in April 2014. Other than stated herein, the Company does not have any current
commitments for capital expenditures or any other commitments that would result in a change in cash flow or cash requirements for
the next twelve months.
We
anticipate that our operations will be supported by funds raised through the sale of debt or equity in the Company in private placement
offerings and through revenues generated from our oil and gas operations. We anticipate the need for a minimum of $2.5 million
in additional funding to continue our operations for the next twelve months. Assuming we
are successful in raising a minimum of $10.0 million subsequent to the date of this
filing through the sale of debt or equity securities through private placements, we will use the proceeds to settle the Company’s
accounts payable and to complete the reworking of six leases. In the event that we are unsuccessful raising additional funds subsequent
to the date hereof, we will move forward with our business plan and plan of operations in a scaled down form until such time that
we can raise additional funds.
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 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.
Pursuant to the terms of
the Investment Agreement, CPUS committed to purchase up to $10,000,000 of our common stock over a period of up to thirty-six (36)
months. From time to time during the thirty-six (36) months period commencing from the effectiveness of the registration statement,
we may deliver a drawdown notice to CPUS which states the dollar amount that we intend to sell to CPUS on a date specified in the
put notice. The maximum investment amount per notice shall be no more than two hundred seventy five percent (275%) of the average
daily volume of the common stock for the ten consecutive trading days immediately prior to date of the applicable put notice. The
purchase price per share to be paid by CPUS shall be calculated at a thirty percent (30%) discount to the lowest trading price
of the common stock as reported by Bloomberg, L.P. during the ten (10) consecutive trading days immediately prior to the receipt
by CPUS of the put notice. Additionally, the Company agreed to pay CPUS a commitment fee equal to $12,500 in the form of shares
of the Company’s common stock, at a purchase price equal to 50% discount to the price per share on the closing date of the
Investment Agreement. We have reserved 332,892,841 shares of our common stock for issuance under the Investment Agreement.
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. A complete summary of these policies is included
in note 2 of the notes to 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.
Oil and gas properties
The Company utilizes the
full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration
and development of oil and gas reserves, including such costs as leasehold acquisition costs, capitalized interest costs relating
to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are
capitalized to the full cost pool. When the Company obtains proven oil and gas reserves, capitalized costs, including estimated
future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production
method using estimates of proved reserves.
Investments in unproved
properties are not depleted pending determination of the existence of proved reserves. Unproved properties are assessed periodically
to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually
by considering the primary lease terms of the properties, the holding period of the properties, and geographic and geologic data
obtained relating to the properties. Where it is not practicable to assess individually the amount of impairment of properties
for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount
of impairment assessed is added to the costs to be amortized, or is reported as a period expense, as appropriate.
Pursuant to full cost accounting
rules, the Company must perform a ceiling test periodically on its proved oil and gas assets. The ceiling test provides that capitalized
costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present
value of future net revenue from estimated production of proved oil and gas reserves using current prices, excluding the future
cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at a discount
factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value
of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the
book and tax basis of oil and gas properties. Should the net capitalized costs for a cost center exceed the sum of the components
noted above, an impairment charge would be recognized to the extent of the excess capitalized costs.
Sales of proved and unproved
properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss
is recognized in the statement of operations.
Exploration activities
conducted jointly with others are reflected at the Company’s proportionate interest in such activities.
Cost related to site restoration programs are
accrued over the life of the project.
Pipeline and Equipment
Depreciation is based on
the estimated useful lives of the assets and is computed using the straight line method. Pipeline, trucks and equipment are recorded
at cost. Depreciation is provided using the following useful lives:
Pipeline |
15 years |
Trucks and equipment |
5—15 years |
Stock-based compensation
The Company accounts for
stock options in accordance with FASB ASC 505, “Equity,” and FASB ASC 718, “Compensation—stock Compensation.
“Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair
value of the options for the year ended December 31, 2012.
Under ASC 718 and 505,
the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing
model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined
using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines
of Staff Accounting bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla”
options in determining the expected term of options grants. SAB 107 permits the expected term of “plain vanilla” options
to be calculated as the average of the option’s vesting term and contractual period.
The Company has used this
method in determining the expected term of all options. At such time as the Company has options with graded vesting, the Company
will recognize compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for
the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date
value of the award that is vested at that date.
Revenue Recognition
Oil and gas revenues are recognized when oil
and gas is produced and sold.
Earnings (loss) per share
Basic earnings (loss) per
share are computed using the weighted average number of shares outstanding during the period. The treasury stock method is used
to determine the diluted effect of stock options and warrants. Diluted loss per share is equal to the basic loss per share for
the years ended December 31, 2013 and 2012 because common stock equivalents consisting of stock purchase warrants and stock options
outstanding at December 31, 2013 and December 31, 2012, were anti-dilutive.
Income taxes
The Company recognizes
deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined
based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates
in effect in the year in which the differences are expected to reverse.
Long-Lived Assets Impairment
Long-term assets of the
Company are reviewed for impairment when circumstances indicate the carrying value may not be recoverable in accordance with the
guidance established in Statement of Financial Accounting Standards No. 144 (SFAS 144) (ASC 360), Accounting for the impairment
or Disposal of Long-Lived Assets. For assets that are to be held and used, an impairment loss is recognized when the estimated
undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an
adjustment is made to write the asset down to its fair value. Fair values are determined based on discounted cash flows or internal
and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable
value.
Asset Retirement Obligations
The Company accounts for
asset retirement obligations in accordance with the provisions of SFAS 143 (ASC 410) “Accounting for Asset Retirement
Obligations”. SFAS 143 (ASC 410) requires the Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal use of the assets. The Asset Retirement Obligation as of December
31, 2013 is $220,347.
Concentration of Credit Risk
The Company has financial
instruments that are exposed to concentrations of credit risk and consist primarily of cash and trade accounts receivable. The
Company routinely maintains cash and temporary cash investments at certain financial institutions in amounts substantially in excess
of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. Management believes that these financial institutions
are of high quality and the risk of loss is minimal.
Financial Instruments
The carrying amount of
financial instruments including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value, unless
otherwise stated as of the date of this current report.
Fair value estimates of
financial instruments are made at the period end based on relevant information about financial markets and specific financial instruments.
Because these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined
with precision. Changes in assumptions can significantly affect estimated fair value.
Contingencies
Certain conditions may
exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved
when one or more future events occur or fail to occur. Company management and legal counsel assess such contingent liabilities
which inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending
against the Company, or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If management determines
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability
is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency
is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability,
together with an estimate of the range of possible loss if determinable and material, is disclosed.
Additional
disclosure concerning subpart 1200 of Regulation S-K can be found in the Company’s financial statements and notes
thereto are hereby incorporated by this reference to the Company’s most recent Quarterly Report for the period ended September
30, 2013, as filed on Form 10-Q with the SEC on November 7, 2013, and in this Annual Report for the year ended December 31, 2013.
ITEM 7A. |
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 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
PETRON ENERGY II, INC.
Financial Statements
For the Years Ended December 31, 2013 and 2012
Index to Financial Statements |
|
Page |
Report of Independent Registered Public Accounting Firm |
|
F-2 |
Consolidated Balance Sheets for the Years ended December 31, 2013 and 2012 |
|
F-3 |
Consolidated Statements of Operations for the Years ended December 31, 2013 and 2012 |
|
F-4 |
Consolidated Statements of Stockholders' Deficit for the Years ended December 31, 2013 and 2012 |
|
F-5 |
Consolidated Statements of Cash Flows for the Years ended December 31, 2013 and 2012 |
|
F-6 |
Notes to Consolidated Financial Statements |
|
F-7 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
Petron Energy II, Inc.
Dallas, TX 75252
We have audited the accompanying consolidated
balance sheets of Petron Energy II, Inc. (a Nevada corporation) and subsidiaries as of December 31, 2013 and 2012, and the related
consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Petron Energy II, Inc. and subsidiaries
as of December 31, 2013 and 2012 and the results of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial
statements, the Company’s significant operating losses since inception raise substantial doubt about its ability to continue
as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/KWCO, PC
KWCO, PC
Odessa, TX 79762
April 10, 2014
F-2
PETRON ENERGY II, INC. |
CONSOLIDATED BALANCE SHEETS |
|
|
December 31, |
|
|
2013 |
|
2012 |
ASSETS |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
105 |
|
|
$ |
17,089 |
|
Accounts Receivable |
|
|
24,342 |
|
|
|
18,332 |
|
Total Current Assets |
|
|
24,447 |
|
|
|
35,421 |
|
|
|
|
|
|
|
|
|
|
Pipeline, net of accumulated depreciation of $320,452 and $245,156, respectively |
|
|
697,548 |
|
|
|
742,844 |
|
Producing Oil & Gas Properties, net of accumulated depletion of $865,165 and $731,795, respectively |
|
|
1,803,632 |
|
|
|
1,424,729 |
|
Other Depreciable Equipment, net of accumulated depreciation of $125,309 and $45,361, respectively |
|
|
609,732 |
|
|
|
71,915 |
|
Other Assets |
|
|
1,532 |
|
|
|
34,790 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
3,136,891 |
|
|
$ |
2,309,699 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Bank Overdraft |
|
$ |
57,942 |
|
|
$ |
— |
|
Accounts Payable--Trade |
|
|
1,282,779 |
|
|
|
716,140 |
|
Accounts Payable--Related Party |
|
|
224,425 |
|
|
|
18,082 |
|
Accrued Liabilities |
|
|
219,649 |
|
|
|
375,284 |
|
Derivative Liability |
|
|
960,047 |
|
|
|
— |
|
Notes Payable--current |
|
|
1,432,731 |
|
|
|
170,500 |
|
Total Current Liabilities |
|
|
4,177,573 |
|
|
|
1,280,006 |
|
|
|
|
|
|
|
|
|
|
Notes Payable--long-term |
|
|
— |
|
|
|
250,000 |
|
Asset Retirement Obligation |
|
|
220,347 |
|
|
|
40,278 |
|
Stock Issuance Liability |
|
|
946,551 |
|
|
|
5,904,090 |
|
TOTAL LIABILITIES |
|
|
5,344,471 |
|
|
|
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, 947,498 and 5,910,000 shares issued and outstanding, respectively |
|
|
947 |
|
|
|
5,910 |
|
Common Stock, $0.0001 par value, 15,000,000,000 shares authorized; 442,085,940 and 11,976,942 issued and outstanding, respectively |
|
|
44,209 |
|
|
|
1,198 |
|
Additional Paid-In Capital |
|
|
21,869,581 |
|
|
|
14,649,439 |
|
Accumulated Deficit |
|
|
(24,122,318 |
) |
|
|
(19,821,223 |
) |
Total Stockholders' Deficit |
|
|
(2,207,580 |
) |
|
|
(5,164,675 |
) |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
$ |
3,136,891 |
|
|
$ |
2,309,699 |
|
The accompanying notes are an integral part
to these consolidated financial statements.
F-3
PETRON ENERGY II, INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2013 |
|
2012 |
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
Oil & Gas Sales |
|
$ |
276,421 |
|
|
$ |
326,343 |
|
Costs and Expenses |
|
|
|
|
|
|
|
|
Cost of Revenue |
|
|
634,945 |
|
|
|
538,616 |
|
Depletion and Depreciation |
|
|
261,244 |
|
|
|
186,014 |
|
Impairment Charge |
|
|
48,000 |
|
|
|
6,046,000 |
|
Derivative Expense |
|
|
1,691,313 |
|
|
|
— |
|
General and Administrative |
|
|
1,547,774 |
|
|
|
1,736,427 |
|
Interest |
|
|
394,240 |
|
|
|
145,349 |
|
Total Expenses |
|
|
4,577,516 |
|
|
|
8,652,406 |
|
Loss from Operations Before Income Taxes |
|
|
(4,301,095 |
) |
|
|
(8,326,063 |
) |
Income Taxes |
|
|
— |
|
|
|
— |
|
Net Loss |
|
$ |
(4,301,095 |
) |
|
$ |
(8,326,063 |
) |
Loss per share--basic and diluted |
|
$ |
(0.04 |
) |
|
$ |
(0.72 |
) |
Weighted average number of shares--basic and diluted |
|
|
121,078,256 |
|
|
|
11,517,282 |
|
The accompanying notes are an integral part
to these consolidated financial statements.
F-4
PETRON ENERGY II, INC. |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT |
Years Ended December 31, 2013 and 2012 |
|
|
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, 2011 |
1,000 |
$ 1 |
- |
$ - |
11,072,751 |
$ 1,107 |
$ 13,516,557 |
$ (11,495,160) |
$ 2,022,505 |
|
|
|
|
|
|
|
|
|
|
Preferred Stock Issued for Oil Lease Acquisition |
|
|
5,910,000 |
5,910 |
|
|
|
|
5,910 |
Common Stock Issued for Services |
|
|
|
|
147,016 |
15 |
158,632 |
|
158,647 |
Common Stock Sales |
|
|
|
|
717,175 |
72 |
838,254 |
|
838,326 |
Common Stock and Warrants Issued for Penalty Interest Related to Convertible Debt |
|
|
|
|
40,000 |
4 |
135,996 |
|
136,000 |
Net Loss |
|
|
|
|
|
|
|
(8,326,063) |
(8,326,063) |
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2012 |
1,000 |
$ 1 |
5,910,000 |
$ 5,910 |
11,976,942 |
$ 1,198 |
$ 14,649,439 |
$ (19,821,223) |
$ (5,164,675) |
|
|
|
|
|
|
|
|
|
|
Common Stock and Warrants Issued for Services |
|
|
|
|
8,422,130 |
842 |
136,233 |
|
137,075 |
Common Stock Issued in Lawsuit Settlement |
|
|
|
|
2,950,477 |
296 |
137,704 |
|
138,000 |
Common Stock Issued for Loan Fees |
|
|
|
|
3,333,334 |
333 |
159,967 |
|
160,300 |
Common Stock Sales |
|
|
|
|
41,141,643 |
4,114 |
521,036 |
|
525,150 |
Conversion of Notes Payable |
|
|
|
|
231,608,094 |
23,161 |
563,615 |
|
586,776 |
Derivative Liability Related to Note Conversions |
|
|
|
|
|
|
731,266 |
|
731,266 |
Conversion of Preferred Stock |
|
|
(4,962,502) |
(4,963) |
142,653,320 |
14,265 |
4,948,237 |
|
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 |
442,085,940 |
$ 44,209 |
$ 21,869,581 |
$ (24,122,318) |
$ (2,207,580) |
The accompanying notes are an integral part
to these consolidated financial statements.
F-5
|
|
PETRON ENERGY II, INC. |
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOW |
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2013 |
|
2012 |
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(4,301,095 |
) |
|
$ |
(8,326,063 |
) |
Adjustments to reconcile net loss to |
|
|
|
|
|
|
|
|
cash used by operating activities: |
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization |
|
|
261,244 |
|
|
|
186,014 |
|
Accretion of asset retirement obligation |
|
|
4,186 |
|
|
|
--- |
|
Amortization of debt discount |
|
|
211,500 |
|
|
|
— |
|
Derivative expense |
|
|
1,691,313 |
|
|
|
— |
|
Impairment charge |
|
|
48,000 |
|
|
|
6,046,000 |
|
Imputed interest on shareholder loans |
|
|
22,084 |
|
|
|
— |
|
Penalty interest |
|
|
45,250 |
|
|
|
— |
|
Interest related to convertible debt |
|
|
— |
|
|
|
136,000 |
|
Common stock and warrants issued for services |
|
|
137,075 |
|
|
|
158,647 |
|
Common stock issued for lawsuit settlement |
|
|
138,000 |
|
|
|
— |
|
Change in other assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) Decrease in oil and gas receivables |
|
|
(6,010 |
) |
|
|
35,134 |
|
Decrease (Increase) in other assets |
|
|
33,258 |
|
|
|
(3,215 |
) |
Increase in accounts payable |
|
|
595,079 |
|
|
|
273,026 |
|
(Decrease) Increase in accrued liabilities |
|
|
(203,200 |
) |
|
|
303,127 |
|
Increase (Decrease) in related party payable |
|
|
56,343 |
|
|
|
(32,535 |
) |
Decrease in asset retirement obligation |
|
|
(9,739) |
|
|
|
--- |
|
Cash used in operating activities |
|
|
(1,276,712 |
) |
|
|
(1,223,865 |
) |
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investment in oil and gas properties |
|
|
(348,241 |
) |
|
|
(94,049 |
) |
Pipeline investment |
|
|
(30,000 |
) |
|
|
— |
|
Accounts payable dedicated for asset purchase |
|
|
453,000 |
|
|
|
— |
|
Purchase of other equipment |
|
|
(617,766 |
) |
|
|
(30,673 |
) |
Cash used in investing activities |
|
|
(543,047 |
) |
|
|
(124,722 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Bank overdraft |
|
|
57,942 |
|
|
|
— |
|
Proceeds from notes payable |
|
|
1,515,006 |
|
|
|
420,500 |
|
Payments on notes payable |
|
|
(225,811 |
) |
|
|
— |
|
Proceeds from sales of common stock |
|
|
525,150 |
|
|
|
838,326 |
|
Advances from shareholders |
|
|
375,000 |
|
|
|
— |
|
Repayment of advances from shareholders |
|
|
(225,000 |
) |
|
|
— |
|
Loan fees |
|
|
(138,325 |
) |
|
|
— |
|
Increase in deposit to lender |
|
|
(81,187 |
) |
|
|
— |
|
Cash from financing activities |
|
|
1,802,775 |
|
|
|
1,258,826 |
|
|
|
|
|
|
|
|
|
|
Decrease in cash |
|
|
(16,984 |
) |
|
|
(89,761 |
) |
Cash at beginning of the period |
|
|
17,089 |
|
|
|
106,850 |
|
|
|
|
|
|
|
|
|
|
Cash at end of the period |
|
$ |
105 |
|
|
$ |
17,089 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
39,105 |
|
|
$ |
6,849 |
|
Cash paid for income taxes |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Oil & gas properties |
|
$ |
(185,622 |
) |
|
$ |
(5,924,738 |
) |
Borrowings for accounts payable for equipment purchases |
|
|
480,440 |
|
|
|
100,000 |
|
Accounts payable paid through borrowing |
|
|
(480,440 |
) |
|
|
(100,000 |
) |
Notes payable |
|
|
(569,342 |
) |
|
|
— |
|
Accrued liabilities |
|
|
(17,434 |
) |
|
|
14,738 |
|
Common stock |
|
|
37,759 |
|
|
|
— |
|
Preferred stock |
|
|
(4,963 |
) |
|
|
5,910 |
|
Additional paid-in capital |
|
|
6,403,085 |
|
|
|
— |
|
Derivative liability |
|
|
(731,266 |
) |
|
|
— |
|
Stock issuance liability |
|
|
(4,957,539 |
) |
|
|
5,904,090 |
|
Asset retirement obligation |
|
|
185,622 |
|
|
|
— |
|
Loan fees |
|
|
(160,300 |
) |
|
|
— |
|
|
|
$ |
— |
|
|
$ |
— |
|
The accompanying notes are an integral part
to these consolidated financial statements.
F-6
PETRON ENERGY
II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
1. INCORPORATION AND NATURE OF OPERATIONS
Petron Energy II, Inc. (“Petron Energy”
or 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. The Company was incorporated in August 2008 under the laws of the State of Nevada.
As of December 31, 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 pipelines consist 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 an 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
Petron Energy II Pipeline, Inc.
Petron Energy II Well Services, Inc.
The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting principles of the United States. All intercompany transactions
and account balances have been eliminated in consolidation.
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 $4,301,095 for the year ended December 31, 2013 (2012 - $8,326,063) and at December 31, 2013 had an accumulated
deficit of $24,122,318 (2012 - $19,821,223). While the Company has recognized significant 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.
Accounting estimates
The preparation of financial statements in
conformity with generally accepted accounting principles of the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
Cash and cash equivalents
Cash equivalents comprise certain highly liquid
instruments with a maturity of three months or less when purchased. As of December 31, 2013 there were no cash equivalents.
Oil and gas properties
The Company utilizes the full cost method to
account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development
of oil and gas reserves, including such costs as leasehold acquisition costs, capitalized interest costs relating to unproved properties,
geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full
cost pool. When the Company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop
the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates
of proved reserves.
Investments in unproved properties are not
depleted pending determination of the existence of proved reserves. Unproved properties are assessed periodically to ascertain
whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering
the primary lease terms of the properties, the holding period of the properties, and geographic and geologic data obtained relating
to the properties. Where it is not practicable to assess individually the amount of impairment of properties for which costs are
not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed
is added to the costs to be amortized, or is reported as a period expense, as appropriate.
Pursuant to full cost accounting rules, the
Company must perform a ceiling test periodically on its proved oil and gas assets. The ceiling test provides that capitalized costs
less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value
of future net revenue from estimated production of proved oil and gas reserves using current prices, excluding the future cash
outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at a discount factor
of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved
properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax
basis of oil and gas properties. Should the net capitalized costs for a cost center exceed the sum of the components noted above,
an impairment charge would be recognized to the extent of the excess capitalized costs. In 2013 and 2012 the Company recognized
an impairment charge of $48,000 and $5,910,000, respectively, in accordance with the ceiling test.
Sales of proved and unproved properties are
accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly
alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized
in the statement of operations.
Exploration activities conducted jointly with
others are reflected at the Company’s proportionate interest in such activities.
Cost related to site restoration programs are
accrued over the life of the project.
Pipeline and equipment
Depreciation is based on the estimated useful
lives of the assets and is computed using the straight line method. Pipeline, trucks and equipment are recorded at cost. Depreciation
is provided using the following useful lives:
Pipeline |
15 years |
Trucks and equipment |
5—15 years |
Stock-based compensation
The Company accounts for stock options in accordance
with FASB ASC 505, “Equity,” and FASB ASC 718, “Compensation—Stock Compensation.” Accordingly, stock
compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the
year ended December 31, 2013.
Under ASC 718 and 505, the fair value of options
is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires
the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical
stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting
bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining
the expected term of options grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated
as the average of the option’s vesting term and contractual period.
The Company has used this method in determining
the expected term of all options. At such time as the Company has options with graded vesting, the Company will recognize compensation
cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount
of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested
at that date.
Advertising costs
The Company expenses advertising costs as these
are incurred. There were no advertising costs in 2013 or 2012.
Revenue recognition
Oil and gas revenues are recognized when oil
and gas is produced and sold.
Earnings (loss) per share
Basic earnings (loss) per share is computed
using the weighted average number of shares outstanding during the period. The treasury stock method is used to determine the diluted
effect of stock options and warrants. Diluted loss per share is equal to the basic loss per share for the years ended December
31, 2013 and 2012 because common stock equivalents would have been anti-dilutive.
Income taxes
The Company recognizes deferred tax liabilities
and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements
or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary
differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the year
in which the differences are expected to reverse.
Long-lived assets impairment
Long-term assets of the Company are reviewed
for impairment when circumstances indicate the carrying value may not be recoverable in accordance with the guidance established
in Statement of Financial Accounting Standards No. 144 (SFAS 144) (ASC 360), Accounting for the impairment or Disposal of Long-Lived
Assets. For assets that are to be held and used, an impairment loss is recognized when the estimated undiscounted cash flows
associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to
write the asset down to its fair value. Fair values are determined based on discounted cash flows or internal and external appraisals,
as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.
Asset retirement obligations
The Company accounts for asset retirement obligations
in accordance with the provisions of SFAS 143 (ASC 410) “Accounting for Asset Retirement Obligations”. SFAS
143 (ASC 410) requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. The Asset Retirement Obligation as of December 31, 2013 is $220,347 which includes
an increase of $180,069 for the year ended December 31, 2013.
Concentration of credit risk
The Company has financial instruments that
are exposed to concentrations of credit risk and consist primarily of cash and trade accounts receivable. The Company routinely
maintains cash and temporary cash investments at certain financial institutions in amounts substantially in excess of Federal Deposit
Insurance Corporation (“FDIC”) insurance limits. Management believes that these financial institutions are of high
quality and the risk of loss is minimal. At December 31, 2013 the Company had no cash balances in excess of FDIC limits.
Financial instruments
The carrying amount of financial instruments
including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value, unless otherwise stated as
of December 31, 2013 and 2012.
Fair value estimates of financial instruments
are made at the period end based on relevant information about financial markets and specific financial instruments. Because these
estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with
precision. Changes in assumptions can significantly affect estimated fair value.
Contingencies
Certain conditions may exist as of the date
the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more
future events occur or fail to occur. Company management and legal counsel assess such contingent liabilities which inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company,
or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought
therein.
If management determines that it is probable
that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability is accrued in
the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable
but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material, is disclosed.
Commitments
The Company amended its operating lease
for its administrative office in Dallas, Texas on May 10, 2011. The lease will expire on April 30, 2014. The only lease commitment
the Company has at December 31, 2013 is for $13,416 for the office rent through April 2014.
Total rental expense was approximately
$38,776 and $40,012 for years ended December 31, 2013 and 2012, respectively.
Recent 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.
3. PRODUCING OIL AND GAS PROPERTIES
The following summarizes the investment in producing oil & gas
properties as of December 31, 2013 and 2012:
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
Leasehold Cost |
|
$ |
753,373 |
|
|
$ |
753,373 |
|
Development Cost |
|
|
1,011,106 |
|
|
|
537,453 |
|
Tangible Equipment |
|
|
876,948 |
|
|
|
865,698 |
|
|
|
|
2,641,427 |
|
|
|
2,156,524 |
|
Accumulated Depreciation |
|
|
|
|
|
|
|
|
and Depletion |
|
|
(837,795 |
) |
|
|
(731,795 |
) |
Net Investment |
|
$ |
1,803,632 |
|
|
$ |
1,424,729 |
|
Depletion expense for the years ended December
31, 2013 and 2012 was $106,000 and $103,000, respectively.
4. PIPELINE AND OTHER DEPRECIABLE EQUIPMENT
The following summarizes the investment in pipeline and other depreciable
equipment as of December 31, 2013 and 2012:
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
Pipeline |
|
$ |
1,018,000 |
|
|
$ |
988,000 |
|
Accumulated Depreciation |
|
|
(320,452 |
) |
|
|
(245,156 |
) |
Net Pipeline |
|
$ |
697,548 |
|
|
$ |
742,844 |
|
|
|
|
|
|
|
|
|
|
Equipment and Other |
|
$ |
735,041 |
|
|
$ |
117,276 |
|
Accumulated Depreciation |
|
|
(125,309 |
) |
|
|
(45,361 |
) |
Net Equipment and Other |
|
$ |
609,732 |
|
|
$ |
71,915 |
|
Depreciation expense for the years ended December 31, 2013 and 2012
was $155,244 and $83,014, respectively.
5. RELATED PARTY TRANSACTIONS
Petron Energy, Inc. is a company controlled
by the Company’s majority shareholder. In 2013 and 2012, the Company paid Petron Energy, Inc. $225,000 and $61,163, respectively.
These amounts have been reflected in the accompanying consolidated financial statements as charges from a related party and are
included in lease operating expenses for the respective years. The Company has recorded $11,481 and $32,014 in revenue and $11,493
and $36,573 in lease operating expenses (including production taxes) for 2013 and 2012, respectively, representing the operations
of wells operated by Petron Energy, Inc. in which the Company has a working interest.
Effective
August 31, 2012, the Company entered into an Executive Employment Agreement with Floyd L. Smith. Pursuant to the employment
agreement, Mr. Smith agreed to serve as President and Chief Executive Officer of the Company for a term of five years, renewable
thereafter for additional one year periods if not terminated by either party. The employment agreement provides for Mr. Smith to
receive a salary of $200,000 per year; reimbursement for reasonable business expenses; the ability to earn a yearly bonus in the
sole discretion of the Board of Directors of the Company; co-investment rights, providing Mr. Smith the right to participate in
the amount of up to 20% of any acquisition, transaction or funding undertaken by the Company during the term of the employment
agreement; stock options, as adjusted for the reverse stock split to purchase 1,200,000 shares of the Company’s common stock
at an exercise price of $0.039 per share, with cashless exercise rights and a five year term, which vested immediately upon the
parties’ entry into the employment agreement; and 1,000 shares of Series A Preferred Stock which give Mr. Smith Super Majority
Voting Rights.
The employment
agreement includes a non-competition provision, prohibiting Mr. Smith from competing against the Company in Texas, Louisiana, Oklahoma
or New Mexico for a term of 12 months following the termination of the employment agreement.
The employment
agreement can be terminated by the Company for cause (as defined in the agreement), without cause, or by Mr. Smith for good reason
(as defined in the agreement) or without good reason. If the employment agreement is terminated due to Mr. Smith’s death,
disability, with cause by the Company or without good reason by Mr. Smith, he is due the consideration earned by him up until the
date of termination of the agreement. If the employment agreement is terminated by the Company without cause or by Mr. Smith for
good reason, Mr. Smith is due the consideration earned by him up until the date of termination, plus the lesser of six months of
salary due to Mr. Smith under the employment agreement and the remaining amount of consideration due pursuant to the terms of the
employment agreement in a lump sum.
Mr. Smith
also agreed to assign the Company rights to any intellectual property and inventions which he creates or conceives during the term
of the employment agreement relating to the Company’s business pursuant to the employment agreement.
6. NOTES PAYABLE
The following summarizes the
outstanding notes payable as of December 31, 2013 and 2012:
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
Draw from a $5,000,000 secured line of credit, interest at 11%, matures April 5, 2014 |
|
$ |
450,000 |
|
|
$ |
— |
|
Unamortized loan costs |
|
|
(87,125) |
|
|
|
|
|
Cash deposit held by lender |
|
|
(81,187) |
|
|
|
|
|
|
|
|
281,688 |
|
|
|
|
|
Unsecured notes from various investors, interest at 20%--25%, maturing on April 3, 2014, issued for overriding and working interests. |
|
|
200,000 |
|
|
|
— |
|
Convertible unsecured notes from a financial institution, interest at 12%, maturing on December 2 and December 6, 2014 with the first dates of conversion eligibility being December 2 and December 6, 2013. The conversion price is the lower of $0.015 per share or 30% of the lowest closing bid price for the common stock during the 20 trading days previous to the conversion date. |
|
|
139,374 |
|
|
|
— |
|
Convertible unsecured notes from a financial institution, interest at 8%, maturing October 25, 2014 and November 25, 2014, the respective first date of conversion eligibility for the respective notes with an applicable discount rate of 50% from the average trading price for the lowest three closing prices for the common stock during the 10 trading days previous to the conversion date. |
|
|
133,000 |
|
|
|
— |
|
Convertible unsecured notes from a financial institution, interest at 9%, maturing on October 28, 2014 November 22, 2014 and November 29, 2014, the respective first date of conversion eligibility with an applicable discount rate of 50% from the lowest closing bid price for the common stock during the 10 trading days previous to the conversion date. |
|
|
131,169 |
|
|
|
— |
|
Unsecured note from an investor, interest at 25%, matures April 3, 2014. |
|
|
100,000 |
|
|
|
— |
|
Unsecured notes from various investors, non - interest bearing, maturing from February to November 2014, issued for overriding and working interests. |
|
|
75,000 |
|
|
|
250,000 |
|
Convertible unsecured note from a financial institution, interest at 8%, matures May 27, 2014. First date of conversion eligibility was February 28, 2014 with an applicable discount rate of 42% from the average trading price for the lowest 3 closing bid prices for the common stock during the 10 trading days previous to the conversion date. |
|
|
68,000 |
|
|
|
— |
|
Convertible unsecured note from a financial institution, interest at 8%, matures August 4, 2014. First date of conversion eligibility is April 30, 2014 with an applicable discount rate of 42% from the average trading price for the lowest 3 closing bid prices for the common stock during the 10 trading days previous to the conversion date. |
|
|
53,000 |
|
|
|
— |
|
Convertible unsecured note from a financial institution, interest at 10%, maturing on October 8, 2014. The first date of conversion eligibility was October 8, 2013. The conversion price is the lower of $0.0075 per share or 50% from average of the 2 lowest closing bid price for the common stock during the 15 trading days previous to the conversion date. |
|
|
50,000 |
|
|
|
— |
|
Initial draw under a convertible unsecured note from a financial institution, 10% original issue discount and a one-time 12% interest charge, matures December 9, 2014. First date of conversion eligibility was December 9, 2013. Conversion price is the lesser of $0.0025 per share or 60% of the lowest traded price for the common stock during the 25 trading days previous to the conversion date. |
|
|
50,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
F-13 |
|
|
|
|
|
|
|
|
|
Unsecured note from an investor, interest at 20%, maturing on April 18, 2014 |
|
|
45,000 |
|
|
|
— |
|
Convertible unsecured notes from a financial institution, interest at 8%, matures June 19, 2014. First date of conversion eligibility was December 19, 2013 with an applicable discount rate of 45% from the average trading price for the lowest 2 closing bid prices for the common stock during the 25 trading days previous to the conversion date. |
|
|
44,000 |
|
|
|
— |
|
Convertible unsecured note from a financial institution, interest at 8%, matures April 15, 2014. First date of conversion eligibility was January 10, 2014 with an applicable discount rate of 42% from the average trading price for the lowest 3 closing bid prices for the common stock during the 10 trading days previous to the conversion date. |
|
|
32,500 |
|
|
|
— |
|
Unsecured note from a company, interest at 5%, matures December 18, 2013. |
|
|
30,000 |
|
|
|
— |
|
Unsecured convertible note from an investor, interest at 10%, maturing February 9, 2013. |
|
|
— |
|
|
|
65,000 |
|
Convertible unsecured note from a financial institution, interest at 5%, matures April 30, 2013. First date of conversion eligibility was January 22, 2013 with an applicable discount rate of 42% from the average trading price for the lowest 3 closing bid prices for the common stock during the 10 trading days previous to the conversion date. |
|
|
— |
|
|
|
63,000 |
|
Convertible unsecured note from a financial institution, interest at 5%, matures April 9, 2013. First date of conversion eligibility was March 13, 2013 with an applicable discount rate of 42% from the average trading price for the lowest 3 closing bid prices for the common stock during the 10 trading days previous to the conversion date. |
|
|
— |
|
|
|
42,500 |
|
|
|
|
1,432,731 |
|
|
|
420,500 |
|
Short-term portion |
|
|
(1,432,731 |
) |
|
|
(170,500 |
) |
Long-term notes payable |
|
$ |
— |
|
|
$ |
250,000 |
|
7. DERIVATIVES
In 2013 the Company entered into numerous convertible
debt agreements of six to twelve months in duration. At December 31, 2013 the Company had $701,043 in outstanding convertible debt
obligations that bear interest from 5% to 12%. Interest expense recognized related to the convertible debt was $26,218. There were
no detachable warrants included in the debt agreements. The derivative liability related to the convertible feature of these notes
payable is $960,047 at December 31, 2013. Derivative expense recognized during the year was $1,691,313. The value of the conversion
shares was determined using the Black-Scholes formula. In connection with the valuation of the conversion shares, the Company used
the following assumptions: dividend yield—0%, risk free interest rate--.07%, volatility—377.99% and an expected term
of 1/10th of a year.
8. INCOME TAXES
The Company uses the liability method in accounting
for income taxes. Deferred income tax assets and liabilities are determined based upon differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
The potential benefit of net operating loss
carry forwards has not been recognized in the accompanying consolidated financial statements since the Company cannot be assured
that it is more likely than not that such benefit will be utilized in future years.
The Company is subject to United States federal
and state income taxes at an approximate rate of 34%. The reconciliation of the provision for income taxes at the United States
federal statutory rate compared to the Company’s income tax expense as reported for the years ended December 31, 2013 and
2012 is as follows:
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
4,301,095 |
|
|
$ |
8,326,063 |
|
Income Tax Rate |
|
|
34 |
% |
|
|
34 |
% |
Income Tax Benefit |
|
|
1,462,372 |
|
|
|
2,830,861 |
|
Permanent Difference |
|
|
(622,983) |
|
|
|
(103,664 |
) |
Valuation Allowance Change |
|
|
(839,389) |
|
|
|
(2,727,197 |
) |
Deferred Income Tax (Recovery) |
|
$ |
— |
|
|
$ |
— |
|
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes.
Future income taxes arise from temporary differences
in the recognition of income and expenses for financial reporting and tax purposes. The significant components of future income
tax assets and liabilities at December 31, 2013 and 2012 are as follows:
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards |
|
$ |
3,586,257 |
|
|
$ |
2,711,283 |
|
Impairments |
|
|
2,071,960 |
|
|
|
2,055,640 |
|
Asset Retirement Obligation |
|
|
4,080 |
|
|
|
--- |
|
Depletion and Depreciation |
|
|
(279,485 |
) |
|
|
(223,500 |
) |
Net Deferred Tax Assets |
|
|
5,382,812 |
|
|
|
4,543,423 |
|
Valuation Allowance |
|
|
(5,382,812 |
) |
|
|
(4,543,423 |
) |
Deferred Tax Asset |
|
$ |
— |
|
|
$ |
— |
|
The Company has recognized a valuation allowance
for the deferred tax assets for which it is more likely than not that the realization will not occur. The valuation allowance is
reviewed periodically. When circumstance change and this causes a change in management's judgment about the realizeability of deferred
tax assets, the impact of the change on the valuation allowance is generally reflected in current income.
The net operating loss carryforwards for income
tax purposes are approximately $10,550,000 and will begin to expire in 2026. Neither the Company nor any of its subsidiaries have
ever been the subject of an examination by the Internal Revenue Service.
Pursuant to Section 382 of the Internal Revenue
Code, use of the Company’s net operating loss carryforwards may be limited if the Company experiences a cumulative change
in ownership of greater than 50% in a moving three year period. Ownership changes could impact the Company’s ability to utilize
net operating losses and credit carryforwards remaining at the ownership change date. The limitation would be determined by the
fair market value of common stock outstanding prior to the ownership change, multiplied by the applicable federal rate.
9. STOCKHOLDERS’ EQUITY
Preferred Stock
The articles of incorporation of the Company
authorize the issuance of 10,000,000 shares of $0.001 par value Preferred Stock. The Board of Directors is authorized, from time
to time, to divide the preferred shares into “Series” and to fix and determine separately for each Series any or all
of the relative rights and preferences.
In connection with an employment agreement,
the Company issued 1,000 shares of Series A Preferred Stock in August 2011. The Series A Preferred Stock has voting rights on all
shareholder matters equal to fifty-one percent (51%) of the total vote. There are no other liquidation, conversion or redemption
rights.
On February 17, 2012, the Board of Directors
designated “Series B Convertible Preferred Stock” with the number of shares initially constituting such series being
up to 6,000,000 shares, issuing 5,910,000 for the acquisition of oil & gas properties in Knox County, Texas.
The Board of Directors does not formally
approve the declaration of the preferred stock dividends; therefore, as checks for payment of preferred dividends are approved
by the CEO of the Company, dividend expense is recognized. For the years ended December 31, 2013 and 2012, there were no preferred
stock dividends.
Warrants
The following summarizes the stock purchase
warrant transactions for the year ended December 31, 2013 and 2012:
|
|
Number of Warrants |
|
Weighted Average Exercise Price |
|
|
|
|
|
Outstanding, December 31, 2011 |
|
|
1,000,000 |
|
|
$ |
0.8000 |
|
Warrants Issued with Convertible Debt |
|
|
100,000 |
|
|
$ |
1.4000 |
|
Outstanding, December 31, 2012 |
|
|
1,100,000 |
|
|
$ |
0.8545 |
|
Warrants Issued to an Officer |
|
|
807,760 |
|
|
$ |
0.0125 |
|
Outstanding, December 31, 2013 |
|
|
1,907,760 |
|
|
$ |
0.4980 |
|
10. FAIR VALUE ESTIMATES
In February 2007 the FASB issued ASC 820 “Fair
Value Measurements and Disclosures”. The objective of ASC 820 is to increase consistency and comparability in fair value
measurements and to expand disclosures about fair value measurements. ASC 820 defines fair value establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 applies
under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements.
The Company measures its options at fair value
in accordance with ASC 820. 820 specifies a valuation hierarchy based on whether the inputs to those valuations techniques are
observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect the Company’s own assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1—Quoted prices
for identical instruments in active markets;
Level 2—Quoted prices for similar
instruments in active markets, quoted process for identical or similar instruments in markets that are not active, and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3—Valuations derived
from valuations techniques in which one or more significant inputs or significant value drivers are unobservable.
This hierarchy requires the Company to minimize
the use of unobservable inputs and to use observable market data, if available, when estimating fair value. The fair values of
the common stock options, preferred stock and common stock issuances at December 31, 2013 and 2012 were as follows:
|
|
Markets for Identical Assets |
|
Observable Inputs |
|
Unobservable Inputs |
|
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Warrants |
|
$ |
— |
|
|
$ |
84,000 |
|
|
$ |
— |
|
|
$ |
84,000 |
|
Common Stock |
|
$ |
— |
|
|
$ |
52,000 |
|
|
$ |
— |
|
|
$ |
52,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Warrants |
|
$ |
— |
|
|
$ |
11,400 |
|
|
$ |
— |
|
|
$ |
11,400 |
|
Common Stock |
|
$ |
— |
|
|
$ |
125,675 |
|
|
$ |
— |
|
|
$ |
125,675 |
|
Convertible Debt Derivative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability |
|
$ |
— |
|
|
$ |
960,047 |
|
|
$ |
— |
|
|
$ |
960,047 |
|
Expense |
|
$ |
— |
|
|
$ |
1,691,313 |
|
|
$ |
— |
|
|
$ |
1,691,313 |
|
Paid-in Capital |
|
$ |
— |
|
|
$ |
731,266 |
|
|
$ |
— |
|
|
$ |
731,266 |
|
11. SUBSEQUENT EVENTS
The Company’s management has evaluated
subsequent events through April 9, 2014, the date the consolidated financial statements were issued.
The Company filed a Certificate of
Amendment (the “Third Amendment”) to the Company’s Articles of Incorporation on February 4, 2014 to increase
the number of authorized shares of the Company’s common stock from 2,989,999,999 to 6,000,000,000 and on February 27, 2014
the Company filed a Certificate of Amendment (the “Fourth Amendment”) to increase the number of authorized shares of
the Company’s common stock from 6,000,000,000 to 15,000,000,000. On March 27, 2014 the Company filed a Certificate of Amendment
(the “Fifth Amendment”) to change the par value of its common stock from $0.001 per share to $0.0001 per share. As
of the date of this registration statement, we have authorized capital stock consisting of 15,000,000,000 shares of common stock,
$0.0001 par value per share and 10,000,000 shares of preferred stock, $0.001 par value per share.
On December 13, 2013 the Company executed
a $10,000,000 Investment Agreement whereby an investor will buy shares of the Company’s common stock, subject to certain
limitations, as requested by the Company. The purchase price is at a 30% discount from the lowest closing bid price for the ten
days before the purchase request. The Investment Agreement cannot be used until the Company as an effective Registration Statement
filed with the Securities and Exchange Commission.
Subsequent to December 31, 2013 the
Company has issued 1,417,862,657 shares of its common stock. 154,066,994 shares were issued for conversions of Preferred Stock,
990,314,609 were issued from conversions of notes payable and the remaining were purchased by accredited investors or issued for
services rendered.
Other than the changes in the authorized
shares of common stock and the change in the par value of the common stock, in the opinion of the Company’s management, there
have been no other significant subsequent events since December 31, 2013.
12. SUPPLEMENTAL INFORMATION ON OIL & GAS (Unaudited)
|
2013 |
2012 |
Capitalized Costs Relating to Oil and Gas Producing |
|
|
Activities at December 31, 2013 and 2012 |
|
|
|
|
|
Proved Oil and Gas Properties |
$ 2,438,541 |
$ 1,953,638 |
Proved Non-producing Oil and Gas Properties |
202,886 |
202,886 |
|
2,641,427 |
2,156,524 |
Less Accumulated Depletion |
(837,795) |
(731,795) |
|
|
|
Net Capitalized Costs Relating to Oil and Gas Producing Activities |
$ 1,803,632 |
$ 1,424,729 |
|
|
|
Costs incurred in Oil and Gas Producing Activities for the |
|
|
year ended December 31, 2013 and 2012 |
|
|
|
|
|
Property acquisition cost: |
|
|
Proved |
$ - |
$ 5,910,000 |
Unproved |
- |
- |
Exploration and development costs |
348,281 |
203,662 |
|
|
|
Depletion rate per equivalent barrel of production |
$ 27.89 |
$ 34.92 |
|
|
|
Results for Operations for Oil and Gas Producing Activities for the |
|
|
year ended December 31, 2013 and 2012 |
|
|
|
|
|
Oil and Gas Sales |
$ 276,421 |
$ 293,798 |
Less: Production Costs |
634,945 |
538,616 |
Depletion, Depreciation and Amortization |
106,000 |
103,000 |
Impairment of oil and gas investment |
48,000 |
6,046,000 |
|
(512,524) |
(6,393,818) |
Income Tax Benefit |
- |
- |
|
|
|
Results of Operations for Oil and Gas Producing Activities |
|
|
(excluding corporate overhead and financing costs) |
$ (512,524) |
$ (6,393,818) |
Reserve Information
The following estimates of proved and proved
developed reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport
to reflect realizable values or fair market values of the Company’s reserves. The Company emphasizes that reserve estimates
are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties.
Accordingly, these estimates are expected to change as future information becomes available. All of the Company’s reserves
are located in the United States.
Proved reserves are estimated reserves of crude
oil (including condensates and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed
reserves are those expected to be recovered through existing wells, equipment, and operating methods.
The standardized measure of discounted future
net cash flows is computed by applying average prices of oil and gas based upon the prior 12 months to the estimated future production
of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing
the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future
tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and
assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of
10% a year to reflect the estimated timing of the future cash flows.
The following table sets forth estimated proved oil and gas reserves together with the changes therein for the years |
ended December 31, 2013 and 2012: |
|
|
|
|
|
2013 |
2012 |
|
Oil |
Gas |
Oil |
Gas |
(bbls) |
(mcf) |
(bbls) |
(mcf) |
|
|
|
|
|
Proved Developed and Undeveloped Reserves: |
|
|
|
|
Beginning of the year |
35,031 |
106,650 |
59,191 |
- |
Revisions of previous estimate |
3,125 |
95,541 |
(30,283) |
106,650 |
Purchases |
- |
- |
8,959 |
- |
Production |
(2,478) |
(8,580) |
(2,836) |
- |
End of the year |
35,678 |
193,611 |
35,031 |
106,650 |
Proved Developed Reserves: |
|
|
|
|
Beginning of year |
35,031 |
106,650 |
59,191 |
- |
End of year |
35,678 |
193,611 |
35,031 |
106,650 |
|
|
|
|
|
The following table sets forth the Standardized Measure of Discounted Future Net |
|
|
Cash Flows for 2013 and 2012 and shows the reconciliation of the changes therein: |
|
|
|
2013 |
2012 |
|
|
Standardized measure of Discounted Future |
|
|
|
|
Net Cash Flows at December 31 |
|
|
|
|
Future cash inflows |
$ 4,167,792 |
$ 3,611,006 |
|
|
Future production costs |
(1,604,556) |
(1,383,744) |
|
|
Future development costs |
(45,000) |
(45,000) |
|
|
|
2,518,236 |
2,182,262 |
|
|
Future net cash flows 10% annual discount |
|
|
|
|
for estimated timing of cash flows |
(725,412) |
(757,410) |
|
|
|
|
|
|
|
Standardized measure of Discounted Future |
|
|
|
|
Net Cash Flows relating to Proved Oil and |
|
|
|
|
Gas Reserves |
$ 1,792,824 |
$ 1,424,852 |
|
|
The following reconciles the change in the |
|
|
|
|
standardized measure of discounted future |
|
|
|
|
net cash flows during the year: |
|
|
|
|
Beginning of the year |
$ 1,424,852 |
$ 1,750,619 |
|
|
Purchases of minerals in place |
- |
231,772 |
|
|
Sales of oil and gas produced, net of |
|
|
|
|
production costs |
358,524 |
242,597 |
|
|
Net changes in prices and production costs |
(1,317,946) |
(496,481) |
|
|
Development costs incurred during the year |
|
|
|
|
which were previously estimated |
- |
94,661 |
|
|
Net change in estimated future development |
|
|
|
|
costs |
- |
(35,339) |
|
|
Revisions of previous quantity estimates |
1,295,394 |
(1,133,600) |
|
|
Change in discount |
32,000 |
770,623 |
|
|
End of year |
$ 1,792,824 |
$ 1,424,852 |
|
|
The main reason for the
increase in the gas reserves in 2013 was the revision on one lease due to the better than expected production levels. The revision
on this lease was an increase of 73,992 mcf. The increase in the gas reserves in 2012 was the result of development activity undertaken
in 2012 that resulted in a reserve revision to proved developed.
In 2012 certain development
efforts did not result in a favorable outcome when completed so the reserves relative to the lease were revised downward by 11,849.
Also in 2012 there were wells taken out of production due to repair issues which resulted in a further downward revision of 16,705
barrels. All other revisions resulted in a net decrease in proved reserves of 1,729 barrels for a net total downward revision in
2012 of 30,283 barrels.
The 2012 purchases of minerals
in place were from the acquisition of oil and gas interests in Knox, County, Texas. The Company exchanged preferred stock for these
interests on February 27, 2012 as explained in footnote 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 Annual Report on Form 10-K (the "Evaluation Date"), has concluded that as of the Evaluation
Date, our disclosure controls and procedures were 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. |
|
Management's Annual Report on Internal Control over
Financial Reporting
The management of the Company
is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) under the Exchange Act. The Company's internal control over financial reporting is a process designed under the
supervision of the Company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America (US GAAP) and includes those policies and procedures
that: |
|
· |
Provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
|
· |
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect of the financial statements. |
Management recognizes that
there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal
control can provide only reasonable assurance with respect of financial statement preparation and may not prevent or detect misstatements.
In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions
or due to deterioration in the degree of compliance with our established policies and procedures.
As of December 31, 2013,
management assessed the effectiveness of the Company's internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments.”
Based on that evaluation,
management concluded that, during the period covered by this report, such internal controls and procedures were not effective to
detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed
in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that
taken together may be considered to be a material weakness.
A material weakness is
a deficiency, or combination of deficiencies, that results in more than a remote likelihood that a material misstatement of annual
or interim financial statements will not be prevented or detected. In connection with the assessment described above, management
identified the following control deficiencies that represent material weaknesses at December 31, 2013:
(1) Inadequate segregation of duties
consistent with control objectives. The aforementioned material weakness was identified by our Chief Executive Officer and our
Chief Financial Officer in connection with the review of our financial statements.
Management believes that
the material weakness set forth in Item (1) above did not have an effect on the Company's financial reporting in
2013. However, management believes that the lack of a functioning audit committee and lack of a majority of outside directors on
the Company's board of directors can adversely affect reporting in the future years, when our operations become more complex and
less transparent and require higher level of financial expertise from the overseeing body of the Company.
We are committed to improving
our financial organization. As part of this commitment, we will, as soon as funds are available to the Company (1) appoint one
or more outside directors to our board of directors who shall be appointed to the audit committee of the Company resulting in a
fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls
and procedures; (2) create a position to segregate duties consistent with control objectives and will increase our personnel resources;
and (3) hire independent third parties to provide expert advice.
We will continue to monitor
and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an
ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary
and as funds allow. This annual report does not include an attestation report of the Company's independent registered public accounting
firm regarding internal control over financial reporting. Management's report is not subject to attestation by the Company's independent
registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide
only management’s report in this annual report.
Changes in internal control over financial reporting.
There were no changes in
our internal control over financial reporting during our most recent fiscal quarter that materially affected, or were reasonably
likely to materially affect, our internal control over financial reporting. |
ITEM 9B. OTHER INFORMATION.
In
2013, 4,962,502 shares of the Company’s Series B Convertible preferred stock converted into an aggregate of 142,653,320 shares
of the common stock of the Company. Under the Plan of Reorganization and Asset Purchase Agreement and the Certificate of Designation,
these shares of Series B Convertible preferred stock convert into common shares of the Company having a total value of $5,910,000,
based on the average trading price of the Company’s common stock on the five days prior to the date of conversion, which
was on January 7, 2013 (the “Conversion Date”). However, the Series B cannot be converted by the holders thereof if
such conversion would result in the acquisition by such holder of more than 9.99% of the Company’s outstanding stock (the
“Ownership Limitation”). At March 14, 2013, we had 710,438 shares of Series B Convertible Preferred Stock issued and
outstanding, which had not converted because of the Ownership Limitation.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Identification of Directors and Executive Officers
The following
table sets forth the name, age and position of our Directors and executive officer. There are no other persons who can be classified
as a promoter or controlling person of us. Our executive officer and Directors are as follows:
Name |
Age |
Position |
Date Appointed |
Floyd L. Smith |
52 |
Chief Executive Officer, President, Secretary, Treasurer and Director |
December 16, 2013 |
Bob Currier |
63 |
Chief Financial Officer |
July 15, 2013 |
David Knepper |
62 |
Director |
December 16, 2013 |
Judson F. Hoover |
55 |
Director |
December 16, 2013 |
Background and Business Experience
of Directors and Executive Officers
Floyd
L. Smith
Mr.
Smith has served as the President of Petron Energy II, Inc. and its predecessor, Petron Special Energy Corp., an oil and gas exploration
company since June 2007. Since May 2004, Mr. Smith has served as President of Petron Properties, LLP, a real estate company. From
January 2004 to August 2008, Mr. Smith served as the President and owner of Murray Mortgage. Since October 1998 Mr. Smith has served
as President of Petron Energy, Inc. From July 1992 to April 1998, Mr. Smith served as a broker at Grand Energy, Inc., working in
sales. From August 1984 to July 1992, Mr. Smith served as a store manager in Wal-Mart Stores, Inc. Mr. Smith obtained his
Bachelor’s Degree from Harding University, in Searcy, Arkansas in Business Administration in 1984.
Mr. Smith has deep knowledge
of the Company’s history, strategies, technologies and culture. Having led Petron Special as Chief Executive Officer and
as a Director since 2007, Mr. Smith has been the driving force behind the strategies and operations of Petron Special. His
leadership of diverse business units and functions before becoming Chief Executive Officer gives Mr. Smith profound insight
into the product development, marketing, finance, and operations aspects of the Company.
Bob Currier
Mr. Currier has a CPA certificate
and has over 35 years of experience both in the public accounting and corporate sectors. Since 1987, Mr. Currier has been involved
with entrepreneurial ventures in industries ranging from medical to real estate to oil and gas. With these companies, he has been
responsible for developing financial reporting systems, helping raise capital, implementing internal controls and budget preparation.
His experience has included both public and private entrepreneurial companies. He has also worked on SEC reporting engagements
on a contract basis.
Mr. Currier started his
professional career in 1971 with the audit staff at Ernst & Ernst in Kansas City. After six years, he transferred to the Paris,
France office where he spent six years working on the audit of the French national oil company (Elf Aquitaine) and U. S. companies
such as Eli Lilly and Harris Corporation. On the French national oil company audit, he was responsible for the exploration and
production subsidiaries, the consolidation and joint venture audits. From Paris, he moved to the Dallas office and transitioned
from oil and gas auditing to entrepreneurial services and was named the Vice Chairman of the entrepreneurial services group. Mr.
Currier’s experience with the entrepreneurial services group included working with business plans and financial projections
for various start-up companies.
David Knepper
Mr.
Knepper has held multiple positions in the oil and gas industry over the course of the last 36 years. Mr. Knepper has served as
President of Dogwood Operating Company, Inc., since July 2011. From June 2009 to June 2011, Mr. Knepper served as a Manager and
as reorganization officer of MSB Energy. From May 2006 to May 2009, Mr. Knepper served as the Vice President of Engineering of
Striker Petroleum. From June 2002 to May 2006, Mr. Knepper served as a private consultant to various oil and gas clients. From
February 2000 to June 2002, Mr. Knepper served as a Manager – Special Projects, at Tribo Companies. From October 1993 to
February 2000, Mr. Knepper served as Executive Director of Probe Resources. From August 1991 to October 1993, Mr. Knepper served
as a Consultant to STZ Petroleum. From February 1990 to August 1991, Mr. Knepper served as Vice President of Acquisitions of DKM
Resources. From August 1984 to December 1989, Mr. Knepper served as Manager of Acquisitions of Transco Exploration. From September
1982 to July 1984, Mr. Knepper served as Vice President of Engineering of L&A Energy. From May 1979 to September 1982, Mr.
Knepper served as Acquisition Manager for Damson Oil. From May 1975 to May 1979, Mr. Knepper served as Production Engineer, Reservoir
Engineer and the chairman of multiple committees at Amoco Production.
Mr.
Knepper obtained his Bachelor’s Degree from Texas A&M University in 1975. Mr. Knepper is a member of the Society of Petroleum
Engineers, the Texas Society of Professional Engineers and the Student Engineers Council – Texas A&M University.
Mr.
Knepper has had a long and successful career in the oil and gas industry. He has significant experience in the operations of public
and private companies. As evidenced by his broad network of resources developed over many years of involvement in the energy industry.
Mr. Knepper understands how to locate, evaluate and negotiate oil and gas properties. Mr. Knepper’s depth of experience and
expansive network as a board member makes him a significant asset to the Company.
Judson F. Hoover
Judson Rick F. Hoover received
his Bachelor of Science degree from Regis University in 1986. Shortly after graduation, he received his Certificate of Public Accounting
in the State of Colorado. He has extensive experience in financial matters, mergers, acquisitions, restructuring, public company
compliance, oil and gas operations, and real estate. From December 2004 to March 2007, Mr. Hoover served as CFO for Ness Energy
International, a publicly traded oil and gas company with operations in Texas and Israel. From June 2007 to June 2009, he served
as Controller for Union Drilling, Inc., a publicly traded oil services company. From 1997 to 2004 and from 2007 through 2010, Mr.
Hoover provided consulting services relating to various aspects of international and national publicly held energy companies. From
March 31, 2011 to September 28, 2012, Mr. Hoover had served as the Chief Financial Officer of Sun River Energy, Inc. With over
20 years of national and international experience in executive management, of which 10 years were in oil and gas and 22 years were
served on behalf of publicly traded companies.
Our
Directors and any additional Directors we may appoint in the future are elected annually and will hold office until our next annual
meeting of the shareholders and until their successors are elected and qualified. Officers will hold their positions at the pleasure
of the Board of Directors, absent any employment agreement. Our officers and Directors may receive compensation as determined by
us from time to time by vote of the Board of Directors. Such compensation might be in the form of stock options. Directors may
be reimbursed by the Company for expenses incurred in attending meetings of the Board of Directors. Vacancies in the Board are
filled by majority vote of the remaining Directors.
Term of Office
Each of our officers is
elected by the Company’s Board of Directors to serve until the next annual meeting of Directors or until their successors
are duly elected and qualified. Each of our Directors is elected by the Company’s shareholders and shall hold office until
the next annual meeting of shareholders and until his/her successor shall have been duly elected and qualified.
Family Relationships
There
are no family relationships among our Directors or executive officers.
Involvement
in Certain Legal Proceedings
During the past ten years
no director, executive officer, promoter or control person of the Company has been involved in the following:
|
(1) |
A petition under the Federal bankruptcy laws or any state insolvency law which was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing with the exception of Bob Currier who was the Chief Financial Officer of a non-public mortgage company that declared bankruptcy in May 2011 |
|
(2) |
Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); |
|
(3) |
Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: |
i. Acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by
the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan
association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
ii. Engaging in any type of business practice; or
iii. Engaging in any activity in connection with the purchase
or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities
laws;
|
(4) |
Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity; |
|
(5) |
Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated; |
|
(6) |
Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated; |
|
(7) |
Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: |
i. Any Federal or State securities or commodities law or regulation;
or
ii. Any law or regulation respecting financial institutions or
insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil
money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
iii. Any law or regulation prohibiting mail or wire fraud or
fraud in connection with any business entity; or
|
(8) |
Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Committees
of the Board
Our
Company currently does not have nominating, compensation or audit committees or committees performing similar functions nor does
our Company have a written nominating, compensation or audit committee charter. Our Directors believe that it is not necessary
to have such committees, at this time, because the functions of such committees can be adequately performed by the Board of Directors.
Our
Company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for
Directors. The Board of Directors believes that, given the stage of our development, a specific nominating policy would be premature
and of little assistance until our business operations develop to a more advanced level. Our Company does not currently have any
specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or
procedure for evaluating such nominees. The Board of Directors will assess all candidates, whether submitted by management or shareholders,
and make recommendations for election or appointment.
A
shareholder who wishes to communicate with our Board of Directors may do so by directing a written request addressed to our President
and Director, at the address appearing on the first page of this filing.
Risk Oversight
Effective
risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business
decision, the Board of Directors discusses risk throughout the year generally or in connection with specific proposed
actions. The Board of Directors’ approach to risk oversight includes understanding the critical risks in the
Company’’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities
for risk oversight among the full Board of Directors, and fostering an appropriate culture of integrity and compliance with
legal responsibilities.
Corporate Governance
The
Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely
and understandable disclosure in reports and documents that the Company files with the Securities and Exchange Commission and in
other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations.
The Company has not formally adopted a written code of business conduct and ethics that governs the Company’s employees,
officers and Directors as the Company is not required to do so.
In
lieu of an Audit Committee, the Company’s Board of Directors is responsible for reviewing and making recommendations concerning
the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial
statements and other services provided by the Company’s independent public accountants. The Board of Directors reviews the
Company's internal accounting controls, practices and policies.
Code of Ethics
Our Board of Directors
has not adopted a code of ethics due to the fact that we presently only have three Directors and four employees. We anticipate
that we will adopt a code of ethics when we increase either the number of our Directors or the number of our employees.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange
Act requires our executive officers and Directors, and persons who own more than ten percent of our common stock to file reports
of ownership and change in ownership with the Securities and Exchange Commission and the exchange on which the common stock is
listed for trading. Executive officers, Directors and more than ten percent (10%) stockholders are required by regulations promulgated
under the Exchange Act to furnish us with copies of all Section 16(a) reports filed. Based solely on our review of copies of the
Section 16(a) reports filed for the fiscal years ended December 31, 2013, we believe that our executive officers, Directors and
ten percent (10%) stockholders complied with all reporting requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets
forth the compensation paid to our executive officers during the twelve month periods ended December 31, 2013, 2012 and 2011:
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
Nonqualified |
|
|
|
|
|
|
Year |
|
|
|
|
|
|
|
|
|
Incentive |
|
Deferred |
|
|
|
|
Name and |
|
Ended |
|
|
|
|
|
Stock |
|
Option |
|
Plan |
|
Compensation |
|
All Other |
|
|
Principal |
|
December |
|
Salary |
|
Bonus |
|
Awards |
|
Awards |
|
Compensation |
|
Earnings |
|
Compensation |
|
Total |
Position |
|
|
31 |
|
|
|
($) |
|
|
|
($) |
|
|
|
($) |
|
|
|
($) |
|
|
|
($) |
|
|
|
($) |
|
|
|
($) |
|
|
|
($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floyd L. Smith CEO, President, Secretary, Treasurer and Director |
|
|
2011 |
|
|
$ |
181,331 |
|
|
|
— |
|
|
|
$ 4,791 (1) |
|
|
|
$ 377,456 (2) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
563,578 |
|
|
|
|
2012 |
|
|
$ |
200,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
200,000 |
|
|
|
|
2013 |
|
|
$ |
200,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bob Currier |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFO (3) |
|
|
2013 |
|
|
$ |
79,750 |
|
|
|
— |
|
|
|
— |
|
|
$ |
11,400 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
91,150 |
|
The
table above does not include prerequisites and other personal benefits in amounts less than 10% of the total annual salary and
other compensation. There have been no changes in the Company’s compensation policy since the end of the Company’s
last fiscal year, December 31, 2013.
(1) Represents
the value, pursuant to Accounting Standards Codification Topic 718, of 1,000 shares of Series A Preferred Stock that the Company
issued to Mr. Smith.
(2) Represents
the value, pursuant to Accounting Standards Codification Topic 718, of Stock Options to purchase 12,000,000 shares of the Company’s
common stock at an exercise price of $0.0039 per share, which were granted to Mr. Smith pursuant to the terms of his Executive
Employment Agreement, which grant was effective August 31, 2011. See ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
for additional information on this agreement.
(3) Bob
Currier was appointed as the Company’s Chief Financial Officer on July 15, 2013. Additionally, the Company entered
into an Officer Employment Agreement with Mr. Currier (the “Employment Agreement”), effective July 1, 2013. See ITEM
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS for additional information on this agreement.
Outstanding Equity Awards at Fiscal Year-End
The table below summarizes
the outstanding equity awards to our executive officers as of December 31, 2013.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END |
OPTION AWARDS |
|
STOCK AWARDS |
Name |
Number of Securities Underlying Unexercised
Options
(#)
Exercisable |
Number of Securities Underlying Unexercised
Options
(#)
Unexercisable |
Equity Incentive Plan Awards: Number of Securities
Underlying Unexercised Unearned Options
(#) |
Option
Exercise
Price
($) |
Option
Expiration
Date |
|
Number
of
Shares
awarded
(#) |
Floyd L. Smith |
1,200,000 |
- |
- |
$0.039 |
August 31, 2016 |
|
- |
Bob Currier |
807,760 |
- |
- |
$0.0150 |
June 1, 2016 |
|
- |
David Knepper |
- |
- |
- |
- |
- |
|
2,136,662 |
Judson F. Hoover |
- |
- |
- |
- |
- |
|
2,136,662 |
Compensation Discussion
and Analysis
Director Compensation
Our
Board of Directors currently receive stock consideration for their services as members of the Board of Directors. The Board of
Directors reserves the right in the future to award the members of the Board of Directors cash or stock based consideration for
their services to the Company, which awards, if granted shall be in the sole determination of the Board of Directors.
Executive Compensation
Philosophy
Our
Board of Directors determines the compensation given to our executive officers in their sole determination. Our Board of Directors
also reserves the right to pay our executives a salary, and/or issue them shares of common stock issued in consideration for services
rendered and/or to award incentive bonuses which are linked to our performance, as well as to the individual executive officer’s
performance. This package may also include long-term stock based compensation to certain executives which is intended to align
the performance of our executives with our long-term business strategies. Additionally, the Board of Directors reserves the right
to grant stock options in the future if the Board, in its sole determination, believes such grants would be in the best interests
of the Company.
Compensation Committee
We currently do not have
a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.
Incentive Bonus
The
Board of Directors may grant incentive bonuses to our executive officers in its sole discretion, if the Board of Directors believes
such bonuses are in the Company’s best interest, after analyzing our current business objectives and growth, if any, and
the amount of revenue we are able to generate each month, which revenue is a direct result of the actions and ability of such executives.
Long-term, Stock Based
Compensation
In
order to attract, retain and motivate executive talent necessary to support the Company’s long-term business strategy we
may award certain executives with long-term, stock-based compensation in the future, in the sole discretion of our Board of Directors,
which we do not currently have any immediate plans to award, other than the stock options previously granted to Mr. Smith, as described
above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners
The
following table sets forth, as of December 31, 2013, the number and percentage of outstanding shares of our common stock owned
by: (a) each person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock;
and (b) all current Directors and executive officers, as a group, and includes the 1,000 shares of Series A Preferred Stock
and Super Majority Voting Rights associated with such Series A Preferred Stock which the Company agreed to issue to Mr. Smith pursuant
to the Employment Agreement.
As
of December 31, 2013, and including the securities described above, there were 442,085,940 shares of common stock issued and outstanding,
1,000 shares of Series A Preferred Stock issued and outstanding and 947,498 shares of Series B Preferred Stock issued and outstanding.
Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed
to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for
example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided. In computing
the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such
person by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following
table does not necessarily reflect the person’s actual voting power at any particular date.
To
our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned
by them.
|
|
Percentage |
Preferred |
|
|
|
|
of |
Stock Voting |
|
|
|
Common |
Common |
Rights |
Total Voting |
|
|
Stock |
Stock |
(Represented |
Shares |
Total |
Name and Address of |
Beneficially |
Beneficially |
in Voting |
Beneficially |
Voting |
Beneficial Owner (1) |
Owned |
Owned |
Shares) (2) |
Owned (3) |
Percentage (4) |
|
|
|
|
|
|
Floyd L. Smith CEO, President, Secretary, Treasurer and Director |
3,966,089 |
0.9% |
460,140,126 |
464,106,215 |
51.4% |
David Knepper, Director |
2,136,662 |
0.5% |
- |
2,136,662 |
0.2% |
Judson Hoover, Director |
2,136,662 |
0.5% |
- |
2,136,662 |
0.2% |
Bob Currier, CFO |
- |
0.0% |
- |
- |
0.0% |
Daniel Vesco |
37,500,000 |
8.5% |
3,239 |
37,503,239 |
4.2% |
AGS Capital Group |
36,057,700 |
8.2% |
- |
36,057,700 |
4.0% |
All Officers and Directors as a Group (4 persons) |
8,239,413 |
1.9% |
460,143,365 |
468,379,539 |
51.9% |
(1) The address for each officer
and Director of the Company, unless otherwise stated, is the Company’s principal address, 17950 Preston Road, Suite 960,
Dallas, Texas 75252.
(2) The
Series A Preferred Stock is not entitled to any dividends, liquidation preference, conversion rights, or redemption rights. The
Series A Preferred Stock does however have the right, voting as a separate class, at any annual or special meeting of shareholders
to vote in aggregate 51% of our outstanding voting shares on any and all shareholder matters (the “Super Majority Voting
Rights”).
(3) Not
including any options, warrants or non-voting securities held by the named shareholders above.
(4) Based
on an aggregate of 902,235,541 outstanding voting shares, calculated based on 442,085,940 shares of common stock issued and outstanding,
9,475 voting shares attributable to the Series B Preferred Stock, and 460,140,126 voting shares attributable to the Series A Preferred
Stock.
Changes in Control
There are no present arrangements
or pledges of the Company’s securities which may result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Director Independence
For purposes of determining
director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCBB on which shares of common stock
are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Director” means
a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the
opinion of the Company's Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities
of a director.
According to the NASDAQ
definition, Floyd Smith is not an independent director because he is also an executive officer of the Company. According to the
NASDAQ definition, David Knepper and Judson Hoover are independent directors.
Related Party Transactions
Petron Energy, Inc. is
a company controlled by the Company’s majority shareholder. In 2013 and 2012, the Company paid Petron Energy, Inc. $225,000
and $61,163, respectively. These amounts have been reflected in the accompanying consolidated financial statement as charges from
a related party and are included in general and administrative expenses for the respective years.
Effective
August 31, 2012, the Company entered into an Executive Employment Agreement with Floyd L. Smith. Pursuant to the employment
agreement, Mr. Smith agreed to serve as President and Chief Executive Officer of the Company for a term of five years, renewable
thereafter for additional one year periods if not terminated by either party. The employment agreement provides for Mr. Smith to
receive a salary of $200,000 per year; reimbursement for reasonable business expenses; the ability to earn a yearly bonus in the
sole discretion of the Board of Directors of the Company; co-investment rights, providing Mr. Smith the right to participate in
the amount of up to 20% of any acquisition, transaction or funding undertaken by the Company during the term of the employment
agreement; pre-reverse split stock options to purchase 12,000,000 shares of the Company’s common stock at an exercise price
of $0.0039 per share, with cashless exercise rights and a five year term, which vested immediately upon the parties’ entry
into the employment agreement; and 1,000 shares of Series A Preferred Stock which give Mr. Smith Super Majority Voting Rights.
The
employment agreement includes a non-competition provision, prohibiting Mr. Smith from competing against the Company in Texas, Louisiana,
Oklahoma or New Mexico for a term of 12 months following the termination of the employment agreement.
The
employment agreement can be terminated by the Company for cause (as defined in the agreement), without cause, or by Mr. Smith for
good reason (as defined in the agreement) or without good reason. If the employment agreement is terminated due to Mr. Smith’s
death, disability, with cause by the Company or without good reason by Mr. Smith, he is due the consideration earned by him up
until the date of termination of the agreement. If the employment agreement is terminated by the Company without cause or by Mr.
Smith for good reason, Mr. Smith is due the consideration earned by him up until the date of termination, plus the lesser of six
months of salary due to Mr. Smith under the employment agreement and the remaining amount of consideration due pursuant to the
terms of the employment agreement in a lump sum.
Mr.
Smith also agreed to assign the Company rights to any intellectual property and inventions which he creates or conceives during
the term of the employment agreement relating to the Company’s business pursuant to the employment agreement.
Other than the foregoing,
none of the directors or executive officers of the Company, nor any person who owned of record or was known to own beneficially
more than 5% of the Company’s outstanding shares of its Common Stock, nor any associate or affiliate of such persons or companies,
has any material interest, direct or indirect, in any transaction that has occurred during the past fiscal year, or in any proposed
transaction, which has materially affected or will affect the Company.
With regard to any future
related party transaction, we plan to fully disclose any and all related party transactions in the following manner:
·
Disclosing such transactions in reports where required;
·
Disclosing in any and all filings with the SEC, where required;
·
Obtaining disinterested directors consent; and
·
Obtaining shareholder consent where required.
Review, Approval and Ratification
of Related Party Transactions
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 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|
|
Year Ended December 31, |
|
|
2013 |
|
2012 |
|
|
|
|
|
Audit fees |
|
$ |
111,823 |
|
|
$ |
116,812 |
|
Audit-related fees |
|
|
— |
|
|
|
— |
|
Tax fees |
|
|
— |
|
|
|
— |
|
All other fees |
|
|
— |
|
|
|
— |
|
Total |
|
$ |
111,823 |
|
|
$ |
116,812 |
|
Audit
Fees
During the fiscal year
ended December 31, 2013, we incurred approximately $111,823 in
fees to our principal independent accountants for professional services rendered in connection with the audit and review of our
financial statements for fiscal year ended December 31, 2013.
During the fiscal year
ended December 31, 2012, we incurred approximately $116,812 in
fees to our principal independent accountants for professional services rendered in connection with the audit and review of our
financial statements for fiscal year ended December 31, 2012.
Audit-Related Fees
There were no fees
billed during the fiscal years ended December 31, 2013 and 2012 for assurance and related services by our principal independent
accountants that are reasonably related to the performance of the audit or review of our financial statements (and are not reported
under Item 9(e)(1) of Schedule 14A).
Tax Fees
There were no fees billed
during the fiscal years ended December 31, 2013 and 2012 for professional services rendered by our principal accountant related
to tax compliance, tax advice and tax planning.
All Other Fees
There were no fees
billed during the fiscal years ended December 31, 2013 and 2012 for products and services provided by our principal independent
accountants (other than the services reported in Items 9(e)(1) through 9(e)(3) of Schedule 14A).
PART IV
ITEM 15. 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 3.2a(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 3.3(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* |
Reserve Report of Forrest A. Garb & Associates, Inc., Independent Petroleum Engineers for the Year Ended December 31, 2013 |
Exhibit 31.1* |
Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 31.2* |
Certificate of the Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.1* |
Certificate of the Chief Executive Officer and the Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.2* |
Certificate of the Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Attached hereto.
(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.
SIGNATURES
In accordance with Section
13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
PETRON ENERGY II, INC. |
|
|
Dated: April 10, 2014 |
By: /s/ Floyd L. Smith |
|
Floyd L. Smith |
|
Chief Executive Officer
(Principal Executive Officer),
President, Treasurer and Director
|
|
PETRON ENERGY II, INC. |
|
|
Dated: April 10, 2014 |
By: /s/ Bob Currier |
|
Bob Currier |
|
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer),
|
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: April 10, 2014 |
By: /s/ Floyd L. Smith |
|
Floyd L. Smith |
|
Chief Executive Officer
(Principal Executive Officer),
President, Treasurer and Director |
|
PETRON ENERGY II, INC. |
|
|
Dated: April 10, 2014 |
By: /s/ David Knepper |
|
David Knepper |
|
Director |
|
PETRON ENERGY II, INC. |
|
|
Dated: April 10, 2014 |
By: /s/ Judson Hoover |
|
Judson Hoover |
|
Director |
APPENDIX
C: Petron Energy II, Inc. September 30, 2014 Quarterly Report
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, 2014
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 000-55278
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 30, 2014, there were 3,491,768,839
shares of the registrant’s $0.00001 par value common stock issued and outstanding.
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.
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 September 30, 2014 (unaudited) and December 31, 2013 |
|
|
F-2 |
CONSOLIDATED STATEMENTS OF OPERATIONS for the three months and nine months ended September 30, 2014 and 2013 (unaudited) |
|
|
F-3 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT for the year ended December 31, 2013 and the nine months ended September 30, 2014 (unaudited) |
|
|
F-4 |
CONSOLIDATED STATEMENTS OF CASH FLOWS for the nine months ended September 30, 2014 and 2013 (unaudited) |
|
|
F-5 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
|
F-6 |
PETRON ENERGY II, INC. |
CONSOLIDATED BALANCE SHEETS |
|
|
|
September 30, |
|
|
|
December 31, |
|
|
|
|
2014 |
|
|
|
2013 |
|
ASSETS |
|
|
(unaudited) |
|
|
|
(audited) |
|
Current Assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
53,957 |
|
|
$ |
105 |
|
Accounts Receivable |
|
|
15,603 |
|
|
|
24,342 |
|
Total Current Assets |
|
|
69,560 |
|
|
|
24,447 |
|
|
|
|
|
|
|
|
|
|
Pipeline, net of accumulated depreciation of $371,340 and $320,452, respectively |
|
|
646,660 |
|
|
|
697,548 |
|
Producing Oil & Gas Properties, net of accumulated depletion of $917,795 and $837,759, respectively |
|
|
2,495,809 |
|
|
|
1,803,632 |
|
Other Depreciable Equipment, net of accumulated depreciation of $233,437 and $125,309, respectively |
|
|
524,601 |
|
|
|
609,732 |
|
Other Assets |
|
|
5,487 |
|
|
|
1,532 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
3,742,117 |
|
|
$ |
3,136,891 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Bank Overdraft |
|
$ |
— |
|
|
$ |
57,942 |
|
Accounts Payable--Trade |
|
|
592,674 |
|
|
|
1,282,779 |
|
Accounts Payable--Related Party |
|
|
— |
|
|
|
224,425 |
|
Accrued Liabilities |
|
|
190,610 |
|
|
|
219,649 |
|
Derivative Liability |
|
|
9,724,552 |
|
|
|
960,047 |
|
Notes Payable--current |
|
|
2,439,030 |
|
|
|
1,432,731 |
|
Total Current Liabilities |
|
|
12,946,866 |
|
|
|
4,177,573 |
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligation |
|
|
344,790 |
|
|
|
220,347 |
|
Stock Issuance Liability |
|
|
543,896 |
|
|
|
946,551 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
13,835,552 |
|
|
|
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, 544,440 and 947,498 shares issued and outstanding, respectively |
|
|
544 |
|
|
|
947 |
|
Common Stock, $0.00001 par value, 5,000,000,000 shares authorized, 914,622,402 and 884,172 issued and outstanding, respectively |
|
|
9,146 |
|
|
|
9 |
|
Additional Paid-in Capital |
|
|
30,634,421 |
|
|
|
21,913,781 |
|
Accumulated Deficit |
|
|
(40,737,547 |
) |
|
|
(24,122,318 |
) |
Total Stockholders' Deficit |
|
|
(10,093,435 |
) |
|
|
(2,207,580 |
) |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
$ |
3,742,117 |
|
|
$ |
3,136,891 |
|
The accompanying notes are an integral part
to these consolidated financial statements.
PETRON ENERGY II, INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas Sales |
|
$ |
62,402 |
|
|
$ |
76,403 |
|
|
$ |
173,929 |
|
|
$ |
204,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue |
|
|
158,252 |
|
|
|
133,753 |
|
|
|
480,188 |
|
|
|
475,750 |
|
Depletion and Depreciation |
|
|
87,221 |
|
|
|
108,904 |
|
|
|
239,016 |
|
|
|
233,149 |
|
Derivative Expense |
|
|
9,148,620 |
|
|
|
42,052 |
|
|
|
13,608,647 |
|
|
|
283,352 |
|
General and Administrative |
|
|
565,254 |
|
|
|
138,497 |
|
|
|
1,996,057 |
|
|
|
1,120,675 |
|
Interest |
|
|
147,082 |
|
|
|
122,118 |
|
|
|
465,250 |
|
|
|
266,666 |
|
Total Expenses |
|
|
10,106,429 |
|
|
|
545,324 |
|
|
|
16,789,158 |
|
|
|
2,379,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations Before Income Taxes |
|
|
(10,044,027 |
) |
|
|
(468,921 |
) |
|
|
(16,615,229 |
) |
|
|
(2,175,555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(10,044,027 |
) |
|
$ |
(468,921 |
) |
|
$ |
(16,615,229 |
) |
|
$ |
(2,175,555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share--basic and diluted |
|
$ |
(0.03 |
) |
|
$ |
(2.16 |
) |
|
$ |
(0.14 |
) |
|
$ |
(18.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares--basic and diluted |
|
|
292,130,121 |
|
|
|
216,950 |
|
|
|
119,313,372 |
|
|
|
120,880 |
|
The accompanying notes are an integral part
to these consolidated financial statements.
PETRON ENERGY II, INC. |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT |
For the year ended December 31, 2013 and the nine months ended September 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 Liability Reclassification |
|
|
|
|
|
- |
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 Issued for Services |
|
|
|
|
3,462,042 |
35 |
252,565 |
|
252,600 |
Common Stock Sales |
|
|
|
|
714,850 |
7 |
383,403 |
|
383,410 |
Issuances Related to Equity Purchase Line |
|
|
|
|
600,000 |
6 |
119,114 |
|
119,120 |
Conversion of Notes Payable |
|
|
|
|
907,640,141 |
9,076 |
2,714,265 |
|
2,723,341 |
Derivative Liability Reclassification |
|
|
|
|
|
|
4,844,162 |
|
4,844,162 |
Conversion of Preferred Stock |
|
|
(403,058) |
(403) |
1,321,197 |
13 |
402,987 |
|
402,597 |
Imputed Interest on Shareholder Notes |
|
|
|
|
|
|
4,144 |
|
4,144 |
Net Loss |
|
|
|
|
|
|
|
(16,615,229) |
(16,615,229) |
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2014 (unaudited) |
1,000 |
$ 1 |
544,440 |
$ 544 |
914,622,402 |
$ 9,146 |
$ 30,634,421 |
$ (40,737,547) |
$ (10,093,435) |
The accompanying notes are an integral part
to these consolidated financial statements.
PETRON ENERGY II, INC. |
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOW |
(Unaudited) |
|
|
Nine Months Ended September 30, |
|
|
2014 |
|
2013 |
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(16,615,229 |
) |
|
$ |
(2,175,555 |
) |
Adjustments to reconcile net loss to |
|
|
|
|
|
|
|
|
cash used by operating activities: |
|
|
|
|
|
|
|
|
Depletion and depreciation |
|
|
239,016 |
|
|
|
233,149 |
|
Accretion of asset retirement obligation |
|
|
12,442 |
|
|
|
— |
|
Amortization of debt discount |
|
|
87,125 |
|
|
|
155,760 |
|
Imputed interest on shareholder loans |
|
|
4,144 |
|
|
|
22,891 |
|
Derivative expense |
|
|
13,608,647 |
|
|
|
283,352 |
|
Penalty interest |
|
|
— |
|
|
|
45,249 |
|
Common stock issued for services |
|
|
252,600 |
|
|
|
95,198 |
|
Note payable issued for services |
|
|
— |
|
|
|
25,000 |
|
Common stock issued for lawsuit settlement |
|
|
— |
|
|
|
138,000 |
|
Change in other assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease/(Increase) in oil and gas receivables |
|
|
8,739 |
|
|
|
(30,583 |
) |
(Increase)/Decrease in other assets |
|
|
(3,955 |
) |
|
|
3,259 |
|
(Decrease)/Increase in accounts payable |
|
|
(941,962 |
) |
|
|
243,715 |
|
Increase in accrued liabilities |
|
|
1,830 |
|
|
|
173,626 |
|
Decrease in accrued liabilities |
|
|
— |
|
|
|
(3,900 |
) |
|
|
|
(3,346,603 |
) |
|
|
(790,839 |
) |
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investment in oil and gas properties |
|
|
(565,318 |
) |
|
|
(267,326 |
) |
Proceeds from the sale of equipment |
|
|
24,500 |
|
|
|
— |
|
Pipeline investment |
|
|
— |
|
|
|
(121,000 |
) |
Accounts payable dedicated for asset purchase |
|
|
— |
|
|
|
619,000 |
|
Purchase of other equipment |
|
|
(55,996 |
) |
|
|
(610,016 |
) |
Cash used in investing activities |
|
|
(596,814 |
) |
|
|
(379,342 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Bank overdraft |
|
|
(57,942 |
) |
|
|
61,737 |
|
Proceeds from sales of common stock |
|
|
383,410 |
|
|
|
505,150 |
|
Proceeds from equity line |
|
|
119,120 |
|
|
|
— |
|
Proceeds from notes payable |
|
|
4,567,024 |
|
|
|
674,630 |
|
Repayment of notes payable |
|
|
(1,095,530 |
) |
|
|
— |
|
Increase in deposit to lender |
|
|
81,187 |
|
|
|
— |
|
Loan fees |
|
|
— |
|
|
|
(79,825 |
) |
Cash from financing activities |
|
|
3,997,269 |
|
|
|
1,161,692 |
|
|
|
|
|
|
|
|
|
|
Decrease in cash |
|
|
53,852 |
|
|
|
(8,489 |
) |
Cash at beginning of period |
|
|
105 |
|
|
|
17,089 |
|
|
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
53,957 |
|
|
$ |
8,600 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
(2,224,133 |
) |
|
$ |
(221,336 |
) |
Common stock |
|
|
1,526,838 |
|
|
|
107,436 |
|
Preferred stock |
|
|
(403 |
) |
|
|
(4,521 |
) |
Additional paid-in capital |
|
|
5,221,928 |
|
|
|
4,996,628 |
|
Derivative liability |
|
|
(4,010,872 |
) |
|
|
(197,426 |
) |
Common stock issuance liability |
|
|
(402,597 |
) |
|
|
(4,416,261 |
) |
Accrued liabilities |
|
|
(64,403 |
) |
|
|
(4,220 |
) |
Loan fees |
|
|
— |
|
|
|
(260,300 |
) |
Oil and gas properties |
|
|
231,359 |
|
|
|
(185,622 |
) |
Asset retirement obligation |
|
|
(231,359 |
) |
|
|
185,622 |
|
Other assets |
|
|
(46,358 |
) |
|
|
— |
|
|
|
$ |
— |
|
|
$ |
— |
|
The accompanying notes are an integral part
to these consolidated financial statements.
PETRON ENERGY II, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 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
September 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 two other oil companies.
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, 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 nine month periods ended September 30, 2014 and 2013. Operating
results for the nine month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2014.
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 $16,615,229 for the nine month period ended September 30, 2014 (2013 - $2,175,555) and at September
30, 2014 had an accumulated deficit of $40,737,547 (2013 - $21,996,778). 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.
3. CAPITAL STRUCTURE
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.
4. SUBSEQUENT EVENTS
On October 3, 2014 the Company amended its
Articles of Incorporation to increase the number of authorized shares of common stock from 2,000,000,000 to 5,000,000,000.
The Company has applied for a reverse stock
split of its common shares whereby every one thousand five hundred (1,500) pre-split shares of common stock were exchanged for
one (1) post-split share of the Company’s common stock. As of the date of this report, final approval has not been received.
[End Notes to Financial Statements]
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 September
30, 2014 and September 30, 2013
Our net loss for the three month period ended
September 30, 2014 was $10,044,027 as compared to a loss for the three month period ended September 30, 2013 of $468,921. The most
significant factor contributing to this loss was related to 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 September 30, 2014 and 2013:
|
|
For the three Months Ended |
|
|
|
|
|
|
September
30, 2014 |
|
September 30, 2013 |
|
Increase or (Decrease) |
|
% Change |
|
|
|
|
|
|
|
|
|
Revenue |
|
|
62,402 |
|
|
|
76,403 |
|
|
|
(14,001 |
) |
|
|
-18 |
% |
Cost of Revenue |
|
|
158,252 |
|
|
|
133,753 |
|
|
|
24,499 |
|
|
|
18 |
% |
Depletion and Depreciation |
|
|
87,221 |
|
|
|
108,904 |
|
|
|
(21,683 |
) |
|
|
-20 |
% |
Derivative Expense |
|
|
9,148,620 |
|
|
|
42,052 |
|
|
|
9,106,568 |
|
|
|
21,655 |
% |
General and Administrative Expense |
|
|
565,254 |
|
|
|
138,497 |
|
|
|
426,757 |
|
|
|
308 |
% |
Interest Expense |
|
|
147,082 |
|
|
|
122,118 |
|
|
|
24,964 |
|
|
|
20 |
% |
The decrease in revenue for the quarter is
due to lower sales price of approximately 10% plus the timing of a pick-up of the oil from the tanks. There was a pick-up made
on October 2, 2014 that would have added approximately $4,200 to the revenue had the pick-up been made in September.
In the third quarter of 2014 work was done
to bring the Knox county wells back on line since approval had been received from the Texas Railroad Commission. There were no
comparable costs in the third quarter of 2013.
The Company obtained approximately $1,200,000
of convertible debt during the three month period ended September 30, 2014. The cost of the original issue discount is the reason
for the increase in the derivative expense as well as the expense recognized upon conversion of debt incurred previous to this
quarter. The Company’s plan is to decrease the use of convertible debt in the future which will decrease the derivative expense.
The following table shows the major changes
in the components of the General and Administrative expenses for the three month period ended September 30, 2014 as compared to
the three month period ended September 30, 2013:
|
For the three Months Ended |
|
|
|
|
September
30, 2014 |
September 30, 2013 |
Increase or (Decrease) |
|
|
|
|
|
|
|
|
Reclassification of attorney fees |
- |
(139,000) |
139,000 |
|
Prior legal fees billed to the Company in error. Correct billing is to a related party |
Lawsuit accrual |
- |
(20,000) |
20,000 |
|
Lawsuit was settled in 2013, therefore, no further accrual needed in 2014 |
Convertible debt fees |
154,000 |
25,000 |
129,000 |
|
Fees associated with the convertible debt issuances which were much higher in 2014 |
Capitalize prior leasehold costs |
- |
(40,000) |
40,000 |
|
Capitalization of leasehold acquisition costs that were expensed prior to July 2013 |
Directors' fees |
30,000 |
20,000 |
10,000 |
|
Director fees did not start until August 2013 |
Investor relations |
90,000 |
- |
90,000 |
|
Significantly more investor relations activity in 2014 |
Working interest receivable write-off |
7,500 |
- |
7,500 |
|
Instead of trying to collect currently, we will collect from future production |
All other items |
283,754 |
292,497 |
(8,743) |
|
|
Total |
565,254 |
138,497 |
426,757 |
|
|
The increase in debt of approximately $2,000,000
at September 30, 2014 as compared to September 30, 2013 accounted for approximately $40,000 of increase in interest. In 2013 we
were still amortizing some debt costs. This amortization, which was included in interest, was approximately $86,000. Included in
interest is 2014 are costs of refinancing of approximately $50,000.
For the Nine Month Period Ended September
30, 2014 and September 30, 2013
Our net loss for the nine month period ended
September 30, 2014 was $16,615,229 as compared to a loss for the nine month period ended September 30, 2013 of $2,175,555. As with
the period of three months ended September 30,2014 compared to the same period in 2013, the chief contributing factor to the loss
is the derivative expense and interest expense. The derivative expense is due to the impact of the convertible debt that was obtained
by the Company in order to pay the accounts payable. A condensed summary of operations for the period of nine months ended September
30, 2014 compared to the period of nine months ended September 30, 2013 follows:
|
|
For the nine Months Ended |
|
|
|
|
|
|
September
30, 2014 |
|
September 30, 2013 |
|
Increase or (Decrease) |
|
% Change |
|
|
|
|
|
|
|
|
|
Revenue |
|
|
173,929 |
|
|
|
204,037 |
|
|
|
(30,108 |
) |
|
|
-15 |
% |
Cost of Revenue |
|
|
480,188 |
|
|
|
475,750 |
|
|
|
4,438 |
|
|
|
1 |
% |
Depletion and Depreciation |
|
|
239,016 |
|
|
|
233,149 |
|
|
|
5,867 |
|
|
|
3 |
% |
Derivative Expense |
|
|
13,608,647 |
|
|
|
283,352 |
|
|
|
13,325,295 |
|
|
|
4,703 |
% |
General and Administrative Expense |
|
|
1,996,057 |
|
|
|
1,120,675 |
|
|
|
875,382 |
|
|
|
78 |
% |
Interest Expense |
|
|
465,250 |
|
|
|
266,666 |
|
|
|
198,584 |
|
|
|
74 |
% |
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 $4,090,000 of
convertible debt in the nine month period ended September 30, 2014 as compared to $88,000 of convertible debt raised during the
period of nine months ended 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 Company’s plan is to
decrease the use of convertible debt in the future which will decrease the derivative expense.
The following table shows the major changes
in the components of the General and Administrative expenses for the period of nine months ended September 2014 as compared to
the period of nine months ended September 2013:
|
For the nine Months Ended |
|
|
|
|
September
30, 2014 |
September
30, 2013 |
Increase or (Decrease) |
|
|
|
|
|
|
|
|
Debt issuance costs--TCA |
- |
196,500 |
(196,500) |
|
Fees associated with new debt in 2013 were not repeated in 2014 |
Reclassification of attorney fees |
- |
(139,000) |
139,000 |
|
Prior legal fees billed to the Company in error. Correct billing is to a related party |
Lawsuit accrual |
- |
185,000 |
(185,000) |
|
Lawsuit was settled in 2013, therefore, no further accrual needed in 2014 |
Convertible debt fees |
549,000 |
100,000 |
449,000 |
|
Fees associated with the convertible debt issuances which were much higher in 2014 |
Capitalize prior leasehold costs |
- |
(40,000) |
40,000 |
|
Capitalization of leasehold acquisition costs that were expensed prior to July 2013 |
S-1 fees |
13,500 |
- |
13,500 |
|
No S-1 was file in 2013 |
Directors' fees |
120,000 |
20,000 |
100,000 |
|
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 |
435,500 |
27,000 |
408,500 |
|
Significantly more investor relations activity in 2014 |
Working interest receivable write-off |
48,500 |
- |
48,500 |
|
Instead of trying to collect currently, we will collect from future production |
All other items |
769,557 |
771,175 |
(1,618) |
|
|
Total |
1,996,057 |
1,120,675 |
875,382 |
|
|
In addition to the
increase in the outstanding debt, costs related to early debt retirements in 2014 have been recorded in interest expense. These
two factors are the chief reasons for the increase in the interest expense.
Liquidity and Capital Resources
As of September 30, 2014, we had a working
capital deficit of approximately $12,880,000 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 $9,800,000 which more than offset a decrease in accounts payable and accrued expenses of approximately
$1,000,000. We intend to fund ongoing operations by continuing to raise capital from debt and equity sources. Our efforts for the
quarter ended September 30, 2014 resulted in capital being raised in the amount of approximately $1,522,000. 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. 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.
Future Financings
We will continue to rely on sales of our common
stock and debt 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
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.
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 Company issued its common stock during
the quarter ended September 30, 2014 in the following transactions:
|
• |
Sold an aggregate of 120,000 shares of the Company’s restricted common stock to 1 accredited investor in a private transaction for consideration of $30,000. |
|
• |
24,998 shares of the Company’s Series B Convertible Preferred Stock were converted into an aggregate of 713,063 shares of the common stock of the Company. |
|
• |
Issued 3,167,682 shares of the Company’s restricted common stock to the Company’s directors as compensation for services rendered to the Company. |
|
• |
Issued 78,252,380 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 63,024,428 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 86,642,124 shares of its common stock to Asher Enterprises, Inc. in connection with convertible promissory notes entered into by and between the Company and Asher Enterprises, Inc. |
|
• |
Issued 86,760,193 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. |
|
• |
Issued 124,736,913 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 106,062,259 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 14,190,000 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 3(a)(9) transactions. |
|
• |
Issued 48,400,000 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 112,289,908 shares of its common stock to GEL Properties, LLC in connection with a convertible promissory note entered into by and between the Company and GEL Properties, LLC related to 3(a)(9) transaction. |
|
• |
Issued 155,614,596 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 14,060,000 shares of its common stock to investors related to debt assumption agreements by and between the investors and the Company related to 3(a)(9) transactions. |
|
• |
Issued 14,000,000 shares of its common stock to Carebourn Capital, LP in connection with a convertible promissory note entered into by and between the Company and Carebourn Capital, LP related to a 3(a)(9) transaction. |
Subsequent to the quarter ended September 30,
2014, the Company issued shares of common stock in the following transactions:
|
• |
Issued 10,659,898 shares of the Company’s restricted common stock to the Company’s directors as compensation for services rendered to the Company. |
|
• |
Issued 510,700,227 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 281,951,552 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. |
|
• |
Issued 47,678,087 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 50,000 shares of its common stock to an investor related to a debt assumption agreement by and between the investor and the Company related to a 3(a)(9) transaction. |
|
• |
Issued 151,317,464 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 173,685,714 shares of its common stock
to Asher Enterprises, Inc. in connection with convertible promissory notes entered into by and between the Company and Asher Enterprises,
Inc.
|
|
• |
Issued 326,000,000 shares of its common stock
to Carebourn Capital, LP in connection with a convertible promissory note entered into by and between the Company and Carebourn
Capital, LP related to a 3(a)(9) transaction.
|
|
• |
Issued 482,092,938 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 226,310,328 shares of its common stock
to GEL Properties, LLC in connection with a convertible promissory note entered into by and between the Company and GEL Properties,
LLC related to a 3(a)(9) transaction.
|
|
• |
Issued 249,500,000 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 25,170,000 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.
|
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
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)
Exhibit 3.2g |
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
Certificate of Amendment to Articles of Incorporation
dated October 3, 2014 changing the authorized common stock to 5,000,000,000 shares filed herewith |
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 interactive
data 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.
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: November 7, 2014 |
By: /s/ Floyd L. Smith |
|
Floyd L. Smith |
|
Chief Executive Officer |
|
Petron Energy II, Inc. |
|
|
Dated: November 7, 2014 |
By: /s/ Bob Currier |
|
Bob Currier |
|
Chief Financial Officer |