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PETRON ENERGY II, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION

May 8, 2014

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 A summary of operations for the first quarter of 2014 compared to the first quarter of 2013 follows: 2014 2013 Revenues Oil & Gas Sales $ 78,326$ 106,874 Costs and Expenses Cost of Revenue 172,695 103,300 Depletion and Depreciation 81,310 49,980 Derivative Expense 1,333,973 82,300 General and Administrative 598,288 200,321 Interest 141,016 54,562 Total Expenses 2,327,282 490,463 Net Loss $ (2,248,956 )$ (383,589 )



The decrease in revenue of approximately $28,500 can be chiefly attributed to the fact that we have not had any production from Knox County, Texas in 2014. In the first quarter of 2013 we had revenue of $26,653 from Knox County. The production was stopped in Knox County in April of 2013 due to a requirement by the Texas Railroad Commission to plug certain wells. Due to capital constraints, this work was not completed until April of 2014. Production will resume as soon as we have the approval from the Texas Railroad Commission.

In May of 2013 we started recording fees related to a Consulting and Operating Agreement with Petron Energy, Inc. These fees are $25,000 per month and in 2014 they are recorded in cost of revenue. Since the fees started in May 2013, there are none recorded in the first quarter of 2013. The total of $75,000 is the chief reason for the increase in the cost of revenue of nearly $70,000.

Depletion and depreciation increased due to depreciation associated with a significant equipment purchase recorded after the first quarter of 2013.

In the first quarter of 2013 we started raising capital with convertible debt. The conversion terms of the convertible debt resulted in a beneficial conversion option to the lender. In accordance with GAAP we have expensed the beneficial conversion option. In the first quarter of 2014 we issued approximately $483,000 of debt with immediate convertibility as compared to none in the first quarter of 2013, although $154,500 of previously issued debt did become convertible in the first quarter of 2013. Conversions of debt were approximately $575,000 in the first quarter of 2014 and approximately $87,000 in the first quarter of 2013. The increase in the activity related to convertible debt is the reason for the increase in the derivative expense.

2



Significant items that contributed to the increase in the General and Administrative expenses for the first quarter of 2014 as compared to the first quarter of 2013 are:

Approximate Item Increase Description This cost increase is related to more work in the area of Investor Consultants $ 60,000 Relations Director fees of $15,000 per month ($5,000 per director) started in Director Fees 45,000 August of 2013. Our Chief Financial Officer started in July 2013 so there is no similar cost in the first Payroll 40,000 quarter 2013. Fees related to the various notes that were issued in the first quarter Financing Fees 50,000 of 2014 Investor Relations/Financing broker Commissions 105,000 fee. See below. We have recorded audit fees when billed. Last year most fees were billed in Audit 60,000 the second quarter $ 360,000



Subsequent to the end of the first quarter, we renegotiated an agreement with an individual who was working for the Company in the capacity of a financing broker and investor relations consultant. The renegotiated terms cover the time from January 2013 through April 2014. The relationship was discontinued as of the end of April. Since the full amount of the commitment was known at March 31, 2014 we decided to record the entire agreement as of the end of the first quarter.

Interest expense has increased due to the increase in the convertible debt, but also due to a line of credit agreement entered into with TCA Global Credit Master Fund, LP ("TCA"). This agreement was entered into in April of 2013. The initial draw was $450,000. The interest on this debt and the amortization of deferred loan fees are the chief reasons for the increase in the interest expense.

Liquidity and Capital Resources

As of March 31, 2014, we had a working capital deficit of approximately $4,454,000 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 of $353,000 which more than offset a decrease in accounts payable and accrued expenses of approximately $301,000. We intend to fund ongoing operations by continuing to raise capital from debt and equity sources. Our efforts for the quarter ended March 31, 2014 resulted in capital being raised in the amount of approximately $941,000. On April 25, 2014 an S-1 Registration Statement filed by the Company became effective which allows us to access the $10,000,000 Investment Agreement the Company has with an investor. 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.

3 Future Financings



We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund our operations and other activities.

Critical Accounting Policies



Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. 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.


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Source: Edgar Glimpses


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