10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

Commission File Number 000-52590

Paxton Energy, Inc.
(Exact name of registrant as specified in its charter)
Nevada	20-1399613
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
295 Highway 50, Suite 2, Lake Village Professional Building, Stateline, NV 89449 Mailing Address:  P.O. Box 1148, Zephyr Cove, NV 89448-1148
(Address of principal executive offices) (zip code)
(775) 588-5390
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x No   o

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   x No   o

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 o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes   o No   x

As of August 11, 2011, issuer had 59,548,682 outstanding shares of common stock, par value $0.001.

EXPLANATORY NOTE

On August 15, 2011, Paxton Energy, Inc. filed its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 (the “Original Report”). This Amendment No. 1 on Form 10-Q/A to the Original Report (this “Form 10-Q/A”) is being filed solely for the purpose of furnishing Exhibit 101 to the Original Report, which contains the XBRL Interactive Data Files required by Rule 405 of Regulation S-T, by amending the Exhibit Index under Item 6 of Part II of the Original Report. As permitted by Rule 405(a)(2)(ii) of Regulation S-T, Exhibit 101 is required to be furnished by amendment within 30 days of the original filing date of the Original Report.

Except as described above, this Form 10-Q/A does not amend or update any information contained in the Original Report to reflect events occurring subsequent to the original filing date or otherwise.

ITEM 6.	EXHIBITS
10.01	Securities Purchase Agreement, dated as of February 7, 2011, by and between Paxton Energy, Inc. and Asher Enterprises, Inc. †
10.02	Form of Convertible Promissory Note, issued February 7, 2011†
10.03	Securities Purchase Agreement, dated as of April 5, 2011, by and between Paxton Energy, Inc. and Asher Enterprises, Inc. †
10.04	Form of Convertible Promissory Note, issued April 5, 2011†
31.01	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
31.02	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
32.01	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
99.1	Letter of Resignation from Stephen Spalding†
101 INS	XBRL Instance Document*
101 SCH	XBRL Schema Document*
101 CAL	XBRL Calculation Linkbase Document*
101 LAB	XBRL Labels Linkbase Document*
101 PRE	XBRL Presentation Linkbase Document*
101 DEF	XBRL Definition Linkbase Document*

†

Previously filed

*

The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

2

SIGNATURES

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

	PAXTON ENERGY, INC.
Date:  August 22, 2011	By:	/s/ CHARLES F. VOLK, JR.
		Charles F. Volk, Jr. Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

3

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BALANCE SHEETS PARENTHETICAL (USD $)	Jun. 30, 2011	Dec. 31, 2010
Preferred stock par value	$ 0.001	$ 0.001
Preferred stock shares authorized	10,000,000	10,000,000
Common stock par value	$ 0.001	$ 0.001
Common stock shares authorized	500,000,000	500,000,000
Common stock shares issued	58,907,556	20,343,263
Common stock shares outstanding	58,907,556	20,343,263

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STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		6 Months Ended		85 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011
Oil and gas revenues, net	$ 175	$ 2,983	$ 5,654	$ 6,119	$ 368,214
Lease operating expenses	(80)	2,729	3,310	4,460	146,778
Impairment loss on oil and gas properties					3,847,192
Accretion of asset retirement obligations	87	78	173	341	8,581
General and administrative expense	646,613	334,713	1,069,512	386,382	3,758,842
Share-based compensation	3,439,027	1,666,500	3,523,125	1,878,663	7,431,407
Total costs and operating expenses	4,085,647	2,004,020	4,596,120	2,269,846	15,192,800
Loss from operations	(4,085,472)	(2,001,037)	(4,590,466)	(2,263,727)	(14,824,586)
Interest income					63,982
Change in fair value of derivative liabilities	1,349,520	(10,914)	1,312,339	(38,348)	1,070,766
Gain on transfer of common stock from Bayshore Exploration, L.L.C.					24,000
Interest expense	(54,785)	(37,122)	(72,522)	(64,465)	(527,135)
Amortization of deferred financing costs	(67,576)		(67,576)		(67,576)
Amortization of discount on convertible debentures and notes and other debt	(113,420)	(9,692)	(267,511)	(9,692)	(1,662,911)
Total other income (expense)	1,113,739	(57,728)	904,730	(112,505)	(1,098,874)
Net Loss	$ (2,971,733)	$ (2,058,765)	$ (3,685,736)	$ (2,376,232)	$ (15,923,460)
Basic and Diluted Loss Per Common Share	$ (0.07)	$ (0.62)	$ (0.11)	$ (0.72)
Basic Weighted-Average Common Shares Outstanding	40,436,426	3,340,667	32,288,112	3,303,874
Diluted Weighted-Average Common Shares Outstanding	40,436,426	3,340,667	32,288,112	3,303,874

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Document and Entity Information	3 Months Ended
	Jun. 30, 2011	Aug. 11, 2011
Document and Entity Information
Entity Registrant Name	PAXTON ENERGY INC
Document Type	10-Q
Document Period End Date	Jun. 30, 2011
Amendment Flag	false
Entity Central Index Key	0001342643
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		59,548,682
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2

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Subordinated Note Payable

3 Months Ended

Jun. 30, 2011

Subordinated Note Payable

Subordinated Note Payable

(F)           Subordinated Note Payable

As further described in Note B, on May 6, 2011, the Company acquired a leasehold interest in oil and gas properties from Montecito Offshore, L.L.C.   Pursuant to the terms of the agreement, as amended, the Company issued a subordinated promissory note in the amount of $500,000 as partial consideration for the purchase.  The note bears interest at 9% per annum.  The note and unpaid interest were originally due ninety days after the date of the promissory note, but have been extended to August 15, 2011. The note is secured by a second lien mortgage, subordinated to the convertible debentures issued in May 2011, as further described in Note G to these condensed consolidated financial statements. The Company is currently negotiating with Montecito to extend the maturity date of the note as it does not have the cash to repay the note at this time.  There can be no assurances that an extension will be granted on terms acceptable to the Company, if at all.

      

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Fair Value Measurements

3 Months Ended

Jun. 30, 2011

Fair Value Measures and Disclosures

Fair Value Disclosures [Text Block]

(K)           Fair Value Measurements

For asset and liabilities measured at fair value, the Company uses the following hierarchy of inputs:

• Level one — Quoted market prices in active markets for identical assets or liabilities;

• Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

• Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Liabilities measured at fair value on a recurring basis at June 30, 2011 are summarized as follows:

	Level 1		Level 2		Level 3		Total
Derivative liability - conversion
feature of debentures and
related warrants	$	-	$	1,617,929	$	-	$	1,617,929
Derivative liability - beneficial
conversion feature	$	-	$	121,444	$	-	$	121,444

   

Liabilities measured at fair value on a recurring basis at December 31, 2010 are summarized as follows:

	Level 1		Level 2		Level 3		Total
Derivative liability - beneficial
conversion feature	$	-	$	243,376	$	-	$	243,376

As further described in Note J, the fair value of the derivative liability for the conversion feature of the convertible debentures and related warrants is measured using the Lattice Model and as further described in Note E, the fair value of the beneficial conversion feature is measured using the intrinsic value method, equal to the excess of the market price of the stock over the conversion price, multiplied by the number of shares to be received upon conversion.

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Oil and Gas Acquisition Agreements

3 Months Ended

Jun. 30, 2011

Business Combinations

Business Combination Disclosure [Text Block]

(B)           Oil and Gas Acquisition Agreements

Montecito Agreement

On May 6, 2011, the Company completed its acquisition of certain assets pursuant to an Asset Sale Agreement (the Montecito Agreement) with Montecito Offshore, L.L.C. (Montecito).   The assets consist of certain oil and gas leases located in the Vermillion 179 tract, which is in the shallow waters of the Gulf of Mexico offshore from Louisiana.  Pursuant to the terms of the Montecito Agreement, as amended, Montecito agreed to sell the Company a 70% leasehold working interest, with a net revenue interest of 51.975%, of certain oil and gas leases owned by Montecito, for $1,500,000 in cash, a subordinated promissory note in the amount of $500,000, and 15 million shares of common stock.  The leasehold interest has been capitalized in the amount of $5,698,563, representing $2,000,000 in cash and promissory note, $3,675,000 for the common stock based on a closing price of $0.245 per share on the closing date, and $23,563 in acquisition costs.  No drilling or production has commenced as of June 30, 2011.

Virgin Oil Agreement

On April 29, 2011, the Company entered into an Agreement of Merger (the Agreement) with PaxAcq Inc. (PaxAcq), a newly-created wholly-owned subsidiary of the Company, with Virgin Oil Company, Inc. (Virgin), and with Virgin Offshore U.S.A., Inc., a wholly-owned subsidiary of Virgin.  Pursuant to the terms of the Agreement, at closing, the shareholders of Virgin would have received an aggregate of 70 million shares of the Company’s common stock in exchange for all of the issued and outstanding shares of Virgin and PaxAcq would have merged with and into Virgin, so that Virgin would become a wholly-owned subsidiary of the Company.  However, effective June 29, 2011, the Agreement was deemed null and void as a result of the Company’s inability to raise a net of $5 million of equity within 60 days, as required under the terms of the Agreement.

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Common Stock

3 Months Ended

Jun. 30, 2011

Equity

Stockholders' Equity Note Disclosure [Text Block]

(H)           Common Stock

Issuance of Common Stock to Officers

Effective June 3, 2011, the Board of Directors approved the issuance of 15,750,000 shares of common stock to two of the executive officers of the Company as additional bonus compensation for their accomplishments since the change of control of the Company on March 17, 2010.  For accounting purposes, this issuance has been recorded at $2,992,500, or $0.19 per share, the closing price of the common stock on the date the issuance was authorized.

Issuance of Common Stock for Legal Services

On May 5, 2011, the Company issued 200,000 shares of common stock to a law firm as compensation for legal services rendered to the Company.  For accounting purposes, this issuance has been recorded at $50,000, or $0.25 per share, the closing price of the common stock on the date the issuance was made.

Issuance of Common Stock and Warrants for Cash

During the six months ended June 30, 2011, the Company sold 600,000 shares of common stock and warrants to purchase 300,000 shares of common stock.  The warrants are exercisable at $0.45 per share and expire on August 31, 2013.  Proceeds to the Company from the sale were $90,000, which were allocated $60,780 to the common stock and $29,220 to the warrants based on their relative fair values.

Issuance of Common Stock in Satisfaction of Payable to Former Officers and Consultant

In connection with the change of managerial control of the Company in March 2010, the new board of directors agreed to issue 1,250,000 post-split shares of the Company’s common stock to former management and 250,000 post-split shares to a consultant as compensation for services.  The former management and consultant completed all that was required of them under this arrangement during March, 2010.  Accordingly, the Company recognized this obligation to these individuals and the associated compensation during March, 2010 by recording $212,163 of share-based compensation representing the estimated value of 1,500,000 shares of post-split shares of the Company’s common stock.  The estimated value of the shares was based on the closing price of the common stock on March 17, 2010, adjusted for the expected dilutive effects of various stock issuances that were required to occur prior to the issuance of the post-split shares.  In September, 2010, the Company issued 1,500,000 shares to the former management and consultant, and the obligation was satisfied.

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Supplemental Cash Flow Information

3 Months Ended

Jun. 30, 2011

Statement of Cash Flows, Supplemental Disclosures

Cash Flow, Supplemental Disclosures [Text Block]

(M)           Supplemental Cash Flow Information

During the six months ended June 30, 2011, the Company had the following noncash investing and financing activities:

· The Company issued 2,743,592 shares of common stock as a result of the conversion of $130,000 of principal of 9% convertible promissory notes and $9,923 of related accrued interest.

· The Company issued 1,186,315 shares of common stock as a result of the conversion of $41,000 of principal of 8% convertible promissory notes with an unaffiliated entity and $2,000 of related accrued interest.

· The Company issued 3,084,386 shares of common stock as a result of the conversion of $150,000 of principal of 6% convertible promissory notes with an unaffiliated entity and $4,219 of related accrued interest.

· The Company issued 15 million shares of common stock and a subordinated promissory note in the amount of $500,000 in connection with its acquisition of certain oil and gas leases from Montecito Offshore, L.L.C.

· In connection with the sale of convertible debentures and warrants, the Company issued five-year warrants to its placement agent to acquire 1.7 million shares of common stock.  These warrants had a fair value of $125,688, which was capitalized as deferred financing costs.

During the six months ended June 30, 2010, the Company had the following noncash investing and financing activity:

· The Company issued 5,801,060 shares of common stock in exchange for the settlement of $698,092 of accrued registration rights penalties and interest.

· The Company issued 683,176 shares of common stock in exchange for the cancellation of options and warrants to acquire 683,176 shares of common stock.

The Company paid $0 and $28,093 for interest during the six months ended June 30, 2011 and 2010, respectively.

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Stock Options and Warrants

3 Months Ended

Jun. 30, 2011

Equity

Shareholders' Equity and Share-based Payments [Text Block]

(I)           Stock Options and Warrants

Stock Options and Compensation-Based Warrants

On June 29, 2010, the stockholders of the Company approved the adoption of the 2010 Stock Option Plan.  Effective June 3, 2011, the Company amended and restated the 2010 Stock Option Plan and adopted the Paxton Energy, Inc. Amended and Restated 2010 Incentive Stock Option Plan.  The Amended Plan provides for the issuance of stock grants and granting of incentive and nonqualified stock options to employees and consultants of the Company.  Generally, options granted under the plan may not have a term in excess of ten years.  The Amended Plan reserves 35 million shares of the Company’s common stock for issuance there under.

Generally accepted accounting principles for stock options and compensation-based warrants require the recognition of the cost of services received in exchange for an award of equity instruments in the financial statements, is measured based on the grant date fair value of the award, and requires the compensation expense to be recognized over the period during which an employee or other service provider is required to provide service in exchange for the award (the vesting period).  No income tax benefit has been recognized for share-based compensation arrangements and no compensation cost has been capitalized in the accompanying condensed balance sheet. 

A summary of stock option and compensation-based warrant activity for the six-month period ended June 30, 2011 is presented below:

						Weighted
	Shares			Weighted		Average
	Under			Average		Remaining	Aggregate
	Option or			Exercise		Contractual	Intrinsic
	Warrant			Price		Life	Value
Outstanding at December 31, 2010		13,750,000		$	0.30	8.9 years
Granted or issued		8,250,000			0.20
Canceled		(1,500,000	)		0.38
Outstanding at June 30, 2011		20,500,000			0.24	7.2 years	$	-
Exercisable at June 30, 2011		10,444,506		$	0.25	8.3 years	$	-

During the six months ended June 30, 2011, the Company granted options to an employee and to a new director to acquire an aggregate of 1,250,000 shares of common stock at $0.30 per share.  Of these options, 416,733 vested immediately and 833,267 vest over periods of up to two years.  Additionally, during the six months ended June 30, 2011, options to acquire 3,500,000 shares of common stock were modified to reduce the exercise price from $0.38 to $0.30 per share and options to acquire 1,500,000 shares of common stock were canceled as part of the termination of services of a consultant.  The effects of these modifications on share-based compensation were not material.  During the six months ended June 30, 2010, the Company granted options to acquire 7,000,000 shares of common stock at $0.24 per share.  These options vested immediately.  The fair value of these stock options was estimated on the date of grant using the Black-Scholes option pricing model.  The weighted-average fair value of the stock options granted during the six months ended June 30, 2011 was $0.1780 per share.  The weighted-average assumptions used for the options granted during the six months ended June 30, 2011 were risk-free interest rate of 1.58%, volatility of 234%, expected life of 5.1 years, and dividend yield of zero.  The weighted-average fair value of the stock options granted during the six months ended June 30, 2010 was $0.2131 per share.  The weighted-average assumptions used for the options granted during the six months ended June 30, 2010 were risk-free interest rate of 1.78%, volatility of 215%, expected life of 5.0 years, and dividend yield of zero.  The assumptions employed in the Black-Scholes option pricing model include the following.  The expected life of the options granted is equal to the average of the vesting period and the term of the option, as allowed for under the simplified method prescribed by Staff Accounting Bulletin 107.   The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury constant maturities rate for the expected life of the related stock options. The dividend yield represents anticipated cash dividends to be paid over the expected life of the stock options.

In June 2011, the Company issued warrants to acquire 7 million shares of common stock to its placement agent under a consulting agreement, all of which have been earned upon issuance.  The warrants are exercisable at $0.18 per share and contain full ratchet anti-dilution protection.  The Company has determined that this anti-dilution reset provision of the warrants is subject to derivative liability treatment and is required to be accounted for at its fair value.  Upon issuance, the Company determined the fair value of the warrants was $334,438 and recorded share-based compensation in that amount.  There were no compensation-based warrants issued during the six months ended June 30, 2010.

For the three-month periods ended June 30, 2011 and 2010, the Company reported compensation expense related to stock options and compensation-based warrants of $446,527 and $1,491,700.  For the six-month periods ended June 30, 2011 and 2010, the Company reported compensation expense related to stock options and compensation-based warrants of $530,625 and $1,491,700.  As of June 30, 2011, there was approximately $315,000 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately 1.6 years.  The intrinsic values at June 30, 2011 are based on a closing price of $0.14.

Other Stock Warrants

A summary of other stock warrant activity for the six-month period ended June 30, 2011 is presented below:

					Weighted
			Weighted		Average
	Shares		Average		Remaining	Aggregate
	Under		Exercise		Contractual	Intrinsic
	Warrant		Price		Life	Value
Outstanding at December 31, 2010		2,183,625	$	0.45	2.7 years	$	-
Issued		20,486,802		0.31
Outstanding at June 30, 2011		22,670,427		0.33	4.4 years	$	-

    

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Convertible debentures and related warrants

3 Months Ended

Jun. 30, 2011

Convertible debentures and related warrants

Convertible debentures and related warrants

(G)           Convertible Debentures and related warrants

In May 2011 the Company sold units to certain investors for aggregate cash proceeds of $2,550,000 at a price of $30,000 per unit. Each unit consisted of a secured convertible debenture in the principal amount of $30,000 and a warrant to purchase 200,000 shares of the Company’s common stock.  The convertible debentures mature in May 2012 and bear interest at 9% per annum.  The debentures are convertible at the holder’s option at any time into common stock at a conversion price of $0.15 per share.  The debentures will automatically be redeemed with a 30% premium upon a Change of Control or Listing Event (each as defined in the convertible debenture). Interest on the debentures is payable quarterly in arrears in cash.   The Company is in default under the convertible debentures because it has not made the interest payment that was due on July 1, 2011.  To date, such default has not been either cured or waived by the holders of the convertible debentures.  Upon the occurrence of an event of default, the debenture holders have the right to exercise their rights under the Mineral Mortgage associated with the debentures.  These rights include, among other things, the right to foreclose on the collateral if necessary.  The Company is currently working to resolve the default on these debentures.  The Company can provide no assurance that it will obtain a resolution, or that the secured creditors will not eventually foreclose if not paid in the near term. 

The debentures contain full ratchet anti-dilution protection.  In addition, the conversion price shall be adjusted if the conversion price of securities in a subsequent offering by the Company is adjusted pursuant to a make good provision.  The shares of common stock issuable upon conversion of the debentures are entitled to piggyback registration rights.  The Company has determined that this anti-dilution reset provision caused the conversion feature to be bifurcated from the debentures, treated as a derivative liability, and accounted for at its fair value.  Upon issuance, the Company determined the fair value of the conversion feature was $1,110,308 and recorded a corresponding discount to the convertible debentures.

In connection with this placement, the Company issued warrants to acquire 17 million shares of the Company’s common stock to the debenture holders.  The warrants are exercisable for a period of five years at an exercise price of $0.30 per share.  The warrants will be exercisable on a cashless basis at any time six months after issuance if there is not an effective registration statement registering for resale the shares issuable upon exercise of the warrants. The shares of common stock issuable upon exercise of the warrants are entitled to piggyback registration rights.  The warrants contain full ratchet anti-dilution protection.  The Company has determined that this anti-dilution reset provision of the warrants is subject to derivative liability treatment and is required to be accounted for at its fair value.  Upon issuance, the Company determined the fair value of the warrants was $1,256,886 and recorded a corresponding discount to the convertible debentures.

The total discount to the debentures of $2,367,194 is being amortized over the one year term of the debentures using the effective interest method.  During the period from the issuance of the debentures in May 2011 through June 30, 2011, the Company amortized discount of $67,724.  The carrying amount of the convertible debentures was $250,530 at June 30, 2011, representing their unconverted face amount of $2,550,000 less the unamortized discount of $2,299,470.   

 In connection with this sale of convertible debentures and warrants, the Company 1) paid its placement agent a cash payment of $324,000, 2)issued five-year warrants to its placement agent to acquire 1.7 million shares of common stock, which was 10% of the aggregate number of shares of Common Stock issuable upon conversion of the debentures, and 3) paid $50,000 for legal services in connection with the issuance of these convertible debentures and warrants.  The warrants issued to the placement agent are exercisable at $0.30 per share, may be exercised on a cashless basis, and contain full ratchet anti-dilution protection.  The Company has determined that this anti-dilution reset provision of the warrants is subject to derivative liability treatment and is required to be accounted for at its fair value.  Upon issuance, the Company determined the fair value of the warrants was $125,688 and recorded a corresponding charge to deferred financing costs.  Total deferred financing costs recorded for the issuance of convertible debentures was $499,688.  Deferred financing costs are being amortized over the one year term of the debentures using the effective interest method.  During the period from the issuance of the debentures in May 2011 through June 30, 2011, the Company amortized deferred financing costs of $67,576.  

Pursuant to the debentures and warrants, no holder may convert or exercise such holder’s debenture or warrant if such conversion or exercise would result in the holder beneficially owning in excess of 4.99% of our then issued and outstanding common stock. A holder may, however, increase or decrease this limitation (but in no event exceed 9.99% of the number of shares of common stock issued and outstanding) by providing the Company with 61 days’ notice that such holder wishes to increase or decrease this limitation.

Pursuant to a Mineral Mortgage between the Company and the purchasers of the debentures and warrants, the Company granted a first priority lien on all assets acquired from Montecito Offshore, L.L.C., as further discussed in Note B to these condensed consolidated financial statements.

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STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended		85 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011
Net loss	$ (3,685,736)	$ (2,376,232)	$ (15,923,460)
Impairment loss on oil and gas properties			3,847,192
Share-based compensation for services	3,573,125	1,878,663	7,481,407
Amortization of deferred financing costs and discount on convertible debentures and notes and other debt	335,087	9,692	1,730,487
Gain on transfer of common stock from Bayshore Exploration, L.L.C.			(24,000)
Accretion of asset retirement obligations	173	341	8,581
Depreciation expense	305	332	5,127
Change in fair value of derivative liabilities	(1,312,339)	38,348	(1,070,766)
Change in accounts receivable			16,818
Change in prepaid expenses and other current assets	(5,557)	1,041	(14,896)
Change in other assets	(14,610)		(14,610)
Change in accounts payable and accrued liabilities	259,523	151,778	1,178,327
Change in payable to officer	(30,000)	34,250
Change in accrued registration rights penalties and interest	558	37,033	302,969
Net Cash Used In Operating Activities	(879,471)	(224,754)	(2,476,824)
Acquisition of oil and gas properties	(1,523,563)		(3,440,078)
Purchase of property and equipment	(2,356)		(7,519)
Net Cash Used In Investing Activities	(1,525,919)		(3,447,597)
Proceeds from the issuance of common stock and warrants, net of registration and offering costs	90,000		3,134,970
Proceeds from issuance of convertible notes and other debt, and related beneficial conversion features and common stock, less amounts held in attorneys' trust accounts	90,000	229,745	1,327,332
Proceeds from issuance of convertible debentures	2,550,000		2,550,000
Proceeds from related parties for issuance of secured convertible notes and other debt, and related beneficial conversion features and common stock			180,000
Payment of deferred financing costs	(374,000)		(374,000)
Payment of payable to Bayshore Exploration L.L.C.			(489,600)
Payment of principal on notes payable to stockholder			(325,000)
Payment of principal on note payable			(75,250)
Net Cash Provided By Financing Activities	2,356,000	229,745	5,928,452
Net Increase (Decrease) In Cash And Cash Equivalents	(49,390)	4,991	4,031
Cash and Cash Equivalents At Beginning Of Period	53,421	4,026
Cash and Cash Equivalents At End Of Period	$ 4,031	$ 9,017	$ 4,031

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Accrued Liabilities

3 Months Ended

Jun. 30, 2011

Payables and Accruals

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

(C)           Accrued Liabilities

Accrued liabilities consisted of the following at June 30, 2011 and December 31, 2010:

	June 30,		December 31,
	2011		2010
Accrued salaries	$	368,940	$	281,593
Accrued payroll taxes		48,706		27,262
Accrued director fees		11,533		18,000
Accrued interest		102,953		47,548
Other accrued expenses		2,500		2,500
Total accrued liabilities	$	534,632	$	376,903

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Notes Payable

3 Months Ended

Jun. 30, 2011

Notes Payable {1}

Notes Payable

(D)           Notes Payable

On September 3, 2008, the Company issued $225,000 of secured promissory notes to four individuals who were unaffiliated with the Company and $75,000 of secured promissory notes to two individuals who were related parties at the time.  All of these promissory notes bear interest at 12% per annum, with interest payable monthly.  The promissory notes were originally due September 1, 2009 and are secured by all of the assets of the Company.  With the change in management control in March 2010, accrued interest on these notes was paid through January 31, 2010 and the due dates of the promissory notes were extended to August 31, 2010.  The notes came due on August 31, 2010 and have not been paid.  Both the non-payment of interest and the Company’s failure to repay the notes when they matured constitute events of default under the notes.  Upon the occurrence of an event of default, the noteholders have the right to exercise their rights under the security agreement associated with the notes.  These rights include, among other things, the right to foreclose on the collateral if necessary.  The Company is currently negotiating with its secured lenders for an extension or other resolution.  The Company can provide no assurance that it will obtain an extension or other resolution, or that the secured creditors will not eventually foreclose if not paid in the near term.

Between July 9, 2009 and December 31, 2009, the Company’s two former officers and directors loaned the Company a total of $30,000 to provide working capital for the immediate needs of the Company.  These notes bear interest at 12%, are not collateralized, and were originally due December 30, 2009.  With the change in management control in March 2010, accrued interest on these notes was paid through January 31, 2010 and the due dates of the promissory notes were extended to August 31, 2010.  The notes came due on August 31, 2010 and have not been paid.  Both the non-payment of interest and the Company’s failure to repay the notes when they matured constitute events of default under the notes.  The Company is currently negotiating with its lenders for an extension or other resolution.  The Company can provide no assurance that it will obtain an extension or other resolution.

To provide working capital to the Company, four parties advanced the Company $115,000 between March 28, 2011 and April 6, 2011.  As consideration for their advances, the Company issued warrants to these parties to acquire 115,000 shares of the Company’s common stock.  The warrants are exercisable for a period of five year at an exercise price of $0.30 per share.  The warrants contain full ratchet anti-dilution protection.  The Company has determined that this anti-dilution reset provision of the warrants is subject to derivative liability treatment and is required to be accounted for at its fair value.  Upon issuance, the Company determined the fair value of the warrants was $6,509 and recorded a corresponding discount to the liability for the advances.  The total discount to the liability has been amortized during the quarter ended June 30, 2011.  Of the amounts advanced, $100,000 was satisfied through the issuance of convertible debentures and warrants, as disclosed in Note G.  The remaining $15,000 was to be repaid out of the first closing of the convertible debenture financing.  However, the advance was not repaid out of the first closing of that financing.  The advance is accruing interest at the rate of 10% per annum and is to be promptly repaid.

A summary of notes payable at June 30, 2011 and December 31, 2010 is as follows:

	June 30,		December 31,
	2011		2010
2008 secured promissory notes to six individuals	$	300,000	$	300,000
2009 unsecured promissory notes to former officers		30,000		30,000
March 2011 advance		15,000		-
	$	345,000	$	330,000

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Related-Party and Other Transactions

3 Months Ended

Jun. 30, 2011

Related Party Disclosures

Related Party Transactions Disclosure [Text Block]

(L)           Related-Party and Other Transactions

Payable to Officer

In connection with their employment agreements, the Company agreed to provide for one-time payments aggregating $70,000 to reimburse two of the executive officers for sums and expenditures made and services provided prior to and in connection with the change of control of the Company in March 2010.   At December 31, 2010, the Company has reimbursed part of this amount, leaving a balance payable to one of these officers of $30,000.  The balance of this obligation to the officer has been paid as of June 30, 2011.

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Unsecured Convertible Promissory Notes Payable

3 Months Ended

Jun. 30, 2011

Unsecured Convertible Promissory Notes Payable

Unsecured Convertible Promissory Notes Payable

(E)           Unsecured convertible promissory notes payable

$300,000 Convertible Promissory Note Offering

Commencing in March 2010, new management of the Company initiated the placement of unsecured convertible promissory notes to raise up to $300,000 for the payment of transaction expenses, payment of certain accounts payable, and to provide working capital.  These notes bear interest at 9% per annum.  The repayment of the notes, including accrued interest, was due on December 31, 2010 if not converted into common stock earlier.  Originally, the principal amount of the notes, plus accrued interest, were to be automatically converted, in whole, into shares and warrants of the Company upon the completion of a planned $3,000,000 sale of common stock and warrants as part of the change of control and the exchange of oil and gas interests by the Company’s new chief executive officer with the Company.  However, in October 2010, management of the Company decided to allow the conversion of notes payable under this offering prior to the completion of the planned $3,000,000 placement and prior to the automatic conversion process described in the notes.  

The number of shares of common stock and warrants to be issued upon such conversion is equal to a discount of 66% of the price of the common stock and warrants in the planned $3,000,000 placement of common stock and warrants.  As such, the conversion price is $0.051 per share of common stock and warrant to purchase one half share of common stock.  The holders of these convertible promissory notes will be entitled to the same registration rights, if any, given to the purchasers of the planned $3,000,000 offering.  Proceeds from the convertible note offering totaled $298,000.  In November 2010, the Company received notice of conversion of notes totaling $158,000, plus accrued interest of $8,630, which were converted into 3,267,247 shares of common stock and warrants to purchase 1,633,625 shares of common stock.  During the six months ended June 30, 2011, the Company received notice of conversion of notes totaling $130,000, plus accrued interest of $9,923, which were converted into 2,743,592 shares of common stock and warrants to purchase 1,371,802 shares of common stock.  The warrants are exercisable at $0.45 per share until August 31, 2013.  The unconverted balance of these promissory notes is $10,000 and $140,000 at June 30, 2011 and December 31, 2010, respectively.  In July 2011, the remaining $10,000 note and unpaid accrued interest was converted into 213,049 shares of common stock and warrants to purchase 106,525 shares of common stock.

Convertible Promissory Notes to an Unaffiliated Entity

In April and December of 2010 and in February and April of 2011, the Company has issued unsecured convertible promissory notes to an unaffiliated entity.  Aggregate proceeds from the convertible promissory notes total $160,000.  The convertible promissory notes bear interest at 8% per annum.  The and unpaid accrued interest are generally due approximately nine months after the issuance date.  In general, the notes are convertible until maturity at a variable conversion price equal to 50% of the average of the lowest three closing bid prices from the ten trading days prior to the date of the conversion notice.  In December 2010, the Company received notices of conversion of notes totaling $21,000, which were converted into 377,290 shares of common stock, or a weighted-average conversion price of $0.05566 per share.  During the six months ended June 30, 2011, the Company received notices of conversion of notes totaling $41,000 and accrued interest of $2,000, which were converted into 1,186,315 shares of common stock, or a weighted-average conversion price of $0.03625 per share.

This variable conversion feature constitutes an embedded derivative under generally accepted accounting principles and is required to be valued at its fair value.  The fair value of the beneficial conversion feature has been estimated at a total of $152,308 for the four notes, which has been recorded as discounts to the carrying amount of the convertible promissory notes.  The discounts are being amortized over the period from the issuance dates to the maturity dates.  The Company recognized interest expense from the amortization of the discounts in the amount of $39,187 for the three months ended June 30, 2011 and $59,717 for the six months ended June 30, 2011.  The Company recognized interest expense from the amortization of the discount in the amount of $9,692 for the three and six months ended June 30, 2010.  The carrying amount of the convertible promissory notes is $46,613 at June 30, 2011, representing their unconverted face amount of $98,000 less the unamortized discount of $51,387.  The carrying amount of the convertible promissory notes was $27,896 at December 31, 2010, representing their unconverted face amount of $64,000 less the unamortized discount of $36,104.   

Convertible Promissory Notes Issued in Exchange for Accounts Payable

On October 12, 2010, an unrelated third party acquired the rights to certain of the Company’s past-due accounts payable totaling $193,676.  That entity and the Company then agreed to convert the past-due accounts payable into Convertible Redeemable Notes Payable with an aggregate principal amount of $193,676.  These notes were due October 12, 2012 and bore interest at 6%.  Interest was payable on or before the due date of the notes and was payable in shares of the Company’s common stock.  The holder of the notes was entitled, at its option, to convert all or any portion of the principal of the notes, along with related accrued interest, into shares of the Company’s common stock at a conversion price equal to $0.05 per share.  On October 18, 2010, the note holder converted $43,676 of principal into 873,522 shares of common stock. During the three months ended March 31, 2011, the remaining $150,000 of principal and $4,219 of accrued interest were converted into 3,084,386 shares of common stock.

The fair value of the beneficial conversion feature was originally estimated at $193,676 for these convertible promissory notes, which was recorded as discounts to the carrying amount of the convertible promissory notes.  The discounts were amortized over the period from the issuance dates of the notes to the earlier of the maturity dates or the conversion dates.  The Company recognized interest expense from the amortization of the discounts in the amount of $133,561 for the three months ended March 31, 2011.  The carrying amount of the convertible promissory notes was $16,439 at December 31, 2010, representing their unconverted face amount of $150,000 less the unamortized discount of $133,561.

A summary of unsecured convertible promissory notes at June 30, 2011 and December 31, 2010 is as follows:

	June 30, 2011						December 31, 2010
	Unpaid Principal		Unamortized Discount		Carrying  Value		Unpaid Principal		Unamortized Discount		Carrying Value
$300,000 Convertible Note Offering	$	10,000	$	-	$	10,000	$	140,000	$	-	$	140,000
Convertible Notes to an Unaffiliated Entity		98,000		51,387		46,613		64,000		36,104		27,896
Convertible Notes Issued for Accounts Payable		-		-		-		150,000		133,561		16,439
	$	108,000	$	51,387	$	56,613	$	354,000	$	169,665	$	184,335

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STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (USD $)	Total	Common Stock	Additional Paid-In Capital	Deficit Accumulated During the Exploration Stage
Balance at Dec. 31, 2010	$ (868,965)	$ 20,343	$ 11,348,416	$ (12,237,724)
Balance - Shares at Dec. 31, 2010	20,343,263	20,343,263
Issuance of common stock and warrants for cash, January 2011, $0.15 per unit	90,000	600	89,400
Issuance of common stock and warrants for cash, January 2011, $0.15 per unit - Shares	600,000	600,000
Issuance of common stock and warrants upon conversion of notes payable and accrued interest, January 2011 to June 2011, $0.0292 to $0.0625 per share	437,636	7,015	430,621
Issuance of common stock and warrants upon conversion of notes payable and accrued interest, January 2011 to June 2011, $0.0292 to $0.0625 per share - Shares	7,014,293	7,014,293
Issuance of common stock in connection with the Montecito Asset Sale Agreement	3,675,000	15,000	3,660,000
Issuance of common stock in connection with the Montecito Asset Sale Agreement - Shares	15,000,000	15,000,000
Issuance of common stock for legal services	50,000	200	49,800
Issuance of common stock for legal services - Shres	200,000	200,000
Share-based compensation from grant of common stock options and issuance of common stock warrants to officers, directors and consultants	196,187		196,187
Share-based compensation from issuance of common stock to officers	2,992,500	15,750	2,976,750
Share-based compensation from issuance of common stock to officers - Shares	15,750,000	15,750,000
Net loss	(3,685,736)			(3,685,736)
Balance at Jun. 30, 2011	$ 2,886,622	$ 58,908	$ 18,751,174	$ (15,923,460)
Balance - Shares at Jun. 30, 2011	58,907,556	58,907,556

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Organization and Summary of Significant Accounting Policies

3 Months Ended

Jun. 30, 2011

Accounting Policies

Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Text Block]

(A)           Organization, Change in Control and Significant Accounting Policies

Organization – Paxton Energy, Inc. (the “Company”) was organized under the laws of the State of Nevada on June 30, 2004.  During August 2004, shareholder control of the Company was transferred, a new board of directors was elected and new officers were appointed.  These officers and directors managed the Company until March 17, 2010, at which time, the existing members of the Company’s board of directors resigned, new members were appointed to the board of directors, and managerial control of the Company was transferred to new management.  The new board of directors immediately commenced, among other things, the placement of unsecured convertible promissory notes to raise funds for working capital and held a meeting of stockholders on June 29, 2010, at which the stockholders approved 1) a 1-for-3 reverse common stock split, 2) a second reverse stock split of approximately 1 share for 2.4 shares of common stock, 3) the amendment of the Company’s certificate of incorporation to increase the Company’s authorized capital from 100 million to 500 million shares of common stock and from 5 million to 10 million shares of preferred stock, and 4) the adoption of the 2010 Stock Option Plan.

Nature of Operations – During June 2005, the Company commenced acquiring working interests in oil and gas properties principally located in the Cooke Ranch prospect in LaSalle County, Texas.  In connection with these properties in Texas, the Company is engaged primarily as a joint interest owner with Bayshore Exploration L.L.C. (Bayshore) in the acquisition, exploration, and development of oil and gas properties and the production and sale of oil and gas.  Through June 30, 2011, the Company has participated in drilling ten wells in Texas.  Additionally, the Company owns a working interest in the 8,843-acre balance of the Cooke Ranch prospect and has the right to participate in a program to acquire up to a 75% working interest in leases adjacent to the Cooke Ranch prospect, where, to date, the Company has acquired an interest in leases on approximately 2,268 gross acres.  Current management of the Company is currently evaluating the oil and gas properties in Texas.  As further described in Note B, the Company acquired a 70% leasehold working interest, with a net revenue interest of 51.975%, of certain oil and gas leases in the Gulf of Mexico.  The Company is considered to be in the exploration stage due to the lack of significant revenues.

Condensed Interim Consolidated Financial Statements– The accompanying unaudited condensed consolidated financial statements of Paxton Energy, Inc., have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, these consolidated financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements.  These consolidated financial statements should be read in conjunction with the Company’s annual financial statements and the notes thereto for the year ended December 31, 2010, and for the period from June 30, 2004 (date of inception) through December 31, 2010, included in the Company’s annual report on Form 10-K.  In the opinion of the Company’s management, the accompanying unaudited condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to fairly present the Company’s financial position as of June 30, 2011 and its consolidated results of operations for the three months ended June 30, 2011 and 2010, and its consolidated results of operations and cash flows for the six months ended June 30, 2011 and 2010 and for the period from June 30, 2004 (date of inception), through June 30, 2011.  The results of operations for the three months and the six months ended June 30, 2011, may not be indicative of the results that may be expected for the year ending December 31, 2011.

Business Condition – The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has not had significant revenue and is still considered to be in the exploration stage.  The Company incurred losses of $2,971,733 and $3,685,736 for the three months and the six months ended June 30, 2011 and $4,154,493 for the year ended December 31, 2010.  The Company also used cash of $879,471 and $498,605 in its operating activities during the six months ended June 30, 2011 and the year ended December 31, 2010, respectively.  Through June 30, 2011, the Company has accumulated a deficit during the exploration stage of $15,923,460.  At June 30, 2011, the Company has a working capital deficit of $2,072,681 including current liabilities of $2,092,276.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

As discussed above, the existing members of the Company’s board of directors resigned on March 17, 2010 and new members were appointed.  During the period since the change of control in March 2010, the accomplishments of the new board of directors include, among other things, the following:

· The placement of unsecured convertible promissory notes in the amount of $458,000 to provide working capital for the Company.

· The settlement of its liability for accrued registration rights penalties and interest in the amount of $698,092 by the issuance of common stock.

· The conversion of all outstanding options and warrants to purchase 683,176 shares of common stock into 683,176 shares of common stock.

· The consummation of two reverse stock splits that resulted in a total of approximately 10 million post-consolidation shares of common stock outstanding at the date of the reverse stock splits.

· The sale of $255,000 of equity securities.

· The sale of convertible debentures and warrants for gross proceeds of $2,550,000.

· The acquisition of a 70% leasehold working interest, with a net revenue interest of 51.975%, of certain oil and gas leases owned by Montecito, for $1,500,000 in cash, a subordinated promissory note in the amount of $500,000, and 15 million shares of common stock. 

The Company entered into an agreement with a consulting company on September 7, 2010, under which the consultant agreed to provide the Company with one or more financial and strategic business plans.  Thereafter, on September 27, 2010, the Company entered into an agreement with an investment banking firm to provide investment banking and financial advisory services.  Services under these two agreements are being provided to the Company in connection with the evaluation and due diligence of potential oil and gas property acquisitions.

The Company is currently seeking equity, debt, and transaction financing to fund these potential acquisitions and other expenditures, although the Company does not have any definitive contracts or commitments for either at this time.  The Company will have to raise additional funds to continue operations and, while the Company has been successful in doing so in the past, there can be no assurance that it will be able to do so in the future.  The Company’s continuation as a going concern is dependent upon its ability to obtain necessary additional funds to continue operations and the attainment of profitable operations.

Basic and Diluted Loss per Common Share – Basic loss per common share amounts are computed by dividing net loss by the weighted-average number of shares of common stock outstanding during each period.  Diluted loss per share amounts are computed assuming the issuance of common stock for potentially dilutive common stock equivalents. All outstanding stock options, warrants, and convertible promissory notes are currently antidilutive and have been excluded from the diluted loss per share calculations.  None of the options and warrants to acquire 43,170,427 shares of common stock, or the promissory notes and debentures convertible into 18,847,075 shares of common stock and warrants to purchase 106,138 shares of common stock were included in the computation of diluted loss per share at June 30, 2011.  None of the options to acquire 7,000,000 shares of common stock or promissory notes convertible into approximately 520,000 shares of common stock were included in the computation of diluted loss per share at June 30, 2010

Fair Values of Financial Instruments – The carrying amounts reported in the consolidated balance sheets for receivable from attorneys’ trust accounts, accounts payable, payable to Bayshore Exploration L.L.C., and payable to officer approximate fair value because of the immediate or short-term maturity of these financial instruments.  The carrying amounts reported for notes payable, unsecured convertible promissory notes payable, subordinated note payable, and convertible debentures approximate fair value because the underlying instruments are at interest rates which approximate current market rates.  The fair value of derivative liabilities are estimated based on the method disclosed in Note J to these condensed consolidated financial statements.

Recently Issued Accounting Statements – In 2011, the Financial Accounting Standards Board ("FASB") issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company will adopt this accounting standard upon its effective date for periods ending on or after December 15, 2011, and does not anticipate that this adoption will have a significant impact on its consolidated financial position or results of operations.

In 2011, the FASB issued new disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The Company will adopt this accounting standard upon its effective date for periods ending on or after December 15, 2011, and does not anticipate that this adoption will have any impact on its consolidated financial position or results of operations.

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Derivative Liabilities

3 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities

Derivatives and Fair Value [Text Block]

(J)           Derivative Liabilities

Convertible Debenures and Related Warrants

As described above in Notes E, G and I to these condensed consolidated financial statements, the Company issued convertible debentures and various warrants which contain full ratchet anti-dilution protection.  The Company has determined that this anti-dilution reset provision of the convertible debentures and these warrants is subject to derivative liability treatment and is required to be accounted for at fair value.  Upon issuance, the Company determined the aggregate fair value of the conversion feature and of the warrants was $2,833,829.  The Company has determined the aggregate fair value of the conversion feature and the warrants was $1,617,929 at June 30, 2011, resulting in a gain on the change in the derivative liability of $1,215,900 for the three months and the six months ended June 30, 2011.

The Company estimated the fair value of the conversion feature and the warrants using the Lattice model. Accordingly, the fair value of the conversion feature and warrants as determined using the Lattice model is affected by the Company’s stock price on the date of issuance as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the debentures and warrants, actual and projected redemptions and conversion price resets.  Expected volatility is based primarily on the historical volatility of other comparable oil and gas companies.  Volatility used in the calculation ranged from a low of 64% in year one to a high of 137% in year five. Management estimated that the probability of the debentures being redeemed at 0% initially, increasing by 1% per month thereafter to a maximum of 20%.

Beneficial Conversion Feature

As described above in Note E to these condensed consolidated financial statements, the Company issued unsecured convertible promissory notes to an unaffiliated entity which contains a beneficial conversion feature which is treated as an embedded derivative under generally accepted accounting principles and is required to be accounted for at fair value.  The Company has estimated the fair value of the beneficial conversion feature based on the intrinsic value of the conversion feature, which equals the difference between the variable conversion price of the notes and the closing price of the Company’s common stock on the date of the valuation.  The fair value of the beneficial conversion feature was estimated to be $121,444 and $243,376 as of June 30, 2011 and December 31, 2010, respectively.  The Company recognized a gain from the change in fair value of this beneficial conversion feature of $133,620 and $96,439 for the three months and six months ended June 30, 2011.  The Company recognized a loss from the change in fair value of this beneficial conversion feature of $20,192 for the three and six months ended June 30, 2010.

Warrants

Effective January 1, 2009 the Company adopted the provisions of new accounting standards related to embedded derivatives and reclassified the fair value of certain common stock purchase warrants from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in April 2006.  The warrants did not qualify for hedge accounting, and as such, all changes in the fair value of these warrants were recognized currently in results of operations until June 29, 2010 when the warrants were canceled.  The Company recognized a gain from the change in fair value of these warrants of $9,278 for the three months ended June 30, 2010 and recognized a loss from the change in fair value of these warrants of $18,156 for the six months ended June 30, 2010.

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Subsequent Events

3 Months Ended

Jun. 30, 2011

Subsequent Events

Subsequent Events [Text Block]

(N)           Subsequent Events

Conversion of Promissory Notes to an Unaffiliated Entity

In December of 2010, the Company issued an unsecured convertible promissory note in the amount of $35,000 to an unaffiliated entity.  In July 2011, the Company received notices for the conversion of the remaining principal balance of this note in the amount of $23,000 and accrued interest of $1,400, which were converted into 428,077 shares of common stock.

Conversion of Promissory Note from $300,000 Offering

Commencing in March 2010, new management of the Company initiated the placement of unsecured convertible promissory notes to raise up to $300,000.  In July 2011, the last remaining note in the principal amount of $10,000, plus unpaid accrued interest, was converted into 213,049 shares of common stock and warrants to purchase 106,525 shares of common stock.

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BALANCE SHEETS (USD $)	Jun. 30, 2011	Dec. 31, 2010
Cash and cash equivalents	$ 4,031	$ 53,421
Receivable from attorneys' trust accounts	668	668
Prepaid expenses and other current assets	14,896	9,339
Total Current Assets	19,595	63,428
Property and Equipment, net of accumulated depreciation	2,392	341
Oil and gas properties, using full cost accounting	6,286,449	587,886
Deferred financing costs	432,112
Other assets	14,610
Total Assets	6,755,158	651,655
Accounts payable	286,693	193,651
Accrued liabilities	534,632	376,903
Payable to Bayshore Exploration L.L.C.	106,153	113,544
Payable to officer		30,000
Notes payable	345,000	330,000
Unsecured convertible promissory notes payable, net of discount	56,613	184,335
Subordinated note payable	500,000
Convertible debentures, net of discount	250,530
Accrued registration rights penalties and interest	12,655	12,097
Total Current Liabilities	2,092,276	1,240,530
Long-term asset retirement obligation	36,887	36,714
Derivative liabilities	1,739,373	243,376
Total Long-Term Liabilities	1,776,260	280,090
Common stock, $0.001 par value; 500,000,000 shares authorized, 58,907,556 and 20,343,263 shares issued and outstanding, respectively	58,908	20,343
Additional paid-in capital	18,751,174	11,348,416
Deficit accumulated during the exploration stage	(15,923,460)	(12,237,724)
Total Stockholders' Equity (Deficit)	2,886,622	(868,965)
Total Liabilities and Stockholders' Equity (Deficit)	$ 6,755,158	$ 651,655