WORTHINGTON ENERGY, INC. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - WORTHINGTON ENERGY, INC.	Financial_Report.xls
EX-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. - WORTHINGTON ENERGY, INC.	ex32-01.htm
EX-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. - WORTHINGTON ENERGY, INC.	ex31-01.htm
EX-10.01 - CONVERTIBLE REDEEMABLE SECURED NOTE, DATED AUGUST 10, 2011, ISSUED BY PAXTON ENERGY, INC. TO GEL PROPERTIES, INC. - WORTHINGTON ENERGY, INC.	ex10-01.htm
EX-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. - WORTHINGTON ENERGY, INC.	ex31-02.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 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

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

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 ¨
	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

As of November 8, 2011, issuer had 64,699,621 outstanding shares of common stock, par value $0.001.

TABLE OF CONTENTS

		Page

PART I – FINANCIAL INFORMATION
	Item 1. Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Operations (Unaudited)	5
	Condensed Consolidated Statement of Stockholders’ Equity (Deficit) (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	Item 2. Management’s Discussion and Analysis of Financial Condition and	24
	Results of Operations	25
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	32
	Item 4. Controls and Procedures	33

PART II – OTHER INFORMATION
	Item 1. Legal Proceedings	35
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35
	Item 3. Defaults Upon Senior Securities	36
	Item 5. Other Information	36
	Item 6. Exhibits	37
	Signatures	38

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Paxton Energy, Inc., has included its unaudited condensed consolidated balance sheets as of September 30, 2011, and December 31, 2010 (the end of its most recently completed fiscal year), unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, and for the period from June 30, 2004 (date of inception) through September 30, 2011, unaudited condensed consolidated statement of stockholders’ equity (deficit) for the nine months ended September 30, 2011, and unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010, and for the period from June 30, 2004 (date of inception) through September 30, 2011, together with unaudited condensed notes thereto. In the opinion of management of Paxton Energy, Inc., the condensed consolidated financial statements reflect all adjustments, all of which are normal recurring adjustments, necessary to fairly present the consolidated financial condition, results of operations, and cash flows of Paxton Energy, Inc., for the interim periods presented. The condensed consolidated financial statements included in this report on Form 10-Q should be read in conjunction with the audited financial statements of Paxton Energy, Inc., and the notes thereto for the year ended December 31, 2010, included in our annual report on Form 10-K.

PAXTON ENERGY, INC.
(AN EXPLORATION-STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	September 30,			December 31,
	2011			2010

ASSETS

Current Assets
Cash and cash equivalents	$	2,491		$	53,421
Receivable from attorneys' trust accounts		668			668
Prepaid expenses and other current assets		18,087			9,339
Total Current Assets		21,246			63,428

Property and Equipment, net of accumulated depreciation		14,828			341
Oil and gas properties, using full cost accounting		6,286,449			587,886
Deferred financing costs		313,627			-
Other assets		14,610			-

Total Assets	$	6,650,760		$	651,655

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities
Accounts payable	$	305,640		$	193,651
Accrued liabilities		737,909			376,903
Payable to Bayshore Exploration L.L.C.		106,153			113,544
Payable to related parties		5,000			30,000
Notes payable		345,000			330,000
Unsecured convertible promissory notes payable, net of discount		41,816			184,335
Subordinated note payable		500,000			-
Convertible debentures, net of discount		469,444			-
Accrued registration rights penalties and interest		12,939			12,097
Total Current Liabilities		2,523,901			1,240,530

Long-Term Liabilities
Long-term asset retirement obligation		36,973			36,714
Derivative liabilities		1,149,372			243,376
Total Long-Term Liabilities		1,186,345			280,090

Stockholders' Equity (Deficit)
Preferred stock, $0.001 par value; 10,000,000 shares authorized,
none issued and outstanding		-			-
Common stock, $0.001 par value; 500,000,000 shares authorized,
62,232,741 and 20,343,263 shares issued and outstanding, respectively		62,233			20,343
Additional paid-in capital		19,066,711			11,348,416
Deficit accumulated during the exploration stage		(16,188,430	)		(12,237,724	)
Total Stockholders' Equity (Deficit)		2,940,514			(868,965	)

Total Liabilities and Stockholders' Equity (Deficit)	$	6,650,760		$	651,655

The accompanying notes are an integral part of these condensed consolidated financial statements.

PAXTON ENERGY, INC.
(AN EXPLORATION-STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
													For the Period from
													June 30, 2004
	For the Three Months Ended						For the Nine Months Ended						(Date of Inception)
	September 30,						September 30,						through
	2011			2010			2011			2010			September 30, 2011

Oil and gas revenues, net	$	-		$	5,717		$	5,654		$	11,836		$	368,214

Costs and Operating Expenses
Lease operating expenses		-			2,472			3,310			6,932			146,778
Impairment loss on oil and gas properties		-			-			-			-			3,847,192
Accretion of asset retirement obligations		86			78			259			419			8,667
General and administrative expense		312,306			285,988			1,331,818			672,370			4,021,148
Share-based compensation		93,023			392,794			3,666,148			2,271,457			7,574,430
Total costs and operating expenses		405,415			681,332			5,001,535			2,951,178			15,598,215

Loss from operations		(405,415	)		(675,615	)		(4,995,881	)		(2,939,342	)		(15,230,001	)

Other income (expense)
Interest income		-			-			-			-			63,982
Change in fair value of derivative liabilities		641,388			(47,500	)		1,953,727			(85,848	)		1,712,154
Gain on transfer of common stock from
Bayshore Exploration, L.L.C.		-			-			-			-			24,000
Interest expense		(89,779	)		(17,139	)		(162,301	)		(81,604	)		(616,914	)
Amortization of deferred financing costs		(118,485	)		-			(186,061	)		-			(186,061	)
Amortization of discount on convertible
debentures and notes and other debt		(292,679	)		(14,154	)		(560,190	)		(23,846	)		(1,955,590	)
Total other income (expense)		140,445			(78,793	)		1,045,175			(191,298	)		(958,429	)

Net Loss	$	(264,970	)	$	(754,408	)	$	(3,950,706	)	$	(3,130,640	)	$	(16,188,430	)

Basic and Diluted Loss Per Common Share	$	(0.004	)	$	(0.068	)	$	(0.095	)	$	(0.530	)

Basic and Diluted Weighted-Average
Common Shares Outstanding		60,372,224			11,019,497			41,752,355			5,904,011

The accompanying notes are an integral part of these condensed consolidated financial statements.

PAXTON ENERGY, INC.
(AN EXPLORATION-STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended September 30, 2011
(Unaudited)
							Deficit
							Accumulated			Total
					Additional		During the			Stockholders'
	Common Stock				Paid-In		Exploration			Equity
	Shares		Amount		Capital		Stage			(Deficit)

Balance - December 31, 2010		20,343,263	$	20,343	$	11,348,416	$	(12,237,724	)	$	(868,965	)

Issuance of common stock and warrants for cash,
January 2011, $0.15 per unit		600,000		600		89,400		-			90,000

Issuance of common stock and warrants upon
conversion of notes payable and accrued interest,
January 2011 to September 2011, $0.0263 to $0.0625
per share		8,939,478		8,940		594,535		-			603,475

Issuance of common stock in connection with the
Montecito Asset Sale Agreement		15,000,000		15,000		3,660,000		-			3,675,000

Issuance of common stock for legal and
consulting services		1,200,000		1,200		101,200		-			102,400

Issuance of common stock in settlement of liabilities,
August 2011, $0.15 per share		400,000		400		59,600		-			60,000

Share-based compensation from grant of common
stock options and issuance of common stock warrants
to officers, directors and consultants		-		-		236,810		-			236,810

Share-based compensation from issuance of common
stock to officers		15,750,000		15,750		2,976,750		-			2,992,500

Net loss		-		-		-		(3,950,706	)		(3,950,706	)

Balance - September 30, 2011		62,232,741	$	62,233	$	19,066,711	$	(16,188,430	)	$	2,940,514

The accompanying notes are an integral part of these condensed consolidated financial statements.

PAXTON ENERGY, INC.
(AN EXPLORATION-STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
							For the Period from
							June 30, 2004
	For the Nine Months Ended						(Date of Inception)
	September 30,						through
	2011			2010			September 30, 2011

Cash Flows From Operating Activities
Net loss	$	(3,950,706	)	$	(3,130,640	)	$	(16,188,430	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Impairment loss on oil and gas properties		-			-			3,847,192
Share-based compensation for services		3,666,148			2,271,457			7,574,430
Amortization of deferred financing costs and discount
on convertible debentures and notes and other debt		746,251			23,846			2,141,651
Gain on transfer of common stock from
Bayshore Exploration, L.L.C.		-			-			(24,000	)
Accretion of asset retirement obligations		259			419			8,667
Depreciation expense		1,027			498			5,849
Change in fair value of derivative liabilities		(1,953,727	)		85,848			(1,712,154	)
Changes in assets and liabilities:
Accounts receivable		-			-			16,818
Prepaid expenses and other current assets		(8,748	)		265			(18,087	)
Other assets		(14,610	)		-			(14,610	)
Accounts payable and accrued liabilities		545,411			327,388			1,464,215
Payable to officer		(25,000	)		30,000			5,000
Accrued registration rights penalties and interest		842			37,270			303,253
Net Cash Used In Operating Activities		(992,853	)		(353,649	)		(2,590,206	)

Cash Flows From Investing Activities
Acquisition of oil and gas properties		(1,523,563	)		-			(3,440,078	)
Purchase of property and equipment		(15,514	)		-			(20,677	)
Net Cash Used In Investing Activities		(1,539,077	)		-			(3,460,755	)

Cash Flows From Financing Activities
Proceeds from the issuance of common stock and warrants,
net of registration and offering costs		90,000			30,000			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		215,000			348,000			1,452,332
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		2,481,000			378,000			6,053,452
Net Increase (Decrease) In Cash And Cash Equivalents		(50,930	)		24,351			2,491
Cash and Cash Equivalents At Beginning Of Period		53,421			4,026			-
Cash and Cash Equivalents At End Of Period	$	2,491		$	28,377		$	2,491

Supplemental Cash Flow Information—Note M.

The accompanying notes are an integral part of these condensed consolidated financial statements.

PAXTON ENERGY, INC.

(An Exploration Stage Company)

Notes to Condensed Consolidated Financial Statements

(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 September 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, in May 2011, 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 condensed consolidated financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. These condensed 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 consolidated financial position as of September 30, 2011 and its consolidated results of operations for the three months ended September 30, 2011 and 2010, and its consolidated results of operations and cash flows for the nine months ended September 30, 2011 and 2010 and for the period from June 30, 2004 (date of inception), through September 30, 2011. The results of operations for the three months and the nine months ended September 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 $264,970 and $3,950,706 for the three months and the nine months ended September 30, 2011, respectively, and $4,154,493 for the year ended December 31, 2010. The Company also used cash of $992,853 and $498,605 in its operating activities during the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively. Through September 30, 2011, the Company has accumulated a deficit during the exploration stage of $16,188,430. At September 30, 2011, the Company has a working capital deficit of $2,502,655 including current liabilities of $2,523,901. 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 $583,000 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 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, the Company has entered into agreements with certain consulting firms to provide investment banking and financial advisory services. Services under these 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 42,576,952 shares of common stock, or the promissory notes and debentures convertible into 25,793,642 shares of common stock were included in the computation of diluted loss per share at September 30, 2011. None of the options and warrants to acquire 13,850,000 shares of common stock, or the promissory notes convertible into approximately 6,233,000 shares of common stock and warrants to purchase 3,017,000 shares of common stock were included in the computation of diluted loss per share at September 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 related parties 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 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 financial position or results of operations.

In 2011, the FASB issued new accounting guidance that simplifies goodwill impairment tests. The new guidance states that a "qualitative" assessment may be performed to determine whether further impairment testing is necessary. The Company will adopt this accounting standard upon its effective date for periods beginning on or after December 15, 2011. Management is continuing to evaluate what impact, if any, the adoption of this guidance will have on its financial position or results of operations.

(B) Oil and Gas Acquisition Agreements and Operations

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 September 30, 2011.

Texas Oil and Gas Operations

The Company owns various 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 has principally engaged as a joint interest owner with Bayshore in the acquisition, exploration, and development of these properties and in the production and sale of oil and gas. Bayshore is the operator of the properties. Oil and gas revenues and related lease operating expenses from these properties has not been significant historically, especially in recent periods. During the quarter ended September 30, 2011, Bayshore ceased reporting to the Company the amounts of its respective share in the oil and gas revenues and related lease operating expenses. Accordingly, the Company has reported no oil and gas revenues or related lease operating expenses for the three months ended September 30, 2011. Management of the Company does not believe that this has a significant effect on the Company’s consolidated financial position or results of operations.

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.

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

	September 30,		December 31,
	2011		2010

Accrued salaries	$	478,463	$	281,593
Accrued payroll taxes		51,380		27,262
Accrued director fees		23,533		18,000
Accrued interest		182,033		47,548
Other accrued expenses		2,500		2,500

Total accrued liabilities	$	737,909	$	376,903

(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 note holders 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. On or about November 2, 2011, the note holders filed a lawsuit in the First Judicial District Court of the State of Nevada in and for Carson City. The plaintiff is seeking a judgment for the payment of the outstanding notes and for immediate possession and/or sale of assets of the Company that were pledged pursuant to a security agreement, plus costs and attorney fees. The Company intends to file an answer to the complaint and defend the action.

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. These note holders are among the plaintiffs who filed a lawsuit, as discussed in the previous paragraph, seeking a judgment for the payment of the outstanding notes.

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 currently outstanding.

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

	September 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

(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 bore 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 was equal to a discount of 66% from 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 was $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 nine months ended September 30, 2011, the Company received notice of conversion of the remaining notes totaling $140,000, plus accrued interest of $10,788, which were converted into 2,956,641 shares of common stock and warrants to purchase 1,478,324 shares of common stock. The warrants are exercisable at $0.45 per share until August 31, 2013.

Convertible Promissory Notes to Unaffiliated Entities

In April and December of 2010 and in February, April, and August of 2011, the Company has issued unsecured convertible promissory notes to an unaffiliated entity. Aggregate proceeds from the convertible promissory notes total $210,000. The convertible promissory notes bear interest at 8% per annum. The principal 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. Additionally, the notes contain a reset provision that provides that if the Company issues or sells any shares of common stock for consideration per share less than the conversion price of the notes, that the conversion price will be reduced to the amount of consideration per share of the stock issuance. 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 nine months ended September 30, 2011, the Company received notices of conversion of notes totaling $99,000 and accrued interest of $4,800, which were converted into 2,898,451 shares of common stock, or a weighted-average conversion price of $0.03581 per share.

This variable conversion price and the anti-dilution reset provision constitute an embedded derivative under generally accepted accounting principles and are required to be valued at fair value. The fair value of these beneficial conversion features has been estimated at a total of $202,308 for the five notes, which has been recorded as discounts to the carrying amount of the convertible promissory notes. The discounts are amortized over the period from the issuance dates to the maturity dates or to the conversion dates, whichever is earlier. The Company recognized interest expense from the amortization of the discounts in the amount of $45,751 for the three months ended September 30, 2011 and $105,468 for the nine months ended September 30, 2011. The Company recognized interest expense from the amortization of the discount in the amount of $14,154 for the three months ended September 30, 2010 and $23,846 for the nine months ended September 30, 2010.

The carrying amount of the convertible promissory notes is $34,364 at September 30, 2011, representing their unconverted face amount of $90,000 less the unamortized discount of $55,636. 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.

On August 10, 2011, the Company issued an unsecured convertible promissory note to another unaffiliated entity. Proceeds from the convertible promissory note were $75,000. The convertible promissory note bears interest at 6% per annum. The principal and unpaid accrued interest are due August 10, 2012. The note is convertible any time after February 10, 2012 until maturity at a variable conversion price equal to 70% of the lowest closing bid price from the five trading days prior to the date of the conversion notice. This variable conversion price constitutes an embedded derivative under generally accepted accounting principles and is required to be valued at fair value. The fair value of the beneficial conversion feature has been estimated at $69,730 for the note, which has been recorded as a discount to the carrying amount of the convertible promissory note. The discount is being amortized over the period from the issuance date to the maturity date or to the conversion dates, whichever is earlier. The Company recognized interest expense from the amortization of the discount in the amount of $2,182 for the three months and the nine months ended September 30, 2011. The carrying amount of the convertible promissory note is $7,452 at September 30, 2011, representing the unconverted face amount of $75,000 less the unamortized discount of $67,548.

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 September 30, 2011 and December 31, 2010 is as follows:

	September 30, 2011						December 31, 2010
	Unpaid Principal		Unamortized Discount		Carrying Value		Unpaid Principal		Unamortized Discount		Carrying Value

$300,000 Convertible Note Offering	$	-	$	-	$	-	$	140,000	$	-	$	140,000
Convertible Notes to Unaffiliated Entities		165,000		123,184		41,816		64,000		36,104		27,896
Convertible Notes Issued for Accounts Payable		-		-		-		150,000		133,561		16,439

	$	165,000	$	123,184	$	41,816	$	354,000	$	169,665	$	184,335

(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 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 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 the due date was extended to August 15, 2011. The note came due on August 15, 2011 and has not been paid. The Company’s failure to repay the note when due constitutes an event of default under the note. Upon the occurrence of an event of default, the note holder has the right to exercise its rights under the security agreement associated with the note. These rights include, among other things, the right to foreclose on the collateral if necessary. The Company is currently discussing with Montecito the terms of settlement of this note. There can be no assurances that this note will be settled on terms acceptable to the Company or that the note holder will note exercise its rights under the note.

(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 or on October 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. The Company recognized interest expense from the amortization of the discounts in the amount of $218,914 for the three months ended September 30, 2011 and $286,638 for the period from the issuance of the debentures in May 2011 through September 30, 2011. The carrying amount of the convertible debentures was $469,444 at September 30, 2011, representing their unconverted face amount of $2,550,000 less the unamortized discount of $2,080,556.

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. The Company amortized deferred financing costs in the amount of $118,485 for the three months ended September 30, 2011 and $186,061 for the period from the issuance of the debentures in May 2011 through September 30, 2011.

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.

(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 and Consulting 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.

On August 23, 2011, the Company entered into a consulting contract for investment advisory services. The contract provided for the issuance of 500,000 shares of common stock to the consultant. For accounting purposes, this issuance has been recorded at $34,950, or $0.0699 per share, the closing price of the common stock on the date of the contract.

On September 22, 2011, the Company entered into a consulting contract for investment advisory services. The contract provided for the issuance of 500,000 shares of common stock to the consultant. For accounting purposes, this issuance has been recorded at $17,450, or $0.0349 per share, the closing price of the common stock on the date of the contract.

Issuance of Common Stock and Warrants for Cash

During the nine months ended September 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 Settlement of Liabilities

In August 2011, the Company issued 400,000 shares of common stock to a consultant in settlement of $60,000 of consulting fees that were owed to the consultant. For accounting purposes, this issuance has been recorded at the amount of the liability settled of $60,000, or $0.15 per share.

(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 nine-month period ended September 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		8,300,000			0.20
Canceled		(1,500,000	)		0.38
Expired		(750,000	)		0.15

Outstanding at September 30, 2011		19,800,000			0.25	7.2 years	$	-

Exercisable at September 30, 2011		10,061,924		$	0.25	8.6 years	$	-

During the nine months ended September 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 nine months ended September 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. Furthermore, effective August 31, 2011, the Company issued warrants to an officer to acquire 50,000 shares of common stock in connection with his release from his employment agreement. These warrants are exercisable at $0.20 per share and expire three years after issuance. 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.

During the nine months ended September 30, 2010, the Company granted options to two executive officers and a director to acquire a total of 7,000,000 shares of common stock at $0.24 per share. These options vested immediately. Additionally, the Company granted an option to the new Chief Financial Officer to acquire 3 million shares of the Company’s common stock at an exercise price of $0.38 per share. The option expires on May 17, 2020. The option to purchase 1 million shares of common stock vests at the end of six months of employment and the option to purchase the remaining 2 million shares vests monthly over the following 24 months. Furthermore, on August 12, 2010, the Company granted options to acquire an aggregate of 3 million shares of the Company’s common stock at an exercise price of $0.38 per share to two consultants. Of these options to purchase 3 million shares, one third (1 million shares) of the options vests at the end of six months of service and the remaining two thirds (2 million shares) vest monthly over the following 24 months. These options expire on May 17, 2020. And, on August 25, 2010, the Company issued compensation-based warrants to acquire 750,000 shares of the Company’s common stock at an exercise price of $0.15 per share to a consulting company. These warrants vested immediately and expire on August 24, 2011.

With the exception of the warrant to acquire 7 million shares of common stock issued to the placement agent, the fair value of these stock options and compensation-based warrants was estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of the stock options and compensation based warrants granted during the nine months ended September 30, 2011 was $0.1732 per share. The weighted-average assumptions used for the options and compensation-based warrants granted during the nine months ended September 30, 2011 were risk-free interest rate of 1.53%, volatility of 236%, expected life of 5.0 years, and dividend yield of zero. The weighted-average fair value of options and compensation-based warrants granted during the nine months ended September 30, 2010 was $0.1535 per share. The weighted-average assumptions used for the options granted during the nine months ended September 30, 2010 were risk-free interest rate of 1.69%, volatility of 212%, expected life of 5.2 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.

For the three-month periods ended September 30, 2011 and 2010, the Company reported compensation expense related to stock options and compensation-based warrants of $40,623 and $72,794. For the nine-month periods ended September 30, 2011 and 2010, the Company reported compensation expense related to stock options and compensation-based warrants of $571,248 and $1,564,494. As of September 30, 2011, there was approximately $115,000 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately 1.5 years. The intrinsic values at September 30, 2011 are based on a closing price of $0.0495 per share.

Other Stock Warrants

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

Weighted

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

20,593,327

0.31

Outstanding at September 30, 2011

22,776,952

0.33

4.1 years

(J) Derivative Liabilities

Convertible Debenures and Related Warrants

As described above in Notes 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 these anti-dilution reset provisions of the convertible debentures and these warrants are subject to derivative liability treatment and are required to be accounted for at fair value. Upon issuance, the Company determined the aggregate fair value of the embedded derivative was $2,833,829. The Company has determined the aggregate fair value of the embedded derivative was $963,595 at September 30, 2011. Accordingly, the Company has recorded a gain on the change in the derivative liability of $654,335 and $1,870,234 for the three months and the nine months ended September 30, 2011, respectively.

The Company estimated the fair value of the embedded derivative using multinomial lattice models. Accordingly, the fair value of the embedded derivative 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 50% in year one to a high of 139% 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%.

Convertible Promissory Notes

As described above in Note E to these condensed consolidated financial statements, the Company has issued unsecured convertible promissory notes to unaffiliated entities which contain variable conversion prices and in some cases, anti-dilution reset provisions, which are treated as embedded derivatives under generally accepted accounting principles and are required to be accounted for at fair value. The Company has estimated the fair value of these beneficial conversion features using multinomial lattice models. Accordingly, the fair value of the beneficial conversion features as determined using the lattice models 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 notes, actual and projected redemptions and conversion price resets. Expected volatility is based primarily on the historical volatility of other comparable oil and gas companies.

The fair value of the embedded derivatives for unconverted notes was estimated to be $185,777 and $243,376 as of September 30, 2011 and December 31, 2010, respectively. The Company recognized a loss from the change in fair value of these derivative liabilities of $12,947 for the three months ended September 30, 2011 and a gain of $83,493 for the nine months ended September 30, 2011. The Company recognized a loss from the change in fair value of the derivative liabilities of $47,500 and $67,692 for the three months and nine months ended September 30, 2010, respectively.

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 loss from the change in fair value of these warrants of $18,156 for the nine months ended September 30, 2010.

(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 September 30, 2011 are summarized as follows:

	Level 1		Level 2		Level 3		Total

Derivative liability - conversion
feature of debentures and
related warrants	$	-	$	963,595	$	-	$	963,595

Derivative liability - beneficial
conversion feature and reset
provisions of notes	$	-	$	185,777	$	-	$	185,777

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 and reset
provisions of notes	$	-	$	243,376	$	-	$	243,376

As further described in Notes E and J, the fair value of the derivative liabilities for the beneficial conversion features of the convertible notes, convertible debentures and related warrants is measured using multinomial lattice models.

(L) Related-Party and Other Transactions

Payable to Related Parties

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 September 30, 2011.

Effective August 31, 2011, the Company agreed to pay an officer $5,000 for unreimbursed business expenses in connection with his release from his employment agreement, which remains unpaid at September 30, 2011.

(M) Supplemental Cash Flow Information

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

	●	The Company issued 2,956,641 shares of common stock as a result of the conversion of $140,000 of principal of 9% convertible promissory notes and $10,788 of related accrued interest.

	●	The Company issued 2,898,451 shares of common stock as a result of the conversion of $99,000 of principal of 8% convertible promissory notes with an unaffiliated entity and $4,800 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.

	●	The Company issued 400,000 shares of common stock to a consultant in settlement of $60,000 of consulting fees that were owed to the consultant.

During the nine months ended September 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 nine months ended September 30, 2011 and 2010, respectively.

(N) Lease Commitment

In June 2011, the Company entered into a new lease for office space in California under the terms of an operating lease. The term of the lease is from June 15, 2011 through May 31, 2016. The lease provides for payments of $3,653 per month at the inception of the lease and increasing periodically to $4,018 per month at the end of the lease. Minimum lease commitments for the term of the lease are as follows:

Year ending December 31,
2011	$	23,863
2012		43,830
2013		43,830
2014		45,413
2015		47,543
Thereafter		20,089

Total	$	224,568

(O) Subsequent Events

Conversion of Promissory Notes to an Unaffiliated Entity

In April of 2011, the Company issued an unsecured convertible promissory note in the amount of $40,000 to an unaffiliated entity. Subsequent to September 30, 2011, the Company received notices for the conversion of entire amount of this note plus accrued interest of $1,600, which were converted into 2,466,880 shares of common stock.

Black Sands Energy Asset Purchase Agreement

On October 25, 2011, the Company entered into an Asset Sale Agreement (Agreement) with Black Sands Energy, LLC, a limited liability company (Black Sands). Pursuant to the Agreement, the Company agreed to purchase 50% of Black Sands’ rights, title and interests in and to certain assets of Black Sands.

Pursuant to the Agreement, the Company agreed to assume certain liabilities and obligations, whereas Black Sands agreed to retain and be responsible for discharging all obligations and liabilities currently associated with the assets.

As partial consideration for the sale of the assets, the Company agreed to pay Black Sands $3,250,000, to issue 2,500,000 restricted shares of the Company’s common stock, and to deposit an additional $3,000,000 into the Redwater/Maud/Recompletion/Rework escrow account by no later than December 30, 2011.

The Agreement contains a number of conditions to closing, including but not limited to the following:

●	The Company and Black Sands will each have performed and complied with all terms of the Agreement required to be performed or complied with by it at or prior to closing;

●

No action or proceeding by or before any governmental authority shall have been instituted or threatened (and not subsequently dismissed, settled or otherwise terminated) which might restrain, prohibit or invalidate any of the transactions contemplated by the Agreement, other than an action or proceeding instituted or threatened by a party or any of its affiliates;

●	The representations and warranties made by the Company and Black Sands to each other shall be true and correct in all material respects on the closing date as though made on and as of the closing date; and

●	The satisfaction of the due diligence to be performed by the Company on certain matters, including with specific reference Black Sands’ title to the assets.

There can be no assurance that the Agreement will close by December 31, 2011, the expected closing date, or at all.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.

Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to our anticipated revenues, costs and operating expenses and results, estimates used in the preparation of our financial statements, future performance and operations, plans for future oil and gas exploration, sources of liquidity, and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include those relating to the availability of funding from external sources on terms acceptable to us for planned exploration, development, or acquisitions; the ability of our management to develop and execute an effective exploration, development, and acquisition plan; the ability of third-party project operators and contractors to identify suitable prospects and conduct required operations effectively and economically and in accordance with contractual requirements; future results of drilling individual wells and other exploration and development activities; future variations in well performance as compared to initial test data; the prices at which we may be able to sell oil or gas; domestic or global economic conditions; the inherent uncertainty and costs of prolonged arbitration or litigation; and changes in federal or state tax laws or the administration of such laws.

Company Overview

Paxton Energy, Inc. is an oil and gas exploration and production company with assets in Texas and a recently acquired property in the Gulf of Mexico. Our assets in Texas consist of a minority working interest in limited production and drilling prospects in the Cooke Ranch area of La Salle County, Texas, and Jefferson County, Texas, all operated by Bayshore Exploration L.L.C. The Texas asset had limited revenues and substantial losses, which we expect for the foreseeable future. We have recently determined to expand our operations. In May 2011, we acquired our assets in the Gulf of Mexico referred to as Vermilion 179 (“VM 179”) consisting of a leasehold working interest in certain oil and gas leases located offshore from Louisiana, upon which no drilling or production has commenced as of yet.

In Texas, we have working interests ranging from 4% to 31.75% (net revenue interests ranging from 3% to 23.8125%) in the various wells in which we have participated. In the Gulf of Mexico, we have a 70% leasehold working interest, with a net revenue interest of 51.975% of certain oil and gas leases in the Vermillion 179 tract. VM 179 is adjacent to Exxon's VM 164 #A9 well.

We are seeking to make additional acquisitions that are currently producing oil in the United States as a way to increase our cash flow. Other than as disclosed herein, we currently do not have any contracts or agreements to acquire additional companies and/or working interests in existing wells, and no assurances can be given that we will identify or acquire such additional acquisitions on terms acceptable to us, if at all. Additional acquisitions will likely require the issuance of equity or debt securities, either directly or indirectly to raise funds for such acquisitions.

Organization

Paxton Energy, Inc. was organized under the laws of the State of Nevada on June 30, 2004. On March 17, 2010, the Company entered into a “Change of Control and Recapitalization Agreement” with Charles Volk of San Francisco, California (the “Change of Control Agreement”). On that same day, all our directors and officers resigned and were replaced by Charles F. Volk, Jr., James E. Burden, and Clifford Henry as directors and Charles F, Volk, Jr. as CEO, Treasurer (Chief Financial Officer) and Chairman of the Board of Directors and James E. Burden as President and Secretary. The Change of Control Agreement provides for the Company to issue 62,700,000 shares of the Company’s common stock to Mr. Volk and others upon the transfer to the Company of producing and non-producing oil and gas properties with minimum net tangible worth of $2,000,000, and an annual net cash flow of $1,000,000. In July 2011, the Company and Mr. Volk entered into an agreement whereby Mr. Volk agreed to reduce the total number of shares issuable pursuant to the Change of Control Agreement to 10 million.

Recent Developments

Black Sands Energy Asset Purchase Agreement

On October 25, 2011, the Company entered into an Asset Sale Agreement (the “Agreement”) with Black Sands Energy, LLC, a limited liability company (“Black Sands”). Pursuant to the Agreement, the Company agreed to purchase 50% of Black Sands’ rights, title and interests in and to certain assets of Black Sands (collectively, the “Assets”).

As partial consideration for the sale of the Assets, the Company agreed to pay Black Sands $3,250,000, to issue 2,500,000 restricted shares of the Company’s common stock, and to deposit an additional $3,000,000 into the Redwater/Maud/Recompletion/Rework escrow account by no later than December 30, 2011.

The Agreement contains a number of conditions to closing, including but not limited to the following:

(i)

Each of the Company and Black Sands shall have performed and complied with all terms of the Agreement required to be performed or complied with by it at or prior to Closing;

(ii)

No action or proceeding by or before any governmental authority shall have been instituted or threatened (and not subsequently dismissed, settled or otherwise terminated) which might restrain, prohibit or invalidate any of the transactions contemplated by this Agreement, other than an action or proceeding instituted or threatened by a party or any of its affiliates;

(iii)

The representations and warranties made by each of the Company and Black Sands to each other shall be true and correct in all material respects on the closing date as though made on and as of the closing date; and

(iv)

The satisfaction of the due diligence to be performed by the Company on certain matters, including with specific reference Black Sands’ title to the Assets.

There can be no assurance that the Agreement will close by December 31, 2011, the expected closing date, or at all.

Results of Operations

Results of Operations as a Comparison of the Three and Nine Months Ended September 30, 2011 and 2010

Oil and Gas Revenues

Our oil and gas revenues were $0 and $5,654 for the three and nine months ended September 30, 2011, respectively, compared to $5,717 and $11,836 for the three and nine months ended September 30, 2010, respectively, representing a decrease of $5,717 for the three-month period and a decrease of $6,182 for the nine-month period. The decrease in oil and gas revenue is principally related to the shutting in of two of our wells during most of the quarter ended June 30, 2011 pending workover to enhance production and due to Bayshore ceasing to report to the Company the amounts of its respective share in oil and gas revenues starting in the quarter ended September 30, 2011. Accordingly, we did not report oil and gas revenues from our Texas operations for the three months ended September 30, 2011. The historical level of oil and gas production has not been significant and management does not believe that the omission of oil and gas revenues from the Texas operations has a significant effect on the Company’s reported results of operations. Because the level of oil and gas production has not been significant in the past, we continue to be characterized as an exploration-stage company.

Cost and Operating Expenses

Our costs and operating expenses were $405,415 and $5,001,535 for the three and nine months ended September 30, 2011, respectively, compared to $681,332 and $2,951,178 for the three and nine months ended September 30, 2010, respectively, representing a decrease of $275,917 for the three-month period and an increase of $2,050,357 for the nine-month period.

Lease Operating Expenses – Lease operating expenses were $0 and $3,310 for the three and nine months ended September 30, 2011, respectively, compared to $2,472 and $6,932 for the three and nine months ended September 30, 2010, respectively, representing a decrease of $2,472 for the three-month period and a decrease of $3,622 for the nine-month period. The decrease in lease operating expenses is principally due to Bayshore ceasing to report to the Company the amounts of its respective share in lease operating expenses starting in the quarter ended September 30, 2011. Accordingly, we did not report lease operating expenses from our Texas operations for the three months ended September 30, 2011. The historical level of oil and gas production has not been significant and our amount of lease operating expenses is relatively consistent in relation to our oil and gas production.

Accretion of Asset Retirement Obligations – Accretion of asset retirement obligations was $86 and $259 for the three and nine months ended September 30, 2011, respectively, compared to $78 and $419 for the three and nine months ended September 30, 2010, respectively, representing an increase of $8 for the three-month period and a decrease of $160 for the nine-month period. The change in accretion of asset retirement obligations expenses principally reflects the fact that the original accretion period for certain wells has past.

General and Administrative Expense – General and administrative expense was $312,306 and $1,331,818 for the three and nine months ended September 30, 2011, respectively, as compared to $285,988 and $672,370 for the three and nine months ended September 30, 2010, respectively, representing an increase of $26,318 for the three-month period and an increase of $659,448 for the nine-month period. The increase in general and administrative expense during the three months ended September 30, 2011 is related primarily to: (1) an increase in fees for professional services of $5,963; (2) an increase in office rental expense of $13,084 related to our new office lease, and 3) an increase in director fees of $6,000 resulting from the addition of a new outside director. The increase in general and administrative expense during the nine months ended September 30, 2011 is related primarily to: (1) increases of $314,221 for compensation and related payroll taxes as a result of the increase in the number of officers and employees, due to the fact that we had no paid employees in the first quarter of 2010, and due to the accrual of bonuses totaling $87,500 for two officers as compensation under their employment agreements for the acquisition of VM 179; and (2) increases for consulting, legal, accounting, and audit services of $352,330 for the nine months ended September 30, 2011 compared to the prior period, which were a result of our expanded acquisition and financing activities since the Change of Control Agreement in March 2010. These increases were offset by a decrease of $70,000 for expenses recorded effective April 1, 2010 that were authorized and accrued under the employments agreements to provide for one-time payments to reimburse the two 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.

Share-Based Compensation – We have entered into various transactions that have resulted in the recording of share-based compensation during the three and nine months ended September 30, 2011 and 2010. Share-based compensation for the three and nine months ended September 30, 2011 was $93,023 and $3,666,148, respectively. The transactions during the three and nine months ended September 30, 2011 were as follows:

●

Effective June 3, 2011, we issued 15,750,000 shares of common stock to two executive officers 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.

●

During the period since the reorganization, we have granted options to acquire common stock to our officers and employees, as well as to certain consultants. Certain of these options vested immediately, while other options vest over periods of up to thirty months from the grant date. Additionally, we have issued compensation-based warrants to financial advisory firms and to a employee in connection with a release from his employment agreement. Share-based compensation is measured on the grant date for stock options and on the issue date for compensation-based warrants, and recognized over the vesting period. For the three months and nine months ended September 30, 2011, we reported share-based compensation related to these stock options and warrants of $40,623 and $571,248, respectively.

●

During the three months ended September 30, 2011, the Company entered into two consulting contracts for investment advisory services. The contracts provided for the issuance of a total of 1,000,000 shares of common stock to the consultants. The issuances were recorded at $52,400, based on the closing prices of the common stock on the dates of the contracts.

●

In May 2011, the Company issued 200,000 shares of common stock to a law firm as compensation for legal services rendered to the Company. The issuance was recorded at $50,000, based on the closing price of the common stock on the date of issuance.

Share-based compensation for the three months and nine months ended September 30, 2010 was $392,794 and $2,271,457, respectively. The transactions during the three and nine months ended September 30, 2010 were as follows:

●

In March 2010, we agreed to issue 1,250,000 post-split shares of common stock to former management and 250,000 post-split shares to an advisor as compensation for services in connection with the change of managerial control of the Company. The former management and advisor completed all that was required of them under this arrangement during the quarter ended March 31, 2010. Accordingly, we recognized this obligation to these individuals and the associated compensation during the quarter ended March 31, 2010 by recording $212,163 of stock-based compensation representing the estimated value of 1,500,000 shares of post-split shares of our common stock.

●

As part of the reorganization, we agreed to issue 249,296 shares of common stock following the initial stock split to two newly appointed members of the board of directors. With the approval of the initial 1-for-3 common stock split, the required conditions for the issuance had been met and the common stock was deemed to have been issued as of June 30, 2010. The issuance was valued at the closing price of the common stock on June 29, 2010. We recorded share-based compensation of $54,000, or approximately $0.22 per share.

●

As part of the reorganization, we agreed to issue 683,176 shares of common stock following the initial stock split in exchange for the cancelation of all common stock options and warrants previously outstanding. The exchange was accounted for as a modification of the options and warrants pursuant to generally accepted accounting principles for share-based compensation, whereby compensation in the amount of $120,800 was recognized for the value of the common stock issued in excess of the value of the options and warrants that were canceled. The common stock issued was valued at the closing price of approximately $0.22 per share on June 29, 2010 and the value of the warrants and options that were canceled were valued using the Black-Scholes pricing model. With the approval of the initial 1-for-3 common stock split, the required conditions for the issuance had been met and the common stock was deemed to have been issued as of June 30, 2010.

●

During the period since the reorganization, we have granted options and issued warrants to acquire an aggregate of 13,750,000 shares of common stock to our new executive officers and to outside consultants. Options and warrants to acquire 7,750,000 shares vested immediately and the remaining options to acquire 6,000,000 shares are vesting over a period of thirty months. Share-based compensation is measured on the grant date and recognized over the vesting period. For the three and nine month periods ended September 30, 2010, we reported share-based compensation related to these stock options and warrants of $72,794 and $1,564,494, respectively.

●

In September 2010, we entered into two separate agreements for financial advisory services, strategic business planning services, investor and public relations services, investment banking services, and capital raising services. As partial consideration under these agreements, we issued an aggregate of 3,225,000 shares of common stock to the service providers. We recognized $320,000 of share-based compensation in connection with the issuance of these shares.

Although the net changes with respect to our revenues and our costs and operating expenses for the three and nine months ended September 30, 2011 and 2010, are summarized above, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

Other Income (Expense)

Change in fair value of derivative liabilities – As more fully discussed in Notes E and J to the accompanying condensed consolidated financial statements, we issued unsecured convertible promissory notes commencing in April 2010 which contain a variable conversion price and anti-dilution reset provisions. In addition, as more fully discussed in Notes G and J to the accompanying condensed consolidated financial statements, during the quarter ended June 30, 2011, we issued convertible debentures and warrants that contain full ratchet anti-dilution protection. These beneficial conversion features are treated as embedded derivatives under generally accepted accounting principles and are required to be accounted for at fair value. We have estimated the fair value of the beneficial conversion features of the unsecured convertible promissory notes, the convertible debentures, and the related warrants using multinomial Lattice models. The fair value of these derivative liabilities was estimated to be $1,149,372 and $243,376 as of September 30, 2011 and December 31, 2010, respectively. We recognized a gain from the change in fair value of these derivative liabilities of $641,388 and $1,953,727 for the three and nine months ended September 30, 2011, respectively. We recognized a loss from the change in fair value of the beneficial conversion features of $47,500 and $67,692 for the three and nine months ended September 30, 2010, respectively.

Effective January 1, 2009 with the adoption of the provisions of new accounting standards for embedded derivatives, warrants to acquire our common stock that were previously treated as equity must be treated as a derivative liability and measured at fair value. These warrants were canceled in June 2010 with the issuance of common stock. We recognized a loss from the change in fair value of these warrants of $18,156 for the nine months ended September 30, 2010.

Interest Expense – We incurred interest expense of $89,779 and $162,301 for the three and nine months ended September 30, 2011, respectively, compared to $17,139 and $81,604 for the three and nine months ended September 30, 2010, respectively, representing increases of $72,640 and $80,697 for the three and nine months ended September 30, 2011, respectively. The increase in interest expense is due to the issuance of new convertible promissory notes commencing in April 2010 and continuing through August 2011, plus the issuance of convertible debentures totaling $2,550,000 in May 2011, offset by the elimination of virtually all interest on the registration rights penalties in June 2010 with the issuance of common stock in settlement of substantially all of the registration rights penalties.

Amortization of deferred financing costs – In connection with this sale of convertible debentures and warrants, we 1) paid our placement agent a cash payment of $324,000, 2) issued five-year warrants to our placement agent to acquire 1.7 million shares of common stock, and 3) paid $50,000 for legal services. We determined the fair value of the warrants was $125,688. 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. We amortized deferred financing costs in the amount of $118,485 for the three months ended September 30, 2011 and $186,061 for the period from the issuance of the debentures in May 2011 through September 30, 2011. As of September 30, 2011, there is $313,627 of recorded, but unamortized, deferred financing costs that will be amortized and recorded as a non-cash expense over the remaining term of the debentures.

Amortization of discount on convertible notes and other debt –As more fully discussed in Notes E, G and J to the accompanying condensed consolidated financial statements, we have issued convertible promissory notes and debentures to several individuals or entities, commencing in April 2010. In each case, the notes have a favorable conversion price in comparison to the market price of our common stock on the date of the issuance of the notes. Additionally, most of these instruments contain anti-dilution reset provisions. The fair value of these beneficial conversion features is measured on the issue date of the notes. Generally, a discount is recorded for these beneficial conversion features and amortized over the term of the note or debenture as a non-cash charge to the statement of operations. We have amortized $292,679 and $560,190 of discount on convertible notes and debentures for the three and nine months ended September 30, 2011, respectively, compared to $14,154 and $23,846 for the three and nine months ended September 30, 2010, respectively. As of September 30, 2011, there is $123,184 of recorded, but unamortized, discount on the unsecured convertible promissory notes to unaffiliated entities and $2,080,556 of discount on convertible debentures that will be amortized and recorded as a non-cash expense over the remaining terms of the respective notes or debentures.

Liquidity and Capital Resources

During the fiscal year ended December 31, 2010 and the nine months ended September 30, 2011, our principal sources of liquidity consisted of proceeds from recently issued unsecured convertible promissory notes, convertible debentures, common stock and warrants. During the fiscal year ended December 31, 2010 and the nine months ended September 30, 2011, our sources of capital resources were 1) a private placement of convertible debentures in the aggregate amount of $2,550,000, 2) a private placement of convertible promissory notes in the aggregate amount of $298,000, 3) the issuance of six separate unsecured convertible promissory notes totaling $285,000, 4) a private placement of common stock and warrants in the aggregate amount of $255,000, and 5) an issuance of an unsecured note for $15,000. At September 30, 2011, we had $2,491 in cash. At September 30, 2011, we had a working capital deficit of $2,502,655, as compared to a deficit of $1,177,102 as of December 31, 2010. In addition, we have total stockholders’ equity of $2,940,514 at September 30, 2011, compared to total stockholders’ deficit of $868,965 at December 31, 2010, an increase in the stockholders’ equity of $3,809,479.

Our operations used net cash of $992,853 during the nine months ended September 30, 2011 compared to using $353,649 of net cash during the nine months ended September 30, 2010. Net cash used in operating activities during the nine months ended September 30, 2011 consisted of our net loss of $3,950,706 plus changes in fair value of derivative liabilities of $1,953,727, the total of which was offset by non-cash expenses of stock-based compensation of $3,666,148, amortization of deferred financing costs and discount on convertible notes of $746,251, depreciation expense of $1,027, and accretion of asset retirement obligations of $259, and further offset by non-cash changes in working capital and other assets of $497,895.

Investing activities during the nine months ended September 30, 2011 included cash paid totaling $1,523,563 toward the acquisition of oil and gas leases under the Montecito Agreement. We also made leasehold improvements and acquired office equipment with a total cost of $15,514. We had no investing activities during the nine months ended September 30, 2010.

Financing activities provided $2,481,000 of net cash during the nine months ended September 30, 2011 compared to $378,000 during the nine months ended September 30, 2010. Cash flows from financing activities during the nine months ended September 30, 2011 relate to 1) proceeds from a private placement of convertible debentures in the aggregate amount of $2,550,000, less issuance costs of $374,000, 2) the receipt of proceeds from the placement of unsecured convertible promissory notes in the amount of $200,000, 3) proceeds of $90,000 from the issuance of common stock and warrants, and 4) proceeds from an unsecured note payable of $15,000.

On October 12, 2010, an unrelated third party acquired the rights of certain of our past-due accounts payable totaling $193,676. We issued promissory notes to this third party in the amount of $193,676 to convert the outstanding accounts payable into promissory notes and then converted the promissory notes into convertible redeemable notes. These notes are due October 12, 2012 and bear interest at 6% per annum commencing October 31, 2010. Interest was payable on or before the due date of the notes and was payable in shares of our common stock, at our option. The holder of the notes is entitled, at its option, to convert all or any portion of the principal of the notes, along with related accrued interest, into shares of our 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 six months ended June 30, 2011, the remaining $150,000 of principal and $4,219 of accrued interest was converted into 3,084,386 shares of common stock.

We 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 financials and strategic business plans. Thereafter, we entered into agreements with certain consulting firms to provide investment banking and financial advisory services. Services under these agreements are being provided to us in connection with the evaluation and due diligence of potential oil and gas property acquisitions.

We are currently seeking debt and equity financing to fund potential acquisitions and other expenditures, although we do not have any contracts or commitments for either at this time. We will have to raise additional funds to continue operations and, while we have been successful in doing so in the past, there can be no assurance that we will be able to do so in the future. Our continuation as a going concern is dependent upon our ability to obtain necessary additional funds to continue operations and the attainment of profitable operations.

May 2011 Financing

The Bridge Notes mature in May 2012 and bear interest at 9% per annum and are convertible at the holder’s option at any time into Common Stock at a conversion price of $0.15 per share. The Bridge Notes will automatically be redeemed with a 30% premium upon a Change of Control or Listing Event (each as defined in the Note). Interest on the Bridge Notes is payable quarterly in arrears in cash. The Bridge Notes 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 us is adjusted pursuant to a make good provision. The shares of Common Stock issuable upon conversion of the Note are entitled to piggyback registration rights. As of November 11, 2011, we are in default under the Bridge Notes because we have not made the interest payment that was due on July 1, 2011 in the aggregate amount of $34,670 or the interest payment that was due on October 1, 2011 in the aggregate amount of $58,650.

The Bridge Warrants are exercisable for a period of five years at an exercise price of $0.30 per share. The Bridge 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 Bridge Warrants. The shares of Common Stock issuable upon exercise of the Bridge Warrants are entitled to piggyback registration rights.

Pursuant to the Bridge Notes and Bridge Warrants, no holder may convert or exercise such holder’s Note or Bridge 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 the Security Agreement, between ourselves and the investors, we granted the investors a first priority lien on all assets acquired from Montecito pursuant to the Montecito Agreement.

Critical Accounting Policies

We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. The list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Notes to the December 31, 2010 Financial Statements filed in our Annual Report on Form 10-K with the U.S. Securities and Exchange Commission on April 1, 2011. Note that our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Stock-based Compensation

We calculate the fair value of all share-based payments to employees and non-employee directors, including grants of stock options and stock awards and amortize these fair values to share-based compensation in the statement of operations over the respective vesting periods of the underlying awards. Share-based compensation related to stock options is computed using the Black-Scholes option pricing model. We estimate the fair value of stock option awards using assumptions about volatility, expected life of the awards, risk-free interest rate, and dividend yield rate. The expected volatility in this model is based on the historical volatility of our common stock. The risk-free interest rate is based on the U.S. Treasury constant maturities rate for the expected life of the related options. 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 dividend rate takes into account the absence of any historical payments and management’s intention to retain all earnings for future operations and expansion. We estimate the fair value of restricted stock awards based upon the closing market price of our common stock at the date of grant. We charge the fair value of non-restricted awards to share-based compensation upon grant.

We account for equity instruments issued in exchange for the receipt of goods or services from other than employees and non-employee directors in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. The fair value of the equity instrument is charged directly to share-based compensation expense and credited to paid-in capital.

Convertible Debt and Derivative Accounting

For convertible debt that is issued with beneficial conversion features, we perform an allocation of the proceeds of the convertible note between the principal amount of the note and the fair value of the beneficial conversion feature. The fair value of the beneficial conversion feature is recorded as a discount to the principal amount of the note, but not in excess of the principal amount of the note. The discount is amortized over the period from the issuance date to the maturity date or the date of conversion, whichever occurs earlier, as a non-cash charge to the statement of operations. Upon the issuance of the note, an assessment is made of the beneficial conversion feature to determine whether the beneficial conversion feature should be accounted for as equity or liability. In the case of a variable conversion price or anti-dilution reset provisions, the features are accounted for as a derivative liability and carried at fair value on the balance sheet. The fair value of the derivative liability is remeasured each reporting period and the change in fair value to recorded in the statement of operations.

For convertible debentures and various warrants which contain full ratchet anti-dilution protection, we have determined that the convertible debentures and warrants are subject to derivative liability treatment and are required to be accounted for at their fair value. We estimated the fair value of the full ratchet anti-dilution protection of the convertible debentures and the warrants using multinomial Lattice models. Accordingly, the fair value of the full ratchet anti-dilution protection of the convertible debentures and warrants as determined using the Lattice models is affected by our 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.

Revenue Recognition

All revenues are derived from the sale of produced crude oil and natural gas. Revenue and related production taxes and lease operating expenses are recorded in the month the product is delivered to the purchaser. Payment for the revenue, net of related taxes and lease operating expenses, is received from the operator of the well approximately 45 days after the month of delivery. Accounts receivable are stated at the amount management expects to collect. Management provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance based on its assessment of the collectability of the receivable. At September 30, 2011 and 2010, no allowance for doubtful accounts was deemed necessary.

Income Taxes

Provisions for income taxes are based on taxes payable or refundable and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and tax operating loss carryforwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Impairment of Long-Lived Assets

Long-lived assets, including oil and gas properties, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows of the related asset or group of assets over their remaining lives. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. The impairment of long-lived assets requires judgments and estimates. If circumstances change, such estimates could also change.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of September 30, 2011. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses described below, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective 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 Securities and Exchange Commission rules and forms, and that such information is not accumulated nor communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:

a) We did not have sufficient personnel in our accounting and financial reporting functions. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis;

b) We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. generally accepted accounting principles (“U.S. GAAP”) commensurate with our complexity and our financial accounting and reporting requirements. This control deficiency is pervasive in nature. Further, there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented or detected on a timely basis as a result; and

c) We lack a system to administratively review, audit or verify the reporting by Bayshore of revenues and expenditures in connection with the oil and gas properties on which we conduct activities. Similarly, we have not obtained units of production or similar third-party purchaser confirmation of the details of our oil and gas production. There is a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis without the ability to independently review and verify the results of our revenue and expenses related to our operations.

The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weaknesses had any effect on the accuracy of our financial statements for the current reporting period.

We are committed to improving our financial organization. As part of this commitment, we will create a segregation of duties consistent with control objectives and will look to increase our personnel resources and technical accounting expertise within the accounting function by the end of fiscal 2011 to resolve non-routine or complex accounting matters. In addition, when funds are available to us, which we expect to occur by the end of fiscal 2011, we will take the following action to enhance our internal controls: Hiring additional knowledgeable personnel with technical accounting expertise to further support our current accounting personnel, which management estimates will cost approximately $75,000 per annum. We have in the past, and will continue to engage outside consultants in the future as necessary in order to ensure proper treatment of non-routine or complex accounting matters. In addition, management is working to establish a system to administratively review, audit or verify the reporting by Bayshore of revenues and expenditures in connection with the oil and gas properties on which we conduct activities.

Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weaknesses: (A) lack of sufficient personnel in our accounting and financial reporting functions to achieve adequate segregation of duties; and (B) insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of US GAAP commensurate with our complexity and our financial accounting and reporting requirements.

Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our accounting staff consists of a Chief Financial Officer working with other members of management, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

We will continue to monitor and evaluate the effectiveness of our disclosure 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.

Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as disclosed below, we are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

On or about November 2, 2011, several debt holders of the Company filed a lawsuit in the First Judicial District Court of the State of Nevada in and for Carson City against the Company by filing a Complaint. The case is Auction Specialists, et al. v. Paxton Energy, Inc., Case No. 11 0C003451B. In this action, the plaintiff seeks a judgment for the payment of the outstanding notes and for immediate possession and/or sale of assets of the Company that were pledged pursuant to a security agreement. Paxton’s time to answer or move with respect to the Complaint has not yet expired.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 5, 2011, we issued 208,000 shares of common stock to an accredited investor upon the conversion of $13,000 of an outstanding convertible promissory note. The securities were issued in a transaction pursuant to Regulation D under the Securities Act of 1933, as amended.

On July 7, 2011, we issued 220,077 shares of common stock to an accredited investor upon the conversion of $10,000 of an outstanding convertible promissory note and accrued interest of $1,400. The securities were issued in a transaction pursuant to Regulation D under the Securities Act of 1933, as amended.

On July 13, 2011, we issued 213,049 shares of common stock to an accredited investor upon the conversion of $10,000 of an outstanding convertible promissory note and accrued interest of $866. The securities were issued in a transaction pursuant to Regulation D under the Securities Act of 1933, as amended.

On August 15, 2011, we issued 397,351 shares of common stock to an accredited investor upon the conversion of $12,000 of an outstanding convertible promissory note. The securities were issued in a transaction pursuant to Regulation D under the Securities Act of 1933, as amended.

On August 22, 2011, we issued 415,225 shares of common stock to an accredited investor upon the conversion of $12,000 of an outstanding convertible promissory note. The securities were issued in a transaction pursuant to Regulation D under the Securities Act of 1933, as amended.

On August 23, 2011, we issued 500,000 shares of common stock to a consulting firm under a contract for services rendered. The securities were issued in a transaction pursuant to Section 4(2) under the Securities Act of 1933, as amended.

On August 29, 2011, we issued 400,000 shares of common stock to a consulting firm in connection with the settlement of $60,000 for services previously rendered. The securities were issued in a transaction pursuant to Section 4(2) under the Securities Act of 1933, as amended.

On September 7, 2011, we issued 471,483 shares of common stock to an accredited investor upon the conversion of $11,000 of an outstanding convertible promissory note and accrued interest of $1,400. The securities were issued in a transaction pursuant to Regulation D under the Securities Act of 1933, as amended.

On September 22, 2011, we issued 500,000 shares of common stock to a consulting firm under a contract for services rendered. The securities were issued in a transaction pursuant to Section 4(2) under the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

On September 3, 2008, we issued $300,000 of secured promissory notes to six individuals, two of whom were related parties at the time of issuance. All of these promissory notes bear interest at 12% per annum, with interest payable monthly. The promissory notes were originally due on September 1, 2009 and are secured by all of our assets. 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 our failure to repay the notes when they matured constitute events of default under the notes. As a result of the 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. The secured lenders filed a lawsuit in November 2, 2011 as a result of the defaults described herein. See Item 1 – Legal Proceedings. We are attempting to negotiate with our secured lenders for an extension or other resolution. We can provide no assurance that we will obtain an extension or other resolution.

In May 2011, we completed the Financing which generated aggregate cash gross proceeds of $2,450,000 and the conversion of $100,000 in prior debt. The proceeds were raised through the sale of the Bridge Notes and Bridge Warrants. The Bridge Notes mature in May 2012, and bear interest at 9% per annum and are convertible at the holder’s option at any time into Common Stock at a conversion price of $0.15 per share. The Bridge Notes will automatically be redeemed with a 30% premium upon a Change of Control or Listing Event (each as defined in the Note). Interest on the Bridge Notes is payable quarterly in arrears in cash. The Bridge Notes 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 us is adjusted pursuant to a make good provision. The shares of Common Stock issuable upon conversion of the Note are entitled to piggyback registration rights. As of November 10, 2011, we are in default under the Bridge Notes because we have not made the interest payment that was due on July 1, 2011 in the aggregate amount of $34,670 or the interest payment that was due on October 1, 2011 in the aggregate amount of $58,650.

ITEM 5. OTHER INFORMATION

(a) Form 8-K Information

GEL Properties Note

On August 10, 2011, the Company entered into an agreement with GEL Properties, Inc., an accredited investor (the “Investor”), providing for the sale by the Company to the Investor of a 6% convertible redeemable secured note in the principal amount of $75,000 (the “Note”).

The Note matures on August 10, 2012 (the “Maturity Date”) and bears interest at the annual rate of 6%. Interest must be paid by the Company in shares of common stock at the conversion price. The Company is not required to make any payments until the Maturity Date although the Company has the ability to repay the Note at any time at 150% of the unpaid principal amount upon five days prior written notice to the Investor.

The Investor may convert, at any time after February 10, 2012, the outstanding principal on the Note into shares of the Company’s common stock (“Common Stock”) at a conversion price per share equal to seventy percent (70%) of the lowest closing bid price of the Common Stock during the five trading days immediately preceding and including the date of conversion, subject to a floor conversion price of $.0001 per share.

Robert Smith Termination

Effective August 31, 2011, the Company terminated Robert Smith as President.

ITEM 6. EXHIBITS

10.01

Convertible Redeemable Secured Note, dated August 10, 2011, issued by Paxton Energy, Inc. to GEL Properties, Inc.

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.

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*

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.

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: November 14, 2011	By:	/s/ CHARLES F. VOLK, JR.
		Charles F. Volk, Jr. Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

Attached files

WORTHINGTON ENERGY, INC. Reports

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