Xun Energy, Inc. (fka XNRG)

[michaeldesanta]

Dilution = Bad, but required to draw $15 million credit facility.

This is why it's called toxic financing. It dilutes your equity. Per the last 10Q:

Plan of Operation For Remaining Fiscal Year

We will attempt to continue to source equity or debt financing, or Joint Venture partners for our operating costs and for our oil and gas well drilling programs or attempt to identify a profitable acquisition candidate. Our Reserve Equity Finance agreement with AGS Capital Group, LLC for $15 Million requires the Company to register 37 Million shares of our stock with the SEC. This will take time to become effective. There is no guarantee that the Company will be successful in registering the 37 Million shares with the SEC. We have had discussions with several companies and individuals for funding and/or Joint Ventures. However, we have not come to terms with any company or individual as of February 28, 2014. We will attempt to finance our operating expenses with additional debt or through equity financing.

And then additionally:

For each advance, the Company may issue an amount of stock up to $250,000. Such advance will not exceed more than 200% of the average daily trading volume for the previous 10 trading days. The purchase price of the shares shall be set at ninety percent (90%) of the average of the three (3) lowest closing bid prices of the stock during the ten (10) consecutive weekday trading days (the “Pricing Period”) immediately after the date on which the Company provides an advance notice.

Ouch! So that means at the current price of $0.0001, the most the company could issue to AGS Capital Group at the $250K limit at once time would be 2.778 billion shares at $0.00009 per share (sold at 10% discount of the lowest three day trailing bid of $0.0001), which they will most certainly dump right away into the market at bid. I see no reason why they would want to hold, since they're bound to earn an immediate 10% profit anyway and they have nothing to lose dumping it, as $0.0001 is the floor.

The company might be able to pull this off a number of times at the current unknown outstanding amount, but that's about it. The company would need to otherwise do a reverse split or increase the authorized shares limit to 75 billion to utilize the full $15 million credit facility... either way, this would massively destroy share value and mitigate any potential value gained in the process for existing shareholders. The company is aware of this:

We may not have access to the full amount under the equity line of credit.

For the five consecutive trading days prior to February 4, 2014, the lowest closing trade price of our common stock was $0.0002. There is no assurance that the Market Price of our common stock will increase substantially in the near future. The entire commitment under the equity line of credit is $15,000,000. The aggregate number of shares of common stock necessary to raise the entire $15,000,000 at $0.0002 per share is approximately 75 Billion. The number of common shares that remains issuable is lower than the number of common shares we need to issue in order to have access to the full amount under the equity line of credit. Therefore, we may not have access to the remaining commitment under the equity line of credit unless the Market Price of our common stock to increase substantially. Pursuant to the Drawdown Agreement, as amended, the Company may not sell any Put Shares to the Selling Stockholder unless the Exercise Market Price of the Company’s common stock is at least $0.50. The Company may have to restructure the common stock through a common stock reverse split to meet its minimum Exercise Market Price of $0.50 per share of common stock. The purchase price that the Selling Stockholder will have to pay may be less than the $0.50 minimum Exercise Market Price as the Selling Stockholder’s purchase price is ninety percent (90%) of the average of the three lowest closing bid prices during the ten consecutive trading days immediately following the Company's delivery of a Notice (the “Pricing Market Price”).

Per the XNRG forums, Mr. Mikolajczyk has already said that the company has no immediate or future plans to do a reverse split:

The Company has no plans to complete a reverse stock split now or in the near future. Right now it does not make any business sense to have a stock reverse split. It is an administrative nightmare to do a stock reverse split.

A stock reverse split is a complicated process which requires the Company to file a Preliminary Information Statement (Pre 14C) to the shareholders of the Company, which also is subject to comments from the SEC. After all comments are cleared with the SEC, a Definitive Information Statement (DEF 14C) is filed with the SEC. Depending on the stock ownership, a shareholder vote must be taken, either by consent or by proxy vote. Once the DEF 14C is filed with the SEC, there are many more steps afterwards such as obtaining approval from FINRA, obtaining a new CUSIP number, etc.

A stock reverse split is not something that happens over night and may take many months before it becomes effective. If a stock reverse split was to occur, it would be completed on the basis of what is in the best interests for the Company and the shareholders of record.

We thank you for your interest, support and faith in the Company.

Respectfully,
Xun Energy, Inc.
Jerry G. Mikolajczyk
President and CEO

If we could trust this is true, then the only two other options are to either finance against any equity appraised in Rice #15 or wait for cash to accumulate, which could take awhile, before moving forward. Either way, in light of the massive dilution to shareholders, I'm fairly certain now that waiting is the best thing to do and it's possible Mr. Mikolajczyk's is thinking the same based on his cryptic update.

Lastly, on the Q&A session discussion he adds:

Dear Investors and followers,

Thank you for the questions above regarding the current activities of the Company.
We use the Xun Forum as the medium to update our shareholders with events or activities that do not warrant a press release or the reporting of a material event using an 8K filing with the SEC. The Company adopts the Xun Forum as a medium to announce key information in compliance with Regulation Fair Disclosure.

Over the last several months we made advances that added value to our Company. As value is being added, the investors that provided Company funding exited converted their debt into common stock and liquidate the stock into the market. This is their usual business model and it applied a downward pressure on the stock, resulting in a lower PPS. Market conditions, competition between investors, timing, and the investor’s internal rate of return are key factors to the exit strategy and the downward pressure on the PPS. The Company has no control over these factors. Our focus is on bringing value to the Company.

We believe that once the Company begins revenue generation the need for any toxic debt financing will be mitigated and the Company’s fundamentals will show improvement, thus increasing shareholder confidence and value.

We are pretty much on target with our staged goals for a five year long term growth plan. Since each project requires steady and often significant funding, we ask our shareholders to remain patient. Of course, we cannot guarantee success with in all our endeavors, we are committed each day to advance this company, overcome challenges when they arise, and make Xun Energy a valuable entity.

Thank you for your support and faith in the Company and its management.

Respectfully,
Xun Energy, Inc.
Jerry G. Mikolajczyk,
President, CEO, CFO, Director

What's interesting here is that with today's announcement:

Dear Folks,

We report that the Rice #15 oil well has produced 195.89 barrels of crude oil as of 7:04 AM EDT, July 4, 2014, since oil began streaming on June 16, 2014.

Production of crude oil and water on Rice #15 is leveling off. Based on the last 24 hours of production, Rice #15 is producing at slightly less than 3.5 to 1 ratio of water to oil. We reduced the pulley size from 7" to 5" and will pump at this rate for now.

During the week, Ergon picked up 147.87 barrels of crude oil generating revenue for the Company. Ergon picked up a partial load due to local and state laws. Crude oil tanker trucks are restricted to a maximum of 150 barrels of crude oil per lift. Even though the load is less than 150 barrels, the Company will be paid on the pricing for "plus 150 barrels" due to the fact that more than 150 barrels was in the 210 Stock tank at the time of pickup by the tanker truck.

This is our last production report for the Rice #15 well on the Xun Forum. Our revenue will be reflected in our next 10-Q which is for the period ending August 31, 2014.

The drilling rig was demobilized from the Rice lease and is not scheduled for drilling the remaining four oil wells on the lease at this moment. Management decided to wait until all the funding is in before re-scheduling the drill rig.

Thank you for your support and faith in the Company and its management.

Respectfully,

Xun Energy, Inc.
Jerry G. Mikolajczyk,
President, CEO, CFO, Director

A few key things have gone into motion that were specifically called out during the Q&A session:

1. We can now confirm that the company has earned at least 150 bbl worth of revenue at the spot market price. At 82.5% royalty back to the company and ~$104 market price, this is about $12,870. We don't know when "during the week" was, but we can presume this is output from about two weeks, so double that and you'll get the approximate output at around ~$25K a month or $300K a year. Given the significance of the new revenue stream, I'm confident this would trigger the "once the Company begins revenue generation the need for any toxic debt financing will be mitigated" scenario, so I would think Mr. Mikolajczyk would like to move forward and avoid more share value destruction (keeping in mind that he is the largest shareholder by far with a combination of common shares and preferred B convertible shares equal to some crazy 11 billion common shares). The fact that Mr. Mikolajczyk acknowledges and uses the choice word "toxic debt" openly on a public forum suggests he is well aware of the damage and I would like to think he has the common sense to stay away from it? Least he hurt himself, being the largest shareholder. At the minimum, he'll earn some disfavor from his predatory and parasitic allies, AGS Capital Group.

2. What exactly does "Management decided to wait until all the funding is in before re-scheduling the drill rig." mean? This is totally up to interpretation, but to me, this means they are waiting to accumulate revenue and use that to fund the other wells. This is in light of the limited number of favorable choices. I'm not sure what the exact costs are to work on the other wells, but my calculations suggest about $300K in annual revenue royalties for the company alone, so I'm confident that in the next few months the company should have enough to move forward or to obtain a loan against Rice #15 to get the others online.

3. The last and most important hint that Mr. Mikolajczyk has made is the fact that no further revenue data will be shared publicly on the XNRG forum. Why all the secrecy so suddenly when the company had just started opening up and doing a good job at sharing updates? Well, for one thing, when you get into financials (and you're earning a lot of it), it becomes material information and needs to be accounted and reported. This means reporting it via filings and not via a haphazard message board. This is good for investors, because we can be certain now that this is serious money and not some pennies on the ground that they're collecting, otherwise why waste the time and money filing it? More importantly, this gets into the company books and becomes official record.

Presuming the remaining four Rice wells output as much or more than Rice #15 in the future, then you're talking over a potential cumulative output of $1.5 million a year. That would be nice for a change...

... so hang on! Be patient. I think I'm going to ride this one out and leave my other 17 million order fill at $0.0001 on its own pace. I'm not going anywhere.