10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

OR

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

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER: 000-54842

PEGASI ENERGY RESOURCES CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	20-4711443
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

218 N. Broadway, Suite 204

Tyler, Texas 75702

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 903- 595-4139

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Act. Yes  ¨ No   x

There were 63,620,575 shares of the registrant's common stock outstanding as of August 8, 2013.

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
Signatures		26

PART I – FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS

PEGASI ENERGY RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2013			2012
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	1,049,224		$	1,421,198
Accounts receivable, trade		458,703			404,120
Accounts receivable, related parties		17,584			13,002
Joint interest billing receivable, related parties, net		520,174			1,388,969
Joint interest billing receivable, net		153,433			275,423
Other current assets		31,623			58,678
Total current assets		2,230,741			3,561,390
Property and equipment:
Equipment		66,855			66,855
Pipelines		942,714			934,419
Leasehold improvements		7,022			7,022
Vehicles		56,174			56,174
Office furniture		136,283			136,283
Website		15,000			15,000
Total property and equipment		1,224,048			1,215,753
Less accumulated depreciation		(492,409	)		(449,931	)
Property and equipment, net		731,639			765,822
Oil and gas properties:
Oil and gas properties, proved		17,781,370			17,193,227
Oil and gas properties, unproved		13,869,249			13,090,037
Capitalized asset retirement obligations		505,095			491,338
Total oil and gas properties		32,155,714			30,774,602
Less accumulated depletion and depreciation		(1,757,001	)		(1,565,559	)
Oil and gas properties, net		30,398,713			29,209,043
Other assets:
Restricted cash – drilling program		20,495			29,435
Certificates of deposit		78,508			78,450
Easements		34,848			34,848
Total other assets		133,851			142,733
Total assets	$	33,494,944		$	33,678,988

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

3

PEGASI ENERGY RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS (continued)

	June 30,			December 31,
	2013			2012
Liabilities and Stockholders' Equity	(Unaudited)
Current Liabilities:
Cash overdraft	$	23,897		$	17,795
Accounts payable		1,879,924			1,515,153
Accounts payable, related parties		2,692,122			2,447,387
Revenue payable		967,859			691,202
Interest payable, related parties		1,975,494			1,659,336
Liquidated damages payable		37,415			34,260
Other payables		39,618			30,094
Current portion of notes payable and capital leases		8,395			8,111
Total current liabilities		7,624,724			6,403,338
Drilling prepayments		20,495			29,435
Notes payable and capital leases		13,620			17,893
Notes payable, related parties		8,160,646			8,160,646
Asset retirement obligations		659,483			628,668
Total liabilities		16,478,968			15,239,980
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock: $0.001 par value; 5,000,000 shares authorized; none issued and outstanding		-			-
Common stock: $0.001 par value; 150,000,000 shares authorized; 63,620,575 and 62,602,377 shares issued and outstanding, respectively		63,621			62,603
Additional paid-in capital		43,173,306			42,776,416
Accumulated deficit		(26,220,951	)		(24,400,011	)
Total stockholders' equity		17,015,976			18,439,008
Total liabilities and stockholders' equity	$	33,494,944		$	33,678,988

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

4

PEGASI ENERGY RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2013			2012			2013			2012
Revenues:
Oil and gas	$	448,957		$	146,723		$	770,244		$	314,731
Condensate and skim oil		10,129			-			31,334			12,470
Transportation and gathering		51,173			35,866			89,697			75,185
Total revenues		510,259			182,589			891,275			402,386
Operating expenses:
Lease operating expense		238,237			103,915			413,800			186,148
Pipeline operating expenses		61,613			31,456			104,736			71,045
Depletion and depreciation		130,460			69,202			233,920			136,620
General and administrative		683,047			2,735,123			1,636,765			4,150,694
Total operating expenses		1,113,357			2,939,696			2,389,221			4,544,507
Loss from operations		(603,098	)		(2,757,107	)		(1,497,946	)		(4,142,121	)
Other income (expense):
Interest income		29			37			58			105
Interest expense		(158,773	)		(159,267	)		(318,882	)		(317,905	)
Changes in fair value of warrant derivative liability		-			(436,880	)		-			(1,240,430	)
Warrant modification expense		-			-			-			(260,554	)
Changes in liquidated damages		(1,605	)		312,965			(3,155	)		175,955
Other income, net		-			1,644			2,500			2,271
Total other expense, net		(160,349	)		(281,501	)		(319,479	)		(1,640,558	)
Loss from operations before income tax expense		(763,447	)		(3,038,608	)		(1,817,425	)		(5,782,679	)
Income tax expense		(3,515	)		-			(3,515	)		-
Net loss	$	(766,962	)	$	(3,038,608	)	$	(1,820,940	)	$	(5,782,679	)
Basic and diluted loss per share:
Basic and diluted loss per share	$	(0.01	)	$	(0.06	)	$	(0.03	)	$	(0.11	)
Weighted average shares outstanding – basic and diluted		63,584,305			54,664,712			63,111,699			52,500,887

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

5

PEGASI ENERGY RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June, 30
	2013			2012
Operating Activities
Net loss	$	(1,820,940	)	$	(5,782,679	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depletion and depreciation		233,920			136,620
Accretion of discount on asset retirement obligations		17,058			10,141
Stock based compensation		393,108			2,195,743
Common stock issued for consulting services		-			434,500
Gain on sale of equipment		-			(276	)
Change in fair value of warrant derivative liability		-			1,240,430
Warrant modification expense		-			260,554
Changes in operating assets and liabilities:
Accounts receivable, trade		(54,583	)		106,214
Account receivable, related parties, net		(4,582	)		(1,500	)
Joint interest billing receivable, related parties, net		868,795			(1,359,327	)
Joint interest billing receivable, net		122,290			(273,939	)
Other current assets		27,055			140
Accounts payable		231,224			509,083
Accounts payable, related parties		244,735			258,996
Revenue payable		276,657			10,876
Interest payable, related parties		316,158			316,158
Liquidated damages payable		3,155			(175,955	)
Other payables		9,524			(12,033	)
Net cash provided by (used in) operating activities		863,574			(2,126,254	)
Investing Activities
Additions to certificates of deposit		(58	)		(104	)
Purchases of property and equipment		(8,595	)		(64,086	)
Purchase of oil and gas properties		(1,233,808	)		(4,325,846	)
Net cash used in investing activities		(1,242,461	)		(4,390,036	)
Financing Activities
Payments on notes payable and capital leases		(3,989	)		(3,824	)
Cash overdraft		6,102			(128,932	)
Deferred financing costs		-			(15,550	)
Proceeds from exercise of warrants		4,800			-
Proceeds from sale of common stock, net of offering costs		-			1,986,945
Net cash provided by financing activities		6,913			1,838,639
Net decrease in cash and cash equivalents		(371,974	)		(4,677,651	)
Cash and cash equivalents at beginning period		1,421,198			6,749,368
Cash and cash equivalents at end of period	$	1,049,224		$	2,071,717

See Note 5 for supplemental cash flow and non-cash information.

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

6

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND 2012

1.   NATURE OF OPERATIONS

Pegasi Energy Resources Corporation (“PERC” or the “Company”) an independent energy company engaged in the exploration for, and production of, crude oil and natural gas.  The Company’s focus is on the development of a repeatable, low-geological risk, high-potential project in the active East Texas oil and gas region.  The Company’s business strategy in what it has designated the “Cornerstone Project”, is to identify and exploit resources in and adjacent to existing or indicated producing areas within the mature Rodessa field. The Company believes that it is uniquely familiar with the history and geology of the Cornerstone Project area based on its collective experience in the region as well as through its development and ownership of a large proprietary database, which details the drilling history of the Cornerstone Project area since 1980.  In 2012, the Company drilled the Morse #1-H well targeting the Bossier formation and completed it using hydraulic fracture stimulation techniques.  The Morse #1-H is the first such horizontal well completed in the Rodessa field and the Company believes that implementing the latest proven drilling and completion techniques to exploit its geological insight in the Cornerstone Project area will enable it to find significant oil and gas reserves.

PERC conducts its main exploration and production operations through its wholly-owned subsidiary, Pegasi Operating, Inc. ("POI").  It conducts additional operations through another wholly-owned subsidiary, TR Rodessa, Inc. ("TR Rodessa").  

TR Rodessa owns an 80% undivided interest in and operates a 40-mile natural gas pipeline and gathering system which is currently being used by PERC to transport its hydrocarbons to market.  Excess capacity on this system is used to transport third-party hydrocarbons.  

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)  Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with PERC’s audited consolidated financial statements for the year ended December 31, 2012, and notes thereto, which are included in the Company’s annual report on Form 10-K filed with the SEC on March 27, 2013.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein.  The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  The notes to consolidated financial statements, which would substantially duplicate the disclosures required in the Company’s 2012 annual consolidated financial statements, have been omitted.

b)  Principles of Consolidation

The consolidated financial statements include the accounts of PERC and its wholly-owned subsidiaries.  All intercompany accounts and transactions have been eliminated.  In preparing the accompanying consolidated financial statements, management has made certain estimates and assumptions that affect reported amounts in the consolidated financial statements and disclosures.  Actual results may differ from these estimates.

 c)  Stock-based Compensation

The Company has accounted for stock-based compensation under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718-10, Compensation-Stock Compensation.  The Company recognizes stock-based compensation expense in the consolidated financial statements for equity-classified employee stock-based compensation awards based on the grant date fair value of the awards.  Non-employee share-based awards are accounted for based upon FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees.  During the three months ended June 30, 2013 and June 30, 2012, the Company recognized $131,036 and $1,591,631, respectively, of stock-based compensation.  During the six months ended June 30, 2013 and June 30, 2012, the Company recognized $393,108 and $2,195,743, respectively, of stock-based compensation expense which has been recorded as a general and administrative expense in the consolidated statements of operations.

7

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND 2012

d)  Net Loss per Common Share

Basic net loss per common share is calculated using the weighted average number of common shares outstanding during the period. The Company uses the treasury stock method of calculating fully diluted per share amounts whereby any proceeds from the exercise of stock options or other dilutive instruments are assumed to be used to purchase common shares at the average market price during the period. The dilutive effect of convertible securities is reflected in diluted loss per share by application of the if-converted method. Under this method, conversion shall not be assumed for the purposes of computing diluted loss per share if the effect would be anti-dilutive. For the three and six months ended June 30, 2013 and 2012 the Company had potentially dilutive shares of 39,319,541 and 37,522,102, respectively. For the three and six months ended June 30, 2013 and 2012, the diluted loss per share is the same as basic loss per share, as the effect of common stock equivalents are anti-dilutive.

e)  New Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligations Is Fixed at the Reporting Date”. The amendments in this update cover a wide range of topics in the ASC. These amendments provide guidance for joint and several liability arrangements for amounts fixed at the reporting date. The amendments in this update will be effective for fiscal periods beginning after December 15, 2013. The adoption of ASU 2013-04 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists”. The objective in this update covers FASB ASC Topic 740 and is to eliminate the diversity in presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this update will be effective for fiscal periods beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

f) Notes Payable, Related Parties

Notes payable, related parties totaling $8,160,646 consisted of the “Teton Renewal Note” in the amount of $6,987,646 dated June 23, 2011 including interest at 8%, with all principal due on the maturity date of June 1, 2015, secured by a stock pledge and security agreement and the “Teton Promissory” note in the amount of $1,173,000 dated October 14, 2009, including interest of 6.25%, with all interest and principal due on the maturity date of June 1, 2015, unsecured. There have been no changes in the note terms since December 31, 2012.

g)  Reclassifications

Certain reclassifications have been made to the comparative consolidated financial statements to conform to the current period’s presentation.

3.  FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 825, Financial Instruments, requires certain disclosures regarding the fair value of financial instruments.  Fair value of financial instruments is made at a specific point in time, based on relevant information about financial markets and specific financial instruments.  As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.

FASB ASC Topic 820, Fair Value Measurement, defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

8

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND 2012

FASB ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  FASB ASC Topic 820 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 - Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identicalassets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 - Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The following table sets forth our estimate of fair value of our financial instruments that are liabilities as of June 30, 2013:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Nonrecurring
Asset retirement obligation	$	-	$	-	$	659,483	$	659,483

The following table sets forth our estimate of fair value of our financial instruments that are liabilities as of December 31, 2012:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Nonrecurring
Asset retirement obligation	$	-	$	-	$	628,668	$	628,668

The following table sets forth a summary of changes in fair value of our asset retirement obligation during the six months ended June 30, 2013 and 2012:

	2013		2012
Beginning Balance - January 1,	$	628,668	$	343,687
Accretion expense		17,058		10,141
Additions to estimates		13,757		-
Balance at June 30,	$	659,483	$	353,828

9

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND 2012

In accordance with the reporting requirements of FASB ASC Topic No. 825, the Company calculates the fair value of its assets and liabilities that qualify as financial instruments under this statement and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments.  The estimated fair values of accounts receivable, accounts payable and other current assets and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments.  The carrying value of long-term debt approximates market value due to the use of market interest rates.  

4.     RESTRICTED CASH

Collateral

Certificates of deposit have been posted as collateral supporting a reclamation bond guaranteeing remediation of our oil and gas properties in Texas.  As of June 30, 2013 and December 31, 2012, the balance of the certificates of deposit totaled $78,508 and $78,450, respectively.

2010 Drilling Program

During the last quarter of 2010, the Company executed participation and operating agreements with various independent oil and gas companies regarding the drilling of various wells.   Funds received from these companies are restricted to the drilling programs and are considered released when they are spent in accordance with the agreements.   Since inception, total funds of $2,462,492 were received on this program, $2,374,799 was spent on drilling activities, and $58,213 was reclassified to promote income leaving a balance of $29,480. During the quarter ended March 31, 2013, the remaining balance was either refunded to the original investors or applied against investor joint interest billing receivable balances, as applicable, to close out the 2010 restricted cash and drilling program leaving a zero balance as of March 31, 2013. There has been no additional activity in this program since that date.

2011 Drilling Program

During the last quarter of 2011, the Company executed joint operating agreements with various independent oil and gas companies regarding the drilling of various wells.   Funds received from these companies are restricted to the drilling programs and are considered released when they are spent in accordance with the agreements.  Total funds of $5,003,823 were received on these programs; $1,159,038 that the Company owed to these companies was applied to the programs in the six months ended June 30, 2013 and the Company contributed $56,190 to the programs to cover costs in excess of agreed upon amounts. A total of $6,354,667 was spent on drilling activities, and $13,714 was reclassified to promote income.  In addition, individual investor shortages at June 30, 2013 of $169,825 were reclassified to their joint interest billing receivables, leaving a balance of $20,495 in restricted cash and drilling prepayments at June 30, 2013.

5.     SUPPLEMENTAL CASH FLOW AND NON-CASH INFORMATION

The following non-cash transactions were recorded during the six months ended June 30:

	2013		2012
Trade in proceeds on equipment	$	-	$	2,640
Cashless exercise of warrants classified as a derivative	$	-	$	1,117,428
Reclassification of derivative warrant liability to equity due to modification of warrants	$	-	$	673,524
Oil and gas assets financed through account payables	$	133,547	$	697,093
Promote liabilities applied against oil and gas assets	$	-	$	121,379
Equipment/vehicle financed through notes payable	$	-	$	7,592
Additions to asset retirement obligation	$	13,757	$	-

10

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND 2012

The following is supplemental cash flow information for the six months ended June 30:

	2013		2012
Cash paid during the period for interest	$	2,724	$	1,747
Cash paid during the period for taxes	$	3,515	$	-

6.  STOCK-BASED COMPENSATION

Stock Plans

The Company adopted the 2007 Stock Option Plan (the “2007 Plan”), 2010 Incentive Stock Option Plan (the “2010 Plan”) and the 2012 Incentive Stock Option Plan (the “2012 Plan”) for directors, executives, selected employees, and consultants to reward them for making major contributions to the success of the Company by issuing long-term incentive awards under these Plans thereby providing them with an interest and incentive in the growth and performance of the Company.  The 2007 Plan reserves 1,750,000 shares of common stock for issuance by the Company as stock options.  The 2010 Plan reserves 5,000,000 shares of common stock for issuance by the Company as stock options, stock awards or restricted stock purchase offers.  The 2012 Plan reserves 10,000,000 shares of common stock for issuance by the Company as stock options, stock awards or restricted stock purchase offers.

Stock Options Issued

There were no options granted and vested during the six months ended June 30, 2013. There were 4,730,775 options granted and vested during the six months ended June 30, 2012.   As of June 30, 2013 and 2012, the Company had $655,182 and $-0- unrecognized compensation expense related to non-vested stock-based compensation arrangements, respectively.

A summary of option activity during the six months ended June 30, 2013 is as follows:

	Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2012		9,700,060	$	0.57	$	-
Options granted		-		-		-
Options exercised		-		-		-
Outstanding at June 30, 2013		9,700,060	$	0.57	$	-

The following is a summary of stock options outstanding at June 30, 2013:

Exercise Price		Options Outstanding		Remaining Contractual Lives (Years)		Options Exercisable
$	0.65		900,000		1.50		900,000
$	0.42		1,059,285		2.50		1,059,285
$	0.50		10,000		2.50		10,000
$	0.50		486,364		3.50		486,364
$	0.55		363,636		3.50		363,636
$	0.50		880,775		3.50		880,775
$	0.55		3,000,000		4.00		3,000,000
$	0.66		3,000,000		9.25		1,000,000

Based on the Company's stock price of $0.84 at June 30, 2013, the options outstanding had an intrinsic value of $2,599,581.  

11

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND 2012

Total options exercisable at June 30, 2013 amounted to 7,700,060 shares and had a weighted average exercise price of $0.55.  Upon exercise, the Company issues the full amount of shares exercisable per the term of the options from new shares.  The Company has no plans to repurchase those shares in the future.  The following is a summary of options exercisable at June 30, 2013 and December 31, 2012:

	Shares		Weighted Average Exercise Price
June 30, 2013		7,700,060	$	0.55
December 31, 2012		7,700,060	$	0.55

The Company estimates the fair value of stock options using the Black-Scholes option pricing valuation model, consistent with the provisions of FASB ASC Topic 505 and FASB ASC Topic 718.  Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company’s stock, the risk-free rate and the Company’s dividend yield.  Estimates of fair value are not intended to predict actual future events or the value ultimately realized by grantees, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.  The Company uses the simplified method to determine the expected term on options issued.

7.  WARRANTS OUTSTANDING

Warrants Exercised

On March 18, 2013, the Company issued 95,299 shares of common stock to an investor holding modified 2007 Warrants who exercised 100,000 warrants of their 1,000,000 warrants on a cashless basis.  On March 22, 2013, the Company issued 149,760 shares of common stock to the same investor holding modified 2007 Warrants who exercised 150,000 warrants of their remaining 900,000 warrants on a cashless basis.  On April 5, 2013, the Company issued 765,139 shares of common stock to the same investor upon a cashless exercise of warrants to purchase 1,500,000 shares.

On May 1, 2013, the Company issued 8,000 shares of common stock for $4,800 to an investor holding 2011 Warrants who exercised 8,000 warrants on a cash basis.

A summary of warrant activity and shares issuable upon exercise of the warrants during the six months ended June 30, 2013 is as follows:

	Warrants			Shares Issuable Under Warrants			Weighted Average Exercise Price
Outstanding at December 31, 2012		16,091,210			22,303,573		$	0.65
Warrants issued		-			-			-
Warrants exercised		(1,008,000	)		(2,008,000	)		0.50
Outstanding at June 30, 2013		15,083,210			20,295,573		$	0.66

The outstanding warrants at June 30, 2013 had an intrinsic value of $3,311,797.  All of the 15,083,210 warrants outstanding at June 30, 2013 are exercisable and expire at various dates between July 2014 and September 2017.

8.  STOCKHOLDERS’ EQUITY

During the six months ended June 30, 2013, the Company issued 1,010,198 shares of common stock to an investor holding modified 2007 Warrants who exercised 1,000,000 warrants on a cashless basis.  The Company also issued 8,000 shares of common stock for $4,800 to an investor holding 2011 Warrants who exercised 8,000 on a cash basis. See Note 7 for additional details.

12

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND 2012

9.      SEGMENT INFORMATION

The following information is presented in accordance with FASB ASC Topic 280, Segment Reporting.  The Company is engaged in exploration and production of crude oil and natural gas and pipeline transportation.  POI, a wholly-owned subsidiary of PERC, conducts the exploration and production operations.  TR Rodessa operates a 40-mile gas pipeline and gathering system which is used to transport hydrocarbons to market to be sold.  The Company identified such segments based on management responsibility and the nature of their products, services, and costs.  There are no major distinctions in geographical areas served as all operations are in the United States.  The Company measures segment profit (loss) as income (loss) from operations.  Business segment assets are those assets controlled by each reportable segment.  The following table sets forth certain information about the financial information of each segment as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Business segment revenue:
Oil and gas sales	$	448,957		$	146,723		$	770,244		$	314,731
Condensate and skim oil		10,129			-			31,334			12,470
Transportation and gathering		51,173			35,866			89,697			75,185
Total revenues	$	510,259		$	182,589		$	891,275		$	402,386
Business segment loss:
Oil and gas sales	$	100,396		$	(7,941	)	$	162,520		$	26,828
Condensate and skim oil		10,129			-			31,334			12,470
Transportation and gathering		(31,207	)		(12,546	)		(61,400	)		(30,917	)
General corporate		(682,416	)		(2,736,620	)		(1,630,400	)		(4,150,502	)
Loss from operations	$	(603,098	)	$	(2,757,107	)	$	(1,497,946	)	$	(4,142,121	)
Depreciation and depletion:
Oil and gas sales	$	110,324		$	50,749		$	193,924		$	101,755
Transportation and gathering		16,642			13,631			33,008			25,232
General corporate		3,494			4,822			6,988			9,633
Total depletion and depreciation	$	130,460		$	69,202		$	233,920		$	136,620
Capital expenditures:
Oil and gas sales							$	1,381,112		$	4,901,560
Transportation and gathering								8,362			64,086
General corporate								233			7,592
Total capital expenditures							$	1,389,707		$	4,973,238

		June 30, 2013		December 31, 2012
Business segment assets:
Oil and gas sales	$	30,826,560	$	30,101,703
Transportation and gathering		762,876		770,822
General corporate		1,905,508		2,806,463
Total assets	$	33,494,944	$	33,678,988

13

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND 2012

10. COMMITMENTS AND CONTINGENCIES

Contingent Liabilities

In preparing financial statements at any point in time, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. The Company is involved in actions from time to time, which if determined adversely, could have a material negative impact on the Company's consolidated financial position, results of operations and cash flows. Management, with the assistance of counsel makes estimates, if determinable, of the Company’s probable liabilities and records such amounts in the consolidated financial statements. Such estimates may be the minimum amount of a range of probable loss when no single best estimate is determinable. Disclosure is made, when determinable, of any additional possible amount of loss on these claims, or if such estimate cannot be made, that fact is disclosed.

Along with the Company's counsel, management monitors developments related to legal matters and, when appropriate, makes adjustments to record liabilities to reflect current facts and circumstances.  Management has recorded a liability related to its registration rights agreement with investors that provides for the filing of a registration statement for the registration of the shares issued in the offering in December 2007, as well as the shares issuable upon exercise of related warrants.  The Company failed to meet the deadline for the effectiveness of the registration statement and therefore was required to pay liquidated damages of approximately $100,000 on the first day of effectiveness failure, or July 18, 2008.  An additional $100,000 penalty was required to be paid by the Company every thirty days thereafter, prorated for periods totaling less than thirty days, until the effectiveness failure was cured, up to a maximum of 18% of the aggregate purchase price, or approximately $1,800,000.  The Company’s registration became effective on August 21, 2008. 

At June 30, 2013, management reevaluated the status of the registration statement and determined an accrual of $37,415 was sufficient to cover any potential payments for liquidated damages and the related accrued interest.  The damages are reflected as liquidated damages payable of $37,415 and $34,260 in the accompanying consolidated balance sheets as of June 30, 2013 and December 31, 2012, respectively.   The difference of $3,155 was recorded as expense in the Other Income (Expense) section of the consolidated statements of operations.

14

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

Forward Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations include a number of forward-looking statements that reflect management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words.  Those statements include statements regarding the intent, belief or current expectations of us and the management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.

Company Overview

We are an independent energy company engaged in the exploration for, and production of, crude oil and natural gas.  Our focus is on the development of a repeatable, low-geological risk, high-potential project in the active East Texas oil and gas region.  We currently hold interests in properties located in Cass and Marion Counties, Texas, home to the Rodessa oil field.  This field has historically been the domain of small independent operators and is not a legacy field for any major oil company.

Our business strategy in what we have designated the “Cornerstone Project”, is to identify and exploit resources in and adjacent to existing or indicated producing areas within the mature Rodessa field. We believe that we are uniquely familiar with the history and geology of the Cornerstone Project area based on our collective experience in the region as well as through our development and ownership of a large proprietary database, which details the drilling history of the Cornerstone Project area since 1980.  We plan to develop and produce reserves at low cost and will take an aggressive approach to exploiting our contiguous acreage position through utilization of the latest “best in class” drilling and completion techniques.  In 2012, we drilled the Morse #1-H well targeting the Bossier formation and completed it using hydraulic fracture stimulation techniques.  The Morse #1-H is the first such horizontal well completed in the Rodessa field and we believe that implementing the latest proven drilling and completion techniques to exploit our geological insight in the Cornerstone Project area will enable us to find significant oil and gas reserves.

Plan of Operations

Our corporate strategy can be thought of in terms of the acquisition of leases and the development of resources on leased acreage.

Acquisition of Leases in the Cornerstone Project area

As of June 30, 2013, our leasehold position is approximately 31,960 gross acres and 22,020 net acres, of which our working interest is approximately 13,080 net acres.

●  Supporting Our Drilling Program.  Our priority is now drilling, and consequently, our leasing program’s primary objective is to support our planned drilling program by securing holdout leases and renewing leases that are due to expire in those units where we plan to drill over the next twelve months.

●  Acquiring Additional Drilling Locations.  We have an extensive proprietary database that we use to identify additional drilling locations and target acreage for acquisition in the Cornerstone Projectarea.  Most properties in the project area are held by smaller independent companies that lack the resources and expertise to exploit them fully.  We intend to pursue these opportunities to selectively expand our portfolio of properties.  Acreage additions will complement our existing substantial acreage position in the area and provide us with additional drilling opportunities.    We are in discussion with prospective partners to establish a new lease fund to acquire new acreage in 2013.

15

Development of Resources in the Cornerstone Project area

Over two-thirds of our net leased acreage is currently undeveloped (approximately 8,840 undeveloped net acres of a total of 13,080 net acres as of June 30, 2013). The primary focus of our drilling program is to develop the resources of these undeveloped acres and subsequently hold this acreage with production, rather than to develop our existing reserves on developed acreage.

●  Horizontal Wells Targeting the Bossier/Cotton Valley Limestone.   Our priority is to drill horizontal wells targeting the Bossier/Cotton Valley Limestone.  We employ the latest horizontal drilling and dynamic multi-stage fracking techniques that have proven so successful in the Bakken Shale in North Dakota and elsewhere to develop the low permeability oil bearing Bossier and Cotton Valley Limestone formations.  Our first horizontal well, the Morse #1-H, was drilled with a 2,000 foot horizontal section. This well was completed with a five‐stage frack and recorded an average production rate of 281 Bbl/day of high quality crude oil in its first five days of production. A jet pump system was initially employed to assist production and the well was later shut in for a period of 33 days between August and September 2012 for the installation of a gas lift production system. The well was shut in again on February 25, 2013 for the performance of a remedial work-over operation. The well returned to production on March 19, 2013. The production rate initially stabilized at a rate of approximately 55 Bbl/day of oil and 75 MCF of gas per day. The production rate subsequently declined to an average of approximately 40 Bbl/Day of oil and 60 MCF of gas per day in June 2013. We now believe that the well’s production rate has been compromised by the gas lift system. We intend to install a mechanical pump to replace the gas lift system, although no date has yet been set for such work.  We expect that it will take approximately 30 days to install the mechanical pump system. We believe that the successful production of oil from the Morse #1-H supports our development strategy. We have learned much from the drilling, completion and production of the Morse #1-H that will enable us to improve the design and execution of our next planned horizontal well targeting the Bossier/Cotton Valley Limestone. Having proven our development model, we now plan to drill wells with longer laterals involving 15 to 25 frack stages to improve the well economics. We estimate that the drilling and completion costs of such wells will be approximately $12 million. We are not currently capitalized to drill a program of such wells to develop the Bossier/Cotton Valley Limestone and so are actively engaged in securing the finance to fund such a drilling program. We have a 56% working interest in the Morse #1-H well.

●  Vertical Wells. Our secondary priority is to drill vertical wells to offset the Norbord #1 discovery of 2010 in the Travis Peak and to recomplete existing wells to maximize their present value by utilizing a multi-zone production technique.  During 2012, we drilled two vertical wells to offset the Norbord discovery of 2010.  We successfully completed the Haggard B well in May 2012 and it began production in June 2012.  In addition, we drilled the Haggard A in 2012 and suspended operations pending completion in the Travis Peak formation with fracture stimulation.  The fracture stimulation of the Haggard A, the third development well in the Rodessa (Norbord – Travis Peak) field discovered by Pegasi in 2010, was completed on April 2, 2013. Following flow back of the fracture stimulation fluids, the well achieved an AOF (absolute open flow) daily production rate of 1,341 MCF per day of natural gas and 17 Bbls per day of condensate.  We believe that the productivity of the Haggard A from the Travis Peak formation confirms the opportunity to drill further vertical wells targeting this formation in Marion County. In November 2012, we performed a work-over of the Norbord well bore to isolate and test new perforations. A production test of an oil-bearing zone commenced in March 2013 and is ongoing.

 Consolidated Results of Operations

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Summarized Consolidated Results of Operations

	2013			2012			Increase (Decrease)
Total revenue	$	510,259		$	182,589		$	327,670
Total operating expense		1,113,357			2,939,696			(1,826,339	)
Loss from operations		(603,098	)		(2,757,107	)		(2,154,009	)
Total other expenses		(160,349	)		(281,501	)		(121,152	)
Income tax expense		(3,515	)		-			3,515
Net loss	$	(766,962	)	$	(3,038,608	)	$	(2,271,646	)

16

Revenues:  Total revenues for the quarter ended June 30, 2013 totaled $510,259 compared to $182,589 for the quarter ended June 30, 2012.  Oil revenue for the quarter ended June 30, 2013 was $302,117 compared to $84,735 for the quarter ended June 30, 2012. The majority of this increase of $217,382 was from the completion of the Morse #1-H well in October 2012, which generated $163,018 in revenue during the three months ended June 30, 2013. In addition, the Haggard A well was completed in April 2013 and generated revenue of $33,848 for the quarter ended June 30, 2013. Gas revenue for the quarter ended June 30, 2013 was $146,840 compared to $61,988 for the quarter ended June 30, 2012, resulting in an increase of $84,852. The increase in gas revenue was due to an increase in the average price of gas of approximately 84%. Also, the Haggard A began production in the second quarter of 2013, resulting in additional gas revenue of $60,797. This was offset by no production in the Norbord well, which was undergoing workovers during the second quarter in 2013, compared to $30,949 in gas revenue during the second quarter 2012. Transportation and gathering revenue increased $15,307 to $51,173 for the quarter ended June 30, 2013, compared to $35,866 for the quarter ended June 30, 2012.   Condensate and skim oil was $10,129 and $-0- for the quarters ended June 30, 2013 and 2012, respectively. Condensate and skim oil are by-products from drilling and are only sold when a sufficient amount has been collected, resulting in fluctuations from quarter to quarter.

Expenses:  Total operating expenses for the quarter ended June 30, 2013 were $1,113,357, compared to $2,939,696 for the quarter ended June 30, 2012, resulting in a total decrease of $1,826,339.  This change is comprised primarily of a decrease in general and administrative expenses offset by an increase in lease operating expenses.

●  General and Administrative Expense:  There was a $2,052,076 decrease in general and administrative expense to $683,047 for the quarter ended June 30, 2013, from $2,735,123 for the quarter ended June 30, 2012. The primary reason for the decrease was stock-based compensation of $1,591,631 incurred during the quarter ended June 30, 2012, whereas there was only $131,036 of stock-based compensation incurred during the quarter ended June 30, 2013, a $1,460,595 decrease. The compensation resulted from the issuance of stock options to selected employees, executives, directors, and consultants as incentive for continuing our development. The compensation for the quarter ended June 30, 2013 was an accrual based on options granted in 2012, which are due to vest in October 2013.

Certain investor relations consulting fees decreased $627,000 to $-0- for the quarter ended June 30, 2013, due to a contract we engaged in for 2012 with a company to assist us with the implementation and maintenance of ongoing programs to increase the investment community’s awareness of our activities, stimulate their interest in us and assist with our press release production and dissemination.  This contract was not renewed in 2013.

●  Lease Operating Expenses:  Total lease operating expenses for the quarter ended June 30, 2013 were $238,237 compared to $103,915 for the quarter ended June 30, 2012, which resulted in an increase of $134,322. The increase was related to: (1) the completion of the Haggard A in April 2013, which resulted in a lease operating expense increase of $37,236 during the quarter ended June 30, 2013; (2) the completion of the Morse #1-H well in October 2012, which resulted in a lease operating expense increase of $34,796 during the quarter ended June 30, 2013; and (3) workovers on the Norbord well during 2013, which resulted in a $32,078 increase in lease operating expenses during the quarter ended June 30, 2013.

●  Depletion and Depreciation Expense:  Total depletion and depreciation for the quarter ended June 30, 2013 was $109,083, compared to $48,968 for the quarter ended June 30, 2012, which resulted in an increase of $60,115.  The increase was due to the addition of new wells and future development costs.

Other Income (Expenses):  Total other expenses for the quarter ended June 30, 2013 was $160,349, compared to $281,501 for the quarter ended June 30, 2012, resulting in a decrease of $121,152.  The primary reason for the decrease was a non-cash loss of $436,880 in the quarter ended June 30, 2012 resulting from the change in fair value of our warrant derivative liability. The change was caused by an increase in the stock price between March 31, 2012 and June 30, 2012.  The 2007 derivative warrants expired in December 2012; therefore, the change in fair value of the derivative warrant liability no longer has to be recorded. This decrease in other expense was offset by a decrease in other income.  The change in liquidated damages was a non-cash gain of $312,965 in the quarter ended June 30, 2012 and a non-cash loss of $1,605 in the quarter ended June 30, 2013, resulting in a net change of $314,570.  The non-cash gain in the quarter ended June 30, 2012 was due to the reversal of a penalty of $314,341, which had been originally recorded as an expense in the quarter ended March 31, 2012.

Income Tax Expense:  During the three months ended June 30, 2013, we recognized a net income tax expense of $3,515 for state franchise taxes. There was no income tax expense during the three months ended June 30, 2012.

Net Loss:  As a result of the above described revenues and expenses, we incurred a net loss of $766,962 in the quarter ended June 30, 2013 as compared to a net loss of $3,038,608 in the quarter ended June 30, 2012.

17

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Summarized Consolidated Results of Operations

	2013			2012			Increase (Decrease)
Total revenue	$	891,275		$	402,386		$	488,889
Total operating expense		2,389,221			4,544,507			(2,155,286	)
Loss from operations		(1,497,946	)		(4,142,121	)		(2,644,175	)
Total other expenses		(319,479	)		(1,640,558	)		(1,321,079	)
Income tax expense		(3,515	)		-			3,515
Net loss	$	(1,820,940	)	$	(5,782,679	)	$	(3,961,739	)

Revenues:  Total revenues for the six months ended June 30, 2013 totaled $891,275, compared to $402,386 for the six months ended June 30, 2012.  Oil revenue for the six months ended June 30, 2013 was $525,590, compared to $185,366 for the six months ended June 30, 2012.  The increase of $340,224 in oil revenue was due to the completion of the Morse #1-H well in October 2012, which generated $296,193 in revenue during the six months ended June 30, 2013. In addition, the Haggard A well was completed in April 2013 and generated a $33,848 in revenue during the six months ended June 30, 2013 compared to $-0- in revenue during the six months ended June 30, 2012.  Gas revenue for the six months ended June 30, 2013 was $244,654, compared to $129,365 for the six months ended June 30, 2012, resulting in an increase of $115,289. The majority of the increase in gas revenue was due to an increase in the average price of gas of approximately 67%.  In addition, the purchase of seven older wells in June 2012 generated $28,503 in revenue for the six months ended June 30, 2013 compared to $191 for the six months ended June 30, 2012.  Transportation and gathering revenue increased $14,512 to $89,697 for the six months ended June 30, 2013, compared to $75,185 for the six months ended June 30, 2012.  Condensate and skim oil was $31,334 and $12,470 for the six months ended June 30, 2013 and June 30, 2012, respectively. Condensate and skim oil are by-products from drilling and are only sold when a sufficient amount has been collected, resulting in fluctuations from quarter to quarter.

Expenses:  Total operating expenses for the six months ended June 30, 2013 were $2,389,221, compared to $4,544,507 for the six months ended June 30, 2012, resulting in a total decrease of $2,155,286.  This change is comprised primarily of decreases in general and administrative expenses offset by an increase in lease operating costs and depletion and depreciation.

●  General and Administrative Expenses:  There was a $2,513,929 decrease in general and administrative expenses to $1,636,765 for the six months ended June 30, 2013 from $4,150,694 for the six months ended June 30, 2012.   The primary reason for the decrease was stock-based compensation of $2,195,743 incurred during the six months ended June 30, 2012, whereas there was only $393,108 stock-based compensation incurred in the six months ended June 30, 2013, a decrease of $1,802,635. The compensation resulted from the issuance of stock options to selected employees, executives, directors, and consultants as incentive for continuing our development. The compensation for the six months ended June 30, 2013 was an accrual based on options granted in 2012, which are due to vest in October 2013.

Certain investor relations consulting fees decreased $627,000 to $-0- for the six months ended June 30, 2013, due to a contract we engaged in for 2012 with a company to assist us with the implementation and maintenance of ongoing programs to increase the investment community’s awareness of our activities, stimulate their interest in us and assist with our press release production and dissemination.  This contract was not renewed in 2013.  In addition, advertising and marketing costs decreased $76,390 to $5,000 for the six months ended June 30, 2013 due to various contracts held in 2012 with companies for investor relations not being renewed in 2013.

●  Lease Operating Expense:  Total lease operating expenses for the six months ended June 30, 2013 were $413,800 compared to $186,148 for the six months ended June 30, 2012, which resulted in an increase of $227,652.  The increase was related to: (1) the purchase of seven wells in June 2012, which resulted in an increase of $90,907 in lease operating expenses to $97,298 in for the six months ended June 30, 2013, compared to $6,391 during the six months ended June 30, 2012; (2) the completion of the Morse #1-H well in October 2012, which generated an increase of $76,712 in lease operating expense during the six months ended June 30, 2013; (3) the completion of the Haggard A well in April 2013, which generated an increase of $38,204 in lease operating expenses during the six months ended June 30, 2013; and (4) workovers performed on the Norbord well in 2013, which resulted in an increase of $21,119 of lease operating expenses during the six months ended June 30, 2013.

● Depletion and Depreciation Expense:  Total depletion and depreciation for the six months ended June 30, 2013 was $233,920, compared to $136,620 for the six months ended June 30, 2012, which resulted in an increase of $97,300.  The increase was due to the addition of new wells and future development costs.

18

Other Income (Expenses):  Total other expenses for the six months ended June 30, 2013 were $319,479, compared to other expense of $1,640,558 for the six months ended June 30, 2012, resulting in a decrease of $1,321,079.   The primary reason for the decrease was a non-cash loss from the change in fair value of the derivative liability of $1,240,430 recognized in the six months ended June 30, 2012 due to the increase in our stock price between December 31, 2011 and June 30, 2012. The 2007 derivative warrants expired in December 2012; therefore, the change in fair value of the derivative warrant liability no longer has to be recorded.

In addition, modifications to certain 2007 warrants in the six months ended June 30, 2012, resulted in warrant modification expense of $260,554 compared to $-0- for the six months ended June 30, 2013 as the 2007 derivative warrants expired in December 2012. There was also a decrease to the change in liquidated damages of $179,110 from a non-cash gain of $175,955 in the six months ended June 30, 2012 to a non-cash loss of $3,155 in the six months end June 30, 2013. The modification of the 2007 warrants during the six months ended June 30, 2012 created a non-cash gain in the Other Income (Expense) section of the consolidated statement of operations.

Income Tax Expense:  During the six months ended June 30, 2013, we recognized a net income tax expense of $3,515 for state franchise taxes.  There was no income tax expense during the six months ended June 30, 2012.

Net Loss:  As a result of the above described revenues and expenses, we incurred a net loss of $1,820,940 for the six months ended June 30, 2013 as compared to net loss of $5,782,679 for the six months ended June 30, 2012.

Liquidity and Capital Resources

We held $1,049,224 in cash at June 30, 2013, made up of a majority of our cash accounts. However, at June 30, 2013, several cash accounts had an overdraft that totaled $23,897, resulting in net cash of $1,025,327. We held $1,421,198 in cash at December 31, 2012, made up of a majority of our cash accounts. However, at December 31, 2012, several cash accounts had an overdraft that totaled $17,795, resulting in net cash of $1,403,403. The decrease in net cash of $378,076 is related to purchases of leases and well equipment, and the increase in our workover activities in excess of cash provided by operating activities.

Cash Flows

The following table summarizes our cash flows for the six months ended June 30, 2013 and 2012:

	2013			2012
Total cash provided by (used in):
Operating activities	$	863,574		$	(2,126,254	)
Investing activities		(1,242,461	)		(4,390,036	)
Financing activities		6,913			1,838,639
Decrease in cash and cash equivalents	$	(371,974	)	$	(4,677,651	)

Cash provided by (used in) Operating Activities:  For the six months ended June 30, 2013, cash provided by operating activities was $863,574, compared to $2,126,254 used in operating activities for the six months ended June 30, 2012, resulting in an increase in cash provided by operating activities of $2,989,828. 

The net loss of $5,782,679 for the six months ended June 30, 2012 decreased by $3,961,739 to the net loss of $1,820,940 for the six months ended June 30, 2013.

Non-cash income and expense items for the six months ended June 30, 2013 totaled $644,086, a decrease of $3,633,626 from $4,277,712 in non-cash income and expense items for the six months ended June 30, 2012, which decrease is for the reasons set forth below.

Non-cash expense for stock based compensation decreased $1,802,635 to $393,108 incurred during the six months ended June 30, 2013, from $2,195,743 incurred during the six months ended June 30, 2012.  The compensation resulted from the issuance of stock options to selected employees, executives, directors, and consultants as incentives for continuing our development. The change in the fair value of warrant derivative liability for the six months ended June 30, 2013 was $-0-, compared to a non-cash expense of $1,240,430 for the six months ended June 30, 2012. There was no warrant modification expense for the six months ended June 30, 2013, compared to a non-cash expense of $260,554 for the six months ended June 30, 2012.  Both the warrant derivative liability and warrant modification expense were $-0- in the six months of 2013 due to the expiration of the associated warrants in December 2012. There was a decrease of $434,500 to $-0- in non-cash expense for stock issued to consultants for the six months ended June 30, 2013, compared to the six months ended in 2012.  Depletion, depreciation, and accretion expense increased $104,217 to $250,978 for the six months ended June 30, 2013, compared to $146,761 for the six months ended June 30, 2012, which related to the addition of new wells and future development costs.

19

Operating assets decreased by $958,975 in the six months ended June 30, 2013, compared to an increase of $1,528,412 for the six months ended June 30, 2012, resulting in a change of $2,487,387. Approximately $2,228,122 of this change is the result of related party receivables decreasing $868,795 in the six months ended June 30, 2013, compared to an increase of $1,359,327 in the six months ended June 30, 2012. Joint interest billings receivable decreased $122,290 in the six months ended June 30, 2013 and increased $273,939 in the six months ended June 30, 2012, resulting in a change of approximately $396,229. The decrease in these receivables was due to payments received from working interest owners during the six months ended June 30, 2013. The remaining changes in operating assets of approximately $136,964 consisted of changes in accounts receivable trade and other assets.

Operating liabilities increased by $1,081,453 during the six months ended June 30, 2013, compared to an increase of $907,125 for the six months ended June 30, 2012, resulting in an increase of $174,328. Accounts payable increased $475,959 for the six months ended June 30, 2013, a decrease of $292,120 compared to the $768,079 increase in the six months ended June 30, 2012. This decrease was related to workover expenses on the Morse #1-H, Norbord, and Haggard B wells incurred during the six months ended June 30, 2013. The change in liquidated damages payable increased $179,110; from a decrease of $175,955 for the six months ended June 30, 2012 to an increase of $3,155 for the six months ended June 30, 2013 due to modifications to warrant agreements in 2012. Revenue payable increased $276,657 for the six months ended June 30, 2013; an increase of $265,781, compared to the $10,876 increase during the six months ended June 30, 2012.  This majority of this increase is due to monies being held in legal suspense for royalty owners pending completion of title work and division orders.  The remaining changes in other operating liabilities were approximately $21,557.

Cash used in Investing Activities:  For the six months ended June 30, 2013, cash used in investing activities was $1,242,461, compared to $4,390,036 for the six months ended June 30, 2012, resulting in a decrease of $3,147,575. We spent $1,233,808 on the purchases of property and equipment during the six months ended June 30, 2013, compared to $4,325,846 spent on lease and well equipment, and intangible drilling and completion costs for work done on the Haggard A, Haggard B and Morse #1-H wells during the six months ended June 30, 2012, a decrease of $3,092,038. 

Cash provided by Financing Activities:  For the six months ended June 30, 2013, cash provided by financing activities totaled $6,913, compared to $1,838,639 for the six months ended June 30, 2012, resulting in a decrease of $1,831,726. In the six months ended June 30, 2012, we received $1,986,945 in net proceeds from the sale of common stock and units of common stock and warrants, while there were no proceeds received during the six months ended June 30, 2013. We had deferred financing costs of $15,550 for the six months ended June 30, 2012, compared to $-0- during the six months ended June 30, 2013. The remaining change in cash provided by financing activities for the six months ended June 30, 2013 was primarily a result of changes in the cash overdraft. There was a $6,102 increase in our cash overdrafts for the six months ended June 30, 2013, compared to a decrease of $128,932 in our cash overdrafts for the six months ended June 30, 2012.

Sources of Liquidity

Production revenues have not been sufficient to finance our operating expenses; therefore, we have had to raise capital in recent years to fund our activities.Planned lease acquisitions and exploration, development, production and marketing activities, as well as administrative requirements (such as salaries, insurance expenses, general overhead expenses, legal compliance costs and accounting expenses) will require a substantial amount of additional capital and cash flow.

We expect that additional funds raised from future financing activities will be needed to finance our operations for the next twelve months.  The extent of our drilling program in 2013 is dependent on our ability to raise additional capital. There are no guarantees that we will be able to raise additional funds on terms acceptable to us, if at all.  We will also consider farm-out agreements, whereby we would lease parts of our properties to other operators for drilling purposes and we would receive payment based on the production.  

We are actively pursuing sources of additional capital through various financing transactions or arrangements, including farm-outs, joint venturing of projects, debt financing, equity financing and other means.   

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our consolidated financial condition, revenues, results of operations, liquidity, or capital expenditures.

20

Critical Accounting Policies

Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the notes to consolidated financial statements which accompany the consolidated financial statements.  These policies have been consistently applied in all material respects and address such matters as revenue recognition and depreciation methods.  The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the recorded amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates. 

Accounts Receivable

We perform ongoing credit evaluations of our customers’ financial condition and extend credit to virtually all of our customers.  Collateral is generally not required, nor is interest charged on past due balances.  Credit losses to date have not been significant and have been within management’s expectations.  In the event of complete non-performance by our customers, our maximum exposure is the outstanding accounts receivable balance at the date of non-performance.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from five to thirty-nine years.  Expenditures for major renewals and betterments that extend the useful lives are capitalized.  Expenditures for normal maintenance and repairs are expensed as incurred.  Upon the sale or abandonment, the cost of the equipment and related accumulated depreciation are removed from the accounts and any gains or losses thereon are recognized in the operating results of the respective period.

Oil and Gas Properties

We use the full-cost method of accounting for our oil and gas producing activities, which are all located in Texas.  Accordingly, all costs associated with the acquisition, exploration, and development of oil and gas reserves, including directly-related overhead costs, are capitalized.

All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the units-of-production method using estimates of proved reserves.  Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs.  If the results of an assessment indicate that the properties are impaired, the amount of the impairment will be added to the capitalized costs to be amortized.

In addition, the capitalized costs are subject to a “ceiling test,” which limits such costs to the aggregate of the “estimated present value,” discounted at a ten percent interest rate, of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties and less the income tax effects related to the properties. 

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the operating results of the respective period.

Fair Value of our Debt and Equity Instruments

Many of our various debt and equity transactions require us to determine the fair value of a debt or equity instrument in order to properly record the transaction in our consolidated financial statements.  Fair value is generally determined by applying widely acceptable valuation models, (e.g. the Black Scholes model) using the trading price of the underlying instrument or by comparison to instruments with comparable maturities and terms.

Revenue Recognition

We utilize the accrual method of accounting for crude oil and natural gas revenues, whereby revenues are recognized based on our net revenue interest in the wells.  Crude oil inventories are immaterial and are not recorded.

Gas imbalances are accounted for using the entitlement method.  Under this method, revenues are recognized only to the extent of our proportionate share of the gas sold.  However, we have no history of significant gas imbalances.

21

Income Taxes

Deferred income taxes are determined using the “liability method” in accordance with FASB ASC Topic No. 740, Income Taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which such temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the operating results of the period that includes the enactment date.  In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

Recently Issued Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligations Is Fixed at the Reporting Date”. The amendments in this update cover a wide range of topics in the ASC. These amendments provide guidance for joint and several liability arrangements for amounts fixed at the reporting date. The amendments in this update will be effective for fiscal periods beginning after December 15, 2013. The adoption of ASU 2013-04 is not expected to have a material impact on our consolidated financial position or results of operations.

In July 2013, the FASB issued ASU2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists”. The objective in this update covers FASB ASC Topic 740 and is to eliminate the diversity in presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this update will be effective for fiscal periods beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on our consolidated financial position or results of operations.

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required under Regulation S-K for “smaller reporting companies.”

ITEM 4.          CONTROLS AND PROCEDURES.

(a) 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 the end of the period covered by this Quarterly Report on Form 10-Q. 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 weakness described below, as of June 30, 2013, 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 SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  The material weakness, which relates to internal control over financial reporting, that was identified is: 

a)   Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process.  The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis.

22

We are committed to improving our financial organization.  We will look to increase our personnel resources and technical accounting expertise within the accounting function to resolve non-routine or complex accounting matters. In addition, when funds are available, 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 $100,000 per annum.  As our operations are relatively small and we continue to have net cash losses each quarter, we do not anticipate being able to hire additional internal personnel until such time as our operations are profitable on a cash basis or until our operations are large enough to justify the hiring of additional accounting personnel.  We currently engage an outside accounting firm to assist us in the preparation of our consolidated financial statements and anticipate doing so until we have a sufficient number of internal accounting personnel to achieve compliance. As necessary, we will engage consultants in the future in order to ensure proper accounting for our consolidated financial statements.

Due to the fact that our internal accounting staff consists solely of a Chief Financial Officer, 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 turn over issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

(b) Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

23

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. However, 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 described 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, consolidated financial condition, or operating results.

On or about January 27, 2012, purported shareholders of Prodigy Oil and Gas, LLC (“Prodigy”), a minority working interest partner on one of our projects, filed a lawsuit in District Court, Dallas, Texas against Prodigy, us and others, by filing a Petition. The case is William Hall, et al. v. Prodigy Oil & Gas, LLC, et al., Cause No. DC-12-01065. In this action, the plaintiffs seek the return of investments made in Prodigy, and believe that some of those funds were given to us. The plaintiffs have not accused us of wrongdoing, only that they believe we hold money and profits that they are entitled to as constructive trustees. As of June 30, 2013, the lawsuit was settled outside of court. We contributed $25,000 towards the total settlement to the plaintiff. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against our organization.

ITEM 1A.        RISK FACTORS.

Not required under Regulation S-K for “smaller reporting companies.”

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

During the three months ended June 30, 2013, we issued 765,139 shares of our common stock to one investor upon a cashless exercise of warrants to purchase 1,500,000 shares.  We also issued 8,000 shares of our common stock to one investor for $4,800 upon a cash exercise of warrants to purchase 8,000 shares. The shares were issued pursuant to an exemption under Section 4(2) of the Securities Act of 1933, as amended.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.           MINE SAFETY DISCLOSURES.

None.

ITEM 5.           OTHER INFORMATION.

None.

24

ITEM 6.           EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

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 Taxonomy Extension Schema Document*

101 CAL XBRL Taxonomy Calculation Linkbase Document*

101 LAB XBRL Taxonomy Labels Linkbase Document*

101 PRE XBRL Taxonomy Presentation Linkbase Document*

101 DEF XBRL Taxonomy Extension Definition Linkbase Document*

___________

*Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

25

SIGNATURES

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

	PEGASI ENERGY RESOURCES CORPORATION
Date: August 14, 2013	By:/s/ MICHAEL NEUFELD
	Michael Neufeld
	Chief Executive Officer
Date: August 14, 2013	By: /s/ JONATHAN WALDRON
	Jonathan Waldron
	Chief Financial Officer

26

EX-31.01

EXHIBIT 31.01

PEGASI ENERGY RESOURCES CORPORATION

OFFICER’S CERTIFICATE PURSUANT TO SECTION 302

     I, Michael Neufeld, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Pegasi Energy Resources Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: August 14, 2013

/s/ MICHAEL NEUFELD

Michael Neufeld

Chief Executive Officer

EX-31.02

EXHIBIT 31.02

PEGASI ENERGY RESOURCES CORPORATION

OFFICER’S CERTIFICATE PURSUANT TO SECTION 302

     I, Jonathan Waldron, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Pegasi Energy Resources Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: August 14, 2013

/s/ JONATHAN WALDRON

Jonathan Waldron

Chief Financial Officer

EX-32.01

Exhibit 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

I, Michael Neufeld, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Pegasi Energy Resources Corporation on Form 10-Q for the fiscal quarter ended June 30, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Pegasi Energy Resources Corporation.

	By:	/s/    MICHAEL NEUFELD
Date: August 14, 2013	Name:	Michael Neufeld
	Title:	Chief Executive Officer

I, Jonathan Waldron, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Pegasi Energy Resources Corporation on Form 10-Q for the fiscal quarter ended June 30, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Pegasi Energy Resources Corporation.

	By:	/s/    JONATHAN WALDRON
Date: August 14, 2013	Name:	Jonathan Waldron
	Title:	Chief Financial Officer

XML

3. FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis [Table Text Block]

The following table sets forth our estimate of fair value of our financial instruments that are liabilities as of June 30, 2013 and December 31, 2012:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Nonrecurring
Asset retirement obligation	$	-	$	-	$	659,483	$	659,483

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Nonrecurring
Asset retirement obligation	$	-	$	-	$	628,668	$	628,668

Schedule of Derivative Liabilities at Fair Value [Table Text Block]

The following table sets forth a summary of changes in fair value of our asset retirement obligation during the six months ended June 30, 2013 and 2012:

	2013		2012
Beginning Balance - January 1,	$	628,668	$	343,687
Accretion expense		17,058		10,141
Additions to estimates		13,757		-
Balance at June 30,	$	659,483	$	353,828

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Revenues:
Oil and gas	$ 448,957	$ 146,723	$ 770,244	$ 314,731
Condensate and skim oil	10,129	0	31,334	12,470
Transportation and gathering	51,173	35,866	89,697	75,185
Total revenues	510,259	182,589	891,275	402,386
Operating expenses:
Lease operating expense	238,237	103,915	413,800	186,148
Pipeline operating expenses	61,613	31,456	104,736	71,045
Depletion and depreciation	130,460	69,202	233,920	136,620
General and administrative	683,047	2,735,123	1,636,765	4,150,694
Total operating expenses	1,113,357	2,939,696	2,389,221	4,544,507
Loss from operations	(603,098)	(2,757,107)	(1,497,946)	(4,142,121)
Other income (expense):
Interest income	29	37	58	105
Interest expense	(158,773)	(159,267)	(318,882)	(317,905)
Changes in fair value of warrant derivative liability	0	(436,880)	0	(1,240,430)
Warrant modification expense	0	0	0	(260,554)
Changes in liquidated damages	(1,605)	312,965	(3,155)	175,955
Other income, net	0	1,644	2,500	2,271
Total other expense, net	(160,349)	(281,501)	(319,479)	(1,640,558)
Loss from operations before income tax expense	(763,447)	(3,038,608)	(1,817,425)	(5,782,679)
Income tax expense	(3,515)	0	(3,515)	0
Net loss	$ (766,962)	$ (3,038,608)	$ (1,820,940)	$ (5,782,679)
Basic and diluted loss per share:
Basic and diluted loss per share (in Dollars per share)	$ (0.01)	$ (0.06)	$ (0.03)	$ (0.11)
Weighted average shares outstanding – basic and diluted (in Shares)	63,584,305	54,664,712	63,111,699	52,500,887

XML

5. SUPPLEMENTAL CASH FLOW AND NON-CASH INFORMATION

6 Months Ended

Jun. 30, 2013

Supplemental Cash Flow Elements [Abstract]

Cash Flow, Supplemental Disclosures [Text Block]

5.     SUPPLEMENTAL CASH FLOW AND NON-CASH INFORMATION

The following non-cash transactions were recorded during the six months ended June 30:

	2013		2012
Trade in proceeds on equipment	$	-	$	2,640
Cashless exercise of warrants classified as a derivative	$	-	$	1,117,428
Reclassification of derivative warrant liability to equity due to modification of warrants	$	-	$	673,524
Oil and gas assets financed through account payables	$	133,547	$	697,093
Promote liabilities applied against oil and gas assets	$	-	$	121,379
Equipment/vehicle financed through notes payable	$	-	$	7,592
Additions to asset retirement obligation	$	13,757	$	-

The following is supplemental cash flow information for the six months ended June 30:

	2013		2012
Cash paid during the period for interest	$	2,724	$	1,747
Cash paid during the period for taxes	$	3,515	$	-

XML

3. FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) - Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis (USD $)	Jun. 30, 2013	Dec. 31, 2012
Nonrecurring
Asset retirement obligation	$ 659,483	$ 628,668
Fair Value, Inputs, Level 1 [Member]
Nonrecurring
Asset retirement obligation	0	0
Fair Value, Inputs, Level 2 [Member]
Nonrecurring
Asset retirement obligation	0	0
Fair Value, Inputs, Level 3 [Member]
Nonrecurring
Asset retirement obligation	$ 659,483	$ 628,668

XML

5. SUPPLEMENTAL CASH FLOW AND NON-CASH INFORMATION (Tables)

6 Months Ended

Jun. 30, 2013

Supplemental Cash Flow Elements [Abstract]

Schedule of Cash Flow, Supplemental Disclosures [Table Text Block]

The following non-cash transactions were recorded during the six months ended June 30:

	2013		2012
Trade in proceeds on equipment	$	-	$	2,640
Cashless exercise of warrants classified as a derivative	$	-	$	1,117,428
Reclassification of derivative warrant liability to equity due to modification of warrants	$	-	$	673,524
Oil and gas assets financed through account payables	$	133,547	$	697,093
Promote liabilities applied against oil and gas assets	$	-	$	121,379
Equipment/vehicle financed through notes payable	$	-	$	7,592
Additions to asset retirement obligation	$	13,757	$	-

	2013		2012
Cash paid during the period for interest	$	2,724	$	1,747
Cash paid during the period for taxes	$	3,515	$	-

XML

5. SUPPLEMENTAL CASH FLOW AND NON-CASH INFORMATION (Details) - Schedule of Cash Flows, Noncash Transactions and Supplemental Information (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Schedule of Cash Flows, Noncash Transactions and Supplemental Information [Abstract]
Trade in proceeds on equipment	$ 0	$ 2,640
Cashless exercise of warrants classified as a derivative	0	1,117,428
Reclassification of derivative warrant liability to equity due to modification of warrants	0	673,524
Oil and gas assets financed through account payables	133,547	697,093
Promote liabilities applied against oil and gas assets	0	121,379
Equipment/vehicle financed through notes payable	0	7,592
Additions to asset retirement obligation	13,757	0
Cash paid during the period for interest	2,724	1,747
Cash paid during the period for taxes	$ 3,515	$ 0

XML

4. RESTRICTED CASH (Details) (USD $)	30 Months Ended		36 Months Ended		6 Months Ended	30 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Dec. 31, 2012 Drilling Program 2010 [Member]	Mar. 31, 2013 Drilling Program 2010 [Member]	Jun. 30, 2013 Drilling Program 2011 [Member]	Jun. 30, 2013 Drilling Program 2011 [Member]
4. RESTRICTED CASH (Details) [Line Items]
Certificates of Deposit, at Carrying Value	$ 78,508	$ 78,450
Total Funds Received On These Programs	5,003,823		2,462,492			1,159,038
Actual Spent On Drilling Activities			2,374,799			6,354,667
Reclassified To Promote Income On Drilling Activities			58,213		13,714
Prepayments Refunded			29,480
Balance In Restricted Cash and Drilling Prepayments				0	20,495	20,495
Contributions in Excess of Agreed Upon Amounts					56,190
Oil and Gas Joint Interest Billing Receivables					$ 169,825	$ 169,825

XML

8. STOCKHOLDER'S EQUITY (Details) (Warrants, cashless exercisable [Member])	6 Months Ended
	Jun. 30, 2013
Warrants, cashless exercisable [Member]
8. STOCKHOLDER'S EQUITY (Details) [Line Items]
Stock Issued During Period, Shares, Conversion of Convertible Securities	1,010,198
Warrants Exercised in the Period	1,000,000

XML

6. STOCK-BASED COMPENSATION (Details) - Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Exercisable (Employee Stock Option [Member], USD $)	Jun. 30, 2013	Dec. 31, 2012
Employee Stock Option [Member]
6. STOCK-BASED COMPENSATION (Details) - Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Exercisable [Line Items]
Shares	7,700,060	7,700,060
Weighted average exercise price (in Dollars per share)	$ 0.55	$ 0.55

XML

3. FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) - Schedule of Derivative Liabilities at Fair Value (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Schedule of Derivative Liabilities at Fair Value [Abstract]
Beginning Balance - January 1,	$ 628,668	$ 343,687
Accretion expense	17,058	10,141
Additions to estimates	13,757	0
Balance at June 30,	$ 659,483	$ 353,828

XML

1. NATURE OF OPERATIONS

6 Months Ended

Jun. 30, 2013

Disclosure Text Block [Abstract]

Nature of Operations [Text Block]

1.   NATURE OF OPERATIONS

Pegasi Energy Resources Corporation (“PERC” or the “Company”) an independent energy company engaged in the exploration for, and production of, crude oil and natural gas.  The Company’s focus is on the development of a repeatable, low-geological risk, high-potential project in the active East Texas oil and gas region.  The Company’s business strategy in what it has designated the “Cornerstone Project”, is to identify and exploit resources in and adjacent to existing or indicated producing areas within the mature Rodessa field. The Company believes that it is uniquely familiar with the history and geology of the Cornerstone Project area based on its collective experience in the region as well as through its development and ownership of a large proprietary database, which details the drilling history of the Cornerstone Project area since 1980.  In 2012, the Company drilled the Morse #1-H well targeting the Bossier formation and completed it using hydraulic fracture stimulation techniques.  The Morse #1-H is the first such horizontal well completed in the Rodessa field and the Company believes that implementing the latest proven drilling and completion techniques to exploit its geological insight in the Cornerstone Project area will enable it to find significant oil and gas reserves.

PERC conducts its main exploration and production operations through its wholly-owned subsidiary, Pegasi Operating, Inc. ("POI").  It conducts additional operations through another wholly-owned subsidiary, TR Rodessa, Inc. ("TR Rodessa").  

TR Rodessa owns an 80% undivided interest in and operates a 40-mile natural gas pipeline and gathering system which is currently being used by PERC to transport its hydrocarbons to market.  Excess capacity on this system is used to transport third-party hydrocarbons.  

XML

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

3.  FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 825, Financial Instruments, requires certain disclosures regarding the fair value of financial instruments.  Fair value of financial instruments is made at a specific point in time, based on relevant information about financial markets and specific financial instruments.  As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.

FASB ASC Topic 820, Fair Value Measurement, defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

FASB ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  FASB ASC Topic 820 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 - Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identicalassets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 - Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The following table sets forth our estimate of fair value of our financial instruments that are liabilities as of June 30, 2013:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Nonrecurring
Asset retirement obligation	$	-	$	-	$	659,483	$	659,483

The following table sets forth our estimate of fair value of our financial instruments that are liabilities as of December 31, 2012:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Nonrecurring
Asset retirement obligation	$	-	$	-	$	628,668	$	628,668

The following table sets forth a summary of changes in fair value of our asset retirement obligation during the six months ended June 30, 2013 and 2012:

	2013		2012
Beginning Balance - January 1,	$	628,668	$	343,687
Accretion expense		17,058		10,141
Additions to estimates		13,757		-
Balance at June 30,	$	659,483	$	353,828

In accordance with the reporting requirements of FASB ASC Topic No. 825, the Company calculates the fair value of its assets and liabilities that qualify as financial instruments under this statement and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments.  The estimated fair values of accounts receivable, accounts payable and other current assets and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments.  The carrying value of long-term debt approximates market value due to the use of market interest rates.  

XML

6. STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

6.  STOCK-BASED COMPENSATION

Stock Plans

The Company adopted the 2007 Stock Option Plan (the “2007 Plan”), 2010 Incentive Stock Option Plan (the “2010 Plan”) and the 2012 Incentive Stock Option Plan (the “2012 Plan”) for directors, executives, selected employees, and consultants to reward them for making major contributions to the success of the Company by issuing long-term incentive awards under these Plans thereby providing them with an interest and incentive in the growth and performance of the Company.  The 2007 Plan reserves 1,750,000 shares of common stock for issuance by the Company as stock options.  The 2010 Plan reserves 5,000,000 shares of common stock for issuance by the Company as stock options, stock awards or restricted stock purchase offers.  The 2012 Plan reserves 10,000,000 shares of common stock for issuance by the Company as stock options, stock awards or restricted stock purchase offers.

Stock Options Issued

There were no options granted and vested during the six months ended June 30, 2013. There were 4,730,775 options granted and vested during the six months ended June 30, 2012.   As of June 30, 2013 and 2012, the Company had $655,182 and $-0- unrecognized compensation expense related to non-vested stock-based compensation arrangements, respectively.

A summary of option activity during the six months ended June 30, 2013 is as follows:

	Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2012		9,700,060	$	0.57	$	-
Options granted		-		-		-
Options exercised		-		-		-
Outstanding at June 30, 2013		9,700,060	$	0.57	$	-

The following is a summary of stock options outstanding at June 30, 2013:

Exercise Price		Options Outstanding		Remaining Contractual Lives (Years)		Options Exercisable
$	0.65		900,000		1.50		900,000
$	0.42		1,059,285		2.50		1,059,285
$	0.50		10,000		2.50		10,000
$	0.50		486,364		3.50		486,364
$	0.55		363,636		3.50		363,636
$	0.50		880,775		3.50		880,775
$	0.55		3,000,000		4.00		3,000,000
$	0.66		3,000,000		9.25		1,000,000

Based on the Company's stock price of $0.84 at June 30, 2013, the options outstanding had an intrinsic value of $2,599,581.  

Total options exercisable at June 30, 2013 amounted to 7,700,060 shares and had a weighted average exercise price of $0.55.  Upon exercise, the Company issues the full amount of shares exercisable per the term of the options from new shares.  The Company has no plans to repurchase those shares in the future.  The following is a summary of options exercisable at June 30, 2013 and December 31, 2012:

	Shares		Weighted Average Exercise Price
June 30, 2013		7,700,060	$	0.55
December 31, 2012		7,700,060	$	0.55

The Company estimates the fair value of stock options using the Black-Scholes option pricing valuation model, consistent with the provisions of FASB ASC Topic 505 and FASB ASC Topic 718.  Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company’s stock, the risk-free rate and the Company’s dividend yield.  Estimates of fair value are not intended to predict actual future events or the value ultimately realized by grantees, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.  The Company uses the simplified method to determine the expected term on options issued.

XML

4. RESTRICTED CASH

6 Months Ended

Jun. 30, 2013

Disclosure Text Block Supplement [Abstract]

Restricted Assets Disclosure [Text Block]

4.     RESTRICTED CASH

Collateral

Certificates of deposit have been posted as collateral supporting a reclamation bond guaranteeing remediation of our oil and gas properties in Texas.  As of June 30, 2013 and December 31, 2012, the balance of the certificates of deposit totaled $78,508 and $78,450, respectively.

2010 Drilling Program

During the last quarter of 2010, the Company executed participation and operating agreements with various independent oil and gas companies regarding the drilling of various wells.   Funds received from these companies are restricted to the drilling programs and are considered released when they are spent in accordance with the agreements.   Since inception, total funds of $2,462,492 were received on this program, $2,374,799 was spent on drilling activities, and $58,213 was reclassified to promote income leaving a balance of $29,480. During the quarter ended March 31, 2013, the remaining balance was either refunded to the original investors or applied against investor joint interest billing receivable balances, as applicable, to close out the 2010 restricted cash and drilling program leaving a zero balance as of March 31, 2013. There has been no additional activity in this program since that date.

2011 Drilling Program

During the last quarter of 2011, the Company executed joint operating agreements with various independent oil and gas companies regarding the drilling of various wells.   Funds received from these companies are restricted to the drilling programs and are considered released when they are spent in accordance with the agreements.  Total funds of $5,003,823 were received on these programs; $1,159,038 that the Company owed to these companies was applied to the programs in the six months ended June 30, 2013 and the Company contributed $56,190 to the programs to cover costs in excess of agreed upon amounts. A total of $6,354,667 was spent on drilling activities, and $13,714 was reclassified to promote income.  In addition, individual investor shortages at June 30, 2013 of $169,825 were reclassified to their joint interest billing receivables, leaving a balance of $20,495 in restricted cash and drilling prepayments at June 30, 2013.

XML

6. STOCK-BASED COMPENSATION (Details) (Employee Stock Option [Member], USD $)				6 Months Ended
	Dec. 31, 2007 Incentive Stock Option Plan 2007 [Member]	Dec. 31, 2010 Incentive Stock Option Plan 2010 [Member]	Dec. 31, 2012 Incentive Stock Option Plan 2012 [Member]	Jun. 30, 2013	Jun. 30, 2012
6. STOCK-BASED COMPENSATION (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	1,750,000	5,000,000	10,000,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross				0	4,730,775
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized (in Dollars)				$ 655,182	$ 0
Share Price (in Dollars per share)				$ 0.84
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value (in Dollars)				$ 2,599,581

XML

7. WARRANTS OUTSTANDING (Details) (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
7. WARRANTS OUTSTANDING (Details) [Line Items]
Proceeds from Warrant Exercises (in Dollars)	$ 4,800	$ 0
Warrants Outstanding Intrinsic Value (in Dollars)	3,311,797
Number of warrants exercisable	15,083,210
Warrants cashless exercise, March 18, 2013 [Member]
7. WARRANTS OUTSTANDING (Details) [Line Items]
Common Stock Shares Received	95,299
Warrants Exercised in the Period	100,000
Warrants Held by Investor	1,000,000
Warrants cashless exercise, March 22, 2013 [Member]
7. WARRANTS OUTSTANDING (Details) [Line Items]
Common Stock Shares Received	149,760
Warrants Exercised in the Period	150,000
Warrants Held by Investor	900,000
Warrant cashless exercise, April 5, 2013 [Member]
7. WARRANTS OUTSTANDING (Details) [Line Items]
Common Stock Shares Received	765,139
Warrants Exercises In Period Shares Issuable Under Warrants	1,500,000
Warrant exercise, May 1, 2013 [Member]
7. WARRANTS OUTSTANDING (Details) [Line Items]
Warrants Exercised in the Period	8,000
Stock Issued During Period, Shares, Conversion of Convertible Securities	8,000
Proceeds from Warrant Exercises (in Dollars)	$ 4,800

XML

10. COMMITMENTS AND CONTINGENCIES (Details) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2008	Dec. 31, 2012
10. COMMITMENTS AND CONTINGENCIES (Details) [Line Items]
Liquidated Damages Payable	$ 37,415		$ 34,260
Liquidated Damages [Member]
10. COMMITMENTS AND CONTINGENCIES (Details) [Line Items]
Payment Of Liquidated Damages		100,000
Loss Contingency, Additional Damages Paid, Value		100,000
Payment Of Liquidated Damages Period		every thirty days thereafter, prorated for periods totaling less than thirty days
Payment Of Liquidated Damages Maximum Percentage		18.00%
Registration Payment Arrangement, Maximum Potential Consideration		1,800,000
Liquidated Damages Payable	37,415		34,260
Other Nonoperating Income (Expense)	$ 3,155

XML

CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Preferred stock par value (in Dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock par value (in Dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	150,000,000	150,000,000
Common stock, shares issued	63,620,575	62,602,377
Common stock, shares outstanding	63,620,575	62,602,377

XML

9. SEGMENT INFORMATION

6 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Segment Reporting Disclosure [Text Block]

9.      SEGMENT INFORMATION

The following information is presented in accordance with FASB ASC Topic 280, Segment Reporting.  The Company is engaged in exploration and production of crude oil and natural gas and pipeline transportation.  POI, a wholly-owned subsidiary of PERC, conducts the exploration and production operations.  TR Rodessa operates a 40-mile gas pipeline and gathering system which is used to transport hydrocarbons to market to be sold.  The Company identified such segments based on management responsibility and the nature of their products, services, and costs.  There are no major distinctions in geographical areas served as all operations are in the United States.  The Company measures segment profit (loss) as income (loss) from operations.  Business segment assets are those assets controlled by each reportable segment.  The following table sets forth certain information about the financial information of each segment as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Business segment revenue:
Oil and gas sales	$	448,957		$	146,723		$	770,244		$	314,731
Condensate and skim oil		10,129			-			31,334			12,470
Transportation and gathering		51,173			35,866			89,697			75,185
Total revenues	$	510,259		$	182,589		$	891,275		$	402,386
Business segment loss:
Oil and gas sales	$	100,396		$	(7,941	)	$	162,520		$	26,828
Condensate and skim oil		10,129			-			31,334			12,470
Transportation and gathering		(31,207	)		(12,546	)		(61,400	)		(30,917	)
General corporate		(682,416	)		(2,736,620	)		(1,630,400	)		(4,150,502	)
Loss from operations	$	(603,098	)	$	(2,757,107	)	$	(1,497,946	)	$	(4,142,121	)
Depreciation and depletion:
Oil and gas sales	$	110,324		$	50,749		$	193,924		$	101,755
Transportation and gathering		16,642			13,631			33,008			25,232
General corporate		3,494			4,822			6,988			9,633
Total depletion and depreciation	$	130,460		$	69,202		$	233,920		$	136,620
Capital expenditures:
Oil and gas sales							$	1,381,112		$	4,901,560
Transportation and gathering								8,362			64,086
General corporate								233			7,592
Total capital expenditures							$	1,389,707		$	4,973,238

		June 30, 2013		December 31, 2012
Business segment assets:
Oil and gas sales	$	30,826,560	$	30,101,703
Transportation and gathering		762,876		770,822
General corporate		1,905,508		2,806,463
Total assets	$	33,494,944	$	33,678,988

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Operating Activities
Net loss	$ (1,820,940)	$ (5,782,679)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depletion and depreciation	233,920	136,620
Accretion of discount on asset retirement obligations	17,058	10,141
Stock based compensation	393,108	2,195,743
Common stock issued for consulting services	0	434,500
Gain on sale of equipment	0	(276)
Change in fair value of warrant derivative liability	0	1,240,430
Warrant modification expense	0	260,554
Changes in operating assets and liabilities:
Accounts receivable, trade	(54,583)	106,214
Account receivable, related parties, net	(4,582)	(1,500)
Joint interest billing receivable, related parties, net	868,795	(1,359,327)
Joint interest billing receivable, net	122,290	(273,939)
Other current assets	27,055	140
Accounts payable	231,224	509,083
Accounts payable, related parties	244,735	258,996
Revenue payable	276,657	10,876
Interest payable, related parties	316,158	316,158
Liquidated damages payable	3,155	(175,955)
Other payables	9,524	(12,033)
Net cash provided by (used in) operating activities	863,574	(2,126,254)
Investing Activities
Additions to certificates of deposit	(58)	(104)
Purchases of property and equipment	(8,595)	(64,086)
Purchase of oil and gas properties	(1,233,808)	(4,325,846)
Net cash used in investing activities	(1,242,461)	(4,390,036)
Financing Activities
Payments on notes payable and capital leases	(3,989)	(3,824)
Cash overdraft	6,102	(128,932)
Deferred financing costs	0	(15,550)
Proceeds from exercise of warrants	4,800	0
Proceeds from sale of common stock, net of offering costs	0	1,986,945
Net cash provided by financing activities	6,913	1,838,639
Net decrease in cash and cash equivalents	(371,974)	(4,677,651)
Cash and cash equivalents at beginning period	1,421,198	6,749,368
Cash and cash equivalents at end of period	$ 1,049,224	$ 2,071,717

XML

CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 1,049,224	$ 1,421,198
Accounts receivable, trade	458,703	404,120
Accounts receivable, related parties	17,584	13,002
Joint interest billing receivable, related parties, net	520,174	1,388,969
Joint interest billing receivable, net	153,433	275,423
Other current assets	31,623	58,678
Total current assets	2,230,741	3,561,390
Property and equipment:
Equipment	66,855	66,855
Pipelines	942,714	934,419
Leasehold improvements	7,022	7,022
Vehicles	56,174	56,174
Office furniture	136,283	136,283
Website	15,000	15,000
Total property and equipment	1,224,048	1,215,753
Less accumulated depreciation	(492,409)	(449,931)
Property and equipment, net	731,639	765,822
Oil and gas properties:
Oil and gas properties, proved	17,781,370	17,193,227
Oil and gas properties, unproved	13,869,249	13,090,037
Capitalized asset retirement obligations	505,095	491,338
Total oil and gas properties	32,155,714	30,774,602
Less accumulated depletion and depreciation	(1,757,001)	(1,565,559)
Oil and gas properties, net	30,398,713	29,209,043
Other assets:
Restricted cash – drilling program	20,495	29,435
Certificates of deposit	78,508	78,450
Easements	34,848	34,848
Total other assets	133,851	142,733
Total assets	33,494,944	33,678,988
Current Liabilities:
Cash overdraft	23,897	17,795
Accounts payable	1,879,924	1,515,153
Accounts payable, related parties	2,692,122	2,447,387
Revenue payable	967,859	691,202
Interest payable, related parties	1,975,494	1,659,336
Liquidated damages payable	37,415	34,260
Other payables	39,618	30,094
Current portion of notes payable and capital leases	8,395	8,111
Total current liabilities	7,624,724	6,403,338
Drilling prepayments	20,495	29,435
Notes payable and capital leases	13,620	17,893
Notes payable, related parties	8,160,646	8,160,646
Asset retirement obligations	659,483	628,668
Total liabilities	16,478,968	15,239,980
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock: $0.001 par value; 5,000,000 shares authorized; none issued and outstanding	0	0
Common stock: $0.001 par value; 150,000,000 shares authorized; 63,620,575 and 62,602,377 shares issued and outstanding, respectively	63,621	62,603
Additional paid-in capital	43,173,306	42,776,416
Accumulated deficit	(26,220,951)	(24,400,011)
Total stockholders' equity	17,015,976	18,439,008
Total liabilities and stockholders' equity	$ 33,494,944	$ 33,678,988

XML

6. STOCK-BASED COMPENSATION (Details) - Schedule of Stock Options Roll Forward (USD $)	6 Months Ended
	Jun. 30, 2013
Options [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Stock Options Roll Forward [Line Items]
Outstanding at December 31, 2012 (in Shares)	9,700,060
Options granted (in Shares)	0
Options exercised (in Shares)	0
Outstanding at June 30, 2013 (in Shares)	9,700,060
Weighted Average Exercise Price [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Stock Options Roll Forward [Line Items]
Outstanding at December 31, 2012	$ 0.57
Options granted	$ 0
Options exercised	$ 0
Outstanding at June 30, 2013	$ 0.57
Weighted Average Grant Date Fair Value [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Stock Options Roll Forward [Line Items]
Options granted	$ 0

XML

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) [Line Items]
Allocated Share-based Compensation Expense (in Dollars)	$ 131,036	$ 1,591,631	$ 393,108	$ 2,195,743
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in Shares)	39,319,541	37,522,102	39,319,541	37,522,102
Notes Payable, Related Parties, Noncurrent (in Dollars)	8,160,646		8,160,646		8,160,646
Teton Renewal Note [Member]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) [Line Items]
Debt Instrument, Face Amount (in Dollars)	6,987,646		6,987,646
Debt Instrument, Interest Rate, Stated Percentage	8.00%		8.00%
Debt Instrument, Maturity Date			Jun. 01, 2015
Teton Promissory Note [Member]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) [Line Items]
Debt Instrument, Face Amount (in Dollars)	$ 1,173,000		$ 1,173,000
Debt Instrument, Interest Rate, Stated Percentage	6.25%		6.25%
Debt Instrument, Maturity Date			Jun. 01, 2015

XML

9. SEGMENT INFORMATION (Details) - Schedule of Segment Reporting Information, by Segment (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Segment Reporting Information [Line Items]
Oil and gas sales	$ 448,957	$ 146,723	$ 770,244	$ 314,731
Condensate and skim oil	10,129	0	31,334	12,470
Transportation and gathering	51,173	35,866	89,697	75,185
Total revenues	510,259	182,589	891,275	402,386
Business segment profit (loss)	(603,098)	(2,757,107)	(1,497,946)	(4,142,121)
Depletion and depreciation	130,460	69,202	233,920	136,620
Capital expenditures			1,389,707	4,973,238
Oil and Gas [Member]
Segment Reporting Information [Line Items]
Oil and gas sales	448,957	146,723	770,244	314,731
Business segment profit (loss)	100,396	(7,941)	162,520	26,828
Depletion and depreciation	110,324	50,749	193,924	101,755
Capital expenditures			1,381,112	4,901,560
Condensate and skim oil [Member]
Segment Reporting Information [Line Items]
Condensate and skim oil	10,129	0	31,334	12,470
Business segment profit (loss)	10,129	0	31,334	12,470
Transportation and Gathering [Member]
Segment Reporting Information [Line Items]
Transportation and gathering	51,173	35,866	89,697	75,185
Business segment profit (loss)	(31,207)	(12,546)	(61,400)	(30,917)
Depletion and depreciation	16,642	13,631	33,008	25,232
Capital expenditures			8,362	64,086
Corporate Segment [Member]
Segment Reporting Information [Line Items]
Business segment profit (loss)	(682,416)	(2,736,620)	(1,630,400)	(4,150,502)
Depletion and depreciation	3,494	4,822	6,988	9,633
Capital expenditures			$ 233	$ 7,592

XML

9. SEGMENT INFORMATION (Details) - Schedule of Segment Reporting Information, by Segment (USD $)	Jun. 30, 2013	Dec. 31, 2012
Segment Reporting Information [Line Items]
Business segment assets	$ 33,494,944	$ 33,678,988
Oil and Gas [Member]
Segment Reporting Information [Line Items]
Business segment assets	30,826,560	30,101,703
Transportation and Gathering [Member]
Segment Reporting Information [Line Items]
Business segment assets	762,876	770,822
Corporate Segment [Member]
Segment Reporting Information [Line Items]
Business segment assets	$ 1,905,508	$ 2,806,463

XML

8. STOCKHOLDER'S EQUITY

6 Months Ended

Jun. 30, 2013

Stockholders' Equity Note [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

8.  STOCKHOLDERS’ EQUITY

During the six months ended June 30, 2013, the Company issued 1,010,198 shares of common stock to an investor holding modified 2007 Warrants who exercised 1,000,000 warrants on a cashless basis.  The Company also issued 8,000 shares of common stock for $4,800 to an investor holding 2011 Warrants who exercised 8,000 on a cash basis. See Note 7 for additional details.

XML

6. STOCK-BASED COMPENSATION (Details) - Schedule of Share-based Compensation, Stock Options, Activity (USD $)	6 Months Ended
	Jun. 30, 2013
Stock Option Exercise price $0.65 [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Share-based Compensation, Stock Options, Activity [Line Items]
Exercise price (in Dollars per share)	$ 0.65
Options outstanding	900,000
Remaining contractual lives	1 year 6 months
Options exercisable	900,000
Stock Option Exercise price $0.42 [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Share-based Compensation, Stock Options, Activity [Line Items]
Exercise price (in Dollars per share)	$ 0.42
Options outstanding	1,059,285
Remaining contractual lives	2 years 6 months
Options exercisable	1,059,285
Stock Option Exercise Price $0.50 [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Share-based Compensation, Stock Options, Activity [Line Items]
Exercise price (in Dollars per share)	$ 0.50
Options outstanding	10,000
Remaining contractual lives	2 years 6 months
Options exercisable	10,000
Stock Option Exercise price $0.50 [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Share-based Compensation, Stock Options, Activity [Line Items]
Exercise price (in Dollars per share)	$ 0.50
Options outstanding	486,364
Remaining contractual lives	3 years 6 months
Options exercisable	486,364
Stock Option Exercise price $0.55 [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Share-based Compensation, Stock Options, Activity [Line Items]
Exercise price (in Dollars per share)	$ 0.55
Options outstanding	363,636
Remaining contractual lives	3 years 6 months
Options exercisable	363,636
Stock Option Exercise Price $0.50 [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Share-based Compensation, Stock Options, Activity [Line Items]
Exercise price (in Dollars per share)	$ 0.50
Options outstanding	880,775
Remaining contractual lives	3 years 6 months
Options exercisable	880,775
Stock Option Exercise Price $0.55 [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Share-based Compensation, Stock Options, Activity [Line Items]
Exercise price (in Dollars per share)	$ 0.55
Options outstanding	3,000,000
Remaining contractual lives	4 years
Options exercisable	3,000,000
Stock Option Exercise Price $0.66 [Member]
6. STOCK-BASED COMPENSATION (Details) - Schedule of Share-based Compensation, Stock Options, Activity [Line Items]
Exercise price (in Dollars per share)	$ 0.66
Options outstanding	3,000,000
Remaining contractual lives	9 years 3 months
Options exercisable	1,000,000

XML

Accounting Policies, by Policy (Policies)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

a)  Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with PERC’s audited consolidated financial statements for the year ended December 31, 2012, and notes thereto, which are included in the Company’s annual report on Form 10-K filed with the SEC on March 27, 2013.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein.  The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  The notes to consolidated financial statements, which would substantially duplicate the disclosures required in the Company’s 2012 annual consolidated financial statements, have been omitted.

Consolidation, Policy [Policy Text Block]

b)  Principles of Consolidation

The consolidated financial statements include the accounts of PERC and its wholly-owned subsidiaries.  All intercompany accounts and transactions have been eliminated.  In preparing the accompanying consolidated financial statements, management has made certain estimates and assumptions that affect reported amounts in the consolidated financial statements and disclosures.  Actual results may differ from these estimates.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

c)  Stock-based Compensation

The Company has accounted for stock-based compensation under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718-10, Compensation-Stock Compensation.  The Company recognizes stock-based compensation expense in the consolidated financial statements for equity-classified employee stock-based compensation awards based on the grant date fair value of the awards.  Non-employee share-based awards are accounted for based upon FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees.  During the three months ended June 30, 2013 and June 30, 2012, the Company recognized $131,036 and $1,591,631, respectively, of stock-based compensation.  During the six months ended June 30, 2013 and June 30, 2012, the Company recognized $393,108 and $2,195,743, respectively, of stock-based compensation expense which has been recorded as a general and administrative expense in the consolidated statements of operations.

Earnings Per Share, Policy [Policy Text Block]

d)  Net Loss per Common Share

Basic net loss per common share is calculated using the weighted average number of common shares outstanding during the period. The Company uses the treasury stock method of calculating fully diluted per share amounts whereby any proceeds from the exercise of stock options or other dilutive instruments are assumed to be used to purchase common shares at the average market price during the period. The dilutive effect of convertible securities is reflected in diluted loss per share by application of the if-converted method. Under this method, conversion shall not be assumed for the purposes of computing diluted loss per share if the effect would be anti-dilutive. For the three and six months ended June 30, 2013 and 2012 the Company had potentially dilutive shares of 39,319,541 and 37,522,102, respectively. For the three and six months ended June 30, 2013 and 2012, the diluted loss per share is the same as basic loss per share, as the effect of common stock equivalents are anti-dilutive.

New Accounting Pronouncements, Policy [Policy Text Block]

e)  New Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligations Is Fixed at the Reporting Date”. The amendments in this update cover a wide range of topics in the ASC. These amendments provide guidance for joint and several liability arrangements for amounts fixed at the reporting date. The amendments in this update will be effective for fiscal periods beginning after December 15, 2013. The adoption of ASU 2013-04 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists”. The objective in this update covers FASB ASC Topic 740 and is to eliminate the diversity in presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this update will be effective for fiscal periods beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

Debt, Policy [Policy Text Block]

f) Notes Payable, Related Parties

Notes payable, related parties totaling $8,160,646 consisted of the “Teton Renewal Note” in the amount of $6,987,646 dated June 23, 2011 including interest at 8%, with all principal due on the maturity date of June 1, 2015, secured by a stock pledge and security agreement and the “Teton Promissory” note in the amount of $1,173,000 dated October 14, 2009, including interest of 6.25%, with all interest and principal due on the maturity date of June 1, 2015, unsecured. There have been no changes in the note terms since December 31, 2012.

Reclassification, Policy [Policy Text Block]

g)  Reclassifications

Certain reclassifications have been made to the comparative consolidated financial statements to conform to the current period’s presentation.

XML

7. WARRANTS OUTSTANDING

6 Months Ended

Jun. 30, 2013

Stockholders Equity Note Warrants Or Rights [Abstract]

Stockholders Equity Note Warrants Or Rights [Text Block]

7.  WARRANTS OUTSTANDING

Warrants Exercised

On March 18, 2013, the Company issued 95,299 shares of common stock to an investor holding modified 2007 Warrants who exercised 100,000 warrants of their 1,000,000 warrants on a cashless basis.  On March 22, 2013, the Company issued 149,760 shares of common stock to the same investor holding modified 2007 Warrants who exercised 150,000 warrants of their remaining 900,000 warrants on a cashless basis.  On April 5, 2013, the Company issued 765,139 shares of common stock to the same investor upon a cashless exercise of warrants to purchase 1,500,000 shares.

On May 1, 2013, the Company issued 8,000 shares of common stock for $4,800 to an investor holding 2011 Warrants who exercised 8,000 warrants on a cash basis.

A summary of warrant activity and shares issuable upon exercise of the warrants during the six months ended June 30, 2013 is as follows:

	Warrants			Shares Issuable Under Warrants			Weighted Average Exercise Price
Outstanding at December 31, 2012		16,091,210			22,303,573		$	0.65
Warrants issued		-			-			-
Warrants exercised		(1,008,000	)		(2,008,000	)		0.50
Outstanding at June 30, 2013		15,083,210			20,295,573		$	0.66

The outstanding warrants at June 30, 2013 had an intrinsic value of $3,311,797.  All of the 15,083,210 warrants outstanding at June 30, 2013 are exercisable and expire at various dates between July 2014 and September 2017.

XML

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)  Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with PERC’s audited consolidated financial statements for the year ended December 31, 2012, and notes thereto, which are included in the Company’s annual report on Form 10-K filed with the SEC on March 27, 2013.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein.  The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  The notes to consolidated financial statements, which would substantially duplicate the disclosures required in the Company’s 2012 annual consolidated financial statements, have been omitted.

b)  Principles of Consolidation

The consolidated financial statements include the accounts of PERC and its wholly-owned subsidiaries.  All intercompany accounts and transactions have been eliminated.  In preparing the accompanying consolidated financial statements, management has made certain estimates and assumptions that affect reported amounts in the consolidated financial statements and disclosures.  Actual results may differ from these estimates.

 c)  Stock-based Compensation

The Company has accounted for stock-based compensation under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718-10, Compensation-Stock Compensation.  The Company recognizes stock-based compensation expense in the consolidated financial statements for equity-classified employee stock-based compensation awards based on the grant date fair value of the awards.  Non-employee share-based awards are accounted for based upon FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees.  During the three months ended June 30, 2013 and June 30, 2012, the Company recognized $131,036 and $1,591,631, respectively, of stock-based compensation.  During the six months ended June 30, 2013 and June 30, 2012, the Company recognized $393,108 and $2,195,743, respectively, of stock-based compensation expense which has been recorded as a general and administrative expense in the consolidated statements of operations.

d)  Net Loss per Common Share

Basic net loss per common share is calculated using the weighted average number of common shares outstanding during the period. The Company uses the treasury stock method of calculating fully diluted per share amounts whereby any proceeds from the exercise of stock options or other dilutive instruments are assumed to be used to purchase common shares at the average market price during the period. The dilutive effect of convertible securities is reflected in diluted loss per share by application of the if-converted method. Under this method, conversion shall not be assumed for the purposes of computing diluted loss per share if the effect would be anti-dilutive. For the three and six months ended June 30, 2013 and 2012 the Company had potentially dilutive shares of 39,319,541 and 37,522,102, respectively. For the three and six months ended June 30, 2013 and 2012, the diluted loss per share is the same as basic loss per share, as the effect of common stock equivalents are anti-dilutive.

e)  New Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligations Is Fixed at the Reporting Date”. The amendments in this update cover a wide range of topics in the ASC. These amendments provide guidance for joint and several liability arrangements for amounts fixed at the reporting date. The amendments in this update will be effective for fiscal periods beginning after December 15, 2013. The adoption of ASU 2013-04 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists”. The objective in this update covers FASB ASC Topic 740 and is to eliminate the diversity in presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this update will be effective for fiscal periods beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

f) Notes Payable, Related Parties

Notes payable, related parties totaling $8,160,646 consisted of the “Teton Renewal Note” in the amount of $6,987,646 dated June 23, 2011 including interest at 8%, with all principal due on the maturity date of June 1, 2015, secured by a stock pledge and security agreement and the “Teton Promissory” note in the amount of $1,173,000 dated October 14, 2009, including interest of 6.25%, with all interest and principal due on the maturity date of June 1, 2015, unsecured. There have been no changes in the note terms since December 31, 2012.

g)  Reclassifications

Certain reclassifications have been made to the comparative consolidated financial statements to conform to the current period’s presentation.

XML

7. WARRANTS OUTSTANDING (Details) - Schedule of warrant activity (USD $)	6 Months Ended
	Jun. 30, 2013
Warrants [Member]
7. WARRANTS OUTSTANDING (Details) - Schedule of warrant activity [Line Items]
Outstanding at December 31, 2012	16,091,210
Warrants issued	0
Warrants exercised	(1,008,000)
Outstanding at June 30, 2013	15,083,210
Shares Issuable Under Warrants [Member]
7. WARRANTS OUTSTANDING (Details) - Schedule of warrant activity [Line Items]
Outstanding at December 31, 2012	22,303,573
Warrants issued	0
Warrants exercised	(2,008,000)
Outstanding at June 30, 2013	20,295,573
Weighted Average Exercise Price [Member]
7. WARRANTS OUTSTANDING (Details) - Schedule of warrant activity [Line Items]
Outstanding at December 31, 2012 (in Dollars per share)	$ 0.65
Warrants issued (in Dollars per share)	$ 0
Warrants exercised (in Dollars per share)	$ 0.50
Outstanding at June 30, 2013 (in Dollars per share)	$ 0.66

XML

6. STOCK-BASED COMPENSATION (Tables)

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Stock Options Roll Forward [Table Text Block]

A summary of option activity during the six months ended June 30, 2013 is as follows:

	Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2012		9,700,060	$	0.57	$	-
Options granted		-		-		-
Options exercised		-		-		-
Outstanding at June 30, 2013		9,700,060	$	0.57	$	-

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

The following is a summary of stock options outstanding at June 30, 2013:

Exercise Price		Options Outstanding		Remaining Contractual Lives (Years)		Options Exercisable
$	0.65		900,000		1.50		900,000
$	0.42		1,059,285		2.50		1,059,285
$	0.50		10,000		2.50		10,000
$	0.50		486,364		3.50		486,364
$	0.55		363,636		3.50		363,636
$	0.50		880,775		3.50		880,775
$	0.55		3,000,000		4.00		3,000,000
$	0.66		3,000,000		9.25		1,000,000

Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Exercisable [Table Text Block]

The following is a summary of options exercisable at June 30, 2013 and December 31, 2012:

	Shares		Weighted Average Exercise Price
June 30, 2013		7,700,060	$	0.55
December 31, 2012		7,700,060	$	0.55

XML

10. COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

10. COMMITMENTS AND CONTINGENCIES

Contingent Liabilities

In preparing financial statements at any point in time, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. The Company is involved in actions from time to time, which if determined adversely, could have a material negative impact on the Company's consolidated financial position, results of operations and cash flows. Management, with the assistance of counsel makes estimates, if determinable, of the Company’s probable liabilities and records such amounts in the consolidated financial statements. Such estimates may be the minimum amount of a range of probable loss when no single best estimate is determinable. Disclosure is made, when determinable, of any additional possible amount of loss on these claims, or if such estimate cannot be made, that fact is disclosed.

Along with the Company's counsel, management monitors developments related to legal matters and, when appropriate, makes adjustments to record liabilities to reflect current facts and circumstances.  Management has recorded a liability related to its registration rights agreement with investors that provides for the filing of a registration statement for the registration of the shares issued in the offering in December 2007, as well as the shares issuable upon exercise of related warrants.  The Company failed to meet the deadline for the effectiveness of the registration statement and therefore was required to pay liquidated damages of approximately $100,000 on the first day of effectiveness failure, or July 18, 2008.  An additional $100,000 penalty was required to be paid by the Company every thirty days thereafter, prorated for periods totaling less than thirty days, until the effectiveness failure was cured, up to a maximum of 18% of the aggregate purchase price, or approximately $1,800,000.  The Company’s registration became effective on August 21, 2008. 

At June 30, 2013, management reevaluated the status of the registration statement and determined an accrual of $37,415 was sufficient to cover any potential payments for liquidated damages and the related accrued interest.  The damages are reflected as liquidated damages payable of $37,415 and $34,260 in the accompanying consolidated balance sheets as of June 30, 2013 and December 31, 2012, respectively.   The difference of $3,155 was recorded as expense in the Other Income (Expense) section of the consolidated statements of operations.

XML

1. NATURE OF OPERATIONS (Details)	6 Months Ended
	Jun. 30, 2013
Disclosure Text Block [Abstract]
Undivided Ownership Percentage	80.00%

XML

7. WARRANTS OUTSTANDING (Tables) (Warrants [Member])

6 Months Ended

Jun. 30, 2013

Warrants [Member]

7. WARRANTS OUTSTANDING (Tables) [Line Items]

Schedule of Warrant Activity [Table Text Block]

A summary of warrant activity and shares issuable upon exercise of the warrants during the six months ended June 30, 2013 is as follows:

	Warrants			Shares Issuable Under Warrants			Weighted Average Exercise Price
Outstanding at December 31, 2012		16,091,210			22,303,573		$	0.65
Warrants issued		-			-			-
Warrants exercised		(1,008,000	)		(2,008,000	)		0.50
Outstanding at June 30, 2013		15,083,210			20,295,573		$	0.66

XML

Document And Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 08, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	Pegasi Energy Resources Corporation.
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		63,620,575
Amendment Flag	false
Entity Central Index Key	0001363254
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2

XML

9. SEGMENT INFORMATION (Tables)

6 Months Ended

Jun. 30, 2013

9. SEGMENT INFORMATION (Tables) [Line Items]

Schedule of Segment Reporting Information, by Segment [Table Text Block]

The following table sets forth certain information about the financial information of each segment as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Business segment revenue:
Oil and gas sales	$	448,957		$	146,723		$	770,244		$	314,731
Condensate and skim oil		10,129			-			31,334			12,470
Transportation and gathering		51,173			35,866			89,697			75,185
Total revenues	$	510,259		$	182,589		$	891,275		$	402,386
Business segment loss:
Oil and gas sales	$	100,396		$	(7,941	)	$	162,520		$	26,828
Condensate and skim oil		10,129			-			31,334			12,470
Transportation and gathering		(31,207	)		(12,546	)		(61,400	)		(30,917	)
General corporate		(682,416	)		(2,736,620	)		(1,630,400	)		(4,150,502	)
Loss from operations	$	(603,098	)	$	(2,757,107	)	$	(1,497,946	)	$	(4,142,121	)
Depreciation and depletion:
Oil and gas sales	$	110,324		$	50,749		$	193,924		$	101,755
Transportation and gathering		16,642			13,631			33,008			25,232
General corporate		3,494			4,822			6,988			9,633
Total depletion and depreciation	$	130,460		$	69,202		$	233,920		$	136,620
Capital expenditures:
Oil and gas sales							$	1,381,112		$	4,901,560
Transportation and gathering								8,362			64,086
General corporate								233			7,592
Total capital expenditures							$	1,389,707		$	4,973,238

Assets [Member]

9. SEGMENT INFORMATION (Tables) [Line Items]

Schedule of Segment Reporting Information, by Segment [Table Text Block]

		June 30, 2013		December 31, 2012
Business segment assets:
Oil and gas sales	$	30,826,560	$	30,101,703
Transportation and gathering		762,876		770,822
General corporate		1,905,508		2,806,463
Total assets	$	33,494,944	$	33,678,988