10-Q 1 eos10q03312015.htm 10-Q eos10q03312015.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 x
Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2015
 
 o
Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______.
Commission file number 000-30995
 
EOS PETRO, INC.
 
(Exact name of registrant as specified in its charter)
 
Nevada
(State or other jurisdiction of incorporation or organization)
98-0550353
(I.R.S. Employer Identification No.)
   
1999 Avenue of the Stars, Suite 2520
Los Angeles, California
(Address of principal executive offices)
 
90067
(Zip code)
   
 
(310) 552-1555
(Registrant’s telephone number, including area code)
 
 (Former name, former address and former fiscal year, if changed since last report)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
(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 Exchange Act).
 
Yes o   No x
 
As of May 18, 2015, the registrant had 47,744,882 outstanding shares of common stock.


 
 
 

EOS PETRO, INC. TABLE OF CONTENTS
 
       
       
     
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Eos Petro, Inc. and Subsidiaries
             
             
             
   
March 31,
    
December 31,
  
   
2015
    
2014
  
ASSETS
  
(unaudited)
        
             
Current assets
            
Cash
   $ 280     $ 133,210  
Other current assets
     26,550       42,959  
Total current assets
     26,830       176,169  
                 
Oil and gas properties, net
     1,111,114       1,121,175  
Other property plant and equipment, net
     8,757       11,257  
Long-term deposits
     102,441       102,441  
Total assets
   $ 1,249,142     $ 1,411,042  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
                
                 
Current liabilities
                
Accounts payable
   $ 940,620     $ 148,888  
Accrued expenses
     757,810       1,149,956  
Accrued termination fee
     5,500,000       -  
Accrued structuring fee
     4,000,000       -  
LowCal convertible and promissory notes payable
     8,250,000       8,250,000  
Notes payable
     1,273,000       1,273,000  
Derivative liabilities
     8,454,532       11,039,552  
Total current liabilities
     29,175,962       21,861,396  
                 
                 
Asset retirement obligation
     86,205       84,102  
Total liabilities
     29,262,167       21,945,498  
                 
Commitments and contingencies
                
                 
Stockholders' deficit
                
Series B Preferred stock: $0.0001 par value; 44,000,000 shares authorized,
                
none issued and outstanding
     -       -  
Common stock; $0.0001 par value; 300,000,000 shares authorized
                
  47,744,882 and 47,738,882 shares issued and outstanding     4,775       4,774  
Additional paid-in capital
     99,488,168       89,077,781  
Stock subscription receivable
     (88,200 )     (88,200 )
Accumulated deficit
     (127,417,768 )     (109,528,811 )
Total stockholders' deficit
     (28,013,025 )     (20,534,456 )
Total liabilities and stockholders' deficit
   $ 1,249,142     $ 1,411,042  
                 
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  
 
 
 
Eos Petro, Inc. and Subsidiaries
             
             
             
   
Three Months Ended March 31,
  
   
2015
    
2014
  
   
(unaudited)
    
(unaudited)
  
Revenues
            
Oil and gas sales
   $ 60,059     $ 103,706  
                 
Costs and expenses
                
Lease operating expense
     11,429       65,258  
General and administrative
     10,881,750       11,043,959  
Structuring fee
     4,000,000       -  
Acquisition termination fee
     5,500,000       -  
Total costs and expenses
     20,393,179       11,109,217  
                 
Loss from operations
     (20,333,120 )     (11,005,511 )
                 
Other income (expense)
                
                 
Interest and finance costs
     (140,857 )     (4,552,210 )
Change in fair value of derivative liabilities
     2,585,020       -  
Loss on debt extinguishment
     -       (609,620 )
Total other income (expense)
     2,444,163       (5,161,830 )
                 
Net loss
   $ (17,888,957 )   $ (16,167,341 )
                 
Net loss per share attributed to common
                
stockholders - basic and diluted
   $ (0.37 )   $ (0.35 )
Weighted average common shares outstanding
                
basic and diluted
     47,741,349       46,683,482  
                 
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  
 
 
 
 
Eos Petro, Inc. and Subsidiaries
  
 
For the Three Months Ended March 31, 2015
  
(unaudited)
  
                                                 
                                                 
                           
Additional
    
Stock
          
Total
  
   
Series B Preferred Stock
    
Common Stock
    
Paid-in
    
Subscription
    
Accumulated
    
Stockholders'
  
   
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Receivable
    
Deficit
    
Deficit
  
                                                 
Balance, December 31, 2014
     -     $ -       47,738,882     $ 4,774     $ 89,077,781     $ (88,200 )   $ (109,528,811 )   $ (20,534,456 )
Issuance of common stock for consulting services
             -       6,000       1       31,599       -       -       31,600  
Fair value of warrants issued for consulting services
     -       -       -       -       7,943,127       -       -       7,943,127  
Fair value of share based compensation
     -       -       -       -       2,435,661       -       -       2,435,661  
Net loss
     -       -       -       -       -       -       (17,888,957 )     (17,888,957 )
Balance, March 31, 2015 (unaudited)
     -     $ -       47,744,882     $ 4,775     $ 99,488,168     $ (88,200 )   $ (127,417,768 )   $ (28,013,025 )
                                                                 
                                                                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
Eos Petro, Inc. and Subsidiaries
  
 
             
             
             
             
   
Three Months Ended March 31,
  
   
2015
    
2014
  
   
(unaudited)
    
(unaudited)
  
Cash flows from operating activities
            
Net loss
   $ (17,888,957 )   $ (16,167,341 )
Adjustments to reconcile net loss to net cash
                
used in operating activities:
                
Depletion
     10,061       9,384  
Depreciation
     2,500       2,500  
Accretion of asset retirement obligation
     2,103       1,911  
Amortization of debt issuance costs
     -       339,253  
Non-cash finance costs
     -       4,080,250  
Loss on debt extinguishment
     -       609,620  
Fair value of stock issued for services
     31,600       591,824  
Fair value of warrants issued for consulting services
     7,943,127       9,483,700  
Fair value of share-based compensation
     2,435,661       483,977  
Termination fee
     5,500,000       -  
Structuring fee
     4,000,000       -  
Change in fair value of derivative liabilities
     (2,585,020 )     -  
Change in operating assets and liabilities:
                
Deposits and other current assets
     16,409       (21,390 )
Accounts payable
     791,732       -  
Accrued expenses
     (392,146 )     158,029  
Amounts due shareholder
     -       17,700  
Net cash used in operating activities
     (132,930 )     (410,583 )
                 
Cash flows from financing activities:
                
Proceeds from issuance of notes payable
     -       750,000  
Repayment of  notes payable
     -       (175,000 )
Net cash provided by financing activities
     -       575,000  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
     (132,930 )     164,417  
                 
CASH AND CASH EQUIVALENTS, beginning of period
     133,210       21,951  
                 
CASH AND CASH EQUIVALENTS, end of period
   $ 280     $ 186,368  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  
                 
Cash paid for interest
   $ -     $ -  
Cash paid for income taxes
   $ -     $ -  
                 
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
  
                 
300,000 shares of common stock to be issued for convertible notes
   $ -     $ 3,434,000  
Issued 66,000 shares of common stock for extinguishment of debt
   $ -     $ 693,000  
Fair value of shares of beneficial conversion feature
                
recognized as debt discount
   $ -     $ 1,396,250  
                 
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  
 

 
 
4
Eos Petro, Inc. and Subsidiaries
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)


NOTE 1 - ORGANIZATION

The unaudited condensed consolidated financial statements have been prepared by Eos Petro, Inc., (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission.  The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the financial condition of the Company and its operating results for the respective periods. The condensed consolidated balance sheet at December 31, 2014 has been derived from the Company's audited consolidated financial statements. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. The results for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.

Organization and Business

The Company was organized under the laws of the state of Nevada in 2007. On October 12, 2012, pursuant to the Merger Agreement entered into by and between the Company, Eos Global Petro, Inc. (“Eos”), and Eos Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), dated July 16, 2012, Merger Sub merged into Eos, with Eos being the surviving entity and the Company the legal acquirer (the “Merger”). As a result of the Merger, Eos became a wholly-owned subsidiary of the Company.
 
Effective as of May 20, 2013, the Company changed its name to Eos Petro, Inc. (it previously had been named “Cellteck, Inc.”).

The Company has two wholly-owned subsidiaries, Eos and Eos Merger Sub, Inc., a Delaware corporation (“Merger Sub”), which was formed as an acquisition vehicle for potential transactions. Eos itself also has two subsidiaries: Plethora Energy, Inc. a Delaware corporation and a wholly-owned subsidiary of Eos (“Plethora Energy”), and EOS Atlantic Oil & Gas Ltd., a Ghanaian corporation (“EAOG”), which is also 10% owned by one of our Ghanaian-based third party consultants. Plethora Energy also owns 90% of Plethora Bay Oil & Gas Ltd., a Ghanaian corporation (“PBOG”), which is also 10% owned by the same Ghanaian-based consultant.  Eos, Merger Sub, PBOG, Plethora Energy and EAOG are collectively referred to as the Company’s “Subsidiaries.”
 
Business

The Company is in the business of acquiring, exploring and developing oil and gas-related assets.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of our wholly owned and majority owned subsidiaries. Intercompany transactions and balances have been eliminated. Management evaluates its investments on an individual basis for purposes of determining whether or not consolidation is appropriate.

Basic and Diluted Earnings (Loss) Per Share

Earnings per share is calculated in accordance with the ASC 260-10, “Earnings Per Share.” Basic earnings-per-share is based upon the weighted average number of common shares outstanding. Diluted earnings-per-share is based on the assumption that all dilutive convertible preferred shares, stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained

 
5
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)



thereby were used to purchase common stock at the average market price during the period.  The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.

   
March 31,
  
   
2015
    
2014
  
Options
     1,325,000       700,000  
Warrants
     14,677,992       11,408,000  
Convertible notes
     2,000,000       1,162,500  
Total
     18,002,992       13,270,500  

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates reflected in the consolidated financial statements include, but are not limited to, amortization and depletion allowances, the recoverability of the carrying amount and estimated useful lives of long-lived assets, asset retirement obligations, the valuation of equity instruments issued in connection with financing transactions, assumptions used in the valuation of conversion features and derivative liabilities, and share-based compensation costs. Changes in facts and circumstances may result in revised estimates.  Actual results could differ from those estimates.

Full Cost Method of Accounting for Oil and Gas Properties

The Company has elected to utilize the full cost method of accounting for its oil and gas activities. In accordance with the full cost method of accounting, the Company capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. Capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves once proved reserves are determined to exist.

Capitalized oil and gas property costs within a cost center are amortized on an equivalent unit-of-production method, The equivalent unit-of-production rate is computed on a quarterly basis by dividing production by proved oil and gas reserves at the beginning of the quarter then applying such amount to capitalized oil and gas property costs, which includes estimated asset retirement costs, less accumulated amortization, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.
 
Full Cost Ceiling Test
 
Oil and gas properties without estimated proved reserves are not amortized until proved reserves associated with the properties can be determined or until impairment occurs. At the end of each reporting period, the unamortized costs of oil and gas properties are subject to a “ceiling test” which limits capitalized costs to the sum of the estimated future net revenues from proved reserves, discounted at 10% per annum to present value, based on current economic and operating conditions, adjusted for related income tax effects. If the net capitalized costs exceed the cost center ceiling, the excess is recognized as an impairment of oil and gas properties. An impairment recognized in one period may not be reversed in a subsequent period even if higher oil and gas prices increase the cost center ceiling applicable to the subsequent period.

The estimated future net revenues used in the ceiling test are calculated using average quoted market prices for sales of oil and gas on the first calendar day of each month during the preceding 12-month period prior to the end of the current reporting period. Prices are held constant indefinitely and are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts. Prices used in the ceiling test computation do not include the impact of derivative instruments because the Company elected not to meet the criteria to qualify its derivative instruments for hedge accounting treatment.

 
6
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)

 
The Company assesses oil and gas properties at least quarterly to ascertain whether impairment has occurred. In assessing impairment, the Company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. Through March 31, 2015, the Company has not experienced any impairment of its capitalized oil and gas properties.

The Company recorded depletion expense of $10,061, and $9,384 for the three months ended March 31, 2015 and 2014, respectively.

Proceeds from the sale of oil and gas properties are recognized as a reduction of capitalized oil and gas property costs with no gain or loss recognized, unless the sale significantly alters the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center. Through March 31, 2015, the Company has not had any sales of oil and gas properties that significantly alter that relationship.

Asset Retirement Obligation

The Company accounts for its future asset retirement obligations (“ARO”) by recording the fair value of the liability during the period in which it was incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an ARO is included in proven oil and gas properties in the balance sheets. The ARO consists of costs related to the plugging of wells, removal of facilities and equipment, and site restoration on its oil and gas properties. The asset retirement liability is accreted to operating expense over the useful life of the related asset. As of March 31, 2015 and December 31, 2014, the Company had an ARO of $86,205 and $84,102, respectively.

Oil and Gas Revenue

Revenues are recognized when hydrocarbons have been delivered, the customer has taken title and collection is reasonably assured.

Share-Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs. The Company accounts for share-based payments under the guidance as set forth in the Share-Based Payment Topic of the FASB Accounting Standards Codification, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on estimated fair values. The Company estimates the fair value of share-based payment awards to employees and directors on the date of grant using an option-pricing model, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in the Company's Statements of Operations. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance where the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the equity instruments is complete. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

 
7
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)

 
Fair Value Measurements

The Company applies the provisions of ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows:
 
 
·
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 
·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

For certain financial instruments, the carrying amounts reported in the consolidated balance sheets for cash and cash equivalents and current liabilities, including notes payable and convertible notes, each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.

The Company uses Level 2 inputs for its valuation methodology for the warrant derivative liabilities as their fair values were determined by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives.

At March 31, 2015 and December 31, 2014, the Company identified the following liabilities that are required to be presented on the balance sheet at fair value (see Note 7):
 
   
Fair Value
    
Fair Value Measurements at
  
   
As of
    
March 31, 2015
  
Description
  
March 31, 2015
    
Using Fair Value Hierarchy
  
         
Level 1
    
Level 2
    
Level 3
  
Warrant derivative liabilities
   $ 8,454,532     $ -       8,454,532       -  
                                 
Total
   $ 8,454,532     $ -       8,454,532       -  
 
 
   
Fair Value
    
Fair Value Measurements at
  
   
As of
    
December 31, 2014
  
Description
  
December 31, 2014
    
Using Fair Value Hierarchy
  
         
Level 1
    
Level 2
    
Level 3
  
Warrant derivative liabilities
   $ 11,039,552     $ -       11,039,552       -  
                                 
Total
   $ 11,039,552     $ -       11,039,552       -  

 
 
8
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)


The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 815.

Concentrations

The future results of the Company’s oil and natural gas operations will be affected by the market prices of oil and natural gas. The availability of a ready market for oil and natural gas products in the future will depend on numerous factors beyond the control of the Company, including weather, imports, marketing of competitive fuels, proximity and capacity of oil and natural gas pipelines and other transportation facilities, any oversupply or undersupply of oil, natural gas and liquid products, the regulatory environment, the economic environment, and other regional and political events, none of which can be predicted with certainty.

One customer accounts for 100% of oil sales for the three months ended March 31, 2015 and 2014.  The Company’s oil and gas properties are located in Illinois.
 
Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the Company in the first quarter of its fiscal year ending June 30, 2018. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements.
 
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (ASU 2014-12). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The Company is currently evaluating the impact of adopting ASU 2014-12 on the Company’s results of operations or financial condition.
 
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 
9
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)


In November 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.  The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required.  The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract.  The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.   The Company is currently evaluating the impact the adoption of ASU 2014-16 on the Company’s financial statement presentation and disclosures.

In January 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-01 (Subtopic 225-20) - Income Statement - Extraordinary and Unusual Items.  ASU 2015-01 eliminates the concept of an extraordinary item from GAAP.  As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item.  However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently.  ASU 2015-01 is effective for periods beginning after December 15, 2015.  The adoption of ASU 2015-01 is not expected to have a material effect on the Company’s consolidated financial statements.  Early adoption is permitted.

In February, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis.  ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).  ASU 2015-02 is effective for periods beginning after December 15, 2015.  The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s consolidated financial statements.  Early adoption is permitted.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.

NOTE 3 – GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of March 31, 2015, the Company had a stockholders’ deficit of $28,013,025, and for the three months ended March 31, 2015, reported a net loss of $17,888,957 and had negative cash flows from operating activities of $132,930. In addition, the Company may have become obligated to pay a $5.5 million termination fee under the "Dune Merger Agreement," as defined in Note 11 below (the “Parent Termination Fee,” as more fully defined in the Dune Merger Agreement) (see Note 11) and $4 million that may be due under a structuring fee with GEM  Global Yield Fund ("GEM") (see Note 11).  Management estimates the Company’s capital requirements for the next twelve months, including drilling and completing wells for the Company's oil and gas "Works Property" located in Illinois and possible acquisitions, will total approximately $2,500,000, excluding any amounts that may be due to Dune under the Dune Merger Agreement or a $4 million structuring fee that may be due to GEM. Errors may be made in predicting and reacting to relevant business trends and the Company will be subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies. The Company may not be able to successfully address any or all of these risks and uncertainties. Failure to adequately do so could cause the Company’s business, results of operations, and financial condition to suffer. As a result, the Company's independent registered public accounting firm, in its report on the Company's December 31, 2014 consolidated financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

 
10
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)


 
The Company’s ability to continue as a going concern is an issue due to its net losses and negative cash flows from operations, and its need for additional financing to fund future operations. The Company’s ability to continue as a going concern is subject to its ability to obtain necessary funding from outside sources, including the sale of its securities or loans from financial institutions. There can be no assurance that such funds, if available, can be obtained on terms reasonable to the Company. Any debt financing or other financing of securities senior to common stock that the Company is able to obtain will likely include financial and other covenants that will restrict the Company’s flexibility. At a minimum, the Company expects these covenants to include restrictions on its ability to pay dividends on its common stock in the case of debt financing, or cause substantial dilution for stockholders in the case of convertible debt and equity financing. Any failure to comply with these covenants would have a material adverse effect on the Company’s business, prospects, financial condition, results of operations and cash flows.  The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty.

NOTE 4 - LOWCAL CONVERTIBLE AND PROMISSORY NOTES PAYABLE

LowCal convertible and promissory notes payable at March 31, 2015 and December 31, 2014 are as follows:

   
March 31,
    
December 31,
  
   
2015
    
2014
  
LowCal Convertible Note
   $ 5,000,000     $ 5,000,000  
LowCal Promissory Note
     3,250,000       3,250,000  
Total
   $ 8,250,000     $ 8,250,000  
                 
In February 8, 2013, and subsequently amended, the Company and Eos entered into: (i) a Loan Agreement and Secured Promissory Note; (ii) a Lock-Up/Leak-Out Agreement; (iii) a Guaranty; (iv) a Series B Convertible Preferred Stock Purchase Agreement; (v) a Leasehold Mortgage, Assignment, Security Agreement and Fixture Filing; and (vi) a Compliance/Oversight Agreement (collectively referred to as the “Loan Agreements”).  Pursuant to the Loan Agreements, LowCal Industries, LLC (“LowCal”) agreed to purchase from Eos, for $2,480,000, a promissory note in the principal amount of $2,500,000, with interest at 10% per annum (the “LowCal Loan”). At LowCal’s option, LowCal could elect to convert any part of the principal of the LowCal Loan into shares of the Company’s common stock at a conversion price of $5.00 per share. On November 6, 2013, the Company, Eos, LowCal and certain affiliates of LowCal entered into a second amendment to the Loan Agreements. Pursuant to the amended Loan Agreements, the total amount of the LowCal Loan was increased from $2,500,000 to $5,000,000 and the conversion price was changed from $5.00 to $4.00, and on that date, the Company received proceeds in the aggregate amount of $1,000,000.  Pursuant to the November 6, 2013 amendment, LowCal further agreed to purchase an additional 1,000,000 restricted shares of the Company’s common stock upon receipt of the remaining funding (the “LowCal Shares”). Between the months of January 2014 through June 2014, the Company received the remaining funding of $1,500,000 pursuant to the second amendment of the LowCal Loan.  As such, on June 2014, the amended principal balance of the LowCal Loan of $5,000,000 was fully funded. On May 13, 2014, the Company entered into a third amendment to the LowCal Loan, pursuant to which, among others, the conversion price of the LowCal Loan was further reduced from its then conversion price of $4.00 per share to $2.50 per share,

The principal and all interest on the LowCal Loan was initially due  on or before December 31, 2013, but after the various amendments, is now currently due on June 30, 2015.   

 
11
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)



The LowCal Loan is secured by (i) a mortgage, lien on, assignment of and security interest in and to oil and gas properties; (ii) a guaranty by the Company as a primary obligor for payment of Eos’ obligations when due; and (iii) a first priority position or call right for an amount equal to the then outstanding principal balance of and accrued interest on the LowCal Loan on the first draw down by either Eos or the Company from a commitment letter entered into with a prospective investor, should the Company or Eos be in a position to draw on this facility.

In conjunction with the issuances of the first tranche of the proceeds of the LowCal Loan of $2,500,000 in 2013, the Company issued 950,000 shares of the Company’s common stock valued at $3,239,500. The Company granted, but did not issue, 400,000 of the LowCal Shares valued at $3,370,000 during the year ended December 31, 2013. These shares were issued during 2014 along with the remaining 600,000 of the LowCal Shares as a financing cost with a fair value of $7,604,000. Pursuant to the terms of the third amendment in 2014 to the LowCal Loan, the Company also granted LowCal a warrant to purchase 500,000 shares of the Company’s common stock at an exercise price of $4.00 per share valued at $7,293,171.  Furthermore, the Company also determined that since the conversion prices of the notes was less than the market prices of the common stock feature upon the date of issuance or modification, a beneficial conversion feature existed on those dates. The fair value of the common shares and warrants issued, and the value of the beneficial conversion feature that arose on the date of issuance were recorded as financing costs or as a valuation discount at issuance, and had been fully amortized as of December 31, 2014. During the three months ended March 31, 2014, the Company amortized $339,253 of the LowCal Loan discount which was recorded to interest and finance costs.

On January 13, 2015, the Company entered into a fifth amendment to the Loan Agreements (the “Amendment”).  As part of the Amendment, the Company and LowCal entered into the following: (i) an amended and restated LowCal Loan, still in the principal amount of $5,000,000; and (ii) a new unsecured promissory note in the principal amount of $3,250,000 (the “Second LowCal Note”).

Pursuant to the Amendment:
 
·
LowCal forgave approximately $667,000 of accrued interest on the LowCal Loan and eliminated all interest on the LowCal Loan going forward.
 
·
$750,000, which was advanced to the Company in 2014, was recognized as included in the principal amount of the Second LowCal Note.
 
·
The cash exit fee was removed from the LowCal Loan.
 
·
The maturity date on the LowCal Loan was extended to June 30, 2015.
 
·
The Second LowCal Note shall accrue interest at an annual rate of 10% and has a maturity date of June 30, 2015, but must also be repaid upon the earlier to occur of: (i) the Company closing certain potential acquisition transactions, or (ii) the Company closing a financing for a minimum of $20,000,000.
 
·
The parties agreed that, upon repayment in full of the Second LowCal Note, LowCal will forever release, cancel and terminate all of its mortgages and any other liens against the Company.
 
As the Amendment reflected the culmination and documenting of transactions that occurred and were agreed to in 2014, the Company recorded the terms and provisions of the Amendment on the Company’s financial statements as of the year ended December 31, 2014, including the recording of the Second LowCal Note in the principal amount of $3,250,000 and a loss on debt extinguishment of $1,832,576.

NOTE 5 – NOTES PAYABLE

In addition to the LowCal Loan and Second LowCal Note set forth in Note 4 above, notes payable at March 31, 2015 and December 31, 2014 are as follows:

   
March 31,
    
December 31,
  
   
2015
    
2014
  
             
Secured note payable, at 18% (1)
   $ 600,000     $ 600,000  
Note payable, at 6% (2)
     250,000       250,000  
Note payable, at 2%, (3)
     100,000       100,000  
Note payable at 4%, (4)
     323,000       323,000  
Total
   $ 1,273,000     $ 1,273,000  
 
 

(1) On February 16, 2012, Eos entered into a Secured Promissory Note with Vatsala Sharma (“Sharma”) for a secured loan for $400,000 due in 60 days at an interest rate of 18% per annum. On May 9, 2012, the Company and Sharma increased the loan amount from $400,000 to $600,000.  In the event the loan is not paid in full by the maturity date, Sharma will receive an additional 275,000 shares of the Company’s common stock. The loan is secured by a blanket security interest in all of Eos’ assets, and newly acquired assets, a mortgage on the Works Property, a 50% security interest in Nikolas Konstant’s personal residence, and his personally held shares in a non-affiliated public corporation.  As amended, the maturity date of the Sharma loan is July 1, 2015.

(2) Effective May 22, 2012, the Company entered into a Loan Agreement with Vicki P. Rollins (“Rollins”) for a secured loan in the amount of $350,000 originally due on September 22, 2012. The loan is secured by a priority blanket security interest in all of the Company’s assets. When the Loan Agreement was initially entered into, the Company issued to Rollins 175,000 warrants to purchase common stock with an exercise price of $2.50. Such warrants expired on May 22, 2014. On July 1, 2014, Rollins agreed to extend the maturity date of the loan to December 31, 2014 and amend the terms of the loan so that no interest accrues from inception through repayment. The Company issued to Rollins an aggregate of 250,000 new warrants in exchange for such extension and amendment.  On December 31, 2014, the maturity date was further extended to June 15, 2015. The balance of the note payable was $250,000 at March 31, 2015 and December 31, 2014.
 
(3)  On October 9, 2014, the Company issued an unsecured promissory note to Ridelinks, Inc. for $200,000, with interest at 2% and a maturity date of March 15, 2015 that was extended to June 15, 2015 and includes an exit fee of $30,000.  The promissory note and exit fee can be prepaid at any time. The Company repaid $100,000 during the year ended December 31, 2014. 
 
(4)  On September 30, 2014, The Company issued an unsecured promissory note to Bacchus Investors, LLC, for $323,000, with interest at 4%. The unsecured promissory note is due upon demand.

NOTE 6 – ASSET RETIREMENT OBLIGATION

Changes in the Company’s asset retirement obligations were as follows:

   
Three Months
        
   
Ended
    
Year Ended
  
   
March 31, 2015
    
December 31, 2014
  
Asset retirement obligation, beginning of period
   $ 84,102     $ 76,457  
Additions
     -       -  
Accretion expense
     2,103       7,645  
Asset retirement obligations, end of period
   $ 86,205     $ 84,102  

NOTE 7 – DERIVATIVE LIABILITIES

In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.  Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments.  In August 2014, the Company issued warrants to purchase an aggregate of 1,775,000 shares of the Company’s common stock, to a former noteholder and certain other related parties. The warrant agreements included an anti-dilution provision that would reduce the exercise price if the Company were to issue additional equities at a price below the exercise price which is in effect at the time of the issuance of the additional equities. Pursuant to ASC Topic 815, “Derivatives and Hedging”, the Company determined that these warrants met the definition of a derivative and are to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 
13
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)


 

As of December 31, 2014 and March 31, 2015, the derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following assumptions.

   
December 31,
    
March 31,
  
   
2014
    
2015
  
Exercise Price
   $ 2.50     $ 2.50  
Stock Price
   $ 6.50     $ 5.10  
Risk-free interest rate
     1.10 %     1.10 %
Expected life of the options (Years)
     3.64       3.39  
Expected volatility
     188 %     182 %
Expected dividend yield
     0 %     0 %
Expected forfeitures
     0 %     0 %
                 
Fair Value
   $ 11,039,552     $ 8,454,532  

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the warrants was determined by the expiration dates of the warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

The Company recorded an adjustment to the fair value of derivative liabilities of $2,585,020 for three months ended March 31, 2015.

NOTE 8 - RELATED PARTY TRANSACTIONS

Plethora Enterprises, LLC

The Company has a consulting agreement with Plethora Enterprises, LLC (“Plethora”), which is solely owned by Nikolas Konstant, the Company’s chairman of the board and chief financial officer.  Under the consulting agreement, for the three months ended March 31, 2015 and 2014, the Company recorded compensation expense of $117,540 and $90,000, respectively. 

Other

On October 3, 2011, the Company entered into an Exclusive Business Partner and Advisory Agreement with Baychester Petroleum, a Ghanaian limited liability company ("Baychester"), which owns a 10% minority interest in EAOG and PBOG. The terms of such agreement were amended in June 2014. Pursuant to the amended agreement dated June 16, 2014, the Company agreed to pay to Baychester $35,000 by September 2014 in exchange for services rendered. Moreover, commencing July 1, 2014 and continuing every month thereafter, the Company agreed to pay to Baychester a monthly consulting fee of $10,000, provided, however, that the Company reserved the right to audit and review Baychester’s provided services every three months, and, if the Company determines the services rendered are not commensurate with $10,000 a month in compensation, the Company may, in its sole and absolute discretion, upon written notice to Baychester, immediately decrease or terminate any and all remaining future monthly cash fee payments to Baychester. Finally, in the event the Ghanaian Ministry of Energy formally invites the Company to a meeting to negotiate the terms of a deal to acquire a concession in Ghana, regardless of the outcome of the meeting, the Company will pay to Baychester an additional $35,000. The Company recorded compensation expense of $0 and $20,000, respectively under the agreement with Baychester consulting agreement, for the three months ended March 31, 2015 and 2014.

 
14
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)


NOTE 9 - STOCKHOLDERS’ DEFICIT

Stock Issuances for Services

On June 23, 2013, the Company entered into a one year consulting agreement with Hahn Engineering, Inc. (“Hahn”). Pursuant to the agreement, Hahn will be issued 2,000 restricted shares of common stock of the Company per month. While initially such monthly issuances were capped at 24,000 shares, in June 2014 the parties agreed to continue the consulting agreement month to month and to continue to provide 2,000 restricted shares of common stock of the Company to Hahn each such month. At March 31, 2015, the consulting agreement was still in effect and, during the three months ended March 31, 2015, Hahn received 6,000 restricted shares of common stock of the Company valued at $31,600 which was recorded as consulting expense.

NOTE 10 - STOCK OPTIONS AND WARRANTS

Option Activity

A summary of the option activity is presented below:

                         
               
Weighted
        
         
Weighted
    
Average
        
         
Average
    
Remaining
    
Aggregate
  
   
Number of
    
Exercise
    
Contractual
    
Intrinsic
  
   
Options
    
Price ($)
    
Life (in years)
    
Value ($)
  
Outstanding, December 31, 2014
     1,300,000       2.50       3.81       5,200,000  
Granted
     25,000       2.50                  
Exercised
     -                          
Forfeited/Canceled
     -                          
Outstanding, March 31, 2015
     1,325,000       2.50       3.58       3,445,000  
Exercisable, March 31, 2015
     1,175,000       2.50       3.48       3,055,000  

The following table summarizes information about options outstanding at March 31, 2015:

Options Outstanding
       
Weighted
  
Weighted
       
Average
  
Average
Exercise
  
Number of
  
Remaining
  
Exercise
Price ($)
  
Shares
  
Life (Years)
  
Price ($)
2.50
  
1,325,000
  
3.58
  
2.50
 
 

The following table summarizes information about options exercisable at March 31, 2015:

Options Exercisable
       
Weighted
  
Weighted
       
Average
  
Average
Exercise
  
Number of
  
Remaining
  
Exercise
Price ($)
  
Shares
  
Life (Years)
  
Price ($)
2.50
  
1,175,000
  
3.48
  
2.50

On February 11, 2015, Sudhir Vasudeva was granted an option to purchase 25,000 restricted shares of the Company’s common stock in exchange for his services as a non-employee director of the Company. Such options were valued at $98,226 using a Black-Scholes valuation model, vested fully on the date of issuance, have an exercise price of $2.50 per share and expire on May 1, 2016. Furthermore, on February 11, 2015, the Company extended the expiration date of an aggregate of 100,000 options which had previously been granted to certain directors of the Company at an exercise price of $2.50 per share, and which were set to expire on May 1, 2015. As extended, such options now also expire on May 1, 2016.  The value of the extension of the options was calculated as $99,684 using a Black-Scholes valuation model.  The assumptions used in calculating the fair value of options and extensions granted using the Black-Scholes option- pricing model for options are as follows:
 
 
·
Expected life of 1.22 years;
 
·
Volatility of 182%;
 
·
Dividend yield of 0%; and
 
·
Risk free interest rate of 1.10%.

During the three months ended March 31, 2015 and 2014, the Company recorded $2,237,751 and $483,977, respectively, of share based compensation relating to the vesting of other previously granted options.  As of March 31, 2015, the unamortized balance is $2,237,751 which will be expensed through June 30, 2015.

Warrant Activity

A summary of warrant activity is presented below: 

               
Weighted
        
         
Weighted
    
Average
        
         
Average
    
Remaining
    
Aggregate
  
   
Number of
    
Exercise
    
Contractual
    
Intrinsic
  
   
Warrants
    
Price ($)
    
Life (in years)
    
Value ($)
  
Outstanding, December 31, 2014
     14,577,992       4.69       1.96       36,008,468  
Granted
     100,000       2.75                  
Exercised
     -                          
Forfeited/Canceled
     -                          
Outstanding, March 31, 2015
     14,677,992       4.17       1.72       19,129,779  
Exercisable, March 31, 2015
     10,007,992       3.63       2.23       19,129,779  

 
 
The following tables summarize information about warrants outstanding at March 31, 2015:
 
Warrants Outstanding
  
           
Weighted
    
Weighted
  
           
Average
    
Average
  
Exercise
    
Number of
    
Remaining
    
Exercise
  
Price ($)
    
Shares
    
Life (Years)
    
Price ($)
  
  2.50       4,959,992       2.19       2.50  
  3.00       2,353,000       1.32       3.00  
  4.00       1,175,000       2.93       4.00  
  5.35       4,670,000       0.62       5.35  
  6.00       20,000       2.09       6.00  
  8.00       1,500,000       3.28       8.00  
          14,677,992                  

The following table summarizes information about warrants exercisable at March 31, 2015:

Warrants Exercisable
  
           
Weighted
    
Weighted
  
           
Average
    
Average
  
Exercise
    
Number of
    
Remaining
    
Exercise
  
Price ($)
    
Shares
    
Life (Years)
    
Price ($)
  
  2.50       4,959,992       2.19       2.50  
  3.00       2,353,000       1.32       3.00  
  4.00       1,175,000       2.93       4.00  
  6.00       20,000       0.62       6.00  
  8.00       1,500,000       3.28       8.00  
          10,007,992                  

DVIBRI

Pursuant to a consulting agreement entered into with DVIBRI, LLC in 2013, the Company issued warrants to purchase 199,992 shares of the Company’s common stock with 16,666 warrants vesting each month.  The warrants have an exercise price of $2.50 per share and expire on June 30, 2017.  The Company expensed $150,224 for the three months ended March 31, 2015. The fair value of the 33,332 warrants that vested during the three months ended March 31, 2015 was determined to be using the Black-Scholes option pricing model with the following assumptions:
 
 
·
Expected life of 2.25 years
 
·
Volatility of 182%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 1.10%
 
Jerry Astor

On February 12, 2015, in exchange for financial advisory services provided, the Company issued to Jerry Astor two warrants to purchase an aggregate of 100,000 restricted shares of the Company’s common stock. The exercise price of 50,000 warrants is $2.50 per share, and the exercise price of the other 50,000 warrants is $3.00 per share. All of the warrants vested and became exercisable upon issuance and will expire on February 12, 2020.

The fair value of the 100,000 warrants was determined to be $485,078 using the Black-Scholes option pricing model with the following assumptions:
 
 
·
Expected life of 5 years
 
·
Volatility of 182%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 1.10%

 
17
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)


 
GEM Global Yield Fund

Included in the warrant table above are warrants granted to GEM in 2012 that have not yet vested:

The Company issued a warrant to purchase 2,335,000 shares of common stock of the Company to GEM at an exercise price of $5.35 per share (the “GEM C Warrant”). The GEM C Warrant will vest upon either of the following dates: (i) the date that the Company, or a subsidiary or affiliate of the Company, and the Ghanaian Ministry of Energy receive ratification from the Ghanaian Parliament for acquiring a block concession for oil and gas exploration; or (ii) the Company or a Subsidiary closes a deal to acquire assets having a cost greater than $40,000,000. The Company may elect to shorten the term of the GEM C Warrant by moving the expiration date to the date six months (plus any additional days added if the underlying shares remain unregistered after 270 days) from the day that all of the following conditions have been satisfied: (i) either of the preconditions to vesting set forth above have been satisfied; (ii) the Company has publicly announced the ratification from the Ghanaian parliament; (iii) the shares issuable upon exercise of the GEM C Warrant are subject to an effective registration statement; and (iv) the Company provides notice to GEM of its election to shorten the term within twenty business days of the last of the conditions in (i), (ii) and (iii) to occur. These options have not vested as of March 31, 2015.

The Company also granted a warrant to purchase 2,335,000 shares of common stock of the Company, par value $0.0001 per share, to 590 Partners Capital, LLC at an exercise price of $5.35 per share (the “590 Partners C Warrant”). All of the terms in the 590 Partners C Warrant for vesting, exercise, expiration and anti-dilution are identical to those in the GEM C Warrant described above. These options have not vested as of March 31, 2015.

BAS and Agents

On April 6, 2015 the Company entered into an agreement (“Agreement”) with Mr. Konstant, AGRA, BAS, Jeff Ahlholm, and Lloyd Brian Hannan (AGRA, BAS, Mr. Ahlholm and Mr. Hannan are collectively referred to herein as “BAS and Agents”). The Agreement among, other things, grants to BAS and Agents 1,500,000 warrants in consideration for advisory services previously rendered.  The 1,500,000 warrants to BAS and Agents, all vesting immediately with an exercise price of $2.50 per share and an expiration date of May 1, 2019.  Even though the warrants were not issued until April 6, 2015, the Company has recorded the expense associated with these warrants as of March 31, 2015 as the advisory services were rendered prior to March 31, 2015.  However, the 1,500,000 warrants have not been included in the rollforward table above as the warrants were not actually issued until April 6, 2015.  The fair value of the warrants was determined to be $7,307,825 using a Black-Scholes model. The Company used the following assumptions in determining the fair value:
 
 
·
Expected life of 4.07 years
 
·
Volatility of 182%;
 
·
Dividend yield of 0%; and
 
·
Risk free interest rate of 1.10%.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On July 11, 2011, Eos entered into an employment agreement with Michael Finch to fill the position of Eos’ CEO. A dispute arose with Mr. Finch resulting in him being terminated. On August 9, 2012, Mr. Finch made a Demand for Arbitration before JAMS alleging breach of the Employment Agreement. As of March 15, 2014 the arbitration was suspended by JAMS for lack of prosecution by Mr. Finch. Eos had not yet prepared or sent a response to the demand. Eos denies any breach of the employment agreement or other wrongdoing on its part and will vigorously defend those claims if they should ever be reasserted.

 
18
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)

 
On August 2, 2012, Eos executed a series of agreements with 1975 Babcock, LLC (“Babcock”) in order to secure a $300,000 loan (the “Babcock Loan”). As of August 3, 2012, Eos also leased 7,500 square feet of office space at 1975 Babcock Road in San Antonio, Texas (the “Babcock Lease”) from Babcock. On November 7, 2013, the Company, Eos and Mr. Nikolas Konstant (the Company’s Chairman of the Board and Chief Financial Officer) entered into an agreement for the payment and satisfaction of the Babcock Loan and Babcock Lease, as amended, and all other related agreements. Under the terms and conditions of the agreement, in order to pay off and satisfy the Babcock Loan in full and void the Babcock Lease, including any rent then owed and payable, in its entirety, Eos agreed to pay $330,000.  In addition, the Company agreed to issue an aggregate of 70,000 restricted shares of the Company’s common stock to certain affiliates of Babcock, which were issued on January 13, 2014.  
 
The Company has been made aware that a complaint has been filed against the Company and Nikolas Konstant by an entity alleging to be the landlord of the Babcock Lease. The complaint purportedly asks for $149,625 in unpaid rent and late fees for the Babcock Lease, although the Company has not yet been served with a copy of the complaint. The Company denies any breach or the Babcock Lease or other wrongdoing on its part and will vigorously defend against such claims if it is ever served with the complaint.

As discussed further down in this Note 11, Dune has threatened to bring litigation to collect the Parent Termination Fee, as defined in the Dune Merger Agreement. The Company has accordingly recorded a liability for $5,500,000 related to the Parent Termination Fee. No lawsuit has been filed to date against the Company for the Parent Termination Fee, and the Company would vigorously defend itself, should any action ever be brought. The Company believes that it has equitable and legal defenses against payment of all or a portion of the Parent Termination Fee.

DVIBRI Consulting Agreement
 
On August 26, 2013, the Company engaged DVIBRI as a consultant to render financial advice pursuant to a Consulting Agreement. The initial term of DVIBRI's consulting services, pursuant to an amendment to the Consulting Agreement effective as of February 3, 2014, expired on February 28, 2014. The Company issued 20,000 shares valued at $286,000 to DVIBRI on February 21, 2014 as compensation for services provided under the Consulting Agreement.

After the expiration of the initial Consulting Agreement, the Company and DVIBRI entered into a new Consulting Agreement, effective as of March 1, 2014, for the provision of additional consulting services for a one year period. As compensation for the services to be provided, the Company agreed to issue to DVIBRI the following: (i) $10,000 of monthly compensation, payable one half each month with the remainder payable in one lump sum at the end of the term; and (ii) a warrant to purchase 199,992 shares of the Company’s common stock with 16,666 warrants vesting monthly.

Dune Merger Agreement
 
On September 17, 2014 the Company entered into an Agreement and Plan of Merger with Dune Energy Inc. (“Dune”) and Merger Sub., dated as of September 16, 2014, as subsequently amended (the “Dune Merger Agreement”), and on the terms and subject to the conditions described therein, Merger Sub agreed to conduct a cash tender offer to purchase all of Dune’s issued and outstanding shares of common stock at a price of $0.30 per share in cash, without interest, upon the terms and conditions set forth in the Dune Merger Agreement. 

Due to the severe decline in oil prices, the Company’s sources of capital for the merger and tender offer were withdrawn, and the Company was unable to complete the merger and tender described in the Dune Merger Agreement on the terms originally negotiated.   After a series of amendments to the Dune Merger Agreement while the parties continued to try to negotiate financing terms, the tender offer ultimately expired on February 27, 2015. 

Subsequently, on March 4, 2015, Dune provided the Company with notice of its decision to terminate the Dune Merger Agreement in accordance with the terms thereof, and demanded the Parent Termination Fee (as defined in the Dune Merger Agreement) of $5,500,000 in cash, and reimbursement for certain unidentified expenses incurred by Dune.  Dune has threatened to bring litigation to collect these amounts in connection with its contention that the Company breached the Dune Merger Agreement and is entitled to the Parent Termination Fee. The Company has accordingly recorded a liability for $5,500,000 related to the Parent Termination Fee. No lawsuit has been filed to date against the Company for the Parent Termination Fee, and the Company would vigorously defend itself, should any action ever be brought. The Company believes that it has equitable and legal defenses against payment of all or a portion of the Parent Termination Fee.

 
19
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)



GEM Global Yield Fund

The Company and GEM Global Yield Fund, a member of the Global Emerging Markets Group (“GEM”), entered into a financing commitment on August 31, 2011, whereby GEM would provide and fund the Company with up to $400 million dollars (the “Commitment”), for the Company’s African acquisition activities.

The Company and GEM formalized the Commitment by way of a definitive Common Stock Purchase Agreement and Registration Rights Agreement, both dated as of July 11, 2013 (collectively referred to as the “Commitment Agreements”).  Pursuant to the Commitment Agreements and subject to certain restrictions contained therein, the Commitment may be drawn down at the Company’s option as the Company issues shares of common stock to GEM in return for funds.

Under the agreed upon structure, and subject to certain prerequisites, the Company controls the timing and amount of any drawdown, and the funds withdrawn by the Company may be used to acquire any oil and gas assets the Company identifies, publicly or privately owned, national or international, as well as for working capital purposes.

Pursuant to the Commitment Agreements, the Company must use commercially reasonable efforts to uplist to the NYSE, NASDAQ or AMEX stock exchange within 270 days of July 11, 2013, and then to file a registration statement covering the shares and warrants referenced in the Commitment Agreements within 30 days of uplisting. The Company further agreed to pay to GEM a Structuring Fee equal to $4 million, which must be paid on the 18 month anniversary of July 11, 2013 regardless of whether the Company has drawn down from the Commitment at that time. At the Company’s election, the Company may elect to pay the structuring fee in registered shares of its common stock of the Company at a per share price equal to ninety percent of the average closing trading price of the Company’s common stock for the thirty-day period immediately prior to the 18 month anniversary of July 11, 2013. As of January 11, 2015, the 18 month anniversary date of the agreement, the Company had not met this requirement and may now become liable for payment of this structuring fee to GEM.  As of March 31, 2015, the Company has recorded an accrued structuring fee of $4 million.

NOTE 12– SUBSEQUENT EVENTS

Private Share Sale and Option Agreement

On April 6, 2015, and as subsequently amended on May 6, 2015, Plethora entered into an agreement with Jeff Ahlholm and Lloyd Brian Hannan, the co-owners of [AGRA], pursuant to which Plethora sold 375,000 of its shares of the Company’s restricted common stock to Mr. Ahlholm, and 375,000 shares to Mr. Hannan. If certain conditions are met by June 5, 2015 or June 27, 2015, Mr. Ahlholm and Mr. Hannan shall have the option to purchase up to an additional 2,500,000 shares of the Company’s restricted common stock from Plethora. Nikolas Konstant, our CFO and Chairman of the Board is the sole member and manager of Plethora. Accordingly, the difference between the fair value of the shares and the sales price to the buyers of $3,675,000 will be recognized as a cost during the quarter ended June 30, 2015.

AGRA and BAS Agreements

Pursuant to a consulting agreement effective as of August 1, 2013, as subsequently amended from time to time (the “BAS Agreement”), between the Company, [AGRA Capital, LLC (“AGRA”)] and BA Securities, LLC (“BAS”), AGRA and BAS agreed to provide certain financial advisory services to the Company. 

On April 6, 2015 the Company entered into an agreement (“Agreement”) with Mr. Konstant, AGRA, BAS, Jeff Ahlholm, and Lloyd Brian Hannan (AGRA, BAS, Mr. Ahlholm and Mr. Hannan are collectively referred to herein as “BAS and Agents”). The Agreement terminated the BAS Agreement in its entirety. The Agreement further provides that, in the event that the Company completes certain acquisitions or financings on or prior to April 7, 2017, then additional cash and warrant compensation will be paid to BAS and Agents.  Further, in consideration for advisory services previously rendered, the Company issued an aggregate of 1,500,000 warrants to BAS and Agents, all vesting immediately with an exercise price of $2.50 per share and an expiration date of May 1, 2019. The fair value of the warrants was determined to be $7,307,825 using a Black-Scholes model. Even though the warrants were not issued until April 6, 2015, the fair value of these warrants was recorded as an expense during the quarter ended March 31, 2015 as the advisory services were rendered prior to March 31, 2015 (See Note 10). Pursuant to the Agreement, the Company also extended the expiration date of another 600,000 warrants currently held by BAS and Agents to May 1, 2019, and reduced the exercise price from $4.00 per share to $2.50 per share. The fair value of the extension and modification of these warrants was determined to be $121,340. The Company used the following assumptions in determining the fair value.

 
20
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)


 
 
 
·
Expected life of 3.32 to 4.07 years
 
·
Volatility of 182%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 1.10%

Additional Financing
 
On April 15, 2015 we issued two unsecured promissory notes, one to Plethora, and one to Clearview Partners II, LLC.  Each promissory note has a principal amount of $150,000, with an interest rate of 10% per annum.  The maturity date is 120 days from the date of issuance.  Nikolas Konstant, our CFO and Chairman of the Board is the sole member and manager of Plethora. 

 
Forward Looking Statements

This Report contains projections, expectations, beliefs, plans, objectives, assumptions, descriptions of future events or performances and other similar statements that constitute “forward looking statements” that involve risks and uncertainties, many of which are beyond our control. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. All statements, other than statements of historical facts, included in this Report regarding our expectations, objectives, assumptions, strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and objectives of management are forward-looking statements. All forward-looking statements speak only as of March 31, 2015. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including, but not limited to, those set forth in this Report. Important factors that may cause actual results to differ from projections include, but are not limited to, for example: adverse economic conditions, inability to raise sufficient additional capital to operate our business, delays, cancellations or cost overruns involving the development or construction of oil wells, the vulnerability of our oil-producing assets to adverse meteorological and atmospheric conditions, unexpected costs, lower than expected sales and revenues, and operating defects, adverse results of any legal proceedings, the volatility of our operating results and financial condition, inability to attract or retain qualified senior management personnel, expiration of certain governmental tax and economic incentives, and other specific risks that may be referred to in this Report. It is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained or implied in any forward-looking statement. We undertake no obligation to update any forward-looking statements or other information contained herein. Stockholders and potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this Report are reasonable, we cannot assure stockholders and potential investors that these plans, intentions or expectations will be achieved. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
 
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
 
You should read the following discussion of our financial condition and results of operations together with the un audited financial statements and the notes to the unaudited financial statements included in this Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

On October 12, 2012, pursuant to the Merger Agreement, entered into by and between the Company, Eos and Merger Sub, dated July 16, 2012, Merger Sub merged into Eos, with Eos being the surviving entity in the Merger. As a result of the Merger, Eos became a wholly owned subsidiary of the Company. Upon the closing of the Merger, each issued and outstanding share of common stock of Eos was automatically converted into the right to receive one share of our Series B preferred stock. At the closing, we issued 37,850,044 shares of Series B preferred stock to the former Eos stockholders, subject to the rights of the stockholders of Eos to exercise and perfect their appraisal rights under applicable provisions of Delaware law to accept cash in lieu of shares of the equity securities of the Company.
 
Effective as of May 20, 2013, the Company changed its name to Eos Petro, Inc. (it previously had been named “Cellteck, Inc.”).
 
We are presently focused on the exploration, development, mining, operation and management of medium-scale oil and gas assets. Our primary activities as of March 31, 2015, have centered on organizing activities but have also included the acquisition of existing assets, evaluation of new assets to be acquired, and pre-development activities for existing assets.

 
Our continuing development of oil and gas projects will require the acquisition of land rights, mining equipment and associated consulting activities required to convert the fields into revenue generating assets. Generally, financing is available for these initial project costs where such financing is secured by the assets themselves. From time to time however, our activities may require senior credit facilities, convertible securities and the sale of common and preferred equity at the corporate level.
 
In connection with our business, we will likely engage consultants with expertise in the oil and gas industries, project financing and oil and gas operations.
 
The financial statements included as part of this Report and the financial discussion reflect the performance of Eos and the Company, which primarily relates to Eos’ Works Property oil and gas assets located in Illinois.
 
On September 17, 2014, we entered the Dune Merger Agreement with Dune. Pursuant to the Dune Merger Agreement, we agreed to conduct a tender offer to purchase all of Dune’s issued and outstanding shares of common stock, at $0.30 per share. In addition, we agreed to provide Dune with sufficient funds to pay in full and discharge all of Dune’s outstanding indebtedness and agreed to assume liability for all Dune trade debt, as well as fees and expenses related to the Dune Merger Agreement and the transactions contemplated therein. Following the successful completion of the offer, and subject to the terms and conditions of the Dune Merger Agreement, the Company would have been merged with and into Dune, with Dune surviving as a direct wholly-owned subsidiary of the Company.
 
At the commencement of the tender offer, we estimated that the total amount of cash required to complete the transactions contemplated by the Dune Merger Agreement would be approximately $140 million dollars, including: (i) approximately $22 million to purchase all of the outstanding shares of Common Stock, (ii) approximately $11 million for the payment of any fees, expenses and other related amounts incurred in connection with the tender offer and the Dune merger, and (iii) approximately $107 million to pay in full and discharge all of Dune’s outstanding indebtedness (other than accrued trade debt of Dune, which would have been assumed by the surviving entity in the merger). The tender offer was not subject to a financing contingency. The tender offer commenced on October 9, 2014 and ultimately expired on February 27, 2015.
 
After the expiration of the tender offer, Dune was notified by the Company that shares of Dune’s common stock would be returned to the tendering stockholders.  On March 4, 2015, Dune provided us with notice of its decision to terminate the Dune Merger Agreement in accordance with Section 8.1(c)(i) of the Dune Merger Agreement.
 
Pursuant to Section 8.1(c)(i) of the Dune Merger Agreement, Dune’s letter terminating the Dune Merger Agreement demanded the Parent Termination Fee (as defined in the Dune Merger Agreement) of $5,500,000 in cash, and reimbursement for certain unidentified expenses incurred by Dune.  Dune has threatened to bring litigation to collect these amounts in connection with its contention that the Company breached the Dune Merger Agreement and is entitled to the Parent Termination Fee. The Company has accordingly recorded a liability for $5,500,000 related to the Parent Termination Fee. No lawsuit has been filed to date against the Company for the Parent Termination Fee, and the Company would vigorously defend itself, should any action ever be brought. The Company believes that it has equitable and legal defenses against payment of all or a portion of the Parent Termination Fee.



 
Comparison of the three months ended March 31, 2015 to March 31, 2014.


   
For the Three Months Ended March 31,
              
   
2015
    
2014
              
         
% of
          
% of
    
Dollar
    
Percentage
  
   
Amount
    
Revenue
    
Amount
    
Revenue
    
change
    
Change
  
Revenue
   $ 60,059       100.0 %   $ 103,706       100.0 %     (43,647 )     -42.1 %
Lease operating expense
     11,429       19.0 %     65,258       62.9 %     (53,829 )     -82.5 %
General and administrative expenses
     10,881,750       18118.4 %     11,043,959       10649.3 %     (162,209 )     -1.5 %
Structuring fee
     4,000,000       6660.1 %     0       0.0 %     4,000,000       N/A  
Termination fee
     5,500,000       9157.7 %     0       0.0 %     5,500,000       N/A  
Other income (expense), net
     2,444,163       4069.6 %     (5,161,830 )     -4977.4 %     7,605,993       -147.4 %
Net loss
   $ (17,888,957 )     -29785.6 %   $ (16,167,341 )     -15589.6 %     (1,721,616 )     10.6 %
 
Revenue

We primarily generate revenue from the operation of any oil and gas properties that we own or lease and the sale of hydrocarbons delivered to a customer when that customer has taken title. For the three months ended March 31, 2015 and 2014, our primary revenue has come from one source, the Works Property, located in Southern Illinois. Revenue for the three months ended March 31, 2015 and 2014 was $60,059 and $103,706, respectively.  The decrease in revenues for the three months ended March 31, 2015 is due to a decrease in the price per barrels sold offset by an increase in the number of barrels sold.  For the three months ended March 31, 2015, we sold 1,270 barrels at an average price of $47 per barrel, compared to 1,125 barrels at an average price of $92 per barrel for the three months ended March 31, 2014.

Lease operating expenses

Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the three months ended March 31, 2015 and 2014 was $11,429 and $65,258, respectively.  The decrease in operating expenses was due to a refund of $33,223 received from our former operator during the quarter ended March 31, 2015. 
 
General and administrative expenses

General and administrative expenses for the three months ended March 31, 2015 and 2014 were $10,881,750 and $11,043,959, respectively. Our general and administrative expenses have primarily been made up of professional fees (legal and accounting services) required for our organizing activities, acquisition agreements and development agreements. We recognized approximately $115,000, $7,943,000, and $2,581,000 in professional fees, consulting fees and compensation, respectively for the three months ended March 31, 2015.  We recognized approximately $173,000, $9,484,000, and $596,000 in professional fees, consulting fees and compensation, respectively for the three months ended March 31, 2014.  Other expenses included are temporary professional staffing, rent, utilities, and other overhead expenses.  During the three months ended March 31, 2015, we recorded compensation expense of $2,336,000 related to options that were issued to our CEO in August 2014 and vesting though June 2015.   In addition, during the three months ended March 31, 2015, we recorded consulting fees of approximately $7,943,000 associated with warrants to be issued.

Structuring fee

During the three months ended March 31, 2015, we recorded a charge to earnings related to a structuring fee of $4 million due to GEM Global Yield Fund.  There was no such charge during the three months ended March 31, 2014.
 


 
Acquisition termination fee
During the three months ended March 31, 2015, we recorded a charge to earnings of $5.5 million related to the Parent Termination Fee associated with our proposed acquisition of Dune.  There was no such charge during the three months ended March 31, 2014.

Other income (expenses)

For the three months ended March 31, 2015, net other income was $2,444,163 consisting of interest and finance costs of $140,857 and a gain on change in fair value of derivative liability of $2,585,020.   During the three months ended March 31, 2014, net other expenses consisted primarily of interest and finance costs of $4,552,210 and loss debt extinguishment of $609,620.  The decrease in interest and finance costs is primarily due to the amortization of the fair value of the beneficial conversion features and expensing of the fair value of shares issued in connection with financing incurred during the three months ended March 31, 2014.  We recorded a loss on debt extinguishment of $609,620 for the three months ended March 31, 2014 which is comprised of a loss on debt extinguishment of $639,620 related to the RT Holdings note payable offset by a $30,000 gain on debt extinguishment on the Babcock note payable.

Liquidity and Capital Resources

Since our inception, we have financed operations through consulting and service agreements with limited cash requirements, made up of stock compensation and various debt instruments as more fully described in Stock Based Compensation, Commitments and Contingencies, Material Agreements and Related Party Transactions. Our business calls for significant expenses in connection with the operation and acquisition of oil and gas related projects. In order to maintain our corporate operations and to significantly expand our operations and corresponding revenue from our Works Property, we must raise a significant amount of working capital and capital to fund improvements to the Works Property. As of March 31, 2015, we had cash in the amount of $280. At March 31, 2015, we had total liabilities of $29,262,167. Our current financial resources are not sufficient to allow us to meet the anticipated costs of our business plan for the next 12 months and we will require additional financing in order to fund these activities.
 
Management estimates the Company’s capital requirements for the next twelve months, including drilling and completing wells for the Works Property, will total approximately $2,500,000, excluding any amounts that may be due to Dune under the Parent Termination Fee or a $4 million structuring fee that may be due to GEM.  No assurance can be given that any future financing will be available, or if available, that it will be on terms satisfactory to the Company.  Any debt financing or other financing of securities senior to common stock that the Company is able to obtain will likely include financial and other covenants that will restrict the Company’s flexibility. At a minimum, the Company expects these covenants to include restrictions on its ability to pay dividends on its common stock in the case of debt financing, or cause substantial dilution for stockholders in the case of convertible debt and equity financing. Any failure to comply with these covenants would have a material adverse effect on the Company’s business, prospects, financial condition, results of operations and cash flows.
 
To finance our operations, we have recently issued the following notes:

On January 13, 2015, the Company entered into a fifth amendment to the Loan Agreements (the “Amendment”).  As part of the Amendment, the Company and LowCal entered into the following: (i) an amended and restated LowCal Loan, still in the principal amount of $5,000,000; and (ii) a new unsecured promissory note in the principal amount of $3,250,000 (the “Second LowCal Note”).

Pursuant to the Amendment:
 
·
LowCal forgave approximately $667,000 of accrued interest on the LowCal Loan and eliminated all interest on the LowCal Loan going forward.
 
·
$750,000, which was advanced to the Company in 2014, was recognized as included in the principal amount of the Second LowCal Note.
 
·
The cash exit fee was removed from the LowCal Loan.
 
·
The maturity date on the LowCal Loan was extended to June 30, 2015.



 
·
The Second LowCal Note shall accrue interest at an annual rate of 10% and has a maturity date of June 30, 2015, but must also be repaid upon the earlier to occur of: (i) the Company closing certain potential acquisition transactions, or (ii) the Company closing a financing for a minimum of $20,000,000.
 
·
The parties agreed that, upon repayment in full of the Second LowCal Note, LowCal will forever release, cancel and terminate all of its mortgages and any other liens against the Company.
 
As the Amendment reflected the culmination and documenting of transactions that occurred and were agreed to in 2014, the Company recorded the terms and provisions of the Amendment on the Company’s financial statements as of the year ended December 31, 2014, including the recording of the Second LowCal Note in the principal amount of $3,250,000 and a loss on debt extinguishment of $1,832,576.

On April 15, 2015 we issued two unsecured promissory notes, one to Plethora Enterprises, LLC, and one to Clearview Partners II, LLC.  Each promissory note has a principal amount of $150,000, with an interest rate of 10% per annum.  The maturity date is 120 days from the date of issuance.  Nikolas Konstant, our CFO and Chairman of the Board is the sole member and manager of Plethora Enterprises, LLC. 
 
We do not currently have sufficient financing arrangements in place to fund our operations, and there are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us.
 
In addition to funding our operations, we may become liable to pay certain other contractual obligations, such as a structuring fee to GEM of $4,000,000.  Pursuant to the GEM Commitment Agreements, the Company must use commercially reasonable efforts to uplist to the NYSE, NASDAQ or AMEX stock exchange within 270 days of July 11, 2013, and then to file a registration statement covering the shares and warrants referenced in the Commitment Agreements within 30 days of uplisting. The Company further agreed to pay to GEM a Structuring Fee equal to $4 million, which must be paid on the 18 month anniversary of July 11, 2013 regardless of whether the Company has drawn down from the Commitment at that time. At the Company’s election, the Company may elect to pay the structuring fee in common stock of the Company at a per share price equal to ninety percent of the average closing trading price of the Company’s common stock for the thirty-day period immediately prior to the 18 month anniversary of July 11, 2013. As of January 11, 2015, the 18 month anniversary date of the agreement, the Company had not met this requirement and may now become liable for payment of this structuring fee to GEM.

In connection with the asserted claim by Dune of the alleged breach of contract by the Company of the Dune Merger Agreement, upon a termination of such agreement, a demand letter was received from Dune on March 4, 2015 demanding payment of $5.5 million in the form of the Parent Termination Fee, plus additional costs and expenses which were undefined.  The Company has recorded this liability of $5.5 million as of March 31, 2015. No lawsuit has been filed to date against the Company for the Parent Termination Fee, and the Company would vigorously defend itself, should any action ever be brought. The Company believes that it has equitable and legal defenses against payment of all or a portion of the Parent Termination Fee.
 
Obtaining additional financing is subject to a number of other factors, including the market prices for the oil and gas. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund our business plan could be significantly limited and we may be required to suspend our business operations. We cannot assure you that additional financing will be available on terms favorable to us, or at all. The failure to obtain such a financing would have a material, adverse effect on our business, results of operations and financial condition.
 
As a result, one of our key activities is focused on raising significant working capital in the form of the sale of stock, convertible debt instrument(s) or a senior debt instrument to retire outstanding obligations and to fund ongoing operations. It is expected that shareholders may face significant dilution due to any such raise in any of the forms listed herein. New securities may have rights and preferences superior to that of current stockholders. If we raise capital through debt financing, we may be forced to accept restrictions affecting our liquidity, including restrictions on our ability to incur additional indebtedness or pay dividends.
 
For these reasons, the report of our auditor accompanying our audited financial statements for the year ended December 31, 2014 included a statement that these factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will be dependent on our raising of additional capital and the success of our business plan.
 

 
We have retained consultants to assist us in our efforts to raise capital. The consulting agreements provide for compensation in the form of cash and stock and result in additional dilution to shareholders.

Cash Flows

Operating Activities

Net cash used in operating activities was $132,930 and $410,583 for the three months ended March 31, 2015 and 2014, respectively. The net cash used in operating activities was primarily due to the costs incurred with the organizing activities more fully described above.

Investing Activities

Net cash used in investing activities was $0 and $0 for the three months ended March 31, 2015 and 2014, respectively.

Financing Activities

Net cash provided by financing activities was $0 and $575,000 for the three months ended March 31, 2015 and 2014, respectively. This cash generated from financing activities for the three months ended March 31, 2014 was primarily from issuing our convertible notes of $750,000 offset by repayment of short term notes payable of $175,000.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon consolidated financial statements and condensed consolidated financial statements that we have prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the consolidated financial statements and accompanying notes included in this report. We base our estimates on historical information, when available, and assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
We believe the following accounting policies to be critical to the estimates used in the preparation of our financial statements.

Use of Estimates
 
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the following:
 
 
·
Final well closure and associated ground reclamation costs to determine the asset retirement obligation as discussed under “Asset Retirement Obligations;”
 
·
Estimated variables used in the Black-Scholes option pricing model used to value options and warrants as discussed below under “Fair Value Measurements;”
 
·
Proved oil reserves;
 
·
Future costs to develop the reserves; and
 
·
Future cash inflows and production development costs.


Actual results could differ from those estimates.
 
Revenue Recognition
 
Revenues are recognized when hydrocarbons have been delivered, the customer has taken title and collection is reasonably assured.
 
Full Cost Method of Accounting for Oil and Gas Properties
 
We have elected to utilize the full cost method of accounting for its oil and gas activities. In accordance with the full cost method of accounting, we capitalize all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. Capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves once proved reserves are determined to exist.
 
Capitalized oil and gas property costs within a cost center are amortized on an equivalent unit-of-production method, The equivalent unit-of-production rate is computed on a quarterly basis by dividing production by proved oil and gas reserves at the beginning of the quarter then applying such amount to capitalized oil and gas property costs, which includes estimated asset retirement costs, less accumulated amortization, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.
 
Full Cost Ceiling Test
 
Oil and gas properties without estimated proved reserves are not amortized until proved reserves associated with the properties can be determined or until impairment occurs. At the end of each reporting period, the unamortized costs of oil and gas properties are subject to a “ceiling test” which limits capitalized costs to the sum of the estimated future net revenues from proved reserves, discounted at 10% per annum to present value, based on current economic and operating conditions, adjusted for related income tax effects.  If the net capitalized costs exceed the cost center ceiling, the excess is recognized as an impairment of oil and gas properties. An impairment recognized in one period may not be reversed in a subsequent period even if higher oil and gas prices increase the cost center ceiling applicable to the subsequent period.
 
The estimated future net revenues used in the ceiling test are calculated using average quoted market prices for sales of oil and gas on the first calendar day of each month during the preceding 12-month period prior to the end of the current reporting period. Prices are held constant indefinitely and are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts. Prices used in the ceiling test computation do not include the impact of derivative instruments because the Company elected not to meet the criteria to qualify its derivative instruments for hedge accounting treatment.
 
Proceeds from the sale of oil and gas properties are recognized as a reduction of capitalized oil and gas property costs with no gain or loss recognized, unless the sale significantly alters the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center.
 
Asset Retirement Obligation
 
The Company accounts for its future asset retirement obligations (“ARO”) by recording the fair value of the liability during the period in which it was incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an ARO is included in proven oil and gas properties in the balance sheets. The ARO consists of costs related to the plugging of wells, removal of facilities and equipment, and site restoration on its oil and gas properties.
 

Share-Based Compensation

We periodically issue stock options and warrants to employees and non-employees and in connection with capital raising transactions, for services and for financing costs. We account for share-based payments under the guidance as set forth in the Share-Based Payment Topic of the FASB Accounting Standards Codification, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on estimated fair values. We estimate the fair value of share-based payment awards to employees and directors on the date of grant using an option-pricing model, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in the our Statements of Operations. We account for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the equity instruments is complete. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates.
 
Recently Issued Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the Company in the first quarter of its fiscal year ending June 30, 2018. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements.
 
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (ASU 2014-12). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The Company is currently evaluating the impact of adopting ASU 2014-12 on the Company’s results of operations or financial condition.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
 
In November 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.  The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2014-16 on the Company’s financial statement presentation and disclosures.


 
In January 2015, the FASB issued Accounting Standards Update (ASU) No. 2015- 01 (Subtopic 225-20) - Income Statement -Extraordinary and Unusual Items.  ASU 2015-01 eliminates the concept of an extraordinary item from GAAP.  As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item.  However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently.  ASU 2015-01 is effective for periods beginning after December 15, 2015.  The adoption of ASU 2015-01 is not expected to have a material effect on the Company’s consolidated financial statements.  Early adoption is permitted.
 
In February, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis.  ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).  ASU 2015-02 is effective for periods beginning after December 15, 2015.  The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s consolidated financial statements.  Early adoption is permitted.
 
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

 
Not Applicable

 
Disclosure Controls and Procedures
 
The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2015. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2015, the Company’s disclosure controls and procedures were ineffective.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2015, based on the framework stated by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, due to our financial situation, we will be implementing further internal controls as we become operative so as to fully comply with the standards set by the Committee of Sponsoring Organizations of the Treadway Commission.
 
 

Our Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed 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. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its evaluation as of March 31, 2015, our management concluded that our internal controls over financial reporting were ineffective as of March 31, 2015. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness relates to the following:
 
·
Lack of an independent audit committee; 
 
·
Lack of formal approval policies by the Board of Directors;  
 
·
Lack of adequate consciousness over individuals responsible for certain key control activities; 
 
·
Insufficient number of personnel appropriately qualified to perform control monitoring activities, including the recognition of risks and complexities of its business operations; 
 
·
An insufficient number of personnel with an appropriate level of GAAP knowledge and experience or training in the application of GAAP commensurate with the Company’s financial reporting requirements.

The Company intends to remedy this material weakness by hiring additional employees, officers, and perhaps directors, and reallocating duties, including responsibilities for financial reporting, among our officers, directors and employees as soon as there are sufficient resources available. However, until such time, this material weakness will continue to exist.

Further, In order to mitigate these material weaknesses to the fullest extent possible, all financial reports are reviewed by an outside accounting firm that is not our audit firm. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it will be immediately implemented.

Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
 
From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is determinable and the loss is probable.
 
 
 
Finch Employment Agreement
 
On July 11, 2011, Eos entered into an employment agreement with Michael Finch to fill the position of Eos’ CEO. Pursuant to the agreement, Mr. Finch was entitled to an annual salary of $300,000, 2,000,000 shares of common stock vesting over two years, and certain other insurance and employment benefits. However, a dispute arose regarding the amount of work Mr. Finch was performing for Eos and the employment was terminated. On August 9, 2012, Mr. Finch sent a Demand for Arbitration before JAMS alleging breach of the Employment Agreement. Mr. Finch requests the following remedies: (1) $127,500 in unpaid salary; (2) $11,000 in unpaid health coverage; (3) $6,000 in unpaid vehicle allowance; (4) $15,833 for reimbursement of expenses; and (5) 2,000,000 shares of Eos’ common stock. As of the date of this Report, Eos had not yet prepared or sent a response to the demand. Eos denies any breach of the employment agreement or other wrongdoing on its part and will vigorously defend those claims.
 
Babcock Lease
 
The Company has been made aware that a complaint has been filed against the Company and Nikolas Konstant by an entity alleging to be the landlord of the Babcock Lease. The complaint purportedly asks for $149,625 in unpaid rent and late fees for the Babcock Lease, although the Company has not yet been served with a copy of the complaint. The Company denies any breach or the Babcock Lease or other wrongdoing on its part and will vigorously defend against such claims if it is ever served with the complaint.

Dune Termination Fee
 
On March 4, 2015, Dune provided us with notice of its decision to terminate the Dune Merger Agreement in accordance with Section 8.1(c)(i) of the Dune Merger Agreement.  Pursuant to Section 8.1(c)(i) of the Dune Merger Agreement, Dune’s letter terminating the Dune Merger Agreement demanded the Parent Termination Fee (as defined in the Dune Merger Agreement) of $5,500,000 in cash, and reimbursement for certain unidentified expenses incurred by Dune.  Dune has threatened to bring litigation to collect these amounts in connection with its contention that the Company breached the Dune Merger Agreement and is entitled to the Parent Termination Fee.  The Company has accordingly recorded a liability for $5,500,000 related to the Parent termination Fee. No lawsuit has been filed to date against the Company for the Parent Termination Fee, and the Company would vigorously defend itself, should any action ever be brought. The Company believes that it has equitable and legal defenses against payment of all or a portion of the Parent Termination Fee.

 
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2014, which to our knowledge have not materially changed.  Those risks, which could materially affect our business, financial condition or future results, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.


On January 23, 2015, February 23, 2015 and March 23, 2015, Hahn received 2,000 restricted shares of the Company’s common stock for each month, respectively, for an aggregate of 6,000 shares.

The above shares were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.

 
None.

 
 
 
Not Applicable.
 
 
None.
 
 
 EXHIBIT TABLE
The following is a complete list of exhibits filed as part of the Quarterly Report on Form 10-Q, some of which are incorporated herein by reference from the reports, registration statements and other filings of the issuer with the Securities and Exchange Commission, as referenced below:
 
Reference Number
Item
   
10.1 Unsecured Promissory Note dated April 15, 2015 from Eos Petro, Inc. payable to Plethora Enterprises, LLC*
   
10.2 Unsecured Promissory Note dated April 15, 2015 from Eos Petro, Inc. payable to Clearview Partners, II, LLC*
   
10.3 Eos Petro Employment Agreement dated August 18, 2014 between Eos Petro, Inc. and Martin Oring*
   
10.4 Letter Agreement dated December 31, 2014 between Eos Petro, Inc. and Vicki Rollins*
   
10.5 Letter Agreement dated March 15, 2015 between Eos Petro, Inc. and Ridelinks, Inc.*
   
31.1 Section 302 Certification of Principal Executive Officer.*
   
31.2 Section 302 Certification of Principal Financial Officer.*
   
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.*
   
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.*
   
* Furnished herewith.

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
EOS PETRO, INC.
    a Nevada corporation
   
Date: May 18, 2015
By:
/s/ MARTIN B. ORING       
   
Martin B. Oring
   
President and Chief Executive Officer
 
     
Date: May 18, 2015
By:
/s/ NIKOLAS KONSTANT       
   
Nikolas Konstant
   
Chairman of the Board and Chief Financial Officer
 

 
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