Eos Petro, Inc. - FORM 10-K/A - April 14, 2015

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EX-99.1 - EXHIBIT 99.1 - Eos Petro, Inc.ex991.htm
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EX-10.88 - EXHIBIT 10.88 - Eos Petro, Inc.ex1088.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
Amendment No. 1
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

Or

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-53246

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 90067
(Address of principal executive offices) (Zip Code)
 
(310) 552-1555
(Registrant’s telephone number, including area code)
 
Securities registered under Section 12(b) of the Act:
Common Stock, par value $.0001 per share

Securities registered under Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No  x
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definition 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 (Do not check if a smaller reporting company)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o No  x
 
The aggregate market value of the registrant’s common stock held by non-affiliates, based on the closing price of the registrant’s common stock on the OTC Bulletin Board as of the last business day of the registrant’s most recently completed second fiscal quarter was $197,802,948.
 
The number of shares of the registrant’s Common Stock, $0.0001 par value per share, outstanding as of March 30, 2015 was 47,743,882.
 
 
 
 
 
EXPLANATORY NOTE
 
We are filing this Amendment No. 1 (this "Amended Filing") to amend and restate our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on March 31, 2015 (the "Original Filing"), to correct certain typographical errors throughout the Original Filing. The certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 included in the Original Filing have been updated for the date of this Amended Filing, and we are filing a new Exhibit 23.1 containing the consent of Hahn Engineering, Inc.  References herein to this Annual Report on Form 10-K shall refer to this Amended Filing.

 
 
 
 


 
 


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
 
This annual report on Form 10-K (this “Report”), the other reports, statements, and information that we have previously filed or that we may subsequently file with the SEC, and public announcements that we have previously made or may subsequently make, contain 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 December 31, 2013. Unless the context is otherwise, the forward-looking statements included or incorporated by reference in this Report and those reports, statements, information and announcements address activities, events or developments that Eos Petro, Inc. (“Company”),  (together with its two wholly-owned subsidiaries, Eos Global Petro, Inc., a Delaware corporation (“Eos”), and Eos Merger Sub, Inc., a Delaware corporation (“Eos Delaware”); and Eos’ own two subsidiaries, Plethora Energy, Inc., a Delaware corporation (“Plethora Energy”), and EOS Atlantic Oil & Gas Ltd., a Ghanaian limited liability company (“EAOG”); and Plethora Energy’s subsidiary, Plethora Bay Oil & Gas Ltd., a Ghanaian corporation (“PBOG”), herein after referred to as “we,” “us,” “our,” or “our Company” unless the context otherwise requires) expects or anticipates, will or may occur in the future.
 
Forward-looking statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to this cautionary statement and the factors discussed throughout this Report. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this Report are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government regulations, economic conditions and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions and other factors discussed elsewhere in this Report.
 
The risk factors referred to in this Report could materially and adversely affect our business, financial conditions and results of operations and cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. We do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The risks and uncertainties described below are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity and financial condition could be materially affected in an adverse manner. Under such circumstances, you may lose all or part of your investment.
 
 
 
Overview
 
We are in the business of acquiring, exploring and developing oil and gas-related assets. We formerly marketed the Safe Cell Tab product line, which consisted of products designed to protect users against the potentially harmful and damaging effects of electromagnetic radiation emitted from electrical devices. That segment our business was discontinued in 2013. We have abandoned the assets after settling Safe Cell Tab related liabilities.
 
Historical Development
 
On October 12, 2012, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), entered into by and between the Company, Eos, and Eos Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), Merger Sub merged into Eos, with Eos being the surviving entity (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, effectively resulting in the former stockholders of Eos owning approximately 93% of the then outstanding shares of our common stock (including shares of Series B preferred stock convertible into shares of our common stock) and the holders of our previously outstanding debt and outstanding shares of our common stock owned the balance.
 
 
 
After the Merger, Plethora Enterprises, LLC (“Plethora Enterprises”), a company of which our CFO and Chairman of the Board, Nikolas Konstant, acquired control of the Company: Plethora Enterprises’ 32,500,100 shares of our Series B preferred stock represented approximately 73% of our outstanding voting securities as of December 31, 2012.
 
Effective as of May 20, 2013, the Company changed its name to its present name (it was formerly Cellteck, Inc.) by filing an amendment to its articles of incorporation (the “Amendment”) with the Nevada secretary of state after the name change was approved at a special meeting of the stockholders of the Company held on May 6, 2013.
 
The Amendment also effectuated a reverse stock split of the outstanding shares of common stock of the Company held by stockholders with 2,000 or more aggregate shares of common stock at an exchange ratio of 1-for-800, accompanied by a cash distribution of $0.025 per share to all of the Company’s common stockholders with less than 2,000 shares of common stock in the aggregate, in exchange for and in cancellation of their shares of common stock (the “Stock Split”). This Stock Split triggered the automatic conversion of all 45,275,044 issued and outstanding shares of Series B Convertible Preferred Stock of the Company into 45,275,044 shares of common stock of the Company. The name change and Stock Split became effective in the marketplace on May 21, 2013.
 
Hereinafter, all references throughout this Report to securities of the Company will be referenced as post-split common shares, unless the context specifically otherwise requires, so that references to shares or common stock will be to post-split common shares instead of shares of Series B Convertible Preferred Stock.
 
Our Company was organized in British Columbia during 1996. Eos was incorporated in Delaware on May 2, 2011. On June 6, 2011 Eos acquired a 100% working interest and 80% net revenue interest in five land leases in Edwards County, Illinois (the “Works Property”) which have historically produced oil since 1940.
 
The Company has two wholly-owned subsidiaries, Eos and Eos Merger Sub, Inc., a Delaware corporation (“Eos Delaware”), which was formed for a potential merger with Dune Energy, Inc., discussed further below. 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, Eos Delaware, PBOG, Plethora Energy and EAOG are collectively referred to as the Company’s “Subsidiaries.”
 
Our Strategy
 
We are in the business of acquiring, exploring and developing oil and gas-related assets. Our strategy involves exploiting our existing asset base and acquiring new hydrocarbon reserves, resources and exploration acreage, where opportunities exist to enhance value, while assembling professional teams to use the latest technologies to explore for oil and gas. Commercial discoveries will be appraised and then, where deemed economic, and assuming the availability of the necessary financing, progressed through to the production stage. We anticipate that the cash flow generated from production will be reinvested in exploration and further development of oil and gas properties. In order to execute this strategy, after acquiring our first oil producing domestic property, the Works Property, we have applied to obtain rights to an oil concession in Africa. We are also evaluating other domestic and foreign properties for potential acquisitions.
 
We have an agreement with a consultant to help us obtain rights in Africa. Eos’ wholly-owned subsidiary, Plethora Energy, is presently focusing on obtaining rights to one oil concession located off the coast of Ghana. Laws in Ghana require that any application for a Ghanaian oil concession come from a Ghanaian company, so we also formed EAOG to pursue other concessions in Ghana. We have also formed PBOG. No assurance can be given that any concession application will be approved. If a concession is approved, pursuant to a letter agreement dated September 5, 2011, DCOR, a company engaged in the development, exploration and production of oil and natural gas, could elect to receive a 10% ownership interest in the concession and will serve as operator. If DCOR elects not to acquire the 10% interest, then the agreement shall terminate and be of no further force and effect.
 
Oil and Gas Interests at the Works Property
 
Works Property
 
On June 6, 2011 Eos acquired a 100% working interest and 80% net revenue interest in five land leases in Edwards County, Illinois (the “Works Property”) which have historically produced oil since 1940. The Works Property is comprised of five oil and gas leases in an approximately 510 acre tract of land bordered located in the Albion in Edwards County, Illinois.
 
Disclosure of Reserves
 
The following table provides evaluation information on all 700 acres of the Works Property as of December 31, 2014 from the February 17, 2015 reserve evaluation from Hahn Engineering, Inc. (“Hahn Engineering”):
 
 

 
   
Proved Developed (a)
    
Proved (b)
    
Total Proved (c), (d)
  
   
Producing
    
Non-Producing
    
Undeveloped
Undrilled
    
Proved
  
Gross Reserves
                        
Oil-Barrels (e)
    
46,116
      
28,032
      
218,640
      
292,778
  
Net Reserves
                                
Oil-Barrels (e)
    
36,893
      
22,418
      
174,912
      
234,223
  

(a) In general, the proved developed producing reserves were estimated by the performance method. The reserves estimated by the performance method utilized extrapolations of various historical oil sales data in those cases where such data were definitive. The proved developed non-producing reserves were based on data taken prior to 2008, when the Works Property wells were shut-in.
 
(b) The proved undeveloped undrilled reserves were based on recoveries from similar zone production from the Works Property with a reasonable certainty that they will be recovered.
 
(c) Initial production rates were based on current producing rates for those wells now in production. The proved reserves conform to the definition as set forth in the SEC regulation Part 210.4-10(a).
 
(d) The reserves included in this Report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Moreover, estimates of reserves may increase or decrease as a result of future operations.
 
(e) Liquid hydrocarbons are expressed in standard 42 gallon barrels.
 
We believe that the assumptions, data, methods and procedures used to generate these reserve evaluations were appropriate for the intended purposes of the evaluations.
 
Controls Over Reserve Estimates
 
The preparation of the reserve evaluations were internally overseen and reviewed by Mr. Hogg, one of the Company’s directors. Mr. Hogg has over three decades of oil exploration and operations expertise, both in government negotiations and direct domestic negotiations, as well as in both onshore and offshore hydrocarbon projects. Mr. Hogg holds a B.Sc. in Geology from McMaster University and is registered as a Professional Geologist in Canada and a Qualified Reserves Evaluator, under Canadian National Instrument Standards, responsible for reserves reporting to exchanges in Canada. Mr. Hogg’s qualifications are more fully discussed below under the section entitled “Directors, Executive Officers and Corporate Governance.”
 
Externally, our controls over the reserve evaluation disclosed in this Report included retaining Hahn Engineering as an independent petroleum engineering firm to generate the reserve evaluation. Within Hahn Engineering, the technical person primarily responsible for preparing the estimates set forth in the reserve report incorporated herein was Mr. Joseph Hahn. Mr. Hahn performs consulting petroleum engineering services under the State of Missouri Registered Professional Engineer No. E20517. Mr. Hahn has been working as an oil and gas engineer since the 1970s. Mr. Hahn has substantial experience in the Illinois Basin.
 
Hahn Engineering does not have any interest in the Works Property and neither the employment to complete the reserve report nor the compensation was contingent on estimates of reserves and future income for the Works Property. Eos provided information about some of our oil and gas properties to Hahn Engineering, and Hahn Engineering prepared their own estimates of the reserves attributable to those properties.
 
All of the information regarding the Works Property reserves in this report is derived from Hahn Engineering’s February 17, 2015 reserve report, which is filed as Exhibit 99.1 to this Report.
 
Oil and Gas Production, Production Prices and Production Costs
 
For the fiscal year ended December 31, 2012, the Works Property produced approximately 899 net barrels of oil, for which the average sales price per barrel produced was $83. For the fiscal year ended December 31, 2013, the Works Property produced approximately 6,742 net barrels of oil, for which the average sales price per barrel produced was $88.  For the fiscal year ended December 31, 2014, the Works Property produced approximately 8,779 net barrels of oil, for which the average sales price per barrel produced was $87.
 
 
 
For the fiscal year ended December 31, 2012, we estimate an average production cost per unit of oil of $ 192, our operating expenses for the fiscal year ended December 31, 2012 were $150,844 and our production costs were $ 172,252.
 
For the fiscal year ended December 31, 2013, we estimate an average production cost per unit of oil of $62, our operating expenses for the fiscal year ended December 31, 2013 were $354,046 and our production costs were $401,642.
 
For the fiscal year ended December 31, 2014, we estimate an average production cost per unit of oil of $49, our operating expenses for the fiscal year ended December 31, 2014 were $353,050 and our production costs were $427,076.
 
Oil and Gas Properties, Wells, Operations and Acreage
 
As of December 31, 2012, the Works Property had 4 productive oil wells, and as of December 31, 2013 and 2014, the Works Property had 6 and 8 productive oil wells respectively over its approximately 700 acres. Of those 700 acres, there were 496 net and gross developed acres and 200 net and gross undeveloped acres as of December 31, 2014, 2013 and 2012.
 
Our oil and gas properties are subject to royalties and other customary outstanding interests. Our properties are also subject to an operating agreement, current taxes and insurance payments. Our properties have also been subject to certain liens, mortgages and other security interests. We do not believe that any of these burdens will materially interfere with the use of our properties.
 
Present Activities; Drilling and Other Exploratory and Development Activities
 
During 2013, we drilled five new wells and anticipate drilling three additional wells during 2015.
 
Our oil and gas properties are subject to royalties and other customary outstanding interests. Our properties are also subject to an operating agreement, current taxes and insurance payments. Our properties have also been subject to certain liens, mortgages and other security interests. We do not believe that any of these burdens will materially interfere with the use of our properties,
 
We sell our crude oil and condensate obtained from the Works Property to Countrymark Refining and Logistics, LLC (“Countrymark”) pursuant to an agreement between our operator, TEHI, and Countrymark. The agreement remains in effect until it is revoked in writing by TEHI or upon Countrymark giving TEHI 30 days’ notice. We sell to Countrymark at prevailing daily market prices, which normally incorporate regional differentials that include but are not limited to transportation costs and adjustments for product quality. Pursuant to our agreement with TEHI, TEHI is paid for its operating expenses and certain supervision fees directly from the proceeds of our sale of crude oil to Countrymark before Countrymark remits the sales of the crude oil to us.  In 2014 our agreement with TEHI was terminated, and on July 10, 2014 we entered into an operator agreement with James E. Blumthal to perform the services that were previously being performed by TEHI.
 
Additional information regarding our profits and total assets can be found in the financial statements under Item 8 of this Report.
 
Merger Agreement with Dune Energy, Inc.
 
On September 17, 2014 we entered into an Agreement and Plan of Merger (the “Dune Merger Agreement”) with Dune Energy, Inc., a Delaware corporation (“Dune”) and Eos Merger Sub. Inc., a Delaware corporation and direct wholly-owned subsidiary of Eos (“Merger Sub”).  Pursuant to the Dune Merger Agreement, and on the terms and subject to the conditions described therein, Merger Sub agreed to conduct a cash tender offer (the “Tender Offer”) to purchase all of Dune’s issued and outstanding shares of common stock, par value $0.001 per share (the “Dune Shares”), at a price of $0.30 per Dune Share in cash, without interest, upon the terms and conditions set forth in the Dune Merger Agreement (the “Offer Price”).
 
Due to the severe decline in oil prices, our sources of capital for the merger and tender offer were withdrawn, and we were unable to proceed to complete the merger and tender described in the Dune Merger Agreement on the terms originally negotiated.
 
Through a series of amendments to the Dune Merger Agreement, the parties amended and extended the Dune Merger Agreement, ultimately until February 27, 2015, when the Tender Offer expired.  In conjunction with the Dune Merger Agreement extensions, the Tender Offer was also extended while the parties continued to try negotiate financing terms.
 
The Dune Merger Agreement contained representations, warranties and covenants customary for a transaction of this nature.  The Dune Merger Agreement also included customary termination provisions for Dune and Eos and provided that, in connection with the termination of the Merger Agreement underspecified circumstances, Dune would be required to pay Eos a termination fee of $3,500,000 in cash, and under other specified circumstances, Eos would be required to pay Dune a termination fee of $5,500,000 in cash.
 
 
 
After the expiration of the Tender Offer, Dune was notified by Eos 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 Eos breached the Dune Merger Agreement and is entitled to the breakup fee set forth in the Dune Merger Agreement. We do not believe that we have liability for the break-up fee and we intend to vigorously defend ourselves if an action is brought.
 
The forgoing description of the Dune Merger Agreement, as amended, does not purport to be complete, and is subject to, and qualified in its entirety by, our 8-Ks filed with the Securities and Exchange Commission on September 18, 2014, November 21, 2014, December 23, 2014, January 20, 2015, January 28, 2015, February 4, 2015, February 11, 2015, February 17, 2015, February 24, 2015, February 26, 2015, and March 10, 2015, which are incorporated herein by this reference.
 
Safe Cell Tab Segment
 
Following the Merger, the Company’s principal focus shifted to the oil and gas business. Since the Company’s pre-merger assets and Safe Cell Tab revenue were less than 1% of the Company’s total 2012 and 2013 revenue and assets, the Company’s management has determined that the Company’s Safe Cell Tab operations are immaterial, and this Report will not disclose separate information for the Safe Cell Tab segment. Further, that segment of our business was discontinued in 2013. We have abandoned the assets after settling Safe Cell Tab related liabilities.
 
Seasonality
 
Our business is not significantly impacted by seasonality.
 
Patents, Trademarks and Licenses
 
We do not own any patents, patent applications, service marks or trademarks.
 
Competition
 
Oil and Gas Competition
 
The oil and gas industry is competitive. We compete with numerous large international oil companies and smaller oil companies that target opportunities in the market similar to ours. Many of these companies have far greater economic, political and material resources at their disposal than we do. Members of our board of directors have prior experience in oil field development and production, operations, international business development, finance and experience in management and executive positions. Nevertheless, the markets in which we operate and plan to operate are highly competitive and we may not be able to compete successfully against our current and future competitors.
 
Higher commodity prices generally increase the demand for drilling rigs, supplies, services, equipment and crews, and can lead to shortages of, and increasing costs for, drilling equipment, services and personnel. In recent years, oil and natural gas companies have experienced higher drilling and operating costs. Shortages of, or increasing costs for, experienced drilling crews and equipment and services could restrict our ability to drill wells and conduct our operations. We expect we will depend upon independent drilling contractors to furnish rigs, equipment and tools to drill wells. Higher prices for oil and gas may result in competition among operators for drilling equipment, tubular goods and drilling crews which may affect or ability to expeditiously explore, drill, complete, recomplete and work-over wells.
 
Competition is also strong for attractive oil and natural gas producing assets, undeveloped license areas and drilling rights, and we cannot assure holders of our stock that we will be able to successfully compete when attempting to make further strategic acquisitions.
 
The market for oil and gas is dependent upon a number of factors beyond our control, which at times cannot be accurately predicted. These factors include the proximity of wells to, and the capacity of, natural gas pipelines, the extent of competitive domestic production and imports of oil and gas, the availability of other sources of energy, fluctuations in seasonal supply and demand, and governmental regulation. In addition, there is always the possibility that new legislation may be enacted, which would impose price controls or additional excise taxes upon crude oil.
 
The market price for crude oil is significantly affected by policies adopted by the member nations of the Organization of Petroleum Exporting Countries (“OPEC”). Members of OPEC establish prices and production quotas among themselves for petroleum products from time to time with the intent of controlling the current global supply and consequently price levels. We are unable to predict the effect, if any, that OPEC or other countries will have on the amount of, or the prices received for, crude oil.
 
 
 
Government Regulations
 
It is our policy to conduct all operations in a manner which protects people and property and which complies with all applicable laws and regulations. We recognize that prevention of accidents and ill health is essential to the efficient operation of our businesses, and both considerations are at least equal in prominence to operational and commercial considerations. Our principal health and safety objective is to provide a safe working environment for employees, contract personnel and members of the general public who may be put at risk by the activities of our companies.
 
Worldwide Regulations Generally
 
Our operations and our ability to finance and fund our growth strategy are affected by political developments and laws and regulations in the areas in which we operate. In particular, oil and natural gas production operations and economics are affected by:
  • Change in governments;
  • Civil unrest;
  • Price and currency controls;
  • Limitations on oil and natural gas production;
  • Tax, environmental, safety and other laws relating to the petroleum industry;
  • Changes in laws relating to the petroleum industry;
  • Changes in administrative regulations and the interpretation and application of such rules and regulations; and
  • Changes in contract interpretation and policies of contract adherence.
In any country in which we may do business, the oil and natural gas industry legislation and agency regulation are periodically changed, sometimes retroactively, for a variety of political, economic, environmental and other reasons. Numerous governmental departments and agencies issue rules and regulations binding on the oil and natural gas industry, some of which carry substantial penalties for the failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and our potential for economic loss.
 
Risks Attendant to Foreign Operations
 
As discussed elsewhere herein, in 2014, we anticipate that a portion of our operations will be attributable to operations in foreign countries. International operations are subject to foreign economic and political uncertainties and risks as disclosed more freely in the Report. Unexpected and adverse changes in the foreign countries in which we may operate in could result in economic disruptions, increased costs and potential losses. Our business is subject to fluctuations in demand and to changing domestic and international economic and political conditions which are beyond our control.
 
Environmental Regulations
 
We may be subject to various stringent and complex international, foreign, federal, state and local environmental, health and safety laws and regulations governing matters including the emission and discharge of pollutants into the ground, air or water; the generation, storage, handling, use and transportation of regulated materials; and the health and safety of our employees. These laws and regulations may, among other things:
  • Require the acquisition of various permits before operations commence;
  • Enjoin some or all of the operations of facilities deemed not in compliance with permits;
  • Restrict the types, quantities and concentration of various substances that can be released into the environment in connection with oil and natural gas drilling, production and transportation activities;
  • Limit or prohibit drilling activities in certain locations lying within protected or otherwise sensitive areas; and
  • Require remedial measures to mitigate or remediate pollution from our operations.
These laws and regulations may also restrict the rate of oil and natural gas production below the rate that would otherwise be possible. Compliance with these laws can be costly; the regulatory burden on the oil and gas industry increases the cost of doing business in the industry and consequently affects profitability. We cannot assure you that we have been or will be at all times in compliance with such laws, or that environmental laws and regulations will not change or become more stringent in the future in a manner that could have a material adverse effect on our financial condition and results of operations.
 
Moreover, public interest in the protection of the environment continues to increase. Offshore drilling in some areas has been opposed by environmental groups and, in other areas, has been restricted. In connection with our strategy of expansion into Africa, our operations could be adversely affected to the extent laws are enacted or other governmental action is taken that prohibits or restricts offshore drilling or imposes environmental requirements that result in increased costs to the oil and gas industry in general, such as more stringent or costly waste handling, disposal, cleanup requirements or financial responsibility and assurance requirements.
 
 
 
International Climate Change Efforts
 
Oil and gas operations are subject to various federal, state, local and foreign laws and government regulations that may change from time to time. Matters subject to regulation include discharge permits for drilling operations, well testing, plug and abandonment requirements and bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. Other federal, state, local and foreign laws and regulations relating primarily to the protection of human health and the environment apply to the development, production, handling, storage, transportation and disposal of oil and gas, by-products thereof and other substances and materials produced or used in connection with oil and gas operations, including drilling fluids and wastewater. In addition, we may incur costs arising out of property damage, including environmental damage caused by previous owners or operators of property we purchase or lease or relating to third party sites, or injuries to employees and other persons. As a result, we may incur substantial liabilities to third parties or governmental entities and may be required to incur substantial remediation costs. We also are subject to changing and extensive tax laws, the effects of which cannot be predicted. Compliance with existing, new or modified laws and regulations could result in substantial costs, delay our operations or otherwise have a material adverse effect on our business, financial position and results of operations.
 
Moreover, changes in environmental laws and regulations occur frequently and such laws and regulations tend to become more stringent over time. Increased scrutiny of our industry may also occur as a result of EPA’s 2011-2016 National Enforcement Initiative, “Assuring Energy Extraction Activities Comply with Environmental Laws,” through which EPA will address incidences of noncompliance from natural gas extraction and production activities that may cause or contribute to significant harm to public health or the environment. Stricter laws, regulations or enforcement policies could significantly increase our compliance costs and negatively impact our production and operations, which could have a material adverse effect on our results of operations and cash flows.
 
There is increasing attention in the United States and worldwide being paid to the issue of climate change and the contributing effect of GHG emissions. The modification of existing laws or regulations or the adoption of new laws or regulations curtailing oil and gas exploration in the areas in which we operate could materially and adversely affect our operations by limiting drilling opportunities or imposing materially increased costs.
 
Hydraulic fracturing is an important and commonly used process in the completion of oil and gas wells, particularly in unconventional resource plays. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to stimulate oil and gas production. The U.S. Congress has considered legislation to subject hydraulic fracturing operations to federal regulation and to require the disclosure of chemicals used by us and others in the oil and gas industry in the hydraulic fracturing process. The EPA has asserted federal regulatory authority over hydraulic fracturing involving diesel under the federal Safe Drinking Water Act and has released draft permitting guidance for hydraulic fracturing operations that use diesel fuel in fracturing fluids in those states where EPA is the permitting authority. A number of federal agencies are also analyzing, or have been requested to review, a variety of environmental issues associated with hydraulic fracturing. For example, the EPA is conducting a comprehensive research study to investigate the potential adverse environmental impacts of hydraulic fracturing, including on water quality and public health. The EPA released a progress report outlining work currently underway on December 21, 2012.  A report that compiles the results of various research projects is expected in 2015.  These ongoing or proposed studies, depending on their course and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the Safe Drinking Water Act, the Toxic Substances Control Act, or other regulatory mechanisms. President Obama has created the Interagency Working Group on Unconventional Natural Gas and Oil by Executive Order, which is charged with coordinating and aligning federal agency research and scientific studies on unconventional natural gas and oil resources. In addition, the EPA announced its intention to propose regulations in 2015 under the federal Clean Water Act to regulate waste water discharges from hydraulic fracturing and other natural gas production.
 
Several states have proposed or adopted legislative or regulatory restrictions on hydraulic fracturing through additional permit requirements, public disclosure of fracturing fluid contents, water sampling requirements, and operational restrictions. Further, some cities and municipalities have adopted or are considering adopting bans on drilling. At the international level, the U.K. and EU Parliaments have each in the past discussed Implementing a drilling moratorium.
 
From time to time legislation is introduced in the U.S. Congress that, if enacted into law, would make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production companies. These or any other similar changes in U.S. federal income tax laws could defer or eliminate certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could negatively affect our financial position and results of operations.
 
Employees
 
As of December 31, 2014, the Company had three executive officers who are employees of the Company. One of these executive officers is full-time and the other two are part-time. We also work with a variety of consultants.
 
 
 
Available Information
 
We are subject to the informational requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, we file annual, quarterly and other reports and information with the SEC. You may read and copy these reports and other information we file at the SEC’s public reference room at 100 F Street, NE., Washington, D.C. 20549 on official business days from 10:00 am until 3:00 pm. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Our filings are also available to the public from commercial document retrieval services and the Internet worldwide website maintained by the Securities and Exchange Commission at www.sec.gov. You may also request copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC by requesting copies of such reports in writing. Such written requests should be directed to our corporate secretary and sent to our executive offices at the address set forth below. Such reports and material are also available free of charge through our website as soon as reasonably practicable after we electronically file such reports and material with the SEC, although please note that our website is not incorporated by reference into this report and is included as an inactive textual reference only. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
 
Our principle executive office is located at 1999 Avenue of the Stars, Suite 2520, Los Angeles, CA 90067. Our website, which is still under construction and is not current, is http://www.eos-petro.com, our phone number is (310) 552-1555 and our email address is: nkonstant@eos-petro.com.
 
 
Investment in our common stock is very risky. Our financial condition is unsound. You should not invest in our common stock unless you can afford to lose your entire investment. The risks described below could materially and adversely affect our business, financial condition, results of operations and the trading price of our common stock. You should carefully consider the following risk factors and all other information contained in this Report before making an investment decision. You also should refer to the other information set forth in this Report, including our financial statements and the related notes. The risks and uncertainties described below are not the only ones we face, and there may be additional risks not presently known to us or that we currently believe are immaterial to our business.
 
THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. PERSONS WHO MAY OWN OR INTEND TO PURCHASE SHARES OF COMMON STOCK IN ANY MARKET WHERE THE COMMON STOCK MAY TRADE SHOULD CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH OTHER INFORMATION CONTAINED ELSEWHERE IN OUR REPORTS, PROXY STATEMENTS AND OTHER AVAILABLE PUBLIC INFORMATION, AS FILED WITH THE COMMISSION, PRIOR TO PURCHASING SHARES OF COMMON STOCK. IF AN ACTIVE MARKET IS EVER ESTABLISHED FOR OUR COMMON STOCK, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
 
You should carefully consider the following risk factors in addition to the other information included in this Report. If any of these risks or uncertainties actually occurs, our business, financial condition and results of operations could be materially adversely affected. Additional risks not presently known to us or which we consider immaterial based on information currently available to us may also materially adversely affect us.
 
Risks Relating to Our Business and Operations
 
All of the value of our production and reserves is concentrated in a series of leases in Illinois, and any production problems or reductions in reserve estimates related to this property would adversely impact our business.
 
The Works Property has eight currently producing wells, constituting our total production for the year ended December 31, 2014. In addition, at December 31, 2014, our total net proved reserves were attributable to the fields on the Works Property. If mechanical problems, storms or other events curtailed a substantial portion of this production, or if the actual reserves associated with this producing property are less than our estimated reserves, our results of operations and financial condition could be materially adversely affected. In addition, any expansion of operations and corresponding revenue from the Works Property will require a significant and capital expense that the Company currently does not have.
 
Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operation.
 
We have a limited operating history on which to base an evaluation of its business and prospects. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development. We cannot assure you that we will be successful in addressing the risks we may encounter, and our failure to do so could have a material adverse effect on our business, prospects, financial condition and results of operations. Our future operating results will depend on many factors, including:
 
 
 
  • Our ability to generate adequate working capital;
  • The successful development and exploration of our properties;
  • Market demand for natural gas and oil;
  • The performance level of our competitors;
  • Our ability to attract and retain key employees, and
  • Our ability to efficiently explore, develop and produce sufficient quantities of marketable natural gas or oil in a highly competitive and speculative environment, while maintaining quality and controlling costs.
To achieve profitable operations in the future, we must, alone or with others, successfully manage the factors stated above, as well as continue to develop ways to enhance our production efforts. Despite our best efforts, we may not be successful in our efforts. There is a possibility that some of our wells may never produce oil or natural gas.
 
If we fail to make certain required payments and perform other contractual obligations to our secured lenders, the debt obligations to such lenders may be in default and accelerate, which would have a material adverse effect on us and our continued operations.
 
We have entered into certain loan agreements with our secured lenders with respect to outstanding obligations owing to these lenders. As of December 31, 2014, there was due and owing to these lenders the principal sum of $5,600,000. We can give no assurance that we will be able to fulfill the obligations created under such loan agreements on a timely basis or at all. If we do not comply with any or all of the conditions of the loan agreements, our secured lenders may declare us in default of such agreements. If any of our lenders declares their respective loan agreement in default, we may be forced to discontinue operations, and stockholders may lose their entire investment.
 
We may be unable to obtain additional capital required to implement our business plan, which could restrict our ability to grow.
 
Future acquisitions and future drilling/development activity will require additional capital that exceeds our operating cash flow. In addition, our administrative costs (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) will require cash resources.
 
We may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the required capital by other means. If we do not succeed in raising additional capital, our resources may be insufficient to fund our planned operations in 2015 or thereafter.
 
Any additional capital raised through the sale of equity will dilute the ownership percentage of our stockholders. Raising any such capital could also result in a decrease in the nominal fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity employee incentive plans, all of which may have a dilutive effect to existing investors.
 
Our ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets (both generally and in the oil and gas industry in particular), our limited operating history, the location of our oil and natural gas properties, prices of oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us) and the departure of key employees. Further, if oil or natural gas prices decline, our revenues will likely decrease and such decreased revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities, together with revenues from our operations, is not sufficient to satisfy our capital needs (even if we reduce our operations), we may be required to cease operations, divest our assets at unattractive prices or obtain financing on unattractive terms.
 
For these reasons, the report of our auditor accompanying our financial statements filed herewith includes 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.
 
Our auditors have expressed substantial doubt about our ability to continue as a “going concern.” Accordingly, there is significant doubt about our ability to continue as a going concern.
 
Our business revenues in 2014 did not exceed our operating costs, and we may never become profitable. A significant amount of capital will be necessary to advance the development of our business to the point at which it will become commercially viable. If we continue incurring losses and fail to achieve profitability, we may have to cease our operations.
 
 
 
We estimate that within the next 12 months, we will need substantial cash and liquidity for operations and to fund other committments, and we do not have sufficient cash on hand or liquidity to meet this requirement. Although we are seeking additional sources of debt or equity financings, there can be no assurance that we will be able to obtain any additional financings. If we are unable to obtain new financings, we may not be able to earn profits and may not be able to continue our operations.
 
There is limited history upon which to base any assumption as to the likelihood that we will prove successful, and we may not be able to continue to generate sufficient operating revenues or ever achieve profitable operations. If we are unsuccessful in addressing these risks, our business will most likely fail.
 
Our financial condition raises substantial doubt that we will be able to continue as a “going concern,” and our independent auditors included a statement regarding this uncertainty in their report on our financial statements as of December 31, 2014.  If we cannot continue as a “going concern,” you may lose your entire investment in us.
 
Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct its operations.
 
Our ability to successfully acquire additional properties, to increase our oil and natural gas reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers will depend on developing and maintaining close working relationships with our strategic partners and industry participants and our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment. These realities are also subject to change and our inability to maintain close working relationships with our strategic partners and other industry participants or continue to acquire suitable properties may impair our ability to execute our business plan.
 
To continue to develop our business, we will endeavor to use the business relationships of members of our management to enter into strategic relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other oil and gas companies, including those that supply equipment and other resources which we may use in our business. We may not be able to establish these strategic relationships, or if established, we may not be able to adequately maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to in order to fulfill our obligations to these partners or maintain relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.
 
The possibility of a global financial crisis may significantly impact our business and financial condition for the foreseeable future.
 
The credit crisis and related turmoil in the global financial system may adversely impact our business and financial condition, and we may face challenges if conditions in the financial markets remain challenging. Our ability to access the capital markets may be restricted at a time when we would prefer or be required to raise financing. Such constraints could have a material negative impact on our flexibility to react to changing economic and business conditions. The economic situation could also have a material negative impact on the contractors upon whom we are dependent for drilling our wells, causing them to fail to meet their obligations to us. Additionally, market conditions could have a material negative impact on any crude oil hedging arrangements we may employ in the future if our counterparties are unable to perform their obligations or seek bankruptcy protection.
 
Our future is entirely dependent on the successful acquisition and development of producing and reserve rich properties with complex structures and the need to raise significant capital.
 
We are in the early stages of the acquisition of our portfolio of leaseholds and other natural resource holdings. We will continue to supplement our current portfolio with additional sites and leaseholds. Our ability to meet our growth and operational objectives will depend on the success of our acquisitions, and there is no assurance that the integration of future assets and leaseholds will be successful.
 
Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-downs of connected wells resulting from extreme weather conditions, problems in storage and distribution and adverse geological and mechanical conditions. While we will endeavor to effectively manage these conditions, we cannot assure you we will do so optimally, and we will not be able to eliminate them completely in any case. Therefore, these conditions could diminish our revenue and cash flow levels and could result in the impairment of our oil and natural gas properties.
 
 
 
We may not be able to develop oil and gas reserves on an economically viable basis and our reserves and production may decline as a result.
 
If we succeed in discovering oil and/or natural gas reserves, we cannot assure you that these reserves will be capable of the production levels we project or that such levels will be in sufficient quantities to be commercially viable. On a long-term basis, our viability depends on our ability to find or acquire, develop and commercially produce additional oil and natural gas reserves. Without the addition of reserves through acquisition, exploration or development activities, our reserves and production will decline over time as reserves are produced. Our future performance will depend not only on our ability to develop then-existing properties, but also on our ability to identify and acquire additional suitable producing properties or prospects, to find markets for the oil and natural gas we develop and to effectively distribute our production into the markets.
 
Moreover, you should anticipate that operating and capital expenditures will increase significantly in future years primarily due to:
  • increase in the competitiveness of the markets for our products;
  • hiring of additional personnel;
  • expansion into new markets and acquisition of new properties; and
  • the absence of significant revenues from our current oil and gas producing assets.
To the extent these activities yield increased revenues, the revenues may not offset the increased operating and capital expenditures we incur.
 
Our results of operations and financial condition could be adversely affected by changes in currency exchange rates.
 
Our results of operations and financial condition are affected by currency exchange rates. While oil sales are denominated in U.S. dollars, if we are successful in acquiring natural resource rights in foreign counties, a portion of our operating costs may be denominated in the local currency. A weakening U.S. dollar will have the effect of increasing operating costs while a strengthening U.S. dollar will have the effect of reducing operating costs. Any local currencies may be tied to the Euro. The exchange rate between the Euro and the U.S. dollar has fluctuated widely in response to international political conditions, general economic conditions, the European sovereign debt crisis and other factors beyond our control.
 
A decrease in oil and gas prices may adversely affect our results of operations and financial condition.
 
Our revenues, cash flow, profitability and future rate of growth are substantially dependent upon prevailing prices for oil and gas. Our ability to borrow funds and to obtain additional capital on attractive terms is also substantially dependent on oil and gas prices. Historically, world-wide oil and gas prices and markets have been volatile, and may continue to be volatile in the future.
 
Prices for oil and gas are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include international political conditions, including recent uprisings and political unrest in the Middle East and Africa, the European sovereign debt crisis, the domestic and foreign supply of oil and gas, the level of consumer demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels, the health of international economic and credit markets, and general economic conditions. In addition, various factors, including the effect of federal, state and foreign regulation of production and transportation, general economic conditions, changes in supply due to drilling by other producers and changes in demand may adversely affect our ability to market our oil and gas production. Any significant decline in the price of oil or gas would adversely affect our revenues, operating income, cash flows and borrowing capacity and may require a reduction in the carrying value of our oil and gas properties and our planned level of capital expenditures.
 
If there is a sustained economic downturn or recession in the United States or globally, oil and gas prices may fall and may become and remain depressed for a long period of time, which may adversely affect our results of operations.
 
In recent years, there has been an economic downturn or a recession in the United States and globally. The reduced economic activity associated with the economic downturn or recession may reduce the demand for, and the prices we receive for, our oil and gas production. A sustained reduction in the prices we receive for our oil and gas production will have a material adverse effect on our results of operations.
 
 
 
Unless we are able to replace reserves which we have produced, our cash flows and production will decrease over time.
 
Our future success depends upon our ability to find, develop or acquire additional oil and gas reserves that are economically recoverable. Except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, our estimated net proved reserves will generally decline as reserves are produced. There can be no assurance that our planned development and exploration projects and acquisition activities will result in significant additional reserves or that we will have continuing success drilling productive wells at economic finding costs. The drilling of oil and gas wells involves a high degree of risk, especially the risk of dry holes or of wells that are not sufficiently productive to provide an economic return on the capital expended to drill the wells. In addition, our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including title problems, weather conditions, political instability, availability of capital, economic/currency imbalances, compliance with governmental requirements, receipt of additional seismic data or the reprocessing of existing data, material changes in oil or gas prices, prolonged periods of historically low oil and gas prices, failure of wells drilled in similar formations or delays in the delivery of equipment and availability of drilling rigs. Our current domestic oil and gas producing properties are operated by third parties and, as a result, we have limited control over the nature and timing of exploration and development of such properties or the manner in which operations are conducted on such properties.
 
Substantial capital, which may not be available to us in the future, is required to replace and grow reserves.
 
We intend to make, substantial capital expenditures for the acquisition, exploitation, development, exploration and production of oil and gas reserves. Historically, we have financed these expenditures primarily with debt. During 2015 we expect to continue to participate, in the further exploration and development projects at the Works Property leases in Illinois. However, if lower oil and gas prices, operating difficulties or declines in reserves result in our revenues being less than expected or limit our ability to borrow funds we may have a limited ability, particularly in the current economic environment, to expend the capital necessary to undertake or complete future drilling programs. We cannot assure you that additional debt or equity financing or cash generated by operations will be available to meet these requirements. It is possible that we may raise capital for these purposes in the form of the sale of common stock or in convertible debt securities which could lead to significant dilution of our existing shareholders.
 
Our drilling activities require us to risk significant amounts of capital that may not be recovered.
 
Drilling activities are subject to many risks, including the risk that no commercially productive reservoirs will be encountered. There can be no assurance that new wells drilled by us will be productive or that we will recover all or any portion of our investment. Drilling for oil and gas may involve unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain and cost overruns are common. Our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, many of which are beyond our control, including title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment and services.
 
Weather, unexpected subsurface conditions and other unforeseen operating hazards may adversely impact our oil and gas activities.
 
The oil and gas business involves a variety of operating risks, including fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases, the occurrence of any of which could result in substantial losses to us due to injury and loss of life, severe damage to and destruction of property, natural resources and equipment, pollution and other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The impact that any of these risks may have upon us is increased due to the low number of producing properties we own.
 
Our Works Property operator maintains insurance against some, but not all, potential risks; however, there can be no assurance that such insurance will be adequate to cover any losses or exposure for liability. The occurrence of a significant unfavorable event not fully covered by insurance could have a material adverse effect on our financial condition, results of operations and cash flows. Furthermore, should we need to purchase additional insurance ourselves; we cannot predict whether insurance will continue to be available at a reasonable cost or at all.
 
Our reserve information represents estimates that may turn out to be incorrect if the assumptions upon which these estimates are based are inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present values of our reserves.
 
There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves, including many factors beyond our control. Reserve engineering is a subjective process of estimating the underground accumulations of oil and gas that cannot be measured in an exact manner. The estimates included in this document are based on various assumptions required by the SEC, including unescalated prices and costs and capital expenditures subsequent to December 31, 2014, and, therefore, are inherently imprecise indications of future net revenues. Actual future production, revenues, taxes, operating expenses, development expenditures and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves incorporated by reference in this document. In addition, our reserves may be subject to downward or upward revision based upon production history, results of future development, availability of funds to acquire additional reserves, prevailing oil and gas prices and other factors. Moreover, the calculation of the estimated present value of the future net revenue using a 10% discount rate as required by the SEC is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with our reserves or the oil and gas industry in general. It is also possible that reserve engineers may make different estimates of reserves and future net revenues based on the same available data.
 
 
 
The estimated future net revenues attributable to our net proved reserves are prepared in accordance with current SEC guidelines, and are not intended to reflect the fair market value of our reserves. In accordance with the rules of the SEC, our reserve estimates are prepared using an average of beginning of month prices received for oil and gas for the preceding twelve months. Future reductions in prices below the average calculated would result in the estimated quantities and present values of our reserves being reduced.
 
A substantial portion of our proved reserves are or will be subject to service contracts, production sharing contracts and other arrangements. The quantity of oil and gas that we will ultimately receive under these arrangements will differ based on numerous factors, including the price of oil and gas, production rates, production costs, cost recovery provisions and local tax and royalty regimes. Changes in many of these factors do not affect estimates of U.S. reserves in the same way they affect estimates of proved reserves in foreign jurisdictions, or will have a different effect on reserves in foreign countries than in the United States. As a result, proved reserves in foreign jurisdictions may not be comparable to proved reserve estimates in the United States.
 
Part of our business plan is to acquire rights to foreign natural resources. Even though we have not yet achieved our goal of acquiring such assets, we anticipate that if we do we will have less control over our foreign investments than domestic investments, and turmoil in foreign countries may affect our foreign investments.
 
International assets and operations are subject to various political, economic and other uncertainties, including, among other things, the risks of war, expropriation, nationalization, renegotiation or nullification of existing contracts, taxation policies, foreign exchange restrictions, changing political conditions, international monetary fluctuations, currency controls and foreign governmental regulations that favor or require the awarding of drilling contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. In addition, if a dispute arises with foreign operations, we may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons, especially foreign oil ministries and national oil companies, to the jurisdiction of the United States.
 
Private ownership of oil and gas reserves under oil and gas leases in the United States differs distinctly from our ownership of foreign oil and gas properties. In the foreign countries in which we may do business, the state generally retains ownership of the minerals and consequently retains control of, and in many cases participates in, the exploration and production of hydrocarbon reserves. Accordingly, operations outside the United States may be materially affected by host governments through royalty payments, export taxes and regulations, surcharges, value added taxes, production bonuses and other charges.
 
Our proposed international operations expose us to legal, political and economic risks in different countries as well as currency exchange rate fluctuations that could harm our business and financial results. We could be adversely affected by our failure to comply with laws applicable to our foreign activities, such as the U.S. Foreign Corrupt Practices Act.
 
There are risks inherent in doing business internationally, including:
  • Imposition of governmental controls and changes in laws, regulations, policies, practices, tariffs and taxes;
  • Political and economic instability;
  • Changes in United States and other national government trade policies affecting the market for our services;
  • Potential non-compliance with a wide variety of laws and regulations, including the United States Foreign Corrupt Practices Act (FCPA) and similar non-United States laws and regulations;
  • Currency exchange rate fluctuations, devaluations and other conversion restrictions;
  • Restrictions on repatriating foreign profits back to the United States; and
  • Difficulties in staffing and managing international operations.
The FCPA and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our internal policies mandate compliance with all applicable anti-bribery laws. We require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. There is no assurance that our policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged FCPA violations is expensive and could consume significant time and attention of our senior management.
 
 
 
In spite of the lack of revenue as of the date of this Report, any of these factors could have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
Competitive industry conditions may negatively affect our ability to conduct operations.
 
We operate in the highly competitive areas of oil exploration, development and production. We compete with, and may be outbid by, competitors in our attempts to acquire exploration and production rights in oil and gas properties. These properties include exploration prospects as well as properties with proved reserves. There is also competition for contracting for drilling equipment and the hiring of experienced personnel. Factors that affect our ability to compete in the marketplace include:
  • our access to the capital necessary to drill wells and acquire properties;
  • our ability to acquire and analyze seismic, geological and other information relating to a property;
  • our ability to retain and hire the personnel necessary to properly evaluate seismic and other information relating to a property;
  • our ability to hire experienced personnel, especially for our accounting, financial reporting, tax and land departments;
  • the location of, and our ability to access, platforms, pipelines and other facilities used to produce and transport oil and gas production; and
  • the standards we establish for the minimum projected return on an investment of our capital.
Our competitors include major integrated oil companies and substantial independent energy companies, many of which possess greater financial, technological, personnel and other resources than we do. These companies may be able to pay more for oil and natural gas properties, evaluate, bid for and purchase a greater number of properties than our financial or human resources permit, and are better able than we are to continue drilling during periods of low oil and gas prices, to contract for drilling equipment and to secure trained personnel. Our competitors may also use superior technology which we may be unable to afford or which would require costly investment by us in order to compete.
 
We may be unable to integrate successfully the operations of any acquisitions with our operations and we may not realize all the anticipated benefits of any future acquisition.
 
Failure to successfully assimilate any acquisitions could adversely affect our financial condition and results of operations.
 
Acquisitions involve numerous risks, including:
  • operating a significantly larger combined organization and adding operations;
  • difficulties in the assimilation of the assets and operations of the acquired business, especially if the assets acquired are in a new business segment or geographic area;
  • the risk that oil and natural gas reserves acquired may not be of the anticipated magnitude or may not be developed as anticipated;
  • the loss of significant key employees from the acquired business;
  • the diversion of management’s attention from other business concerns;
  • the failure to realize expected profitability or growth;
  • the failure to realize expected synergies and cost savings;
  • coordinating geographically disparate organizations, systems and facilities; and
  • coordinating or consolidating corporate and administrative functions.
 
 
 
Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. If we consummate any future acquisition, our capitalization and results of operation may change significantly, and you may not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in evaluating future acquisitions.
 
Properties that we buy may not produce as projected and we may be unable to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against such liabilities, which could result in material liabilities and adversely affect our financial condition.
 
One of our growth strategies is to capitalize on opportunistic acquisitions of oil and gas reserves. Any future acquisition will require an assessment of recoverable reserves, title, future oil and gas prices, operating costs, potential environmental hazards, potential tax and ERISA liabilities, and other liabilities and similar factors. Ordinarily, our review efforts are focused on the higher valued properties and are inherently incomplete because it generally is not feasible to review in depth every individual property involved in each acquisition. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Inspections may not always be performed on every well, and potential problems, such as ground water contamination and other environmental conditions and deficiencies in the mechanical integrity of equipment are not necessarily observable even when an inspection is undertaken. Any unidentified problems could result in material liabilities and costs that negatively impact our financial condition.
 
Additional potential risks related to acquisitions include, among other things:
  • incorrect assumptions regarding the future prices of oil and gas or the future operating or development costs of properties acquired;
  • incorrect estimates of the oil and gas reserves attributable to a property we acquire;
  • an inability to integrate successfully the businesses we acquire;
  • the assumption of liabilities;
  • limitations on rights to indemnity from the seller;
  • the diversion of management’s attention from other business concerns; and
  • losses of key employees at the acquired businesses.
If we consummate any future acquisitions, our capitalization and results of operations may change significantly.
 
We require subcontractors and suppliers to assist us in providing certain services, and we may be unable to retain the necessary consultants, subcontractors or obtain supplies to complete certain projects adversely affecting our business.
 
We use and intend to continue to use consultants and subcontractors to perform portions of our oil production and to manage workflow. We are currently dependent on James Blumental for the Works Property production. However, general market conditions may limit the availability of subcontractors to perform portions of our requirements causing delays and increases in our costs, which could have an adverse effect on our financial condition, results of operations and cash flows.
 
We also use and will continue to use suppliers to provide the materials and some equipment used for oil and gas projects. If a supplier fails to provide supplies and equipment at a price we estimated or fails to provide supplies and equipment that is not of acceptable quantity, we may be required to source the supplies or equipment at a higher price or may be required to delay performance of the project. The additional cost or project delays could negatively impact project profitability.
 
Failure of a consultant, subcontractor or supplier to comply with laws, rules or regulations could negatively affect our business.
 
Title to our oil and natural gas producing properties cannot be guaranteed and may be subject to prior recorded or unrecorded agreements, transfers, claims or other defects.
 
Although title reviews may be conducted prior to the purchase of oil and natural gas producing properties or the commencement of drilling wells, those reviews do not guarantee or certify that an unforeseen defect in the chain of title will not arise to defeat our claim. Unregistered agreements or transfers, or native land claims, may affect title. If title is disputed, we will need to defend our ownership through the courts, which would likely be an expensive and protracted process and have a negative effect on our operations and financial condition. In the event of an adverse judgment, we would lose or property rights. A defect in our title to any of our properties may have a material adverse effect on our business, financial condition, results of operations and prospects.
 
 
 
Compliance with environmental and other government regulations could be costly and could negatively impact production.
 
The laws and regulations of the United States regulate our current business. Our operations could result in liability for personal injuries, property damage, natural resource damages, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. Failure to comply with environmental laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties and the issuance of orders enjoining operations. In addition, we could be liable for environmental damages caused by, among others, previous property owners or operators. We could also be affected by more stringent laws and regulations adopted in the future, including any related to climate change and greenhouse gases and use of fracking fluids, resulting in increased operating costs. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could have a material adverse effect on our financial condition, results of operations and liquidity. Additionally, more stringent GHG regulation could impact demand for oil and gas.
 
These laws and governmental regulations, which cover matters including drilling operations, taxation and environmental protection, may be changed from time to time in response to economic or political conditions and could, have a significant impact on our operating costs, as well as the oil and gas industry in general. While we believe that we are currently in compliance with environmental laws and regulations applicable to our operations, no assurances can be given that we will be able to continue to comply with such environmental laws and regulations without incurring substantial costs.
 
Significant physical effects of climatic change have the potential to damage our facilities, disrupt our production activities and cause us to incur significant costs in preparing for or responding to those effects.
 
In an interpretative guidance on climate change disclosures, the SEC indicates that climate change could have an effect on the severity of weather (including hurricanes and floods), sea levels, the arability of farmland, and water availability and quality. If such effects were to occur, our exploration and production operations have the potential to be adversely affected. Potential adverse effects could include damages to our facilities from powerful winds or rising waters in low-lying areas, disruption of our production activities either because of climate-related damages to our facilities in our costs of operation potentially arising from such climatic effects, less efficient or non-routine operating practices necessitated by climate effects or increased costs for insurance coverage in the aftermath of such effects. Significant physical effects of climate change could also have an indirect effect on our financing and operations by disrupting the transportation or process-related services provided by midstream companies, service companies or suppliers with whom we have a business relationship. We may not be able to recover through insurance some or any of the damages, losses or costs that may result from potential physical effects of climate change. In addition, our hydraulic fracturing operations require large amounts of water. Should climate change or other drought conditions occur, our ability to obtain water in sufficient quality and quantity could be impacted and in turn, our ability to perform hydraulic fracturing operations could be restricted or made more costly.
 
From time to time we may hedge a portion of our production, which may result in our making cash payments or prevent us from receiving the full benefit of increases in prices for oil and gas.
 
We may reduce our exposure to the volatility of oil and gas prices by hedging a portion of our production. Hedging also prevents us from receiving the full advantage of increases in oil or gas prices above the maximum fixed amount specified in the hedge agreement. Conversely, hedging may limit our ability to realize cash flows from commodity price increases. In a typical hedge transaction, we have the right to receive from the hedge counterparty the excess of the maximum fixed price specified in the hedge agreement over a floating price based on a market index, multiplied by the quantity hedged. If the floating price exceeds the maximum fixed price, we must pay the counterparty this difference multiplied by the quantity hedged even if we had insufficient production to cover the quantities specified in the hedge agreement. Accordingly, if we have less production than we have hedged when the floating price exceeds the fixed price.
 
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Reform Act, which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The legislation required the Commodities Futures Trading Commission, or the CFTC, and the SEC to promulgate rules and regulations implementing the new legislation, which they have done since late 2010. The CFTC has introduced dozens of proposed rules coming out of the Dodd-Frank Reform Act, and has promulgated numerous final rules based on those proposals. The effect of the proposed rules and any additional regulations on our business is not yet entirely clear, but it is increasingly clear that the costs of derivatives-based hedging for commodities will likely increase for all market participants. Of particular concern, the Dodd-Frank Reform Act does not explicitly exempt end users from the requirements to post margin in connection with hedging activities. While several senators have indicated that it was not the intent of the Act to require margin from end users, the exemption is not in the Act. While rules proposed by the CFTC and federal banking regulators appear to allow for non-cash collateral and certain exemptions from margin for end users, the rules are not final and uncertainty remains.
 
 
 
The full range of new Dodd-Frank requirements to be enacted, to the extent applicable to us or our derivatives counterparties, may result in increased costs and cash collateral requirements for the types of derivative instruments we use to mitigate and otherwise manage our financial and commercial risks related to fluctuations in oil and natural gas prices. In addition, final rules were promulgated by the CFTC imposing federally-mandated position limits covering a wide range of derivatives positions, including non-exchange traded bilateral swaps related to commodities including oil and natural gas. These position limit rules were vacated by a Federal court in September 2012, and the CFTC has appealed that decision and could re-promulgate the rules in a manner that addresses the defects identified by the court. If these position limits rules go into effect in the future, they are likely to increase regulatory monitoring and compliance costs for all market participants, even where a given trading entity is not in danger of breaching position limits.
 
Certain U.S. federal income tax preferences currently available with respect to oil and natural gas production may be eliminated as a result of future legislation.
 
In recent years, the Obama administration’s budget proposals and other proposed legislation have included the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production. If enacted into law, these proposals would eliminate certain tax preferences applicable to taxpayers engaged in the exploration or production of natural resources. These changes include, but are not limited to (i) the repeal of the percentage depletion allowance for oil and gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for U.S. production activities and (iv) the increase in the amortization period from two years to seven years for geophysical costs paid or incurred in connection with the exploration for or development of, oil and gas within the United States. It is unclear whether any such changes will be enacted or how soon any such changes would become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could negatively affect our financial condition and results of operations.
 
We rely on our senior management team and the loss of a single member could adversely affect our operations.
 
We are highly dependent upon our executive officers. The unexpected loss of the services of any of these individuals could have a detrimental effect on us. We do not maintain key man life insurance on any of our executive officers.
 
We rely on a single purchaser of our production, which could have a material adverse effect on our results of operations.
 
We sell our crude oil and condensate obtained on the Works Property to Countrymark Refining and Logistics, LLC pursuant to an agreement between our operator, TEHI, and Countrymark (the “Countrymark Agreement”). The Countrymark Agreement does not cover the price we receive for our crude oil and condensate. We sell to Countrymark at prevailing daily, and traditionally volatile, market prices, which normally incorporate regional differentials that include but are not limited to transportation costs and adjustments for product quality. The Countrymark Agreement may be cancelled on relatively short notice and does not commit Countrymark to acquire specific amounts of crude oil and condensate. The loss of Countrymark as a purchaser could have a material adverse effect on our business, financial condition and results of operations.
 
We may incur additional healthcare costs arising from federal healthcare reform legislation.
 
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in the U.S. This legislation expands health care coverage to many uninsured individuals and expands coverage to those already insured. The changes required by this legislation could cause us to incur additional healthcare and other costs.
 
Our financial results are based upon estimates and assumptions that may differ from actual results and such differences between the estimates and actual results may have an adverse effect on our financial condition, results of operations and cash flows.
 
In preparing our consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles, many estimates and assumptions are used by management in determining the reported revenues and expenses recognized during the periods presented, and disclosures of contingent assets and liabilities known to exist as of the date of the financial statements. These estimates and assumptions must be made because certain information that is used in the preparation of our financial statements cannot be calculated with a high degree of precision from data available, is dependent on future events, or is not capable of being readily calculated based on generally accepted methodologies. Often times, these estimates are particularly difficult to determine, and we must exercise significant judgment. Estimates may be used in our assessments of the allowance for doubtful accounts, useful lives of property and equipment, fair value assumptions in analyzing goodwill and long-lived asset impairments, self-insured claims liabilities, revenue recognition under percentage-of-completion accounting and provisions for income taxes. Actual results for estimates could differ materially from the estimates and assumptions that we use, which could have an adverse effect on our financial condition, results of operations and cash flows.
 
 
 
Risks Relating to Controls and Procedures
 
If we are unable to develop and maintain an effective system of internal controls, stockholders and prospective investors may lose confidence in the reliability of our financial reporting.
 
The Company has identified material weaknesses in our internal controls. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, prevent fraud due to inability to prevent or detect misappropriation of our assets. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm the trading price of our stock.
 
The Company has identified the following factors of the material weaknesses, as further discussed below in this Report:
  • 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 these material weaknesses 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. Our board intends to take greater responsibility and oversight of our day-to-day operations. However, until such time, these material weaknesses will continue to exist.
 
Risks Relating to Our Common Stock
 
Future financings could adversely affect common stock ownership interest and rights in comparison with those of other security holders.
 
Our board of directors has the power to issue additional shares of common stock and other securities convertible into common stock without stockholder approval. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders.
 
If we issue any additional common stock or securities convertible into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result in a reduction of the per share book value of our common stock and result in what is more commonly known as dilution.
 
 
 
Our common stock may be deemed a “penny stock,” which would make it more difficult for our investors to sell their shares.
 
Our common stock may be subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules apply to non-Nasdaq listed companies whose common stock trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquires of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers will in to act as market makers in such securities is limited.
 
Shares of the Company’s common stock may continue to be subject to price volatility and illiquidity because the shares are thinly traded and may never become eligible for trading on a national securities exchange. While the Company may at some point be able to meet the requirements necessary for its common stock to be listed on a national securities exchange, the Company cannot assure investors or potential investors that it will ever achieve a listing of its common stock. Initial listing is subject to a variety of requirements, including minimum asset values, minimum revenue, minimum trading price and minimum public ‘‘float” requirements. There are also continuing eligibility requirements for companies listed on public trading markets. If the Company is unable to satisfy the initial or continuing eligibility requirements of any such market, then its stock may not be listed or could be delisted. This could result in a lower trading price for the Company’s common stock and may limit investors ability to sell their shares, any of which could result in losing some or all of their investment.
 
Our Chairman of the Board has control over key decision making as a result of his control of a majority of our voting stock.
 
Nikolas Konstant, our Chairman and CFO, exercises voting rights with respect to an aggregate of 32,500,100 shares of our common stock, which represents approximately 68.08% of the voting power of our outstanding capital stock as of March 30, 2015.  As a result, Mr. Konstant has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other stockholders do not support. This concentrated control could also discourage a potential investor from acquiring our common stock due to the limited voting power of such stock relative to the shares of common stock and might harm the market price of our common stock. In addition, Mr. Konstant has the ability to control the management and major strategic investments of our company as a result of his positions and his ability to control the election or replacement of our directors. In the event of his death, the shares of our capital stock that Mr. Konstant owns will be transferred to the persons or entities that he designates. As a board member and officer, Mr. Konstant owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Konstant is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.
 
A substantial number of our shares are available for sale in the public market and sales of those shares could adversely affect our stock price.
 
Sales of a substantial number of shares of common stock into the public market, or the perception that such sales could occur, could substantially reduce our stock price in the public market for our common stock, and could impair our ability to obtain capital through a subsequent sale of our securities.
 
The public market for our common stock is minimal.
 
Our common stock is thinly-traded on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company, such as us, or purchase or recommend the purchase of our common stock until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our common stock is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. There can be no assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained. Due to these conditions, we can give you no assurance that you will be able to sell your common stock at or near ask prices or at all.
 
It is anticipated that our stock price will be volatile and the value of your shares may be subject to sudden decreases.
 
It is anticipated that our common stock price will be volatile. Our common stock price may fluctuate due to factors such as:
  • actual or anticipated fluctuations in our quarterly and annual operating results;
  • actual or anticipated product constraints;
  • decreased demand for our products resulting from changes in consumer preferences;
  • product and services announcements by us or our competitors;
  • loss of any of our key executives;
  • regulatory announcements, proceedings or changes;
  • announcements in the oil industry;
  • competitive product developments;
  • intellectual property and legal developments;
  • mergers or strategic alliances in the oil industry;
  • any business combination we may propose or complete;
  • any financing transactions we may propose or complete; or
  • broader industry and market trends unrelated to our performance.
 
 
 
Potential fluctuations in our operating results could lead to fluctuations in the market price for our common stock.
 
Our results of operations are expected to fluctuate significantly from quarter-to-quarter, depending upon numerous factors, including:
  • demand for our products;
  • changes in our pricing policies or those of our competitors;
  • increases in our operating costs;
  • the number, timing and significance of product enhancements and new product announcements by us and our competitors;
  • governmental regulations affecting the production or use of our products; and
  • personnel changes.
We may be unable to achieve or sustain profitability or raise sufficient additional capital, which could result in a decline in our stock price.
 
Future operating performance is never certain, and if our operating results fall below the expectations of securities analysts or investors, the trading price of our common stock will likely decline. Our ability to generate sufficient cash flow or to raise sufficient capital to fund our operating and capital expenditures depends on our ability to improve operating performance. This in turn depends, among other things, on our ability to implement a variety of new and upgraded operational and financial systems, procedures and controls and expand, train, manage and motivate our workforce. All of these endeavors will require substantial management efforts and skills and require significant additional expenditures. We cannot assure you that we will be able to effectively improve our operating performance, and any failure to do so may have a material adverse effect on our business and financial results.
 
There may be restrictions on your ability to resell shares of common stock under Rule 144.
 
Currently, Rule 144 under the Securities Act permits the public resale of securities under certain conditions after a six or twelve month holding period by the seller, including requirements with respect to the manner of sale, sales volume restrictions, filing requirements and a requirement that certain information about the issuer is publicly available (the “Rule 144 resale conditions”). At the time that stockholders intend to resell their shares under Rule 144, there can be no assurances that we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or, if so, current in our reporting requirements under the Exchange Act, in order for stockholders to be eligible to rely on Rule 144 at such time. In addition to the foregoing requirements of Rule 144 under the federal securities laws, the various state securities laws may impose further restrictions on the ability of a holder to sell or transfer the shares of common stock.
 
If we are, or were, a U.S. real property holding corporation, non-U.S. holders of our common stock or other security convertible into our common stock could be subject to U.S. federal income tax on the gain from the sale, exchange, or other disposition of such security.
 
If we are or ever have been a U.S. real property holding corporation (a “USRPHC”) under the Foreign Investment Real Property Tax Act of 1980, as amended (“FIRPTA”) and applicable United States Treasury regulations (collectively, the “FIRPTA Rules”), unless an exception described below applies, certain non-U.S. investors in our common stock (or options or warrants for our common stock would be subject to U.S. federal income tax on the gain from the sale, exchange or other disposition of shares of our common stock (or such options or warrants), and such non-U.S. investor would be required to file a United States federal income tax return. In addition, the purchaser of such common stock, option or warrant would be required to withhold from the purchase price an amount equal to 10% of the purchase price and remit such amount to the U.S. Internal Revenue Service.
 
In general, under the FIRPTA Rules, a company is a USRPHC if its interests in U.S. real property comprise at least 50% of the fair market value of its assets. If we are or were a USRPHC, so long as our common stock is “regularly traded on an established securities market” (as defined under the FIRPTA Rules), a non-U.S. holder who, actually or constructively, holds or held no more than 5% of our common stock is not subject to U.S. federal income tax on the gain from the sale, exchange, or other disposition of our common stock under FIRPTA. In addition, other interests in equity of a USRPHC may qualify for this exception if, on the date such interest was acquired, such interests had a fair market value no greater than the fair market value on that date of 5% of our common stock. Any of our common stockholders (or owners of options or warrants for our common stock) that are non-U.S. persons and own or anticipate owning more than 5% of our common stock (or, in the case of options or warrants, of a value greater than the fair market value of 5% of our common stock) should consult their tax advisors to determine the consequences of investing in our common stock (or options or warrants). We have not conducted a formal analysis of whether we are or have ever been a USRPHC.
 
 
 
Our anti-takeover provisions or provisions of Nevada law, in our articles of incorporation and bylaws and the common share purchase rights that accompany shares of our common stock could prevent or delay a change in control of us, even if a change of control would benefit our stockholders.
 
The Nevada Revised Statutes contain provisions governing the acquisition of a controlling interest in certain publicly held Nevada corporations. These laws provide generally that any person that acquires 20% or more of the outstanding voting shares of certain publicly held Nevada corporations, such as us, in the secondary public or private market must follow certain formalities before such acquisition or they may be denied voting rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights in whole or in part. These laws provide that a person acquires a "controlling interest" whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the Nevada Revised Statutes, would enable that person to exercise (1) one-fifth or more, but less than one-third, (2) one-third or more, but less than a majority or (3) a majority or more, of all of the voting power of the corporation in the election of directors. The Control Share Acquisition Statute generally applies only to Nevada corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and which conduct business directly or indirectly in Nevada. Our Bylaws provide that the provisions of the Nevada Revised Statutes, known as the “Control Share Acquisition Statute” apply to the acquisition of a controlling interest in us, irrespective of whether we have 200 or more stockholders of record, or whether at least 100 of our stockholders have addresses in the State of Nevada appearing on our stock ledger. These laws may have a chilling effect on certain transactions if our articles of incorporation or bylaws are not amended to provide that these provisions do not apply to us or to an acquisition of a controlling interest, or if our disinterested stockholders do not confer voting rights in the control shares.
 
 
None.
 
 
Principal Offices
 
On December 27, 2012, Eos entered into an office lease for 3,127 square feet of space located at 1999 Avenue of the Stars, Suite 2520, Los Angeles, California with an unaffiliated third party. This space is used as our principal office. The lease terminates on April 30, 2017. The monthly rental for 2014 was $15,635.
 
The Works
 
On June 6, 2011 Eos acquired a 100% working interest and 80% net revenue interest in the Works Property, which consists of five land leases in Edwards County, Illinois which have historically produced oil since 1940.
 
 
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 Merger Agreement
 
On September 17, 2014 we entered into an Agreement and Plan of Merger with Dune and Eos Merger Sub. Inc.  Pursuant to 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 Dune 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, our sources of capital for the merger and tender offer were withdrawn, and we were unable to proceed 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 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, 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 Eos breached the Dune Merger Agreement and is entitled to the breakup fee set forth in the Dune Merger Agreement. We do not believe that we have liability for the break-up fee and we intend to vigorously defend ourselves in an action is brought.
 
 
Not applicable.
 
 
 
Common Stock Market Information
 
Our common stock is quoted on the OTCBB. It was quoted under the symbol “CLTK” from October 30, 2008, the date we had our 15c2-11 approval, until February 15, 2013, when we changed our symbol to “EOPT.” Trading in our common stock has not been extensive and such trades cannot be characterized as constituting an active trading market. The following is a summary of the high and low closing prices of our common stock on the OTCBB during the periods presented, as reported on the website of the OTCBB Stock Market. Such prices represent inter-dealer prices, without retail mark-up, mark down or commissions, and may not necessarily represent actual transactions:
 
As of March  30, 2015 we had 47,738,882 outstanding shares of common stock and 147 stock holders of record.  These holders of record include depositories that hold shares of stock for brokerage firms, which in turn hold shares of stock for numerous beneficial owners.

The following table shows the range of market prices of our common stock during 2014 and 2013.
 
   
Closing Sale Price
  
   
High
    
Low
  
             
Year Ended December 31, 2014
            
Fourth Quarter
  
$
14.50
    
$
6.50
  
Third Quarter
  
$
15.05
    
$
12.95
  
Second Quarter
  
$
17.00
    
$
12.50
  
First Quarter
  
$
19.50
    
$
8.00
  
                 
Year Ended December 31, 2013
                
Fourth Quarter
  
$
8.55
    
$
7.50
  
Third Quarter
  
$
8.50
    
$
1.22
  
Second Quarter
  
$
16.00
    
$
6.40
  
First Quarter
  
$
12.00
    
$
1.20
  

Dividends
 
On December 27, 2013, our Board of Directors authorized the issuance of 6,856 shares of our restricted common stock to four former holders of Eos’ Series A Convertible Preferred Stock. This issuance was payment for $27,386 of previously accrued but unpaid dividends that were owed to these four holders at $4.00 per share.
 
Except as set forth immediately above, we have not declared any dividends and we do not plan to declare any dividends in the foreseeable future. There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:
 
 
  • we would not be able to pay our debts as they become due in the usual course of business; or
  • our total assets would be less than the sum of our total liabilities, plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution, unless otherwise permitted under our articles of incorporation.
Equity Compensation Plan Information
 
We do not have any equity compensation plans which have been approved by the shareholders.
 
Recent Sales of Unregistered Securities
 
We entered into a financing commitment on August 31, 2011 with GEM Global Yield Fund, a member of the Global Emerging Markets Group (“GEM”), whereby GEM would provide and fund us with up to $400 million, through a common stock subscription agreement (the “Commitment”), for the Company’s African acquisition activities.
 
We formalized the Commitment with GEM 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”). Together with formalizing the Commitment, pursuant to the Commitment Agreements and subject to certain restrictions contained therein, the Commitment may be drawn down at our option as we issue shares of common stock to GEM in return for funds.
 
Under the agreed upon structure, and subject to certain prerequisites, we control the timing and amount of any drawdown, and the funds withdrawn by us may be used to acquire any oil and gas assets we identify, publicly or privately owned, national or international, as well as for working capital purposes.
 
In consideration of GEM’s continued support of the Company and their lack of termination of or withdrawal from the Commitment between August 31, 2011 and November 21, 2012, we issued to GEM and a GEM affiliate in 2012 a total of six common stock purchase warrants to purchase a total of 8,372,000 shares of common stock. Two of the warrants to purchase a total of 2,399,000 shares vested in 2012.  The vesting conditions of the four remaining warrants were amended with the Commitment Agreements of which 1,303,000 warrants vested in 2013, and 4,670,000 warrants remain unvested as of December 31, 2014. The following summarizes the amendments made to the four warrants on July 11, 2013 in connection with the Commitment Agreements:
  • The GEM B Warrant: The Company issued a warrant to purchase 651,500 shares of common stock of the Company, par value $0.0001 per share, to GEM at an exercise price of $3.00 per share (the “GEM B Warrant”). As amended, the GEM B Warrant’s vesting conditions were altered so that the GEM B Warrant vested on July 11, 2013. The other terms and conditions of the original GEM B Warrant remain unaltered.
  • The 590 Partners B Warrant: The Company issued a warrant to purchase 651,500 shares of common stock of the Company, par value $0.0001 per share, to 590 Partners at an exercise price of $3.00 per share (the “590 Partners B Warrant”). All of the terms in the 590 Partners B Warrant for vesting, exercise, expiration and anti-dilution are identical to those in the GEM B Warrant, as amended.
  • The GEM C Warrant: The Company issued a warrant to purchase 2,335,000 shares of common stock of the Company, par value $0.0001 per share, to GEM at an exercise price of $5.35 per share (the “GEM C Warrant”). Prior to its amendment, the GEM C Warrant would vest only upon the Company acquiring certain rights to oil and gas in Ghana. As amended, 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. Prior to its amendment, the GEM C Warrant also provided the Company with an option to elect to shorten the term of the GEM C Warrant (the “Company Shortening Option”), so long as certain terms and conditions had been satisfied. The amendment changed some of the terms and conditions that must be satisfied prior to the Company’s use of its Company Shortening Option. As amended, 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 set forth in (i); (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.  The other terms and conditions of the original GEM C Warrant remain unaltered.  These options have not vested as of December 31, 2014.
 
 
 
  • The 590 Partners C Warrant: The Company issued a warrant to purchase 2,335,000 shares of common stock of the Company, par value $0.0001 per share, to 590 Partners 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, as amended.
As further consideration for GEM’s execution of the Commitment Agreements, on July 11, 2013 GEM and GEM affiliates received common stock purchase warrants to purchase an additional 1,500,000 shares of common stock of the Company (“Additional Warrants”). The Additional Warrants vest on July 11, 2014 with a ceiling of $8, expire after five years and have an exercise price equal to the 30 day average trading price of the Company’s common stock on July 11, 2014. If the shares underlying the Additional Warrant are not registered within 24 months of July 11, 2013, the expiration date will be extended for each additional day the shares underlying Additional Warrant remain unregistered after 24 months.
 
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 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.
 
On July 1, 2012, Quantum Advisors, LLC ("Quantum"), of which John Mitola is the managing member, entered into a Services Agreement (the "Agreement") with a wholly-owned subsidiary of Eos Petro, Inc. ("Eos"), in order to provide consulting services to Eos and its subsidiaries. Pursuant to the Agreement, Quantum was granted an option to acquire 200,000 shares of common stock of Eos (the "Option").  None of the shares in the Option have an exercise price or expiration date. Instead, 50,000 shares in the Option vest and automatically convert into shares of common stock of Eos on each of the following dates, so long as the Agreement is still in effect on each such date: (i) July 1, 2012; (ii) December 31, 2012; (iii) July 1, 2013; and (iv) December 31, 2013. If the Agreement is terminated, any part of the Option that has not yet vested by the date of termination will expire.  This Agreement expired on December 31, 2014.
 
When first issued, the Option was to acquire 200,000 shares of common stock of Eos Global Petro, Inc. The Option was converted into an option to acquire 200,000 shares of Series B Preferred Stock of Eos on October 12, 2012 in connection with the merger of Eos and the Eos Global Petro, Inc. The Option was again converted on May 20, 2013 into an option to acquire 200,000 shares of common stock of Eos (the "Option" described in the prior paragraph) after Eos filed an amendment to its Articles of Incorporation which triggered the automatic conversion of all shares of Eos' Series B Preferred Stock into shares of common stock. Any shares of common stock of Eos Global Petro, Inc., as well as any shares of Series B Preferred Stock of Eos, that were issued to Quantum from the Option prior to May 20, 2013 have likewise been converted into an equal number of shares of Eos' common stock.
 
On January 21, 2013, the Company entered into a consulting agreement with SAI Geoconsulting, Inc. (“SAI”). The Company retained SAI on a non-exclusive basis to provide consulting support and advisory services for oil and gas activities. The agreement commenced on January 15, 2013 and continued for 24 months. Upon SAI’s execution of the agreement, SAI received a warrant to purchase up to 250,000 shares of the Company’s common stock at a strike price of $2.50 per share. The warrant was exercisable upon effectuation of the Stock Split, and the warrant expires on January 17, 2018. So long as the Stock Split has been effectuated, 50,000 warrants vest annually every January 21st, commencing on January 21, 2013 and ending January 21, 2017.  The consulting agreement was terminated on March 14, 2014.
 
On August 2, 2012, Eos executed a series of agreements with 1975 Babcock, LLC (“Babcock”) in order to secure a $300,000 loan and a $7,500 a month Texas office lease. On November 7, 2013, Eos and Babcock agreed that the following payments to Babcock and certain Babcock affiliates, which were made by the Company, would pay off and fully satisfy all of Eos’ remaining obligations under the loan and lease:
  • On November 8, 2013, a cash payment of $100,000;
  • On November 15, 2013, a cash payment of $100,000;
  • On January 9, 2014, a cash payment of $130,000; and
  • On January 13, 2014, an issuance of 70,000 restricted shares of the Company’s common stock, recorded for accounting purposes during the 2013 fiscal year.
 
 
On October 24, 2011, Eos received $200,000 from RT Holdings, LLC (“RT”) in exchange for an unsecured promissory note 6% interest per annum, originally due November 7, 2011. On November 18, 2013, RT and Eos acknowledged that, as of November 8, there was $232,235, inclusive of interest, outstanding on the note. The parties agreed that such amount would be paid off and fully satisfied by the following issuances and payments, which the Company did make:
  • On November 18, 2013, a cash payment of $75,000;
  • On November 19, 2013, an issuance of 28,855 shares of the Company’s restricted common stock; and
  • On February 7, 2014, a cash payment of $75,000 and an issuance of 66,000 shares of the Company’s restricted common stock.
Pursuant to a consulting agreement effective as of August 1, 2013 (the “BAS Agreement”), between the Company, AGRA Capital, LLC (“AGRA”) and BA Securities, LLC (“BAS”), AGRA and BAS agreed to provide financial advisory services to the Company. In exchange for services provided under the BAS Agreement, on February 10, 2014 the Company issued to AGRA and BAS an aggregate of 500,000 shares of its restricted common stock, recorded for accounting purposes during the 2013 fiscal year.
 
In addition, on November 6, 2013, the Company issued 100,000 warrants to Agra pursuant to their consulting agreement related to the closing of the LowCal convertible notes.
 
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.  The warrants have an exercise price of $2.50 per share, and expire on June 30, 2017.
 
On June 23, 2013, the Company entered into a one year consulting agreement with Hahn Engineering Inc. (“Hahn”). Eos retained Hahn to provide oil and gas consulting services. Pursuant to the agreement, so long as it has not been terminated, commencing July 23, 2013 Hahn is to receive 2,000 restricted shares of common stock each month as compensation, to be capped at 24,000 shares total. 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 month.
 
As of March 31, 2015, the agreement with Hahn was still in effect, and the Company has issued an aggregate of 42,000 restricted shares of common stock to Hahn.
 
On April 1, 2014, the Company entered into a consulting agreement with Mark Bitter (“Bitter”). In exchange for consulting services, the Company issued to Bitter a warrant to purchase an aggregate of 20,000 restricted shares of the Company’s common stock, which vest and become exercisable on May 1, 2014 at $6.00 per share, and expire on May 1, 2017.
 
On August 1, 2014, the Company issued to BAS Securities, LLC (“BAS”), one of the Company’s advisors, 500,000 warrants to purchase restricted shares of its common stock at $4.00 a share, vesting immediately and expiring after four years. The warrants were provided for BAS continuous support in providing consulting services to the Company.
 
Furthermore, pursuant to an agreement effective August 1, 2014, the Company amended the terms of its August 1, 2013 consulting agreement with BAS to appoint BAS as a non-exclusive M&A advisor for the Company. In exchange for the provision of such M&A advisory services, at the close of certain potential acquisitions, BAS shall receive a cash fee equal to 1%-2% of the total size of the acquisition, plus warrant coverage equal to 3.75% of the total amount of the acquisition, divided by 2.5 and at an exercise price of $4.00 per share. Such warrants will have piggy-back registration rights, vest immediately and expire July 31, 2018.
 
During 2014, the Company issued 400,000 shares due to LowCal previously classified as “shares of common stock to be issued” on the December 31, 2013 consolidated financial statements , and an additional 600,000 shares in connection with the Company’s receipt of the remaining funding of $1,500,000 pursuant to the second amendment of the LowCal Note.

We relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), with respect to each of the issuances of unregistered securities set forth above.
 
Performance Graph
 
The following Performance Graph and related information shall not be deemed to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
 
 
 
The following graph compares the cumulative total return to holders of the Company’s common stock during the period commencing July 8, 2013 and ending December 31, 2014. The return is compared to the cumulative total return during the same period achieved on the NASDAQ Composite Index and a peer group index selected by our management that includes three public companies within our industry (the “Peer Group”). The Peer Group is composed of Magnum Hunter Resources Corp., Cobalt International Energy, Inc., and Athlon Energy, Inc. The companies in the Peer Group were selected because they comprise a broad group of publicly held corporations, each of which has some operations similar to ours. When taken as a whole, management believes the Peer Group more closely resembles our total business than any individual company in the group.
 
 
The returns are calculated assuming that an investment with a value of $100 was made in the Company’s common stock and in each stock as of July 8, 2013. All dividends were reinvested in additional shares of common stock, although the comparable companies did not pay dividends during the periods shown. The Peer Group investment is calculated based on a weighted average of the company share prices. The graph lines merely connect the measuring dates and do not reflect fluctuations between those dates.
 
The stock performance shown on the graph is not intended to be indicative of future stock performance.
 
 
The following consolidated selected financial data is derived from the Company’s audited financial statements for the periods indicated below. The following consolidated financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere in this report.
 
Statement of operations data
  
 
    
 
    
 
    
 
  
 
  
 
    
 
    
 
    
From May 2, 2011
  
 
  
Year Ended
    
Year Ended
    
Year Ended
    
(Inception) to
  
 
  
December 31,
2014
    
December 31,
2013
    
December 31,
2012
    
December 31, 2011
  
 
  
 
    
 
    
 
    
 
  
Revenue
   $ 760,452     $ 596,405     $ 74,530     $ 30,968  
Lease operating expense
     (427,076 )     (401,642 )     (172,252 )     (75,411 )
General and administrative expenses
     (30,541,198 )     (15,549,982 )     (1,254,277 )     (1,526,007 )
Other expense
     (48,626,084 )     (11,761,424 )     (571,529 )     (56,898 )
Net loss
   $ (78,833,906 )   $ (27,116,643 )   $ (1,923,528 )   $ (1,627,348 )
Basic and diluted loss per share
   $ (1.68 )   $ (0.59 )   $ (0.05 )   $ (0.05 )

 

Balance Sheet data
  
 
    
 
    
 
    
 
  
 
  
As of December 31,
  
 
  
2014
    
2013
    
2012
    
2011
  
Cash and cash equivalents
   $ 133,210     $ 21,951     $ 47,511     $ -  
Oil and gas properties, net
   $ 1,121,175     $ 1,187,555     $ 182,985     $ 151,856  
Total Assets
   $ 1,411,042     $ 1,354,373     $ 359,728     $ 162,056  
Accounts payable
   $ 148,888     $ 148,888     $ 210,568     $ 368,113  
Accrued expenses
   $ 1,149,956     $ 1,169,644     $ 615,081     $ 95,822  
LowCal convertible and promissory notes payable
   $ 8,250,000     $ 2,612,882     $ -     $ -  
Notes payable
   $ 1,273,000     $ 1,108,380     $ 1,450,000     $ 241,600  
Convertible notes, net
   $ -     $ 250,000     $ 245,312     $ -  
Derivative liabilities
   $ 11,039,552       -       -       -  
Total liabilities
   $ 21,945,498     $ 5,530,861     $ 2,743,752     $ 745,133  
 
                                
Toal stockholders' deficit
   $ (20,534,456 )   $ (4,176,488 )   $ (2,384,024 )   $ (583,077 )
 
 
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto which appear elsewhere in this Report. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors.
 
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 December 31, 2014. 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 audited financial statements and the notes to the audited 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.
 
 
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.”) by filing an amendment to its articles of incorporation (the “Amendment”) with the Nevada secretary of state after the name change was approved at a special meeting of the stockholders of the Company held on May 6, 2013 (the “Special Meeting”).
 
The Amendment also effectuated a reverse stock split of the outstanding shares of common stock of the Company held by stockholders with 2,000 or more aggregate shares of common stock at an exchange ratio of 1-for-800, accompanied by a cash distribution of $0.025 per share to all of the Company’s common stockholders with less than 2,000 shares of common stock in the aggregate, in exchange for and in cancellation of their shares of common stock (the “Stock Split”). This Stock Split triggered the automatic conversion of all 45,275,044 issued and outstanding shares of Series B preferred stock of the Company, including the shares of Series B preferred stock issued in the Merger, into 45,275,044 shares of common stock of the Company.
 
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 27, 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 Shares, at the Offer Price. In addition to the Offer Price, 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 Eos.
 
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 Dune Shares, (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 was originally scheduled to expire on November 6, 2014, but was subsequently extended until February 27, 2015 in order to give us additional time to arrange financing for the contemplated transactions.
 
After the expiration of the Tender Offer, Dune was notified by Eos 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 Eos breached the Dune Merger Agreement and is entitled to the breakup fee set forth in the Dune Merger Agreement. We do not believe that we have liability for the break-up fee and we intend to vigorously defend ourselves in an action is brought.
 
 
Comparison of the year ended December 31, 2014 to the year ended December 31, 2013
 
 
  
For the Years Ended December 31,
    
 
    
 
  
 
  
2014
    
2013
    
 
    
 
  
 
  
 
    
% of
    
 
    
% of
    
Dollar
    
Percentage
  
 
  
Amount
    
Revenue
    
Amount
    
Revenue
    
change
    
Change
  
Revenue
   $ 760,452       100.0 %   $ 596,405       100.0 %     164,047       28 %
Lease operating expense
     427,076       56.2 %     401,642       67.3 %     25,434       6 %
General and administrative expenses
     30,541,198       4016.2 %     15,549,982       2607.3 %     14,991,216       96 %
Other expense, net
     48,626,084       6394.4 %     11,761,424       1972.1 %     36,864,660       313 %
Net loss
   $ (78,833,906 )           $ (27,116,643 )             (51,717,263 )     191 %
 
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. As of December 31, 2014 and 2013, our primary revenue has come from one source, “the Works” property, located in Southern Illinois. Revenue for the year ended December 31, 2014 and 2013 was $760,452 and $596,405, respectively.  The increase in revenues for the year ended December 31, 2014 is due to the increase in the number of barrels sold offset by a slightly lower cost per barrel.  For the year ended December 31, 2014, we sold 8,779 barrels at an average price of $87 per barrel, compared to 6,742 barrels at an average price of $88 per barrel for the year ended December 31, 2013.
 
Lease operating expenses
 
Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the year ended December 31, 2014 and 2013 was $427,076 and $401,642, respectively.  The increase in operating expenses was due to additional repairs on the pumpers and battery units for the wells. 
 
General and administrative expenses
 
General and administrative expenses for the year ended December 31, 2014 and 2013 was $30,541,198 and $15,549,982, 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 $885,000, $23,225,000, and $5,842,000 in professional fees, consulting agreements and compensation, respectively for the year ended December 31, 2014. We recognized approximately $978,000, $ 12,392,000, and $1,359,000 in professional fees, consulting agreements and compensation, respectively for the year ended December 31, 2013. Other general and administrative expenses included are temporary professional staffing, rent, utilities, and other overhead expenses. The significant increase in consulting expense was related to the $13,415,000 non-cash costs related to the amended GEM warrants as discussed in the accompanying consolidated financial statements and $8,697,000 related to the other warrants issued for other consulting services.  The increase in compensation was due to the options vested to Oring per his employment contract valued at $5,443,458.
 
Other expenses, net
 
Other expenses were $48,626,084 consisting of interest and finance costs of $23,834,000, loss on debt extinguishment of $40,016,000 and a gain on change in fair value of derivative liability of $15,225,000, respectively for the year ended December 31, 2014. Other expenses were $11,761,424 consisting of interest and finance costs of $8,372,720 and loss on debt extinguishment of $3,388,704, respectively for the year ended December 31,  2013. The increase in interest and finance costs is primarily due to the fair value of the beneficial conversion features and shares issued in connection with financing incurred during the year ended December 31, 2014. The loss on debt extinguishment is due to the amendments to the notes payable and convertible notes that were amended during the year ended December 31, 2014.  The gain on the change in the derivative liability is due to the decrease in the share price from $14 at the date of issuance to $6.50 at December 31, 2014 and due to the decrease in the estimated volatility from 220% at the date of issuance to 188% at December 31, 2014.
 



Comparison of the year ended December 31, 2013 to the year ended December 31, 2012
 
   
For the Years Ended December 31,
              
   
2013
    
2012
              
         
% of
          
% of
    
Dollar
    
Percentage
  
   
Amount
    
Revenue
    
Amount
    
Revenue
    
change
    
Change
  
Revenue
   $ 596,405       100.0 %   $ 74,530       100.0 %     521,875       700 %
Lease operating expense
     401,642       67.3 %     172,252       231.1 %     229,390       133 %
General and administrative expenses
     15,549,982       2607.3 %     1,254,277       1682.9 %     14,295,705       1140 %
Other expense
     11,761,424       1972.1 %     571,529       766.8 %     11,189,895       1958 %
Net loss
   $ (27,116,643 )     -4546.7 %   $ (1,923,528 )     -2580.9 %     (25,193,115 )     1310 %
 
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. As of December 31,  2013 and 2012, our primary revenue has come from one source, “the Works” property, located in Southern Illinois. Revenue for the year ended December 31, 2013 and 2012 was $596,405 and $74,530, respectively. The increase in revenues for the year ended December 31, 2013 is due to the increase in both the number of barrels sold and the price per barrel.  For the year ended December 31, 2013, we sold 6,742 barrels at an average price of $88 per barrel, compared to 899 barrels at an average price of $83 per barrel for the year ended December 31, 2012.
 
Lease operating expenses
 
Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the year ended December 31, 2013 and 2012 was $401,642 and $172,252, respectively. The increase in operating expenses was due to the significant increase in revenue.
 
General and administrative expenses
 
General and administrative expenses for the year ended December 31, 2013 and 2012 was $15,549,982 and $1,254,277, 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 $978,000, $12,392,000, and $1,359,000 in professional fees, consulting agreements and compensation, respectively for the year ended December 31, 2013. We recognized approximately $392,000, $80,000, and $189,000 in professional fees, consulting agreements and compensation, respectively for the year ended December 31, 2012. Other general and administrative expenses included are temporary professional staffing, rent, utilities, and other overhead expenses. The significant increase in consulting expense is related to the $9,767,000 expense related to the amended GEM warrants as discussed in the accompanying consolidated financial statements and $1,250,000 related to the 500,000 shares of common stock issued to AGRA pursuant to their consulting agreement, and $400,000 related to the 50,000 shares of common stock issued to Quantum per their consulting agreement.
 
Other expenses
 
Other expenses were $11,761,424 consisting of interest and finance costs of $8,372,720 and loss on debt extinguishment of $3,388,704, respectively for the year ended December 31, 2013. During the year ended December 31, 2012, other expenses consisted primarily of interest and finance costs of approximately $514,000. The increase in interest and finance costs is primarily due to the fair value of the beneficial conversion features and shares issued in connection with financing incurred during the year ended December 31, 2013. The loss on debt extinguishment is due to the amendments to the notes payable and convertible notes that were amended during the year ended December 31, 2013.
 
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 December 31, 2014, we had cash in the amount of $133,210. At December 31, 2014, we had total liabilities of $ 21,945,498. 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 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 issued the following notes:
 
 
 
RT Holdings, LLC
 
On October 24, 2011, Eos received $200,000 from RT Holdings, LLC (“RT”) in exchange for an unsecured promissory note payable, originally due November 7, 2011, as extended till April 30, 2013, with interest due at 6% per annum, which was amended to 24%. On the maturity date, in addition to repaying in full the principal amount owed to RT, plus interest, Eos agreed to pay RT a single additional fee of $10,000.
 
On April 25, 2013, pursuant to a letter agreement of forbearance, Eos made a partial payment of $25,000 towards the RT loan which extended the due date to August 31, 2013.
 
On November 18, 2013, RT and Eos acknowledged that, as of November 8, 2013, there was $232,235, inclusive of interest, outstanding on the RT Loan. The difference of $60,000 between the recorded value of $172,325 and the settled amount of $232,235 was recorded as additional expense. Eos paid $75,000 on November 18, 2013 and agreed to make a $75,000 payment to RT on or before January 9, 2014. RT agreed to have the remaining balance of $82,235 paid with 28,885 shares of restricted common stock at a conversion rate of $2.85. However, if the final payment of $75,000 was not paid on or before of the January 9, 2014; and if the 28,855 shares are not delivered to RT on or before November 27, 2013, then the conversion rate was to be decreased to $1.
 
During 2014, we paid $75,000 and issued 66,000 shares valued at $693,001 of common stock for full settlement of the RT Holdings note.
 
Vatsala Sharma
 
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, 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 our 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. On April 24, 2013, the maturity date was extended to August 31, 2013, and on November 18, 2013, Sharma extended the maturity date to May 31, 2014.  On June 30, 2014, the maturity date was extended to October 1, 2014, and subsequently amended to July 1, 2015.
 
Vicki P. Rollins
 
On June 18, 2012, we entered into a Loan Agreement with Vicki P. Rollins (“Rollins”) for a secured loan in the amount of $350,000 due on September 22, 2012, and orally extended to November 30, 2012. Interest is charged at a rate of 6%. In the event that the loan is not repaid on or before the maturity date, all unpaid principal and accrued unpaid interest shall accrue interest at a rate of 18% per annum The loan is secured by a priority blanket security interest in all of the our 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 November 18, 2013, Rollins extended the maturity date to February 28, 2014, and then extended the maturity date again to July 31, 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. On September 1, 2014, the Company issued to Rollins an aggregate of 250,000 new warrants in exchange for such extension and amendment.  The balance of the note payable was $250,000 at December 31, 2014 and is currently in default.
 
1975 Babcock, LLC
 
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. We agreed to pay $7,500.00 a month in rent under the Babcock Lease. Pursuant to the Babcock Loan and Lease documents, Eos granted Babcock a mortgage and security interest in and on the Works Property and related assets, agreements and profits.
 
On November 7, 2013, we entered into the Babcock 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 Babcock 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 on the loan in three separate payments as follows: (i) on or before November 8, 2013, Eos agreed pay $100,000; (ii) on or before November 15, 2013, Eos agreed to pay $100,000; and (iii) on or before January 9, 2014, Eos agreed to pay the final payment of $130,000. Babcock agreed that they will not take action to bring suit or litigate against Eos through December 20, 2013, subject to extension through January 9, 2014 pursuant to the terms and conditions of the Babcock Agreement, so long as the full amount of outstanding and unpaid principal and interest on the loan has been repaid in full and the Babcock Shares have been issued pursuant to the Babcock Agreement. We made payments of $100,000 on November 13, 2013 and November 18, 2013.  During 2014, we paid $100,000 for full settlement of the debt.
 
 
 
Clouding IP, LLC
 
On December 26, 2012, we entered into an Oil & Gas Services Agreement with Clouding IP, LLC (“Clouding”) in order to retain the oil and gas related services of Clouding and its affiliates.
 
Concurrently with the execution of the Oil & Gas Services Agreement with Clouding, on December 26, 2012, we executed a series of agreements with Clouding in order to secure a $250,000 loan (the “Clouding Loan”). Pursuant to the Clouding Loan documents, Eos granted Clouding a mortgage and security interest in and on our assets. The maturity date of the Clouding Loan was March 31, 2013 which was amended to August 31, 2013, pursuant to a written extension on April 19, 2013, and interest accrues on the Clouding Loan at a rate of 4% per annum commencing December 26, 2012. On the maturity date, Eos further agreed to pay to Clouding a loan fee of $25,000. At Clouding’s option, the principal amount of the loan, together with any accrued and unpaid interest or other charges, may be converted into our common stock at a conversion price of $2.50 per share.
 
As the Clouding Loan was not repaid in full on the initial March 31, 2013 maturity date, pursuant to the terms of the Clouding Loan, the Company issued to Clouding an additional 150,000 shares of its Series B preferred stock, which were subsequently converted into 150,000 shares of common stock.
 
On various dates in May and June 2014, the Company paid what it believed to be the remaining outstanding principal. However, Clouding made claims that certain amounts of interest, as well as a loan termination fee, were still due, and on August 20, 2014, the Company entered into a settlement agreement for full cancellation and satisfaction of the Clouding Loan and related agreements. Pursuant to the settlement agreement, the Company was to make a one-time payment of $52,500 and issue 1,775,000 warrants to Clouding and certain related parties. If the $52,500 was not paid by August 22, 2014, then the amount due would be increased by 10% and then an additional 1% for each additional 30 days that the Company had not cured the default. As of December 31, 2014 the amount due is and has been reflected as an accrued expense in the accompanying condensed consolidated balance sheet. The warrants had an exercise price of $4 and an expiration date of August 20, 2018. The warrant agreement provided for a reduction in exercise price to 75% of the original exercise price if the Company did not pay the $52,500 by August 22, 2014 and also 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 the agreement, the exercise price was reduced to $3 when the Company did not make the required payment of $52,500 and further reduced the exercise price to $2.50 when the Company issued additional warrants with an exercise price of $2.50.  As of March  31, 2015 we have not completed our obligations pursuant to the settlement agreement.
 
LowCal Industries, LLC
 
On February 8, 2013, and subsequently amended, the Company and Eos entered into the following agreements with LowCal Industries, LLC (“LowCal”) and LowCal’s affiliates: (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 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 may 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. (Subsequently amended to $4 and then $2.50 per share - see below). The principal and all interest on the LowCal Loans were initially due on or before December 31, 2013, but after various amendments, is now currently due on June 30, 2015.    In conjunction with the issuance of the first tranche of the LowCal Loan, the Company issued LowCal 950,000 shares of the Company’s common stock.
 
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.
 
On the date that the LowCal Loan has been repaid in full, LowCal shall be entitled to receive from Eos an exit fee, payable in cash and stock, in the following amounts: (i) 50,000 restricted shares of Company’s common stock; and (ii) cash in an amount equal to 10% of the total principal amount of the note.
 
 
 
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 to $4.
 
When the Loan Agreements were amended on November 6, 2013, LowCal agreed to purchase an aggregate of up to an additional 1,000,000 restricted shares of the Company’s common stock (the “LowCal Shares”) for par value on the closing date of the Loan Agreements amendment, which was anticipated to occur on or before January 9, 2014. In addition, LowCal received piggy back registration rights for the shares it may receive pursuant to the note.
 
As discussed above, the Company granted, but did not issue, 400,000 shares of common stock valued at $3,370,000 during the year ended December 31, 2013.  These shares were reflected as Shares of Common Stock to be Issued as of December 31, 2013. These shares were issued during 2014.  During the year ended December 31, 2014, the Company received an additional $1,500,000 under the November 6, 2013 amendment and issued 600,000 shares of its common stock as a financing cost.
 
On August 14, 2014, the Loan Agreements were amended in a third amendment in which the Company issued to LowCal a warrant to purchase 500,000 restricted shares of common stock at $4.00 per share, expiring August 14, 2017. The conversion price on principal and interest of the LowCal Loan was also further amended from $4 to $2.50.
 
On January 13, 2015, the Company entered into a fifth amendment (the “Amendment”) with LowCal Industries, LLC and certain their affiliates to the secured convertible promissory note in the principal amount of $5,000,000.  As part of the Amendment, the Company and LowCal entered into the following: (i) an amended and restated First Note (the “Amended First Note”); and (ii) an unsecured promissory note in the principal amount of $3,250,000.
 
Pursuant to the Amendment:
  • LowCal forgave approximately $667,000 of  accrued interest and eliminate all interest going forward on the Amended First Note;
  • Advanced $750,000 to the Company;
  • Removed the exit fee; and
  • Extend the maturity date to June 30, 2015.
As the 5th 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 5th amendment on the Company’s financial statements as year ended December 31, 2014, including the recording of the new unsecured promissory note for the principal amount of $3,250,000.
 
Other Notes
 
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.
 
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 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.  The promissory note is currently in default.
 
On March 31, 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 the future, we may also become liable for a termination fee to Dune Energy, Inc. (“Dune”).  In connection with the asserted claim by Dune of the alleged breach of contract by the Company of that certain merger agreement dated September 17, 2014 and as amended, 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 a termination fee, plus additional costs and expenses which were undefined.  The Company does not believe that is has liability for the termination fee and it intends to vigorously defend itself if an action is brought.
 
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 financial statements filed herewith includes 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 $2,136,741, $1,881,392 and $1,331,291 for the years ended December 31, 2014, 2013 and 2012.  The net cash used in operating activities was primarily due to the costs incurred with the organizing activities more fully described above.
 
Cash Used in Investing Activities
 
Net cash used by investing activities was $0, $1,041,500 and $21,000 for the years ended December 31, 2014, 2013 and 2012, respectively, and was primarily due to the capital costs incurred at the Works property.
 
Cash Flows from Financing Activities
 
Net cash flow from financing activities was $2,248,000, $2,897,332 and $1,399,802 for the years ended December 31, 2014, 2013 and 2012, respectively. This cash was generated from the issuance of notes payable and convertible notes payable.
 
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.
 
Fair Value Measurements
 
We apply 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 condensed 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.
 
We use Level 2 inputs for our 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. Our 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.
 
Recently Issued Accounting Pronouncements
 
In May 2014, the (“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.
 
Contractual Obligations
 
Our significant contractual obligations as of December 31, 2014, are as follows:
 
   
 
    
 
    
 
    
 
    
 
  
 
  
 
    
 
    
 
    
More than
    
 
  
 
  
Less than
    
One to three
    
Three to five
    
Five
    
 
  
 
  
One Year
    
Years
    
Years
    
Years
    
Total
  
Convertible notes payable
   $ 8,250,000     $ -     $ -     $ -     $ 8,250,000  
Notes payable
     1,273,000       -       -       -       1,273,000  
Other contractual obligations(1)
     4,000,000 (2)     -       -       -       4,000,000  
Leases
     193,248       267,752       -       -       460,000  
Total
   $ 13,716,248     $ 267,752     $ -     $ -     $ 13,983,000  
 
                                        
 
(1)  This amount does not include any amounts allegedly owed to Dune Energy, Inc. (“Dune”).  In connection with the asserted claim by Dune of the alleged breach of contract by Eos of that certain merger agreement dated September 17, 2014 and as amended, 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 a termination fee, plus additional costs and expenses which were undefined.  Eos does not believe that is has liability for the termination fee and it intends to vigorously defend itself if an action is brought.
 
(2)  This amount includes a Structuring Fee which the Company may become liable to pay to GEM.  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.
 
 
 
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.
 
 
The financial statements and supplementary data required to be filed pursuant to this Item 8 begin on page F-1 of this Report.
 
 
None.
 
 
Evaluation of 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 December 31, 2014. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2014, the Company’s disclosure controls and procedures were ineffective. This conclusion by the Company’s Chief Executive Officer and Chief Financial Officer does not relate to reporting periods after December 31, 2014.
 
Management’s Report on Internal Control Over Financial Reporting
 
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 December 31, 2014, 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 December 31, 2014, our Management concluded that our internal controls over financial reporting were ineffective as of December 31, 2014. 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.
 
The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by Weinberg & Company, P.A., our independent registered accounting firm, as stated in their report which appears elsewhere herein.
 
Changes in Internal Control Over Financial Reporting
 
No change in the Company’s internal control over financial reporting occurred during the fourth quarter ended December 31, 2014, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
We do not expect that internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
 
None.
 
 
 
Directors
 
Information relating to the officers and directors of our company, other corporate governance matters and other information required under this Item 10 is set forth in our Proxy Statement for our 2015 Annual Meeting of Stockholders (“Proxy Statement”) and is incorporated herein by reference. The following is a listing of certain information regarding our executive officers.
 
Executive Officers
 
Nikolas Konstant. Mr. Konstant became our President, Chief Executive Officer, Chief Financial Officer and Chairman in connection with the closing of the Merger Agreement. He also has served as the Chairman of Eos Petro, Inc. since 2011. Mr. Konstant has more than 17 years of experience as a merchant financier, investor and advisor to public and private companies on mergers and acquisitions, capital formation and balance sheet restructurings. Mr. Konstant has been providing equity and debt financing for public and private companies for over 17 years as a merchant financier. Previously, Mr. Konstant was the managing director of NCVC, LLC, a $200 million venture capital fund and indirect subsidiary of Nightingale Conant. While at NCVC, Mr. Konstant provided equity for the Wolfgang Puck Food Company, Nutrition for Life (which was the number one stock on NASDAQ in the year of 1996), On Stage Entertainment, Platinum Technologies and several other public companies. Previously, Mr. Konstant founded nanoUniverse, PLC (AIM: NANO), co- founded Electric City Corporation (currently known as Lime Energy Co.) (NASDAQ: LIME) and co- founded Advanced Cell Technology, Inc. (OTCBB: ACTC). Mr. Konstant has been a board member of Nightingale Conant, On Stage Entertainment, UCLA Board of Governors and on the board of the investment Subcommittee of Cedars Sinai Hospital. Mr. Konstant currently serves on the Cedars Sinai Board of Governors. Mr. Konstant is also the Chairman of DreamWorks Children of the World a charitable organization for Children of the World. Mr. Konstant attended Harvard Business School and has several certificates from HBS and the University of Chicago in addition a degree of Calculus from Barstow College. He is semi fluent in Greek, semi fluent in Italian and French. He is presently studying Mandarin. Mr. Konstant is a Mason at the Menorah Lodge #523. Mr. Konstant was a member in YPO, the Young Presidents Organization, since 1998 with the Belair Chapter in Los Angeles California. As a financier, investor and advisor, we believe that Mr. Konstant will contribute his leadership skills, knowledge and finance background, and business experience to our board of directors. In addition, we believe that Mr. Konstant’s membership on our board of directors will help to achieve the objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.
 
 
 
Martin B. Oring. Mr. Oring became a member of our board of directors in connection with the closing of the Merger Agreement. On June 23, 2013 he was appoint the Chief Executive Officer of the Company. He has been a member of the board of directors of Searchlight Minerals Corp. since October 6, 2008 and its President and Chief Executive Officer since October 1, 2010. Mr. Oring, a senior financial/planning executive, has served as the President of Wealth Preservation, LLC, a financial advisory firm that serves high-net-worth individuals, since 2001. Since the founding of Wealth Preservation, LLC in 2001, Mr. Oring has completed the financial engineering, structuring, and implementation of over $1 billion of proprietary tax and estate planning products in the capital markets and insurance areas for wealthy individuals and corporations. From 1998 until 2001, Mr. Oring served as Managing Director, Executive Services at Prudential Securities, Inc., where he was responsible for advice, planning and execution of capital market and insurance products for high-net-worth individuals and corporations. From 1996 to 1998, he served as Managing Director, Capital Markets, during which time he managed Prudential Securities’ capital market effort for large and medium-sized financial institutions. From 1989 until 1996, he managed the Debt and Capital Management group at The Chase Manhattan Corporation as Manager of Capital Planning (Treasury). Prior to joining Chase Manhattan, he spent approximately eighteen years in a variety of management positions with Mobil Corporation, one of the world’s leading energy companies. When he left Mobil in 1986, he was Manager, Capital Markets & Investment Banking (Treasury). Mr. Oring is also currently a director and chief executive officer of PetroHunter Energy Corporation, and was previously a director of Parallel Petroleum Corporation, each of which is a publicly traded oil and gas exploration and production company. He also served as a director of Falcon Oil & Gas Australia Limited, a subsidiary of Falcon Oil & Gas Ltd., an international oil and gas exploration and production company, headquartered in Denver, Colorado, which trades on the TSX Venture Exchange. Mr. Oring has served as a Lecturer at Lehigh University, the New York Institute of Technology, New York University, Xerox Corporation, Salomon Brothers, Merrill Lynch, numerous Advanced Management Seminars, and numerous in-house management courses for a variety of corporations and organizations. He has an MBA Degree in Production Management, Finance and Marketing from the Graduate School of Business at Columbia University, and a B.S. Degree in Mechanical Engineering from Carnegie Institute of Technology. As a financial planner and an executive with experience in banking and finance, we believe that Mr. Oring will contribute his leadership skills, knowledge and finance background, and business experience to our board of directors. In addition, we believe that Mr. Oring’s membership on our board of directors will help to achieve the objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.
 
 
Information required under this Item 11 is set forth in our Proxy Statement and is incorporated herein by reference.
 
 
Information required under this Item 12 is set forth in our Proxy Statement and is incorporated herein by reference.
 
 
Information required under this Item 13 is set forth in our Proxy Statement and is incorporated herein by reference.
 
 
Information regarding principal accounting fees and services and other information required under this Item 14 is set forth in our Proxy Statement and is incorporated herein by reference.
 
 
 
(A)           Documents Filed as Part of this Report
 
(1)           Financial Statements
 
All financial statements of the registrant referenced in Item 8 of this Report are appended to the end of this report, commencing on page F-1.
 
(2)           Financial Statement Schedules
 
None.
 
 
 
(3)           Exhibits

   
Previously Filed on and
Exhibit No.
Description
Incorporated by Reference to
2.1
Agreement and Plan of Merger by and between Cellteck, Inc., Eos Petro, Inc., and Eos Merger Sub, Inc., a wholly-owned subsidiary of Cellteck, Inc., dated July 16, 2012
The current report on Form 8-K filed July 23, 2012
2.2
First Amendment to the Agreement and Plan of Merger dated January 16, 2013 between Cellteck, Inc. and Eos Petro, Inc.
The current report on Form 8-K filed January 17, 2013
3.1
Articles of Incorporation of Cellteck, Inc., as amended
The registration statement on Form 10-12G filed May 19, 2008
3.2
Certificate of Designations for Series A Preferred Stock
The current report on Form 10-K/A filed September 23, 2010
3.3
Certificate of Designations for Series B Preferred Stock
The current report on Form 8-K/A filed January 17, 2013
3.4
Bylaws of Cellteck, Inc.
The registration statement on Form 10-12G filed May 19, 2008
3.5
Amendment to the Certificate of Designations for Series B Preferred Stock
The current report on Form 8-K filed January 17, 2013
4.1
Specimen Stock Certificate
The registration statement on Form 10-12G filed May 19, 2008
10.1
Contribution Agreement dated May 3, 2011 between Eos Petro, Inc. and Plethora Partners LLC, as amended
The current report on Form 8-K/A filed March 11, 2013
10.2
Purchase and Sale Agreement dated June 6, 2011 between Eos Petro, Inc. and TEHI Illinois, LLC
The current report on Form 8-K/A filed January 17, 2013
10.3
Letter Agreement dated September 5, 2011 between Eos Petro, Inc. and DCOR
The current report on Form 8-K/A filed January 17, 2013
10.4
Exclusive Business Partner and Advisory Agreement dated October 3, 2011 between Eos Petro, Inc. and Baychester Petroleum Limited
The current report on Form 8-K/A filed January 17, 2013
10.5
Promissory Note dated October 24, 2011 between Eos Petro, Inc., Nikolas Konstant and RT Holdings, LLC
The current report on Form 8-K/A filed January 17, 2013
10.6
Loan Agreement and Secured Promissory Note dated February 16, 2012 between Vatsala Sharma and Eos Petro, Inc.
The current report on Form 8-K/A filed January 17, 2013
10.7
Loan Mortgage, Assignment, Security Agreement and Fixture Filing dated February 16, 2012 between Vatsala Sharma and Eos Petro, Inc.
The current report on Form 8-K/A filed January 17, 2013
10.8
Personal Guaranty Agreement dated February 16, 2012 between Nikolas Konstant and Vatsala Sharma
The current report on Form 8-K/A filed January 17, 2013
10.9
Collateral Assignment dated February 16, 2012 between Nikolas Konstant and Vatsala Sharma
The current report on Form 8-K/A filed January 17, 2013
10.10
First Consolidated Amendment dated February 16, 2012 between Vatsala Sharma and Eos Petro, Inc.
The current report on Form 8-K/A filed January 17, 2013
10.11
Second Consolidated Amendment dated February 16, 2012 between Vatsala Sharma and Eos Petro, Inc.
The current report on Form 8-K/A filed January 17, 2013
10.12
Third Consolidated Amendment dated February 16, 2012 between Vatsala Sharma and Eos Petro, Inc.
The current report on Form 8-K/A filed January 17, 2013
10.13
Oil & Gas Operating Agreement dated June 6, 2012 between Eos Petro, Inc. and TEHI Illinois, LLC
The current report on Form 8-K/A filed January 17, 2013
10.14
Bridge Loan Agreement dated June 18, 2012 between Eos Petro, Inc. and Vicki Rollins
The current report on Form 8-K/A filed January 17, 2013
 
 
 
10.15
Services Agreement dated July 1, 2012 between Eos Petro, Inc. and Quantum Advisors, LLC
The current report on Form 8-K filed October 15, 2012
10.16
First Amendment and Allonge to Promissory Note dated July 10, 2012 between Eos Petro, Inc., Nikolas Konstant and RT Holdings, LLC
The current report on Form 8-K/A filed January 17, 2013
10.17
Loan Agreement and Secured Promissory Note dated August 2, 2012 between Eos Petro, Inc. and 1975 Babcock, LLC
The current report on Form 8-K/A filed January 17, 2013
10.18
Leasehold Mortgage, Assignment, Security Agreement and Fixture Filing dated August 2, 2012 between Eos Petro, Inc. and 1975 Babcock, LLC
The current report on Form 8-K/A filed January 17, 2013
10.19
Personal Guaranty Agreement dated August 2, 2012 between Nikolas Konstant, Eos Petro, Inc. and 1975 Babcock, LLC
The current report on Form 8-K/A filed January 17, 2013
10.20
Lease Agreement dated August 3, 2012 between Eos Petro, Inc. and 1975 Babcock Road, LLC
The current report on Form 8-K/A filed January 17, 2013
10.21
Lease Guaranty dated August 3, 2012 between Nikolas Konstant and 1975 Babcock Road, LLC
The current report on Form 8-K/A filed January 17, 2013
10.22
Consulting Agreement dated September 24, 2012 between Eos Petro, Inc. and Plethora Enterprises, LLC
The current report on Form 8-K filed October 15, 2012
10.23
Amended and Restated Consulting Agreement dated September 25, 2012 between Eos Petro, Inc. and John Linton, as amended
The current report on Form 8-K filed October 15, 2012
10.24
Letter Agreement dated September 26, 2012 between Eos Petro, Inc., 1975 Babcock, LLC and 1975 Babcock Road, LLC
The current report on Form 8-K/A filed January 17, 2013
10.25
$400,000,000 Subscription Commitment dated August 31, 2011 between Eos Petro, Inc. and GEM Global Yield Fund
The current report on Form 8-K filed January 17, 2013
10.26
Common Stock Purchase Warrant dated November 21, 2012 between Eos Petro, Inc. and GEM Global Yield Fund (GEM A Warrant)
The current report on Form 8-K filed January 17, 2013
10.27
Amended Common Stock Purchase Warrant dated November 21, 2012 between Eos Petro, Inc. and GEM Global Yield Fund (GEM B Warrant)
The current report on Form 8-K filed July 24, 2013
10.28
Amended Common Stock Purchase Warrant dated November 21, 2012 between Eos Petro, Inc. and GEM Global Yield Fund (GEM C Warrant)
The current report on Form 8-K filed July 24, 2013
10.29
Common Stock Purchase Warrant dated November 21, 2012 between Eos Petro, Inc. and 590 Partners Capital, LLC (590 Partners A Warrant)
The current report on Form 8-K filed January 17, 2013
10.30
Amended Common Stock Purchase Warrant dated November 21, 2012 between Eos Petro, Inc. and 590 Partners Capital, LLC (590 Partners B Warrant)
The current report on Form 8-K filed July 24, 2013
10.31
Amended Common Stock Purchase Warrant dated November 21, 2012 between Eos Petro, Inc. and 590 Partners Capital, LLC (590 Partners C Warrant)
The current report on Form 8-K filed July 24, 2013
10.32
Common Stock Purchase Agreement dated July 10, 2013 between Eos Petro, Inc. and GEM Global Yield Fund
The current report on Form 8-K filed July 24, 2013
10.33
Registration Rights Agreement dated July 10, 2013 between Eos Petro, Inc. and GEM Global Yield Fund
The current report on Form 8-K filed July 24, 2013
10.34
Common Stock Purchase Warranty dated July 10, 2013 between Eos Petro, Inc. and GEM Capital SAS (Additional Warrant)
The current report on Form 8-K filed July 24, 2013
10.35
Common Stock Purchase Warrant dated July 10, 2013 between Eos Petro, Inc. and 590 Partners Capital, LLC (Additional Warrant)
The current report on Form 8-K filed July 24, 2013
 
 
 
10.36
Oil & Gas Services Agreement dated December 26, 2012 between Cellteck, Inc. and Clouding IP, LLC, as amended
The current report on Form 8-K filed January 17, 2013
10.37
Warrant to Purchase Common Stock between Cellteck, Inc. and Clouding IP, LLC, as amended
The current report on Form 8-K filed January 17, 2013
10.38
Loan Agreement and Secured Promissory Note dated December 26, 2012 between Cellteck, Inc., and Clouding IP, LLC, as amended
The current report on Form 8-K filed January 17, 2013
10.39
Leasehold Mortgage, Assignment, Security Agreement and Fixture Filing dated December 26, 2012 between Cellteck, Inc. and Clouding IP, LLC, as amended
The current report on Form 8-K filed January 17, 2013
10.40
Office Lease dated December 27, 2012 between Eos Petro, Inc. and 1999 STARS, LLC
The current report on Form 8-K filed January 17, 2013
10.41
Loan Agreement and Secured Promissory Note dated February 8, 2013, between Eos Petro, Inc. and LowCal Industries, LLC
The current report on Form 8-K filed February 28, 2013
10.42
Guaranty dated February 8, 2013 between Cellteck, Inc. and LowCal Industries, LLC
The current report on Form 8-K filed February 28, 2013
10.43
Series B Convertible Preferred Stock Purchase Agreement dated February 8, 2013 between Cellteck, Inc. and LowCal Industries, LLC
The current report on Form 8-K filed February 28, 2013
10.44
First Amendment to the LowCal Agreements dated April 23, 2013 between Eos Petro, Inc., Cellteck, Inc., Sail Property Management Group LLC, LowCal Industries, LLC and LowCo [EOS/Petro], LLC
The annual report on Form 10-K filed May 8, 2013
10.45
Amended and Restated Leasehold Mortgage, Assignment, Security Agreement and Fixture Filing dated April 23, 2013 between Eos Petro, Inc. and LowCal Industries, LLC
The annual report on Form 10-K filed May 8, 2013
10.46
Series B Convertible Preferred Stock Purchase Agreement dated April 23, 2013 between Cellteck, Inc., LowCal Industries, LLC and LowCo [EPS/Petro], LLC
The annual report on Form 10-K filed May 8, 2013
10.47
Second Amendment to the LowCal Agreements, dated as of November 6, 2013, by and among Eos Global Petro, Inc., Eos Petro, Inc., LowCal Industries, LLC, Sail Property Management Group, LLC and LowCo [EOS/Petro], LLC
The current report on Form 8-K filed November 13, 2013
10.48
Second Amended and Restated Loan Agreement and Secured Promissory Note, dated as of November 6, 2013, by and among Eos Global Petro, Inc., and LowCal Industries, LLC
The current report on Form 8-K filed November 13, 2013
10.49
Common Stock Purchase Agreement, dated as of November 6, 2013, 2013, by and among Eos Petro, Inc., LowCal Industries, LLC, and LowCo [EOS/Petro], LLC
The current report on Form 8-K filed November 13, 2013
10.50
Lock-up/Leak-out Agreement, dated as of November 6, 2013, by and among Eos Petro, Inc., and LowCal Industries, LLC
The current report on Form 8-K filed November 13, 2013
10.51
Side Letter Agreement dated November 6, 2013, by and among Eos Global Petro, Inc., Eos Petro, Inc., LowCal Industries, LLC, Sail Property Management Group, LLC and LowCo [EOS/Petro], LLC
The current report on Form 8-K filed November 13, 2013
10.52
Compliance/Oversight Agreement dated February 8, 2013 between Eos Petro, Inc. and Sail Property Management Group, LLC
The current report on Form 8-K filed February 28, 2013
10.53
Second Amendment to the Clouding Agreements dated April 19, 2013 between Cellteck, Inc. and Clouding IP, LLC
The annual report on Form 10-K filed May 8, 2013
10.54
Consulting Agreement dated June 23, 2013 between Eos Petro, Inc. and Hahn Engineering, Inc.
The current report on Form 8-K filed July 24, 2013
 
 
 
10.55
Eos Petro Employment Agreement dated June 23, 2013 between Eos Petro, Inc. and Martin Oring
The current report on Form 8-K filed July 24, 2013
10.56
Common Stock Purchase Warrant dated June 23, 2013 between Eos Petro, Inc. and Wealth Preservation LLC
The current report on Form 8-K filed July 24, 2013
10.57
Third Amendment to the LowCal Agreements effective as of January 9, 2014, by and among Eos Global Petro, Inc., Eos Petro, Inc., LowCal Industries, LLC, Sail Property Management Group LLC and LowCo [EOS/Petro] LLC
The annual report on Form 10-K filed March 31, 2014
10.58
Consulting Agreement dated August 26, 2013, as subsequently amended on December 13, 2013, between Eos Petro, Inc. and DVIBRI, LLC
The annual report on Form 10-K filed March 31, 2014
10.59
Consulting Agreement effective as of March 1, 2014 between Eos Petro, Inc. and DVIBRI, LLC
The quarterly report on Form 10-Q filed May 15, 2014
10.60
Consulting Agreement effective as of April 1, 2014 between Eos Petro, Inc. and Mark Bitter
The quarterly report on Form 10-Q filed May 15, 2014
10.61
Letter Agreement Dated July 1, 2014 between Eos Petro, Inc. and Vicki P. Rollins
The quarterly report on Form 10-Q filed August 18, 2014
10.62
Letter Agreement re: Business Partner and Advisory Agreement Dated June 26, 2014 between Eos Petro, Inc. and Baychester Petroleum
The quarterly report on Form 10-Q filed August 18, 2014
10.63
First Amendment to Consulting Agreement Effective June 30, 2014 between Eos Petro, Inc. and DVIBRI, LLC
The quarterly report on Form 10-Q filed August 18, 2014
10.64
Consulting Agreement Dated June 24, 2014 between Eos Petro, Inc. and Youssry Hassan
The quarterly report on Form 10-Q filed August 18, 2014 Herewith
10.65
Fourth Amendment to the LowCal Agreements dated August 14, 2014, by and among Eos Global Petro, Inc., Eos Petro, Inc., LowCal Industries, LLC, Sail Property Management Group, LLC and LowCo [EOS/Petro], LLC
The quarterly report on Form 10-Q filed August 18, 2014
10.66
Agreement and Plan of Merger, dated as of September 17, 2014, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc., a wholly-owned subsidiary of Eos Petro, Inc.
The current report on Form 8-K filed September 18, 2014
10.67
Offer to Purchase, dated October 9, 2014
The Schedule TO filed October 9, 2014 by Eos Petro, Inc. and Dune Energy, Inc.
10.68
Form of Letter of Transmittal (including Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9)
The Schedule TO filed October 9, 2014 by Eos Petro, Inc. and Dune Energy, Inc.
10.69
Form of Notice of Guaranteed Delivery
The Schedule TO filed October 9, 2014 by Eos Petro, Inc. and Dune Energy, Inc.
10.70
Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
The Schedule TO filed October 9, 2014 by Eos Petro, Inc. and Dune Energy, Inc.
10.71
Form of Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
The Schedule TO filed October 9, 2014 by Eos Petro, Inc. and Dune Energy, Inc.
10.72
Summary Newspaper Advertisement as published in The New York Times on October 9, 2014
The Schedule TO filed October 9, 2014 by Eos Petro, Inc. and Dune Energy, Inc.
10.73
Non-Disclosure Agreement, dated July 11, 2014, between Dune Energy, Inc. and Eos Petro, Inc.
The Schedule TO filed October 9, 2014 by Eos Petro, Inc. and Dune Energy, Inc.
10.74
Letter Agreement, dated as of November 20, 2014, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc.
The current report on Form 8-K filed November 21, 2014
10.75
Third Amendment to Agreement and Plan of Merger dated December 22, 2014, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc.
The current report on Form 8-K filed December 23, 2014
 
 
 
10.76
Fourth Amendment to Agreement and Plan of Merger dated January 15, 2015, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc.
The current report on Form 8-K filed January 20, 2015
10.77
Fifth Amendment to Agreement and Plan of Merger dated January 23, 2015, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc.
The current report on Form 8-K filed January 28, 2015
10.78
Sixth Amendment to Agreement and Plan of Merger dated January 30, 2015, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc.
The current report on Form 8-K filed February 4, 2015
10.79
Seventh Amendment to Agreement and Plan of Merger dated February 6, 2015, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc.
The current report on Form 8-K filed February 11, 2015
10.80
Eighth Amendment to Agreement and Plan of Merger dated February 13, 2015, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc.
The current report on Form 8-K filed February 17, 2015
10.81
Ninth Amendment to Agreement and Plan of Merger dated February 20, 2015, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc.
The current report on Form 8-K filed February 20, 2015
10.82
Tenth Amendment to Agreement and Plan of Merger dated February 24, 2015, among Dune Energy, Inc., Eos Petro, Inc. and Eos Merger Sub, Inc.
The current report on Form 8-K filed February 26, 2015
10.83
Fifth Amendment to the LowCal Agreements, dated as of January 13, 2015, by and among Eos Global Petro, Inc., Eos Petro, Inc., LowCal Industries, LLC, Sail Property Management Group, LLC and LowCo [EOS/Petro], LLC.
The current report on Form 8-K filed January 16, 2015
10.84
Sudhir Vasudeve’s Director’s Agreement, dated February 19, 2015.
The current report on Form 8-K filed February 19, 2015
10.85
Warrant to Purchase Common Stock between Eos Petro, Inc. and Jerry Astor, dated February 12, 2015
Filed herewith
10.86
Warrant to Purchase Common Stock between Eos Petro, Inc. and Jerry Astor, dated February 12, 2015
Filed herewith
10.87
Unsecured Promissory Note between Eos Petro, Inc. and Ridelinks, Inc., dated October 9, 2014
Filed herewith
10.88
Unsecured Promissory Note between Eos Petro, Inc. and Bacchus Investors, LLC, dated September 30, 2014
Filed herewith
10.89
Letter Agreement between Eos Petro, Inc. and Vatsala Sharma, dated October 1, 2014
Filed herewith
10.90
Joint Oil and Gas Operating Agreement between Eos Global Petro, Inc. and James Blumthal, dated July 10, 2014
Filed herewith
  
21.1
List of Subsidiaries of Eos Petro, Inc.
Filed herewith
23.1
Consent of Hahn Engineering
Filed herewith
31.1
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.1
Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.2
Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
99.1
Works Unit Reserve Evaluation dated February 17, 2015 by Hahn Engineering, Inc.
Filed herewith
101
Interactive Data File (XBRL)
Furnished herewith



 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
Dated: April 14, 2015
Eos Petro, Inc.

By: /s/ Martin Oring
Martin Oring
CEO

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Person
 
Capacity
 
Date
 
/s/ Nikolas Konstant
Nikolas Konstant
 
Chairman of the Board, Chief Financial Officer
 
April 14, 2015
/s/                          
John Mitola
 
Corporate Secretary, Director
 
/s/ John Hogg
John Hogg
 
Director
April 14, 2015
/s/ Martin Oring
Martin Oring
 
Chief Executive Officer, Director
April 14, 2015
/s/                          
Sudhir Vasudeva
 
Director
 
 
 
 
46
 
 
EOS Petro, Inc. and Subsidiaries
Index to Consolidated Financial Statements



Reports of Independent Registered Public Accounting Firm
  
F-2
     
Consolidated Balance Sheets
  
F-4
     
Consolidated Statements of Operations
  
F-5
     
Consolidated Statements of Stockholders’ Deficit
  
F-6
     
Consolidated Statements of Cash Flows
  
F-7
     
Notes to the Consolidated Financial Statements
  
F-8


 
F-1
 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
EOS Petro, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of EOS Petro, Inc. and Subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EOS Petro, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), EOS Petro, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 31, 2015 expressed an adverse opinion thereon.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company had a stockholders’ deficit at December 31, 2014 and has experienced recurring operating losses and negative operating cash flows since inception.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3 to the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that might result from the outcome of this uncertainty.


/s/ Weinberg & Company, P.A.

Los Angeles, California
March 31, 2015
 
 
F-2
 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING


To the Board of Directors and Stockholders of
EOS Petro, Inc. and Subsidiaries

We have audited EOS Petro, Inc. and Subsidiaries' (the "Company") internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). EOS Petro, Inc. and Subsidiaries' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, 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 because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



 
F-3
 


A material weakness is a deficiency, or a combination of 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 following material weaknesses have been identified and included in management’s assessment.

Control Environment.   The Company did not maintain an effective control environment, which is the foundation for the discipline and structure necessary for effective internal control over financial reporting, as evidenced by:  (i) lack of an independent audit committee;  (ii) lack of formal approval policies by the Board of Directors;   (iii) lack of adequate consciousness over individuals responsible for certain key control activities;  (iv) insufficient number of personnel appropriately qualified to perform control monitoring activities, including the recognition of risks and complexities of its business operations;  (v) 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.

a.  
The Company did not have effective controls to ensure that a formal approval policy by the Company’s Board of Directors is in place to authorize all of the significant and material transactions and activities of the Company.  Specifically, there were certain equity and financing transactions of the Company that were executed prior to the authorization of the Company’s Board of Directors.

b.  
The Company has insufficient number of personnel and therefore, lacks proper segregation of duties.  The Company’s Chief Executive Officer is the one that initiates, authorizes, executes, and issue checks or authorize wire transfers for payment of the Company’s expenditures.

c.  
The Company did not have effective controls to ensure the accurate preparation and review of its financial statements.  Specifically, the Company’s controls over the completeness, valuation and review of reconciliations and journal entries, which were prepared and maintained by an outside accounting firm, were ineffective in their design and operation.  In addition, the Company did not have effective controls over the process for identifying and accumulating all required supporting information to ensure the completeness of its footnote disclosures.

d.  
The Company did not have effective controls to ensure that (i) equity instruments (warrants and shares of stock) issued in conjunction with certain debt transactions were properly valued and amortized; and (ii) modifications to its debt instruments were accounted for appropriately.

e.  
The Company is subject to specialized accounting guidelines for oil and gas exploration activities.  Due to insufficient number of personnel, the Company lacks staff with an appropriate level of GAAP knowledge and experience or training in the application of specialized accounting guidelines for oil and gas exploration activities in the preparation of the accounting records supporting the balances on the financial statements of the Company.

The foregoing material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.  Accordingly, management has determined that each control deficiency constitutes a material weakness.

 
 
F-4
 
 
 
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 consolidated financial statements, and this report does not affect our report dated March 31, 2015, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weaknesses described above on the achievement of the objectives of the control criteria, EOS Petro, Inc. and Subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated balance sheets of EOS Petro, Inc. and Subsidiaries as of December 31, 2014 and 2013, and related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2014 and our report dated March 31, 2015, expressed an unqualified opinion, modified for a going concern uncertainty.


/s/ Weinberg & Company, P.A.

Los Angeles, California
March 31, 2015
 

 
F-5
 
 
Eos Petro, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31,
             
             
             
   
2014
    
2013
  
ASSETS
            
             
Current assets
            
Cash
   $ 133,210     $ 21,951  
Other current assets
     42,959       21,029  
Total current assets
     176,169       42,980  
                 
Oil and gas properties using the full cost method of accounting, net of accumulated depletion of $128,433 and $62,053, respectively
     1,121,175       1,187,555  
Other property plant and equipment, net of accumulated depreciation of $18,743 and $8,603, respectively
     11,257       21,397  
Long-term deposits
     102,441       102,441  
Total assets
   $ 1,411,042     $ 1,354,373  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
                
                 
Current liabilities
                
Accounts payable
   $ 148,888     $ 148,888  
Accrued expenses
     1,149,956       1,169,644  
Amounts due shareholder
     -       164,610  
LowCal convertible and promissory notes payable, net of discount
                
     of $0 and $887,118, respectively
     8,250,000       2,612,882  
Notes payable
     1,273,000       1,108,380  
Convertible notes payable
     -       250,000  
Derivative liabilities
     11,039,552       -  
Total current liabilities
     21,861,396       5,454,404  
                 
                 
Asset retirement obligation
     84,102       76,457  
Total liabilities
     21,945,498       5,530,861  
                 
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
                
   47,738,882 and 46,628,882 shares issued and outstanding
     4,774       4,663  
Additional paid-in capital
     89,077,781       23,231,954  
Shares of common stock to be issued - Nil and  400,000
     -       3,370,000  
Stock subscription receivable
     (88,200 )     (88,200 )
Accumulated deficit
     (109,528,811 )     (30,694,905 )
Total stockholders' deficit
     (20,534,456 )     (4,176,488 )
Total liabilities and stockholders' deficit
   $ 1,411,042     $ 1,354,373  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F-6
 
 
Eos Petro, Inc. and Subsidiaries
  
Consolidated Statements of Operations
  
For the Years Ended December 31,
  
                   
                   
                   
   
2014
    
2013
    
2012
  
                   
Revenues
                  
Oil and gas sales
   $ 760,452     $ 596,405     $ 74,530  
                         
Costs and expenses
                        
Lease operating expense
     427,076       401,642       172,252  
General and administrative
     30,541,198       15,549,982       1,254,277  
Total costs and expenses
     30,968,274       15,951,624       1,426,529  
                         
Loss from operations
     (30,207,822 )     (15,355,219 )     (1,351,999 )
                         
Other income (expense)
                        
                         
Interest and finance costs
     (23,834,276 )     (8,372,720 )     (514,144 )
Change in fair value of derivative liabilities
     15,224,507       -       -  
Loss on debt extinguishment
     (40,016,315 )     (3,388,704 )     -  
Reverse merger costs
     -       -       (57,385 )
Total other income (expense)
     (48,626,084 )     (11,761,424 )     (571,529 )
                         
Net loss
     (78,833,906 )     (27,116,643 )     (1,923,528 )
                         
Preferred stock dividends
     -       -       (15,978 )
Net loss attributed to common stockholders
   $ (78,833,906 )   $ (27,116,643 )   $ (1,939,506 )
                         
Net loss per share attributed to common
                        
stockholders - basic and diluted
   $ (1.68 )   $ (0.59 )   $ (0.05 )
Weighted average common shares outstanding
                        
basic and diluted
     47,050,948       45,622,352       38,149,900  

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

 
F-7
 
 
Eos Petro, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
For the Three Years Ended December 31, 2014
                                                           
                                                           
                                                           
                           
Additional
     Shares of Common      
Stock
            
Total
  
   
Series B Preferred Stock
    
Common Stock
    
Paid-in
    
Stock to be
      
Subscription
      
Accumulated
    
Stockholders'
  
   
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Issued
      
Receivable
      
Deficit
    
Deficit
  
Balance, December 31, 2011
     35,860,044     $ 3,586       -      $ -     $ 1,140,293     $ -       $ (88,200 )     $ (1,638,756 )   $ (583,077 )
                                                                             
Issuance of stock for personal guarantee
                                                                            
of loan by shareholder
     1,000,000       100       -       -       55,900       -         -         -       56,000  
Issuance of stock in debt transactions
     440,000       44       -       -       24,596       -         -         -       24,640  
Issuance of stock for services
     600,000       60       -       -       31,740       -         -         -       31,800  
Fair value of warrants issued in connection with
                                                                            
extension of notes payable
     -       -       -       -       5,468       -         -         -       5,468  
Fair value of options issued to directors
     -       -       -       -       3,964       -         -         -       3,964  
Fair value of warrants issued for consulting services
     -       -       -       -       11,687       -         -         -       11,687  
Stock issued in connection with reverse merger
     6,000,000       600       94,897       9       (609 )     -         -         -       -  
Shares issued in connection with promissory note
     250,000       25       -       -       4,975       -         -         -       5,000  
Accrued dividends on preferred stock
     -       -       -       -       -       -         -         (15,978 )     (15,978 )
Net loss
     -       -       -       -       -       -         -         (1,923,528 )     (1,923,528 )
Balance, December 31, 2012
     44,150,044       4,415       94,897       9       1,278,014       -         (88,200 )       (3,578,262 )     (2,384,024 )
Issuance of Series B preferred stock for consulting services
     25,000       3       -       -       497       -         -         -       500  
Issuance of Series B preferred stock in connection with promissory note
     950,000       95       -       -       3,239,405       -         -         -       3,239,500  
Issuance of Series B preferred stock for extension of notes payable
     150,000       15       -       -       2,985       -         -         -       3,000  
Fair value of warrants issued for consulting services
     -       -       -       -       10,314,767       -         -         -       10,314,767  
Purchase of shares associated with reverse stock split
     -       -       (206 )     -       (4,118 )     -         -         -       (4,118 )
Automatic conversion of Series B preferred stock for common stock
     (45,275,044 )     (4,528 )     45,275,044       4,528       -       -         -         -       -  
Issuance of common stock for cash
     -       -       540,436       54       90,396       -         -         -       90,450  
Issuance of common stock for consulting services
     -       -       613,000       61       1,909,248       -         -         -       1,909,309  
Fair value of share based compensation
     -       -       -       -       967,954       -         -         -       967,954  
Issuance of 98,855 shares related to loan amendments
     -       -       98,855       10       837,988       -         -         -       837,998  
Beneficial converson feature related to debt modification
     -       -       -       -       2,579,562       -         -         -       2,579,562  
Beneficial conversion feature related to issuance of convertible debt
     -       -       -       -       1,106,250       -         -         -       1,106,250  
Shares to be issued related to issuance of convertible note
     -       -       -       -       -       3,370,000         -         -       3,370,000  
Fair value of warrants issued in connection with convertible note
     -       -       -       -       853,548       -         -         -       853,548  
Shares issued for accrued dividends
     -       -       6,856       1       55,458       -         -         -       55,459  
Net loss
     -       -       -       -       -       -         -         (27,116,643 )     (27,116,643 )
Balance, December 31, 2013
     -       -       46,628,882       4,663       23,231,954       3,370,000         (88,200 )       (30,694,905 )     (4,176,488 )
Issuance of common stock for consulting services
     -       -       44,000       4       601,115       -         -         -       601,119  
Issuance of common stock related to debt extinguishment
     -       -       66,000       7       692,994       -         -         -       693,001  
Fair value of share based compensation
     -       -       -       -       5,443,458       -         -         -       5,443,458  
Fair value of warrants issued for consulting services
     -       -       -       -       22,112,191       -         -         -       22,112,191  
Fair value of warrants issued for note payable extension
     -       -       -       -       3,212,283       -         -         -       3,212,283  
Fair value of warrants issued for financing costs
     -       -       -       -       2,766,716       -         -         -       2,766,716  
Beneficial conversion feature related to issuance of convertible debt
     -       -       -       -       12,750,000       -         -         -       12,750,000  
Fair value of warramts issued in connection with convertible note
     -       -       -       -       7,293,170       -         -         -       7,293,170  
Fair value of shares issued in connection with convertible note
     -       -       1,000,000       100       10,973,900       (3,370,000 )       -         -       7,604,000  
Net loss
     -       -       -       -       -       -         -         (78,833,906 )     (78,833,906 )
Balance, December 31, 2014
     -     $ -       47,738,882     $ 4,774     $ 89,077,781     $ -       $ (88,200 )     $ (109,528,811 )   $ (20,534,456 )
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
F-8
 

 
Eos Petro, Inc. and Subsidiaries
  
Consolidated Statements of Cash Flows
  
For the Years Ended December 31,
  
                   
   
2014
    
2013
    
2012
  
                   
Cash flows from operating activities
                  
Net loss
   $ (78,833,906 )   $ (27,116,643 )   $ (1,923,528 )
Adjustments to reconcile net loss to net cash
                        
used in operating activities:
                        
Depletion
     66,380       40,645       21,408  
Depreciation
     10,140       7,106       1,497  
Accretion of asset retirement obligation
     7,645       6,951       4,254  
Amortization of debt issuance costs
     2,387,118       2,617,571       195,312  
Non-cash finance costs
     20,876,170       5,406,533       -  
Loss on debt extinguishment
     40,016,315       3,388,704       -  
Fair value of stock issued for services
     601,119       1,909,809       31,800  
Fair value of stock issued in debt transaction
     -       3,000       30,108  
  Fair value of warrants issued for consulting services
     22,112,191       10,314,767       11,687  
  Fair value of stock issued for loan guaranty by related party
     -       -       56,000  
Fair value of share-based compensation
     5,443,458       967,954       3,964  
Reverse merger costs
     -       -       57,385  
Change in fair value of derivative liabilities
     (15,224,507 )     -       -  
Change in operating assets and liabilities:
                        
Deposits and other current assets
     (21,930 )     (3,741 )     (4,966 )
Accounts payable
     -       (61,680 )     (217,052 )
Accrued expenses
     587,676       610,022       503,281  
Amounts due shareholder
     (164,610 )     27,610       (102,441 )
Net cash used in operating activities
     (2,136,741 )     (1,881,392 )     (1,331,291 )
                         
Cash flows from investing activities:
                        
Purchase of other fixed assets
     -       (19,000 )     (11,000 )
Capital expenditures on oil and gas properties
     -       (1,022,500 )     (10,000 )
Net cash used in investing activities
     -       (1,041,500 )     (21,000 )
                         
Cash flows from financing activities:
                        
  Proceeds from issuance of common stock for cash
     -       90,450       -  
Proceeds from (repayment to) related party
     -       (39,000 )     136,402  
Proceeds from issuance of notes payable
     523,000       -       1,250,000  
Repayment of  notes payable
     -       (500,000 )     (41,600 )
Purchase of stock pursuant to reverse stock split
     (275,000 )     (4,118 )     -  
Repayment of convertible notes
     (250,000 )     -       -  
Debt issuance costs
     -       (150,000 )     (195,000 )
  Proceeds from issuance of LowCal convertible and promissory notes
     2,250,000       3,500,000       250,000  
Net cash provided by financing activities
     2,248,000       2,897,332       1,399,802  
                         
NET INCREASE IN CASH AND CASH EQUIVALENTS
     111,259       (25,560 )     47,511  
                         
CASH AND CASH EQUIVALENTS, beginning of period
     21,951       47,511       -  
                         
CASH AND CASH EQUIVALENTS, end of period
   $ 133,210     $ 21,951     $ 47,511  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
          
                         
Cash paid for interest
   $ -     $ -     $ 59,442  
Cash paid for income taxes
   $ -     $ -     $ -  
                         
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
          
                         
Accrued dividends on preferred stock
   $ -     $ -     $ 15,978  
Issued 250,000 shares of Series B Preferred stock
                        
pursuant to debt agreement
   $ -     $ -     $ 5,000  
Capitalized asset retirement obligation
   $ -     $ 22,715     $ 42,537  
Issued 950,000 shares of Series B Preferred stock
                        
pursuant to debt agreement
   $ -     $ 3,239,500     $ -  
Issued 98,855 shares of common stock for loan amendment
   $ -     $ 837,998     $ -  
400,000 shares of common stock to be issued pursuant to loan amendment
   $ -     $ 3,370,000     $ -  
Issued 6,856 shares for accrued dividends
   $ -     $ 55,549     $ -  
Conversion of Series B Preferred stock to common stock
   $ -     $ 4,528     $ -  
Issued 66,000 shares of common stock for extinguishment of debt
   $ 53,380     $ -     $ -  
Fair value of shares of beneficial converstion feature
                        
recognized as debt discount
   $ 1,500,000     $ -     $ -  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F-9
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



NOTE 1 - ORGANIZATION

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.

Upon completion of the Merger, the former stockholders of Eos owned approximately 93% of the then outstanding shares of Company stock and the holders of the Company’s previously outstanding debt and outstanding shares of Company common stock own the balance. As the owners and management of Eos had voting and operating control of the Company after the Reverse Merger, the transaction has been accounted for as a recapitalization of the Company with Eos deemed the acquiring company for accounting purposes, and the Company was deemed the legal acquirer. Due to the change in control, the consolidated financial statements reflect the historical results of Eos prior to the Merger and that of the consolidated company following the Merger. Common stock and the corresponding capital amounts of the Company pre-Merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the Merger.
 
Effective as of May 20, 2013, the Company changed its name to Eos Petro, Inc. (it previously had been named “Cellteck, Inc.”) by filing an amendment to its articles of incorporation with the Nevada secretary of state after the name change was approved at a special meeting of the stockholders of the Company held on May 6, 2013. In anticipation of the Company’s name change, on May 17, 2013, the Company also changed the name of Eos (previously named “Eos Petro, Inc.”), to Eos Global Petro, Inc.
 
The Company has two wholly-owned subsidiaries, Eos and Eos Merger Sub, Inc., a Delaware corporation (“Eos Delaware”), which was formed for a potential merger with Dune Energy, Inc. following successful completion of the Company’s tender offer for all outstanding shares of Dune Energy, Inc., discussed further below. 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, Eos Delaware, PBOG, Plethora Energy and EAOG are collectively referred to as the Company’s “Subsidiaries.”
 
Business

We are in the business of acquiring, exploring and developing oil and gas-related assets. We formerly marketed the Safe Cell Tab product line, which consists of products designed to protect users against the potentially harmful and damaging effects of electromagnetic radiation emitted from electrical devices.  That segment of our business was discontinued in 2013.  We have abandoned the assets after settling Safe Cell Tab related liabilities.

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 and includes the automatically converted shares of Series B preferred stock on a retroactive basis. 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 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.
 
 
 
F-10
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



   
December 31,
  
   
2014
    
2013
    
2012
  
Options
     1,300,000       700,000       100,000  
Warrants
     14,577,992       11,458,000       9,668,000  
Convertible notes
     2,000,000       975,000       100,000  
Total
     17,877,992       13,133,000       9,868,000  

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, 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. Average depreciation, depletion and amortization (“DD&A”) per BOE was $4.79, $5.34, and $2.04 for the years ended December 31, 2014, 2013 and 2012, respectively.
 
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.
 
 
 
F-11
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
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 December 31, 2014, the Company has not experienced any impairment of its capitalized oil and gas properties.

The Company recorded depletion expense of $66,380, $40,645 and $21,408 for the years ended December 31, 2014, 2013 and 2012, 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 December 31, 2014, 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 December 31, 2014 and 2013, the Company had an ARO of $84,102 and $76,457, 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.

 
 
F-12
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
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 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 December 31, 2014, the Company identified the following liabilities that are required to be presented on the balance sheet at fair value:
 
 
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       -  
                               
 
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 years ended December 31, 2014, 2013 and 2012.  The Company’s oil and gas properties are located in Illinois.
 
 
 
F-13
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



Segment Reporting

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The two business segments are as follows:

 
(1)
The acquisition, development, and operation of onshore oil and gas properties which is performed by Eos.

 
(2)
The design and production of products to protect users against the potentially harmful and damaging effects of electromagnetic radiation emitted from electrical devices, which is performed by the Company.

Following the Merger, the Company’s principal focus has shifted to the business of Eos. The Company’s pre-Merger assets were less than 1% of total assets and its safe cell tab revenue was less than 1% of total revenue for. Since the Company’s pre-Merger assets and operations are immaterial, the Company reports only one segment for financial statement reporting purposes.  Further, that segment of our business was discontinued in 2013, and we have written off all assets after settling all Safe Cell Tab related liabilities.

Recently Issued Accounting Pronouncements

In May 2014, the (“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.
 
 
 
F-14
 
Eos Petro, Inc. and Subsidiaries
Notes to 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 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 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 December 31, 2014, the Company had a stockholders’ deficit of $20,534,456, and for the year ended December 31, 2014, reported a net loss of $78,833,906 and had negative cash flows from operating activities of $2,136,741.   Furthermore, $350,000 of notes payable were in default. In addition, subsequent to December 31, 2014 the Company may have become obligated to a $5.5 million termination fee due under the Dune Acquisition Agreement (see Note 14) and $4 million that may be due under a structuring fee with a warrant holder (see Note 11).  Management estimates the Company’s capital requirements for the next twelve months, including drilling and completing wells for the Works Property and possible acquisitions, will total approximately $2,500,000. 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.

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 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.
 
 
 
F-15
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



Note 4 – LOWCAL CONVERTIBLE AND PROMISSORY NOTES PAYABLE
 
   
December 31,
  
   
2014
    
2013
  
LowCal Convertible Note
   $ 5,000,000     $ 3,500,000  
Unamortized discount
     -       (887,118 )
Subtotal
     5,000,000       2,612,882  
LowCal Promissory Note
     3,250,000       -  
Total
   $ 8,250,000     $ 2,612,882  

On February 8, 2013, and subsequently amended, the Company and Eos entered into s: (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 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. (Subsequently amended to $4 and then $2.50 per share - see below).  The principal and all interest on the LowCal Loans was initially due  on or before December 31, 2013 , but after various amendments, is now currently due on June 30, 2015 (see below).   

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 issuance of the first tranche of the LowCal Note of $2,500,000, the Company also issued 950,000 shares of the Company’s common stock valued at $3,239,500. The Company recognized $2,500,000 of this amount as debt discount and the excess amount of the total fair value of the common shares issued over the recognized debt discount of $739,500 was accounted for as a finance cost on the Company's statement of operations for year ended December 31, 2013.  The debt discount recognized of $2,500,000 was fully amortized to interest expense by December 31, 2013.
 
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 to $4. The Company received proceeds in the aggregate amount of $1,000,000 pursuant to second tranche of the LowCal Note.   As of December 31, 2013, total principal balance of the LowCal Note was $3,500,000.

In conjunction with the receipt of the $1,000,000 funding in 2013, the Company granted LowCal 400,000 shares of its common stock valued at $3,370,000.  The Company also determined that since the market prices (ranging from $8.30 to $8.55) of the Company’s common stock was in excess of the then $4.0 conversion price per share, a beneficial conversion feature of $1,106,250 existed upon issuance.  To account for the total of these costs of $4,476,250, the Company recorded a valuation discount of $1,000,000 upon issuance, which was subsequently amortized over the life of the LowCal Note, based on the then maturity date on December 31, 2014.  The incremental cost of $3,476,250 was recorded as a financing cost during the year ended December 31, 2013.  The amendment of the conversion price per share from $5.00 to $4.00 per share also resulted in a modification cost of $2,579,562 in 2013 relating to the original principal balance of $2,500,000 received in the first tranche.
 
 
 
F-16
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



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 Note.  As such, on June 2014, the amended principal balance of the LowCal Note of $5,000,000 was fully funded. As part of this financing, the Company issued 600,000 shares of its common stock as a financing cost with a fair value of $7,604,000. In addition, as the $4 per share conversion price for the $1,500,000 LowCal additional funding was below the market price of the Company’s common shares at the date of issuance, a beneficial conversion feature of $1,500,000 was created upon issuance. This amount represented the amount by which the value of the shares into which the notes are convertible exceeded the aggregate conversion price on the date of issuance. In addition, the Company considered the $7,604,000 fair value of the 600,000 LowCal Shares to be a financing cost. To account for these costs, the Company recorded a valuation discount of $1,500,000 upon issuance, and the incremental cost of $9,356,500 over the face amount of the note was recorded as a financing cost during the year ended December 31, 2014. The Company fully amortized the valuation discount to interest expense as of December 31, 2014.
 
On May 13, 2014, the Company entered into a third amendment to the LowCal Note, pursuant to which, among others, the conversion price of the LowCal Note was further reduced from its then conversion price of $4.0 per share to $2.50 per share, and the maturity date was extended to December 31, 2014.  The reduction in the conversion price resulted in a modification cost of   $11,250,000 pursuant to the provisions of ASC Topic 470-50, Accounting for Modification (or Exchange) of Convertible Debt Instruments (“ASC 470-50”).  The modification cost was calculated as the intrinsic value relating to the fair value of the additional shares to be issued as a result of the modification and was recorded as a finance cost during the year ended December 31, 2014.  Also, pursuant to the terms of the third amendment to the LowCal Note, the Company also granted LowCal a warrant to purchase 500,000 shares of the Company’s common stock at an exercise price of $4.0 per share, expiring on June 30, 2017.  The Company calculated the fair value of these warrants at grant date using the Black Scholes option pricing model and determined the fair value to be $7,293,171.  The Company recognized this amount as finance cost on the Company’s statement of operations for the year ended December 31, 2014.

On January 13, 2015, the Company entered into a 5th amendment (the “Amendment”) with LowCal Industries, LLC and certain of their affiliates to a secured convertible promissory note in the principal amount of $5,000,000.  As part of the Amendment, the Company and LowCal entered into the following: (i) an amended and restated First Note (the “Amended First Note”); and (ii) an unsecured promissory note in the principal amount of $3,250,000.
Pursuant to the fifth agreement,

  • LowCal forgave approximately $667,000 of  accrued interest and eliminate all interest going forward
  • Advanced $750,000 to the Company
  • Remove the exit fee
  • Extend the maturity date to June 30, 2015
As the 5th Amendment reflected the culmination and documenting of transactions that occurred and were agreed to in 2014, the Company recorded a loss on debt extinguishment related to the fifth amendment of $1,832,576 in the accompanying statement of operations for the year ended December 31, 2014.

During the years ended December 31, 2014, 2013 and 2012, the Company amortized $2,387,118,  $2,617,571, and $195,312, respectively, of the LowCal loan discount which was recorded to interest and finance costs.  

 
 
F-17
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
NOTE 5 - NOTES PAYABLE
 
   
December 31,
  
   
2014
    
2013
  
             
Note payable at 24% (1)
   $ -     $ 128,380  
Secured note payable, at 18% (2)
     600,000       600,000  
Note payable, at 6% (3)
     250,000       250,000  
Note payable, at 5%, (4)
     -       130,000  
Note payabe, at 2%, (5)
     100,000       -  
Note payable at 4%, (6)
     323,000       -  
Total
   $ 1,273,000     $ 1,108,380  

(1) On October 24, 2011, Eos received $200,000 from RT Holdings, LLC (“RT”) in exchange for an unsecured promissory note payable, originally due November 7, 2011, as extended till January 9, 2014, with interest due at 6% per annum, which was amended to 24%.  On the maturity date, in addition to repaying in full the principal amount owed to RT, plus interest, Eos agreed to pay RT a single additional fee of $10,000.

As of December 31, 2013, the Company owed $128,380.  During 2014, the Company settled the loan by paying $75,000 and issuing 66,000 shares of the Company’s common stock.  The fair value of the 66,000 shares was $693,001.  The Company recorded a loss on debt extinguishment of $639,621.

(2) 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.  On June 30, 2014, the maturity date was extended to October 1, 2014 and subsequently amended to July 1, 2015.

(3) 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.  The fair value of the 250,000 warrants was $3,212,283 and was recorded as finance costs in the accompanying consolidated statement of operations for the year ended December 31, 2014.  The balance of the note payable was $250,000 at December 31, 2014 and 2013 and is currently in default.

(4) 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”). On 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. The Company agreed to pay $7,500 a month in rent under the Babcock Lease. Pursuant to the Babcock Loan and Lease documents, Eos granted Babcock a mortgage and security interest in its oil and gas properties and related assets, agreements and profits.

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 Babcock 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 on the loan.  The Company made payments of $100,000 each on November 13, 2013 and November 18, 2013. During 2014, the Company paid $100,000 for settlement of the debt.  Accordingly, the Company recorded a gain on extinguishment of debt of $30,000 on the accompanying consolidated statement of operations for the year ended December 31, 2014.
 
 
 
F-18
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
(5)  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 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.  The promissory note is currently in default.

(6)  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 – CONVERTIBLE PROMISSORY NOTE

Clouding IP, LLC

On December 26, 2012, Eos entered into an Oil & Gas Services Agreement with Clouding IP, LLC (“Clouding”) in order to retain the oil and gas related services of Clouding and its affiliates.

Concurrently with the execution of the Oil & Gas Services Agreement with Clouding, on December 26, 2012, the Company executed a series of agreements with Clouding in order to secure a $250,000 loan (the “Clouding Loan”). Pursuant to the Clouding Loan documents, Eos granted Clouding a mortgage and security interest in and on the Company’s assets. The maturity date of the Clouding Loan was March 31, 2013 which was amended to August 31, 2013, pursuant to a written extension on April 19, 2013, and interest accrues on the Clouding Loan at a rate of 4% per annum commencing December 26, 2012. On the maturity date, Eos further agreed to pay to Clouding a loan fee of $25,000. At Clouding’s option, the principal amount of the loan, together with any accrued and unpaid interest or other charges, may be converted into common stock of the Company at a conversion price of $2.50 per share.  

As the Clouding Loan was not repaid in full on the initial March 31, 2013 maturity date, pursuant to the terms of the Clouding Loan, the Company issued to Clouding an additional 150,000 shares of its Series B preferred stock, which were subsequently converted into 150,000 shares of common stock.  As of December 31, 2013, the amount outstanding on the note was $250,000.

On various dates in May and June 2014, the Company paid what it believed to be the remaining outstanding principal; however, Clouding made claims that certain amounts of interest, as well as a loan termination fee, were still due.  On August 20, 2014, the Company entered into a settlement agreement for full cancellation and satisfaction of the Clouding Loan and related agreements.  Pursuant to the settlement agreement, the Company was to make a one-time payment of $52,500 and issue 1,775,000 warrants to Clouding and certain related parties.  If the $52,500 was not paid by August 22, 2014, then the amount due would be increased by 10% and then an additional 1% for each additional 30 days that the Company had not cured the default.  As of December 31, 2014, the amount due is $58,327 and has been reflected as an accrued expense in the accompanying consolidated balance sheet.  The warrants had an exercise price of $4 per share and an expiration date of August 20, 2018.  The warrant agreement provided for a reduction in exercise price to 75% of the original exercise price if the Company did not pay the $52,500 by August 22, 2014 and also 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 the agreement, the exercise price was reduced to $3 when the Company did not make the required payment of $52,500 and further reduced the exercise price to $2.50 when the Company issued additional warrants with an exercise price of $2.50.  Due to the anti-dilution provision, the Company determined that the warrants were derivatives and recorded the fair value of the warrants of $26,264,059 at issuance as a derivative liability and as a loss on debt extinguishment on the December 31, 2014 consolidated financial statements.

NOTE 7 – ASSET RETIREMENT OBLIGATION

Changes in the Company’s asset retirement obligations were as follows:
 
 
 
F-19
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
 
   
Decemer 31,
  
   
2014
    
2013
  
Asset retirement obligation, beginning of period
   $ 76,457     $ 46,791  
Additions
     -       22,715  
Accretion expense
     7,645       6,951  
Asset retirement obligations, end of period
   $ 84,102     $ 76,457  
 
NOTE 8 – 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.  As discussed in Note 6, the Company issued 1,775,000 warrants to Clouding and certain 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.
 
As of August 20, 2014 (issuance date of the warrants) and December 31, 2014, the derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following assumptions:
 
Warrants:
 
   
August 20, 2014 (Issuance date)
    
December 31, 2014
  
Exercise Price
   $ 4.0     $ 2.5  
Stock Price
   $ 15     $ 6.5  
Risk-free interest rate
     .94 %     1.10 %
Expected volatility
     220 %     188 %
Expected life (in years)
  
4 years
    
3.64 years
  
Expected dividend yield
     0 %     0 %
                 
Fair Value:
   $ 26,264,059     $ 11,039,552  
 
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.

At the issuance date of the warrants on August 20, 2014, the Company determined the aggregate fair value to be $26,264,059, and was accounted for as a derivative liability.   For the year ended December 31, 2014, the Company recorded a change in fair value of the derivative liability of $15,224,507.   As of December 31, 2014, the aggregate fair value of the derivative liabilities was $11,039,552.

 
 
F-20
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
NOTE 9 - 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 years ended December 31, 2014 and 2013, the Company recorded compensation expense of $360,000 and $360,000, respectively.  The amount due to Mr. Konstant under the Plethora consulting agreement is $0 and $164,610 at December 31, 2014 and 2013, respectively.

Other

On October 3, 2011, the Company entered into an Exclusive Business Partner and Advisory Agreement with 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. 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.

NOTE 10 - STOCKHOLDERS’ DEFICIT

Stock Issuances for Services

In May 2012, the Company issued 300,000 shares of the Company’s Series B Preferred Stock to Agra Capital Advisors, LLC / Akire Inc. (“Agra”). The stock was valued at $.056 per share or total fair value of $16,800 with the assistance of an outside valuation firm. On July 1, 2012, the Company issued 50,000 shares of the Company’s Series B Preferred Stock to Quantum as part of a consulting agreement.  The value of the shares totaled $2,800. On August 2, 2012, the Company issued 200,000 shares of the Company’s Series B Preferred Stock to John Linton pursuant to a consulting agreement.  The value of the shares totaled $11,200. On December 31, 2012, the Company issued 50,000 shares of the Company’s Series B Preferred Stock pursuant to a consulting agreement with Quantum.  The value of the shares totaled $1,000.

On January 15, 2013, the Company issued 25,000 shares of the Company’s Series B Preferred Stock pursuant to a consulting agreement.  The value of the shares totaled $500 and was recorded as consulting expense.

During 2013, the Company issued to Quantum 100,000 shares of common stock pursuant to a consulting agreement.   The value of the shares totaled $570,500 and was recorded as consulting expense.

On August 1, 2013, the Company issued 500,000 shares of common stock to Agra pursuant to a consulting agreement.  The value of the shares totaled $1,250,000 and was recorded as consulting expense.

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 December, 2013, Hahn had received 13,000 restricted shares of common stock of the Company valued at $88,110 which was recorded as consulting expense. During the year ended December 31, 2014, Hahn had received 24,000 restricted shares of common stock of the Company valued at $315,119 which was recorded as consulting expense.

During the year ended December 31, 2014, the Company issued 20,000 shares of common stock pursuant to a consulting agreement.  The value of the shares totaled $286,000 and was recorded as consulting expense.

 
 
F-21
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
Stock Issuances Related to Notes Payable

In February 2012, the Company issued 1,000,000 shares at of the Company’s Series B Preferred Stock at $.056 per share as consideration for the personal pledge of Nikolas Konstant, the Company’s chief executive officer, in the Secured Promissory Note to Sharma Vatsala. The shares were valued at $56,000.
 
In February and March 2012, the Company issued a total of 400,000 shares of the Company’s Series B Preferred Stock at $.056 per share to Sharma Vatsala for extensions of the Secured Promissory Note. The shares were valued at $22,400. On September 26, 2012, the Company issued 20,000 shares of the Company’s Series B Preferred Stock to Babcock pursuant to a note agreement.  The value of the shares totaled $1,120. On July 10, 2012, the Company issued 20,000 shares of the Company’s Series B Preferred Stock to RT Holdings as consideration for extending the maturity date of the note.  The value of the shares totaled $1,120.

On December 26, 2012, the Company issued 250,000 shares of the Company’s Series B Preferred Stock pursuant to the convertible promissory note agreement with Clouding. The value of the shares totaled $5,000

Pursuant to a loan agreement entered into on February 8, 2013 and later amended on April 23, 2013, the Company issued 950,000 shares of the Company’s Series B Preferred Stock pursuant to the LowCal loan agreement.  The value of the shares totaled $3,239,500 of which $2,500,000 was recorded as a debt discount, which will be amortized over the life of the loan agreement and recorded as interest expense, and $739,500, which is the amount the fair value of the stock exceeded the face value of the convertible notes, was recorded as a finance cost.
 
On March 31, 2013, the Company issued 150,000 shares of the Company’s Series B Preferred Stock pursuant to a loan agreement with Clouding.  The value of the shares totaled $3,000 and was recorded as interest expense.

On November 7, 2013, the Company issued 70,000 shares of common stock pursuant to the amendment of the Babcock loan.  The value of the shares totaled $598,500, and was recorded as loss on debt extinguishment.

On November 17, 2013, the Company issued 28,885 shares of common stock pursuant to the amendment of the RT Holdings loan.  The value of the shares totaled $239,497 of which $28,855 was applied toward the loan and the remaining $210,642 and was recorded as loss on debt extinguishment.

On February 2, 2014, the Company issued 66,000 shares of common stock to RT holdings pursuant to a loan settlement agreement.  The value of the shares totaled $693,001 and was recorded as a reduction of the note payable of $53,380 and a loss on debt modification of $639,621.

As part of the financing with the LowCal Notes described in Note 4, the Company granted, but did not issue, 400,000 shares of common stock valued at $3,370,000 during the year ended December 31, 2013.  These shares were reflected as Shares of Common Stock to be Issued as of December 31, 2013. These shares were issued during 2014.  Also as part of the financing with the LowCal Notes issued 600,000 shares of common stock valued at $7,604,000 during the year ended December 31, 2014.

Stock Issuances for Cash

On November 15, 2012, pursuant to a letter agreement (the “Purchase Agreement”) the Company agreed to sell to Sterling Atlantic, LLC (“Sterling”), post Stock-Split, up to 50,000 restricted shares of its common stock and 50,000 warrants to purchase shares of its common stock at an exercise price of $2.50, with a five-year term. Under the Purchase Agreement, if the Company received less than $50,000, the number of shares and warrants to be issued would be reduced proportionately. During 2013, the Company received an aggregate of $40,000: (i) $15,000 came directly from Sterling; and (ii) $25,000 came from Billy Parrott, an individual, at the direction of Sterling. Consequently, when the Stock Split was effectuated on May 20, 2013, the Company issued 15,000 shares and 15,000 warrants to Sterling and 25,000 shares and 25,000 warrants to Billy Parrott, where the warrants had the terms set forth above from the Purchase Agreement.
 
 
 
F-22
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



On June 21, 2013, the Company issued 500,000 restricted shares of common stock at $0.10 per share or for a total of $50,000 cash pursuant to a consulting agreement with Brian Hannan and Jeffrey Ahlholm.

NOTE 11 - 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, 2011
     -       -       -    
Granted
     100,000       2.50       -    
Exercised
     -       -       -    
Forfeited/Canceled
     -       -       -    
Outstanding, December 31, 2012
     100,000       2.50       2.58    
Granted
     600,000       2.50       -    
Exercised
     -       -       -    
Forfeited/Canceled
     -       -       -    
Outstanding, December 31, 2013
     700,000       2.50       4.07    
Granted
     600,000       2.50            
Exercised
     -                    
Forfeited/Canceled
     -                    
Outstanding, December 31, 2014
     1,300,000       2.50       3.81  
    5,200,000
Exercisable, December 31, 2014
     1,000,000       2.50       3.58  
    4,000,000

The following table summarizes information about options outstanding at December 31, 2014:
 
Options Outstanding
   
Weighted
Weighted
   
Average
Average
Exercise
Number of
Remaining
Exercise
Price ($)
Shares
Life (Years)
Price ($)
2.50
  1,300,000
3.81
2.50
 
 
 
F-23
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



The following table summarizes information about options exercisable at December 31, 2014:

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

On June 23, 2013, the Company entered into an employment agreement with Martin Oring, who also acts as a director of the Company, in which Mr. Oring was appointed the CEO of the Company. In exchange for Mr. Oring’s services, he received an option to purchase 600,000 shares of restricted common stock of the Company at an exercise price of $2.50 with a five year term valued at $1,935,908. 50,000 options shares vested each month the employment agreement remained in effect through June 30, 2014. On August 18, 2014, the Company and Mr. Oring entered into a new employment agreement in which Mr. Oring shall continue to act as the Company’s CEO in exchange for new options. Pursuant to the new agreement entered into on August 18, 2014, the Company issued to Mr. Oring an additional option to purchase 600,000 shares of restricted common stock of the company at an exercise price of $2.50 with a five year term valued at $1,935,908. 50,000 of such options vested immediately on the date of grant for Mr. Oring’s services provided in July 2014. The remaining options shall vest in monthly installments of 50,000 commencing August 31, 2014 and continuing thereafter every month Mr. Oring’s employment agreement remains in effect.

The assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model for options granted during the years ended December 31, 2014, 2013 and 2012 are as follows:

   
Decmeber 31,
  
   
2014
    
2013
    
2012
  
Risk-free interest rate
     0.73 %     0.73 %     0.39 %
Expected life of the options (Years)
     4.95       3       3  
Expected volatility
     220 %     214 %     214 %
Expected dividend yield
     0 %     0 %     0 %
Expected forfeitures
     0 %     0 %     0 %

The weighted average grant-date fair value for the options granted during the years ended December 31, 2014, 2013 and 2012, was $14.92, $3.23 and $0.04, respectively.

During the years ended December 31, 2014, 2013 and 2012, the Company recorded $5,443,458, $967,954, and $3,964, respectively, of share based compensation.

As of December 31, 2014, the unamortized balance is $4,475,501 which will be expensed through June 30, 2015.

 
 
F-24
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
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, 2011
     -       -       -    
Granted
     9,668,000       4.00       -    
Exercised
     -       -       -    
Forfeited/Canceled
     -       -       -    
Outstanding, December 31, 2012
     9,668,000       -       -    
Granted
     1,890,000       7.18       -    
Exercised
     -       -       -    
Forfeited/Canceled
     -       -       -    
Outstanding, December 31, 2013
     11,558,000       4.50       2.21    
Granted
     3,444,992       2.99            
Exercised
     -       -            
Forfeited/Canceled
     (425,000 )     2.62            
Outstanding, December 31, 2014
     14,577,992       4.69       1.96  
  36,008,468
Exercisable, December 31, 2014
     9,874,660       4.39       2.45  
  30,514,640

The following tables summarize information about warrants outstanding at December 31, 2014:
 
Warrants Outstanding
           
Weighted
    
Weighted
  
           
Average
    
Average
  
Exercise
    
Number of
    
Remaining
    
Exercise
  
Price ($)
    
Shares
    
Life (Years)
    
Price ($)
  
  2.50       4,909,992       2.46       2.50  
  3.00       2,303,000       1.48       3.00  
  4.00       1,175,000       3.17       4.00  
  5.35       4,670,000       0.87       5.35  
  6.00       20,000       2.33       6.00  
  12.95       1,500,000       3.53       12.95  
          14,577,992                  
                             

The following table summarizes information about warrants exercisable at December 31, 2014:
 
Warrants Exercisable
           
Weighted
    
Weighted
  
           
Average
    
Average
  
Exercise
    
Number of
    
Remaining
    
Exercise
  
Price ($)
    
Shares
    
Life (Years)
    
Price ($)
  
  2.50       4,876,660       2.41       2.50  
  3.00       2,303,000       1.48       3.00  
  4.00       1,175,000       3.17       4.00  
  6.00       20,000       2.33       6.00  
  12.95       1,500,000       3.53       12.95  
          9,874,660                  

 
 
F-25
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
Warrant Activity

On May 22, 2012, pursuant to the terms of the loan payable as discussed in Note 5 with Vicki P. Rollins, the Company issued a fully vested warrant to purchase 175,000 shares of the Company’s common stock at an exercise price of $2.50 per share expiring two (2) years from the date of issuance. The fair value of the warrant at the date of grant was determined to be $4,675.

On August 2, 2012, pursuant to the term of the loan payable as discussed in Note 5 with Babcock, the Company issued a fully vested warrant to purchase 20,000 shares of the Company’s common stock at an exercise price of $2.50 per share expiring three (3) years from the date of issuance. The fair value of the warrant at the date of grant was determined to be $793.

On August 2, 2012, pursuant to the term of the consulting agreement with John Linton, the Company issued a fully vested warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $3.0 per share expiring two (2) years from the date of issuance. The fair value of the warrant at the date of grant was determined to be $2,542

On December 26, 2012, pursuant to the Oil & Gas Services Agreement with Clouding, the Company issued Clouding a warrant to purchase 1,000,000 shares of common stock with a three-year term and an exercise price of $3.00 per share. The warrant will not be exercisable unless and until the Stock Split has been effectuated, and the warrant expires on December 25, 2015. By its terms, neither the exercise price nor the number of shares issuable upon exercise shall be increased or decreased upon the occurrence of the Stock Split contemplated in the Merger Agreement.  The Company recorded an expense of $2,743 for the vested warrants based on the fair value of the warrants at the date of grant.

The fair value of the above grants was estimated the Black-Scholes option-pricing model with the following assumptions:

 
·
Expected life of 3 years
 
·
Volatility of 214%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 0.33%

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, through a common stock subscription agreement (the “Commitment”), for the Company’s African acquisition activities.
 
 
 
F-26
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



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”). Together with formalizing the Commitment, 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.

In consideration of GEM’s continued support of the Company and their lack of termination of or withdrawal from the Commitment between August 31, 2011 and November 21, 2012, the Company issued to GEM and a GEM affiliate a total of six common stock purchase warrants to purchase a total of 8,372,000 shares of common stock. Two of the warrants to purchase a total of 2,399,000 shares vested in 2012.  The Company recorded an expense for the year ended December 31, 2012 of $6,298 for the vested warrants based on the fair value of the warrants at the date of grant. The fair value was estimated the Black-Scholes option-pricing model with the following weighted average assumptions:
 
 
·
Expected life of 3 years
 
·
Volatility of 214%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 0.33%

The vesting conditions of the four remaining warrants were amended with the Commitment Agreements. The following summarizes the amendments made on July 11, 2013 to the four warrants issued in 2012 in connection with the Commitment Agreements of which 1,303,000 warrants vested in 2013, and 4,670,000 warrants remain unvested as of December 31, 2014:

 
·
The GEM B Warrant: The Company issued a warrant to purchase 651,500 shares of common stock of the Company, par value $0.0001 per share, to GEM at an exercise price of $3.00 per share (the “GEM B Warrant”). As amended, the GEM B Warrant’s vesting conditions were altered so that the GEM B Warrant vested on July 11, 2013. The other terms and conditions of the original GEM B Warrant remain unaltered.

 
·
The 590 Partners B Warrant: The Company issued a warrant to purchase 651,500 shares of common stock of the Company, par value $0.0001 per share, to 590 Partners at an exercise price of $3.00 per share (the “590 Partners B Warrant”). All of the terms in the 590 Partners B Warrant for vesting, exercise, expiration and anti-dilution are identical to those in the GEM B Warrant, as amended.

 
·
The GEM C Warrant: The Company issued a warrant to purchase 2,335,000 shares of common stock of the Company, par value $0.0001 per share, to GEM at an exercise price of $5.35 per share (the “GEM C Warrant”). Prior to its amendment, the GEM C Warrant would vest only upon the Company acquiring certain rights to oil and gas in Ghana. As amended, 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. Prior to its amendment, the GEM C Warrant also provided the Company with an option to elect to shorten the term of the GEM C Warrant (the “Company Shortening Option”), so long as certain terms and conditions had been satisfied. The amendment changed some of the terms and conditions that must be satisfied prior to the Company’s use of its Company Shortening Option. As amended, 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 set forth in (i); (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.  The other terms and conditions of the original GEM C Warrant remain unaltered.  These options have not vested as of December 31, 2014. 
 
 
 
F-27
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



 
·
The 590 Partners C Warrant: The Company issued a warrant to purchase 2,335,000 shares of common stock of the Company, par value $0.0001 per share, to 590 Partners 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, as amended.
 
 
·
The Company recorded as consulting expense the fair value of the 1,303,000 GEM B Warrants and the 590 Partners B Warrants which vested on July 11, 2013 pursuant to the amended agreements.  The fair value was determined to be $4,095,407 using the Black-Scholes option pricing model with the following assumptions:
 
 
 
·
Expected life of 3.34 years
 
·
Volatility of 214%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 0.65%

As further consideration for GEM’s execution of the Commitment Agreements, on July 11, 2013 GEM and GEM affiliates received common stock purchase warrants to purchase an additional 1,500,000 shares of common stock of the Company (“Additional Warrants”). The Additional Warrants vest on July 11, 2014 with a ceiling of $8, expire after five years and have an exercise price equal to the 30 day average trading price of the Company’s common stock on July 11, 2014. If the shares underlying the Additional Warrant are not registered within 24 months of July 11, 2013, the expiration date will be extended for each additional day the shares underlying Additional Warrant remain unregistered after 24 months.

The fair value of the 1,500,000 Additional Warrants was determined to be $11,965,068 using the Black-Scholes option pricing model with the following assumptions:

 
·
Expected life of 4.53 years
 
·
Volatility of 277%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 1.79%

During the year ended December 31, 2013, the Company amortized $5,670,064 of the costs.

On the vesting date of July 11, 2014, the Company calculated the fair value of the 1,500,000 Additional Warrants to be $19,085,444 using the Black-Scholes option pricing model with the following assumptions:

 
·
Expected life of 4.00 years
 
·
Volatility of 220%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 0.92%
 
The remaining fair value was amortized through the vesting period of July 11, 2014.  The Company expensed $13,415,380 during the year ended December 31, 2014 and expensed $5,670,064 during the year ended December 31, 2013 for a cumulative expense of $19,085,444.

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 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.
 
 
 
F-28
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



SAI Geoconsulting

On January 21, 2013, the Company entered into a consulting agreement with SAI Geoconsulting, Inc. (“SAI”). The Company retained SAI on a non-exclusive basis to provide consulting support and advisory services for oil and gas activities. The agreement commenced on January 15, 2013 and continues for 24 months. Upon SAI’s execution of the agreement, SAI received a warrant to purchase up to 250,000 shares of the Company’s common stock at a strike price of $2.50 per share. The warrant was exercisable upon effectuation of the Stock Split, and the warrant expires on January 17, 2018. So long as the Stock Split has been effectuated, 50,000 warrants vest annually every January 21st, commencing on January 21, 2013 and ending January 21, 2017.  The consulting agreement was terminated on March 14, 2014.

The fair value of the 250,000 warrants will be expensed over the vesting period. The fair value of the 50,000 warrants that vested on May 20, 2013 was determined to be $167,527 using the Black-Scholes model with the following assumptions:
  • Dividend yield of 0%
  • Expected volatility of 214%
  • Risk-free interest rate of 0.85%
  • Expected life of 4.67 years
The fair value of the remaining 200,000 warrants at December 31, 2013 was determined to be $1,595,500, of which $380,658 was recognized during the year ended December 31, 2013. The fair value was determined using the Black-Scholes model with the following assumptions:

  • Dividend yield of 0%
  • Expected volatility of 277%
  • Risk-free interest rate of 1.75%
  • Expected life of 4.05 years
Agra

On November 6, 2013, the Company issued 100,000 warrants to Agra pursuant to their consulting agreement related to the closing of the LowCal convertible notes.  The warrants have an exercise price of $4.00, vest immediately and expire on July 31, 2018. The fair value of the 100,000 warrants was determined to be $853,548, which was recorded as “Interest and finance costs” on the accompanying consolidated statement of operations for the year ended December 31, 2013.  The fair value was determined using the Black-Scholes model with the following assumptions:

  • Dividend yield of 0%
  • Expected volatility of 277%
  • Risk-free interest rate of 1.34%
  • Expected life of 4.73 years

 
F-29
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



 
DVIBRI

Pursuant to a consulting agreement entered into with DVIBRI 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 and expire on June 30, 2017.  The Company expensed $1,881,325 for the year ended December 31, 2014. The fair value of the 166,660 warrants that vested during the year ended December 31, 2014 was determined to be using the Black-Scholes option pricing model with the following assumptions:
  • Expected life of  between 2.5 and 3 years
  • Volatility of between 188% and 221%;
  • Dividend yield of 0%;
  • Risk free interest rate between 1.10% and 2.53%
Mark Bitter

On April 1, 2014, the Company entered into a consulting agreement with Mark Bitter (“Bitter”). In exchange for consulting services, the Company issued to Bitter a warrant to purchase an aggregate of 20,000 restricted shares of the Company’s common stock, which vest and become exercisable on May 1, 2014 at $6.00 per share, and expire on May 1, 2017.

The fair value of the 20,000 warrants that vested during the quarter was determined to be $330,499 using the Black-Scholes option pricing model with the following assumptions:

  • Expected life of 3 years
  • Volatility of 253%;
  • Dividend yield of 0%;
  • Risk free interest rate of 0.86%
BAS Securities, LLC

On August 1, 2014, the Company issued to BAS Securities, LLC (“BAS”), one of the Company’s advisors, 500,000 warrants to purchase restricted shares of its common stock at $4.00 a share, vesting immediately and expiring after four years. The warrants were provided for BAS continuous support in providing consulting services to the Company. The Company determined the fair value at the date of grant to be $6,404,466 using the Black-Scholes option pricing model with the following assumptions:
  • Expected life of  4 years
  • Volatility of 220%;
  • Dividend yield of 0%;
  • Risk free interest rate of 0.94%
The fair value was recorded as consulting expense in the accompanying consolidated financial statements during the year ending December 31, 2014.

Furthermore, pursuant to an agreement effective August 1, 2014, the Company amended the terms of its August 1, 2013 consulting agreement with BAS to appoint BAS as a non-exclusive M&A advisor for the Company. In exchange for the provision of such M&A advisory services, at the close of certain potential acquisitions, BAS shall receive a cash fee equal to 1%-2% of the total size of the acquisition, plus warrant coverage equal to 3.75% of the total amount of the acquisition, divided by 2.5 and at an exercise price of $4.00 per share. Such warrants will have piggy-back registration rights, vest immediately and expire July 31, 2018.

 
 
F-30
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


Vicki P. Rollins

As discussed in Note 5, on September 1, 2014, the Company issued to Rollins an aggregate of 250,000 new warrants pursuant to a loan extension and amendment.  The fair value of the 250,000 warrants was $3,212,283 using the Black-Scholes option pricing model with the following assumptions:

  • Expected life of 4.09 years
  • Volatility of 220%;
  • Dividend yield of 0%;
  • Risk free interest rate of 0.90%
Clouding

On August 20, 2014, the Company entered into a settlement agreement for full cancellation and satisfaction of the Clouding Loan and related agreements.  Pursuant to the settlement agreement, the Company issued 1,775,000 warrants to Clouding and certain related parties.  Details of such warrants are discussed further in Note 6 above.

LowCal

Pursuant to the third amendment to the LowCal loan agreement as discussed in Note 4, the Company issued to LowCal a warrant to purchase 500,000 restricted shares of common stock at $4.00 per share, expiring August 14, 2017. The Company determined the fair value of the 500,000 warrants to be $7,293,270 using the Black-Scholes option pricing model with the following assumptions:

  • Expected life of 3 years
  • Volatility of 220%;
  • Dividend yield of 0%;
  • Risk free interest rate of 0.87%
Professional Pension Fund, LLC

On September 11, 2014, in exchange for financial advisory services provided, the Company issued to Professional Pension Fund, LLC, a warrant to purchase an aggregate of 200,000 restricted shares of the Company’s common stock at an exercise price of $2.50, which vest and become exercisable on September 11, 2014 and expire on September 11, 2017.

The fair value of the 200,000 warrants was determined to be $2,766,716 using the Black-Scholes option pricing model with the following assumptions:

  • Expected life of 3 years
  • Volatility of 220%;
  • Dividend yield of 0%;
  • Risk free interest rate of 1.07%
NOTE 12 - 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.
 
 
 
F-31
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



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.

In response to the announcement of the Dune Merger Agreement (defined below), the Company has been named in a class action complaint filed in the Court of Chancery of the State of Delaware, Civil Action No. 10177-VCL, originally filed on September 29, 2014 and subsequently amended on October 17, 2014.  The complaint names Dune Energy, Inc., (“Dune”), along with each of the directors of Dune’s board, as well as the Company and Eos Delaware.  The complaint alleges that the directors of Dune’s board breached their fiduciary duties to Dune’s public stockholders, and that Dune, the Company and Eos Delaware aided and abetted Dune’s board’s breaches of fiduciary duties.  The complaint seeks a preliminary and permanent injunction, enjoining all defendants from proceeding with, consummating or closing the transactions contemplated in the Dune Merger Agreement, and in the event that the aforementioned transactions close, rescission of the transactions or awarding of rescissory damages, as well as an award of plaintiff’s attorneys’ and experts’ fees and costs. The Company denies all allegations of wrongdoing on its part, or on the part of Eos Delaware, and will vigorously defend against such claims in connection with the complaint.  Given the early stage of the litigation, however, at this time the Company is unable to form a professional judgment that an unfavorable outcome is either probable or remote, and it is not possible to assess whether or not the outcome of these proceedings will or will not have a material adverse effect on the Company.

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 (the “Dune Merger Agreement”) with Dune. Pursuant to the Dune Merger Agreement, the Company has agreed to conduct a cash tender offer (the “Offer”) to purchase all of Dune’s issued and outstanding shares of common stock, par value $0.001 per share (the “Shares”), at a price of $0.30 per Share in cash, without interest, upon the terms and conditions set forth in the Dune Merger Agreement (the “Offer Price”).  In addition to the Offer Price, Eos and Purchaser shall provide Dune with sufficient funds to pay in full and discharge all of Dune’s outstanding indebtedness and shall assume liability for all Dune trade debt, as well as fees and expenses related to the Dune Merger Agreement and the transactions contemplated therein.

At the commencement of the Offer, the Company estimated that the total amount of cash required to complete the transactions contemplated by the Dune Merger Agreement will be approximately $140 million dollars, including: (i) approximately $22 million to purchase all of the Shares, (ii) approximately $11 million for the payment of any fees, expenses and other related amounts incurred in connection with the 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 shall be assumed by the surviving entity in the merger). The Offer is not subject to a financing contingency.
 
 
 
F-32
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



In certain instances set forth in the Dune Merger Agreement, if the Dune Merger Agreement is terminated, depending on the circumstances that caused the termination, either: (i) the Company may owe Dune a termination fee of $5.5 million dollars, or (ii) Dune may owe the Company a termination fee of $3.5 million dollars.

Following the successful completion of the Offer, and subject to the terms and conditions of the Dune Merger Agreement, the Company will be merged with and into Dune, with Dune surviving as a direct wholly-owned subsidiary of Eos (the “Dune Merger”). At the effective time of the Dune Merger, each issued and outstanding Share, other than Shares held in the treasury of Dune or owned by Eos or any of their affiliates and Shares held by holders who have properly demanded appraisal rights under Delaware law, will be converted into the right to receive consideration equal to the Offer Price.

The Offer commenced on October 9, 2014 and was originally scheduled to expire on November 6, 2014, but on November 6, 2014 the expiration of the Offer was extended to November 20, 2014 in order to give the Company additional time to arrange financing for the contemplated transactions.

The above does not purport to be a complete summary of the Offer and Dune Merger. For further information, please see the Company’s Schedule T/O as filed with the Securities and Exchange Commission on October 9, 2014, as subsequently amended, as well as the 14D-9 filed by Dune with the Securities and Exchange Commission on October 9, 2014, as subsequently amended.

Office Lease

On December 27, 2012, the Company entered into a lease to rent 3,127 square feet of space to be used as the principal office of the Company. The lease term is from December 27, 2012 to April 30, 2017.  The Company agreed to pay rent as follows: (i) for the period of time from December 27, 2012 to December 31, 2012, rent of $2,446; (ii) commencing January 1, 2013 through December 31, 2013, monthly rent of $15,166; (iii) commencing January 1, 2014 through December 31, 2014, monthly rent of $15,635; (iv) commencing January 1, 2015 through December 31, 2015, monthly rent of $16,104; (v) commencing January 1, 2016 through December 31, 2016, monthly rent of $16,573; and (vi) commencing January 1, 2014 through April 30, 2017, monthly rent of $17,073. So long as Eos is not in default under the Office Lease, Eos shall be entitled to an abatement of rent in the amount of $15,166 per month for four full calendar months commencing February 1, 2013.  The Company paid a security deposit of $102,441.

The minimum lease payments are as follows:
Year
  
Amount
  
2015
   $ 193,248  
2016
     198,876  
2017
     68,876  
    $ 461,000  

Rent expense for the years ended December 31, 2014, 2013 and 2012 was $177,545, $177,545 and $48,000, respectively.

 
 
F-33
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


 
NOTE 13 - INCOME TAXES
 
Deferred tax assets of the Company are as follows:
 
   
December 31,
  
   
2014
    
2013
  
Deferred tax assets:
            
Net operating loss carryforwards
   $ 2,712,421     $ 1,941,839  
Deferred Compensation
     36,450       23,901  
Accrued expenses
     416,513       179,094  
Stock Based Compensation
     181,247       181,247  
Valuation Allowance
     (3,346,631 )     (2,326,081 )
Net deferred tax asset
   $ -     $ -  

A valuation allowance has been recorded to reduce the net benefit recorded in the financial statements related to these deferred tax assets. The valuation allowance is deemed necessary as a result of the uncertainty associated with the ultimate realization of these deferred tax assets.

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes for the years ended December 31, were as follows:
 
   
2014
    
2013
    
2012
  
Statutory federal income tax rate
     (34 ) %     (34 ) %     (34 ) %
State income taxes, net of federal taxes
     (6 ) %     (6 ) %     (6 ) %
Non-includable items
     27 %     20 %     7 %
Increase in valuation allowance
     13 %     20 %     33 %
Effective income tax rate
     -       -       -  

The components of income tax expense for the years ended December 31, are as follows:

   
2014
    
2013
    
2012
  
                   
Current federal income tax
   $ -     $ -     $ -  
Current state income tax
     -       -       -  
Deferred taxes
     (1,020,550 )     (1,075,587 )     (696,004 )
Valuation allowance
     1,020,550       1,075,587       696,004  
    $ -     $ -     $ -  

The Company adopted accounting rules which address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under these rules, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. These accounting rules also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2014 and 2013, no liability for unrecognized tax benefits was required to be recorded.”

At December 31, 2014, the Company had net operating loss carry forwards of approximately $6,719,000 for both federal and state that may be offset against future taxable income. These carry forwards will begin to expire in the year ended December 31 2031 for federal and state.  No tax benefit has been reported in the December 31, 2014, 2013 and 2012 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
 
 
 
F-34
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



NOTE 14– SUBSEQUENT EVENTS

Dune Merger Agreement
 
On September 17, 2014 the Company entered into an Agreement and Plan of Merger with Dune and Eos Merger Sub. Inc.  Pursuant to 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 Dune 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 were unable to proceed 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 Dune Merger Agreement, 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 breakup fee set forth in the Dune Merger Agreement. The Company does not believe that it has liability for the break-up fee and we intend to vigorously defend ourselves in an action is brought. 
 
Consulting Agreement
 
On February 12, 2015, in exchange for consulting 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, and the exercise price of the other 50,000 warrants is $3.00. All of the warrants vested and became exercisable upon issuance and will expire on February 12, 2020.
 
Additional Financing
 
On March 31, 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. 

 
F-35
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements




NOTE 15 – SELECTED QUARTERLY DATA (UNAUDITED)
 
   
March 31,
    
June 30,
    
September 30,
    
December 31,
        
   
2014
    
2014
    
2014
    
2014
    
Total
  
Revenue
   $ 103,706     $ 323,121     $ 187,805     $ 145,820     $ 760,452  
Gain (loss) from operations
     (11,005,511 )     (6,814,549 )     (11,690,567 )     (697,195 )     (30,207,822 )
Net gain (loss)
   $ (16,167,341 )   $ (12,718,954 )   $ (56,946,844 )   $ 6,999,233     $ (78,833,906 )
Basic and diluted loss per share
   $ (0.35 )   $ (0.27 )   $ (1.21 )   $ 0.15     $ (1.68 )
                                         
                                         
                                         
   
March 31,
    
June 30,
    
September 30,
    
December 31,
          
    2013     2013     2013     2013    
Total
  
Revenue
   $ 23,978     $ 196,776     $ 248,820     $ 126,831     $ 596,405  
Loss from operations
     (670,928 )     (828,221 )     (7,873,270 )     (5,982,800 )     (15,355,219 )
Net loss
   $ (732,016 )   $ (2,694,086 )   $ (8,764,170 )   $ (14,926,371 )   $ (27,116,643 )
Basic and diluted loss per share
   $ (0.01 )   $ (0.06 )   $ (0.19 )   $ (0.33 )   $ (0.59 )


 
F-36
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements




NOTE 16 - SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
 
Costs incurred in oil and gas property acquisition, exploration and development activities are summarized below:

   
   
Years Ended
  
   
December 31,
    
December 31,
    
December 31,
  
   
2014
    
2013
    
2012
  
Unproved property acquisition costs
   $ -     $ -     $ -  
Exploration costs
     -       117,050       76,746  
Development costs
     -       -       -  
Asset retirement obligation
     7,645       6,951       4,254  
Total cost incurred
   $ 7,645     $ 124,001     $ 81,000  
                         

Estimated Quantities of Proved Reserves  
 
Hahn Engineering, Inc., an independent engineering firm, prepared the estimates of the proved reserves, future production, and income attributable to the leasehold interests as of December 31, 2014 and 2013. Estimates of proved reserves as of December 31, 2014 and 2013 were prepared by management using the report of Hahn Engineering, Inc. The estimated proved net recoverable reserves presented below include only those quantities that were expected to be commercially recoverable at prices and costs in effect at the balance sheet dates under the then existing regulatory practices and with conventional equipment and operating methods. Proved developed reserves represent only those reserves estimated to be recovered through existing wells. Proved undeveloped reserves include those reserves that may be recovered from new wells on undrilled acreage or from existing wells on which a relatively major expenditure for recompletion or secondary recovery operations is required. All of the Company’s Proved Reserves are located onshore in the continental United States of America.
 
The following table shows the estimated proved developed reserves and the proved undeveloped reserves:

Estimated Quantities of Proved Reserves
  
                   
   
December 31,
    
December 31,
    
December 31,
  
   
2014
    
2013
    
2012
  
   
Oil
    
Oil
    
Oil
  
   
(bbls)
    
(bbls)
    
(bbls)
  
Balance, beginning of the year
     222,413       89,054       69,090  
Purchases of reserves in place
     -       -       -  
Revision of previous estimates
     20,588       140,101       20,863  
Production
     (8,779 )     (6,742 )     (899 )
Net change
     234,222       222,413       89,054  
 
The following table reflects the changes in estimated quantities of proved reserves:

Estimated Quantities of Proved Reserves
  
                   
   
December 31,
    
December 31,
    
December 31,
  
   
2014
    
2013
    
2012
  
   
Oil
    
Oil
    
Oil
  
   
(bbls)
    
(bbls)
    
(bbls)
  
                   
Proved developed reserves:
     59,310       41,453       33,912  
Proved undeveloped reserves:
     174,912       180,960       55,142  
Total proved reserves
     234,222       222,413       89,054  
 

 
F-37
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



Standardized Measure of Discounted Future Net Cash Flows
 
The Standardized Measure related to prove oil and gas reserves is summarized below. Future cash inflows were computed by applying a twelve month average of the first day of the month prices to estimated future production, less estimated future expenditures (based on year end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expense. Future income tax expenses are calculated by applying appropriate year-end tax rates to future pretax net cash flows, less the tax basis of properties involved. Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows. This calculation procedure does not necessarily result in an estimate of the fair market value or the present value of the Company.

Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties. Estimates of fair value should also consider unproved reserves, anticipated future oil and gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is subjective and imprecise.

Standardized Measure of Oil and Gas
  
                   
   
December 31,
    
December 31,
    
December 31,
  
   
2014
    
2013
    
2012
  
Future cash inflows
   $ 20,606,888     $ 19,999,359     $ 7,728,962  
Future production and development costs
     (4,452,624 )     (5,479,000 )     (2,802,100 )
Future income taxes
     (3,774,242 )     (3,894,466 )     (1,063,757 )
Future net cash flows
     12,380,022       10,625,893       3,863,105  
Discount of future net cash flows at 10% per annum
     (4,175,018 )     (4,058,069 )     (1,231,826 )
Standardized measure of discounted future net cash flows
   $ 8,205,004     $ 6,567,824     $ 2,631,279  
 
Reserve estimates and future cash flows are based on the average market prices for sales of oil and gas on the first calendar day of each month during the year. The average prices used for 2014, 2013 and 2012 were $88, $90, and $87    per barrel, respectively, for crude oil.  At December 31, 2014, the price per barrel of oil was $59.   The future cash flow could be significantly different than the amount in the above table when the oil is actually sold.

Future operating expenses and development costs are computed primarily by the Company’s petroleum engineers by estimating the expenditures to be incurred in developing and producing the Company’s proved oil and gas reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions. Future income taxes are based on year-end statutory rates, adjusted for the tax basis of oil and gas properties and available applicable tax assets. A discount factor of 10% was used to reflect the timing of future net cash flows. The standardized measure of discounted future net cash flows is not intended to represent the replacement cost or fair value of the Company’s oil and gas properties. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in oil and gas reserve
estimates.
 
 
F-38
 
Eos Petro, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



The following table sets forth the changes in standardized measure of discounted future net cash flows relating to prove oil and gas reserves for the periods indicated.

Changes in Standardized Measure
  
                   
   
December 31,
    
December 31,
    
December 31,
  
   
2014
    
2013
    
2012
  
Beginning of the year
   $ 6,567,824     $ 2,631,279     $ 1,949,660  
Sales of oil and gas produced, net of production costs
     (333,376 )     (194,763 )     97,722  
Purchases of minerals in place
     -       -       -  
Revision of previous quantity estimates
     1,970,516       4,131,308       583,897  
Net change
   $ 8,204,964     $ 6,567,824     $ 2,631,279  
 

 
F-39
 
 

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