For the quarterly period ended March 31, 2017

For the transition period from _______ to _______.

EOS PETRO, INC.

(Exact name of registrant as specified in its charter)

(310) 552-1555
(Registrant’s telephone number, including area code)

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o  No  x

As of March 9, 2018, the registrant had 55,496,528 outstanding shares of common stock.

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PART I - FINANCIAL INFORMATION

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2017 and 2016

(Unaudited)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Eos Petro, Inc. (the “Company”) was organized under the laws of the state of Nevada in 2007. On October 12, 2012, the Company (then named "Cellteck, Inc.") and Eos Global Petro, Inc. ("Eos").   As a result of the merger, Eos became a wholly-owned subsidiary of the Company. Effective May 20, 2013, the Company changed its name to Eos Petro, Inc.

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of March 31, 2017, the Company had a stockholders’ deficit of $23,856,588, and, for the three months ended March 31, 2017, reported a net loss of $1,770,434 and had negative cash flows from operating activities of $120,277.  The Company is also in default on $8,590,000 of its convertible and promissory notes.

In addition, the Company may have become obligated to pay a $5.5 million termination fee under the "Dune Merger Agreement," as defined in Note 8 below (the "Parent Termination Fee," as more fully defined in the Dune Merger Agreement) (see Note 8) and $4 million that may be due under a structuring fee with GEM Global Yield Fund ("GEM").  Furthermore, $8,250,000 of LowCal Convertible and Promissory Notes became due on May 1, 2016 and are therefore now due and payable. Management estimates the Company's capital requirements for the next twelve months, including drilling and completing wells for the Company's oil and gas "Works Property" located in Illinois and possible acquisitions, will total approximately $2,500,000, excluding any amounts that may be due to Dune Energy, Inc. under the Dune Merger Agreement or a $4 million structuring fee that may be due to GEM. Errors may be made in predicting and reacting to relevant business trends and the Company will be subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies. The Company may not be able to successfully address any or all of these risks and uncertainties. Failure to adequately do so could cause the Company's business, results of operations, and financial condition to suffer. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. 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.

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 obtaining loans from investors or 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.

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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 condensed 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, and assumptions used in valuing derivative liabilities and net operating loss carryforwards. Actual results could differ from those estimates.

Basic and Diluted Earnings (Loss) Per Share

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

Concentrations

One customer accounted for 100% of oil sales for the three months ended March 31, 2016.  

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers.  ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition.  Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.  In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, and ASU 2017-05, all of which clarify certain implementation guidance within ASU 2014-09.    ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017.   Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein.  The standard can be adopted either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).  The Company is currently in the process of analyzing the information necessary to determine the impact of adopting this new guidance on its financial position, results of operations, and cash flows.  The Company will adopt the provisions of this statement in the first quarter of fiscal 2018.  

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In February 2016, the FASB issued ASU No. 2016-02, Leases.  This update will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months.  For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows.  For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows.  ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018.  Early adoption is permitted.   Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach.  The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements and related disclosures.

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 consolidated financial statements.

NOTE 2 - LOWCAL CONVERTIBLE AND PROMISSORY NOTES PAYABLE

LowCal convertible and promissory notes payable at March 31, 2017 and December 31, 2016 are as follows:

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 equal to the 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.

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NOTE 3 – NOTES PAYABLE

Notes payable at March 31, 2017 and December 31, 2016 are as follows:

(1) Note payable issued in 2012 to Vatsala Sharma with interest at 18% per annum, secured by all of Eos’ assets, a mortgage on the Works oil and gas property, a 50% security interest in Nikolas Konstant’s personal residence, and his personally held shares in a non-affiliated public corporation.  As amended, the maturity date of the Sharma loan is January 15, 2017.  This note is currently in default.

(2)  Notes payable issued in 2014 ($130,000), 2015 ($453,000), and 2016 ($275,000) to Bacchus Investors, LLC, with interest at 4-10% per annum, unsecured, and due upon demand.

(3) Note payable issued in 2014 to Ridelinks, Inc., interest at 2% per annum, and unsecured.  The note was initially due March 26, 2016.  On April 14, 2017, the note was amended to extend the maturity date July 31, 2017 (see Note 9).  

(4) Unsecured promissory notes, interest at 5% to 10% per annum, and due upon demand.

(5) Note payable issued in 2016, interest at 10%, and secured by certain assets.  The note was initially due December 15, 2016.  On April 11, 2017, the note was amended to extend the maturity date to July 30, 2017 (see Note 9).  

(6) Note payable issued in 2016, interest at 5%, secured by certain assets of the Company, in the original principal amount of $500,000, due on June 5, 2017.  On February 6, 2017, the note was amended and a loan fee of $75,000 and accrued interest of $5,000 were added to principal.   In addition, the Company agreed to issue 150,000 shares to the note holder valued at $223,500 based on the market price of the Company’s stock on the date of the amendment.  The amendment of the note was recorded as a debt extinguishment.

(7) Note issued in 2016, with an original issue discount of $10,000, unsecured, and due November 30, 2016. The note is currently in default.

During three months ended March 31, 2017, the Company recognized amortization of debt discounts of notes issued in 2016 of $45,916.  As of March 31, 2017, the unamortized valuation discount was $0.  

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NOTE 4 – DERIVATIVE LIABILITIES

Under authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments.   On November 1, 2016, the Company issued a warrant to purchase an aggregate of 500,000 shares of the Company’s common stock to an investor in connection with a note payable. The exercise price of the warrant is equal to 85% of the price per shares of common stock sold by the Company in a future offering of at least $1,000,000. If no such offering occurs within six months then the exercise price will be $0.10 per shares. Since the exercise price of the warrant is a percentage of a future offering price, the Company determined that the warrant met the definition of a derivative and is to be re-measured at the end of each reporting period with the change in fair value reported in the statement of operations.

As of March 31, 2017, and December 31, 2016, the derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following assumptions:

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

The Company recorded an adjustment to the fair value of derivative liabilities of $578 and $605,662 for three months ended March 31, 2017 and 2016, respectively, and were valued using Level 2 inputs.

NOTE 5 - RELATED PARTY TRANSACTIONS

Plethora Enterprises, LLC

The Company has a consulting agreement with Plethora, which is solely owned by Nikolas Konstant, the Company’s Chairman of the Board and Chief Financial Officer.  Under the consulting agreement, for the three months ended March 31, 2017 and 2016, the Company recorded compensation expense of $90,000 and $90,000, respectively.   At March 31, 2017 and December 31, 2016 and 2015, there was $403,262 and $363,601, respectively, due to Mr. Konstant, and included in the balance of accrued officers’ compensation in the accompanying consolidated balance sheet.

During the three months ended March 31, 2016, Plethora sold an aggregate of 351,515 of its shares of the Company's restricted common stock in private sales.  The proceeds from these sales of $125,000 were loaned to the Company.  Of the 351,515 shares of common stock sold by Plethora, 251,515 shares were sold to either affiliates of the Company, vendors, or individuals with whom the Company had a past business relationship.  The Company considered the provisions of Staff Accounting Bulletin ("SAB") Topic 5T, Accounting for Expenses or Liabilities Paid by Principal Stockholders, and determined that the difference between the quoted market price of the shares

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and the sales price to the buyers as additional compensation cost and a contribution to capital by a major related party stockholder (Plethora).  As such, the Company recorded a charge of $931,060 during the three months ended March 31, 2016 relating to the difference between the sales price and the fair market price of the shares on the date of the transaction.

During the three months ended March 31, 2017 the Company issued:

100,000 shares of its common stock to a consultant valued at $149,000 based on the market price of the Company’s common stock at the date of issuance; 

150,000 shares of its common stock in connection with an extension of the maturity date of a note payable (See Note 3) valued at $223,500 based on the market price of the Company’s common stock at the date of issuance; and  

100,000 shares of its common stock for cash proceeds of $100,000.  

NOTE 7 - STOCK OPTIONS AND WARRANTS

Option Activity

A summary of the option activity is presented below:

At March 31, 2017, there was no intrinsic value to the outstanding and exercisable stock options.

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The following table summarizes information about options outstanding at March 31, 2017:

During the three months ended March 31, 2017 and 2016, the Company recorded $896,042 and $7,836,691, respectively, of share based compensation relating to the vesting of options granted in 2016.  As of March 31, 2017, the unamortized balance related to future stock based compensation for options previously granted but not vested is $2,284,172.

Warrant Activity

A summary of warrant activity is presented below: 

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The following tables summarize information about warrants outstanding and exercisable at March 31, 2017:

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Dune Merger Agreement

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

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

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

GEM Global Yield Fund

Pursuant to the financing commitment, dated August 31, 2011, and the Common Stock Purchase Agreement and Registration Rights Agreement, both dated as of July 11, 2013, entered into between the Company and GEM (collectively referred to as the "Commitment Agreements"), the Company was required to 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 was to be paid on the 18-month anniversary of July 11, 2013 regardless of whether the Company had drawn down from the Commitment at that time. At the Company's election, the Company may elect to pay the structuring fee in registered shares of its common stock of the Company at a per share price equal to 90% of the average closing trading price of the Company's common stock for the thirty-day period immediately prior to the 18-month

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anniversary of July 11, 2013. As of January 11, 2015, the 18-month anniversary date of the agreement, the Company had not met this requirement and may now become liable for payment of this structuring fee to GEM.  As of December 31, 2015, the Company has recorded an accrued structuring fee of $4 million.

NOTE 9– SUBSEQUENT EVENTS

These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-Q for the period ended September 30, 2017, filed on April 27, 2018, with the Securities and Exchange Commission, which contains additional information of events subsequent to March 31, 2017.

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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 March 31, 2017. 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.

Overview

We are focused on the acquisition, exploration, development, mining, operation and management of medium-scale oil and gas assets. Our primary activities as of March 31, 2017, 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.

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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.

Comparison of the three months ended March 31, 2017 to March 31, 2016

Revenue

We primarily generate revenue from the operation of oil and gas properties that we own or lease and the sale of hydrocarbons delivered to a customer when that customer has taken title. For the three months ended March 31, 2016, our primary revenue came from one source, the Works Property, located in Southern Illinois. Revenue for the three months ended March 31, 2017 and 2016 was $0 and $19,428, respectively.  The decrease in revenues for the three months ended March 31, 2017 is due to the Works Property being shut down during the first quarter of 2017.  For the three months ended March 31, 2016, we sold 710 barrels at an average price of $27 per barrel.  The Works Property restarted production in the second quarter of 2017. As disclosed below, 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 our business activities.

Lease operating expenses

Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the three months ended March 31, 2017 and 2016 was $0 and $32,674, respectively.  The decrease in operating expenses was due to the wells being shut down during the first quarter of 2017. 

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2017 and 2016 were $1,330,985 and $9,986,981, 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 $213,000, $12,500, and $1,037,000 in professional fees, consulting fees and compensation, respectively, for the three months ended March 31, 2017.  We recognized approximately $667,000, $1,056,000, and $8,165,000 in professional fees, consulting fees and compensation, respectively, for the three months ended March 31, 2016. The decrease in professional fees was primarily due to lower legal and accounting fees for services rendered in 2017 as compared to 2016. The decrease in compensation was due to stock option expense of $7,836,691 for the three months ended March 31, 2016 compared to $896,042 for the three months ended March 31, 2017 related to options that were granted to an officer in January 2016 and vesting through January 2018.  The decrease in consulting fees is a result of us recognizing costs of $931,060 due to our majority stockholder selling shares of common stock to entities with which we have current business relationships at a

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significant discount to market during the three months ended March 31, 2016.  There was no such charge during the three months ended March 31, 2017.

Other income (expenses)

For the three months ended March 31, 2017, net other expense was $439,027, consisting of interest and finance costs of $440,027 and a gain on change in fair value of derivative liability of $578.   Interest and financing costs for the three months ended March 31, 2017 includes a charge of $223,500 for the issuance of 150,000 shares of common stock for a debt extension and a $50,000 loan modification fee related to the same debt extension. For the three months ended March 31, 2016, net other expense was $1,318,269, consisting of interest and finance costs of $1,923,931 and a gain on change in fair value of derivative liability of $605,662.   Interest and financing costs for the three months ended March 31, 2016 includes a charge of $488,378 related to the Seventh Amendment to the LowCal Agreements for the issuance of 75,000 shares of common stock, and the extension of the warrant expiration date and a charge of $1,250,000 for the value of an aggregate of 315,000 shares of common stock issued for debt extensions.  

Liquidity and Capital Resources

Since our inception, we have financed operations through consulting and service agreements with limited cash requirements, made up of stock compensation and various debt instruments as more fully described in Stock Based Compensation, Commitments and Contingencies, Material Agreements and Related Party Transactions. Our business calls for significant expenses in connection with the operation and acquisition of oil and gas related projects. In order to maintain our corporate operations and to significantly expand our operations and corresponding revenue from our Works Property, we must raise a significant amount of working capital and capital to fund improvements to the Works Property. As of March 31, 2017, we had cash in the amount of $4,485. At March 31, 2017, we had total liabilities of $23,926,162. 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. In addition, the Company’s independent registered public accounting firm, in its report on our December 31, 2016, financial statements, has raised substantial doubt about the company’s ability to continue as going concern.

Management estimates the Company's capital requirements for the next twelve months, including drilling and completing wells for the Works Property, will total approximately $2,500,000, excluding any amounts that may be due to Dune under the Parent Termination Fee or a $4 million structuring fee that may be due to GEM.  No assurance can be given that any future financing will be available, or if available, that it will be on terms satisfactory to the Company.  Any debt financing or other financing of securities senior to common stock that the Company is able to obtain will likely include financial and other covenants that will restrict the Company's flexibility. At a minimum, the Company expects these covenants to include restrictions on its ability to pay dividends on its common stock in the case of debt financing, or cause substantial dilution for stockholders in the case of convertible debt and equity financing. Any failure to comply with these covenants would have a material adverse effect on the Company's business, prospects, financial condition, results of operations and cash flows.

To finance our operations, we have issued notes payable. At March 31, 2017, we had the following outstanding debt:

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 under the financing commitment, dated August 31, 2011, and the Common

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Stock Purchase Agreement and Registration Rights Agreement, both dated as of July 11, 2013, entered into between the Company and GEM (collectively referred to as the "Commitment Agreements"), whereby GEM would provide and fund the Company with up to $400 million dollars for the Company's African acquisition activities.

Pursuant to the GEM Commitment Agreements, the Company was required to use commercially reasonable efforts to uplist to the NYSE, NASDAQ or AMEX stock exchange within 270 days of July 11, 2013, and then 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 of $4,000,000, which was to be paid on the 18-month anniversary of July 11, 2013, regardless of whether the Company had 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 90% 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. The Company believes that it has equitable and legal defenses against payment of this structuring fee.

In connection with the asserted claim by Dune of the alleged breach of contract by the Company of the Dune Merger Agreement, upon a termination of such agreement, a demand letter was received from Dune on March 4, 2015 demanding payment of $5.5 million in the form of the Parent Termination Fee, plus additional costs and expenses which were undefined.  The Company has recorded this liability of $5.5 million as of December 31, 2015. No lawsuit has been filed to date against the Company for the Parent Termination Fee, and the Company would vigorously defend itself, should any action ever be brought. The Company believes that it has equitable and legal defenses against payment of all of the Parent Termination Fee.

Obtaining additional financing is subject to a number of other factors, including the market prices for the oil and gas. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund our business plan could be significantly limited and we may be required to suspend our business operations. We cannot assure you that additional financing will be available on terms favorable to us, or at all. The failure to obtain such a financing would have a material, adverse effect on our business, results of operations and financial condition.

As a result, one of our key activities is focused on raising significant working capital in the form of the sale of stock, convertible debt instrument(s) or a senior debt instrument to retire outstanding obligations and to fund ongoing operations. It is expected that stockholders may face significant dilution due to any such raise in any of the forms listed herein. New securities may have rights and preferences superior to that of current stockholders. If we raise capital through debt financing, we may be forced to accept restrictions affecting our liquidity, including restrictions on our ability to incur additional indebtedness or pay dividends.

For these reasons, the report of our auditor accompanying our audited financial statements for the year ended December 31, 2016 included a statement that these factors raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. 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 $120,277 and $303,448 for the three months ended March 31, 2017 and 2016, respectively. The net cash used in operating activities was primarily due to the costs incurred with the organizing activities more fully described above.  

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Financing Activities

Net cash provided by financing activities was $100,000 and $309,725 for the three months ended March 31, 2017 and 2016, respectively. Cash generated from financing activities for the three months ended March 31, 2017 was from selling shares of our common stock for $100,000.   Cash generated from financing activities for the three months ended March 31, 2016 was primarily from issuing promissory notes to related and unrelated parties totaling of $375,000 offset by repayment of related party promissory notes and notes payable of $65,275.  

Critical Accounting Policies

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 reflected in the condensed 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, and assumptions used in valuing derivative liabilities and net operating loss carryforwards.  Actual results could differ from those estimates 

Share-Based Compensation  

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

Recently Issued Accounting Pronouncements

See Note 1 to the consolidated financial statements included elsewhere in this Form 10Q.

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.

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Not Applicable

Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2017. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2017, the Company’s disclosure controls and procedures were ineffective.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2017, based on the framework stated by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, due to our financial situation, we will be implementing further internal controls as we become operative so as to fully comply with the standards set by the Committee of Sponsoring Organizations of the Treadway Commission.

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

Based on its evaluation as of March 31, 2017, our management concluded that our internal controls over financial reporting were ineffective as of March 31, 2017. 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 weaknesses relate to the following:

Lack of an independent audit committee;   

Lack of formal approval policies by the Board of Directors;    

Lack of adequate oversight 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. However, until such time, these material weaknesses 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.

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Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Dune Termination Fee

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

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, which to our knowledge have not materially changed.  Those risks, which could materially affect our business, financial condition or future results, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

In February 2017, the Company issued 100,000 shares of common stock to a consultant for services rendered.

In February 2017, the Company issued 150,000 shares of common stock to an investor in connection with the extension of the maturity date of a note payable.

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

The Company is currently in default of the LowCal notes totaling $8,250,000 and $340,000 of notes payable.

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Not Applicable.

None.

* Furnished herewith.

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

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