UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

x

Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2013

 

¨

Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______.

 

Commission file number 000-30995

 

CELLTECK, INC.

 

(Exact name of registrant as specified in its charter)

 

Nevada (State or other jurisdiction of incorporation or organization)	98-0550353 (I.R.S. Employer Identification No.)
1999 Avenue of the Stars, Suite 2520 Los Angeles, California (Address of principal executive offices)	90067 (Zip code)

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x No ¨

 

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

 

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

 

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

 

Yes ¨ No x

 

As of May 10, 2013, the registrant had 61,633,891 outstanding shares of common stock.

 

 

CELLTECK, INC. TABLE OF CONTENTS

 

			Page No.
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	20
	Item 4T.	Controls and Procedures	20
PART II. OTHER INFORMATION
	Item 1	Legal Proceedings	21
	Item 1A	Risk Factors	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
	Item 3.	Defaults Upon Senior Securities	22
	Item 4	Mine Safety Disclosures	22
	Item 5.	Other Information	22
	Item 6.	Exhibits	22
		SIGNATURES	23

  

 

PART I – FINANCIAL INFORMATION

  

ITEM 1. Financial Statements 

 

Cellteck, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

		March 31,				December 31,
		2013				2012
		(Unaudited)
ASSETS
Current assets
Cash		$	25,388			$	47,511
Deposits and other current assets			2,122				17,288
Total current assets			27,510				64,799
Oil and gas properties, net			727,993				182,985
Other property plant and equipment, net			13,169				9,503
Long-term deposits			102,441				102,441
Total assets		$	871,113			$	359,728
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable		$	151,888			$	210,568
Accrued expenses			724,537				615,081
Advances from shareholder			156,000				137,000
Short-term advances - related party			25,000				39,000
Convertible notes payable, net of discount of $12,030 and $4,688			1,487,970				245,312
Notes payable			1,380,000				1,450,000
Total current liabilities			3,925,395				2,696,961
Asset retirement obligation			47,961				46,791
Total liabilities			3,973,356				2,743,752
Commitments and contingencies			-				-
Stockholders' deficit
Series B Preferred stock: $0.0001 par value; 44,000,000 shares authorized,
44,825,044 and 44,150,044 shares issued and outstanding			4,483				4,415
Common stock; $0.0001 par value; 300,000,000 shares authorized
61,633,891 shares issued and outstanding			6,163				6,163
Additional paid-in capital			1,285,589				1,271,860
Stock subscription receivable			(88,200	)			(88,200	)
Accumulated deficit			(4,310,278	)			(3,578,262	)
Total stockholders' deficit			(3,102,243	)			(2,384,024	)
Total liabilities and stockholders' deficit		$	871,113			$	359,728

 

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

  

 

Cellteck, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

 

		Three Months Ended March 31,
		2013				2012
		(Unaudited)				(Unaudited)
Revenues
Oil and gas sales		$	23,978			$	16,474
Costs and expenses
Lease operating expense			57,971				52,474
General and administrative			636,935				134,446
Total costs and expenses			694,906				186,920
Loss from operations			(670,928	)			(170,446	)
Interest expense			(61,088	)			(128,792	)
Net loss			(732,016	)			(299,238	)
Preferred stock dividends			-				(5,984	)
Net loss attributed to common stockholders		$	(732,016	)		$	(305,222	)
Net loss per share attributed to common
stockholders - basic and diluted		$	(0.01	)			(0.01	)
Weighted average comon shares oustanding
Basic and diluted			61,633,891				35,686,813

 

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

 

 

Cellteck, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Deficit

 

																		Additional				Stock								Total
		Series B Preferred Stock								Common Stock								Paid-in				Subscription				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Capital				Receivable				Deficit				Deficit
Balance, December 31, 2012			44,150,044				4,415				61,633,891				6,163				1,271,860				(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			500,000				50				-				-				9,950				-				-				10,000
Issuance of Series B preferred stock for extension of notes payable			150,000				15				-				-				2,985				-				-				3,000
Warrants issued for services			-				-				-				-				297				-				-				297
Net loss			-				-				-				-				-				-				(732,016	)			(732,016	)
Balance, March 31, 2013 (Unaudited)			44,825,044			$	4,483				61,633,891			$	6,163			$	1,285,589			$	(88,200	)		$	(4,310,278	)		$	(3,102,243	)

 

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

 

 

Cellteck, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

		Three Months Ended March 31,
		2013				2012
		(Unaudited)				(Unaudited)
Cash flows from operating activities
Net loss		$	(732,016	)		$	(299,238	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion			4,992				-
Depreciation			1,334				-
Accretion of asset retirement obligation			1,170				-
Amortization of debt issuance costs			2,658				16,800
Fair value of stock issued for services			500				-
Fair value of stock issued for extension of debt transaction			3,000				-
Fair value of stock issued for loan guaranty by related party			-				56,000
Fair value of warrants issued for consulting services			297				-
Change in operating assets and liabilities:
Deposits and other current assets			15,166				-
Accounts payable			(58,680	)			(153,191	)
Accrued expenses			109,456				45,993
Net cash used in operating activities			(652,123	)			(333,636	)
Cash flows used in investing activities:
Purchase of other fixed assets			(5,000	)			(3,000	)
Capital expenditures on oil and gas properties			(550,000	)			(10,000	)
Net cash used in investing activities			(555,000	)			(13,000	)
Cash flows from financing activities:
Repayment of short-term advances- related party			(14,000	)			-
Net proceeds from (to) shareholder			19,000				(23,364	)
Proceeds from issuance of short term notes payable			-				400,000
Repayment of short term notes payable			(70,000	)			(30,000	)
Proceeds form issuance of convertible notes			1,250,000				-
Net cash provided by financing activities			1,185,000				346,636
NET DECREASE IN CASH AND CASH EQUIVALENTS			(22,123	)			-
CASH AND CASH EQUIVALENTS, beginning of period			47,511				-
CASH AND CASH EQUIVALENTS, end of period		$	25,388			$	-
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest		$	1,500			$	-
Cash paid for income taxes		$	-			$	-
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued dividends on preferred stock		$	-			$	5,984
Issued 550,000 shares of Series B Preferred stock
pursuant to debt agreement		$	10,000			$	-

 

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

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

NOTE 1 - ORGANIZATION

 

The unaudited consolidated financial statements have been prepared by Cellteck, Inc., (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission.  The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the financial condition of the Company and its operating results for the respective periods. The condensed balance sheet at December 31, 2012 has been derived from the Company's audited financial statements. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.

 

Organization

 

Cellteck, Inc. (the “Company,” or “Cellteck”) was organized under the laws of the state of Nevada in 2007 to serve as a vehicle for the re-organization and spin-off of Safe Cell Tab, Inc.’s safe cell tab business from China Ivy School, Inc. The safe cell tab is a small, thin, oval shaped device designed specifically to help protect users of cell phones, cordless phones, laptops, microwaves and any other hand held devices from the potentially harmful and damaging effects of electromagnetic radiation or EMF’s, which are emitted from these electrical devices.

 

On October 12, 2012, pursuant to the Merger Agreement entered into by and between the Company, Eos 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. As of the closing of the transaction, each issued and outstanding share of common stock of Eos, was automatically converted into the right to receive one share of Cellteck Series B preferred stock. At the closing, Cellteck issued 37,850,044 shares of Series B preferred stock to the former Eos stockholders. Each share of Cellteck Series B preferred stock is convertible into 800 shares of Cellteck common stock and will automatically convert into shares of Cellteck common stock upon the filing of an amendment to the articles of incorporation for the authorization of a sufficient number of shares of common stock to convert all issued and outstanding shares of Series B preferred stock into common stock.

 

Prior to the closing of the transactions contemplated by the Merger Agreement, the Company had 61,633,891 shares of common stock and 40,000,000 shares of Series A preferred stock issued and outstanding. Simultaneously with the closing of the Merger the holders of 40,000,000 shares of Cellteck Series A preferred stock converted their shares into 100,000 shares of Series B preferred stock; and the holders of $150,000 of pre-existing outstanding Celleteck indebtedness converted such debt into 5,900,000 shares of Series B preferred stock, 2,805,000 shares of which the Company sold to former EOS stockholders. In addition to the conversion of the $150,000 of outstanding indebtedness into preferred stock, EOS assumed $57,385 of net liabilities of the Company.

 

Upon completion of the Merger and assuming the conversion of the Series B preferred stock into shares of common stock, the former stockholders of Eos own approximately 93% of the then outstanding shares of Cellteck common stock (including shares of Series B preferred stock convertible into shares of Cellteck common stock) and the holders of Cellteck previously outstanding debt and outstanding shares of Cellteck common stock own the balance. As the owners and management of Eos have voting and operating control of Cellteck after the Reverse Merger, the transaction has been accounted for as a recapitalization of Cellteck with Eos deemed the acquiring company for accounting purposes, and Cellteck 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 combined 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. The amount of debt assumed upon the reverse merger of $57,385 was reflected as a cost of the merger in 2012.

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

Eos has two subsidiaries which are also engaged in the oil and gas business: Plethora Energy, Inc., a Delaware corporation (“Plethora Energy”) and EOS Atlantic Oil & Gas Ltd., a Ghanaian limited liability company (“EAOG”, and collectively referred to with Eos and Plethora Energy as the Company’s “Subsidiaries”)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The consolidated financial statements include our accounts and those of our 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,” and is determined using the two-class method which is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. 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. At March 31, 2013, there were 100,000 options and 9,918,000 warrants that were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive. There were no such instruments at March 31, 2012. As of March 31, 2013, there were 44,825,044 Series B preferred shares that are outstanding that will be converted into an equal number of common shares upon finalization of a proposed stock split of the currently outstanding common shares. The effect of the conversion of the Series B preferred shares, and the simultaneous reverse split of the outstanding common shares will be to decrease the shares of common stock outstanding by approximately 17 million.

 

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. 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.

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

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 basically 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.

 

The Company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment, the Company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. Through March 31, 2013, the Company had not experienced impairment of its capitalized oil and gas properties.

 

The Company recorded depletion expense of $4,992 and $0 for the three months ended March 31, 2013 and 2012, respectively.

 

Asset Retirement Obligation

 

The Company accounts for its future asset retirement obligations (“ARO”) by recording the fair value of the liability during the period in which it was incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an ARO is included in proven oil and gas properties in the balance sheets. The ARO consists of costs related to the plugging of wells, removal of facilities and equipment, and site restoration on its oil and gas properties. The asset retirement liability is accreted to operating expense over the useful life of the related asset. As of March 31, 2013 and December 31, 2012, the Company had an ARO of $47,961 and $46,791, 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 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.

 

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.

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

One customer accounts for 100% of oil sales for the three months ended March 31, 2013 and 2012.

  

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 Cellteck.

 

Following the Merger, the Company’s principal focus has shifted to the business of Eos. The Company’s pre-Merger assets are less than 1% of total assets and its safe cell tab revenue is less than 1% of total revenue for the year ended December 31, 2012. Since the Company’s pre-Merger assets and safe cell tab operations are immaterial, the Company reports only one segment for financial statement reporting purposes.

 

Recently Issued Accounting Pronouncements

 

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption of this standard to have a material impact on its consolidated results of operations, financial condition, or liquidity.

 

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.

 

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. The Company has a limited operating history on which to base an evaluation of its current business and future prospects. As of March 31, 2013, the Company had a stockholders’ deficit of $3,102,243, and for the three months ended March 31, 2013, reported a net loss from operations of $732,016 and negative cash flows from operating activities of $652,123. Management estimates the Company’s capital requirements for the next twelve months, including drilling and completing wells for the Works Property and various other projects, will total approximately $1,000,000. 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 2012 consolidated financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

The Company’s ability to continue as a going concern is an issue due to its net losses and negative cash flows from operations, and its need for additional financing to fund future operations. The Company’s ability to continue as a going concern is subject to its ability to obtain necessary funding from outside sources, including the sale of its securities or loans from financial institutions. There can be no assurance that such funds, if available, can be obtained on terms reasonable to the Company. 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.

 

NOTE 4 - NOTES PAYABLE

 

A summary of notes payable at March 31, 2013 and December 31, 2012 are as follows:

 

		March 31,				December 31,
		2013				2012
Note payable at 24% (1)		$	130,000			$	200,000
Secured note payable, at 18%, With guaranteed interest of $54,000 (2)			600,000				600,000
Note payable, at 6% (3)			350,000				350,000
Note payable, at 5%, (4)			300,000				300,000
Total		$	1,380,000			$	1,450,000

 

 

(1) On October 24, 2011, Eos received $200,000 from RT Holdings, LLC (“RT”) in exchange for an unsecured promissory note payable, due November 7, 2011 with interest due at 6% per annum which was amended to 24%. The Company paid $70,000 to RT during the three months ended March 31, 2013.

 

On April 25, 2013, pursuant to a letter agreement of forbearance, Eos agreed to make a partial payment of $25,000 towards the RT loan on or before June 30, 2013. So long as that payment is made, RT will forbear from enforcing any remaining obligations arising out of the RT Loan until August 31, 2013, at which time all amounts owing will be payable in full. 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. The Company paid $70,000 to RT during the three months ended March 31, 2013.

 

(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 either (i) the Company’s Series B preferred stock, if the Stock Split has not yet been effectuated; or (ii) the Company’s common stock, if the Stock Split has been effectuated. The loan is secured by a first priority blanket security interest in all of Eos’ assets, and newly acquired assets, a mortgage on the Works property, a 50% interest in Eos’ and the Company’s CEO and majority shareholder’s personal residence, and the CEO’s personally held shares in a non-affiliated public corporation. On April 24, 2013, the maturity date was extended to August 31, 2013.

 

During the three months ended March 31, 2012, the Company amortized $16,800 of the loan discount which was recorded to interest expense. There was no amortized cost during the three months ended March 31, 2013, due to the loan discount being fully amortized as of December 31, 2012.

 

(3) On June 18, 2012 the Company 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 second priority blanket security interest in all of the Company’s assets to the extent their security interests overlap with the security interest of Babcock gained from the Babcock Loan (see (4) below). Additionally, the Company is prohibited from incurring additional indebtedness during the term of the loan, with the exception of the existing Vatsala Sharma loan, without the written consent of Rollins. On April 18, 2013, the maturity date was extended to August 31, 2013.

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

(4) On August 2, 2012, Eos executed a series of agreements with Babcock in order to secure a $300,000 loan (the “Babcock Loan”). Pursuant to the Babcock Loan documents, Eos granted Babcock a mortgage and security interest in and on the Works Property and related assets, agreements and profits. The maturity date, pursuant to an April 30, 2013 extension, is May 31, 2013. As of March 31, 2013, Eos has not made any payments on the Babcock Loan or Babcock Lease (as defined in the Report).

 

On April 30, 2013, the Babcock Loan and Babcock Lease were amended. Eos agreed to pay $5,000, due and payable on April 30, 2013, to Babcock in exchange for an extension on the maturity date of the Babcock Loan to May 31, 2013. In addition, Eos agreed to pay Babcock $15,000, due and payable on April 30, 2013, as consideration for Babcock’s agreement to defer of any enforcement of its rights under the Babcock Lease caused by Eos’ failure to pay monthly rent owed on the Babcock Lease until May 31, 2013. Eos was also granted the option to pay a $25,000 lease termination fee to Babcock on or before May 31, 2013. If such fee is paid, Eos may void the Babcock Lease and all obligations owed to Babcock thereunder, including rent then owed and payable.

 

NOTE 5 – CONVERTIBLE PROMISSORY NOTES

 

A summary of convertible promissory notes at March 31, 2013 and December 31, 2012 are as follows:

 

		March 31,				December 31,
		2013				2012
Clouding Loan		$	250,000			$	250,000
LowCal Loan			1,250,000				-
Unamortized discount			(12,030	)			(4,688	)
Total		$	1,487,970			$	245,312

 

Clouding IP, LLC

 

On December 26, 2012, the Company 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, the Company 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, the Company 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 Series B Preferred Stock of the Company at a conversion price of $2.50 per share. If all outstanding shares of Series B Preferred Stock have automatically converted pursuant to their terms when Clouding elects to exercise its option, Clouding will instead receive an equivalent number of shares of common stock equal to the number of shares of Series B Preferred Stock that Clouding would have otherwise received.

 

The Clouding Loan was not repaid in full on March 31, 2013, so the Company issued to Clouding the additional 150,000 shares of its Series B Preferred Stock. The shares were valued at $3,000 and were recorded to interest expense. During the three months ended March 31, 2013, the Company amortized $1,616 of the loan discount which was recorded to interest expense.

 

The amount due to Clouding at March 31, 2013 and December 31, 2012 is $250,000 with a remaining unamortized debt discount of $3,072 and $4,688, respectively.

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

LowCal Industries

 

On February 8, 2013, and subsequently amended on April 23, 2013, 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”). The principal and all interest on the LowCal Loan is due in one installment on or before December 31, 2013, the maturity date. At LowCal’s option, LowCal may elect to convert any part of the principal of the LowCal Loan into shares of Cellteck’s Series B Convertible Preferred Stock, or, if the Stock Split has been effectuated, common stock, at a conversion price of $5.00 per share. Furthermore, Eos must provide LowCal with 10 days’ notice before any repayment of the LowCal Loan. At LowCal’s option, upon its receipt of such notice, it may elect to convert all accrued but unpaid interest into 50,000 shares of the Company’s Series B Convertible Preferred Stock or, if the Stock Split has been effectuated, common stock. As of March 31, 2013, LowCal purchased $1,250,000 of these notes for net proceeds of $1,240,000. Subsequent to March 31, 2013, LowCal purchased the remaining notes of $1,250,000.

 

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.

 

When the Loan Agreements were first entered into on February 8, 2013, LowCal agreed to purchase 500,000 shares of Series B Convertible Preferred Stock of the Company for $10,000. When the Loan Agreements were amended on April 23, 2013, LowCal agreed to purchase an additional 450,000 shares of Series B Convertible Preferred Stock of the Company for $10,000. LowCal executed a Lock-Up/Leak-Out Agreement which restricts LowCal’s ability to sell these shares and any other shares of the Company it obtains through August 8, 2013

 

Lastly, Eos agreed that Sail Property Management Group LLC, an affiliate of LowCal (“Sail”), would be entitled to conduct periodic oversight and inspection of Eos’ business, operations and properties on behalf of LowCal. In exchange for Sail’s services, Sail will receive a $25,000 fee from Eos on the maturity date of the LowCal Loan, in addition to reimbursement for reasonable expenses.

 

The Company recorded as a debt discount the fair value of the 500,000 shares, which was determined to be $10,000, which will be amortized over the life of the Loan Agreement and recorded as interest expense. During the three months ended March 31, 2013 and 2012, the Company amortized $1,042 of the loan discount which was recorded to interest expense.

 

The amount due to LowCal at March 31, 2013 is $1,250,000 with a remaining unamortized debt discount of $8,958.

 

NOTE 6 – ASSET RETIREMENT OBLIGATION

 

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

 

		Three Months
		Ended
		March 31, 2013
Asset retirement obligation, beginning of period		$	46,791
Additions			-
Accretion expense			1,170
Asset retirement obligations, end of period		$	47,961

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

NOTE 7 - RELATED PARTY TRANSACTIONS

 

The Company has a consulting agreement with Plethora Enterprises, LLC (“Plethora”), which is solely owned by Nikolas Konstant, the Company’s chief executive officer. Under the consulting agreement, for the three months ended March 31, 2013 and 2012, the Company recorded compensation expense of $90,000 and $0. During the three months ended March 31, 2013, Mr. Konstant received $71,000. The amount due to Mr. Konstant under Plethora consulting agreement is $116,000 and $97,000 at March 31, 2013 and December 31, 2012, respectively. The total amount due to Mr. Konstant at March 31, 2013 and December 31, 2012 is $156,000 and $137,000, respectively.

 

NOTE 8 - STOCKHOLDERS’ DEFICIT

 

Common Stock

 

The Company is authorized to issue an aggregate of 300,000,000 shares of common stock with $0.0001 par value.

 

Preferred Stock

 

The Company is authorized to issue an aggregate of 100,000,000 shares of preferred stock with $0.0001 par value. The Company designated 47,000,000 of the 100,000,000 authorized shares of preferred stock as Series B Voting Convertible Preferred Stock (“Series B Preferred Stock”).

 

Accrued Dividends

 

As of March 31, 2013 and December 31, 2012, the Company has preferred stock dividends payable of $27,386 which are accrued dividends related to EOS Petro, Inc. before the merger.

 

Stock Issuances

 

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 $5,000.

 

On February 8, 2013, the Company issued 500,000 shares of the Company’s Series B Preferred Stock pursuant to a loan agreement. The value of the shares totaled $10,000.

 

On March 31, 2013, the Company issued 150,000 shares of the Company’s Series B Preferred Stock pursuant to a loan agreement. The value of the shares totaled $3,000.

 

NOTE 9 - STOCK OPTIONS AND WARRANTS

 

On January 17, 2013, the Company issued 250,000 warrants pursuant to a consulting agreement. The warrants have an exercise price of $2.50, expire on January 21, 2018 and vest over 4 years.

 

The Company determined the fair value of the 250,000 warrants to be $1,186 using the Black-Scholes option pricing model with the following assumptions:

 

·

Expected life of 5 years

·

Volatility of 214%;

·

Dividend yield of 0%;

·

Risk free interest rate of 0.75%

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

The Company determined the fair value of the 250,000 shares of stock to be $1,186 based on a share value of $0.058.

 

NOTE 10 - COMMITMENTS AND CONTINGENCIES

 

The Company, through Eos, is a passive working and net revenue interest owner and operator in the oil and gas industry. As such, the Company to date has not acquired its own insurance coverage over its passive interests in the properties; instead the Company has relied on the third party operators for its properties to maintain insurance to cover its operations.

 

There can be no assurance that insurance, if any, will be adequate to cover any losses or exposure to liability. Although the Company believes the policies obtained by the third party operators provide coverage in scope and in amounts customary in the industry, they do not provide complete coverage against all operating risks. An uninsured or partially insured claim, if successful and of significant magnitude, could have a material adverse effect on the Company and its financial condition via its contractual liability to the prospect.

 

SAI Geoconsulting, Inc. Consulting Agreement

 

On January 21, 2013, Eos and the Company entered into a consulting agreement with SAI Geoconsulting, Inc. (“SAI”). Eos 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. Eos agreed to pay finder’s fees equaling the greater of: (1) $30,000 or (2) the total sum of SAI's hourly fees on the project at $200/hr.

Eos further agreed to pay SAI the following additional commission on transactions that are located by, originated by or presented, in whole or part SAI:

 

	·	2.5% for transactions valued, at closing, under $25 million,
	·	2.0% for transactions valued, at closing, under $50 million,
	·	1.5% for transactions valued, at closing, under $100 million, or
	·	1.0% for transactions valued, at closing, over $100 million.

 

As additional compensation for services rendered, SAI received 25,000 shares of restricted Series B preferred stock of the Company upon its execution of the agreement, and the Company may, but is not obligated, to issue to SAI, as additional consideration for SAI’s continued support of the Company and Eos’ oil and gas activities, up to 75,000 shares of the Company’s restricted common stock from time to time as the Company’s Board of Directors may determine in its sole and absolute discretion. Furthermore, 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 will not be exercisable unless and until the Stock Split has been effectuated, 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.

 

If the Stock Split has not been effectuated by January 21st of any given year, any shares that would otherwise have vested on such date shall instead vest on the next business day immediately following effectuation of the Stock Split.

 

TEHI Illinois LLC

 

On June 6, 2012, Eos entered into an Oil and Gas Operating agreement with TEHI Illinois LLC. (“TEHI”) giving authority to TEHI as the Operator for oil and/or gas production (whether primary or secondary) with full control and management of all operations on the oil and gas property located in Illinois in which Eos has an 80% revenue and 100% working interest (the “Works Property”). TEHI has operated as the Operator on the leased properties without contract since Eos’ purchase of the Works lease in June, 2011. TEHI will receive expenses of $300 per month for managing the affairs of the lease and to properly keep the wells in operation and good workmanlike manner. Eos will also pay to TEHI its proportionate share of all operating expenses arising out of the operation and maintenance of any wells drilled, completed and equipped. TEHI is entitled to submit monthly operating statements of all operating expenses directly to the oil pipeline purchaser and deduct its operating costs from crude oil sales before remitting to Eos the Eos’ share of said crude oil sales. Eos granted a security interest in and a lien upon Eos’s ownership and interests in the oil and gas leases, the wells situated thereon, and the oil and gas produced therefrom, the proceeds therefrom, and all equipment, fixtures and personal property situated thereon to secure payment, together with interest thereon. TEHI was also granted a preferential right of first refusal to purchase the Works Property in the event Eos ever desires to sell or dispose of all or any part of Eos’ interest in the Works Property.

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

During the three months ended March 31, 2013, the Company paid approximately $53,000 to TEHI.

 

Brian Hannan and Jeff Ahlholm

 

On December 15, 2012, Eos entered into a one-year consulting agreement (the “AGRA Agreement”) with Brian Hannan and Jeff Ahlholm, co-owners of Agra Capital Advisors LLC and Glacier Partners Holdings, LLC (Mr. Hannan and Mr. Ahlholm are hereinafter referred to as the “AGRA Partners”) to provide consulting services relating to business plan development, strategic planning, acquisitions and financing activities. The AGRA Partners will be paid a monthly advisory fee of $30,000 during the term of the agreement, to be capped at $360,000. The monthly advisory fee could be paid in either cash or shares of the Company’s common stock based on mutual agreement of Eos and AGRA Partners. AGRA Partners will also receive an M&A advisory and finder’s fee of not less than 2% of the value of certain transactions. On transactions jointly originated or originated by Eos or its affiliates, AGRA Partners will receive success fees ranging from 1.0% to 2.5%, depending on the value of the transaction. In addition, AGRA Partners may elect to purchase 500,000 shares of common stock of the Company for $50,000. As of March 31, 2013, AGRA Partners have not elected to purchase these shares, and their ability to do so expires concurrently with the expiration of the December 15, 2012 consulting agreement. During the three months ended March 31, 2013, the Company paid approximately $182,000 to AGRA Partners.

 

Various Consulting Agreements

 

As further discussed in the Company’s December 31, 2012 financial statements filed with Form 10-K, the Company has entered into certain consulting agreements with outside parties to locate and secure equity or debt financing for the Company. In exchange for these services, the Company will pay fees comprised of differing amounts of cash, shares of stock, and warrants.

 

Loss Contingencies, legal proceedings—

 

On July 11, 2011, the Company entered into an employment agreement with Michael Finch to fill the position of 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 the Company and the employment was terminated. On August 9, 2012, Mr. Finch sent a Demand for Arbitration before JAMS, a provider of arbitration, mediation and alternative dispute resolution services, (the “Demand”) alleging breach of the employment agreement. In the Demand, 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 the Company’s common stock. The Demand does not have a case or filing number assigned to it. The Company has not yet prepared or sent a response to the Demand. The Company denies any breach of the employment agreement or other wrongdoing on its part and will vigorously defend those claims. We are unable to express an opinion as to the likelihood of an unfavorable outcome or an estimate as to the amount or range of potential loss at this time.

 

On September 13, 2012, Eos entered into an employment agreement with Martin Cox to fill the position of Operations Manager. Pursuant to the agreement, Mr. Cox was entitled to receive $20,000 upon execution of the employment agreement and an annual salary of $120,000. However, a dispute arose regarding the amount of work Mr. Cox was performing for Eos. Eos’ position is that the employment agreement was cancelled and never went into effect. Mr. Cox disputes the cancellation of the employment agreement. On March 8, 2013, a claim was orally asserted on Mr. Cox’s behalf that Eos owes Mr. Cox $90,000 pursuant to the terms of the employment agreement. As of May 6, 2013, no lawsuits have been filed against us that relate to Mr. Cox’s employment agreement. Eos denies any breach of the employment agreement or other wrongdoing on its part and will vigorously defend itself against Mr. Cox’s claims.

 

 

Cellteck, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

NOTE 11– SUBSEQUENT EVENTS

 

Special Meeting of the Stockholders

 

On May 6, 2013, at a special meeting of the Company’s stockholders, the common stock and Series B Preferred Stock holders, voting on a combined basis, approved the following proposals:

 

·

In light of the Company’s new oil and gas focus, a name change of the Company from “Cellteck, Inc.” to “Eos Petro, Inc.;”

 

·

To approve 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;

 

·

To adopt a 2013 Stock Inventive Award Plan for Employees and Other Services Providers, and to reserve up to 5,400,00 shares of the Company’s common stock for issuance under the plan; and

 

·

To adopt a 2013 Equity Incentive Plan for Directors, and to reserve up to 1,000,000 shares of common stock under the plan.

 

These proposals will be effectuated as soon as the Company has obtained the requisite approvals from FINRA. The financial statements will reflect the reverse stock split in the quarter approvals are received from FINRA.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

This Report contains projections, expectations, beliefs, plans, objectives, assumptions, descriptions of future events or performances and other similar statements that constitute “forward looking statements” that involve risks and uncertainties, many of which are beyond our control. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. All statements, other than statements of historical facts, included in this Report regarding our expectations, objectives, assumptions, strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and objectives of management are forward-looking statements. All forward-looking statements speak only as of March 31, 2013. 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

 

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 Cellteck, 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 Cellteck. 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 Cellteck.

 

We are presently focused on the exploration, development, mining, operation and management of medium-scale oil and gas assets. Our primary activities as of March 31, 2013, have centered on organizing activities but have also included the acquisition of existing assets, evaluation of new assets to be acquired, pre-development activities for existing assets and our reverse merger with Cellteck.

 

 

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 Cellteck, which primarily relates to Eos’ Works Property oil and gas assets located in Illinois.

 

Comparison of the three months ended March 31, 2013 to March 31, 2012.

 

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 March 31, 2013, our primary revenue has come from one source, “the Works” property, located in Southern Illinois. Revenue for the three months ended March 31, 2013 and 2012 was $23,978 and $16,474, respectively.

 

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, 2013 and 2012 was $57,971 and $52,474, respectively.

 

General and administrative expenses

 

General and administrative expenses for the three months ended March 31, 2013 and 2012 was $636,935 and $134,446, 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 $228,000 in professional fees during the three months ended March 31, 2013 related to the reverse merger. They also include payments to third party consultants for their assistance with potential acquisitions. We recognized approximately $120,000 related to consulting agreements. Other expenses included are temporary professional staffing, rent, utilities, and other overhead expenses.

 

Interest expenses

 

Interest expense for the three months ended March 31, 2013 and 2012 was $61,088 and $128,792, respectively. During the three months ended March 31, 2012, we recognized as interest expense $56,000 for shares issued for loan guarantee, $16,800 from amortization of debt discounts and $56,000 based on the terms of the notes. During the three months ended March 31, 2013, we recognized as interest expense $3,000 for shares issued for debt extension, $2,700 from amortization of debt discounts, and $55,000 based on the terms of the notes.

 

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. 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, 2013, we had cash in the amount of $25,388. At March 31, 2013, we had total liabilities of $3,973,356. 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.

 

 

We issued a promissory note on February 8, 2013 for $1,250,000 which was subsequently amended for an additional $1,250,000 for a combined total of $2,500,000. The note’s interest rate is 10% per annum and is due on August 31, 2013. We used the loan proceeds to pay (i) $650,000 for drilling wells on the Works Property, (ii) $105,000 to retire outstanding notes and (iii) $120,000 to Agra under the consulting agreement. The remaining proceeds will be used to assist us in meeting our short-term obligations, but we will require additional financing in order to properly fund our ongoing activities.

 

We do not currently have sufficient financing arrangements in place for such additional financing, 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.

 

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 with our December 31, 2012 10-K 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 $652,123 and $333,636 for the three months ended March 31, 2013 and 2012, respectively. 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 $555,000 and $13,000 for the three months ended March 31, 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 $1,185,000 and $346,636 for the three months ended March 31, 2013 and 2012, respectively. This cash generated from financing activities for the three months ended March 31, 2012 was primarily from our issuing short term notes payable of $400,000 offset by repayment of short term notes payable of $30,000. This cash generated from financing activities for the three months ended March 31, 2013 was primarily from our convertible notes payable of $1,250,000 offset by repayment of short term notes payable of $70,000.

 

 

Critical Accounting Policies

 

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

 

We believe the following accounting policies to be critical to the estimates used in the preparation of our financial statements.

 

Use of Estimates

 

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the following:

 

·

Final well closure and associated ground reclamation costs to determine the asset retirement obligation as discussed under “Asset Retirement Obligations;”

 

·

Estimated variables used in the Black-Scholes option pricing model used to value options and warrants as discussed below under “Fair Value Measurements;”

 

·

Proved oil reserves;

 

·

Future costs to develop the reserves; and

 

·

Future cash inflows and production development costs.

 

Actual results could differ from those estimates.

 

Revenue Recognition

 

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

 

Full Cost Method of Accounting for Oil and Gas Properties

 

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

 

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 basically 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.

 

 

Full Cost Ceiling Test

 

At the end of each quarterly reporting period, the unamortized costs of oil and gas properties are subject to a “ceiling test” which basically 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.

 

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 in 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.

 

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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our chief executive officer who also serves as the Company’s principal financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management designed the disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.

 

 

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2013. Based upon that evaluation, the chief executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are ineffective.

 

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, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings 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.

 

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 March 31, 2013, 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.

 

On November 21, 2011, Eos entered into an Employment Agreement with Anthony Fidaleo to fill the position of Eos’ CFO. Pursuant to the agreement, Mr. Fidaleo was entitled to an annual salary of $240,000.00, 250,000 stock options vesting over two years, and certain other insurance and employment benefits. However, a dispute arose regarding the amount of work Mr. Fidaleo was performing for Eos and the employment was terminated. As of March 31, 2013, no disputes have arisen and no lawsuits or other claims have been filed against us that relate to Mr. Fidaleo’s employment agreement.

 

On September 13, 2012, Eos entered into an employment agreement with Martin Cox to fill the position of Operations Manager. Pursuant to the agreement, Mr. Cox was entitled to receive $20,000 upon execution of the employment agreement and an annual salary of $120,000. However, a dispute arose regarding the amount of work Mr. Cox was performing for Eos. Eos’ position is that the employment agreement was cancelled and never went into effect. Mr. Cox disputes the cancellation of the employment agreement. On March 8, 2013, a claim was orally asserted on Mr. Cox’s behalf that Eos owes Mr. Cox $90,000 pursuant to the terms of the employment agreement. As of May 6, 2013, no lawsuits have been filed against us that relate to Mr. Cox’s employment agreement. Eos denies any breach of the employment agreement or other wrongdoing on its part and will vigorously defend itself against Mr. Cox’s claims.

 

Item 1A. Risk Factors

 

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, 2012, 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.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On January 15, 2013, we issued 25,000 shares of our Series B Preferred Stock pursuant to a consulting agreement with SAI Geoconsulting, Inc (“SAI”). Upon SAI’s execution of the agreement, SAI also received a warrant to purchase up to 250,000 shares of common stock of the Company at a strike price of $2.50 per share, expiring January 21, 2017. Eos retained SAI to provide consulting support and advisory services for oil and gas activities.

 

On February 8, 2013, the Company sold 500,000 shares of the Company’s Series B Preferred Stock for $10,000 pursuant to a loan agreement for $1,250,000 with LowCal Industries, LLC.

 

On March 31, 2013, the Company issued 150,000 shares of the Company’s Series B Preferred Stock pursuant to a loan agreement for $250,000 with Clouding IP, LLC.

 

The above shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering. Each share of our Series B preferred stock is convertible into 800 shares of our common stock, and will automatically convert into shares of our common stock upon the filing, by us, of an amendment to our articles of incorporation for the authorization of a sufficient number of shares of common stock to convert all issued and outstanding shares of Series B preferred stock into common stock. Such an amendment was approved by our stockholders at a special meeting on Mary 6, 2013, and will be effectuated as soon as reasonably practicable once the Company gains clearance from FINRA.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

EXHIBIT TABLE

 

The following is a complete list of exhibits filed as part of the Quarterly Report on Form 10-Q, some of which are incorporated herein by reference from the reports, registration statements and other filings of the issuer with the Securities and Exchange Commission, as referenced below:

 

Reference Number	Item
31.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

SIGNATURES

 

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.

 

	CELLTECK, INC. a Nevada corporation
Date: May 15, 2013	By:	/s/ Nikolas Konstant
		Nikolas Konstant
		President, Chief Executive Officer and Chief Financial Officer