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EX-31.2 - Eos Petro, Inc.exhibit31_2.htm
EX-10.2 - Eos Petro, Inc.exhibit10_2.htm
EX-32.1 - Eos Petro, Inc.exhibit32_1.htm
EX-31.1 - Eos Petro, Inc.exhibit31_1.htm
EX-32.2 - Eos Petro, Inc.exhibit32_2.htm
EXCEL - IDEA: XBRL DOCUMENT - Eos Petro, Inc.Financial_Report.xls
EX-10.4 - Eos Petro, Inc.exhibit10_4.htm
EX-10.3 - Eos Petro, Inc.exhibit10_3.htm
EX-10.5 - Eos Petro, Inc.exhibit10_5.htm
EX-10.1 - Eos Petro, Inc.exhibit10_1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014
 
o
Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______.
 
Commission file number 000-30995
 
EOS PETRO, INC.
 
(Exact name of registrant as specified in its charter)
 
Nevada
(State or other jurisdiction of incorporation or organization)
98-0550353
(I.R.S. Employer Identification No.)
   
1999 Avenue of the Stars, Suite 2520
Los Angeles, California
(Address of principal executive offices)
 
90067
(Zip code)
   
 
(310) 552-1555
(Registrant’s telephone number, including area code)
 
 (Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes    x                  No     o      
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes      x                No     o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o Accelerated filer  x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
                                                                                                                                         
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes    o             No    x
 
As of August 1, 2014, the registrant had 46,728,882 outstanding shares of common stock.
 
 
1

 

 
       
       
     
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2

 

 



 
Condensed Consolidated Balance Sheets
 
             
             
             
   
June 30,
   
December 31,
 
   
2014
   
2013
 
ASSETS
 
(Unaudited)
       
             
Current assets
           
   Cash
  $ 359,566     $ 21,951  
Deposits and other current assets
    72,933       21,029  
Total current assets
    432,499       42,980  
                 
Oil and gas properties, net
    1,149,948       1,187,555  
Other property plant and equipment, net
    16,369       21,397  
Long-term deposits
    102,441       102,441  
Total assets
  $ 1,701,257     $ 1,354,373  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
Current liabilities
               
Accounts payable
  $ 148,888     $ 148,888  
Accrued expenses
    1,466,652       1,169,644  
Amounts due shareholder
    167,560       164,610  
   Convertible notes payable, net of discount of $1,570,458 and $887,118, respectively
    3,429,542       2,862,882  
Notes payable
    850,000       1,108,380  
Total current liabilities
    6,062,642       5,454,404  
                 
Asset retirement obligation
    80,280       76,457  
Total liabilities
    6,142,922       5,530,861  
                 
                 
                 
Commitments and contingencies
    -       -  
                 
Stockholders' deficit
               
Series B Preferred stock: $0.0001 par value; 44,000,000 shares authorized,
               
none issued and outstanding
    -       -  
Common stock; $0.0001 par value; 300,000,000 shares authorized
               
 46,726,882 and 46,628,882 shares issued and outstanding
    4,673       4,663  
Additional paid-in capital
    44,249,062       23,231,954  
Shares of common stock to be issued - 1,000,000 and  400,000
    10,974,000       3,370,000  
Stock subscription receivable
    (88,200 )     (88,200 )
Accumulated deficit
    (59,581,200 )     (30,694,905 )
Total stockholders' deficit
    (4,441,665 )     (4,176,488 )
Total liabilities and stockholders' deficit
  $ 1,701,257     $ 1,354,373  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
3

 

 
Condensed Consolidated Statements of Operations
 
                         
                         
                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Revenues
                       
Oil and gas sales
  $ 323,121     $ 196,776     $ 426,827     $ 220,754  
                                 
Costs and expenses
                               
Lease operating expense
    120,271       148,429       185,529       206,400  
 General and administrative
    7,017,399       876,568       18,061,358       1,513,503  
Total costs and expenses
    7,137,670       1,024,997       18,246,887       1,719,903  
                                 
Loss from operations
    (6,814,549 )     (828,221 )     (17,820,060 )     (1,499,149 )
                                 
Other income (expense)
                               
Interest and finance costs
    (5,904,405 )     (1,865,865 )     (10,456,615 )     (1,926,953 )
Loss on debt extinguishment
    -       -       (609,620 )     -  
Total other income (expense)
    (5,904,405 )     (1,865,865 )     (11,066,235 )     (1,926,953 )
                                 
Net loss
  $ (12,718,954 )   $ (2,694,086 )   $ (28,886,295 )   $ (3,426,102 )
                                 
Net loss per share attributed to common
                               
stockholders - basic and diluted
  $ (0.27 )   $ (0.06 )   $ (0.62 )   $ (0.08 )
Weighted average common shares outstanding
                               
basic and diluted
    46,723,366       45,274,211       46,700,772       44,913,662  

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

 
4

 

 
For the Six Months Ended June 30, 2014
 
(Unaudited)
 
                                                       
                                                       
                           
Additional
         
Stock
         
Total
 
   
Series B Preferred Stock
   
Common Stock
   
Paid-in
   
Stock to be
   
Subscription
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Issued
   
Receivable
   
Deficit
   
Deficit
 
Balance, December 31, 2013
    -     $ -       46,628,882     $ 4,663     $ 23,231,954     $ 3,370,000     $ (88,200 )   $ (30,694,905 )   $ (4,176,488 )
                                                                         
Issuance of common stock for consulting services
    -       -       32,000       3       454,097       -       -       -       454,100  
Issuance of common stock related to debt extinguishment
    -       -       66,000       7       692,993       -       -       -       693,000  
Fair value of share based compensation
    -       -       -       -       967,954       -       -       -       967,954  
Fair value of warrants issued for consulting services
    -       -       -       -       15,649,564       -       -       -       15,649,564  
Beneficial conversion feature related to issuance of convertible debt
    -       -       -       -       3,252,500       -       -       -       3,252,500  
Shares to be issued in connection with convertible note
    -       -       -       -       -       7,604,000       -       -       7,604,000  
Net loss
    -       -       -       -       -       -       -       (28,886,295 )     (28,886,295 )
Balance, June 30, 2014 (Unaudited)
    -     $ -       46,726,882     $ 4,673     $ 44,249,062     $ 10,974,000     $ (88,200 )   $ (59,581,200 )   $ (4,441,665 )
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
5

 
 

 
Condensed Consolidated Statements of Cash Flows
 
             
             
             
             
   
Six Months Ended June 30,
 
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities
           
Net loss
  $ (28,886,295 )   $ (3,426,102 )
 Adjustments to reconcile net loss to net cash
               
     used in operating activities:
               
     Depletion
    37,608       51,937  
     Depreciation
    5,027       2,733  
Accretion of asset retirement obligation
    3,823       2,339  
Amortization of debt issuance costs
    816,660       1,005,072  
Non-cash finance costs
    9,356,500       739,500  
Loss on debt extinguishment
    609,620       -  
Fair value of stock issued for services
    454,100       3,910  
Fair value of stock issued in debt transaction
    -       3,000  
Fair value of warrants issued for consulting services
    15,649,564       243,329  
Fair value of share-based compensation
    967,954       28,956  
Change in operating assets and liabilities:
               
Deposits and other current assets
    (51,904 )     14,150  
Accounts payable
    -       (61,680 )
Accrued expenses
    297,008       291,505  
Amounts due shareholder
    2,950       24,200  
Net cash used in operating activities
    (737,385 )     (1,077,151 )
                 
Cash flows from investing activities:
               
      Purchase of other fixed assets
    -       (10,000 )
      Capital expenditures on oil and gas properties
    -       (632,500 )
Net cash used in investing activities
    -       (642,500 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock for cash
    -       90,000  
Proceeds from (repayment to) related party
    -       (39,000 )
Repayment of short term notes payable
    (175,000 )     (125,000 )
Purchase of stock pursuant to reverse stock split
    -       (4,118 )
Repayment of convertible notes
    (250,000 )        
Proceeds from issuance of convertible notes
    1,500,000       2,500,000  
Net cash provided by financing activities
    1,075,000       2,421,882  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    337,615       702,231  
                 
CASH AND CASH EQUIVALENTS, beginning of period
    21,951       47,511  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 359,566     $ 749,742  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
                 
Cash paid for interest
  $ -     $ -  
Cash paid for income taxes
  $ -     $ -  
                 
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
                 
Issued 950,000 shares of Series B Preferred stock
               
pursuant to debt agreement
  $ -     $ 3,239,500  
Issued 66,000 shares of common stock for extinguishment of debt
  $ 693,000     $ -  
Fair value of 600,000 shares of common stock to be issued
         
pursuant with convertible notes
  $ 7,604,000     $ -  
Fair value of beneficial conversion feature
  $ 3,252,500     $ -  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
6

 
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2014 and 2013
(Unaudited)
NOTE 1 - ORGANIZATION

The unaudited condensed consolidated financial statements have been prepared by Eos Petro, Inc., (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission.  The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the financial condition of the Company and its operating results for the respective periods. The condensed balance sheet at December 31, 2013 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 unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.

Organization and Business

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

Upon completion of the Merger, the former stockholders of Eos owned approximately 93% of the then outstanding shares of Company stock and the holders of the Company’s previously outstanding debt and outstanding shares of Company common stock own the balance. As the owners and management of Eos had voting and operating control of the Company after the Reverse Merger, the transaction has been accounted for as a recapitalization of the Company with Eos deemed the acquiring company for accounting purposes, and the Company was deemed the legal acquirer. Due to the change in control, the condensed 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.
 
Effective as of May 20, 2013, the Company changed its name to Eos Petro, Inc. (it previously had been named “Cellteck, Inc.”) by filing an amendment to its articles of incorporation (the “Amendment”) with the Nevada secretary of state after the name change was approved at a special meeting of the stockholders of the Company held on May 6, 2013 (the “Special Meeting”). In anticipation of the Company’s name change, on May 17, 2013, the Company also changed the name of Eos (previously named “Eos Petro, Inc.”), to Eos Global Petro, Inc.
 
The Company has two wholly-owned subsidiaries, Eos and Eos Australia Pty Ltd, an Australian company (“Eos Australia”), which was formed to explore business opportunities in Australia. The Company also owns 90% of Plethora Buy Oil and Gas Ltd., a Ghanaian corporation (“Plethora Buy”). Eos itself also has two subsidiaries: Plethora Energy, Inc. a Delaware corporation and a wholly-owned subsidiary of Eos (“Plethora Energy”), and EOS Atlantic Oil & Gas Ltd., a Ghanaian corporation (“EAOG”), which is also 10% owned by one of our Ghanaian-based third party consultants. Plethora Energy also owns 90% of Plethora Bay Oil & Gas Ltd., a Ghanaian corporation (“PBOG”), which is also 10% owned by the same Ghanaian-based consultant.  Eos, Eos Australia, Plethora Buy, PBOG, Plethora Energy and EAOG are collectively referred to as the Company’s “Subsidiaries.”
 
Business

We are in the business of acquiring, exploring and developing oil and gas-related assets. We formerly marketed the Safe Cell Tab product line, which consists of products designed to protect users against the potentially harmful and

 
7

 
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2014 and 2013
(Unaudited)

damaging effects of electromagnetic radiation emitted from electrical devices.  That segment of our business was discontinued in 2013.  We have written off all assets after settling all Safe Cell Tab related liabilities.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed 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.” Basic earnings-per-share is based upon the weighted average number of common shares outstanding and includes the automatically converted shares of Series B preferred stock on a retroactive basis. Diluted earnings-per-share is based on the assumption that all dilutive convertible preferred shares, stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.

   
June 30,
 
   
2014
   
2013
 
Options
    700,000       700,000  
Warrants
    11,452,992       9,958,000  
Convertible notes
    1,250,000       600,000  
Total
    13,402,992       11,258,000  

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates reflected in the 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 costs. Changes in facts and circumstances may result in revised estimates.  Actual results could differ from those estimates.

Full Cost Method of Accounting for Oil and Gas Properties

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

 
8

 
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2014 and 2013
(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 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 oil and gas properties 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 June 30, 2014, the Company has not experienced any impairment of its capitalized oil and gas properties.

The Company recorded depletion expense of $28,224 and $37,608 for three and six months ended June 30, 2014, respectively, and $46,945 and $51,937 for the three and six months ended June 30, 2013, 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 June 30, 2014 and December 31, 2013, the Company had an ARO of $80,280 and $76,457, respectively.

Oil and Gas Revenue

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

Share-Based Compensation

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

 
9

 
Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2014 and 2013
(Unaudited)
Fair Value Measurements

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

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

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

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

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

Concentrations

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

One customer accounts for 100% of oil sales for the three and six months ended June 30, 2014 and 2013.  The Company’s oil and gas properties are located in Illinois.

Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)."  ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations.  Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations.  This new accounting guidance is effective for annual periods beginning after December 15, 2014.  The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  The standard is
 
 
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effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  Early adoption is not permitted.  The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard beginning January 1, 2017.

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

NOTE 3 – GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of June 30, 2014, the Company had a stockholders’ deficit of $4,441,665, and for the six months ended June 30, 2014, reported a net loss of $28,886,295 and had negative cash flows from operating activities of $737,385. 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 December 31, 2013 consolidated financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

The Company’s ability to continue as a going concern is an issue due to its net losses and negative cash flows from operations, and its need for additional financing to fund future operations. The Company’s ability to continue as a going concern is subject to its ability to obtain necessary funding from outside sources, including the sale of its securities or loans from financial institutions. There can be no assurance that such funds, if available, can be obtained on terms reasonable to the Company. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty.

NOTE 4 - NOTES PAYABLE

Notes payable at June 30, 2014 and December 31, 2013 are as follows:

   
June 30,
   
December 31,
 
   
2014
   
2013
 
             
Note payable at 24% (1)
  $ -     $ 128,380  
Secured note payable, at 18% (2)
    600,000       600,000  
Note payable, at 6% (3)
    250,000       250,000  
Note payable, at 5%, (4)
    -       130,000  
Total
  $ 850,000     $ 1,108,380  
                 
 
 
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(1) On October 24, 2011, Eos received $200,000 from RT Holdings, LLC (“RT”) in exchange for an unsecured promissory note payable, originally due November 7, 2011, as extended till April 30, 2013, with interest due at 6% per annum, which was amended to 24%.  On the maturity date, in addition to repaying in full the principal amount owed to RT, plus interest, Eos agreed to pay RT a single additional fee of $10,000.

As of December 31, 2013, the Company owed $128,380.  During 2014, the Company settled the loan by paying $75,000 and issuing 66,000 shares of the Company’s common stock.  The fair value of the 66,000 shares was $693,000.  The Company recorded a loss on debt extinguishment of $639,620.

(2) On February 16, 2012, Eos entered into a Secured Promissory Note with Vatsala Sharma (“Sharma”) for a secured loan for $400,000 due in 60 days at an interest rate of 18% per annum. On May 9, 2012, the Company and Sharma increased the loan amount from $400,000 to $600,000.  In the event the loan is not paid in full by the maturity date, Sharma will receive an additional 275,000 shares of the Company’s common stock. The loan is secured by a first priority blanket security interest in all of Eos’ assets, and newly acquired assets, a mortgage on the Works property, a 50% security interest in Nikolas Konstant’s personal residence, and his personally held shares in a non-affiliated public corporation.  On June 30, 2014, the maturity date was extended to October 1, 2014.

(3) Effective May 22, 2012, the Company entered into a Loan Agreement with Vicki P. Rollins (“Rollins”) for a secured loan in the amount of $350,000 originally due on September 22, 2012. The loan is secured by a 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 Sharma loan, without the written consent of Rollins. When the Loan Agreement was initially entered into, the Company issued to Rollins 175,000 warrants to purchase common stock with an exercise price of $2.50. Such warrants expired on May 22, 2014. On July 1, 2014, as is further described in Note 11 below, Rollins agreed to extend the maturity date of the loan to December 31, 2014 and amend the terms of the loan so that no interest accrues from inception through repayment. The Company issued to Rollins an aggregate of 250,000 new warrants in exchange for such extension and amendment.

(4) On August 2, 2012, Eos executed a series of agreements with 1975 Babcock, LLC (“Babcock”) in order to secure a $300,000 loan (the “Babcock Loan”). As of August 3, 2012, Eos also leased 7,500 square feet of office space at 1975 Babcock Road in San Antonio, Texas (the “Babcock Lease”) from Babcock. The Company agreed to pay $7,500 a month in rent under the Babcock Lease. Pursuant to the Babcock Loan and Lease documents, Eos granted Babcock a mortgage and security interest in and on the Works Property and related assets, agreements and profits. 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.

On November 7, 2013, the Company, Eos and Mr. Nikolas Konstant (the Company’s Chairman of the Board and Chief Financial Officer) entered into an agreement for the payment and satisfaction of the Babcock Loan and Babcock Lease, as amended, and all other related agreements. Under the terms and conditions of the Babcock Agreement, in order to pay off and satisfy the Babcock Loan in full and void the Babcock Lease, including any rent then owed and payable, in its entirety, Eos agreed to pay $330,000 on the loan.  In addition, the Company agreed to issue an aggregate of 70,000 restricted shares of the Company’s common stock to certain affiliates of Babcock, which were issued on January 13, 2014.   The Company made payments of $100,000 on November 13, 2013 and November 18, 2013. During 2014, the Company paid $100,000 for settlement of the debt.  Accordingly, the Company recorded a gain on extinguishment of debt of $30,000.

NOTE 5 – CONVERTIBLE PROMISSORY NOTES

A summary of convertible promissory notes at June 30, 2014 and December 31, 2013 are as follows:
 
 
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June 30,
   
December 31,
 
   
2014
   
2013
 
Clouding Loan
  $ -     $ 250,000  
LowCal Loan
    5,000,000       3,500,000  
Unamortized discount
    (1,570,458 )     (887,118 )
Total
  $ 3,429,542     $ 2,862,882  

Clouding IP, LLC

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

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

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

On various dates in May and June 2014, the Company paid the outstanding principal and accrued interest. The Company is currently negotiating a final settlement with Clouding.
 
LowCal Industries

On February 8, 2013, and subsequently amended, the Company and Eos entered into the following agreements with LowCal Industries, LLC (“LowCal”) and LowCal’s affiliates: (i) a Loan Agreement and Secured Promissory Note; (ii) a Lock-Up/Leak-Out Agreement;(iii) a Guaranty; (iv) a Series B Convertible Preferred Stock Purchase Agreement; (v) a Leasehold Mortgage, Assignment, Security Agreement and Fixture Filing; and (vi) a Compliance/Oversight Agreement (collectively referred to as the “Loan Agreements”).

Pursuant to the Loan Agreements, LowCal agreed to purchase from Eos, for $2,480,000, a promissory note in the principal amount of $2,500,000, with interest at 10% per annum (the “LowCal Loan”). At LowCal’s option, LowCal may elect to convert any part of the principal of the LowCal Loan into shares of the Company’s common stock at a conversion price of $5.00 per share. (Subsequently amended to $4 per share and then to $2.50 per share - see below).

The LowCal Loan is secured by (i) a mortgage, lien on, assignment of and security interest in and to oil and gas properties; (ii) a guaranty by the Company as a primary obligor for payment of Eos’ obligations when due; and (iii) a first priority position or call right for an amount equal to the then outstanding principal balance of and accrued interest on the LowCal Loan on the first draw down by either Eos or the Company from a commitment letter entered into with a prospective investor, should the Company or Eos be in a position to draw on this facility.
 
 
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The principal and all interest on the LowCal Loans are due in one installment on or before December 31, 2014.  The Company may offer to prepay the LowCal Loan, and must offer to prepay the LowCal Loan with any funds it receives from specified sources, but LowCal may decline to accept any such prepayments towards the LowCal Loan if LowCal complies with certain conditions set forth in the LowCal Agreements. On or before January 9, 2014, the LowCal Loan was to be secured by a first priority blanket security interest in Eos’ collateral and other rights in certain of Eos and the Company’s existing agreements.

On the date that the LowCal Loan has been repaid in full, LowCal shall be entitled to receive from Eos an exit fee, payable in cash and stock, in the following amounts: (i) 50,000 restricted shares of Company’s common stock; and (ii) cash in an amount equal to 10% of the total principal amount of the note.

On November 6, 2013, the Company, Eos, LowCal and certain affiliates of LowCal entered into a second amendment to the Loan Agreements, originally dated as of February 8, 2013 and first amended on April 23, 2013 (as amended through November 6, 2013, collectively referred to herein as the “LowCal Agreements”). Pursuant to the LowCal Agreements, the total amount of the LowCal Loan was increased from $2,500,000 to $5,000,000 and the conversion price was changed from $5 to $4.

When the LowCal Agreements were amended on November 6, 2013, LowCal agreed to purchase an aggregate of up to an additional 1,000,000 restricted shares of the Company’s common stock (the “LowCal Shares”) for par value on the closing date of the LowCal Agreements, which was anticipated to occur on or before January 9, 2014. 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. In addition, LowCal received piggy back registration rights for the shares it may receive pursuant to the note.  

As is further set forth in Note 11 below, on August 14, 2014, the LowCal Agreements were amended in a third amendment in which the Company issued to LowCal a warrant to purchase 500,000 restricted shares of common stock at $4.00 per share, expiring August 14, 2017. The conversion price on principal and interest of the LowCal Loan was also further amended from $4 to $2.50. LowCal may not exercise the warrant or elect to convert the note if such exercise or conversion would cause it to beneficially own more than 9.99% of the Company’s shares.

During the six months ended June 30, 2014, the Company received an additional $1,500,000 under this amendment and the Company agreed to issue the remaining 600,000 of the LowCal Shares valued at $7,604,000, which has been recorded as “Shares to be issued” in the accompanying condensed consolidated balance sheets, since the shares of common stock were not physically issued during the quarter. The Company intends to physically issue all of the LowCal shares prior to the end of August 2014.

The $4 per share conversion price for the $1,500,000 LowCal additional funding in 2014 was below the market price of the Company’s common shares at the date of issuance creating a beneficial conversion feature of $3,252,500 upon issuance.  This amount represented the amount by which the value of the shares into which the notes are convertible exceeded the aggregate conversion price on the date of issuance. In addition, we considered the $7,604,000 fair value of the 600,000 LowCal Shares to be a financing cost.  To account for these costs, the Company recorded a valuation discount of $1,500,000 upon issuance, and the incremental cost of $9,356,500 over the face amount of the note was recorded as a financing cost during the six months ended June 30, 2014. The Company will amortize the valuation discount to interest expense over the life of the notes.

During the three and six months ended June 30, 2014, the Company recognized aggregate interest expense of $477,407 and $816,660, respectively, and during the three and six months ended June 30, 2013, the Company recognized aggregate interest expense of $1,000,586 and $1,001,628, respectively, relating to the amortization of the discounts on the LowCal notes.  The unamortized balance at June 30, 2014, is $1,570,458.

NOTE 6 – ASSET RETIREMENT OBLIGATION

Changes in the Company’s asset retirement obligations were as follows:
 
 
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Six Months
       
   
Ended
   
Year Ended
 
   
June 30, 2014
   
December 31, 2013
 
Asset retirement obligation, beginning of period
  $ 76,457     $ 46,791  
Additions
    -       22,715  
Accretion expense
    3,823       6,951  
Asset retirement obligations, end of period
  $ 80,280     $ 76,457  

NOTE 7 - RELATED PARTY TRANSACTIONS

Plethora Enterprises, LLC

The Company has a consulting agreement with Plethora Enterprises, LLC (“Plethora”), which is solely owned by Nikolas Konstant, the Company’s chairman of the board and chief financial officer.  Under the consulting agreement, for the three and six months ended June 30, 2014, the Company recorded compensation expense of $90,000 and $180,000, respectively and for the three and six months ended June 30, 2013, the Company recorded compensation expense of $90,000 and $180,000, respectively.  The amount due to Mr. Konstant under the Plethora consulting agreement is $167,560 and $164,610 at June 30, 2014 and December 31, 2013, respectively.

Plethora Oil & Gas Limited

On June 30, 2014, Plethora Energy acquired from Plethora Oil & Gas Limited, a de facto limited liability company with no assets, liabilties, or operations formed under the common law of Delaware and wholly owned by Nikolas Konstant, 15,000 shares for nominal consideration which equals 90% ownership of PBOG, making PBOG a subsidiary of the Company.

Other

On October 3, 2011, the Company entered into an Exclusive Business Partner and Advisory Agreement with Baychester, which owns a 10% minority interest in EAOG and PBOG. The terms of such agreement were amended in June 2014. Pursuant to the amended agreement dated June 16, 2014, the Company agreed to pay to Baychester $35,000 by September 2014 in exchange for services rendered. Moreover, commencing July 1, 2014 and continuing every month thereafter, the Company agreed to pay to Baychester a monthly consulting fee of $10,000. Finally, in the event the Ghanaian Ministry of Energy formally invites the Company to a meeting to negotiate the terms of a deal to acquire a concession in Ghana, regardless of the outcome of the meeting, the Company will pay to Baychester an additional $35,000.

NOTE 8 - STOCKHOLDERS’ DEFICIT

Stock Issuances for Services

On June 23, 2013, the Company entered into a one year consulting agreement with Hahn Engineering, Inc. (“Hahn”). Pursuant to the agreement, Hahn will be issued 2,000 restricted shares of common stock of the Company per month. While initially such monthly issuances were capped at 24,000 shares, in June 2014 the parties agreed to continue the consulting agreement month to month and to continue to provide 2,000 restricted shares of common stock of the Company to Hahn each such month. During the six months ended June 30, 2014, Hahn had received 12,000 restricted shares of common stock of the Company valued at $168,100 which was recorded as consulting expense.

NOTE 9 - STOCK OPTIONS AND WARRANTS

Option Activity
 
 
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A summary of the option activity is presented below:
   
                     
               
Weighted
   
         
Weighted
   
Average
   
         
Average
   
Remaining
 
Aggregate
   
Number of
   
Exercise
   
Contractual
 
Intrinsic
   
Options
   
Price ($)
   
Life (in years)
 
Value ($)
Outstanding, December 31, 2013
    700,000       2.50       4.15    
Granted
    -                    
Exercised
    -                    
Forfeited/Canceled
    -                    
Outstanding, June 30, 2014
    700,000       2.50       3.66  
       8,050,000
Exercisable, June 30, 2014
    700,000       2.50       3.66  
       8,050,000


The following table summarizes information about options outstanding and exercisable at June 30, 2014:

Options Outstanding and Exercisable
   
Weighted
Weighted
   
Average
Average
Exercise
Number of
Remaining
Exercise
Price ($)
Shares
Life (Years)
Price ($)
2.50
       700,000
3.66
2.50

During the three and six months ended June 30, 2014, the Company recorded $483,977 and $967,954 of share based compensation on the vesting of these options.  During the three and six months ended June 30, 2013, the Company recorded $28,956 of share based compensation.

 
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Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2014 and 2013
(Unaudited)

Warrant Activity

A summary of warrant activity is presented below: 

                     
               
Weighted
   
         
Weighted
   
Average
   
         
Average
   
Remaining
 
Aggregate
   
Number of
   
Exercise
   
Contractual
 
Intrinsic
   
Warrants
   
Price ($)
   
Life (in years)
 
Value ($)
Outstanding, December 31, 2013
    11,558,000       4.50       2.36    
Granted
    20,000       -            
Exercised
    199,992       -            
Forfeited/Canceled
    (325,000 )     2.50            
Outstanding, June 30, 2014
    11,452,992       5.16       2.04  
   101,043,412
Exercisable, June 30, 2014
    5,149,664       2.78       1.85  
     57,766,304

The following tables summarize information about warrants outstanding at June 30, 2014:
 
                     
Warrants Outstanding
           
Weighted
   
Weighted
 
           
Average
   
Average
 
Exercise
   
Number of
   
Remaining
   
Exercise
 
Price ($)
   
Shares
   
Life (Years)
   
Price ($)
 
  2.50       2,759,992       1.64       2.50  
  3.00       2,403,000       2.16       3.00  
  4.00       100,000       4.34       4.00  
  5.35       4,670,000       1.62       5.35  
  6.00       20,000       2.84       6.00  
  12.95       1,500,000       4.28       12.95  
          11,452,992                  

The following table summarizes information about warrants exercisable at June 30, 2014:
 
Warrants Exercisable
           
Weighted
   
Weighted
 
           
Average
   
Average
 
Exercise
   
Number of
   
Remaining
   
Exercise
 
Price ($)
   
Shares
   
Life (Years)
   
Price ($)
 
  2.50       2,626,664       1.71       2.50  
  3.00       2,403,000       1.91       3.00  
  4.00       100,000       4.09       4.00  
  6.00       20,000       2.84       6.00  
          5,149,664                  
 
 
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Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2014 and 2013
(Unaudited)

During the six months ended June 30, 2014, the Company recorded $80,537 of consulting expense related to the vested warrants for SAI Consulting.

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

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

The fair value of the 1,500,000 Additional Warrants was determined to be $20,596,177 at June 30, 2014 using the Black-Scholes option pricing model with the following assumptions:

 
·
Expected life of 4.03 years
 
·
Volatility of 221%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 1.62%
The fair value will be amortized over the vesting period and will be adjusted each reporting period in accordance with accounting for non-employee stock based compensation. The Company expensed $4,902,243 and $14,305,406 during the three and six months ended June 30, 2014, respectively, and had expensed $5,670,064 during the year ended December 31, 2013 for a cumulative expense of $19,975,470.  As of June 30, 2014, $620,704 remains to be amortized through July 11, 2014.

Pursuant to the consulting agreement with DVIBRI, discussed further in Note 10, the Company issued warrants to purchase 199,992 shares of the Company’s common stock with 16,666 warrants vesting each month.  The warrants have an exercise price of $2.50 and expire on June 30, 2017.  The fair value of the 66,664 warrants that vested during the quarter was determined to be $933,121 using the Black-Scholes option pricing model with the following assumptions:

 
·
Expected life of 10 years
 
·
Volatility of 221%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 2.53%

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

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

 
·
Expected life of 3 years
 
 
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·
Volatility of 253%;
 
·
Dividend yield of 0%;
 
·
Risk free interest rate of 0.86%

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

The Company has been made aware that a complaint has been filed against the Company and Nikolas Konstant by an entity alleging to be the landlord of the Babcock Lease. The complaint purportedly asks for $149,625 in unpaid rent and late fees for the Babcock Lease, although the Company has not yet been served with a copy of the complaint. The Company denies any breach or the Babcock Lease or other wrongdoing on its part and will vigorously defend against such claims if it is ever served with the complaint.

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

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

Hassan Consulting Agreement

On June 24, 2014, the Company entered into a consulting agreement with Youssry Hassan (“Hassan”). Hassan will assist and advise the Company with the Company’s general business expansion strategies on new target acquisitions of oil and gas wells and fields, particularly in Africa. For transactions located by, originated by or presented, in whole or part, by Hassan, the Company will pay Hassan a success fee ranging from 1 to 2.5% of the total size of the transaction. Moreover, should one of the Company’s concession bids in Egypt become successful, Hassan may be granted up to 1,000,000 restricted shares of the Company’s common stock. Hassan is also entitled to a monthly consulting fee of $25,000, $15,000 of which shall be paid immediately and the remaining $10,000 of which shall be deferred, but not abated, until the end of the fiscal year in which such fees were earned, as well as an annual bonus of $50,000 and $10,000 to cover personal and family medical expenses.

NOTE 11 – SUBSEQUENT EVENTS

On July 1, 2014, Rollins agreed to extend the maturity date of the Rollins loan to December 31, 2014 and amend the terms of the loan so that no interest accrues from inception through repayment. The Company issued to Rollins an aggregate of 250,000 new warrants to Rollins in exchange for such extension and amendment. 175,000 of such warrants have an exercise price of $2.50, and the remainder of an exercise price of $4.00. All of such warrants expire on August 1, 2018.
 
 
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On July 10, 2014, the Company entered into a Joint Oil and Gas Operating Agreement with James Blumthal (“Blumthal”) giving authority to Blumthal 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 properties located in Illinois in which the Company as an 80% revenue and 100% working interest (the “Works Property”).  The Company will will pay to Blumthal its proportionate share of all operating expenses arising out of the operation and maintenance of any wells drilled, completed and equipped.  Concurrently with the signing of the Joint Oil and Gas Operating Agreement with Blumthal, the Company terminated the previous operating agreement with TEHI Illinois, LLC.

On August 1, 2014, the Company issued to BAS 500,000 warrants to purchase restricted shares of its common stock at $4.00 a share, vesting immediately and expiring after four years. The warrants were provided for BAS continuous support in providing consulting services to the Company.  The estimated fair value at the date of grant is $6,300,000.
 
Furthermore, pursuant to an agreement effective August 1, 2014, the Company amended the terms of its August 1, 2013 consulting agreement with BAS to appoint BAS as a non-exclusive M&A advisor for the Company. In exchange for the provision of such M&A advisory services, at the close of certain potential acquisitions, BAS shall receive a cash fee equal to 1%-2% of the total size of the acquisition, plus warrant coverage equal to 3.75% of the total amount of the acquisition, divided by 2.5 and at an exercise price of $4.00 per share. Such warrants will have piggy-back registration rights, vest immediately and expire July 31, 2018.
 
On August 14, 2014, the LowCal Agreements were amended in a third amendment in which the Company issued to LowCal a warrant to purchase 500,000 restricted shares of common stock at $4.00 per share, expiring August 14, 2017. The conversion price on principal and interest of the LowCal Loan was also further amended from $4 to $2.50. LowCal may not exercise the warrant or elect to convert the note if such exercise or conversion would cause it to beneficially own more than 9.99% of the Company’s shares.  The estimated fair value of the warrants at the date of grant is $7,300,000.
 
On June 23, 2013, the Company entered into an employment agreement with Martin Oring, who also acts as a director of the Company, in which Mr. Oring was appointed the CEO of the Company. In exchange for Mr. Oring’s services, he received a warrant to purchase 600,000 shares of restricted common stock of the Company at an exercise price of $2.50 with a five year term. 50,000 warrant shares vested each month the employment agreement remained in effect through June 30, 2014. On August 18, 2014, the Company and Mr. Oring entered into a new employment agreement in which Mr. Oring shall continue to act as the Company’s CEO in exchange for a new warrant. Pursuant to the new agreement entered into on August 18, 2014, the Company issued to Mr. Oring an additional warrant to purchase 600,000 shares of restricted common stock of the company at an exercise price of $2.50 with a five year term. 50,000 of such warrant shares vested immediately on the date of grant for Mr. Oring’s services provided in July 2014. The remaining warrant shares shall vest in monthly installments of 50,000 commencing August 31, 2014 and continuing thereafter every month Mr. Oring’s employment agreement remains in effect. 
 
 
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Eos Petro, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2014 and 2013
(Unaudited)

 
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 June 30, 2014. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including, but not limited to, those set forth in this Report. Important factors that may cause actual results to differ from projections include, but are not limited to, for example: adverse economic conditions, inability to raise sufficient additional capital to operate our business, delays, cancellations or cost overruns involving the development or construction of oil wells, the vulnerability of our oil-producing assets to adverse meteorological and atmospheric conditions, unexpected costs, lower than expected sales and revenues, and operating defects, adverse results of any legal proceedings, the volatility of our operating results and financial condition, inability to attract or retain qualified senior management personnel, expiration of certain governmental tax and economic incentives, and other specific risks that may be referred to in this Report. It is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained or implied in any forward-looking statement. We undertake no obligation to update any forward-looking statements or other information contained herein. Stockholders and potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this Report are reasonable, we cannot assure stockholders and potential investors that these plans, intentions or expectations will be achieved. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

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 the Company, Eos and Merger Sub, dated July 16, 2012, Merger Sub merged into Eos, with Eos being the surviving entity in the Merger. As a result of the Merger, Eos became a wholly owned subsidiary of the Company. Upon the closing of the Merger, each issued and outstanding share of common stock of Eos was automatically converted into the right to receive one share of our Series B preferred stock. At the closing, we issued 37,850,044 shares of Series B preferred stock to the former Eos stockholders, subject to the rights of the stockholders of Eos to exercise and perfect their appraisal rights under applicable provisions of Delaware law to accept cash in lieu of shares of the equity securities of the Company.

Effective as of May 20, 2013, the Company changed its name to Eos Petro, Inc. (it previously had been named “Cellteck, Inc.”) by filing an amendment to its articles of incorporation (the “Amendment”) with the Nevada secretary of state after the name change was approved at a special meeting of the stockholders of the Company held on May 6, 2013 (the “Special Meeting”).
 
 
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The Amendment also effectuated a reverse stock split of the outstanding shares of common stock of the Company held by stockholders with 2,000 or more aggregate shares of common stock at an exchange ratio of 1-for-800, accompanied by a cash distribution of $0.025 per share to all of the Company’s common stockholders with less than 2,000 shares of common stock in the aggregate, in exchange for and in cancellation of their shares of common stock (the “Stock Split”). This Stock Split triggered the automatic conversion of all 45,275,044 issued and outstanding shares of Series B preferred stock of the Company, including the shares of Series B preferred stock issued in the Merger, into 45,275,044 shares of common stock of the Company.
 
We are presently focused on the exploration, development, mining, operation and management of medium-scale oil and gas assets. Our primary activities as of June 30, 2014, 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 Merger with Eos.

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 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 June 30, 2014 to June 30, 2013.

   
For the Three Months Ended June 30,
             
   
2014
   
2013
             
         
% of
         
% of
   
Dollar
   
Percentage
 
   
Amount
   
Revenue
   
Amount
   
Revenue
   
change
   
Change
 
Revenue
  $ 323,121       100.0 %   $ 196,776       100.0 %     126,345       64 %
Lease operating expense
    120,271       37.2 %     148,429       75.4 %     (28,158 )     -19 %
General and administrative expenses
    7,017,399       2171.8 %     876,568       445.5 %     6,140,831       701 %
Other expense
    5,904,405       1827.3 %     1,865,865       948.2 %     4,038,540       216 %
Net loss
  $ (12,718,954 )     -3936.3 %   $ (2,694,086 )     -1369.1 %     (10,024,868 )     372 %
                                                 
 
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 June 30, 2014, our primary revenue has come from one source, the Works Property, located in Southern Illinois. Revenue for the three months ended June 30, 2014 and 2013 was $323,121 and $196,776, respectively.  The increase in revenues for the three months ended June 30, 2014 is due to both the number of barrels sold and the price per barrel.  For the three months ended June 30, 2014, we sold 3,383 barrels at an average price of $95.50 per barrel compared to 2,283 barrels at an average price $86.20 per barrel for the three months ended June 30, 2013.

Lease operating expenses

Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the three months ended June 30, 2014 and 2013 was $120,271 and $148,429, respectively. The decrease is due to the increase in proved reserves from 89,054 as December 31, 2012 to 222,413 as of December 31, 2013.  With the increase in proved reserves, the amortization expense of each barrel extracted decreases.
 
 
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General and administrative expenses

General and administrative expenses for the three months ended June 30, 2014 and 2013 were $7,017,399 and $876,568, 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 $77,000, $5,881,000, and $605,000 in professional fees, consulting fees and compensation, respectively for the three months ended June 30, 2014.  We recognized approximately $233,000, $252,000, and $137,000 in professional fees, consulting fees and compensation, respectively for the three months ended June 30, 2013.  Other expenses included are temporary professional staffing, rent, utilities, and other overhead expenses.  The significant increase in consulting expense is related to the $4,902,000 expense related to the amended GEM warrants.  During the three months ended June 30, 2014, we recorded compensation expense of $484,000 related to options that were issued to our CEO in June 2013 and vesting though June 2014.

Other expenses

For the three months ended June 30, 2014, other expenses were $5,904,405 consisting of interest and finance costs.   During the three months ended June 30, 2013, other expenses consisted primarily of interest and finance costs of $1,865,865.  The increase in interest and finance costs is primarily due to the amortization of the fair value of the beneficial conversion features and expensing of the fair value of shares issued in connection with the LowCal financing incurred during the three months ended June 30, 2014.  

Comparison of the six months ended June 30, 2014 to June 30, 2013.

 
   
For the Six Month Ended June 30,
             
   
2014
   
2013
             
         
% of
         
% of
   
Dollar
   
Percentage
 
   
Amount
   
Revenue
   
Amount
   
Revenue
   
change
   
Change
 
Revenue
  $ 426,827       132.1 %   $ 220,754       112.2 %     206,073       93 %
Lease operating expense
    185,529       57.4 %     206,400       104.9 %     (20,871 )     -10 %
General and administrative expenses
    18,061,358       5589.7 %     1,513,503       769.2 %     16,547,855       1093 %
Other expense
    11,066,235       3424.8 %     1,926,953       979.3 %     9,139,282       474 %
Net loss
  $ (28,886,295 )     -8939.8 %   $ (3,426,102 )     -1741.1 %     (25,460,193 )     743 %
 
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 June 30, 2014, our primary revenue has come from one source, the Works Property, located in Southern Illinois. Revenue for the six months ended June 30, 2014 and 2013 was $426,827 and $220,754, respectively.  The increase in revenues for the six months ended June 30, 2014 is due to both the number of barrels sold and the price per barrel.  For the six months ended June 30, 2014, we sold 4,509 barrels at an average price of $94.67 per barrel compared to 2,554 barrels at an average price $86.42 per barrel for the six months ended June 30, 2013.

Lease operating expenses

Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the six months ended June 30, 2014 and 2013 was $185,529 and $206,400, respectively. The decrease is due to the increase in proved reserves from 89,054 as December 31, 2012 to 222,413 as of December 31, 2013.  With the increase in proved reserves, the amortization expense of each barrel extracted decreases.

General and administrative expenses

General and administrative expenses for the six months ended June 30, 2014 and 2013 were $18,061,358 and $1,513,503, 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 $251,000, $15,999,000, and $1,201,000 in professional fees, consulting fees and compensation, respectively for the six months ended June 30, 2014.  We recognized approximately
 
 
23

 
 
$473,000, $258,000, and $241,000 in professional fees, consulting fees and compensation, respectively for the six months ended June 30, 2013.  Other expenses included are temporary professional staffing, rent, utilities, and other overhead expenses.  The significant increase in consulting expense is related to the $14,305,000 expense related to the amended GEM warrants and the $933,000 expense related to the DVBRI warrants.  During the six months ended June 30, 2014, we recorded compensation expense of $968,000 related to options that were issued to our CEO in June 2013 and vesting though June 2014.

Other expenses

Other expenses were $11,006,235 consisting of interest and finance costs of $10,456,615 and a loss on debt extinguishment of $609,620 for the six months ended June 30, 2014.  During the six months ended June 30, 2013, other expenses consisted primarily of interest and finance costs $1,926,953.  The increase in interest and finance costs is primarily due to the amortization of the fair value of the beneficial conversion features and expensing of the fair value of shares issued in connection with the LowCal financing incurred during the six months ended June 30, 2014.  We recorded a loss on debt extinguishment of $606,869 for the six months ended June 30, 2014 which is comprised of a loss on debt extinguishment of $639,620 related to the RT Holdings note payable offset by a $30,000 gain on debt extinguishment on the Babcock note payable and a $2,751 gain on debt extinguishment on the Clouding note payable.

Liquidity and Capital Resources

Since our inception, we have financed operations through consulting and service agreements with limited cash requirements, made up of stock compensation and various debt instruments. 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 the Works Property, we must raise a significant amount of working capital and capital to fund improvements to the Works Property. As of June 30, 2014, we had cash in the amount of $359,566, and we had total liabilities of $6,142,922, net of discounts of $1,570,458. 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.

During the six months ended June 30, 2014, we received $1,500,000 related to the LowCal convertible notes for a combined total of $5,000,000 as of June 30, 2014.

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, 2013 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.
 
 
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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 $737,385 and $1,077,151 for the six months ended June 30, 2014 and 2013, respectively. The net cash used in operating activities was primarily due to the costs incurred with the organizing activities more fully described above.

Investing Activities

Net cash used in investing activities was $0 and $642,500 for the six months ended June 30, 2014 and 2013, respectively, and was primarily due to the capital costs incurred at the Works Property.

Financing Activities

Net cash provided by financing activities was $1,075,000 and $2,421,882 for the six months ended June 30, 2014 and 2013, respectively. This cash generated from financing activities for the six months ended June 30, 2014 and 2013 was primarily from issuing our convertible notes of $1, 500,000 and $2,500,00, respectively offset by repayment of convertible notes of $250,000 and short term notes payable of $175,000 for the six months ended June 30, 2014 and repayment of short term notes payable of $125,000 for the six months ended June 30, 2013.

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 condensed 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 condensed 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 “Share Based Compensation;”
 
 
·
Proved oil reserves;

 
·
Future costs to develop the reserves; and
 
 
25

 
 
 
·
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.

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.

Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)."  ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about
 
 
26

 
 
discontinued operations.  Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations.  This new accounting guidance is effective for annual periods beginning after December 15, 2014.  The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  Early adoption is not permitted.  The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard beginning January 1, 2017.

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

Off-Balance Sheet Arrangements

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

 
Not Applicable

 
Disclosure Controls and Procedures
 
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 June 30, 2014.  Based upon that evaluation, the chief executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are ineffective.  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.
 
 
27

 

The material weakness relates to the following: 
 
·      We lack the proper accounting policies and procedures that resulted in significant unrecorded transactions, lack of supporting documentation, approval processes and record retention processes;
 
·      We lack the accounting staff to oversee the financial statement closing process in a timely and efficient manner;
 
·      We lack an independent audit committee and chairman; and
 
·      We lack the proper segregation of duties as one person can initiate, authorize and execute transactions.

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

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

Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
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 the filing date, 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.

The Company has been made aware of a complaint which has purportedly been filed against the Company and Nikolas Konstant by an entity alleging to be the landlord of the Babcock Lease. Although the Company has not been served with a copy of the complaint, the complaint purportedly asks for $149,625.00 in unpaid rent and late fees owed by the Company under the Babcock Lease. The Company denies any breach or the Babcock Lease or other wrongdoing on its part and will vigorously defend against such claims if it is ever served with the complaint.
 
 
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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, 2013, 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.


Consulting Agreement with Hahn Engineering

On June 23, 2013, we entered into a one year consulting agreement with Hahn Engineering Inc. (“Hahn”), an entity which previously has prepared reserve reports for our SEC reporting obligations. We retained Hahn to provide oil and gas consulting services.  Pursuant to the agreement, in exchange for the provision of oil and gas consulting services, Hahn received 1,000 restricted shares of our common stock upon full execution of the agreement. In addition, so long as the agreement has not been terminated, commencing on the one month anniversary of June 23, 2013 and continuing on each monthly anniversary of June 23, 2013 thereafter, Hahn will be issued 2,000 restricted shares of our common stock per month.

On April 23, 2014, May 23, 2014, June 23, 2014 and July 23, 2014, Hahn received 2,000 restricted shares of the Company’s common stock for each month, respectively, for an aggregate of 8,000 shares.

The above shares were or will be 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.

 
None.
 
 
Not Applicable.
 
 
None.
 
 
 EXHIBIT TABLE
 
The following is a complete list of exhibits filed as part of the Quarterly Report on Form 10-Q, some of which are incorporated herein by reference from the reports, registration statements and other filings of the issuer with the Securities and Exchange Commission, as referenced below:
 
Reference
Number
Item
 
Exhibit 10.1
Letter Agreement Dated July 1, 2014 between Eos Petro, Inc. and Vicki P. Rollins*
 
 
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Exhibit 10.2
Letter Agreement re: Business Partner and Advisory Agreement Dated June 26, 2014 between Eos Petro, Inc. and Baychester Petroleum*
 
Exhibit 10.3
First Amendment to Consulting Agreement Effective June 30, 2014 between Eos Petro, Inc. and DVIBRI, LLC*
 
Exhibit 10.4
Consulting Agreement Dated June 24, 2014 between Eos Petro, Inc. and Youssry Hassan*
 
Exhibit 10.5
Third Amendment to the LowCal Agreements dated August 14, 2014*

31.1
Section 302 Certification of Principal Executive Officer.*

31.2
Section 302 Certification of Principal Financial Officer.*
     
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.*

32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.*

* Furnished herewith.

 
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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.
 
 
EOS PETRO, INC.
a Nevada corporation
   
Date: August 18, 2014
By:
/s/ MARTIN B. ORING                            
   
Martin B. Oring
   
President and Chief Executive Officer
 
     
Date: August 18, 2014
By:
/s/ NIKOLAS KONSTANT                    
   
Nikolas Konstant
   
Chairman of the Board and Chief Financial Officer
 

 
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