---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

For the fiscal year ended December 31, 2015

 

Or

 

 

Commission File Number: 000-53246

 

Eos Petro, Inc.

(Exact name of registrant as specified in its charter)

 

 

Securities registered under Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

 

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 ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ☒

 

The aggregate market value of the registrant's common stock held by non-affiliates, based on the closing price of the registrant's common stock on the OTC Bulletin Board as of the last business day of the registrant's most recently completed second fiscal quarter was $51,212,102.

 

The number of shares of the registrant's common stock, $0.0001 par value per share, outstanding as of March 30, 2016 was 48,217,882.

 

TABLE OF CONTENTS

PART I	1
Item 1. Business	1
Item 1A. Risk Factors	8
Item 1B. Unresolved Staff Comments	23
Item 2. Properties.	23
Item 3. Legal Proceedings.	23
Item 4. Mine Safety Disclosures	23
PART II	24
Item 5. Market for Registrant's Common Equity, Related Stockholder matters and Issuer Purchases of Equity Securities	24
Item 6. Selected Financial Data.	25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.	26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk	36
Item 8. Financial Statements and Supplementary Data	36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	36
Item 9A. Controls and Procedures	36
Item 9B. Other Information	38
PART III	39
Item 10. Directors, Executive Officers and Corporate Governance	39
Item 11. Executive Compensation	40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	40
Item 13. Certain Relationships and Related Transactions, and Director Independence	40
Item 14. Principal Accounting Fees and Services	40
PART IV	41
Item 15. Exhibits, Financial Statement Schedules	41
Signatures	48

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

This annual report on Form 10-K (this "Report"), the other reports, statements, and information that we have previously filed or that we may subsequently file with the SEC, and public announcements that we have previously made or may subsequently make, contain projections, expectations, beliefs, plans, objectives, assumptions, descriptions of future events or performances and other similar statements that constitute "forward looking statements" that involve risks and uncertainties, many of which are beyond our control. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "will continue," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook," and similar expressions. All statements, other than statements of historical facts, included in this Report regarding our expectations, objectives, assumptions, strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and objectives of management are forward-looking statements. All forward-looking statements speak only as December 31, 2015. Unless the context is otherwise, the forward-looking statements included or incorporated by reference in this Report and those reports, statements, information and announcements address activities, events or developments that Eos Petro, Inc. ("Company"), (together with its two wholly-owned subsidiaries, Eos Global Petro, Inc., a Delaware corporation ("Eos"), and Eos Merger Sub, Inc., a Delaware corporation ("Eos Delaware"); and Eos' own two subsidiaries, Plethora Energy, Inc., a Delaware corporation ("Plethora Energy"), and EOS Atlantic Oil & Gas Ltd., a Ghanaian limited liability company ("EAOG"); and Plethora Energy's subsidiary, Plethora Bay Oil & Gas Ltd., a Ghanaian corporation ("PBOG"), herein after referred to as "we," "us," "our," or "our Company" unless the context otherwise requires) expects or anticipates, will or may occur in the future.

 

Forward-looking statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to this cautionary statement and the factors discussed throughout this Report. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this Report are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government regulations, economic conditions and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions and other factors discussed elsewhere in this Report.

 

The risk factors referred to in this Report could materially and adversely affect our business, financial conditions and results of operations and cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. We do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The risks and uncertainties described below are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity and financial condition could be materially affected in an adverse manner. Under such circumstances, you may lose all or part of your investment.

PART I

Item 1. 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 consisted of products designed to protect users against the potentially harmful and damaging effects of electromagnetic radiation emitted from electrical devices. That segment of our business was discontinued in 2013. We have abandoned the assets after settling Safe Cell Tab related liabilities.

 

 

On October 12, 2012, pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), entered into by and between the Company, Eos, and Eos Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company ("Company Merger Sub"), Company Merger Sub merged into Eos, with Eos being the surviving entity (the "Merger"). As a result of the Merger, Eos became a wholly-owned subsidiary of the Company. Upon the closing of the Merger, each issued and outstanding share of common stock of Eos was automatically converted into the right to receive one share of our Series B convertible preferred stock ("Series B Preferred Stock"), effectively resulting in the former stockholders of Eos owning approximately 93% of the then outstanding shares of our common stock (including shares of Series B Preferred Stock convertible into shares of our common stock) and the holders of our previously outstanding debt and outstanding shares of our common stock owned the balance.

 

 

After the Merger, Plethora Enterprises, LLC ("Plethora Enterprises"), a company wholly-owned by our CFO and Chairman of the Board, Nikolas Konstant, acquired control of the Company, holding 32,500,100 shares of our Series B Preferred Stock representing approximately 73% of our outstanding voting securities as of December 31, 2012.

 

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 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 into 45,275,044 shares of common stock of the Company. The name change and Stock Split became effective on May 21, 2013.

 

Hereinafter, all references throughout this Report to securities of the Company will be referenced as post-split common shares, unless the context specifically otherwise requires, so that references to shares or common stock will be to post-split common shares instead of shares of Series B Preferred Stock.

 

Our Company was organized in British Columbia during 1996. Eos was incorporated in Delaware on May 2, 2011. On June 6, 2011, Eos acquired a 100% working interest and 80% net revenue interest in five oil and gas leases in an approximately 510 acre tract of land located in Albion in Edwards County, Illinois (the "Works Property"), which have historically produced oil since 1940.

 

The Company has two wholly-owned subsidiaries, Eos and Eos Delaware (which was formed for a potential merger with Dune Energy, Inc., discussed further below). Eos itself also has two subsidiaries: Plethora Energy, a wholly-owned subsidiary of Eos, and EAOG, which is also 10% owned by one of our Ghanaian-based third party consultants. Plethora Energy also owns 90% of PBOG, which is also 10% owned by the same Ghanaian-based consultant. Eos, Eos Delaware, PBOG, Plethora Energy and EAOG are collectively referred to as the Company's "Subsidiaries."

 

 

We are in the business of acquiring, exploring and developing oil and gas-related assets. Our strategy involves exploiting our existing asset base and acquiring new hydrocarbon reserves, resources and exploration acreage, where opportunities exist to enhance value, while assembling professional teams to use the latest technologies to explore for oil and gas. Commercial discoveries will be appraised and then, where deemed economic, and assuming the availability of the necessary financing, progressed through to the production stage. We anticipate that the cash flow generated from production will be reinvested in exploration and further development of oil and gas properties. In order to execute this strategy, after acquiring our first oil producing domestic property, the Works Property, we have applied to obtain rights to an oil concession in Africa. We are also evaluating other domestic and foreign properties for potential acquisitions.

 

We have an agreement with a consultant to help us obtain rights in Africa. Eos' wholly-owned subsidiary, Plethora Energy, is presently focusing on obtaining rights to one oil concession located off the coast of Ghana. Laws in Ghana require that any application for a Ghanaian oil concession come from a Ghanaian company, so we also formed EAOG to pursue other concessions in Ghana. We have also formed PBOG. No assurance can be given that any concession application will be approved. If a concession is approved, pursuant to a letter agreement dated September 5, 2011, DCOR, a company engaged in the development, exploration and production of oil and natural gas, could elect to receive a 10% ownership interest in the concession and will serve as operator. If DCOR elects not to acquire the 10% interest, then the agreement shall terminate and be of no further force and effect.

 

  

Disclosure of Reserves

 

 

The following table provides evaluation information on all 700 acres of the Works Property as of December 31, 2015 from the February 17, 2016 reserve evaluation from Hahn Engineering, Inc. ("Hahn Engineering"):

 

 

(a) In general, the proved developed producing reserves were estimated by the performance method. The reserves estimated by the performance method utilized extrapolations of various historical oil sales data in those cases where such data were definitive. The proved developed non-producing reserves were based on data taken prior to 2008, when the Works Property wells were shut-in.

 

(b) The proved undeveloped undrilled reserves were based on recoveries from similar zone production from the Works Property with a reasonable certainty that they will be recovered.

 

(c) Initial production rates were based on current producing rates for those wells now in production. The proved reserves conform to the definition as set forth in the SEC regulation Part 210.4-10(a).

 

(d) The reserves included in this Report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Moreover, estimates of reserves may increase or decrease as a result of future operations.

 

(e) Liquid hydrocarbons are expressed in standard 42 gallon barrels.

 

We believe that the assumptions, data, methods and procedures used to generate these reserve evaluations were appropriate for the intended purposes of the evaluations.

 

Controls Over Reserve Estimates

 

The preparation of the reserve evaluations were internally overseen and reviewed by Mr. John Hogg, one of the Company's directors. Mr. Hogg has over three decades of oil exploration and operations expertise, both in government negotiations and direct domestic negotiations, as well as in both onshore and offshore hydrocarbon projects. Mr. Hogg holds a B.Sc. in Geology from McMaster University and is registered as a Professional Geologist in Canada and a Qualified Reserves Evaluator, under Canadian National Instrument Standards, responsible for reserves reporting to exchanges in Canada. Mr. Hogg's qualifications are more fully discussed below under the section entitled "Directors, Executive Officers and Corporate Governance."

 

Externally, our controls over the reserve evaluation disclosed in this Report included retaining Hahn Engineering as an independent petroleum engineering firm to generate the reserve evaluation. Within Hahn Engineering, the technical person primarily responsible for preparing the estimates set forth in the reserve report incorporated herein was Mr. Joseph Hahn. Mr. Hahn performs consulting petroleum engineering services under the State of Missouri Registered Professional Engineer No. E20517. Mr. Hahn has been working as an oil and gas engineer since the 1970s. Mr. Hahn has substantial experience in the Illinois Basin.

 

Hahn Engineering does not have any interest in the Works Property and neither the employment to complete the reserve report nor the compensation was contingent on estimates of reserves and future income for the Works Property. Eos provided information about some of our oil and gas properties to Hahn Engineering, and Hahn Engineering prepared their own estimates of the reserves attributable to those properties.

 

All of the information regarding the Works Property reserves in this report is derived from Hahn Engineering's February 17, 2016 reserve report, which is filed as Exhibit 99.1 to this Report.

 

 

Oil and Gas Production, Production Prices and Production Costs

 

For the fiscal year ended December 31, 2013, the Works Property produced approximately 6,742 net barrels of oil, for which the average sales price per barrel produced was $88. For the fiscal year ended December 31, 2014, the Works Property produced approximately 8,779 net barrels of oil, for which the average sales price per barrel produced was $87. For the fiscal year ended December 31, 2015, the Works Property produced approximately 4,847 net barrels of oil, for which the average sales price per barrel produced was $43.

 

For the fiscal year ended December 31, 2013, we estimate an average production cost per unit of oil of $62, our operating expenses for the fiscal year ended December 31, 2013 were $354,046 and our total production costs were $401,642.

 

For the fiscal year ended December 31, 2014, we estimate an average production cost per unit of oil of $49, our operating expenses for the fiscal year ended December 31, 2014 were $353,050 and our total production costs were $427,076.

For the fiscal year ended December 31, 2015, we estimate an average production cost per unit of oil of $32, our operating expenses for the fiscal year ended December 31, 2015 were $87,830 and our total production costs were $148,093.

 

Oil and Gas Properties, Wells, Operations and Acreage

 

As of December 31, 2013, the Works Property had 6 productive oil wells, and had 8 productive wells in 2014 and 2015 over its approximately 700 acres. Of those 700 acres, there were 496 net and gross developed acres and 200 net and gross undeveloped acres as of December 31, 2015, 2014 and 2013.

 

Our oil and gas properties are subject to royalties and other customary outstanding interests. Our properties are also subject to an operating agreement, current taxes and insurance payments. Our properties have also been subject to certain liens, mortgages and other security interests. We do not believe that any of these burdens will materially interfere with the use of our properties.

 

Present Activities; Drilling and Other Exploratory and Development Activities

 

During 2013, we drilled three new wells and previously anticipated drilling three additional wells during 2015, but did not do so due to the declining price of oil.

 

Our oil and gas properties are subject to royalties and other customary outstanding interests. Our properties are also subject to an operating agreement, current taxes and insurance payments. Our properties have also been subject to certain liens, mortgages and other security interests. We do not believe that any of these burdens will materially interfere with the use of our properties.

 

On July 10, 2014 we entered into an operator agreement with James E. Blumthal ("Blumthal") to perform the services in connection with the production and sale of crude oil generated at the Works Property. We sell our crude oil and condensate obtained from the Works Property to Countrymark Refining and Logistics, LLC ("Countrymark"). We sell to Countrymark at prevailing daily market prices, which normally incorporate regional differentials that include but are not limited to transportation costs and adjustments for product quality.

 

Additional information regarding our profits and total assets can be found in the financial statements under Item 8 of this Report.

  

 

Following the Merger, the Company's principal focus shifted to the oil and gas business. The Safe Cell Tab segment of our business was discontinued in 2013, and we have abandoned the assets after settling Safe Cell Tab related liabilities. Thus, this Report will not disclose separate information for the Safe Cell Tab segment.

 

 

Our business is not significantly impacted by seasonality.

 

 

 

We do not own any patents, patent applications, service marks or trademarks.

 

 

Oil and Gas Competition

 

The oil and gas industry is competitive. We compete with numerous large international oil companies and smaller oil companies that target opportunities in the market similar to ours. Many of these companies have far greater economic, political and material resources at their disposal than we do. Members of our board of directors have prior experience in oil field development and production, operations, international business development, finance and experience in management and executive positions. Nevertheless, the markets in which we operate and plan to operate are highly competitive and we may not be able to compete successfully against our current and future competitors.

 

Higher commodity prices generally increase the demand for drilling rigs, supplies, services, equipment and crews, and can lead to shortages of, and increasing costs for, drilling equipment, services and personnel. In recent years, oil and natural gas companies have experienced higher drilling and operating costs. Shortages of, or increasing costs for, experienced drilling crews and equipment and services could restrict our ability to drill wells and conduct our operations. We expect we will depend upon independent drilling contractors to furnish rigs, equipment and tools to drill wells. Higher prices for oil and gas may result in competition among operators for drilling equipment, tubular goods and drilling crews which may affect or ability to expeditiously explore, drill, complete, recomplete and work-over wells.

 

Competition is also strong for attractive oil and natural gas producing assets, undeveloped license areas and drilling rights, and we cannot assure holders of our stock that we will be able to successfully compete when attempting to make further strategic acquisitions.

 

The market for oil and gas is dependent upon a number of factors beyond our control, which at times cannot be accurately predicted. These factors include the proximity of wells to, and the capacity of, natural gas pipelines, the extent of competitive domestic production and imports of oil and gas, the availability of other sources of energy, fluctuations in seasonal supply and demand, and governmental regulation. In addition, there is always the possibility that new legislation may be enacted, which would impose price controls or additional excise taxes upon crude oil.

 

The market price for crude oil is significantly affected by policies adopted by the member nations of the Organization of Petroleum Exporting Countries ("OPEC"). Members of OPEC establish prices and production quotas among themselves for petroleum products from time to time with the intent of controlling the current global supply and consequently price levels. We are unable to predict the effect, if any, that OPEC or other countries will have on the amount of, or the prices received for, crude oil.

 

It is our policy to conduct all operations in a manner which protects people and property and which complies with all applicable laws and regulations. We recognize that prevention of accidents and ill health is essential to the efficient operation of our businesses, and both considerations are at least equal in prominence to operational and commercial considerations. Our principal health and safety objective is to provide a safe working environment for employees, contract personnel and members of the general public who may be put at risk by the activities of our companies.

 

Worldwide Regulations Generally

 

Our operations and our ability to finance and fund our growth strategy are affected by political developments and laws and regulations in the areas in which we operate. In particular, oil and natural gas production operations and economics are affected by:

 

In any country in which we may do business, the oil and natural gas industry legislation and agency regulation are periodically changed, sometimes retroactively, for a variety of political, economic, environmental and other reasons. Numerous governmental departments and agencies issue rules and regulations binding on the oil and natural gas industry, some of which carry substantial penalties for the failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and our potential for economic loss.

Risks Attendant to Foreign Operations

 

As discussed elsewhere herein, in 2016, we anticipate that a portion of our operations will be attributable to operations in foreign countries. International operations are subject to foreign economic and political uncertainties and risks as disclosed more freely in the Report. Unexpected and adverse changes in the foreign countries in which we may operate in could result in economic disruptions, increased costs and potential losses. Our business is subject to fluctuations in demand and to changing domestic and international economic and political conditions which are beyond our control.

 

Environmental Regulations

 

We may be subject to various stringent and complex international, foreign, federal, state and local environmental, health and safety laws and regulations governing matters including the emission and discharge of pollutants into the ground, air or water; the generation, storage, handling, use and transportation of regulated materials; and the health and safety of our employees. These laws and regulations may, among other things:

These laws and regulations may also restrict the rate of oil and natural gas production below the rate that would otherwise be possible. Compliance with these laws can be costly; the regulatory burden on the oil and gas industry increases the cost of doing business in the industry and consequently affects profitability. We cannot assure you that we have been or will be at all times in compliance with such laws, or that environmental laws and regulations will not change or become more stringent in the future in a manner that could have a material adverse effect on our financial condition and results of operations.

 

 

Moreover, public interest in the protection of the environment continues to increase. Offshore drilling in some areas has been opposed by environmental groups and, in other areas, has been restricted. In connection with our strategy of expansion into Africa, our operations could be adversely affected to the extent laws are enacted or other governmental action is taken that prohibits or restricts offshore drilling or imposes environmental requirements that result in increased costs to the oil and gas industry in general, such as more stringent or costly waste handling, disposal, cleanup requirements or financial responsibility and assurance requirements.

 

International Climate Change Efforts

 

Oil and gas operations are subject to various federal, state, local and foreign laws and government regulations that may change from time to time. Matters subject to regulation include discharge permits for drilling operations, well testing, plug and abandonment requirements and bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. Other federal, state, local and foreign laws and regulations relating primarily to the protection of human health and the environment apply to the development, production, handling, storage, transportation and disposal of oil and gas, by-products thereof and other substances and materials produced or used in connection with oil and gas operations, including drilling fluids and wastewater. In addition, we may incur costs arising out of property damage, including environmental damage caused by previous owners or operators of property we purchase or lease or relating to third party sites, or injuries to employees and other persons. As a result, we may incur substantial liabilities to third parties or governmental entities and may be required to incur substantial remediation costs. We also are subject to changing and extensive tax laws, the effects of which cannot be predicted. Compliance with existing, new or modified laws and regulations could result in substantial costs, delay our operations or otherwise have a material adverse effect on our business, financial position and results of operations.

 

Moreover, changes in environmental laws and regulations occur frequently and such laws and regulations tend to become more stringent over time. Increased scrutiny of our industry may also occur as a result of the Environmental Protection Agency's ("EPA")  2011-2016 National Enforcement Initiative, "Assuring Energy Extraction Activities Comply with Environmental Laws," through which EPA will address incidences of noncompliance from natural gas extraction and production activities that may cause or contribute to significant harm to public health or the environment. Stricter laws, regulations or enforcement policies could significantly increase our compliance costs and negatively impact our production and operations, which could have a material adverse effect on our results of operations and cash flows.

 

There is increasing attention in the United States and worldwide being paid to the issue of climate change and the contributing effect of GHG emissions. The modification of existing laws or regulations or the adoption of new laws or regulations curtailing oil and gas exploration in the areas in which we operate could materially and adversely affect our operations by limiting drilling opportunities or imposing materially increased costs.

 

Hydraulic fracturing is an important and commonly used process in the completion of oil and gas wells, particularly in unconventional resource plays. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to stimulate oil and gas production. The U.S. Congress has considered legislation to subject hydraulic fracturing operations to federal regulation and to require the disclosure of chemicals used by us and others in the oil and gas industry in the hydraulic fracturing process. The EPA has asserted federal regulatory authority over hydraulic fracturing involving diesel under the federal Safe Drinking Water Act and has released draft permitting guidance for hydraulic fracturing operations that use diesel fuel in fracturing fluids in those states where EPA is the permitting authority. A number of federal agencies are also analyzing, or have been requested to review, a variety of environmental issues associated with hydraulic fracturing. For example, the EPA is conducting a comprehensive research study to investigate the potential adverse environmental impacts of hydraulic fracturing, including on water quality and public health. The EPA released a progress report outlining work currently underway on December 21, 2012. A draft report that compiles the results of various research projects was released in 2015 for peer review and comment. These ongoing or proposed studies, depending on their course and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the Safe Drinking Water Act, the Toxic Substances Control Act, or other regulatory mechanisms. President Obama has created the Interagency Working Group on Unconventional Natural Gas and Oil by Executive Order, which is charged with coordinating and aligning federal agency research and scientific studies on unconventional natural gas and oil resources. In addition, the EPA announced its intention to propose regulations in 2015 under the federal Clean Water Act to regulate waste water discharges from hydraulic fracturing and other natural gas production.

 

Several states have proposed or adopted legislative or regulatory restrictions on hydraulic fracturing through additional permit requirements, public disclosure of fracturing fluid contents, water sampling requirements, and operational restrictions. Further, some cities and municipalities have adopted or are considering adopting bans on drilling. At the international level, the U.K. and EU Parliaments have each in the past discussed Implementing a drilling moratorium.

 

From time to time legislation is introduced in the U.S. Congress that, if enacted into law, would make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production companies. These or any other similar changes in U.S. federal income tax laws could defer or eliminate certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could negatively affect our financial position and results of operations.

 

 

 

As of December 31, 2015, the Company had three employees, one full-time employee and two part-time employees who are also executive officers. We also work with a variety of consultants.

 

 

We are subject to the informational requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, we file annual, quarterly and other reports and information with the SEC. You may read and copy these reports and other information we file at the SEC's public reference room at 100 F Street, NE., Washington, D.C. 20549 on official business days from 10:00 am until 3:00 pm. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Our filings are also available to the public from commercial document retrieval services and the Internet worldwide website maintained by the Securities and Exchange Commission at www.sec.gov. You may also request copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC by requesting copies of such reports in writing. Such written requests should be directed to our corporate secretary and sent to our executive offices at the address set forth below. Such reports and material are also available free of charge through our website as soon as reasonably practicable after we electronically file such reports and material with the SEC, although please note that our website is not incorporated by reference into this report and is included as an inactive textual reference only. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

Our principle executive office is located at 1999 Avenue of the Stars, Suite 2520, Los Angeles, CA 90067. Our website, which is still under construction and is not current, is http://www.eos-petro.com, our phone number is (310) 552-1555 and our email address is: nkonstant@eos-petro.com.

Item 1A. Risk Factors

INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. OUR FINANCIAL CONDITION IS UNSOUND. YOU SHOULD NOT INVEST IN OUR COMMON STOCK UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. THE RISKS DESCRIBED BELOW COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND THE TRADING PRICE OF OUR COMMON STOCK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION CONTAINED IN THIS REPORT BEFORE MAKING AN INVESTMENT DECISION. YOU ALSO SHOULD REFER TO THE OTHER INFORMATION SET FORTH IN THIS REPORT, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE, AND THERE MAY BE ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL TO OUR BUSINESS.

 

THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. PERSONS WHO MAY OWN OR INTEND TO PURCHASE SHARES OF COMMON STOCK IN ANY MARKET WHERE THE COMMON STOCK MAY TRADE SHOULD CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH OTHER INFORMATION CONTAINED ELSEWHERE IN OUR REPORTS, PROXY STATEMENTS AND OTHER AVAILABLE PUBLIC INFORMATION, AS FILED WITH THE COMMISSION, PRIOR TO PURCHASING SHARES OF COMMON STOCK. IF AN ACTIVE MARKET IS EVER ESTABLISHED FOR OUR COMMON STOCK, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

 

 

All of the value of our production and reserves is concentrated in a series of leases in Illinois, and any production problems or reductions in reserve estimates related to this property would adversely impact our business.

 

The Works Property has five currently producing wells, constituting our total production for the year ended December 31, 2015. In addition, at December 31, 2015, our total net proved reserves were attributable to the fields on the Works Property. If mechanical problems, storms or other events curtailed a substantial portion of this production, or if the actual reserves associated with this producing property are less than our estimated reserves, our results of operations and financial condition could be materially adversely affected. In addition, any expansion of operations and corresponding revenue from the Works Property will require a significant and capital expense that the Company currently does not have.

 

 

Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operation.

 

We have a limited operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development. We cannot assure you that we will be successful in addressing the risks we may encounter, and our failure to do so could have a material adverse effect on our business, prospects, financial condition and results of operations. Our future operating results will depend on many factors, including:

To achieve profitable operations in the future, we must, alone or with others, successfully manage the factors stated above, as well as continue to develop ways to enhance our production efforts. Despite our best efforts, we may not be successful in our efforts. There is a possibility that some of our wells may never produce oil or natural gas.

 

If we fail to make certain required payments and perform other contractual obligations to our secured lenders, the debt obligations to such lenders may be in default and accelerate, which would have a material adverse effect on us and our continued operations.

 

We have entered into certain loan agreements with our secured lenders with respect to outstanding obligations owing to these lenders. As of December 31, 2015, there was due and owing to these lenders the principal sum of $8,850,000. We can give no assurance that we will be able to fulfill the obligations created under such loan agreements on a timely basis or at all. If we do not comply with any or all of the conditions of the loan agreements, our secured lenders may declare us in default of such agreements. If any of our lenders declares their respective loan agreement in default, we may be forced to discontinue operations, and stockholders may lose their entire investment.

 

We may be unable to obtain additional capital required to implement our business plan, which could restrict our ability to grow.

 

Future acquisitions and future drilling/development activity will require additional capital that exceeds our operating cash flow. In addition, our administrative costs (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) will require cash resources.

 

We may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the required capital by other means. If we do not succeed in raising additional capital, our resources may be insufficient to fund our planned operations in 2016 or thereafter.

 

Any additional capital raised through the sale of equity will dilute the ownership percentage of our stockholders. Raising any such capital could also result in a decrease in the nominal fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity employee incentive plans, all of which may have a dilutive effect to existing investors.

 

Our ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets (both generally and in the oil and gas industry in particular), our limited operating history, the location of our oil and natural gas properties, prices of oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us) and the departure of key employees. Further, if oil or natural gas prices decline, our revenues will likely decrease and such decreased revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities, together with revenues from our operations, is not sufficient to satisfy our capital needs (even if we reduce our operations), we may be required to cease operations, divest our assets at unattractive prices or obtain financing on unattractive terms.

 

 

For these reasons, the report of our auditor accompanying our financial statements filed herewith includes a statement that these factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will be dependent on our raising of additional capital and the success of our business plan.

 

Our auditors have expressed substantial doubt about our ability to continue as a "going concern." Accordingly, there is significant doubt about our ability to continue as a going concern.

 

Our business revenues in 2015 did not exceed our operating costs, and we may never become profitable. A significant amount of capital will be necessary to advance the development of our business to the point at which it will become commercially viable. If we continue incurring losses and fail to achieve profitability, we may have to cease our operations.

 

We estimate that within the next 12 months, we will need substantial cash and liquidity for operations and to fund other commitments, and we do not have sufficient cash on hand or liquidity to meet this requirement. Although we are seeking additional sources of debt or equity financings, there can be no assurance that we will be able to obtain any additional financings. If we are unable to obtain new financings, we may not be able to earn profits and may not be able to continue our operations.

 

There is limited history upon which to base any assumption as to the likelihood that we will prove successful, and we may not be able to continue to generate sufficient operating revenues or ever achieve profitable operations. If we are unsuccessful in addressing these risks, our business will most likely fail.

 

Our financial condition raises substantial doubt that we will be able to continue as a "going concern," and our independent auditors included a statement regarding this uncertainty in their report on our financial statements as of December 31, 2015. If we cannot continue as a "going concern," you may lose your entire investment in us.

 

Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct its operations.

 

Our ability to successfully acquire additional properties, to increase our oil and natural gas reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers will depend on developing and maintaining close working relationships with our strategic partners and industry participants and our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment. These realities are also subject to change and our inability to maintain close working relationships with our strategic partners and other industry participants or continue to acquire suitable properties may impair our ability to execute our business plan.

 

To continue to develop our business, we will endeavor to use the business relationships of members of our management to enter into strategic relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other oil and gas companies, including those that supply equipment and other resources which we may use in our business. We may not be able to establish these strategic relationships, or if established, we may not be able to adequately maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to in order to fulfill our obligations to these partners or maintain relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.

 

The possibility of a global financial crisis may significantly impact our business and financial condition for the foreseeable future.

 

The credit crisis and related turmoil in the global financial system may adversely impact our business and financial condition, and we may face challenges if conditions in the financial markets remain challenging. Our ability to access the capital markets may be restricted at a time when we would prefer or be required to raise financing. Such constraints could have a material negative impact on our flexibility to react to changing economic and business conditions. The economic situation could also have a material negative impact on the contractors upon whom we are dependent for drilling our wells, causing them to fail to meet their obligations to us. Additionally, market conditions could have a material negative impact on any crude oil hedging arrangements we may employ in the future if our counterparties are unable to perform their obligations or seek bankruptcy protection.

 

 

Our future is entirely dependent on the successful acquisition and development of producing and reserve rich properties with complex structures and the need to raise significant capital.

 

We are in the early stages of the acquisition of our portfolio of leaseholds and other natural resource holdings. We will continue to supplement our current portfolio with additional sites and leaseholds. Our ability to meet our growth and operational objectives will depend on the success of our acquisitions, and there is no assurance that the integration of future assets and leaseholds will be successful.

 

Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-downs of connected wells resulting from extreme weather conditions, problems in storage and distribution and adverse geological and mechanical conditions. While we will endeavor to effectively manage these conditions, we cannot assure you we will do so optimally, and we will not be able to eliminate them completely in any case. Therefore, these conditions could diminish our revenue and cash flow levels and could result in the impairment of our oil and natural gas properties.

  

We may not be able to develop oil and gas reserves on an economically viable basis and our reserves and production may decline as a result.

 

If we succeed in discovering oil and/or natural gas reserves, we cannot assure you that these reserves will be capable of the production levels we project or that such levels will be in sufficient quantities to be commercially viable. On a long-term basis, our viability depends on our ability to find or acquire, develop and commercially produce additional oil and natural gas reserves. Without the addition of reserves through acquisition, exploration or development activities, our reserves and production will decline over time as reserves are produced. Our future performance will depend not only on our ability to develop then-existing properties, but also on our ability to identify and acquire additional suitable producing properties or prospects, to find markets for the oil and natural gas we develop and to effectively distribute our production into the markets.

 

Moreover, you should anticipate that operating and capital expenditures will increase significantly in future years primarily due to:

To the extent these activities yield increased revenues, the revenues may not offset the increased operating and capital expenditures we incur.

 

Our results of operations and financial condition could be adversely affected by changes in currency exchange rates.

 

Our results of operations and financial condition are affected by currency exchange rates. While oil sales are denominated in U.S. dollars, if we are successful in acquiring natural resource rights in foreign counties, a portion of our operating costs may be denominated in the local currency. A weakening U.S. dollar will have the effect of increasing operating costs while a strengthening U.S. dollar will have the effect of reducing operating costs. Any local currencies may be tied to the Euro. The exchange rate between the Euro and the U.S. dollar has fluctuated widely in response to international political conditions, general economic conditions, the European sovereign debt crisis and other factors beyond our control.

 

 

A decrease in oil and gas prices may adversely affect our results of operations and financial condition.

 

Our revenues, cash flow, profitability and future rate of growth are substantially dependent upon prevailing prices for oil and gas. Our ability to borrow funds and to obtain additional capital on attractive terms is also substantially dependent on oil and gas prices. Historically, world-wide oil and gas prices and markets have been volatile, and may continue to be volatile in the future.

 

Prices for oil and gas are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include international political conditions, including recent uprisings and political unrest in the Middle East and Africa, the European sovereign debt crisis, the domestic and foreign supply of oil and gas, the level of consumer demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels, the health of international economic and credit markets, and general economic conditions. In addition, various factors, including the effect of federal, state and foreign regulation of production and transportation, general economic conditions, changes in supply due to drilling by other producers and changes in demand may adversely affect our ability to market our oil and gas production. Any significant decline in the price of oil or gas would adversely affect our revenues, operating income, cash flows and borrowing capacity and may require a reduction in the carrying value of our oil and gas properties and our planned level of capital expenditures.

 

If there is a sustained economic downturn or recession in the United States or globally, oil and gas prices may fall and may become and remain depressed for a long period of time, which may adversely affect our results of operations.

 

In recent years, there has been an economic downturn or a recession in the United States and globally. The reduced economic activity associated with the economic downturn or recession may reduce the demand for, and the prices we receive for, our oil and gas production. A sustained reduction in the prices we receive for our oil and gas production will have a material adverse effect on our results of operations.

 

Unless we are able to replace reserves which we have produced, our cash flows and production will decrease over time.

 

Our future success depends upon our ability to find, develop or acquire additional oil and gas reserves that are economically recoverable. Except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, our estimated net proved reserves will generally decline as reserves are produced. There can be no assurance that our planned development and exploration projects and acquisition activities will result in significant additional reserves or that we will have continuing success drilling productive wells at economic finding costs. The drilling of oil and gas wells involves a high degree of risk, especially the risk of dry holes or of wells that are not sufficiently productive to provide an economic return on the capital expended to drill the wells. In addition, our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including title problems, weather conditions, political instability, availability of capital, economic/currency imbalances, compliance with governmental requirements, receipt of additional seismic data or the reprocessing of existing data, material changes in oil or gas prices, prolonged periods of historically low oil and gas prices, failure of wells drilled in similar formations or delays in the delivery of equipment and availability of drilling rigs. Our current domestic oil and gas producing properties are operated by third parties and, as a result, we have limited control over the nature and timing of exploration and development of such properties or the manner in which operations are conducted on such properties.

 

Substantial capital, which may not be available to us in the future, is required to replace and grow reserves.

 

We intend to make substantial capital expenditures for the acquisition, exploitation, development, exploration and production of oil and gas reserves. Historically, we have financed these expenditures primarily with debt. During 2016 we expect to continue to participate in the further exploration and development projects at the Works Property leases in Illinois. However, if lower oil and gas prices, operating difficulties or declines in reserves result in our revenues being less than expected or limit our ability to borrow funds we may have a limited ability, particularly in the current economic environment, to expend the capital necessary to undertake or complete future drilling programs. We cannot assure you that additional debt or equity financing or cash generated by operations will be available to meet these requirements. It is possible that we may raise capital for these purposes in the form of the sale of common stock or in convertible debt securities which could lead to significant dilution of our existing shareholders.

 

Our drilling activities require us to risk significant amounts of capital that may not be recovered.

 

Drilling activities are subject to many risks, including the risk that no commercially productive reservoirs will be encountered. There can be no assurance that new wells drilled by us will be productive or that we will recover all or any portion of our investment. Drilling for oil and gas may involve unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain and cost overruns are common. Our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, many of which are beyond our control, including title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment and services.

 

 

Weather, unexpected subsurface conditions and other unforeseen operating hazards may adversely impact our oil and gas activities.

 

The oil and gas business involves a variety of operating risks, including fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases, the occurrence of any of which could result in substantial losses to us due to injury and loss of life, severe damage to and destruction of property, natural resources and equipment, pollution and other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The impact that any of these risks may have upon us is increased due to the low number of producing properties we own.

 

Our Works Property operator maintains insurance against some, but not all, potential risks; however, there can be no assurance that such insurance will be adequate to cover any losses or exposure for liability. The occurrence of a significant unfavorable event not fully covered by insurance could have a material adverse effect on our financial condition, results of operations and cash flows. Furthermore, should we need to purchase additional insurance ourselves; we cannot predict whether insurance will continue to be available at a reasonable cost or at all.

 

Our reserve information represents estimates that may turn out to be incorrect if the assumptions upon which these estimates are based are inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present values of our reserves.

 

There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves, including many factors beyond our control. Reserve engineering is a subjective process of estimating the underground accumulations of oil and gas that cannot be measured in an exact manner. The estimates included in this Report are based on various assumptions required by the SEC, including unescalated prices and costs and capital expenditures subsequent to December 31, 2015, and, therefore, are inherently imprecise indications of future net revenues. Actual future production, revenues, taxes, operating expenses, development expenditures and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves incorporated by reference in this document. In addition, our reserves may be subject to downward or upward revision based upon production history, results of future development, availability of funds to acquire additional reserves, prevailing oil and gas prices and other factors. Moreover, the calculation of the estimated present value of the future net revenue using a 10% discount rate as required by the SEC is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with our reserves or the oil and gas industry in general. It is also possible that reserve engineers may make different estimates of reserves and future net revenues based on the same available data.

  

The estimated future net revenues attributable to our net proved reserves are prepared in accordance with current SEC guidelines, and are not intended to reflect the fair market value of our reserves. In accordance with the rules of the SEC, our reserve estimates are prepared using an average of beginning of month prices received for oil and gas for the preceding twelve months. Future reductions in prices below the average calculated would result in the estimated quantities and present values of our reserves being reduced.

 

A substantial portion of our proved reserves are or will be subject to service contracts, production sharing contracts and other arrangements. The quantity of oil and gas that we will ultimately receive under these arrangements will differ based on numerous factors, including the price of oil and gas, production rates, production costs, cost recovery provisions and local tax and royalty regimes. Changes in many of these factors do not affect estimates of U.S. reserves in the same way they affect estimates of proved reserves in foreign jurisdictions, or will have a different effect on reserves in foreign countries than in the United States. As a result, proved reserves in foreign jurisdictions may not be comparable to proved reserve estimates in the United States.

 

Part of our business plan is to acquire rights to foreign natural resources. Even though we have not yet achieved our goal of acquiring such assets, we anticipate that if we do we will have less control over our foreign investments than domestic investments, and turmoil in foreign countries may affect our foreign investments.

 

 

International assets and operations are subject to various political, economic and other uncertainties, including, among other things, the risks of war, expropriation, nationalization, renegotiation or nullification of existing contracts, taxation policies, foreign exchange restrictions, changing political conditions, international monetary fluctuations, currency controls and foreign governmental regulations that favor or require the awarding of drilling contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. In addition, if a dispute arises with foreign operations, we may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons, especially foreign oil ministries and national oil companies, to the jurisdiction of the United States.

 

Private ownership of oil and gas reserves under oil and gas leases in the United States differs distinctly from our ownership of foreign oil and gas properties. In the foreign countries in which we may do business, the state generally retains ownership of the minerals and consequently retains control of, and in many cases participates in, the exploration and production of hydrocarbon reserves. Accordingly, operations outside the United States may be materially affected by host governments through royalty payments, export taxes and regulations, surcharges, value added taxes, production bonuses and other charges.

 

Our proposed international operations expose us to legal, political and economic risks in different countries as well as currency exchange rate fluctuations that could harm our business and financial results. We could be adversely affected by our failure to comply with laws applicable to our foreign activities, such as the U.S. Foreign Corrupt Practices Act.

 

There are risks inherent in doing business internationally, including:

The FCPA and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our internal policies mandate compliance with all applicable anti-bribery laws. We require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. There is no assurance that our policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged FCPA violations is expensive and could consume significant time and attention of our senior management.

 

In spite of the lack of revenue as of the date of this Report, any of these factors could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Competitive industry conditions may negatively affect our ability to conduct operations.

 

We operate in the highly competitive areas of oil exploration, development and production. We compete with, and may be outbid by, competitors in our attempts to acquire exploration and production rights in oil and gas properties. These properties include exploration prospects as well as properties with proved reserves. There is also competition for contracting for drilling equipment and the hiring of experienced personnel. Factors that affect our ability to compete in the marketplace include:

 

Our competitors include major integrated oil companies and substantial independent energy companies, many of which possess greater financial, technological, personnel and other resources than we do. These companies may be able to pay more for oil and natural gas properties, evaluate, bid for and purchase a greater number of properties than our financial or human resources permit, and are better able than we are to continue drilling during periods of low oil and gas prices, to contract for drilling equipment and to secure trained personnel. Our competitors may also use superior technology which we may be unable to afford or which would require costly investment by us in order to compete.

 

We may be unable to integrate successfully the operations of any acquisitions with our operations and we may not realize all the anticipated benefits of any future acquisition.

 

Failure to successfully assimilate any acquisitions could adversely affect our financial condition and results of operations.

 

Acquisitions involve numerous risks, including:

Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. If we consummate any future acquisition, our capitalization and results of operation may change significantly, and you may not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in evaluating future acquisitions.

 

 

Properties that we buy may not produce as projected and we may be unable to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against such liabilities, which could result in material liabilities and adversely affect our financial condition.

 

One of our growth strategies is to capitalize on opportunistic acquisitions of oil and gas reserves. Any future acquisition will require an assessment of recoverable reserves, title, future oil and gas prices, operating costs, potential environmental hazards, potential tax and ERISA liabilities, and other liabilities and similar factors. Ordinarily, our review efforts are focused on the higher valued properties and are inherently incomplete because it generally is not feasible to review in depth every individual property involved in each acquisition. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Inspections may not always be performed on every well, and potential problems, such as ground water contamination and other environmental conditions and deficiencies in the mechanical integrity of equipment are not necessarily observable even when an inspection is undertaken. Any unidentified problems could result in material liabilities and costs that negatively impact our financial condition.

 

Additional potential risks related to acquisitions include, among other things:

If we consummate any future acquisitions, our capitalization and results of operations may change significantly.

 

We require subcontractors and suppliers to assist us in providing certain services, and we may be unable to retain the necessary consultants, subcontractors or obtain supplies to complete certain projects adversely affecting our business.

 

We use and intend to continue to use consultants and subcontractors to perform portions of our oil production and to manage workflow. We are currently dependent on Blumthal for the Works Property production. However, general market conditions may limit the availability of subcontractors to perform portions of our requirements causing delays and increases in our costs, which could have an adverse effect on our financial condition, results of operations and cash flows.

 

We also use and will continue to use suppliers to provide the materials and some equipment used for oil and gas projects. If a supplier fails to provide supplies and equipment at a price we estimated or fails to provide supplies and equipment that is not of acceptable quantity, we may be required to source the supplies or equipment at a higher price or may be required to delay performance of the project. The additional cost or project delays could negatively impact project profitability.

 

Failure of a consultant, subcontractor or supplier to comply with laws, rules or regulations could negatively affect our business.

 

Title to our oil and natural gas producing properties cannot be guaranteed and may be subject to prior recorded or unrecorded agreements, transfers, claims or other defects.

 

Although title reviews may be conducted prior to the purchase of oil and natural gas producing properties or the commencement of drilling wells, those reviews do not guarantee or certify that an unforeseen defect in the chain of title will not arise to defeat our claim. Unregistered agreements or transfers, or native land claims, may affect title. If title is disputed, we will need to defend our ownership through the courts, which would likely be an expensive and protracted process and have a negative effect on our operations and financial condition. In the event of an adverse judgment, we would lose or property rights. A defect in our title to any of our properties may have a material adverse effect on our business, financial condition, results of operations and prospects.

 

 

Compliance with environmental and other government regulations could be costly and could negatively impact production.

 

The laws and regulations of the United States regulate our current business. Our operations could result in liability for personal injuries, property damage, natural resource damages, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. Failure to comply with environmental laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties and the issuance of orders enjoining operations. In addition, we could be liable for environmental damages caused by, among others, previous property owners or operators. We could also be affected by more stringent laws and regulations adopted in the future, including any related to climate change and greenhouse gases and use of fracking fluids, resulting in increased operating costs. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could have a material adverse effect on our financial condition, results of operations and liquidity. Additionally, more stringent GHG regulation could impact demand for oil and gas.

 

These laws and governmental regulations, which cover matters including drilling operations, taxation and environmental protection, may be changed from time to time in response to economic or political conditions and could have a significant impact on our operating costs, as well as the oil and gas industry in general. While we believe that we are currently in compliance with environmental laws and regulations applicable to our operations, no assurances can be given that we will be able to continue to comply with such environmental laws and regulations without incurring substantial costs.

 

Significant physical effects of climatic change have the potential to damage our facilities, disrupt our production activities and cause us to incur significant costs in preparing for or responding to those effects.

 

In an interpretative guidance on climate change disclosures, the SEC has indicated that climate change could have an effect on the severity of weather (including hurricanes and floods), sea levels, the arability of farmland, and water availability and quality. If such effects were to occur, our exploration and production operations have the potential to be adversely affected. Potential adverse effects could include damages to our facilities from powerful winds or rising waters in low-lying areas, disruption of our production activities either because of climate-related damages to our facilities in our costs of operation potentially arising from such climatic effects, less efficient or non-routine operating practices necessitated by climate effects or increased costs for insurance coverage in the aftermath of such effects. Significant physical effects of climate change could also have an indirect effect on our financing and operations by disrupting the transportation or process-related services provided by midstream companies, service companies or suppliers with whom we have a business relationship. We may not be able to recover through insurance some or any of the damages, losses or costs that may result from potential physical effects of climate change. In addition, our hydraulic fracturing operations require large amounts of water. Should climate change or other drought conditions occur, our ability to obtain water in sufficient quality and quantity could be impacted and in turn, our ability to perform hydraulic fracturing operations could be restricted or made more costly.

 

From time to time we may hedge a portion of our production, which may result in our making cash payments or prevent us from receiving the full benefit of increases in prices for oil and gas.

 

We may reduce our exposure to the volatility of oil and gas prices by hedging a portion of our production. Conversely, hedging prevents us from receiving the full advantage of increases in oil or gas prices above the maximum fixed amount specified in the hedge agreement.  In a typical hedge transaction, we have the right to receive from the hedge counterparty the excess of the maximum fixed price specified in the hedge agreement over a floating price based on a market index, multiplied by the quantity hedged. If the floating price exceeds the maximum fixed price, we must pay the counterparty this difference multiplied by the quantity hedged even if we had insufficient production to cover the quantities specified in the hedge agreement. Accordingly, if we have less production than we have hedged when the floating price exceeds the fixed price, we will be liable to the counterparty for such difference.

 

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Reform Act, which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The legislation required the Commodities Futures Trading Commission, or the CFTC, and the SEC to promulgate rules and regulations implementing the new legislation, which they have done since late 2010. The CFTC has introduced dozens of proposed rules coming out of the Dodd-Frank Reform Act, and has promulgated numerous final rules based on those proposals. The effect of the proposed rules and any additional regulations on our business is not yet entirely clear, but it is increasingly clear that the costs of derivatives-based hedging for commodities will likely increase for all market participants. Of particular concern, the Dodd-Frank Reform Act does not explicitly exempt end users from the requirements to post margin in connection with hedging activities. While several senators have indicated that it was not the intent of the Act to require margin from end users, the exemption is not in the Act. While rules proposed by the CFTC and federal banking regulators appear to allow for non-cash collateral and certain exemptions from margin for end users, the rules are not final and uncertainty remains.

 

 

The full range of new Dodd-Frank requirements to be enacted, to the extent applicable to us or our derivatives counterparties, may result in increased costs and cash collateral requirements for the types of derivative instruments we use to mitigate and otherwise manage our financial and commercial risks related to fluctuations in oil and natural gas prices. In addition, final rules were promulgated by the CFTC imposing federally-mandated position limits covering a wide range of derivatives positions, including non-exchange traded bilateral swaps related to commodities including oil and natural gas. These position limit rules were vacated by a Federal court in September 2012, and the CFTC has appealed that decision and could re-promulgate the rules in a manner that addresses the defects identified by the court. If these position limits rules go into effect in the future, they are likely to increase regulatory monitoring and compliance costs for all market participants, even where a given trading entity is not in danger of breaching position limits.

 

Certain U.S. federal income tax preferences currently available with respect to oil and natural gas production may be eliminated as a result of future legislation.

 

In recent years, the Obama administration's budget proposals and other proposed legislation have included the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production. If enacted into law, these proposals would eliminate certain tax preferences applicable to taxpayers engaged in the exploration or production of natural resources. These changes include, but are not limited to (i) the repeal of the percentage depletion allowance for oil and gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for U.S. production activities and (iv) the increase in the amortization period from two years to seven years for geophysical costs paid or incurred in connection with the exploration for or development of, oil and gas within the United States. It is unclear whether any such changes will be enacted or how soon any such changes would become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could negatively affect our financial condition and results of operations.

 

We rely on our senior management team and the loss of a single member could adversely affect our operations.

 

We are highly dependent upon our executive officers. The unexpected loss of the services of any of these individuals could have a detrimental effect on us. We do not maintain key man life insurance on any of our executive officers.

 

We rely on a single purchaser of our production, which could have a material adverse effect on our results of operations.

 

We sell our crude oil and condensate obtained on the Works Property to Countrymark, and the price we receive for our crude oil and condensate is not covered by any agreement. We sell to Countrymark at prevailing daily, and traditionally volatile, market prices, which normally incorporate regional differentials that include but are not limited to transportation costs and adjustments for product quality. Countrymark is not required to acquire specific amounts of crude oil and condensate, and may cease purchases on relatively short notice. The loss of Countrymark as a purchaser could have a material adverse effect on our business, financial condition and results of operations.

  

Our financial results are based upon estimates and assumptions that may differ from actual results and such differences between the estimates and actual results may have an adverse effect on our financial condition, results of operations and cash flows.

 

In preparing our consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles, many estimates and assumptions are used by management in determining the reported revenues and expenses recognized during the periods presented, and disclosures of contingent assets and liabilities known to exist as of the date of the financial statements. These estimates and assumptions must be made because certain information that is used in the preparation of our financial statements cannot be calculated with a high degree of precision from data available, is dependent on future events, or is not capable of being readily calculated based on generally accepted methodologies. Often times, these estimates are particularly difficult to determine, and we must exercise significant judgment. Estimates may be used in our assessments of the allowance for doubtful accounts, useful lives of property and equipment, fair value assumptions in analyzing goodwill and long-lived asset impairments, self-insured claims liabilities, revenue recognition under percentage-of-completion accounting and provisions for income taxes. Actual results for estimates could differ materially from the estimates and assumptions that we use, which could have an adverse effect on our financial condition, results of operations and cash flows.

 

 

 

If we are unable to develop and maintain an effective system of internal controls, stockholders and prospective investors may lose confidence in the reliability of our financial reporting.

 

The Company has identified material weaknesses in our internal controls. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, prevent fraud due to inability to prevent or detect misappropriation of our assets. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm the trading price of our stock.

 

The Company has identified the following factors of the material weaknesses, as further discussed below in this Report:

The Company intends to remedy these material weaknesses by hiring additional employees, officers and perhaps directors and reallocating duties, including responsibilities for financial reporting, among our officers, directors and employees as soon as there are sufficient resources available. Our board intends to take greater responsibility and oversight of our day-to-day operations. However, until such time, these material weaknesses will continue to exist.

 

 

Future financings could adversely affect common stock ownership interest and rights in comparison with those of other security holders.

 

Our Board of Directors has the power to issue additional shares of common stock and other securities convertible into common stock without stockholder approval. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders.

 

If we issue any additional common stock or securities convertible into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result in a reduction of the per share book value of our common stock and result in what is more commonly known as dilution.

  

Our common stock may be deemed a "penny stock," which would make it more difficult for our investors to sell their shares.

 

Our common stock may be subject to the "penny stock" rules adopted under Section 15(g) of the Exchange Act. The penny stock rules apply to non-Nasdaq listed companies whose common stock trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than "established customers" complete certain documentation, make suitability inquires of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers will in to act as market makers in such securities is limited.

 

 

Shares of the Company's common stock may continue to be subject to price volatility and illiquidity because the shares are thinly traded and may never become eligible for trading on a national securities exchange. While the Company may at some point be able to meet the requirements necessary for its common stock to be listed on a national securities exchange, the Company cannot assure investors or potential investors that it will ever achieve a listing of its common stock. Initial listing is subject to a variety of requirements, including minimum asset values, minimum revenue, minimum trading price and minimum public ''float" requirements. There are also continuing eligibility requirements for companies listed on public trading markets. If the Company is unable to satisfy the initial or continuing eligibility requirements of any such market, then its stock may not be listed or could be delisted. This could result in a lower trading price for the Company's common stock and may limit investors ability to sell their shares, any of which could result in losing some or all of their investment.

 

Our Chairman of the Board has control over key decision making as a result of his control of a majority of our voting stock.

 

Nikolas Konstant, our Chairman and CFO, exercises voting rights with respect to an aggregate of 26,267,100 shares of our common stock, which represents approximately 54.6% of the voting power of our outstanding capital stock as of March 30, 2016. As a result, Mr. Konstant has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other stockholders do not support. This concentrated control could also discourage a potential investor from acquiring our common stock due to the limited voting power of such stock relative to the shares of common stock and might harm the market price of our common stock. In addition, Mr. Konstant has the ability to control the management and major strategic investments of our company as a result of his positions and his ability to control the election or replacement of our directors. In the event of his death, the shares of our capital stock that Mr. Konstant owns will be transferred to the persons or entities that he designates. As a board member and officer, Mr. Konstant owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Konstant is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.

 

A substantial number of our shares are available for sale in the public market and sales of those shares could adversely affect our stock price.

 

Sales of a substantial number of shares of common stock into the public market, or the perception that such sales could occur, could substantially reduce our stock price in the public market for our common stock, and could impair our ability to obtain capital through a subsequent sale of our securities.

 

The public market for our common stock is minimal.

 

Our common stock is thinly traded on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that, even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company, such as us, or purchase or recommend the purchase of our common stock until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our common stock is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. There can be no assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained. Due to these conditions, we can give you no assurance that you will be able to sell your common stock at or near ask prices or at all.

 

It is anticipated that our stock price will be volatile and the value of your shares may be subject to sudden decreases.

 

It is anticipated that our common stock price will be volatile. Our common stock price may fluctuate due to factors such as:

 

 

Potential fluctuations in our operating results could lead to fluctuations in the market price for our common stock.

 

Our results of operations are expected to fluctuate significantly from quarter-to-quarter, depending upon numerous factors, including:

We may be unable to achieve or sustain profitability or raise sufficient additional capital, which could result in a decline in our stock price.

 

Future operating performance is never certain, and if our operating results fall below the expectations of securities analysts or investors, the trading price of our common stock will likely decline. Our ability to generate sufficient cash flow or to raise sufficient capital to fund our operating and capital expenditures depends on our ability to improve operating performance. This in turn depends, among other things, on our ability to implement a variety of new and upgraded operational and financial systems, procedures and controls and expand, train, manage and motivate our workforce. All of these endeavors will require substantial management efforts and skills and require significant additional expenditures. We cannot assure you that we will be able to effectively improve our operating performance, and any failure to do so may have a material adverse effect on our business and financial results.

 

 

There may be restrictions on your ability to resell shares of common stock under Rule 144.

 

Currently, Rule 144 under the Securities Act permits the public resale of securities under certain conditions after a six or twelve month holding period by the seller, including requirements with respect to the manner of sale, sales volume restrictions, filing requirements and a requirement that certain information about the issuer is publicly available (the "Rule 144 resale conditions"). At the time that stockholders intend to resell their shares under Rule 144, there can be no assurances that we will be subject to the reporting requirements of the Exchange Act or, if so, current in our reporting requirements under the Exchange Act, in order for stockholders to be eligible to rely on Rule 144 at such time. In addition to the foregoing requirements of Rule 144 under the federal securities laws, the various state securities laws may impose further restrictions on the ability of a holder to sell or transfer the shares of common stock.

 

If we are, or were, a U.S. real property holding corporation, non-U.S. holders of our common stock or other security convertible into our common stock could be subject to U.S. federal income tax on the gain from the sale, exchange, or other disposition of such security.

 

If we are or ever have been a U.S. real property holding corporation (a "USRPHC") under the Foreign Investment Real Property Tax Act of 1980, as amended ("FIRPTA") and applicable United States Treasury regulations (collectively, the "FIRPTA Rules"), unless an exception described below applies, certain non-U.S. investors in our common stock (or options or warrants for our common stock would be subject to U.S. federal income tax on the gain from the sale, exchange or other disposition of shares of our common stock (or such options or warrants), and such non-U.S. investor would be required to file a United States federal income tax return. In addition, the purchaser of such common stock, option or warrant would be required to withhold from the purchase price an amount equal to 10% of the purchase price and remit such amount to the U.S. Internal Revenue Service.

 

In general, under the FIRPTA Rules, a company is a USRPHC if its interests in U.S. real property comprise at least 50% of the fair market value of its assets. If we are or were a USRPHC, so long as our common stock is "regularly traded on an established securities market" (as defined under the FIRPTA Rules), a non-U.S. holder who, actually or constructively, holds or held no more than 5% of our common stock is not subject to U.S. federal income tax on the gain from the sale, exchange, or other disposition of our common stock under FIRPTA. In addition, other interests in equity of a USRPHC may qualify for this exception if, on the date such interest was acquired, such interests had a fair market value no greater than the fair market value on that date of 5% of our common stock. Any of our common stockholders (or owners of options or warrants for our common stock) that are non-U.S. persons and own or anticipate owning more than 5% of our common stock (or, in the case of options or warrants, of a value greater than the fair market value of 5% of our common stock) should consult their tax advisors to determine the consequences of investing in our common stock (or options or warrants). We have not conducted a formal analysis of whether we are or have ever been a USRPHC.

 

Our anti-takeover provisions or provisions of Nevada law, in our articles of incorporation and bylaws and the common share purchase rights that accompany shares of our common stock could prevent or delay a change in control of us, even if a change of control would benefit our stockholders.

 

The Nevada Revised Statutes contain provisions governing the acquisition of a controlling interest in certain publicly held Nevada corporations (the "Control Share Acquisition Statute").  The Control Share Acquisition Statute provides generally that any person that acquires 20% or more of the outstanding voting shares of certain publicly held Nevada corporations, such as us, in the secondary public or private market must follow certain formalities before such acquisition or they may be denied voting rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights in whole or in part. The Control Share Acquisition Statute also provides that a person acquires a "controlling interest" whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the Nevada Revised Statutes, would enable that person to exercise (1) one-fifth or more, but less than one-third, (2) one-third or more, but less than a majority or (3) a majority or more, of all of the voting power of the corporation in the election of directors. The Control Share Acquisition Statute generally applies only to Nevada corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and which conduct business directly or indirectly in Nevada. Our Bylaws provide that the provisions of the Control Share Acquisition Statute apply to the acquisition of a controlling interest in us, irrespective of whether we have 200 or more stockholders of record, or whether at least 100 of our stockholders have addresses in the State of Nevada appearing on our stock ledger. These laws may have a chilling effect on certain transactions if our articles of incorporation or Bylaws are not amended to provide that these provisions do not apply to us or to an acquisition of a controlling interest, or if our disinterested stockholders do not confer voting rights in the control shares.

 

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties.

 

On December 27, 2012, Eos entered into an office lease for 3,127 square feet of space located at 1999 Avenue of the Stars, Suite 2520, Los Angeles, California with an unaffiliated third party. This space is used as our principal office. The lease terminates on April 30, 2017. The monthly rental for 2015 was $16,104.

 

 

On June 6, 2011 Eos acquired a 100% working interest and 80% net revenue interest in the Works Property, which consists of five land leases in Edwards County, Illinois and which have historically produced oil since 1940.

Item 3. 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 September 17, 2014 we entered into an Agreement and Plan of Merger (the "Dune Merger Agreement") with Dune Energy, Inc., a Delaware corporation ("Dune"), and Eos Delaware. Pursuant to the Dune Merger Agreement, and on the terms and subject to the conditions described therein, Eos Delaware agreed to conduct a cash tender offer to purchase all of Dune's issued and outstanding shares of common stock, par value $0.001 per share (the "Dune Shares"), at a price of $0.30 per Dune Share in cash, without interest, upon the terms and conditions set forth in the Dune Merger Agreement. Due to the severe decline in oil prices, our sources of capital for the merger and tender offer were withdrawn, and we were unable to proceed to complete the merger and tender described in the Dune Merger Agreement on the terms originally negotiated. After a series of amendments to the Dune Merger Agreement while the parties continued to try to negotiate financing terms, the tender offer ultimately expired on February 27, 2015. Subsequently, on March 4, 2015, Dune provided us with notice of its decision to terminate the Dune Merger Agreement in accordance with Section 8.1(c)(i) of the Dune Merger Agreement, and demanded the Parent Termination Fee (as defined in the Dune Merger Agreement) of $5,500,000 in cash, and reimbursement for certain unidentified expenses incurred by Dune. Dune has threatened to bring litigation to collect these amounts in connection with its contention that the Company breached the Dune Merger Agreement and is entitled to the breakup fee set forth in the Dune Merger Agreement. We do not believe that we have liability for the break-up fee and we intend to vigorously defend ourselves in an action is brought.

The forgoing description of the Dune Merger Agreement, as amended, does not purport to be complete, and is subject to, and qualified in its entirety by, our 8-Ks filed with the Securities and Exchange Commission on September 18, 2014, November 21, 2014, December 23, 2014, January 20, 2015, January 28, 2015, February 4, 2015, February 11, 2015, February 17, 2015, February 24, 2015, February 26, 2015, and March 10, 2015, which are incorporated herein by this reference.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder matters and Issuer Purchases of Equity Securities

 

Our common stock is quoted on the OTCBB. It was quoted under the symbol "CLTK" from October 30, 2008, the date we had our 15c2-11 approval, until February 15, 2013, when we changed our symbol to "EOPT." Trading in our common stock has not been extensive and such trades cannot be characterized as constituting an active trading market. The following is a summary of the high and low closing prices of our common stock on the OTCBB during the periods presented, as reported on the website of the OTCBB Stock Market. Such prices represent inter-dealer prices, without retail mark-up, mark down or commissions, and may not necessarily represent actual transactions:

 

 

As of March 30, 2016, we had 48,217,882 shares of common stock and 321 stock holders of record. These holders of record include depositories that hold shares of stock for brokerage firms, which in turn hold shares of stock for numerous beneficial owners.

 

The following table shows the range of market prices of our common stock during 2015 and 2014.

 

 

Dividends

 

We have not declared any dividends in the two most recent fiscal years and we do not plan to declare any dividends in the foreseeable future. There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:

Recent Sales of Unregistered Securities

None.

 

Performance Graph

 

The following Performance Graph and related information shall not be deemed to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

 

The following graph compares the cumulative total return to holders of the Company's common stock during the period commencing December 31, 2009 and ending December 31, 2015. The return is compared to the cumulative total return during the same period achieved on the NASDAQ Composite Index and a peer group index selected by our management that includes three public companies within our industry (the "Peer Group"). The Peer Group is composed of Magnum Hunter Resources Corp., Cobalt International Energy, Inc., and Athlon Energy, Inc. The companies in the Peer Group were selected because they comprise a broad group of publicly held corporations, each of which has some operations similar to ours. When taken as a whole, management believes the Peer Group more closely resembles our total business than any individual company in the group.

 

 

The returns are calculated assuming that an investment with a value of $100 was made in the Company's common stock and in each stock as of December 31, 2009. All dividends were reinvested in additional shares of common stock, although the comparable companies did not pay dividends during the periods shown. The Peer Group investment is calculated based on a weighted average of the company share prices. The graph lines merely connect the measuring dates and do not reflect fluctuations between those dates.

 

The stock performance shown on the graph is not intended to be indicative of future stock performance.

Item 6. Selected Financial Data.

The following consolidated selected financial data is derived from the Company's audited financial statements for the periods indicated below. The following consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere in this report.

 

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto which appear elsewhere in this Report. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors.

 

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

 

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

 

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

 

Effective as of May 20, 2013, the Company changed its name to Eos Petro, Inc. (it previously had been named "Cellteck, Inc.").

We are presently focused on the acquisition, exploration, development, mining, operation and management of medium-scale oil and gas assets. Our primary activities as of September 30, 2015, have centered on organizing activities but have also included the acquisition of existing assets, evaluation of new assets to be acquired, and pre-development activities for existing assets.

Our continuing development of oil and gas projects will require the acquisition of land rights, mining equipment and associated consulting activities required to convert the fields into revenue generating assets. Generally, financing is available for these initial project costs where such financing is secured by the assets themselves. From time to time. however, our activities may require senior credit facilities, convertible securities and the sale of common and preferred equity at the corporate level.

 

In connection with our business, we will likely engage consultants with expertise in the oil and gas industries, project financing and oil and gas operations.

 

The financial statements included as part of this Report and the financial discussion reflect the performance of Eos and the Company, which primarily relates to Eos' Works Property oil and gas assets located in Illinois.

 

On September 17, 2014 we entered into the Dune Merger Agreement with Dune, and Eos Delaware agreed to conduct a cash tender offer to purchase all of Dune's issued and outstanding shares of common stock at $0.30 per share.  In addition, we agreed to provide Dune with sufficient funds to pay in full and discharge all of Dune's outstanding indebtedness and agreed to assume liability for all of Dune's trade debt, as well as fees and expenses related to the Dune Merger Agreement and transactions contemplated therein.  At the commencement of the merger and tender offer, we estimated that the total amount of cash required to complete the contemplated transactions was approximately $140 million dollars.  The tender offer was not subject to a financing contingency.  Following successful completion of the offer, Eos Delaware would have been merged into Dune, with Dune surviving as a direct wholly-owned subsidiary of the Company.

Due to the severe decline in oil prices, our sources of capital for the merger and tender offer were withdrawn, and we were unable to complete the merger and tender described in the Dune Merger Agreement on the terms originally negotiated. After a series of amendments to the Dune Merger Agreement while the parties continued to try to negotiate financing terms, the tender offer ultimately expired on February 27, 2015. After the expiration of the tender offer, Dune was notified by us that shares of Dune's common stock would be returned to the tendering stockholders.  

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

Revenue

We primarily generate revenue from the operation of any oil and gas properties that we own or lease and the sale of hydrocarbons delivered to a customer when that customer has taken title. For the years ended December 31, 2015 and 2014, our primary revenue has come from one source, the Works Property, located in Southern Illinois. Revenue for the years ended December 31, 2015 and 2014 was $208,052 and $760,452, respectively.  The decrease in revenues for the year ended December 31, 2015 is due to a decrease in the price per barrels sold and a decrease in the number of barrels sold.  For the year ended December 31, 2015, we sold 4,847 barrels at an average price of $42.92 per barrel, compared to 8,779 barrels at an average price of $86.62 per barrel for the year ended December 31, 2014.  The decrease in the barrels produced in 2015 compared to 2014 is due to shutting down the production of the wells in 2015 due to cold weather related issues in early 2015 and the shutting down of production in September 2015 due to our inability to pay the properties' operator.   Production resumed in October 2015 when we raised additional financing to cover these operating and other business expenses. As disclosed below, our current financial resources are not sufficient to allow us to meet the anticipated costs of our business plan for the next 12 months and we will require additional financing in order to fund our business activities.

Lease operating expenses

Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the years ended December 31, 2015 and 2014 was $148,093 and $427,076, respectively.  The decrease in operating expenses was due to lower production in 2015 and a refund of $33,223 received from our former operator during the quarter ended March 31, 2015. 

 

General and administrative expenses

General and administrative expenses for the years ended December 31, 2015 and 2014 were $27,463,607 and $30,541,198, 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 $849,000, $20,986,000, and $5,149,000 in professional fees, consulting fees and compensation, respectively, for the year ended December 31, 2015.  We recognized approximately $885,000, $23,225,000, and $5,842,000 in professional fees, consulting fees and compensation, respectively, for the year ended December 31, 2014.  Other expenses included are temporary professional staffing, rent, utilities, and other overhead expenses.  During the year ended December 31, 2015, we recorded compensation expense of $4,476,000 related to options that were issued to our CEO in August 2014 and vesting though June 2015.  Also, during the year ended December 31, 2015, we recognized costs of $12,483,200 due to our majority stockholder selling shares of common stock to entities with which we have current business relationships at a significant discount to market.   In addition, during the year ended December 31, 2015, we recorded consulting fees of approximately $8,036,000 associated with the issuance of warrants for consulting services.  During the year ended December 31, 2014, we recorded consulting expense of $14,605,000 related to the amended warrants issued to GEM Global Yield Fund, GEM Capital, and 590 Partners Capital, LLC, (collectively, with their affiliates, "GEM"), $1,881,000 related to the warrants issued to DVIBRI, LLC ("DVIBRI") and $6,404,000 related to the BAS warrants.  During the year ended December 31, 2014, we recorded compensation expense of $968,000 related to options that were issued to our CEO in June 2013 and vesting through June 2014 and we recorded expense of $4,476,000 related to options that were issued to our CEO in August 2014 and vesting through June 2015.

During the year ended December 31, 2015, we recorded a charge to earnings related to a structuring fee of $4 million due to GEM.  There was no such charge during the year ended December 31, 2014.

 

 

Acquisition termination fee

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

Other income (expenses)

For the year ended December 31, 2015, net other income was $1,450,624, consisting of interest and finance costs of $3,207,375 and a gain on change in fair value of derivative liability of $4,657,999.   Interest and financing costs for the year ended December 31, 2015 includes a charge of $2,523,398 related to the Sixth Amendment to the LowCal Agreements (see defined term below) related to the issuance of 75,000 shares of common stock, the issuance of 500,000 warrants and the modification of the terms of previously issued warrants. During the year ended December 31, 2014, net other expenses consisted primarily of interest and finance costs of $23,834,276, loss debt extinguishment of $40,016,315 and a gain on change in fair value of derivative liability of $15,224,507.  The decrease in interest and finance costs is primarily due to the amortization of the fair value of the beneficial conversion features and expensing of the fair value of shares issued in connection with the LowCal Agreements (defined below) incurred during the year ended December 31, 2014.  The loss on debt modification is due to the 1,775,000 warrants issued per the Clouding IP, LLC ("Clouding") settlement agreements with a fair value of approximately $26,300,000 and the reduction in the conversion price from $4 to $2.50 for the LowCal Loan (defined below) with a fair value of approximately $11,300,000.  The adjustment to fair value of derivative liabilities is due to the change in fair value of the 1,775,000 warrants, which were recorded as derivative liabilities due to the anti-dilution provisions.

 

Revenue

 

We primarily generate revenue from the operation of any oil and gas properties that we own or lease and the sale of hydrocarbons delivered to a customer when that customer has taken title. As of December 31, 2014 and 2013, our primary revenue has come from one source, the Works Property, located in Southern Illinois. Revenue for the years ended December 31, 2014 and 2013 was $760,452 and $596,405, respectively.  The increase in revenues for the year ended December 31, 2014 is due to the increase in the number of barrels sold offset by a slightly lower cost per barrel.  For the year ended December 31, 2014, we sold 8,779 barrels at an average price of $87 per barrel, compared to 6,742 barrels at an average price of $88 per barrel for the year ended December 31, 2013.

 

Lease operating expenses

 

Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the years ended December 31, 2014 and 2013 were $427,076 and $401,642, respectively.  The increase in operating expenses was due to additional repairs on the pumpers and battery units for the wells. 

 

 

General and administrative expenses

 

General and administrative expenses for the years ended December 31, 2014 and 2013 were $30,541,198 and $15,549,982, respectively. Our general and administrative expenses have primarily been made up of professional fees (legal and accounting services) required for our organizing activities, acquisition agreements and development agreements. We recognized approximately $885,000, $23,225,000, and $5,842,000 in professional fees, consulting agreements and compensation, respectively, for the year ended December 31, 2014. We recognized approximately $978,000, $ 12,392,000, and $1,359,000 in professional fees, consulting agreements and compensation, respectively for the year ended December 31, 2013. Other general and administrative expenses included are temporary professional staffing, rent, utilities, and other overhead expenses. The significant increase in consulting expense was related to the $13,415,000 non-cash costs related to the amended GEM warrants as discussed in the accompanying consolidated financial statements and $8,697,000 related to the other warrants issued for other consulting services.  The increase in compensation was due to the options vested to Mr. Oring per his employment contract valued at $5,443,458.

 

Other expenses, net

 

Other expenses were $48,626,084 consisting of interest and finance costs of $23,834,000, loss on debt extinguishment of $40,016,000 and a gain on change in fair value of derivative liability of $15,225,000, respectively, for the year ended December 31, 2014. Other expenses were $11,761,424 consisting of interest and finance costs of $8,372,720 and loss on debt extinguishment of $3,388,704, respectively, for the year ended December 31, 2013. The increase in interest and finance costs is primarily due to the fair value of the beneficial conversion features and shares issued in connection with financing incurred during the year ended December 31, 2014. The loss on debt extinguishment is due to the amendments to the notes payable and convertible notes that were amended during the year ended December 31, 2014.  The gain on the change in the derivative liability is due to the decrease in the share price from $14 at the date of issuance to $6.50 at December 31, 2014 and due to the decrease in the estimated volatility from 220% at the date of issuance to 188% at December 31, 2014.

 

Since our inception, we have financed operations through consulting and service agreements with limited cash requirements, made up of stock compensation and various debt instruments as more fully described in Stock Based Compensation, Commitments and Contingencies, Material Agreements and Related Party Transactions. Our business calls for significant expenses in connection with the operation and acquisition of oil and gas related projects. In order to maintain our corporate operations and to significantly expand our operations and corresponding revenue from our Works Property, we must raise a significant amount of working capital and capital to fund improvements to the Works Property. As of December 31, 2015, we had cash in the amount of $1,367. At December 31, 2015, we had total liabilities of $29,176,879. Our current financial resources are not sufficient to allow us to meet the anticipated costs of our business plan for the next 12 months and we will require additional financing in order to fund these activities. In addition, our Auditors in their audit report for the year ending December 31, 2015, modified their accountant's report to express a going concern uncertainty.

 

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

 

To finance our operations, we have recently issued the following notes:

On February 8, 2013, and as subsequently amended through August 14, 2015, the Company and Eos entered into: (i) a Loan Agreement and Secured Promissory Note; (ii) a Lock-Up/Leak-Out Agreement; (iii) a Guaranty; (iv) a Series B Convertible Preferred Stock Purchase Agreement; and (v) a Leasehold Mortgage, Assignment, Security Agreement and Fixture Filing (collectively referred to as the "Loan Agreements"), with LowCal Industries, LLC and LowCo [EOS/Petro], LLC (collectively referred to as "LowCal"). Pursuant to the Loan Agreements, LowCal agreed to purchase from Eos, for $4,980,000, promissory notes in the aggregate principal amount of $5,000,000, with interest at 10% per annum (the "LowCal Loan"). At LowCal's option, LowCal can 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 $2.50 per share. On January 13, 2015, the Company and LowCal amended the Loan Agreements, including the LowCal Loan, and entered into a new unsecured promissory note in the principal amount of $3,250,000, with interest at 10% per annum (the "Second LowCal Note"), $750,000 of which was advanced to the Company in 2014 and was recognized as included in the principal amount of the Second LowCal Note. As of January 13, 2015, LowCal forgave approximately $667,000 of accrued interest on the LowCal Loan and eliminated all interest on the LowCal Loan going forward. As amended, there was no remaining accrued and outstanding interest on the LowCal Loan. The Company recorded the terms and provisions of these transactions on the Company's financial statements as of the year ended December 31, 2014, including the recording of the Second LowCal Note in the principal amount of $3,250,000 and a loss on debt extinguishment of $1,832,576.

 

On August 14, 2015, the LowCal Agreements were amended again (the "Sixth Amendment to the LowCal Agreements"), and the exercise price of the original 500,000 warrants was reduced from $4.00 per share to $2.00 per share, and the expiration date of the warrants was extended from August 14, 2018 to January 1, 2019.  On August 14, 2015, the Company also issued to LowCal 75,000 restricted shares of its common stock, as well as an additional warrant to purchase 500,000 shares of restricted common stock of the Company at an exercise price of $2.00, vesting immediately and expiring January 1, 2019.

The maturity dates of both the LowCal Loan and the Second LowCal Note are May 1, 2016, as amended by the Seventh Amendment to the LowCal Agreements (see Item 9B "Subsequent Events" below). The Second LowCal Note must also be repaid upon the earlier to occur of: (i) the Company closing certain potential acquisition transactions, or (ii) the Company closing a financing for a minimum of $20,000,000. The parties agreed that, upon repayment in full of the Second LowCal Note, LowCal will forever release, cancel and terminate all of its mortgages and any other liens against the Company.

On April 15, 2015 we issued an unsecured promissory note to Clearview Partners II, LLC ("Clearview").  The promissory note has a principal amount of $150,000, with an interest rate of 10% per annum.  The Company and Clearview executed letter agreements extending the maturity date of the unsecured promissory note to July 1, 2016. 

Also, in 2015, we issued a series of unsecured promissory notes to Plethora Enterprises for an aggregate amount of $1,520,000, with an interest rate of 10% per annum and due on July 1, 2016.   Nikolas Konstant, our CFO and Chairman of the Board, is the sole member and manager of Plethora Enterprises.  During the year ended December 31, 2015, $311,840 of the notes were repaid. At December 31, 2015, the aggregate balance due under these promissory notes was $1,208,160.

On November 5, 2015, the Company issued an unsecured promissory note to John Linton for $30,000, with an interest rate of 4% per annum and due on April 1, 2016.

 

On December 14, 2015, the Company issued an unsecured promissory note to Judith Ann Buchmiller for $50,000, with an interest rate of 10% per annum and due on July 1, 2016.

On November 29, 2015, and on December 29, 2015, the Company issued two unsecured promissory notes to Bacchus Investors, LLC, for $80,000 and $50,000 respectively, each with an interest rate of 10% per annum and due on demand.

We do not currently have sufficient financing arrangements in place to fund our operations, and there are no assurances that we will be able to obtain additional financing in an amount sufficient to meet our needs or on terms that are acceptable to us.

 

In addition to funding our operations, we may become liable to pay certain other contractual obligations, such as a structuring fee to GEM of $4,000,000 under the financing commitment, dated August 31, 2011, and the Common Stock Purchase Agreement and Registration Rights Agreement, both dated as of July 11, 2013, entered into between the Company and GEM (collectively referred to as the "Commitment Agreements"), whereby GEM would provide and fund the Company with up to $400 million dollars for the Company's African acquisition activities.

Pursuant to the GEM Commitment Agreements, the Company was required to use commercially reasonable efforts to uplist to the NYSE, NASDAQ or AMEX stock exchange within 270 days of July 11, 2013, and then file a registration statement covering the shares and warrants referenced in the Commitment Agreements within 30 days of uplisting. The Company further agreed to pay to GEM a structuring fee of $4,000,000, which was to be paid on the 18-month anniversary of July 11, 2013 regardless of whether the Company has drawn down from the Commitment at that time. At the Company's election, the Company may elect to pay the structuring fee in common stock of the Company at a per share price equal to 90% of the average closing trading price of the Company's common stock for the thirty-day period immediately prior to the 18-month anniversary of July 11, 2013. As of January 11, 2015, the 18 month anniversary date of the agreement, the Company had not met this requirement and may now become liable for payment of this structuring fee to GEM.

 

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

 

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

 

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

 

For these reasons, the report of our auditor accompanying our audited financial statements for the year ended December 31, 2015 included a statement that these factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will be dependent on our raising of additional capital and the success of our business plan.

  

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

Operating Activities

Net cash used in operating activities was $1,420,003, $2,136,741 and $1,881,392 for the years ended December 31, 2015, 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 $0 and $1,041,500 for the years ended December 31, 2015, 2014 and 2013, respectively.  Net cash used in investing activities in 2013 was primarily due to the capital costs incurred at the Works property.

 

Financing Activities

Net cash provided by financing activities was $1,288,160, $2,248,000 and $2,897,332 for the years ended December 31, 2015 and 2014, respectively. Cash generated from financing activities for the year ended December 31, 2015, 2014 and 2013 was primarily from issuing promissory notes to related and unrelated parties totaling $1,650,000, offset by repayment of related party promissory notes of $311,840 and notes payable of $50,000.  Cash generated from financing activities for the year ended December 31, 2014 was primarily from issuing our convertible notes of $2,250,000 and notes payable of $523,000, offset by repayment of notes payable of $275,000 and convertible notes of $250,000.  Cash generated from financing activities for the year ended December 31, 2013 was primarily from issuing our convertible notes of $3,500,000, offset by repayment of notes payable of $500,000 and payment of debt issuance costs of $150,000.

 

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

 

 

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

Use of Estimates

 

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

·

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

·

Proved oil reserves;

·

Future costs to develop the reserves; and

·

Future cash inflows and production development costs.

·

Estimated variables used in the Black Scholes option pricing model used to value options and warrants.

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

 

Capitalized oil and gas property costs within a cost center are amortized on an equivalent unit-of-production method, The equivalent unit-of-production rate is computed on a quarterly basis by dividing production by proved oil and gas reserves at the beginning of the quarter then applying such amount to capitalized oil and gas property costs, which includes estimated asset retirement costs, less accumulated amortization, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.

 

Full Cost Ceiling Test

 

Oil and gas properties without estimated proved reserves are not amortized until proved reserves associated with the properties can be determined or until impairment occurs. At the end of each reporting period, the unamortized costs of oil and gas properties are subject to a "ceiling test," which limits capitalized costs to the sum of the estimated future net revenues from proved reserves, discounted at 10% per annum to present value, based on current economic and operating conditions, adjusted for related income tax effects.  If the net capitalized costs exceed the cost center ceiling, the excess is recognized as an impairment of oil and gas properties. An impairment recognized in one period may not be reversed in a subsequent period even if higher oil and gas prices increase the cost center ceiling applicable to the subsequent period.

 

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

 

 

Proceeds from the sale of oil and gas properties are recognized as a reduction of capitalized oil and gas property costs with no gain or loss recognized, unless the sale significantly alters the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center.

 

Asset Retirement Obligation

 

The Company accounts for its future asset retirement obligations ("ARO") by recording the fair value of the liability during the period in which it was incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an ARO is included in proven oil and gas properties in the balance sheets. The ARO consists of costs related to the plugging of wells, removal of facilities and equipment, and site restoration on its oil and gas properties.

Share-Based Compensation

 

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

 

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition.  ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract.  The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein.  Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company's financial statements and disclosures.

 

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation – Stock Compensation.  The pronouncement was issued to clarify the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period.  The pronouncement is effective for reporting periods beginning after December 15, 2015. The adoption of ASU 2014-12 will not have a significant impact on the Company's consolidated financial position or results of operations.

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases.  ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months.  ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018.  Early adoption is permitted.  A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.  The Company is in the process of evaluating the possible impact of ASU 2016-02 on the Company's financial statements and disclosures.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements.  ASU 2014-15 requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued.  An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern.  ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter.  Early adoption is permitted.  The Company is currently evaluating the possible impact of the adoption of ASU 2014-15 on the Company's financial statements and disclosures.

In November 2014, the FASB issued Accounting Standards Update No. 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.   The amendments in ASU 2014-6 do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required.  The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract.  ASU 2014-6 applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.  The Company is currently evaluating the impact the adoption of ASU 2014-16 on the Company's financial statements and disclosures

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

 

Our significant contractual obligations as of December 31, 2015, are as follows:

 (1)   This amount includes amounts allegedly owed to Dune in connection with the asserted claim by Dune of the alleged breach of contract by Eos of the Dune Merger Agreement, demanding payment of $5.5 million in the form of a termination fee, plus additional costs and expenses which were undefined.  Eos does not believe that is has liability for the termination fee and it intends to vigorously defend itself if an action is brought.

 

 

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 8. Financial Statements and Supplementary Data

The financial statements and supplementary data required to be filed pursuant to this Item 8 begin on page F-1 of this Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

 

The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2015. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2015, the Company's disclosure controls and procedures were ineffective. This conclusion by the Company's Chief Executive Officer and Chief Financial Officer does not relate to reporting periods after December 31, 2015.

 

 

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

 

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

 

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

 

 

The material weakness relates to the following:

 

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

 

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

 

The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by Weinberg & Company, P.A., our independent registered accounting firm, as stated in their report which appears elsewhere herein.

 

 

No change in the Company's internal control over financial reporting occurred during the fourth quarter ended December 31, 2015 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

We do not expect that internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Item 9B. Other Information

Sharma Loan Extension and Share Issuance

Effective January 1, 2016, the Company and Vatsala Sharma ("Sharma") amended the Secured Promissory Note, with a principal balance of $600,000 and interest at 18% per annum, originally dated February 15, 2012 (as amended, the "Sharma Loan"), to extend the maturity date of the Sharma Loan to July 1, 2016.  In addition, under the terms of the Sharma Loan, the Company issued to Sharma 275,000 restricted shares of its common stock as of January 1, 2016.

Ridelinks Loan Extension

One March 25, 2016, the Company and Ridelinks, Inc. ("Ridelinks"), entered into an Amended and Restated Promissory Note between the parties (the "Amended Ridelinks Note"), which amended and restated the original promissory note between the parties dated October 9, 2014 (the "Ridelinks Loan").  Under the terms of the Amended Ridelinks Note, the Company agreed to pay Ridelinks $100,000 of the remaining principal due on the Ridelinks Loan, along with $15,350 of accrued interest, and the $30,000 exit fee as originally set forth in the Ridelinks Loan.  The maturity date of the Amended Ridelinks Note is April 30, 2016.  As consideration for the Amended Ridelinks Note, the Company agreed to issue 40,000 restricted shares of its common stock to Ridelinks by April 6, 2016.

 

Appointment of Alan D. Gains as Chief Executive Officer

 

Effective January 11, 2016 (the "Effective Date"), the Company entered into an employment agreement with Alan D. Gaines whereby Mr. Gaines is appointed as the Company's Chief Executive Officer ("CEO"), reporting to the Board of Directors. In connection with the appointment of Mr. Gaines, Martin B. Oring stepped down from the position of Chief Executive Officer as of the Effective Date, but will continue serving as a member of the Board of Directors.

In connection with Mr. Gaines' appointment, he will receive an annual base salary of One Hundred Fifty Thousand Dollars ($150,000), which may be increased up to Four Hundred Twenty Thousand Dollars ($420,000.00) annually based on achievement of certain company and individual performance objectives. Mr. Gaines will also be eligible for certain annual bonuses based in part on achievement of certain company and individual performance objectives, and in part on the discretion of the Board of Directors of the Company.

In connection with Mr. Gaines' employment as CEO, the Company and Mr. Gaines also entered into a Stock Option Agreement, signed on December 16, 2015 and effective as of the Effective Date, whereby the Company would issue to Mr. Gaines options to purchase up to 4,500,000 shares of the Company's restricted common stock, all of which have an exercise price of $1.00 per share and expire on the fifth anniversary of the Effective Date. The options shall vest as follows: (i) 1,500,000 of the shares vested on the Effective Date; 1,500,000 of the shares shall vest on the first anniversary of the Effective Date; and 1,500,000 of the shares shall vest on the second anniversary of the Effective Date.

 

Mitola Resignation

On January 19, 2016, John Mitola resigned from his position as a director on the Company's Board of Directors, effective immediately. Mr. Mitola's resignation stemmed from personal reasons, and was not due to any disagreement with the Company on any matter relating to the Company's operations, policies or practices.

Buchmiller Note

On January 20, 2016, the Company issued an unsecured promissory note to Judith Ann Buchmiller for $50,000, with an interest rate of 10% per annum and due on July 1, 2016.

Warrants

On February 18, 2016, the Company granted to a consultant a warrant to purchase 100,000 shares of the Company's common stock, which is exercisable at $2.00 per share and expires on February 18, 2021.

On March 25, 2016, the Company granted to an employee a warrant to purchase 50,000 shares of the Company's common stock, which is exercisable at $1.00 per share and expires on March 25, 2021.

Seventh Amendment to the LowCal Agreements

On March 11, 2016, the Company and LowCal amended the LowCal Agreements (the "Seventh Amendment to the LowCal Agreements").  Under the Seventh Amendment to the LowCal Agreements: (i) the maturity dates of the LowCal Loan and Second LowCal Note was extended to May 1, 2016; (ii) the expiration date of LowCal's warrants was extended to May 1, 2020; (iii) the Company will issue to LowCo [EOS/PETRO], LLC ("LowCo") an additional 75,000 restricted shares of the Company's common stock; and (iv) the parties agreed that if: (1) the Company pays off the $3,250,000.00 principal balance of the Second LowCal Note in full, plus any accrued and unpaid interest, and (2) either: (i) the Company closes a transaction where it acquires at least $10,000,000.00 in additional assets, through an asset purchase, stock purchase, merger, or other similar transaction, which shall be determined by generally accepted accounting principles, or (ii) the Company successfully uplists its common stock to a national exchange market (NASDAQ or  the New York Stock Exchange), then the following will automatically occur: (1) the conversion price of the LowCal Loan will be reduced from $2.50 per share to $2.00 per share, and (2) any outstanding principal and interest due on the LowCal Loan will be converted at a price of $2.00 per share into restricted shares of the Company's common stock, which shall be issued to LowCo.

 

PART III

Item 10. Directors, Executive Officers and Corporate Governance

 

Information relating to the officers and directors of our company, other corporate governance matters and other information required under this Item 10 is set forth in our Proxy Statement for our 2015 Annual Meeting of Stockholders ("Proxy Statement") and is incorporated herein by reference. The following is a listing of certain information regarding our executive officers.

 

 

Nikolas Konstant. Mr. Konstant is currently our Chairman of the Board and Chief Financial Officer.  He became our President, Chief Executive Officer, Chief Financial Officer and Chairman in connection with the closing of the Merger. He also has served as the Chairman of Eos Petro, Inc. since 2011. Mr. Konstant has more than 17 years of experience as a merchant financier, investor and advisor to public and private companies on mergers and acquisitions, capital formation and balance sheet restructurings. Mr. Konstant has been providing equity and debt financing for public and private companies for over 17 years as a merchant financier. Previously, Mr. Konstant was the managing director of NCVC, LLC, a $200 million venture capital fund and indirect subsidiary of Nightingale Conant. While at NCVC, Mr. Konstant provided equity for the Wolfgang Puck Food Company, Nutrition for Life (which was the number one stock on NASDAQ in the year of 1996), On Stage Entertainment, Platinum Technologies and several other public companies. Previously, Mr. Konstant founded nanoUniverse, PLC (AIM: NANO), co- founded Electric City Corporation (currently known as Lime Energy Co.) (NASDAQ: LIME) and co- founded Advanced Cell Technology, Inc. (OTCBB: ACTC). Mr. Konstant has been a board member of Nightingale Conant, On Stage Entertainment, UCLA Board of Governors and on the board of the investment Subcommittee of Cedars Sinai Hospital. Mr. Konstant currently serves on the Cedars Sinai Board of Governors. Mr. Konstant is also the Chairman of DreamWorks Children of the World a charitable organization for Children of the World. Mr. Konstant attended Harvard Business School ("HBS") and has several certificates from HBS and the University of Chicago in addition to a degree of Calculus from Barstow College. He is semi-fluent in Greek, Italian and French. He is presently studying Mandarin. Mr. Konstant is a Mason at the Menorah Lodge #523. Mr. Konstant was a member of  the Young Presidents Organization (YPO) since 1998, with the Belair Chapter in Los Angeles, California. As a financier, investor and advisor, Mr. Konstant, we believe, will contribute his leadership skills, knowledge and finance background, and business experience to our board of directors. In addition, we believe that Mr. Konstant's membership on our board of directors will help to achieve the objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.

 

Martin B. Oring.  Mr. Oring became a member of our Board of Directors in October of 2012. On June 23, 2013 he was appointed the Chief Executive Officer of the Company. Mr. Oring served as the Chief Executive Officer of the Company from June 2013 through January 2016.  Effective, January 11, 2016, Mr. Oring resigned as Chief Executive Officer. Mr. Oring has been a member of the board of directors of Searchlight Minerals Corp. since October 6, 2008 and its President and Chief Executive Officer since October 1, 2010. Mr. Oring, a senior financial/planning executive, has served as the President of Wealth Preservation, LLC, a financial advisory firm that serves high-net-worth individuals, since 2001. Since the founding of Wealth Preservation, LLC in 2001, Mr. Oring has completed the financial engineering, structuring, and implementation of over $1 billion of proprietary tax and estate planning products in the capital markets and insurance areas for wealthy individuals and corporations. From 1998 until 2001, Mr. Oring served as Managing Director, Executive Services at Prudential Securities, Inc., where he was responsible for advice, planning and execution of capital market and insurance products for high-net-worth individuals and corporations. From 1996 to 1998, he served as Managing Director, Capital Markets, during which time he managed Prudential Securities' capital market effort for large and medium-sized financial institutions. From 1989 until 1996, he managed the Debt and Capital Management group at The Chase Manhattan Corporation as Manager of Capital Planning (Treasury). Prior to joining Chase Manhattan, he spent approximately eighteen years in a variety of management positions with Mobil Corporation, one of the world's leading energy companies. When he left Mobil in 1986, he was Manager, Capital Markets & Investment Banking (Treasury). Mr. Oring is also currently a director and chief executive officer of PetroHunter Energy Corporation, and was previously a director of Parallel Petroleum Corporation, each of which is a publicly traded oil and gas exploration and production company. He also served as a director of Falcon Oil & Gas Australia Limited, a subsidiary of Falcon Oil & Gas Ltd., an international oil and gas exploration and production company, headquartered in Dublin, Ireland, which trades on the TSX Venture Exchange. Mr. Oring has served as a Lecturer at Lehigh University, the New York Institute of Technology, New York University, Xerox Corporation, Salomon Brothers, Merrill Lynch, numerous Advanced Management Seminars, and numerous in-house management courses for a variety of corporations and organizations. He has an MBA Degree in Production Management, Finance and Marketing from the Graduate School of Business at Columbia University, and a B.S. Degree in Mechanical Engineering from the Carnegie Institute of Technology. As a financial planner and an executive with experience in banking and finance, Mr. Oring, we believe, will contribute his leadership skills, knowledge and finance background, and business experience to our Board of Directors. In addition, we believe that Mr. Oring's membership on our Board of Directors will help to achieve the objective that its membership be composed of experienced and dedicated individuals with diversity of backgrounds, perspectives, skills and other individual qualities that contribute to board heterogeneity.

 

Alan D. Gaines.  Mr. Gaines was appointed the Chief Executive Officer of the Company on January 11, 2016.  Mr. Gaines has over 30 years of experience as an energy investment banker and advisor, having participated in the raising of debt and equity totaling well over $100 billion. In addition, Mr. Gaines has extensive experience as an entrepreneur and operator in the oil and gas industry. In September 2014, Mr. Gaines formed ALG Corp. (and a predecessor company, Direct Crude, LLC in 2011), and presently serves as its Chairman of the board of directors and CEO. ALG Corp. is an advisory for the energy (predominantly upstream) and media industries, specializing in recapitalization and restructuring. Prior to that, Mr. Gaines served as Chairman of the board of directors and founder of Dune Energy, Inc. ("Dune") from its formation in May 2001 through April 2011. Mr. Gaines also served as CEO of Dune from inception through May 2007, when he stepped down following the acquisition of Goldking Corporation, raising total proceeds of $540 million. Before founding Dune, Mr. Gaines co-founded Gaines, Berland Inc. in 1983, which was a full service investment bank/advisory and brokerage, specializing in global energy markets, with particular emphasis on small to mid-capitalization public and private companies, involved primarily in the exploration and production of oil and natural gas. In the three years prior to selling his personal stake in the company in 1998, Gaines, Berland acted as lead underwriter and/or participated in the placement of more than $3 billion of equity and debt securities.  Mr. Gaines holds a B.B.A. in Finance from Baruch College (CUNY), and an M.B.A. in Finance ("With Distinction"-Valedictorian) from The Zarb School, Hofstra University Graduate School of Management. 

On October 20, 2015, Shlomo Lowy ("Mr. Lowy") became the beneficial owner of 5,347,000 shares of the Company's common stock, through his ownership and control of LowCal and LowCo.  Mr. Lowy is the sole managing member of LowCo, LLC, which in turn acts as the sole managing member of LowCo.  Mr. Lowy also serves as the sole managing member of Kinderlach Ltd Co., LLC, which in turn acts as the sole managing member of LowCal.  The Company is aware that Mr. Lowy filed a Form 5 on February 16, 2016, reflecting one acquisition transaction that was not timely reported.

On January 11, 2016, Mr. Gaines was issued stock options to purchase up to 4,500,000 shares of the Company's common stock.  The Company is aware that on February 16, 2016, Mr. Gaines filed a non-timely Form 3 reflecting the above acquisition transaction.

The Company is aware that on July 16, 2015, Mr. Konstant filed a non-timely Form 4 reflecting one sale transaction by Plethora Enterprises from May 22, 2015.  The Company is aware that Mr. Konstant has not timely filed a Form 5 reflecting five sale transactions by Plethora Enterprises occurring between October 12, 2015 and December 14, 2015.

Item 11. Executive Compensation

Information required under this Item 11 is set forth in our Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required under this Item 12 is set forth in our Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information required under this Item 13 is set forth in our Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

Information regarding principal accounting fees and services and other information required under this Item 14 is set forth in our Proxy Statement and is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules

 

All financial statements of the registrant referenced in Item 8 of this Report are appended to the end of this report, commencing on page F-1.

None.

 

 

 

 

 

 

*Contained a typographical error regarding date and/or party name in previously filed annual reports on Form 10-K.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 30, 2016

Eos Petro, Inc.

By: /s/ Martin Oring

Martin Oring

Director (former CEO, through January 11, 2016)

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

EOS Petro, Inc. and Subsidiaries

Index to Consolidated Financial Statements

---

Report of Independent Registered Public Accounting Firm

---

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

To the Board of Directors and Stockholders of

EOS Petro, Inc. and Subsidiaries

We have audited EOS Petro, Inc. and Subsidiaries' (the "Company") internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). EOS Petro, Inc. and Subsidiaries' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

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

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment.

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

a.

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

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

c.

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

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

e.

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

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

 

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated March 30, 2016, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weaknesses described above on the achievement of the objectives of the control criteria, EOS Petro, Inc. and Subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated balance sheets of EOS Petro, Inc. and Subsidiaries as of December 31, 2015 and 2014, and related consolidated statements of operations, stockholders' deficit, and cash flows for each of the years in the three-year period ended December 31, 2015 and our report dated  March 30, 2016, expressed an unqualified opinion, modified for a going concern uncertainty.

/s/ Weinberg & Company, P.A.

Los Angeles, California

March 30, 2016

---

---

---