Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2017 and 2016
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Eos Petro, Inc. (the “Company”) was organized under the laws of the state of Nevada in 2007. On October 12, 2012, the Company (then named "Cellteck, Inc.") and Eos Global Petro, Inc. ("Eos"). As a result of the merger, Eos became a wholly-owned subsidiary of the Company. Effective May 20, 2013, the Company changed its name to Eos Petro, Inc.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of March 31, 2017, the Company had a stockholders’ deficit of $23,856,588, and, for the three months ended March 31, 2017, reported a net loss of $1,770,434 and had negative cash flows from operating activities of $120,277. The Company is also in default on $8,590,000 of its convertible and promissory notes.
In addition, the Company may have become obligated to pay a $5.5 million termination fee under the "Dune Merger Agreement," as defined in Note 8 below (the "Parent Termination Fee," as more fully defined in the Dune Merger Agreement) (see Note 8) and $4 million that may be due under a structuring fee with GEM Global Yield Fund ("GEM"). Furthermore, $8,250,000 of LowCal Convertible and Promissory Notes became due on May 1, 2016 and are therefore now due and payable. Management estimates the Company's capital requirements for the next twelve months, including drilling and completing wells for the Company's oil and gas "Works Property" located in Illinois and possible acquisitions, will total approximately $2,500,000, excluding any amounts that may be due to Dune Energy, Inc. under the Dune Merger Agreement or a $4 million structuring fee that may be due to GEM. Errors may be made in predicting and reacting to relevant business trends and the Company will be subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies. The Company may not be able to successfully address any or all of these risks and uncertainties. Failure to adequately do so could cause the Company's business, results of operations, and financial condition to suffer. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty.
The Company's ability to continue as a going concern is an issue due to its net losses and negative cash flows from operations, and its need for additional financing to fund future operations. The Company's ability to continue as a going concern is subject to its ability to obtain necessary funding from outside sources, including the sale of its securities or obtaining loans from investors or financial institutions. There can be no assurance that such funds, if available, can be obtained on terms reasonable to the Company. Any debt financing or other financing of securities senior to common stock that the Company is able to obtain will likely include financial and other covenants that will restrict the Company's flexibility. At a minimum, the Company expects these covenants to include restrictions on its ability to pay dividends on its common stock in the case of debt financing, or cause substantial dilution for stockholders in the case of convertible debt and equity financing. Any failure to comply with these covenants would have a material adverse effect on the Company's business, prospects, financial condition, results of operations and cash flows.
8
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates reflected in the condensed consolidated financial statements include, but are not limited to, amortization and depletion allowances, the recoverability of the carrying amount and estimated useful lives of long-lived assets, asset retirement obligations, the valuation of equity instruments issued in connection with financing transactions and share-based compensation, and assumptions used in valuing derivative liabilities and net operating loss carryforwards. Actual results could differ from those estimates.
Basic and Diluted Earnings (Loss) Per Share
Earnings per share is calculated in accordance with the ASC 260-10,
“Earnings Per Share.”
Basic earnings-per-share is based upon the weighted average number of common shares outstanding. Diluted earnings-per-share is based on the assumption that all dilutive convertible preferred shares, stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
Options
|
5,750,000
|
|
5,825,000
|
Warrants
|
8,627,734
|
|
8,762,992
|
Convertible notes
|
2,000,000
|
|
2,000,000
|
Total
|
16,377,734
|
|
16,587,992
|
|
|
|
|
Concentrations
One customer accounted for 100% of oil sales for the three months ended March 31, 2016.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, and ASU 2017-05, all of which clarify certain implementation guidance within ASU 2014-09. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. The standard can be adopted either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company is currently in the process of analyzing the information necessary to determine the impact of adopting this new guidance on its financial position, results of operations, and cash flows. The Company will adopt the provisions of this statement in the first quarter of fiscal 2018.
9
In February 2016, the FASB issued ASU No. 2016-02, Leases. This update will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements and related disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
NOTE 2 - LOWCAL CONVERTIBLE AND PROMISSORY NOTES PAYABLE
LowCal convertible and promissory notes payable at March 31, 2017 and December 31, 2016 are as follows:
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
LowCal Convertible Note
|
$
|
5,000,000
|
$
|
5,000,000
|
LowCal Promissory Note
|
|
3,250,000
|
|
3,250,000
|
Total
|
$
|
8,250,000
|
$
|
8,250,000
|
The LowCal Loan is secured by: (i) a mortgage, lien on, assignment of and security interest in and to oil and gas properties; (ii) a guaranty by the Company as a primary obligor for payment of Eos' obligations when due; and (iii) a first priority position equal to the outstanding principal balance of and accrued interest on the LowCal Loan on the first draw down by either Eos or the Company from a commitment letter entered into with a prospective investor, should the Company or Eos be in a position to draw on this facility.
As amended, the maturity dates of both the LowCal Convertible Note and the LowCal Promissory Note are May 1, 2016, and are currently in default. The parties have agreed that, upon repayment in full of the LowCal Promissory Note, LowCal will forever release, cancel and terminate all of its mortgages and any other liens against the Company. At March 31, 2017 and December 31, 2016, the LowCal Convertible Note is convertible at a conversion price of $2.50 per share into 2,000,000 shares of the Company’s common stock.
10
NOTE 3 – NOTES PAYABLE
Notes payable at March 31, 2017 and December 31, 2016 are as follows:
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Secured note payable, at 18% (1)
|
$
|
300,000
|
$
|
300,000
|
Note payable at 10%, (2)
|
|
728,000
|
|
728,000
|
Note payable, at 2%, (3)
|
|
100,000
|
|
100,000
|
Notes payable at 5% to 10% (4)
|
|
200,000
|
|
200,000
|
Note payable at 10%, (5)
|
|
200,000
|
|
200,000
|
Note payable at 5%, (6)
|
|
580,000
|
|
500,000
|
Note payable at 2%, (7)
|
|
40,000
|
|
40,000
|
Total notes payable
|
|
2,148,000
|
|
2,068,000
|
Debt discount
|
|
-
|
|
(45,916)
|
|
$
|
2,148,000
|
$
|
2,022,084
|
|
|
|
|
|
(1) Note payable issued in 2012 to Vatsala Sharma with interest at 18% per annum, secured by all of Eos’ assets, a mortgage on the Works oil and gas property, a 50% security interest in Nikolas Konstant’s personal residence, and his personally held shares in a non-affiliated public corporation. As amended, the maturity date of the Sharma loan is January 15, 2017. This note is currently in default.
(2) Notes payable issued in 2014 ($130,000), 2015 ($453,000), and 2016 ($275,000) to Bacchus Investors, LLC, with interest at 4-10% per annum, unsecured, and due upon demand.
(3) Note payable issued in 2014 to Ridelinks, Inc., interest at 2% per annum, and unsecured. The note was initially due March 26, 2016. On April 14, 2017, the note was amended to extend the maturity date July 31, 2017 (see Note 9).
(4) Unsecured promissory notes, interest at 5% to 10% per annum, and due upon demand.
(5) Note payable issued in 2016, interest at 10%, and secured by certain assets. The note was initially due December 15, 2016. On April 11, 2017, the note was amended to extend the maturity date to July 30, 2017 (see Note 9).
(6) Note payable issued in 2016, interest at 5%, secured by certain assets of the Company, in the original principal amount of $500,000, due on June 5, 2017. On February 6, 2017, the note was amended and a loan fee of $75,000 and accrued interest of $5,000 were added to principal. In addition, the Company agreed to issue 150,000 shares to the note holder valued at $223,500 based on the market price of the Company’s stock on the date of the amendment. The amendment of the note was recorded as a debt extinguishment.
(7) Note issued in 2016, with an original issue discount of $10,000, unsecured, and due November 30, 2016. The note is currently in default.
During three months ended March 31, 2017, the Company recognized amortization of debt discounts of notes issued in 2016 of $45,916. As of March 31, 2017, the unamortized valuation discount was $0.
11
NOTE 4 – DERIVATIVE LIABILITIES
Under authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. On November 1, 2016, the Company issued a warrant to purchase an aggregate of 500,000 shares of the Company’s common stock to an investor in connection with a note payable. The exercise price of the warrant is equal to 85% of the price per shares of common stock sold by the Company in a future offering of at least $1,000,000. If no such offering occurs within six months then the exercise price will be $0.10 per shares. Since the exercise price of the warrant is a percentage of a future offering price, the Company determined that the warrant met the definition of a derivative and is to be re-measured at the end of each reporting period with the change in fair value reported in the statement of operations.
As of March 31, 2017, and December 31, 2016, the derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following assumptions:
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Exercise Price
|
$
|
0.10
|
$
|
0.10
|
Stock Price
|
$
|
1.00
|
$
|
1.00
|
Expected life of the options (Years)
|
|
2.59
|
|
2.84
|
Expected volatility
|
|
136%
|
|
133%
|
Risk-free interest rate
|
|
1.50%
|
|
0.80%
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
|
|
|
|
Fair Value
|
$
|
468,689
|
$
|
469,267
|
|
|
|
|
|
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the warrants was determined by the expiration dates of the warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
The Company recorded an adjustment to the fair value of derivative liabilities of $578 and $605,662 for three months ended March 31, 2017 and 2016, respectively, and were valued using Level 2 inputs.
NOTE 5 - RELATED PARTY TRANSACTIONS
Plethora Enterprises, LLC
The Company has a consulting agreement with Plethora, which is solely owned by Nikolas Konstant, the Company’s Chairman of the Board and Chief Financial Officer. Under the consulting agreement, for the three months ended March 31, 2017 and 2016, the Company recorded compensation expense of $90,000 and $90,000, respectively. At March 31, 2017 and December 31, 2016 and 2015, there was $403,262 and $363,601, respectively, due to Mr. Konstant, and included in the balance of accrued officers’ compensation in the accompanying consolidated balance sheet.
During the three months ended March 31, 2016, Plethora sold an aggregate of 351,515 of its shares of the Company's restricted common stock in private sales. The proceeds from these sales of $125,000 were loaned to the Company. Of the 351,515 shares of common stock sold by Plethora, 251,515 shares were sold to either affiliates of the Company, vendors, or individuals with whom the Company had a past business relationship. The Company considered the provisions of Staff Accounting Bulletin ("SAB") Topic 5T,
Accounting for Expenses or Liabilities Paid by Principal Stockholders
, and determined that the difference between the quoted market price of the shares
12
and the sales price to the buyers as additional compensation cost and a contribution to capital by a major related party stockholder (Plethora). As such, the Company recorded a charge of $931,060 during the three months ended March 31, 2016 relating to the difference between the sales price and the fair market price of the shares on the date of the transaction.
NOTE 6- STOCKHOLDERS’ DEFICIT
During the three months ended March 31, 2017 the Company issued:
100,000 shares of its common stock to a consultant valued at $149,000 based on the market price of the Company’s common stock at the date of issuance;
150,000 shares of its common stock in connection with an extension of the maturity date of a note payable (See Note 3) valued at $223,500 based on the market price of the Company’s common stock at the date of issuance; and
100,000 shares of its common stock for cash proceeds of $100,000.
NOTE 7 - STOCK OPTIONS AND WARRANTS
Option Activity
A summary of the option activity is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price ($)
|
|
Life (in years)
|
|
Value ($)
|
Outstanding, December 31, 2016
|
|
5,750,000
|
|
1.33
|
|
3.63
|
|
-
|
Granted
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
-
|
|
|
|
|
|
|
Outstanding, March 31, 2017
|
|
5,750,000
|
|
1.33
|
|
3.38
|
|
-
|
Exercisable, March 31, 2017
|
|
4,250,000
|
|
1.44
|
|
3.24
|
|
-
|
|
|
|
|
|
|
|
|
|
At March 31, 2017, there was no intrinsic value to the outstanding and exercisable stock options.
13
The following table summarizes information about options outstanding at March 31, 2017:
Options Outstanding
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
Average
|
|
Average
|
Exercise
|
|
Number of
|
|
Remaining
|
|
Exercise
|
Price ($)
|
|
Shares
|
|
Life (Years)
|
|
Price ($)
|
1.00
|
|
4,500,000
|
|
3.79
|
|
1.00
|
2.50
|
|
1,250,000
|
|
1.92
|
|
2.50
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
Average
|
|
Average
|
Exercise
|
|
Number of
|
|
Remaining
|
|
Exercise
|
Price ($)
|
|
Shares
|
|
Life (Years)
|
|
Price ($)
|
1.00
|
|
3,000,000
|
|
3.79
|
|
1.00
|
2.50
|
|
1,250,000
|
|
1.92
|
|
2.50
|
During the three months ended March 31, 2017 and 2016, the Company recorded $896,042 and $7,836,691, respectively, of share based compensation relating to the vesting of options granted in 2016. As of March 31, 2017, the unamortized balance related to future stock based compensation for options previously granted but not vested is $2,284,172.
Warrant Activity
A summary of warrant activity is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Warrants
|
|
Price ($)
|
|
Life (in years)
|
|
Value ($)
|
Outstanding, December 31, 2016
|
|
8,627,734
|
|
2.75
|
|
2.26
|
|
450,000
|
Granted
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
-
|
|
|
|
|
|
|
Outstanding, March 31, 2017
|
|
8,627,734
|
|
2.75
|
|
2.01
|
|
450,000
|
Exercisable, March 31, 2017
|
|
8,627,734
|
|
2.75
|
|
2.01
|
|
450,000
|
14
The following tables summarize information about warrants outstanding and exercisable at March 31, 2017:
Warrants Outstanding and Exercisable
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
Average
|
|
Average
|
Exercise
|
|
Number of
|
|
Remaining
|
|
Exercise
|
Price ($)
|
|
Shares
|
|
Life (Years)
|
|
Price ($)
|
0.10
|
|
500,000
|
|
2.59
|
|
1.00
|
1.00
|
|
2,175,000
|
|
1.59
|
|
1.00
|
2.00
|
|
1,100,000
|
|
2.56
|
|
2.00
|
2.50
|
|
3,207,734
|
|
2.37
|
|
2.50
|
3.00
|
|
50,000
|
|
2.88
|
|
3.00
|
4.00
|
|
75,000
|
|
1.34
|
|
4.00
|
6.00
|
|
20,000
|
|
0.08
|
|
6.00
|
7.15
|
|
1,500,000
|
|
1.28
|
|
7.15
|
|
|
8,627,734
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Dune Merger Agreement
On September 17, 2014 the Company entered into an Agreement and Plan of Merger with Dune Energy Inc. ("Dune") and Eos Delaware, dated as of September 16, 2014, as subsequently amended (the "Dune Merger Agreement"), and on the terms and subject to the conditions described therein, Eos Delaware agreed to conduct a cash tender offer to purchase all of Dune's issued and outstanding shares of common stock at a price of $0.30 per share in cash, without interest, upon the terms and conditions set forth in the Dune Merger Agreement.
Due to the severe decline in oil prices, the Company's sources of capital for the merger and tender offer were withdrawn, and the Company was unable to complete the merger and tender described in the Dune Merger Agreement on the terms originally negotiated. After a series of amendments to the Dune Merger Agreement while the parties continued to try to negotiate financing terms, the tender offer ultimately expired on February 27, 2015.
Subsequently, on March 4, 2015, Dune provided the Company with notice of its decision to terminate the Dune Merger Agreement in accordance with the terms thereof, and demanded the Parent Termination Fee (as defined in the Dune Merger Agreement) of $5,500,000 in cash, and reimbursement for certain unidentified expenses incurred by Dune. Dune has threatened to bring litigation to collect these amounts in connection with its contention that the Company breached the Dune Merger Agreement and is entitled to the Parent Termination Fee. The Company has accordingly recorded a liability for $5,500,000 related to the Parent Termination Fee. No lawsuit has been filed to date against the Company for the Parent Termination Fee, and the Company would vigorously defend itself, should any action ever be brought.
GEM Global Yield Fund
Pursuant to the financing commitment, dated August 31, 2011, and the Common Stock Purchase Agreement and Registration Rights Agreement, both dated as of July 11, 2013, entered into between the Company and GEM (collectively referred to as the "Commitment Agreements"), the Company was required to use commercially reasonable efforts to uplist to the NYSE, NASDAQ or AMEX stock exchange within 270 days of July 11, 2013, and then to file a registration statement covering the shares and warrants referenced in the Commitment Agreements within 30 days of uplisting. The Company further agreed to pay to GEM a structuring fee equal to $4 million, which was to be paid on the 18-month anniversary of July 11, 2013 regardless of whether the Company had drawn down from the Commitment at that time. At the Company's election, the Company may elect to pay the structuring fee in registered shares of its common stock of the Company at a per share price equal to 90% of the average closing trading price of the Company's common stock for the thirty-day period immediately prior to the 18-month
15
anniversary of July 11, 2013. As of January 11, 2015, the 18-month anniversary date of the agreement, the Company had not met this requirement and may now become liable for payment of this structuring fee to GEM. As of December 31, 2015, the Company has recorded an accrued structuring fee of $4 million.
NOTE 9– SUBSEQUENT EVENTS
These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-Q for the period ended September 30, 2017, filed on April 27, 2018, with the Securities and Exchange Commission, which contains additional information of events subsequent to March 31, 2017.
16