Eos Petro 10Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2014

o	Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______.

Commission file number 000-30995

EOS PETRO, INC.

(Exact name of registrant as specified in its charter)

Nevada (State or other jurisdiction of incorporation or organization)	98-0550353 (I.R.S. Employer Identification No.)

1999 Avenue of the Stars, Suite 2520 Los Angeles, California (Address of principal executive offices)	90067 (Zip code)

(310) 552-1555

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Yes x No o

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

Yes x No o

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

Large accelerated filer o Accelerated filer x

Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

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

Yes o No x

As of November 11, 2014, the registrant had 47,732,882 outstanding shares of common stock.

EOS PETRO, INC. TABLE OF CONTENTS

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

Eos Petro, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets



	September 30,			December 31,
	2014			2013
ASSETS	(Unaudited)

Current assets
Cash	$	954		$	21,951
Deposits and other current assets		12,817			21,029
Total current assets		13,771			42,980

Oil and gas properties, net		1,132,727			1,187,555
Other property plant and equipment, net		13,814			21,397
Long-term deposits		102,441			102,441
Total assets	$	1,262,753		$	1,354,373

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
Accounts payable	$	148,888		$	148,888
Accrued expenses		1,626,852			1,169,644
Amounts due shareholder		142,560			164,610
Convertible notes payable, net of discount of $828,498 and $887,118, respectively		4,171,502			2,862,882
Notes payable		850,000			1,108,380
Derivative liabilities		22,622,348			-
Total current liabilities		29,562,150			5,454,404


Asset retirement obligation		82,191			76,457
Total liabilities		29,644,341			5,530,861



Commitments and contingencies

Stockholders' deficit
Series B Preferred stock: $0.0001 par value; 44,000,000 shares authorized,
none issued and outstanding		-			-
Common stock; $0.0001 par value; 300,000,000 shares authorized
47,732,882 and 46,628,882 shares issued and outstanding		4,773			4,663
Additional paid-in capital		88,229,883			23,231,954
Shares of common stock to be issued - Nil and 400,000		-			3,370,000
Stock subscription receivable		(88,200	)		(88,200	)
Accumulated deficit		(116,528,044	)		(30,694,905	)
Total stockholders' deficit		(28,381,588	)		(4,176,488	)
Total liabilities and stockholders' deficit	$	1,262,753		$	1,354,373


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

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Eos Petro, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues
Oil and gas sales	$	187,805		$	248,820		$	614,632		$	469,574

Costs and expenses
Lease operating expense		112,227			173,968			297,756			380,368
General and administrative		11,766,145			7,948,122			29,827,503			9,461,625
Total costs and expenses		11,878,372			8,122,090			30,125,259			9,841,993

Loss from operations		(11,690,567	)		(7,873,270	)		(29,510,627	)		(9,372,419	)

Other income (expense)
Interest and finance costs		(11,325,602	)		(890,900	)		(21,782,217	)		(2,817,853	)
Adjustments to fair value of derivative liabilities		3,641,711			-			3,641,711			-
Loss on debt extinguishment		(37,572,386	)		-			(38,182,006	)		-
Total other income (expense)		(45,256,277	)		(890,900	)		(56,322,512	)		(2,817,853	)

Net loss	$	(56,946,844	)	$	(8,764,170	)	$	(85,833,139	)	$	(12,190,272	)

Net loss per share attributed to common
stockholders - basic and diluted	$	(1.21	)	$	(0.19	)	$	(1.83	)	$	(0.27	)
Weighted average common shares outstanding
basic and diluted		47,055,447			45,788,790			46,820,296			44,913,662


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

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Eos Petro, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Deficit
For theNine Months Ended September 30, 2014
(Unaudited)


					Additional					Stock						Total
	Common Stock				Paid-in		Stock to be			Subscription			Accumulated			Stockholders'
	Shares		Amount		Capital		Issued			Receivable			Deficit			Deficit
Balance, December 31, 2013		46,628,882	$	4,663	$	23,231,954	$	3,370,000		$	(88,200	)	$	(30,694,905	)	$	(4,176,488	)

Issuance of common stock for consulting services		38,000		3		537,116		-			-			-			537,119
Issuance of common stock related to debt extinguishment		66,000		7		692,993		-			-			-			693,000
Fair value of share based compensation		-		-		3,205,706		-			-			-			3,205,706
Fair value of warrants issued for consulting services		-		-		21,813,544		-			-			-			21,813,544
Fair value of warrants issued for note payable extension		-		-		3,212,283		-			-			-			3,212,283
Fair value of warrants issued for financing costs		-		-		2,766,716		-			-			-			2,766,716
Beneficial conversion feature related to issuance of convertible debt		-		-		14,502,500		-			-			-			14,502,500
Fair value of warramts issued in connection with convertible note		-		-		7,293,171		-			-			-			7,293,171
Fair value of shares to be issued in connection with convertible note		1,000,000		100		10,973,900		(3,370,000	)		-			-			7,604,000
Net loss		-		-		-		-			-			(85,833,139	)		(85,833,139	)
Balance, September 30, 2014 (Unaudited)		47,732,882	$	4,773	$	88,229,883	$	-		$	(88,200	)	$	(116,528,044	)	$	(28,381,588	)

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

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Eos Petro, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows


	Nine Months Ended September 30,
	2014			2013
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net loss	$	(85,833,139	)	$	(12,190,272	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion		54,828			103,940
Depreciation		7,583			4,796
Accretion of asset retirement obligation		5,734			3,509
Amortization of debt issuance costs		1,558,620			1,755,503
Non-cash finance costs		22,628,670			739,500
Loss on debt extinguishment		38,182,006			-
Fair value of stock issued for services		537,119			210,150
Fair value of stock issued in debt transaction		-			3,000
Fair value of warrants issued for consulting services		21,813,544			6,992,284
Fair value of share-based compensation		3,205,706			483,977
Adjustments to fair value of derivative liabilities		(3,641,711	)		-
Change in operating assets and liabilities:
Deposits and other current assets		8,212			(37,814	)
Accounts payable		-			(61,680	)
Accrued expenses		398,881			504,079
Amounts due shareholder		(22,050	)		13,710
Net cash used in operating activities		(1,095,997	)		(1,475,318	)

Cash flows from investing activities:
Purchase of other fixed assets		-			(14,000	)
Capital expenditures on oil and gas properties		-			(832,500	)
Net cash used in investing activities		-			(846,500	)

Cash flows from financing activities:
Proceeds from issuance of common stock for cash		-			90,450
Proceeds from (repayment to) related party		-			(39,000	)
Repayment of short term notes payable		(175,000	)		(225,000	)
Purchase of stock pursuant to reverse stock split		-			(4,118	)
Repayment of convertible notes		(250,000	)
Proceeds from issuance of convertible notes		1,500,000			2,500,000
Net cash provided by financing activities		1,075,000			2,322,332

NET INCREASE IN CASH AND CASH EQUIVALENTS		(20,997	)		514

CASH AND CASH EQUIVALENTS, beginning of period		21,951			47,511

CASH AND CASH EQUIVALENTS, end of period	$	954		$	48,025

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for interest	$	-		$	-
Cash paid for income taxes	$	-		$	-

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:

Issued 950,000 shares of Series B Preferred stock
pursuant to debt agreement	$	-		$	3,239,500
Issued 66,000 shares of common stock for extinguishment of debt	$	53,380		$	-
Fair value of common stock issued with convertible note, recognized
as debt discount	$	1,500,000		$	-


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

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

NOTE 1 - ORGANIZATION

The unaudited condensed consolidated financial statements have been prepared by Eos Petro, Inc., (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the financial condition of the Company and its operating results for the respective periods. The condensed balance sheet at December 31, 2013 has been derived from the Company's audited financial statements. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.

Organization and Business

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

Upon completion of the Merger, the former stockholders of Eos owned approximately 93% of the then outstanding shares of Company stock and the holders of the Company’s previously outstanding debt and outstanding shares of Company common stock own the balance. As the owners and management of Eos had voting and operating control of the Company after the Reverse Merger, the transaction has been accounted for as a recapitalization of the Company with Eos deemed the acquiring company for accounting purposes, and the Company was deemed the legal acquirer. Due to the change in control, the condensed consolidated financial statements reflect the historical results of Eos prior to the Merger and that of the consolidated company following the Merger. Common stock and the corresponding capital amounts of the Company pre-Merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the Merger.

Effective as of May 20, 2013, the Company changed its name to Eos Petro, Inc. (it previously had been named “Cellteck, Inc.”) by filing an amendment to its articles of incorporation 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. In anticipation of the Company’s name change, on May 17, 2013, the Company also changed the name of Eos (previously named “Eos Petro, Inc.”), to Eos Global Petro, Inc.

The Company has two wholly-owned subsidiaries, Eos and Eos Merger Sub, Inc., a Delaware corporation (“Eos Delaware”), which was formed for a potential merger with Dune Energy, Inc. following successful completion of the Company’s tender offer for all outstanding shares of Dune Energy, Inc., discussed further below. Eos itself also has two subsidiaries: Plethora Energy, Inc. a Delaware corporation and a wholly-owned subsidiary of Eos (“Plethora Energy”), and EOS Atlantic Oil & Gas Ltd., a Ghanaian corporation (“EAOG”), which is also 10% owned by one of our Ghanaian-based third party consultants. Plethora Energy also owns 90% of Plethora Bay Oil & Gas Ltd., a Ghanaian corporation (“PBOG”), which is also 10% owned by the same Ghanaian-based consultant. Eos, Eos Delaware, PBOG, Plethora Energy and EAOG are collectively referred to as the Company’s “Subsidiaries.”

Business

We are in the business of acquiring, exploring and developing oil and gas-related assets. We formerly marketed the Safe Cell Tab product line, which consists of products designed to protect users against the potentially harmful and damaging effects of electromagnetic radiation emitted from electrical devices. That segment of our business was discontinued in 2013. We have written off all assets after settling all Safe Cell Tab related liabilities.

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include our accounts and those of our Subsidiaries. Intercompany transactions and balances have been eliminated. Management evaluates its investments on an individual basis for purposes of determining whether or not consolidation is appropriate.

Basic and Diluted Earnings (Loss) Per Share

Earnings per share is calculated in accordance with the ASC 260-10, “Earnings Per Share.” Basic earnings-per-share is based upon the weighted average number of common shares outstanding and includes the automatically converted shares of Series B preferred stock on a retroactive basis. Diluted earnings-per-share is based on the assumption that all dilutive convertible preferred shares, stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.

	September 30,
	2014		2013
Options		1,300,000		700,000
Warrants		14,577,992		11,458,000
Convertible notes		2,000,000		600,000
Total		17,877,992		12,758,000

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates reflected in the condensed consolidated financial statements include, but are not limited to, amortization and depletion allowances, the recoverability of the carrying amount and estimated useful lives of long-lived assets, asset retirement obligations, the valuation of equity instruments issued in connection with financing transactions, assumptions used in the valuation of our outstanding derivative liabilities, and share-based compensation costs. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates.

Full Cost Method of Accounting for Oil and Gas Properties

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

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

Oil and gas properties without estimated proved reserves are not amortized until proved reserves associated with the properties can be determined or until impairment occurs. At the end of each reporting period, the unamortized costs of oil and gas properties are subject to a “ceiling test” which limits capitalized costs to the sum of the estimated future net revenues from proved reserves, discounted at 10% per annum to present value, based on current economic and operating conditions, adjusted for related income tax effects.

The Company assesses oil and gas properties at least annually to ascertain whether impairment has occurred. In assessing impairment, the Company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. Through September 30, 2014, the Company has not experienced any impairment of its capitalized oil and gas properties.

The Company recorded depletion expense of $17,220 and $54,828 for three and nine months ended September 30, 2014, respectively, and $52,003 and $103,940 for the three and nine months ended September 30, 2013, respectively.

Asset Retirement Obligation

The Company accounts for its future asset retirement obligations (“ARO”) by recording the fair value of the liability during the period in which it was incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an ARO is included in proven oil and gas properties in the balance sheets. The ARO consists of costs related to the plugging of wells, removal of facilities and equipment, and site restoration on its oil and gas properties. The asset retirement liability is accreted to operating expense over the useful life of the related asset. As of September 30, 2014 and December 31, 2013, the Company had an ARO of $82,191 and $76,457, respectively.

Oil and Gas Revenue

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

Share-Based Compensation

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

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

Fair Value Measurements

The Company applies the provisions of ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

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

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

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

The Company uses Level 2 inputs for its valuation methodology for the warrant derivative liabilities as their fair values were determined by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives.

At September 30, 2014, the Company identified the following liabilities that are required to be presented on the balance sheet at fair value:

	Fair Value		Fair Value Measurements at
	As of		September 30, 2014
Description	September 30, 2014		Using Fair Value Hierarchy
			Level 1		Level 2		Level 3
Warrant derivative liabilities	$	22,622,348	$	-		22,622,348		-

Total	$	22,622,348	$	-		22,622,348		-

For the three and nine months ended September 30, 2014, the Company recognized a gain of $3,641,711for the changes in the fair value of the derivative liabilities.

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

Concentrations

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

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

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

Recently Issued Accounting Pronouncements

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

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

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern(ASU 2014-15). The guidance in ASU 2014-15 sets forth management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management's plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-15 on its consolidated financial statements.

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

NOTE 3 – GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared under the assumption that the Company will continue as a “going concern,” meaning that there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of September 30, 2014, the Company had a stockholders’ deficit of $28,381,588, and for the nine months ended September 30, 2014, reported a net loss of $85,833,139 and had negative cash flows from operating activities of $1,095,997. Management estimates the Company’s capital requirements for the next twelve months, including drilling and completing wells for the Works Property but not including any possible acquisitions, will total approximately $1,000,000. In addition, however, if the Dune Merger Agreement (as defined in Note 11 below) is consummated, management estimates the Company’s capital requirements for the next twelve months will increase by $192,000,000 due to: (i) approximately $140,000,000 in expenses to consummate the Dune Merger Agreement (such expenses are discussed further in Note 11 below); and (ii) approximately $52,000,000 in CAPEX, including drilling and completing wells, for the assets acquired in the Dune Merger Agreement. 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. In addition, the Company's independent registered public accounting firm, in its report on the Company's December 31, 2013 consolidated financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

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

NOTE 4 - NOTES PAYABLE

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

	September 30,		December 31,
	2014		2013

Note payable at 24% (1)	$	-	$	128,380
Secured note payable, at 18% (2)		600,000		600,000
Note payable, at 6% (3)		250,000		250,000
Note payable, at 5%, (4)		-		130,000
Total	$	850,000	$	1,108,380

(1) On October 24, 2011, Eos received $200,000 from RT Holdings, LLC (“RT”) in exchange for an unsecured promissory note payable, originally due November 7, 2011, as extended till April 30, 2013, with interest due at 6% per annum, which was amended to 24%. On the maturity date, in addition to repaying in full the principal amount owed to RT, plus interest, Eos agreed to pay RT a single additional fee of $10,000.

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

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

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

(3) Effective May 22, 2012, the Company entered into a Loan Agreement with Vicki P. Rollins (“Rollins”) for a secured loan in the amount of $350,000 originally due on September 22, 2012. The loan is secured by a priority blanket security interest in all of the Company’s assets. When the Loan Agreement was initially entered into, the Company issued to Rollins 175,000 warrants to purchase common stock with an exercise price of $2.50. Such warrants expired on May 22, 2014. On July 1, 2014, Rollins agreed to extend the maturity date of the loan to December 31, 2014 and amend the terms of the loan so that no interest accrues from inception through repayment. The Company issued to Rollins an aggregate of 250,000 new warrants in exchange for such extension and amendment. The fair value of the 250,000 warrants was $3,212,284 and was recorded as finance costs in the accompanying condensed consolidated financial statements.

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

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

NOTE 5 – CONVERTIBLE PROMISSORY NOTES

A summary of convertible promissory notes at September 30, 2014 and December 31, 2013 are as follows:

	September 30,			December 31,
	2014			2013
Clouding Loan	$	-		$	250,000
LowCal Loan		5,000,000			3,500,000
Unamortized discount		(828,498	)		(887,118	)
Total	$	4,171,502		$	2,862,882

Clouding IP, LLC

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

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

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

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

On various dates in May and June 2014, the Company paid what it believed to be the remaining outstanding principal. However, Clouding made claims that certain amounts of interest, as well as a loan termination fee, were still due, and on August 20, 2014, the Company entered into a settlement agreement for full cancellation and satisfaction of the Clouding Loan and related agreements. Pursuant to the settlement agreement, the Company was to make a one-time payment of $52,500 and issue 1,775,000 warrants to Clouding and certain related parties. If the $52,500 was not paid by August 22, 2014, then the amount due would be increased by 10% and then an additional 1% for each additional 30 days that the Company had not cured the default. As of September 30, 2014, the amount due is $58,327 and has been reflected as an accrued expense in the accompanying condensed consolidated balance sheet. The warrants had an exercise price of $4 and an expiration date of August 20, 2018. The warrant agreement provided for a reduction in exercise price to 75% of the original exercise price if the Company did not pay the $52,500 by August 22, 2014 and also included an anti-dilution provision that would reduce the exercise price if the Company were to issue additional equities at a price below the exercise price which is in effect at the time of the issuance of the additional equities. Pursuant to the agreement, the exercise price was reduced to $3 when the Company did not make the required payment of $52,500 and further reduced the exercise price to $2.50 when the Company issued additional warrants with an exercise price of $2.50. Due to the anti-dilution provision, the Company determined that the warrants were derivatives and recorded the fair value of the warrants of $26,264,059 as a derivative liability and as a loss on debt extinguishment on the September 30, 2014 condensed consolidated financial statements.

LowCal Industries

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

Pursuant to the Loan Agreements, LowCal agreed to purchase from Eos, for $2,480,000, a promissory note in the principal amount of $2,500,000, with interest at 10% per annum (the “LowCal Loan”). At LowCal’s option, LowCal may elect to convert any part of the principal of the LowCal Loan into shares of the Company’s common stock at a conversion price of $5.00 per share. (Subsequently amended to $4 and then $2.50 per share - see below). The principal and all interest on the LowCal Loans are due in one installment on or before December 31, 2014.

The LowCal Loan is secured by (i) a mortgage, lien on, assignment of and security interest in and to oil and gas properties; (ii) a guaranty by the Company as a primary obligor for payment of Eos’ obligations when due; and (iii) a first priority position or call right for an amount equal to the then outstanding principal balance of and accrued interest on the LowCal Loan on the first draw down by either Eos or the Company from a commitment letter entered into with a prospective investor, should the Company or Eos be in a position to draw on this facility.

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

On November 6, 2013, the Company, Eos, LowCal and certain affiliates of LowCal entered into a second amendment to the Loan Agreements. Pursuant to the amended Loan Agreements , the total amount of the LowCal Loan was increased from $2,500,000 to $5,000,000 and the conversion price was changed from $5 to $4.

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

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

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

On August 14, 2014, the Loan Agreements were amended in a third amendment in which the Company issued to LowCal a warrant to purchase 500,000 restricted shares of common stock at $4.00 per share, expiring August 14, 2017. The conversion price on principal and interest of the LowCal Loan was also further amended from $4 to $2.50. The Company determined the fair value of the 500,000 warrants to be $7,293,271 which was recorded as a finance cost in the accompanying condensed consolidated financial statements. Since the modification of the conversion feature exceeded 10% of the Note's carrying amount, the Company determined the fair value of the decrease in the conversion price from $4 to $2.50 to be $11,250,000 should be recorded as loss on debt extinguishment in the accompanying condensed consolidated financial statements.

During the three and nine months ended September 30, 2014, the Company amortized $785,229 and $1,558,620, respectively, of the LowCal loan discount which was recorded to interest and finance costs. During the three and nine months ended September 30, 2013, the Company amortized $749,186 and $1,750,814, respectively, of the LowCal loan discount which was recorded to interest and finance costs. The unamortized balance at September 30, 2014, is $828,498.

During the three months ended September 30, 2014, the Company issued the 400,000 shares due to LowCal valued at $3,370,000 previously classified as "shares to be issued” on the December 31, 2013 consolidated financial statements.

NOTE 6 – ASSET RETIREMENT OBLIGATION

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

	Nine Months
	Ended		Year Ended
	September 30, 2014		December 31, 2013
Asset retirement obligation, beginning of period	$	76,457	$	46,791
Additions		-		22,715
Accretion expense		5,734		6,951
Asset retirement obligations, end of period	$	82,191	$	76,457

NOTE 7 – DERIVATIVE LIABILITIES

As discussed in Note 5, the Company issued 1,775,000 warrants to Clouding and certain related parties. The warrant agreements included an anti-dilution provision that would reduce the exercise price if the Company were to issue additional equities at a price below the exercise price which is in effect at the time of the issuance of the additional equities. Pursuant to ASC Topic 815, “Derivatives and Hedging”, the Company determined that these warrants met the definition of a derivative; Therefore, the initial value of $26,264,059 was recorded as a derivative liability on the accompanying condensed consolidated balance sheet, and all subsequent changes in fair value will be recorded through adjustments to fair value of derivative liabilities on the accompanying condensed consolidated statements of operations. As of September 30, 2014, the Company determined the fair value of the warrants to be $22,622,348 using a probability weighted average Black-Scholes-Merton pricing model with the following assumptions:

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

Expected life of 3.89 years

Volatility of 199%;

Dividend yield of 0%;

Risk free interest rate of 1.78%

The Company recorded an adjustment to fair value of derivative liabilities of $3,641,711 for three and nine months ended September 30, 2014.

NOTE 8 - RELATED PARTY TRANSACTIONS

Plethora Enterprises, LLC

The Company has a consulting agreement with Plethora Enterprises, LLC (“Plethora”), which is solely owned by Nikolas Konstant, the Company’s chairman of the board and chief financial officer. Under the consulting agreement, for the three and nine months ended September 30, 2014, the Company recorded compensation expense of $90,000 and $270,000, respectively and for the three and nine months ended September 30, 2013, the Company recorded compensation expense of $90,000 and $270,000, respectively. The amount due to Mr. Konstant under the Plethora consulting agreement is $142,560 and $164,610 at September 30, 2014 and December 31, 2013, respectively.

Other

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

NOTE 9 - STOCKHOLDERS’ DEFICIT

Stock Issuances for Services

On June 23, 2013, the Company entered into a one year consulting agreement with Hahn Engineering, Inc. (“Hahn”). Pursuant to the agreement, Hahn will be issued 2,000 restricted shares of common stock of the Company per month. While initially such monthly issuances were capped at 24,000 shares, in June 2014 the parties agreed to continue the consulting agreement month to month and to continue to provide 2,000 restricted shares of common stock of the Company to Hahn each such month. During the nine months ended September 30, 2014, Hahn had received 18,000 restricted shares of common stock of the Company valued at $251,119 which was recorded as consulting expense.

NOTE 10 - STOCK OPTIONS AND WARRANTS

Option Activity

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

A summary of the option activity is presented below:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Number of		Exercise		Contractual		Intrinsic
	Options		Price ($)		Life (in years)		Value ($)
Outstanding, December 31, 2013		700,000		2.50		4.07
Granted		600,000
Exercised		-
Forfeited/Canceled		-
Outstanding, September 30, 2014		1,300,000		2.50		3.66	13,650,000
Exercisable, September 30, 2014		850,000		2.50		3.66	4,725,000

The following table summarizes information about options outstanding at September 30, 2014:

Options Outstanding
		Weighted	Weighted
		Average	Average
Exercise	Number of	Remaining	Exercise
Price ($)	Shares	Life (Years)	Price ($)
2.50	1,300,000	3.66	2.50

The following table summarizes information about options exercisable at September 30, 2014:

Options Exercisable
		Weighted	Weighted
		Average	Average
Exercise	Number of	Remaining	Exercise
Price ($)	Shares	Life (Years)	Price ($)
2.50	850,000	3.66	2.50

On June 23, 2013, the Company entered into an employment agreement with Martin Oring, who also acts as a director of the Company, in which Mr. Oring was appointed the CEO of the Company. In exchange for Mr. Oring’s services, he received an option to purchase 600,000 shares of restricted common stock of the Company at an exercise price of $2.50 with a five year term. 50,000 options shares vested each month the employment agreement remained in effect through June 30, 2014. On August 18, 2014, the Company and Mr. Oring entered into a new employment agreement in which Mr. Oring shall continue to act as the Company’s CEO in exchange for a new options. Pursuant to the new agreement entered into on August 18, 2014, the Company issued to Mr. Oring an additional option to purchase 600,000 shares of restricted common stock of the company at an exercise price of $2.50 with a five year term. 50,000 of such options shares vested immediately on the date of grant for Mr. Oring’s services provided in July 2014. The remaining option shares shall vest in monthly installments of 50,000 commencing August 31, 2014 and continuing thereafter every month Mr. Oring’s employment agreement remains in effect.

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

During the three and nine months ended September 30, 2014, the Company recorded $2,237,752 and $3,205,706, respectively, of share based compensation. During the three and nine months ended September 30, 2013, the Company recorded $455,021 and $483,977, respectively, of share based compensation.

As of September 30, 2014, the unamortized balance is $6,713,252 which will be expensed through June 30, 2015.

Warrant Activity

A summary of warrant activity is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Warrants			Price ($)		Life (in years)		Value ($)
Outstanding, December 31, 2013		11,558,000			4.50		2.21
Granted		3,444,992			2.99
Exercised		-			-
Forfeited/Canceled		(425,000	)		2.62
Outstanding, September 30, 2014		14,577,992			4.69		2.21	120,212,916
Exercisable, September 30, 2014		8,274,664			2.86		2.43	83,899,972

The following tables summarize information about warrants outstanding at September 30, 2014:

Warrants Outstanding
				Weighted		Weighted
				Average		Average
Exercise		Number of		Remaining		Exercise
Price ($)		Shares		Life (Years)		Price ($)
	2.50		4,909,992		2.71		2.50
	3.00		2,303,000		1.74		3.00
	4.00		1,175,000		3.43		4.00
	5.35		4,670,000		1.12		5.35
	6.00		20,000		2.59		6.00
	12.95		1,500,000		3.78		12.95
			14,577,992

The following table summarizes information about warrants exercisable at September 30, 2014:

Warrants Exercisable
				Weighted		Weighted
				Average		Average
Exercise		Number of		Remaining		Exercise
Price ($)		Shares		Life (Years)		Price ($)
	2.50		4,776,664		2.51		2.50
	3.00		2,303,000		1.74		3.00
	4.00		1,175,000		3.43		4.00
	6.00		20,000		2.59		6.00
			8,274,664

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

GEM Global Yield Fund

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

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

The fair value of the 1,500,000 Additional Warrants was determined to be $19,085,444 at the vesting date of July 11, 2014 using the Black-Scholes option pricing model with the following assumptions:

Expected life of 4.00 years

Volatility of 220%;

Dividend yield of 0%;

Risk free interest rate of 0.92%

The remaining fair value was amortized through the vesting period of July 11, 2014. The Company recognized a gain of $890,026 for the three months ended September 30, 2014 and expensed $13,415,380 during the nine months ended September 30, 2014 and expensed $5,670,064 during the year ended December 31, 2013 for a cumulative expense of $19,085,444.

DVIBRI

Pursuant to the consulting agreement with DVIBRI the Company issued warrants to purchase 199,992 shares of the Company’s common stock with 16,666 warrants vesting each month. The warrants have an exercise price of $2.50 and expire on June 30, 2017. The Company expensed $649,541 and $1,582,678 for the three and nine months ended September 30, 2014, respectively. The fair value of the 116,662 warrants that vested during the nine months ended September 30, 2014 was determined to be $1,582,678 using the Black-Scholes option pricing model with the following assumptions:

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

Expected life of between 9.76 and 10 years

Volatility of between 200% and 221%;

Dividend yield of 0%;

Risk free interest rate between 2.52% and 2.53%

Mark Bitter

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

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

Expected life of 3 years

Volatility of 253%;

Dividend yield of 0%;

Risk free interest rate of 0.86%

The fair value was recorded as consulting expense in the accompanying condensed consolidated financial statements.

Vicki P. Rollins

As discussed in Note 4, on September 1, 2014, the Company issued to Rollins an aggregate of 250,000 new warrants pursuant to a loan extension and amendment. The fair value of the 250,000 warrants was $3,212,284 using the Black-Scholes option pricing model with the following assumptions:

Expected life of 4.09 years

Volatility of 220%;

Dividend yield of 0%;

Risk free interest rate of 0.90%

The fair value was recorded as an interest and finance cost in the accompanying condensed consolidated financial statements.

BAS Securities, LLC

On August 1, 2014, the Company issued to BAS Securities, LLC (“BAS”), one of the Company’s advisors, 500,000 warrants to purchase restricted shares of its common stock at $4.00 a share, vesting immediately and expiring after four years. The warrants were provided for BAS continuous support in providing consulting services to the Company. The Company determined the fair value at the date of grant to be $6,404,466 using the Black-Scholes option pricing model with the following assumptions:

Expected life of 4 years

Volatility of 220%;

Dividend yield of 0%;

Risk free interest rate of 0.94%

The fair value was recorded as consulting expense in the accompanying condensed consolidated financial statements.

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

Furthermore, pursuant to an agreement effective August 1, 2014, the Company amended the terms of its August 1, 2013 consulting agreement with BAS to appoint BAS as a non-exclusive M&A advisor for the Company. In exchange for the provision of such M&A advisory services, at the close of certain potential acquisitions, BAS shall receive a cash fee equal to 1%-2% of the total size of the acquisition, plus warrant coverage equal to 3.75% of the total amount of the acquisition, divided by 2.5 and at an exercise price of $4.00 per share. Such warrants will have piggy-back registration rights, vest immediately and expire July 31, 2018.

Clouding

On August 20, 2014, the Company entered into a settlement agreement for full cancellation and satisfaction of the Clouding Loan and related agreements. Pursuant to the settlement agreement, the Company issued 1,775,000 warrants to Clouding and certain related parties. Details of such warrants are discussed further in Note 5 and Note 7 above.

LowCal

Pursuant to the third amendment to the LowCal loan agreement as discussed in Note 5, the Company issued to LowCal a warrant to purchase 500,000 restricted shares of common stock at $4.00 per share, expiring August 14, 2017. The Company determined the fair value of the 500,000 warrants to be $7,293,271 using the Black-Scholes option pricing model with the following assumptions:

Expected life of 3 years

Volatility of 220%;

Dividend yield of 0%;

Risk free interest rate of 0.87%

Professional Pension Fund, LLC

On September 11, 2014, in exchange for financial advisory services provided, the Company issued to Professional Pension Fund, LLC, a warrant to purchase an aggregate of 200,000 restricted shares of the Company’s common stock at an exercise price of $2.50, which vest and become exercisable on September 11, 2014 and expire on September 11, 2017.

The fair value of the 200,000 warrants was determined to be $2,766,726 using the Black-Scholes option pricing model with the following assumptions:

Expected life of 3 years

Volatility of 220%;

Dividend yield of 0%;

Risk free interest rate of 1.07%

The fair value was recorded as consulting expense in the accompanying condensed consolidated financial statements.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

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

In response to the announcement of the Dune Merger Agreement (defined below), the Company has been named in a class action complaint filed in the Court of Chancery of the State of Delaware, Civil Action No. 10177-VCL, originally filed on September 29, 2014 and subsequently amended on October 17, 2014. The complaint names Dune Energy, Inc., (“Dune”), along with each of the directors of Dune’s board, as well as the Company and Eos Delaware. The complaint alleges that the directors of Dune’s board breached their fiduciary duties to Dune’s public stockholders, and that Dune, the Company and Eos Delaware aided and abetted Dune’s board’s breaches of fiduciary duties. The complaint seeks a preliminary and permanent injunction, enjoining all defendants from proceeding with, consummating or closing the transactions contemplated in the Dune Merger Agreement, and in the event that the aforementioned transactions close, rescission of the transactions or awarding of rescissory damages, as well as an award of plaintiff’s attorneys’ and experts’ fees and costs. The Company denies all allegations of wrongdoing on its part, or on the part of Eos Delaware, and will vigorously defend against such claims in connection with the complaint. Given the early stage of the litigation, however, at this time the Company is unable to form a professional judgment that an unfavorable outcome is either probable or remote, and it is not possible to assess whether or not the outcome of these proceedings will or will not have a material adverse effect on the Company.

DVIBRI Consulting Agreement

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

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

Dune Merger Agreement

On September 17, 2014, the Company entered into an Agreement and Plan of Merger (the “Dune Merger Agreement”) with Dune. Pursuant to the Dune Merger Agreement, the Company has agreed to conduct a cash tender offer (the “Offer”) to purchase all of Dune’s issued and outstanding shares of common stock, par value $0.001 per share (the “Shares”), at a price of $0.30 per Share in cash, without interest, upon the terms and conditions set forth in the Dune Merger Agreement (the “Offer Price”). In addition to the Offer Price, the Company and Eos Delaware shall provide Dune with sufficient funds to pay in full and discharge all of Dune’s outstanding indebtedness and shall assume liability for all Dune trade debt, as well as fees and expenses related to the Dune Merger Agreement and the transactions contemplated therein.

At the commencement of the Offer, the Company estimated that the total amount of cash required to complete the transactions contemplated by the Dune Merger Agreement will be approximately $140 million dollars, including: (i) approximately $22 million to purchase all of the Shares, (ii) approximately $11 million for the payment of any fees, expenses and other related amounts incurred in connection with the Offer and the Dune Merger, and (iii) approximately $107 million to pay in full and discharge all of Dune’s outstanding indebtedness (other than accrued trade debt of Dune, which shall be assumed by the surviving entity in the merger). The Offer is not subject to a financing contingency.

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Eos Petro, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

In certain instances set forth in the Dune Merger Agreement, if the Dune Merger Agreement is terminated, depending on the circumstances that caused the termination, either: (i) the Company may owe Dune a termination fee of $5.5 million dollars, or (ii) Dune may owe the Company a termination fee of $3.5 million dollars.

Following the successful completion of the Offer, and subject to the terms and conditions of the Dune Merger Agreement, the Company will be merged with and into Dune, with Dune surviving as a direct wholly-owned subsidiary of Eos (the “Dune Merger”). At the effective time of the Dune Merger, each issued and outstanding Share, other than Shares held in the treasury of Dune or owned by Eos or any of their affiliates and Shares held by holders who have properly demanded appraisal rights under Delaware law, will be converted into the right to receive consideration equal to the Offer Price.

The Offer commenced on October 9, 2014 and was originally scheduled to expire on November 6, 2014, but on November 6, 2014 the expiration of the Offer was extended to November 20, 2014 in order to give the Company additional time to arrange financing for the contemplated transactions.

The above does not purport to be a complete summary of the Offer and Dune Merger. For further information, please see the Company’s Schedule T/O as filed with the Securities and Exchange Commission on October 9, 2014, as subsequently amended, as well as the 14D-9 filed by Dune with the Securities and Exchange Commission on October 9, 2014, as subsequently amended.

NOTE 12 – SUBSEQUENT EVENTS

We are in the process of restructuring the LowCal Loan, although the definitive terms of such restructuring have not yet been finalized. Notwithstanding the foregoing, on October 9, 2014 the Company received a $150,000 advance from LowCal upon the understanding that such advance will become part of the LowCal Loan, as ultimately restructured.

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

Forward Looking Statements

This Report contains projections, expectations, beliefs, plans, objectives, assumptions, descriptions of future events or performances and other similar statements that constitute “forward looking statements” that involve risks and uncertainties, many of which are beyond our control. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. All statements, other than statements of historical facts, included in this Report regarding our expectations, objectives, assumptions, strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and objectives of management are forward-looking statements. All forward-looking statements speak only as of September 30, 2014. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including, but not limited to, those set forth in this Report. Important factors that may cause actual results to differ from projections include, but are not limited to, for example: adverse economic conditions, inability to raise sufficient additional capital to operate our business, delays, cancellations or cost overruns involving the development or construction of oil wells, the vulnerability of our oil-producing assets to adverse meteorological and atmospheric conditions, unexpected costs, lower than expected sales and revenues, and operating defects, adverse results of any legal proceedings, the volatility of our operating results and financial condition, inability to attract or retain qualified senior management personnel, expiration of certain governmental tax and economic incentives, and other specific risks that may be referred to in this Report. It is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained or implied in any forward-looking statement. We undertake no obligation to update any forward-looking statements or other information contained herein. Stockholders and potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this Report are reasonable, we cannot assure stockholders and potential investors that these plans, intentions or expectations will be achieved. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

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

Overview

You should read the following discussion of our financial condition and results of operations together with the audited financial statements and the notes to the audited financial statements included in this Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.

On October 12, 2012, pursuant to the Merger Agreement, entered into by and between the Company, Eos and Merger Sub, dated July 16, 2012, Merger Sub merged into Eos, with Eos being the surviving entity in the Merger. As a result of the Merger, Eos became a wholly owned subsidiary of the Company. Upon the closing of the Merger, each issued and outstanding share of common stock of Eos was automatically converted into the right to receive one share of our Series B preferred stock. At the closing, we issued 37,850,044 shares of Series B preferred stock to the former Eos stockholders, subject to the rights of the stockholders of Eos to exercise and perfect their appraisal rights under applicable provisions of Delaware law to accept cash in lieu of shares of the equity securities of the Company.

The amendment also effectuated a reverse stock split of the outstanding shares of common stock of the Company held by stockholders with 2,000 or more aggregate shares of common stock at an exchange ratio of 1-for-800, accompanied by a cash distribution of $0.025 per share to all of the Company’s common stockholders with less than 2,000 shares of common stock in the aggregate, in exchange for and in cancellation of their shares of common stock (the “Stock Split”). This Stock Split triggered the automatic conversion of all 45,275,044 issued and outstanding shares of Series B preferred stock of the Company, including the shares of Series B preferred stock issued in the Merger, into 45,275,044 shares of common stock of the Company.

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We are presently focused on the exploration, development, mining, operation and management of medium-scale oil and gas assets. Our primary activities as of September 30, 2014, have centered on organizing activities but have also included the acquisition of existing assets, evaluation of new assets to be acquired, pre-development activities for existing assets and our Merger with Eos.

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

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

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

On September 17, 2014, the Company entered the Dune Merger Agreement with Dune. Pursuant to the Dune Merger Agreement, the Company has agreed to conduct the Offer to purchase all of Dune’s issued Shares, at the Offer Price. In addition to the Offer Price, the Company and Eos Delaware shall provide Dune with sufficient funds to pay in full and discharge all of Dune’s outstanding indebtedness and shall assume liability for all Dune trade debt, as well as fees and expenses related to the Dune Merger Agreement and the transactions contemplated therein. Following the successful completion of the Offer, and subject to the terms and conditions of the Dune Merger Agreement, the Company will be merged with and into Dune, with Dune surviving as a direct wholly-owned subsidiary of Eos.

At the commencement of the Offer, we estimated that the total amount of cash required to complete the transactions contemplated by the Dune Merger Agreement will be approximately $140 million dollars, including: (i) approximately $22 million to purchase all of the Shares, (ii) approximately $11 million for the payment of any fees, expenses and other related amounts incurred in connection with the Offer and the Dune Merger, and (iii) approximately $107 million to pay in full and discharge all of Dune’s outstanding indebtedness (other than accrued trade debt of Dune, which shall be assumed by the surviving entity in the merger). The Offer is not subject to a financing contingency. The Offer commenced on October 9, 2014 and was originally scheduled to expire on November 6, 2014, but on November 6, 2014 the expiration of the Offer was extended to November 20, 2014 in order to give us additional time to arrange financing for the contemplated transactions.

Comparison of the three months ended September 30, 2014 to September 30, 2013.

	For the Three Months Ended September 30,
	2014						2013
				% of						% of			Dollar			Percentage
	Amount			Revenue			Amount			Revenue			change			Change
Revenue	$	187,805			100.0	%	$	248,820			100.0	%		(61,015	)		-25	%
Lease operating expense		112,227			59.8	%		173,968			69.9	%		(61,741	)		-35	%
General and administrative expenses		11,766,145			6265.1	%		7,948,122			3194.3	%		3,818,023			48	%
Other expense		45,256,277			24097.5	%		890,900			358.0	%		44,365,377			4980	%
Net loss	$	(56,946,844	)		-30322.3	%	$	(8,764,170	)		-3522.3	%		(48,182,674	)		550	%

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 September 30, 2014, our primary revenue has come from one source, the Works Property, located in Southern Illinois. Revenue for the three months ended September 30, 2014 and 2013 was $187,805 and $248,820, respectively. The decrease in revenues for the three months ended September 30, 2014 is due to both the number of barrels sold and the price per barrel. For the three months ended September 30, 2014, we sold 2,064 barrels at an average price of $90.98 per barrel compared to 2,529 barrels at an average price $98.40 per barrel for the three months ended September 30, 2013.

Lease operating expenses

Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the three months ended September 30, 2014 and 2013 was $112,227 and $173,968, respectively. The decrease is due to the increase in proved reserves from 89,054 as December 31, 2012 to 222,413 as of December 31, 2013. With the increase in proved reserves, the amortization expense of each barrel extracted decreases.

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General and administrative expenses

General and administrative expenses for the three months ended September 30, 2014 and 2013 were $11,766,145 and $7,948,122, 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 $129,000, $9,117,000, and $2,362,000 in professional fees, consulting fees and compensation, respectively for the three months ended September 30, 2014. We recognized approximately $236,000, $6,994,000, and $585,000 in professional fees, consulting fees and compensation, respectively for the three months ended September 30, 2013. Other expenses included are temporary professional staffing, rent, utilities, and other overhead expenses. During the three months ended September 30, 2014, we recorded compensation expense of $2,238,000 related to options that were issued to our CEO in August 2014 and vesting though June 2015.

Other expenses

For the three months ended September 30, 2014, other expenses were $45,256,277 consisting of interest and finance costs of approximately $11,326,000, loss on debt extinguishment of approximately $37,572,000 and a gain of approximately $3,642,000 related to the change in fair value of the derivative liabilities. During the three months ended September 30, 2013, other expenses consisted primarily of interest and finance costs of $890,900. The increase in interest and finance costs is primarily due to the amortization of the fair value of the beneficial conversion features and expensing of the fair value of shares issued in connection with the LowCal financing incurred during the three months ended September 30, 2014. The loss on debt modification is due to the 1,775,000 warrants issued per the Clouding settlement agreement 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 with a fair value of approximately $11,300,000. The gain of $3,642,000 related to 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.

Comparison of the nine months ended September 30, 2014 to September 30, 2013.

	For the Nine Month Ended September 30,
	2014						2013
				% of						% of			Dollar			Percentage
	Amount			Revenue			Amount			Revenue			change			Change
Revenue	$	614,632			327.3	%	$	469,574			188.7	%		145,058			31	%
Lease operating expense		297,756			158.5	%		380,368			152.9	%		(82,612	)		-22	%
General and administrative expenses		29,827,503			15882.2	%		9,461,625			3802.6	%		20,365,878			215	%
Other expense		56,322,512			29989.9	%		2,817,853			1132.5	%		53,504,659			1899	%
Net loss	$	(85,833,139	)		-45703.3	%	$	(12,190,272	)		-4899.2	%		(73,642,867	)		604	%

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 September 30, 2014, our primary revenue has come from one source, the Works Property, located in Southern Illinois. Revenue for the nine months ended September 30, 2014 and 2013 was $614,632 and $469,574, respectively. The increase in revenues for the nine months ended September 30, 2014 is due to both the number of barrels sold and the price per barrel. For the nine months ended September 30, 2014, we sold 6,573 barrels at an average price of $93.51 per barrel compared to 5,083 barrels at an average price $92.38 per barrel for the nine months ended September 30, 2013.

Lease operating expenses

Lease operating expenses for oil and gas assets were primarily made up of the Works Property. Lease operating expenses for the nine months ended September 30, 2014 and 2013 was $297,756 and $380,368, respectively. The decrease is due to the increase in proved reserves from 89,054 as December 31, 2012 to 222,413 as of December 31, 2013. With the increase in proved reserves, the amortization expense of each barrel extracted decreases.

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General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2014 and 2013 were $29,827,503 and $9,461,625, 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 $379,000, $25,447,000 and $3,565,000 in professional fees, consulting fees and compensation, respectively for the nine months ended September 30, 2014. We recognized approximately $706,000, $7,472,000, and $825,000 in professional fees, consulting fees and compensation, respectively for the nine months ended September 30, 2013. Other expenses included are temporary professional staffing, rent, utilities, and other overhead expenses. The significant increase in consulting expense is related to the $13,415,000 expense related to the amended GEM warrants, the $6,404,000 related to BAS warrants, and $1,583,000 expense related to the DVBRI warrants. During the nine months ended September 30, 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 $2,238,000 related to options that were issued to out CEO in August 2014 and vesting through June 2015.

Other expenses

For the nine months ended September 30, 2014, other expenses were $56,323,000 consisting of interest and finance costs of $21,782,000, a loss on debt extinguishment of $38,182,000 and a gain of $3,642,000 related to the change in fair value of the derivative liabilities. The increase in interest and finance costs is primarily due to the amortization of the fair value of the beneficial conversion features and expensing of the fair value of shares issued in connection with the LowCal financing incurred during the nine months ended September 30, 2014. The loss on debt modification is primarily due to the 1,775,000 warrants issued per the Clouding settlement agreement 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 with a fair value of approximately $11,300,000. The gain of $3,642,000 related to 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.

Liquidity and Capital Resources

Since our inception, we have financed operations through consulting and service agreements with limited cash requirements, made up of stock compensation and various debt instruments. Our business calls for significant expenses in connection with the operation and acquisition of oil and gas related projects. In order to maintain our corporate operations and to significantly expand our operations and corresponding revenue from the Works Property, we must raise a significant amount of working capital and capital to fund improvements to the Works Property. As of September 30, 2014, we had cash in the amount of $954, and we had total liabilities of $29,644,341, net of discounts of $828,498. 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.

Management estimates the Company’s capital requirements for the next twelve months, including drilling and completing wells for the Works Property but not including any possible acquisitions, will total approximately $1,000,000. In addition, however, if the Dune Merger Agreement is consummated, management estimates the Company’s capital requirements for the next twelve months will increase by $192,000,000 due to: (i) approximately $140,000,000 in expenses to consummate the Dune Merger Agreement (such expenses are discussed further in Note 11 below); and (ii) approximately $52,000,000 in CAPEX, including drilling and completing wells, for the assets acquired in the Dune Merger Agreement.

During the nine months ended September 30, 2014, we received $1,500,000 related to the LowCal Loan for a combined total of $5,000,000 as of September 30, 2014. As discussed in Note 12, on October 9, 2014 the Company received an additional $150,000 from LowCal.

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

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

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

For these reasons, the report of our auditor accompanying our financial statements filed with our December 31, 2013 10-K includes a statement that these factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will be dependent on our raising of additional capital and the success of our business plan.

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

Cash Flows

Operating Activities

Net cash used in operating activities was $1,095,997 and $1,475,318 for the nine months ended September 30, 2014 and 2013, respectively. The net cash used in operating activities was primarily due to the costs incurred with the organizing activities more fully described above.

Investing Activities

Net cash used in investing activities was $0 and $846,500 for the nine months ended September 30, 2014 and 2013, respectively, and was primarily due to the capital costs incurred at the Works Property.

Financing Activities

Net cash provided by financing activities was $1,075,000 and $2,322,332 for the nine months ended September 30, 2014 and 2013, respectively. This cash generated from financing activities for the nine months ended September 30, 2014 was primarily from issuing our convertible notes of $1,500,000, offset by repayment of convertible notes of $250,000 and short term notes payable of $175,000. This cash generated from financing activities for the nine months ended September 30, 2013 was primarily from issuing our convertible notes of $2,500,000 and from issuance of common stock for cash of $90,450, offset by repayment of short term notes payable of $225,000, repayment of related party of $39,000 and purchase of stock pursuant to reverse stock split of $4,118 for the nine months ended September 30, 2013.

Critical Accounting Policies

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

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

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Use of Estimates

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

Final well closure and associated ground reclamation costs to determine the asset retirement obligation as discussed under “Asset Retirement Obligations;”
Estimated variables used in the Black-Scholes option pricing model used to value options and warrants as discussed below under “Share Based Compensation;”
Proved oil reserves;
Future costs to develop the reserves; and
Future cash inflows and production development costs.
Input assumptions used in the valuation of derivative liabilities

Actual results could differ from those estimates.

Revenue Recognition

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

Full Cost Method of Accounting for Oil and Gas Properties

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

Oil and gas properties without estimated proved reserves are not amortized until proved reserves associated with the properties can be determined or until impairment occurs. At the end of each reporting period, the unamortized costs of oil and gas properties are subject to a “ceiling test” which basically limits capitalized costs to the sum of the estimated future net revenues from proved reserves, discounted at 10% per annum to present value, based on current economic and operating conditions, adjusted for related income tax effects.

Asset Retirement Obligation

Share-Based Compensation

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

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Recently Issued Accounting Pronouncements

Off-Balance Sheet Arrangements

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2014. Based upon that evaluation, the chief executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are ineffective. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness relates to the following:

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

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

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

Changes in Internal Control over Financial Reporting

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is determinable and the loss is probable.

On July 11, 2011, Eos entered into an employment agreement with Michael Finch to fill the position of Eos’ CEO. Pursuant to the agreement, Mr. Finch was entitled to an annual salary of $300,000, 2,000,000 shares of common stock vesting over two years, and certain other insurance and employment benefits. However, a dispute arose regarding the amount of work Mr. Finch was performing for Eos and the employment was terminated. On August 9, 2012, Mr. Finch sent a Demand for Arbitration before JAMS alleging breach of the Employment Agreement. Mr. Finch requests the following remedies: (1) $127,500 in unpaid salary; (2) $11,000 in unpaid health coverage; (3) $6,000 in unpaid vehicle allowance; (4) $15,833 for reimbursement of expenses; and (5) 2,000,000 shares of Eos’ common stock. As of the filing date, Eos had not yet prepared or sent a response to the demand. Eos denies any breach of the employment agreement or other wrongdoing on its part and will vigorously defend those claims.

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

In response to the announcement of the Dune Merger Agreement, the Company has been named in a class action complaint filed in the Court of Chancery of the State of Delaware, Civil Action No. 10177-VCL, originally filed on September 29, 2014 and subsequently amended on October 17, 2014. The complaint names Dune, along with each of the directors of Dune’s board, as well as the Company and Eos Delaware. The complaint alleges that the directors of Dune’s board breached their fiduciary duties to Dune’s public stockholders, and that Dune, the Company and Eos Delaware aided and abetted Dune’s board’s breaches of fiduciary duties. The complaint seeks a preliminary and permanent injunction, enjoining all defendants from proceeding with, consummating or closing the transactions contemplated in the Dune Merger Agreement, and in the event that the aforementioned transactions close, rescission of the transactions or awarding of rescissory damages, as well as an award of plaintiff’s attorneys’ and experts’ fees and costs. The Company denies all allegations of wrongdoing on its part, or on the part of Eos Delaware, and will vigorously defend against such claims in connection with the complaint.

Item 1A. Risk Factors

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which to our knowledge have not materially changed. Those risks, which could materially affect our business, financial condition or future results, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

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

During the three months ended September 30, 2014, the Company issued the 400,000 shares due to LowCal previously classified as "shares to be issued” on the December 31, 2013 consolidated financial statements.

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

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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

Reference Number	Item
31.1	Section 302 Certification of Principal Executive Officer.*
31.2	Section 302 Certification of Principal Financial Officer.*
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.*

* Furnished herewith.

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SIGNATURES

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

	EOS PETRO, INC. a Nevada corporation

Date: November 17, 2014	By:	/s/ MARTIN B. ORING
		Martin B. Oring
		President and Chief Executive Officer

Date: November 17, 2014	By:	/s/ NIKOLAS KONSTANT
		Nikolas Konstant
		Chairman of the Board and Chief Financial Officer

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Eos Petro (EOPT) Inactive 10-Q2014 Q3 Quarterly report

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