ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
We are an independent oil and gas company engaged in oil and gas development, exploration and production with properties and operational focus in the Gulf Coast Region. Our strategy is to grow our asset base by purchasing producing assets at a discount to reserve value, increasing the production rate of reserves, and converting proved developed non-producing reserves to proved developed producing reserves. Acquisitions to date have provided both producing and non producing assets. Our principal assets are oil and gas properties, including a 100% working interest in oil and gas producing properties located in Nueces County, Texas.
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OUR OPERATIONS
During 2006, ECCE acquired interests in 330 gross acres of oil and gas leases located in the State of Texas. These properties are producing. We have also acquired non producing properties, specifically Louisiana State Lease Number 17742 in Block 4, covering 600 acres in the East Cameron Area in Cameron Parish, Louisiana (“Louisiana Shelf Property”). This property was acquired through our acquisition of all the general and limited partner interests of Louisiana Shelf Partners, LP (“Louisiana Shelf Partners”). We also acquired oil, gas and mineral lease no. 1337 located in the State of Louisiana, from VTEX Energy Inc. (the “Bateman Lake Field”).
During the year, ECCE disposed of the Louisiana Shelf Partners and the Bateman Lake Field. As of December 31, 2009, the Wilson Field located in Nueces County, Texas, is the only producing or non-producing property owned by ECCE.
In October 2008, ECCE acquired a gas pipeline (“Pipeline”) approximately 13 miles in length located in Jefferson and Harrison Counties, Ohio. The Pipeline was purchased from M- J Oil Company of Paris, Ohio, an unaffiliated third party, by issuing a mortgage note for $1,000,000. The mortgage note bears an 8% annual interest rate and was due in full on September 30, 2009 and remains unpaid pending negotiations for revised payment terms. The mortgage is secured by the Pipeline assets. The pipeline services oil and gas properties owned by Samurai Corp, an affiliated company.
We plan to target additional exploration and developmental properties for acquisition. Our ability to complete any acquisitions will be subject to our obtaining sufficient financing and our being able to conclude agreements with the property owners on terms that are acceptable to us. No potential acquisition properties have been specifically identified as of the date hereof.
OIL AND GAS PROPERTIES
WILSON PROPERTIES LEASE - NUECES COUNTY, TEXAS
We own 100% of the working interest in the E.C. Wilson and Wilson State Tract Leases (“Wilson Properties”) located in Nueces County, Texas The Wilson field is currently producing oil and gas, and is the only field providing revenue to ECCE. ECCE’s goal for 2010 is to increase production at the Wilson Properties lease. We do not anticipate any capital expenditures during 2010; however ECCE has several options relating to the development of the Wilson Field which could enhance production should funds come available. We will need to raise funds in order for any drilling to occur. If we do not raise funds sufficient to develop the field, we may need to sell the property to raise funds.
BATEMAN LAKE FIELD - ST. MARY’S PARISH, LOUISIANA
In December 2007, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with Old Jersey Oil Ventures LLC, a New Jersey limited liability company (“Old Jersey”) and Eugene A. Noser, Jr. (“Noser”), who held of record 100% of the total issued and outstanding interests in Old Jersey (the “Membership Interest”), regarding acquisition by the Company of Old Jersey. In accordance with the terms and provisions of the Share Exchange Agreement, the Company acquired from Noser all of his Membership Interest in exchange for the issuance of 600,000 shares of the Company’s Series C Preferred Stock and 303,936 shares of the Company’s Series D Preferred Stock.
Old Jersey, together with the Moffat Group, were holders of approximately $5,900,000 in notes (the “Debt”) payable by VTEX Energy, Inc., a Nevada corporation (“VTEX”), relating to the Bateman Lake Field. In January 2008, the Company entered into an assignment of oil, gas and mineral lease (the “VTEX Assignment”) with VTEX pursuant to which VTEX assigned to the Company all of its right, title and interest in the Bateman Lake Field in exchange for $1,000. As a result of the VTEX Assignment, the Company acquired 100% of the interest in the Bateman Lake Field. The Company also assumed the Debt payable by VTEX to Old Jersey. The lease consists of 14 non-producing oil and gas wells on Louisiana State Lease No. 1337, in St. Mary’s Parish, Louisiana. As of December 31, 2009, there had been no oil and gas production from this concession during 2009 or at any other time while the properties were owned by ECCE.
ECCE sold an unused platform to a company that has oil and gas production in a field adjacent to our Bateman Lake property in the St. Mary’s Parish region of Louisiana. We sold the platform in February 2009 for $75,000 to an unaffiliated operator, which was paid in full by June 30, 2009.
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During 2008 and 2009 we unsuccessfully attempted to farm-out the property to another oil and gas company. On July 24, 2009, we negotiated a contract to sell the entire Bateman Lake field to an unaffiliated party for $700,000, plus assumption of the majority of the liens and liabilities related to the properties. In 2009, ECCE recorded an impairment charge of $4,037,875 to adjust the book value to represent the expected realizable value of the properties. The liabilities associated with the oil and gas properties, including asset retirement obligations, were transferred with the assets. The sale was completed on August 31, 2009, with $100,000 being paid to ECCE as of that date. ECCE issued a note receivable for $600,000 representing the balance due. A payment of $433,000 was made on October 15, 2009, with the remaining $167,000 held in escrow pending settlement or payment of certain liens on the property. As of December 31, 2009 we have settled the designated liens, and receiving $121,390 in favorable lien settlement amounts, thus completing the transaction. ECCE recorded a loss on the sale of the Bateman Lake Field of $232,526.
LOUISIANA SHELF PROPERTY - CAMERON PARISH, LOUISIANA
On September 28, 2007, we executed an agreement pursuant to which we acquired all of the assets of Louisiana Shelf Partners for $5,000,000 by issuing 1,000,000 shares of Series B Convertible Preferred Stock. Louisiana Shelf Partners owned the Louisiana Shelf property, consisting of Louisiana State Lease Number 17742 in Block 4, covering 600 acres in the East Cameron Area in Cameron Parish, Louisiana. On February 14, 2008, the Company purchased an additional 25% of the working interest in Louisiana Shelf Property from the trustee of assets then held in bankruptcy in exchange for $10,000. We then owned 100% of the interests in the Louisiana Shelf Property.
During the third quarter of 2009 we determined that the Louisiana Shelf Property was not commercially economical and would not prove to be a successful venture ECCE recorded an impairment charge of $5,031,508 to reduce the value of the property to $166,000 and attempted to sell the property. During the fourth quarter, we disposed of the property in exchange for the assumption of all liabilities relating to well closing and plugging, as well as the assumption of approximately $166,000 in various payables owed to vendors.
OHIO PIPELINE
In October 2008, ECCE acquired a gas pipeline (“Pipeline”) approximately 13 miles in length located in Jefferson and Harrison Counties, Ohio. The Pipeline was purchased from M- J Oil Company of Paris, Ohio, an unaffiliated third party, by issuing a mortgage note for $1,000,000. The mortgage note bears an 8% annual interest rate. The mortgage is secured by the Pipeline assets. The mortgage was due on September 30, 2009, at which time, the entire unpaid balance of principal and accrued interest was to have been paid. The pipeline services oil and gas properties owned by Samurai Corp, an affiliated company
On February 27, 2009, ECCE entered into an agreement to buy oil and gas producing properties in Ohio, from Samurai Corp, an affiliated company owned by Sam Skipper. Upon further review, due to market conditions pertaining to the price of oil and gas, both Samurai and ECCE decided that the transaction was not in the best interest of shareholders of either company. Therefore, on April 13, 2009 the Board of Directors of both companies decided to terminate the transaction.
A review of the pipeline valuation was performed by management. This was necessary as the asset was not an income producing asset during 2009. A comparison of replacement cost, comparable market value and comparable earnings potential to other pipelines, shows that the expected realizable value of the asset at December 31, 2009 was $100,000. An impairment charge of $900,000 was recorded during the year ended December 31, 2009.
Because the failure to complete the transfer of assets from Samurai to ECCE, the covenants of the Pipeline purchase were violated. On February 28, 2009 M-J Oil Company Inc, of Paris Ohio, obtained a judgment against ECCO Energy for non-compliance with covenants in the original mortgage relating to the purchase of the M-J Oil Company pipeline (“Pipeline”). We are in negotiations with the M-J Oil Company to remove the judgment and to adjust the mortgage terms, which required full payment on September 30, 2009. As of this date, we have not reached a satisfactory agreement with the lender.
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COMPETITION
We encounter competition from other natural gas and oil companies in all areas of our operations, including the acquisition of exploratory prospects and proven properties. Many of our competitors are large, well-established companies that have been engaged in the natural gas and oil business for much longer than we have and possess substantially larger operating staffs and greater capital resources than we do. Our ability to explore for oil and natural gas reserves and to acquire additional properties in the future will be dependent upon our ability to conduct our operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. The Company is also affected by competition for drilling rigs and the availability of related equipment. In the past, the oil and natural gas industry has experienced shortages of drilling rigs, equipment, pipe and personnel, which has delayed development drilling and has caused significant price increases. The Company is unable to predict when, or if, such shortages may occur or how they would affect its drilling program.
OIL AND GAS EXPLORATION REGULATION
The Company’s oil and gas exploration, including future production and related operations are subject to extensive rules and regulations promulgated by federal and state agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry adds to our cost of doing business and affects our profitability. Because such rules and regulations are frequently amended or interpreted differently by regulatory agencies, we are unable to accurately predict the future cost or impact of complying with such laws.
The Company’s oil and gas exploration and future production operations are and will be affected by state and federal regulation of gas production, federal regulation of gas sold in interstate and intrastate commerce, state and federal regulations governing environmental quality and pollution control, state limits on allowable rates of production by a well or pro-ration unit and the amount of gas available for sale, state and federal regulations governing the availability of adequate pipeline and other transportation and processing facilities, and state and federal regulation governing the marketing of competitive fuels. For example, a productive gas well may be “shut-in” because of an over-supply of gas or lack of an available gas pipeline in the areas in which we may conduct operations. State and federal regulations generally are intended to prevent waste of oil and gas, protect rights to produce oil and gas between owners in a common reservoir, control the amount of oil and gas produced by assigning allowable rates of production and control contamination of the environment. Pipelines are subject to the jurisdiction of various federal, state and local agencies.
Regulation of Sale and Transportation of Oil
Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future.
Our sales of crude oil are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. The Federal Energy Regulatory Commission, or the FERC, regulates interstate oil pipeline transportation rates under the Interstate Commerce Act. In general, interstate oil pipeline rates must be cost-based, although settlement rates agreed to by all shippers are permitted and market-based rates may be permitted in certain circumstances. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system (based on inflation) for transportation rates for oil that allowed for an increase or decrease in the cost of transporting oil to the purchaser. A review of these regulations by the FERC in 2000 was successfully challenged on appeal by an association of oil pipelines. On remand, the FERC in February 2003 increased the index slightly, effective July 2001. Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any way that is of material difference from those of our competitors.
Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines’ published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors.
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Regulation of Sale and Transportation of Natural Gas
Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 and regulations issued under those Acts by the FERC. In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Deregulation of wellhead natural gas sales began with the enactment of the Natural Gas Policy Act. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act. The Decontrol Act removed all Natural Gas Act and Natural Gas Policy Act price and non-price controls affecting wellhead sales of natural gas effective January 1, 1993.
FERC regulates interstate natural gas transportation rates and service conditions, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas. Since 1985, the FERC has endeavored to make natural gas transportation more accessible to natural gas buyers and sellers. The FERC has stated that open access policies are necessary to improve the competitive structure of the interstate natural gas pipeline industry and to create a regulatory framework that will put natural gas sellers into more direct contractual relations with natural gas buyers by, among other things, unbundling the sale of natural gas from the sale of transportation and storage services. Beginning in 1992, the FERC issued Order No. 636 and a series of related orders to implement its open access policies. As a result of the Order No. 636 program, the marketing and pricing of natural gas have been significantly altered. The interstate pipelines’ traditional role as wholesalers of natural gas has been eliminated and replaced by a structure under which pipelines provide transportation and storage service on an open access basis to others who buy and sell natural gas. Although the FERC’s orders do not directly regulate natural gas producers, they are intended to foster increased competition within all phases of the natural gas industry.
In 2000, the FERC issued Order No. 637 and subsequent orders, which imposed a number of additional reforms designed to enhance competition in natural gas markets. Among other things, Order No. 637 effected changes in FERC regulations relating to scheduling procedures, capacity segmentation, penalties, rights of first refusal and information reporting.
We cannot accurately predict whether the FERC’s actions will achieve the goal of increasing competition in markets in which our natural gas is sold. Additional proposals and proceedings that might affect the natural gas industry are pending before the FERC and the courts. The natural gas industry historically has been very heavily regulated. Therefore, we cannot provide any assurance that the less stringent regulatory approach recently established by the FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers.
Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states on shore and in state waters. Although its policy is still in flux, FERC has reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of getting natural gas to point of sale locations.
Intrastate natural gas transportation is also subject to regulation by state regulatory agencies. The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and scrutiny given to intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers within the state on a comparable basis, we believe that the regulation of similarly situated intrastate natural gas transportation in any states in which we operate and ship natural gas on an intrastate basis will not affect our operations in any way that is of material difference from those of our competitors. Like the regulation of interstate transportation rates, the regulation of intrastate transportation rates affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas.
Operating Hazards and Insurance
The oil and natural gas industry involves a variety of operating hazards and risks that could result in substantial losses from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. The Company may be liable for environmental damages caused by previous owners of property it purchases and leases. As a result, the Company may incur substantial liabilities to third parties or governmental entities, the payment of which could reduce or eliminate funds available for acquisitions, development or distributions, or result in the loss of properties. In addition, the Company participates in wells on a nonoperated basis and therefore may be limited in its ability to control the risks associated with the operation of such wells.
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In accordance with customary industry practices, the Company maintains insurance against some, but not all, potential losses. The Company cannot provide assurance that any insurance it obtains will be adequate to cover any losses or liabilities. . In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on the Company’s financial position and results of operations.
ENVIRONMENTAL REGULATION
Our activities will be subject to existing federal, state and local laws and regulations governing environmental quality and pollution control. Our operations will be subject to stringent environmental regulation by state and federal authorities including the Environmental Protection Agency. Such regulation can increase the cost of such activities. In most instances, the regulatory requirements relate to water and air pollution control measures. Management believes that we are in substantial compliance with current applicable environmental laws and regulations.
Waste Disposal
The Resource Conservation and Recovery Act (“RCRA”), and comparable state statutes, affect minerals exploration and production activities by imposing regulations on the generation, transportation, treatment, storage, disposal and cleanup of “hazardous wastes” and on the disposal of non-hazardous wastes. Under the auspices of the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements.
Comprehensive Environmental Response, Compensation and Liability
The federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) imposes joint and several liabilities for costs of investigation and remediation and for natural resource damages, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release into the environment of substances designated under CERCLA as hazardous substances (“Hazardous Substances”). These classes of persons or potentially responsible parties include the current and certain past owners and operators of a facility or property where there is or has been a release or threat of release of a Hazardous Substance and persons who disposed of or arranged for the disposal of the Hazardous Substances found at such a facility. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover the costs of such action. We may also in the future become an owner of facilities on which Hazardous Substances have been released by previous owners or operators. We may in the future be responsible under CERCLA for all or part of the costs to clean up facilities or property at which such substances have been released and for natural resource damages.
Air Emissions
Our operations are subject to local, state and federal regulations for the control of emissions of air pollution. Major sources of air pollutants are subject to more stringent, federally imposed permitting requirements. The Federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants at specified sources. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Federal Clean Air Act and associated state laws and regulations. Oil and gas operations may in certain circumstances and locations be subject to permits and restrictions under these statutes for emissions of air pollutants, including volatile organic compounds, nitrous oxides, and hydrogen sulfide. Alternatively, regulatory agencies could require us to forego construction, modification or operation of certain air emission sources.
Clean Water Act
The Clean Water Act (“CWA”) imposes restrictions and strict controls regarding the discharge of wastes, including mineral processing wastes, into waters of the United States, a term broadly defined. Permits must be obtained to discharge pollutants into federal waters. The CWA provides for civil, criminal and administrative penalties for unauthorized discharges of hazardous substances and other pollutants. It imposes substantial potential liability for the costs of removal or remediation associated with discharges of oil or hazardous substances. State laws governing discharges to water also provide varying civil, criminal and administrative penalties and impose liabilities in the case of a discharge of petroleum or it derivatives, or other hazardous substances, into state waters. In addition, the EPA has promulgated regulations that may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge of wastes, we may be liable for penalties and costs.
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The Oil Pollution Act of 1990, or OPA, which amends and augments the Clean Water Act, establishes strict liability for owners and operators of facilities that are the site of a release of oil into waters of the United States. In addition, OPA and regulations promulgated pursuant thereto impose a variety of regulations on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills. OPA also requires certain oil and natural gas operators to develop, implement and maintain facility response plans, conduct annual spill training for certain employees and provide varying degrees of financial assurance.
National Environmental Policy Act
Oil and natural gas exploration and production activities on federal lands are subject to the National Environmental Policy Act, or NEPA. NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an Environmental Assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. All of our current exploration and production activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects.
Endangered Species, Wetlands and Damages to Natural Resources
Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands, and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the CWA and CERCLA. Where takings of or harm to species or damages to wetlands, habitat, or natural resources occur or may occur, government entities or at times private parties may act to prevent oil and gas exploration or production or seek damages to species, habitat, or natural resources resulting from filling or construction or releases of oil, wastes, hazardous substances or other regulated materials.
OSHA and Other Laws and Regulations
We are subject to the requirements of the federal Occupational Safety and Health Act (OSHA) and comparable state statutes. The OSHA hazard communication standard, the Emergency Planning and Community Right to Know Act and similar state statutes require that we organize and/or disclose information about hazardous materials stored, used or produced in our operations.
Recent studies have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere. In response to these studies, many nations have agreed to limit emissions of “greenhouse gases” pursuant to the United Nations Framework Convention on Climate Change, also known as the “Kyoto Protocol.” Methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of oil and natural gas, and refined petroleum products, are “greenhouse gases” regulated by the Kyoto Protocol. Although the United States is not participating in the Kyoto Protocol, several states have adopted legislation and regulations to reduce emissions of greenhouse gases. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect our operations and demand for our products. Additionally, the U.S. Supreme Court has ruled, in Massachusetts, et al. v. EPA, that the U.S. Environmental Protection Agency abused its discretion under the Clean Air Act by refusing to regulate carbon dioxide emissions from mobile sources. This Supreme Court decision could result in federal regulation of carbon dioxide emissions and other greenhouse gases, and may affect the outcome of other climate change lawsuits pending in U.S. federal courts in a manner unfavorable to our industry. Currently, our operations are not adversely impacted by existing state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business.
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Texas Railroad Commission
The State of Texas has promulgated certain legislative rules pertaining to exploration, development and production of oil and gas that are administered by the Texas Railroad Commission. The rules govern permitting for new drilling, inspection of wells, fiscal responsibility of operators, bonding wells, the disposal of solid waste, water discharge, spill prevention, liquid injection, waste disposal wells, schedules that determine the procedures for plugging and abandonment of wells, reclamation, annual reports and compliance with state and federal environmental protection laws. We believe that we will function in compliance with these rules.
Private Lawsuits
In addition to claims arising under state and federal statutes, where a release or spill of hazardous substances, oil and gas or oil and gas wastes have occurred private parties or landowners may bring lawsuits against oil and gas companies under state law. The plaintiffs may seek property damages, personal injury damages, remediation costs or injunctions to require remediation or restoration of contaminated property, soil, groundwater or surface water. In some cases, oil and gas operations are located near populated areas and emissions or accidental releases could affect the surrounding properties and population.
EMPLOYEES
Jack Ozbolt is our President and Chief Executive Officer and N. Wilson Thomas is our Chief Financial Officer. These individuals are primarily responsible for the majority of our day-to-day operations. Other services may be provided by outsourcing and consultants and special purpose contracts. We currently employ two people on a full time basis.
ORGANIZATIONAL HISTORY
We were incorporated under the laws of the State of Utah in 1989 under the name “Bluefield Enterprises Inc.” During July 1992, we merged with Optical Express Inc. wherein our name as changed to “Optical Express Inc.” During August 1993, we then merged with The AppleTree Companies, Inc., whereby we were reincorporated as a Delaware corporation and the operating subsidiary of The AppleTree Company, Inc. and our name was changed to J R Bassett Optical Inc. During April 1997, The AppleTree Companies, Inc. filed chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the Eastern District of Virginia. The U.S. Bankruptcy Court subsequently approved the sale of 28,367,500 shares of J R Bassett Optical Inc. owned by record by The AppleTree Companies, Inc. to Robert E. Williams.
On October 19, 2005, Robert E. Williams sold to Samuel Skipper approximately 28,800,000 shares of common stock of J R Bassett Optical Inc. for nominal consideration and our name was subsequently changed to Samurai Energy Corp. On June 30, 2006, The Company, Samurai Energy Corp. (“Samurai Energy”), and SEI Acquisition Corp., the wholly owned subsidiary of Samurai Energy (“SEI”), entered into an agreement and plan of merger (the “Merger Agreement”). In accordance with the terms and provisions of the Merger Agreement and Nevada law: (i) each three shares of the Company were exchanged for one fully paid non-assessable share of the common stock of Samurai Energy, pursuant to which Samurai Energy issued an aggregate of 1,415,999 shares of its common stock to the shareholders of the Company; (ii) the separate corporate existence of SEI ceased; and (iii) the Company was the surviving entity. After completion of the transactions contemplated by the Merger Agreement, the Company became a wholly-owned subsidiary of Samurai Energy and Samurai Energy merged with and into the Company for the purpose of reincorporating under the laws of Nevada. On August 28, 2006, the reincorporation became effective resulting in Samurai Energy continuing its corporate existence in the State of Nevada under the name ECCO Energy Corp.
The acquisition has been accounted for as a business combination between entities under common control similar to a pooling of interest. Prior to the Merger Agreement, Samurai and the Company were controlled by the same management group and had certain common ownership interests in their respective common stock. Therefore, the Company recorded the acquisition of the Company at the carrying value of the assets acquired with no adjustment for the fair value of the assets acquired.
On March 14, 2007, our shares of common stock commenced trading on the Over-the-Counter Bulletin Board under the symbol: “ECCE.OB.” Our transfer agent is Standard Registrar and Transfer, Draper, UT.
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INSURANCE
We currently maintain insurance coverage in amounts that we deem reasonable for our current operations. Our insurance coverage is bundled with properties owned by Samurai Corp, allowing us to obtain more competitive rates for our insurance needs.
RESEARCH & DEVELOPMENT
During each of the last two fiscal years, the Company has not expended any capital on research and development activities.
ITEM 1.A. RISK FACTORS
An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that are facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks.
Risks Related to our Financial Condition
We are an early stage business and, as such, there is a risk of failure.
Any investment in ECCE should be considered a high-risk investment because investors will be placing funds at risk in an early stage business with unforeseen costs, expenses, competition, a history of operating losses and other problems to which start-up ventures are often subject. Investors should not invest in ECCE unless they can afford to lose their entire investment. Your investment must be considered in light of the risks, expenses, and difficulties encountered in establishing a new business in a highly competitive and mature industry. Our limited business history will make it difficult for you to analyze or to aid you in making an informed judgment concerning the merits of an investment in ECCE.
We currently have revenues, but we are not profitable.
For the year ended December 31, 2009, the Company had revenues of approximately $113,006. During this period, the Company had a net loss of $12,356,883. There can be no assurance that the Company will have income from operations or net income in 2010 or thereafter.
We have negative cash flow from operations.
We have experienced losses and negative cash flows from operations since our inception. These conditions raise substantial doubt about our ability to continue as a going concern and management is attempting to raise additional capital to address our liquidity, or to sell or merge the company. There can be no assurance that we will ever be able to generate positive cash flow from operations.
We will need additional capital in 2010 to implement our business plan and/or meet our financial obligations.
At December 31, 2009, we had a working capital deficit of $1,906,110. We will need to raise additional capital during 2010 to fund general corporate working capital needs. Additionally, in 2009 the Company missed payment on (i) a $1,000,000 note, plus accrued interest, in connection with the acquisition of the Pipeline, (ii) a $328,578 note with Ray Nesbitt, plus accrued interest, (iii) a $25,000 note to Louisiana X Partners, plus accrued interest, in connection with the purchase of the Louisiana Shelf property, (iv) a $25,000 note to Bamco Inc, plus accrued interest, in connection with the purchase of the Louisiana Shelf property, (v) a total of $84,000, plus accrued interest, of short term notes to three individuals and (vi) a total of $33,176, plus accrued interest, to Shelby Engineering. As the Company has no debt or equity funding commitments, we will need to rely upon best efforts financings. There can be no assurance that the Company will be successful in raising the required capital. The failure to raise sufficient capital through future debt or equity financings or otherwise may cause the Company to curtail operations, sell assets, or result in the failure of our business.
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We will need to obtain additional financing to complete further exploration.
A substantial portion of our proved oil and gas reserves are undeveloped. At December 31, 2009, we estimated that we would require a total of $1.8 million of development costs to recover approximately $7.3 million of net revenues, or $2.1 million of discounted pretax cash flows from our reserves.
We will require significant additional financing in order to continue our exploration, development and production activities and our assessment of the commercial viability of our properties. Furthermore, if the costs of our planned exploration, development and production programs are greater than anticipated, we may have to seek additional funds through public or private share offerings or arrangements with partners. There can be no assurance that we will be successful in our efforts to raise these required funds, or on terms satisfactory to us. The continued exploration of properties and the development of our business will depend upon our ability to establish the commercial viability of our oil and gas properties and to ultimately develop cash flow from operations and reach profitable operations. Although we have generated revenue from operations, we are experiencing a negative cash flow. Accordingly, the only other sources of funds presently available to us may be through the sale of equity or through debt financing. It is possible that debt financing may not be an alternative to us, due to the general instability of the credit market in the current economic environment. Alternatively, we may finance our business by offering an interest in prospective oil and gas properties to be earned by another party or parties carrying out further exploration and development thereof or to obtain project or operating financing from financial institutions. If we are unable to obtain this additional financing, we will not be able to continue our business activities and our assessment of the commercial viability of our properties. Further, if we are able to establish that development of our properties are commercially viable, our inability to raise additional financing at this stage would result in our inability to place our properties into production and recover our investment.
Risks Related to our Business
We depend on successful exploration, development and acquisitions to maintain revenue in the future.
In general, the volume of production from natural gas and oil properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Except to the extent that we conduct successful exploration and development activities or acquire properties containing proved reserves, or both, our proved reserves will decline as reserves are produced. Our future natural gas and oil production is, therefore, highly dependent on our level of success in finding or acquiring additional reserves. Additionally, the business of exploring for, developing, or acquiring reserves is capital intensive. Recovery of our reserves, particularly undeveloped reserves, will require significant additional capital expenditures and successful drilling operations. Our ability to make the necessary capital investment to maintain or expand our asset base of natural gas and oil reserves will be impaired unless other external sources of capital become available. In addition, we may be required to find partners for any future exploratory activity. To the extent that others in the industry do not have the financial resources or choose not to participate in our exploration activities, we will be adversely affected.
Although certain of our oil and gas properties contain known reserves, we may not discover commercially exploitable quantities of oil or gas on other potential oil and gas properties that would enable us to enter into commercial production, achieve revenues and recover the money we spend on exploration.
There is no assurance that any prospective oil and gas exploration and development programs will result in establishment of reserves. Although our current oil and gas properties are in the production stage, future prospective properties may be only in the development stage and have no known body of reserves. Unproved or proved reserves on these properties may never be determined to be economical. We plan to conduct further exploration and development activities on properties, which may include the completion of feasibility studies necessary to evaluate whether a commercial reserve exists on any of the properties. There is a substantial risk that these exploration activities will not result in discoveries of commercially recoverable reserves of oil and gas. Any determination that properties contain commercially recoverable quantities of oil and gas may not be reached until such time that final comprehensive feasibility studies have been concluded that establish that a reserve is likely to be economic. There is a substantial risk that any preliminary or final feasibility studies carried out by us will not result in a positive determination that such properties can be commercially developed.
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Our estimated reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
No one can measure underground accumulations of oil, natural gas and NGL in an exact way. Reserve engineering requires subjective estimates of underground accumulations of oil, natural gas and NGL and assumptions concerning future oil, natural gas and NGL prices, production levels and operating and development costs. As a result, estimated quantities of proved reserves and projections of future production rates and the timing of development expenditures may prove to be inaccurate. Independent petroleum engineering firms prepare estimates of our proved reserves. Some of our reserve estimates are made without the benefit of a lengthy production history, which are less reliable than estimates based on a lengthy production history. Also, we make certain assumptions regarding future oil, natural gas and NGL prices, production levels and operating and development costs that may prove incorrect. Any significant variance from these assumptions by actual figures could greatly affect our estimates of reserves, the economically recoverable quantities of oil, natural gas and NGL attributable to any particular group of properties, the classifications of reserves based on risk of recovery and estimates of the future net cash flows. Numerous changes over time to the assumptions on which our reserve estimates are based, as described above, often result in the actual quantities of oil, natural gas and NGL we ultimately recover being different from our reserve estimates.
The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated oil, natural gas and NGL reserves. We base the estimated discounted future net cash flows from our proved reserves on an unweighted average of the first-day-of-the month price for each month during the 12-month calendar year and year-end costs. However, actual future net cash flows from our oil and natural gas properties also will be affected by factors such as:
·
actual prices we receive for oil, natural gas and NGL;
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the amount and timing of actual production;
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the timing and success of development activities;
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supply of and demand for oil, natural gas and NGL; and
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changes in governmental regulations or taxation.
In addition, the 10% discount factor, required to be used under the provisions of applicable accounting standards when calculating discounted future net cash flows, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general.
Exploration activities on oil and gas properties may not be commercially successful, which could lead us to abandon our plans to develop the property and our investments in exploration.
Our long-term success depends on our ability to establish commercially recoverable quantities of oil and gas on our properties that can then be developed into commercially viable drilling operations. Oil and gas exploration is highly speculative in nature, involves many risks and is frequently non-productive. These risks include unusual or unexpected geologic formations, and the inability to obtain suitable or adequate machinery, equipment or labor. The success of oil and gas exploration is determined in part by the following factors:
·
identification of potential reserves based on superficial analysis;
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availability of government-granted exploration permits;
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the quality of management and geological and technical expertise; and
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the capital available for exploration and development.
Substantial expenditures are required to establish proven and probable reserves through drilling and analysis, and to develop the drilling and processing facilities and infrastructure at any site chosen. Whether a property will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the property, such as size, grade and proximity to infrastructure; oil and gas prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of oil and gas and environmental protection. We may invest significant capital and resources in exploration activities and abandon such investments if we are unable to identify commercially exploitable oil and gas reserves. The decision to abandon a project may reduce the future trading price of our common stock and impair our ability to raise financing. We cannot provide any assurance to investors that we will discover or acquire any oil and gas reserves in sufficient quantities on any properties to justify commercial operations. Further, we will not be able to recover the funds that we may spend on exploration if we are not able to establish commercially recoverable quantities of oil and gas.
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We actively seek to acquire oil and natural gas properties. Acquisitions involve potential risks that could adversely impact our future growth and our ability to remain a viable entity.
Any acquisition involves potential risks, including, among other things:
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the risk that reserves expected to support the acquired assets may not be of the anticipated magnitude or may not be developed as anticipated;
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the risk of title defects discovered after closing;
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inaccurate assumptions about revenues and costs, including synergies;
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significant increases in our indebtedness and working capital requirements;
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an inability to transition and integrate successfully or timely the businesses we acquire;
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the cost of transition and integration of data systems and processes;
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the potential environmental problems and costs;
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the assumption of unknown liabilities;
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limitations on rights to indemnity from the seller;
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the diversion of management’s attention from other business concerns;
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increased demands on existing personnel and on our corporate structure;
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customer or key employee losses of the acquired businesses; and
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the failure to realize expected growth or profitability
We are a new entrant into the oil and gas exploration and development industry without a profitable operating history.
Our recent activities have been limited to organizational efforts, obtaining working capital and acquiring and developing a very limited number of properties. As a result, there is limited information regarding production or revenue generation. Further, our future revenues may be limited.
The business of oil and gas exploration and development is subject to many risks and if oil and gas is found in economic production quantities, the potential profitability of future possible oil and gas ventures depends upon factors beyond our control. The potential profitability of oil and gas properties if economic quantities of oil and gas are found is dependent upon many factors and risks beyond our control, including, but not limited to: (i) unanticipated ground conditions; (ii) geological problems; (iii) drilling and other processing problems; (iv) the occurrence of unusual weather or operating conditions and other force majeure events; (v) lower than expected reserve quantities; (vi) accidents; (vii) delays in the receipt of or failure to receive necessary government permits; (viii) delays in transportation; (ix) labor disputes; (x) government permit restrictions and regulation restrictions; (xi) unavailability of materials and equipment; and (xii) the failure of equipment or drilling to operate in accordance with specifications or expectations.
Our drilling operations may not be successful.
In the event we acquire additional oil and gas properties, we intend to test certain zones in wellbores already drilled on the properties and if results are positive and capital is available, drill additional wells and begin production operations from existing and new wells. There can be no assurance that such well re-completion activities or future drilling activities will be successful, and we cannot be sure that our overall drilling success rate or our production operations within a particular area will ever come to fruition and, if it does, will not decline over time. We may not recover all or any portion of our capital investment in the wells or the underlying leaseholds. Unsuccessful drilling activities would have a material adverse effect upon our results of operations and financial condition. The cost of drilling, completing, and operating wells is often uncertain, and a number of factors can delay or prevent drilling operations including: (i) unexpected drilling conditions; (ii) pressure or irregularities in geological formations; (iii) equipment failures or accidents; (iv) adverse weather conditions; and (iv) shortages or delays in availability of drilling rigs and delivery of equipment.
Prospects that we decide to drill may not yield natural gas or oil in commercially viable quantities.
We describe some of our current prospects in this Annual Report. Our prospects are in various stages of preliminary evaluation and assessment and we have not reached the point where we will decide to drill at all on the subject prospects. However, the use of seismic data, historical drilling logs, offsetting well information, and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling and testing whether natural gas or oil will be present or, if present, whether natural gas or oil will be present in sufficient quantities or quality to recover drilling or completion costs or to be economically viable. In sum, the cost of drilling, completing and operating any wells is often uncertain and new wells may not be productive.
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We may be unable to identify liabilities associated with the properties or obtain protection from sellers against them.
One of our growth strategies is to capitalize on opportunistic acquisitions of oil and natural gas reserves. However, our reviews of acquired properties are inherently incomplete because it generally is not feasible to review in depth every individual property involved in each acquisition. A detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Further, environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken. We may not be able to obtain indemnification or other protections from the sellers against such potential liabilities, which would have a material adverse effect upon our results of operations.
The potential profitability of oil and gas ventures depends upon global political and market related factors beyond our control.
World prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These and other changes and events may materially affect our financial performance. The potential profitability of oil and gas properties is dependent on these and other factors beyond our control.
Production or oil and gas resources if found are dependent on numerous operational uncertainties specific to the area of the resource that affects its profitability.
Production area specifics affect profitability. Adverse weather conditions can hinder drilling operations and ongoing production work. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. Production and treatments on other wells in the area can have either a positive or negative effect on our production and wells. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The content of hydrocarbons is subject to change over the life of producing wells. The marketability of oil and gas from any specific reserve which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include, but are not limited to, the proximity and capacity of oil and gas pipelines, availability of room in the pipelines to accommodate additional production, processing and production equipment operating costs and equipment efficiency, market fluctuations of prices and oil and gas marketing relationships, local and state taxes, mineral owner and other royalties, land tenure, lease bonus costs and lease damage costs, allowable production, and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in us not receiving an adequate return on our invested capital.
We are dependent upon transportation and storage services provided by third parties.
We are dependent on the transportation and storage services offered by various interstate and intrastate pipeline companies for the delivery and sale of our oil and gas supplies. Both the performance of transportation and storage services by interstate pipelines and the rates charged for such services are subject to the jurisdiction of the Federal Energy Regulatory Commission or state regulatory agencies. An inability to obtain transportation and/or storage services at competitive rates could hinder our processing and marketing operations and/or affect our sales margins.
Our results of operations are dependent upon market prices for oil and gas, which fluctuate widely and are beyond our control.
If and when production from oil and gas properties is reached, our revenue, profitability, and cash flow depend upon the prices and demand for oil and natural gas. The markets for these commodities are very volatile and even relatively modest drops in prices can significantly affect our financial results and impede our growth. Prices received also will affect the amount of future cash flow available for capital expenditures and may affect our ability to raise additional capital. Lower prices may also affect the amount of natural gas and oil that can be economically produced from reserves either discovered or acquired. Factors that can cause price fluctuations include: (i) the level of consumer product demand; (ii) domestic and foreign governmental regulations; (iii) the price and availability of alternative fuels; (iv) technical advances affecting energy consumption; (v) proximity and capacity of oil and gas pipelines and other transportation facilities; (vi) political conditions in natural gas and oil producing regions; (vii) the domestic and foreign supply of natural gas and oil; (viii) the ability of members of Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; (ix) the price of foreign imports; and (x) overall domestic and global economic conditions.
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The availability of a ready market for our oil and gas depends upon numerous factors beyond our control, including the extent of domestic production and importation of oil and gas, the relative status of the domestic and international economies, the proximity of our properties to gas gathering systems, the capacity of those systems, the marketing of other competitive fuels, fluctuations in seasonal demand and governmental regulation of production, refining, transportation and pricing of oil, natural gas and other fuels.
The oil and gas industry in which we operate involves many industry related operating and implementation risks that can cause substantial losses, including, but not limited to, unproductive wells, natural disasters, facility and equipment problems and environmental hazards.
Our success largely depends on the success of our exploitation, exploration, development and production activities. Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control; including the risk that drilling will not result in commercially viable oil or natural gas production. Drilling for oil and natural gas can be unprofitable, not only from dry holes, but from productive wells that do not produce sufficient revenues to return a profit. In addition, our drilling and producing operations may be curtailed, delayed or canceled as a result of other drilling and production, weather and natural disaster, equipment and service failure, environmental and regulatory, and site specific related factors, including but not limited to: (i) fires; (ii) explosions; (iii) blow-outs and surface fractures; (iv) uncontrollable flows of underground natural gas, oil, or formation water; (v) natural disasters; (vi) facility and equipment failures; (vii) title problems; (viii) shortages or delivery delays of equipment and services; (ix) abnormal pressure formations; and (x) environmental hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases. 1(xi) weather related events such as hurricanes can cause disruption of deliveries or destruction of producing facilities, either on or off shore. Such damage may be to our facilities or to facilities operated by other companies needed for the delivery of our production.
If any of these events occur, we could incur substantial losses as a result of: (i) injury or loss of life; (ii) severe damage to and destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of our operations; or (vii) repairs necessary to resume operations.
If we were to experience any of these problems, it could affect well bores, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations. We may be affected by any of these events more than larger companies, since we have limited working capital.
Our producing properties are located in regions which make us vulnerable to risks associated with operating in a limited number of geographic areas, including the risk of damage or business interruptions from hurricanes.
Our properties are geographically located in the Texas Gulf Coast region. As a result, we may be affected by any delays or interruptions in production or transportation in these areas caused by governmental regulation, transportation capacity constraints, natural disasters, regional price fluctuations or other factors.
Such disturbances could in the future have any or all of the following adverse effects on our business:
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interruptions to our operations as we suspend any production in advance of an approaching storm;
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damage to our facilities and equipment, including damage that disrupts or delays any production; and
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disruption to any transportation systems we may rely upon for delivery.
Terrorist attacks aimed at our energy operations could adversely affect our business.
The continued threat of terrorism and the impact of military and other government action has led and may lead to further increased volatility in prices for oil and natural gas and could affect these commodity markets or the financial markets used by us. In addition, the U.S. government has issued warnings that energy assets may be a future target of terrorist organizations. These developments have subjected our oil and natural gas operations to increased risks.
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The oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring leases.
The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration activities during periods of low oil and natural gas market prices. Our larger competitors may be able to absorb the burden of present and future federal, state, local and other laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our industry, we may be at a disadvantage in bidding for exploratory prospects and producing oil and natural gas properties.
We may not be able to keep pace with technological developments in our industry.
The natural gas and oil industry is characterized by rapid and significant technological advancements and introduction of new products and services which utilize new technologies. As others use or develop new technologies, we may be placed at a competitive disadvantage or competitive pressures may force us to implement those new technologies at substantial costs. In addition, other natural gas and oil companies may have greater financial, technical, and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we are able to. We may not be able to respond to these competitive pressures and implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies we use now or in the future were to become obsolete or if we are unable to use the most advanced commercially available technology, our business, financial condition, and results of operations could be materially adversely affected.
The marketability of natural resources will be affected by numerous factors beyond our control, which may result in us not receiving an adequate return on invested capital to be profitable or viable.
The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable.
Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our business operations.
Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend material amounts on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations.
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We may not have enough insurance to cover all of the risks that we face and operations of prospects in which we participate may not maintain or may fail to obtain adequate insurance.
We cannot insure fully against pollution and environmental risks. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations. The impact of recent hurricanes has resulted in escalating insurance costs and less favorable coverage terms.
Oil and natural gas operations are subject to particular hazards incident to the drilling and production of oil and natural gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires and pollution and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operation. The occurrence of a significant adverse event that is not fully covered by insurance could result in the loss of our total investment in a particular prospect which could have a material adverse effect on our financial condition and results of operations
Any change to government regulation/administrative practices may have a negative impact on our ability to operate and our profitability.
The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably.
We may be unable to retain key employees or consultants or recruit additional qualified personnel.
Our extremely limited personnel means that we would be required to spend significant sums of money to locate and train new employees in the event any of our employees resign or terminate their employment with us for any reason. Due to our limited operating history and financial resources, we are entirely dependent on the continued service of Jack Ozbolt, our President, and N. Wilson Thomas, our Chief Financial Officer. Further, we do not have key man life insurance on either of these individuals. We may not have the financial resources to hire a replacement if one or both of our officers were to die. The loss of service of either of these employees could therefore significantly and adversely affect our operations.
We may experience difficulty in achieving and managing future growth.
We may not be successful in upgrading our technical, operations, and administrative resources or in increasing our ability to internally provide certain of the services currently provided by outside sources, and we may not be able to maintain or enter into new relationships with project partners and independent contractors. Our inability to achieve or manage growth may adversely affect our financial condition and results of operations.
Nevada law and our articles of incorporation may protect our directors from certain types of lawsuits.
Nevada law provides that our officers and directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as officers and directors. Our Bylaws permit us broad indemnification powers to all persons against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our officers and directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our officers and directors against claims, including claims arising out of their negligence, poor judgment, or other circumstances.
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Risks Related to Our Common and Preferred Stock
Sales of a substantial number of shares of our common stock into the public market by stockholders may result in significant downward pressure on the price of our common stock and could affect your ability to realize the current trading price of our common stock.
Sales of a substantial number of shares of our common stock in the public market by stockholders could cause a reduction in the market price of our common stock. As of the date of this Annual Report, we have 15,855,853 shares of common stock issued and outstanding, 100,000 of our Series A convertible preferred stock (“Series A Preferred Stock”) issued and outstanding , 434,078 or our Series B convertible preferred stock (“Series B Preferred Stock”)issued and outstanding, 30,000 of our Series C convertible preferred stock (“Series C Preferred Stock”)issued and outstanding, and 303,936 of our Series D convertible preferred stock (“Series D Preferred Stock”). Each share of our preferred stock is convertible into one share of our common stock. As of the date of this Annual Report, there are 11,695,564 outstanding shares of our common stock and 768,041 outstanding shares of our preferred stock that are restricted securities as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Although the Securities Act and Rule 144 place certain prohibitions on the sale of restricted securities, restricted securities may be sold into the public market under certain conditions. In the event that any of the convertible preferred shares of stock are converted into shares of common stock, such shares may be available for immediate resale which could have an adverse effect on the price of our common stock.
Any significant downward pressure on the price of our common stock as stockholders sell their shares of our common stock could encourage short sales by others. Any such short sales could place further downward pressure on the price of our common stock.
The trading price of our common stock on the OTC Bulletin Board will fluctuate significantly and stockholders may have difficulty reselling their shares.
Effective March 14, 2007, our shares of common stock commenced trading on the Over-the-County Bulletin Board. There is a volatility associated with Bulletin Board securities in general and the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: (i) disappointing results from our discovery or development efforts; (ii) failure to meet our revenue or profit goals or operating budget; (iii) decline in demand for our common stock; (iv) downward revisions in securities analysts' estimates or changes in general market conditions; (v) technological innovations by competitors or in competing technologies; (vi) lack of funding generated for operations; (vii) investor perception of our industry or our prospects; and (viii) general economic trends.
In addition, stock markets have experienced price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock.
Additional issuance of equity securities may result in dilution to our existing stockholders.
Our Articles of Incorporation authorize the issuance of 75,000,000 shares of common stock. We have also issued preferred stock classes A, B, C and D. The board of directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, your proportionate ownership interest and voting power will be decreased accordingly. Further, any such issuance could result in a change of control.
There is not now, and there may not ever be, an active market for the Company’s common stock.
There currently is a limited public market for the Company’s common stock. Further, although the common stock is currently quoted on the Over-the-County Bulletin Board, trading of its common stock may be extremely sporadic. For example, several days may pass before any shares may be traded. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of, the common stock. Accordingly, investors must assume they may have to bear the economic risk of an investment in the common stock for an indefinite period of time. This severely limits the liquidity of the common stock, and would likely have a material adverse effect on the market price of the common stock and on the Company’s ability to raise additional capital.
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The Company cannot assure you that our common stock will become liquid or that the common stock will be listed on a securities exchange.
Until the common stock is listed on an exchange, the Company expects its common stock to remain eligible for quotation on the Over-the-County Bulletin Board, or on another over-the-counter quotation system, or in the “pink sheets.” In those venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of the common stock. In addition, if the Company fails to meet the criteria set forth in the SEC regulations, various requirements would be imposed by law on broker-dealers who sell the Company’s securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling the common stock, which may further affect the liquidity of the common stock. This would also make it more difficult for the Company to raise additional capital.
Our common stock is classified as a “penny stock” under SEC rules which limits the market for our common stock.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer, and sales person in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for stock that becomes subject to those penny stock rules. If a trading market for our common stock develops, our common stock will probably become subject to the penny stock rules, and shareholders may have difficulty in selling their shares.
We presently do not intend to pay cash dividends on our common stock.
We currently anticipate that no cash dividends will be paid on the common stock in the foreseeable future. Therefore, prospective investors who anticipate the need for immediate income by way of cash dividends from their investment should not purchase our common stock.
ITEM 1.B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
ECCE moved to 3315 Marquart Street., Suite 206, Houston, Texas 77027 during 2007, and expanded its office space from about 2,000 sq. ft. to 9,750 sq. ft. during 2008. ECCE entered into a new lease agreement through December 31, 2014. The rent for 2009 was negotiated for $18 per square foot, or approximately $14,625 per month. However, due to market conditions, the monthly rent was reduced to $4,800 per month for 2009. As of March 31, 2010, the monthly rent amount will remain at this amount until market conditions improve.
Our principal assets are oil and gas properties, including a 100% working interest in oil and gas producing properties located in Nueces County, Texas.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We have not paid our property taxes for 2007, 2008 or 2009 on the Wilson Field in Nueces County, Texas. The County has indicated that it intends to take legal proceedings to collect those taxes. The County has placed tax liens on the property.
During the third quarter, ECCE settled an ongoing lawsuit relating to the sale of ECCO Biofuels in 2007. The settlement called for a $10,000 payment during the third quarter of 2009, which was made in September 2009. ECCE also issued 40,000 shares of restricted common shares of ECCE stock, valued at $5,600, to the plaintiffs as part of the settlement. The settlement also calls for additional payments of $12,500 to be made on each of the following dates: December 4, 2009, March 5, 2010, June 4, 2010 and September 10, 2010. The additional payments total of $50,000 has been accrued as of December 31, 2009. Total settlement expense of $65,600 was recorded as of December 31, 2009. The company did not make the December 4, 2009 or the March 5, 2010 payments and anticipates future litigation involving this amount.
On February 28, 2009 M-J Oil Company Inc, of Paris Ohio, obtained a judgment against ECCO Energy for non-compliance with covenants in the original mortgage relating to the purchase of the M-J Oil Company pipeline (“Pipeline”). We are in negotiations with the M-J Oil Company to remove the judgment and to adjust the mortgage terms, which required full payment on September 30, 2009. As of this date, we have not reached a satisfactory agreement with the lender.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.
ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Since March 14, 2007, our shares of common stock have traded on the Over-the-Counter Bulletin Board under the symbol: “ECCE.OB”. The market for our common stock is and will be limited and can be volatile. The following table sets forth the high and low bid prices relating to our common stock on a quarterly basis for the periods indicated as compiled by Pink Sheets LLC. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.
As of March 1, 2010, we had 200 shareholders of record.
DIVIDEND POLICY
No dividends have ever been declared by the board of directors on our common stock. We do not intend to pay cash dividends on our common stock in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
As of the date of this Annual Report, we have one equity compensation plan titled the 2005 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Awards Plan (the “Plan”). On December 14, 2005, our board of directors approved and adopted the Plan. The Plan provides for the issuance of 100,000 shares of common stock. As of the date of this Quarterly Report, we have not granted any options under the Plan or outside of any plan.
RECENT SALES OF UNREGISTERED SECURITIES
As of the date of this Annual Report and during fiscal years ended December 31, 2009 and 2008, to provide capital, we sold stock in private placement offerings, issued stock in exchange for our debts or pursuant to contractual agreements as set forth below. The issuances of these equity securities were consummated pursuant to Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder on the basis that such transactions did not involve a public offering and the offerees were sophisticated, accredited investors with access to the kind of information that registration would provide. The recipients of these securities represented its intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. Unless otherwise noted, no sales commissions were paid.
Common Stock
During fiscal 2008, we corrected errors relating to the issuance of shares prior to our change in stock transfer agents. We determined that a total of 25,005 shares were not properly recorded during 2007 and prior years. These shares were issued to correct prior errors relating to the former transfer agent.
On June 11, 2008, we issued 5,200 common shares for marketing services valued and expensed at $5,129.
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On August 14, 2008 we issued 10,000 common shares for consulting services valued and expensed at $10,010.
On October 1, 2008 we issued 10,000 common shares for consulting services valued and expensed at $10,010.
On February 10, 2009, ECCE issued for cash 200,000 common shares for $20,000.
On April 27, 2009, ECCE issued 300,000 common shares for services related to obtaining prospective financing valued at $51,000.
On July 1, 2009, ECCE issued 1,830,000 shares to be distributed to various consultants, and employees. This consists of 330,000 shares being issued to employees for retention, and 1,500,000 shares relating to payment for services. The shares were valued at $923,000.
On July 15, 2009, ECCE issued 49,514 shares of common stock to redeem 30,000 shares of ECCO Series C Preferred stock and associated accumulated dividends in arrears of $24,630. The share conversion was recorded using the book value method, in which no gain or loss is recognized by the company
On August 29, 2009, ECCE issued 100,000 common shares for legal services valued at $14,595.
On September 1, 2009, ECCE settled an ongoing lawsuit relating to the sale of ECCO Biofuels in 2007. We issued 40,000 shares of restricted common shares of ECCE stock to the litigants as part of the settlement. These shares were issued on September 1, 2009 and were valued at $5,600.
On September 29, 2009 ECCE issued 50,000 shares for consulting services. The services were valued at $5,500.
On October 19, 2009, ECCE issued 200,000 shares for consulting services valued at $14,000.
On November 16, 2009, ECCO issued 1,625,000 restricted common shares to employees and consultants. The shares were valued at $81,250.
On December 18, 2009, ECCE issued 989,819 shares of common stock in exchange for shares of the preferred C stock and accumulated dividends on the preferred shares. There was no gain or loss on the conversion of the shares. Dividend interest was applied to the accrued preferred dividends payable.
During December, 2009, ECCE issued 690,177 shares of common stock in exchange for shares of the preferred B stock and accumulated dividends on the preferred shares. There was no gain or loss on the conversion of shares. Dividend interest was applied to the accrued preferred dividends payable.
During February, 2010, ECCE issued 356,391 shares to five of the Preferred B shareholders relating to the conversion from the Preferred B Preferred stock to ECCE common stock. There was no gain or loss on the conversion of the shares.
During February, 2010, ECCE cancelled 500,000 shares of stock which was rewarded to two vendors for services contracted for in 2008. However, their failure to satisfactorily complete their services to our satisfaction resulted in the cancellation of the stock. The original valuation of the shares totaled $275,000.
During February, 2010, ECCE awarded 500,000 shares of common stock to be distributed to various consultants, and employees. This consists of 150,000 shares being issued to employees for retention and 350,000 to consultants for various services. The shares were valued at $30,000.
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Preferred Stock
There was no preferred stock issued during the years ended December 31, 2009 and 2008.
Description of Our Preferred Stock
In addition to our common stock, we are authorized to issue up to 10,000,000 shares of preferred stock, par value $.001. As of the date of this Annual Report, we have issued and outstanding 100,000 shares of our Series A Preferred Stock, 1,000,000 shares issued and 434,078 outstanding of our Series B Preferred Stock, 660,000 shares issued and 30,000 shares outstanding of our Series C Preferred Stock, and 303,936 shares issued and outstanding of our Series D Preferred Stock.
Series A Preferred Stock:
On July 17, 2006, in connection with the merger, ECCE issued 100,000 shares of preferred stock to Mr. Skipper. The preferred stock of ECCE was valued at $27,000 and recorded as compensation expense. The preferred stock is entitled to the number of votes equal to all votes of other security holders plus one vote. As a result, Mr. Skipper has voting control of ECCE.
Series B Preferred Stock
The Series B Preferred Stock, with an initial value of $5.00 per share, ranks senior to the Series A Preferred Stock, and ranks in parity as to dividends and liquidation rights with our Series C Preferred Stock and Series D Preferred Stock. So long as any Series B Preferred Stock is outstanding, we are prohibited from issuing any series of stock having rights senior to or ranking on parity with the Series B Preferred Stock without the approval of the holders of two-thirds of the outstanding Series B Preferred Stock. The holders of the outstanding shares of Series B Preferred Stock shall be entitled to receive in preference to the holders of any other shares of capital stock of the Company (other than the holders of Series C Preferred Stock and Series D Preferred Stock), cumulative dividends whether or not declared, and accruing from issuance at a per share amount equal to 8% per annum of the initial value. Additionally, upon occurrence of our liquidation, dissolution or winding up, the holder of shares of Series B Preferred Stock will be entitled to receive, before any distribution of assets is made to holders of any other shares of capital stock (other than the holders of Series C Preferred Stock and Series D Preferred Stock), but only after all distributions to holders of Series B Preferred Stock have been made in an amount per share of Series B Preferred Stock equal to 100% of the initial value plus the amount of any accrued but unpaid dividends due for each share of Series B Preferred Stock. Each share of Series B Preferred Stock is convertible into fully paid and nonassessable shares of our common stock determined by dividing the initial value of the Series B Preferred Stock plus the amount of accrued and unpaid dividends due thereon by the conversion price. The initial conversion price is $5.00, and is subject to adjustment. Lastly, in addition to the rights discussed above of the holders of the Series B Preferred Stock, at any time after June 15, 2008, and provided a triggering event has occurred, each holder of Series B Preferred Stock shall have the right at such holder’s option to require us to redeem for cash all or a portion of such holder’s shares of Series B Preferred Stock at a price per share equal to the liquidation amount. A “triggering event” shall mean that the wells owned or operated by the limited partnership have generated an aggregate of 1,500,000,000 cubic feet of natural gas. No triggering event has occurred as of the filing of this Annual Report. ECCE disposed of Louisiana Shelf Partners during 2009, thus there will not be a “triggering event” for this property.
On November 15, 2009, or closely thereafter, we made an offer to all shareholders of the Series B Preferred Stock to convert their shares to ECCO Common Stock. In order to recognize the loss of value in ECCO Common Stock since the purchase in 2007, we made a determination to adjust the conversion price for dividends to allow a conversion of the dividends on the Preferred B Stock to be exchanged at a ratio of one dollar for $1.00 per share, down from the initial conversion price of $5.00 per share. This offer expired on March 31, 2010, and the conversion price for dividends has been reset to $5.00 per share.
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Series C Preferred Stock
The Series C Preferred Stock, with an initial value of $5.00 per share, ranks senior to the Series A Preferred Stock, and ranks in parity as to dividends and liquidation rights with our Series B Preferred Stock and Series D Preferred Stock. So long as any Series C Preferred Stock is outstanding, we are prohibited from issuing any series of stock having rights senior to or ranking on parity with the Series C Preferred Stock without the approval of the holders of two-thirds of the outstanding Series C Preferred Stock. The holders of the outstanding shares of Series C Preferred Stock shall be entitled to receive in preference to the holders of any other shares of capital stock of the Company (other than the holders of Series B Preferred Stock and Series D Preferred Stock), cumulative dividends whether or not declared, and accruing from issuance at a per share amount equal to 8% per annum of the initial value. Additionally, upon occurrence of our liquidation, dissolution or winding up, the holder of shares of Series C Preferred Stock will be entitled to receive, before any distribution of assets is made to holders of any other shares of capital stock (other than the holders of Series B Preferred Stock and Series D Preferred Stock), but only after all distributions to holders of Series C Preferred Stock have been made in an amount per share of Series C Preferred Stock equal to 100% of the initial value plus the amount of any accrued but unpaid dividends due for each share of Series C Preferred Stock. Each share of Series C Preferred Stock is convertible into fully paid and nonassessable shares of our common stock determined by dividing the initial value of the Series C Preferred Stock plus the amount of accrued and unpaid dividends due thereon by the conversion price. The initial conversion price is $5.00, and is subject to adjustment.
ECCE disposed of the Bateman Lake property during 2009, thus there will never be any proceeds from that field to retire the Series C Preferred Stock.
On November 15, 2009, or closely thereafter, we made an offer to all shareholders of the Series C Preferred Stock to convert their shares to ECCO Common Stock. In order to recognize the loss of value in ECCO Common Stock since the purchase in 2008, we made a determination to adjust the conversion price for dividends to allow a conversion of the dividends on the Preferred B Stock to be exchanged at a ratio of one dollar for $1.00 per share, down from the initial conversion price of $5.00 per share. This offer expired on March 31, 2010, and the conversion price for dividends has been reset to $5.00 per share.
Series D Preferred Stock
The Series D Preferred Stock, with an initial value of $5.00 per share, ranks senior to the Series A Preferred Stock, and ranks in parity as to dividends and liquidation rights with our Series B Preferred Stock and Series C Preferred Stock. So long as any Series D Preferred Stock is outstanding, we are prohibited from issuing any series of stock having rights senior to or ranking on parity with the Series D Preferred Stock without the approval of the holders of 2/3’s of the outstanding Series D Preferred Stock. The holders of the outstanding shares of Series D Preferred Stock shall be entitled to receive in preference to the holders of any other shares of capital stock of the Company (other than the holders of Series B Preferred Stock and Series C Preferred Stock), cumulative dividends whether or not declared, and accruing from issuance at a per share amount equal to 8% per annum of the initial value. Additionally, upon occurrence of our liquidation, dissolution or winding up, the holder of shares of Series D Preferred Stock will be entitled to receive, before any distribution of assets is made to holders of any other shares of capital stock (other than the holders of Series B Preferred Stock and Series C Preferred Stock), but only after all distributions to holders of Series D Preferred Stock have been made in an amount per share of Series D Preferred Stock equal to 100% of the initial value plus the amount of any accrued but unpaid dividends due for each share of Series D Preferred Stock. Each share of Series D Preferred Stock is convertible into fully paid and nonassessable shares of our common stock determined by dividing the initial value of the Series D Preferred Stock plus the amount of accrued and unpaid dividends due thereon by the conversion price. The initial conversion price is $5.00, and is subject to adjustment.
Commencing upon the occurrence of a Triggering Event (as defined below), the Corporation shall have the obligation to redeem on a pro-rata basis, but only for cash, in an amount equal to thirty and 19/100 (30.19%) percent of all proceeds received by the Corporation under the provisions of that certain Farmout Agreement between the Corporation and Jurasin Oil & Gas, Inc. (the “Farmout Agreement”) dated January 11, 2008 (“Proceeds”) from the Property (as defined below), all or a portion of the holder’s shares of Series D Convertible Preferred Stock at a price per share of Series D Convertible Preferred Stock equal to the Liquidation Amount (for this purpose, the “Redemption Price”). “Triggering Event” shall be the date on which the Corporation first receives Proceeds. The Property shall mean the Corporation’s interest in State of Louisiana Lease No. 1337 (“Lease No. 1337”) located in St. Mary and Terrebonne Parishes in Louisiana.
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In the event that the Triggering Event has not occurred within nine (9) months from the date of the filing of this designation with the Secretary of State of the State of Nevada or after the Triggering Event no redemptions have occurred for a period of three (3) consecutive calendar months, the Corporation shall have the obligation to redeem on a pro-rata basis, but only for cash, in an amount equal to thirty and 19/100 (30.19%) percent of all net proceeds received by the Corporation from the Property. The term “Net Proceeds” as used in the previous sentence shall be the total receipts by the Corporation less any royalty, overriding royalty, net profits, severance and ad valorem taxes and reasonable lease operating expenses and capital costs attributable to the Property which are usual and customary in the industry. Should the Corporation develop the mineral interests which are subject to the Farmout Agreement in whole or in part and/or enter into a subsequent development arrangement to develop such mineral interests after the termination of the Farmout Agreement, the Corporation shall have the obligation to redeem on a pro-rata basis, but only for cash, in an amount equal to thirty and 19/100 (30.19%) percent of all proceeds received by the Corporation under such development and/or under the provisions of such development arrangement.
ECCE disposed of the Bateman Lake property during 2009, so there will never be a “triggering event” or any proceeds related to that property.
The following table provides a summary of the potential dilution of common stock should our Series B, C and/or D Preferred Stock be converted to common stock. The Series A Preferred Stock is not convertible. These valuations are as of December 31, 2009, and assume a conversion of one share of preferred for one share of common at the designated valuation price of $5.00 per share.
Warrants
In March 2008, and in September 2008, we issued a warrant to a third party to acquire up to 30,000 and 5,000 shares of common stock at an exercise price of $1.00 per share, with 30,000 shares expiring on March 19, 2010, and 5,000 shares expiring on September 30, 2010, as additional consideration in connection with a debt financing. The warrant for 30,000 shares expired during the first quarter of 2010.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not required.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The summarized financial data set forth below is derived from and should be read in conjunction with our audited consolidated financial statements for fiscal years ended December 31, 2009 and 2008, including the notes to those financial statements which are included in this Annual Report. The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this Annual Report, particularly in the section entitled "Risk Factors". Our audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
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The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has negative working capital and has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
RESULTS OF OPERATIONS
We have incurred recurring losses to date. We are exploring the sale or merger of the company. If we do not sell or merge the company, then over the next twelve months our strategy is to grow our asset base by acquiring producing properties and investing in working interests in non-operated properties. In addition, we plan to use innovative and sound engineering principles to enhance existing production. We will acquire operated as well as non-operated properties that meet or exceed our rate of return criteria. For acquisitions of properties with additional development, exploitation and exploration potential, our focus has been on acquiring operated properties so that we can better control the timing and implementation of capital spending. We will sell properties when management is of the opinion that the sale price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own.
The execution of our growth strategy is dependent on a number of factors including oil and gas prices, the availability of oil and gas properties that meet our economic criteria and the availability of funds on terms that are acceptable to us, if at all. There is no assurance that these factors will occur. We will require additional capital to meet both our long and short term operating requirements.
Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31, 2009
Our net loss applicable to common stockholders for 2009 was $13,071,593 compared to a net loss of $2,040,477 for the year ended 2008 (a decrease of $11,031,116). The net loss was $12,339,179, or $1.11 per share compared to $1,154,903 or $0.12 per share in 2008.
During 2009, we generated revenue of $113,006 compared to revenue of $432,959 during 2008 (a decrease of $319,953). The decrease in revenues during 2009 compared to 2008 was attributable to a decline in total production sales from 9,968 barrels oil equivalent (“BOE”) in 2008 to 5,757 BOE in 2009, resulting from depletion of the Wilson Properties.
During 2009, we incurred operating expenses of $12,341,623 compared to $1,444,689 incurred during 2008 (an increase of $10,896,934). These operating expenses incurred during fiscal year ended December 31, 2009 consisted of: (i) General and administrative expenses of $1,840,292 (2008: $1,001,207); (ii) depreciation and depletion of $153,990 (2008: $121,088); (iv) Impairment expenses of $9,969,383 (2008: $0); (v) lease operating expenses of $145,432 (2008: $322,394) and (vi) loss on sale of asset $232,526 (2008 $0).
Salaries and compensation expenses, professional and consulting fees, and general and administrative expenses incurred during 2009 increased, primarily due to the need to pay for such expenses with common stock. The value of the common stock as represented on the financial statement greatly exceeded the actual market value of the services. This was because of the lack of liquidity in ECCE common stock, vendors demanded additional stock than that represented by the quoted valuation. Accounting and audit fees of $73,055 were paid to our outside auditors and accountants. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, marketing, and consulting costs.
Depreciation and depletion of oil and gas properties decreased during 2009 primarily due to the decline in gas (22,438 mcf) and oil (315 bbl) production from our Wilson properties.
Our lease operating expenses decreased during fiscal year ended December 31, 2009. During 2008, we incurred significant costs related to environmental actions at the Wilson field. We did not have as significant an amount to pay during fiscal 2009, with most of the cleanup ending during the first quarter. However, such costs are ongoing and we will incur costs relating to clean up and abandonment during 2010 and future years.
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Interest expense of $166,352 (2008: $130,424) increased during 2009 due to the increased debt resulting from the short-term and long term obligations incurred in 2009, 2008 and 2007 for the purchase of our Wilson properties, as well as debt incurred to finance other activities.
LIQUIDITY AND CAPITAL RESOURCES
Balance Sheet Data
At December 31, 2009, our current assets were $213 and our current liabilities were $1,888,619, which resulted in a working capital deficiency of $1,888,406. At December 31, 2009, current liabilities were comprised of: (i) $137,173 in accounts payable-trade; (ii) $1,445,755 in current maturities of debt; and (iii) $305,692 in accrued expenses.
At December 31, 2009, our total assets were $869,292 comprised of: (i) $213 in cash as our only current asset; (ii) $1,129,252 in oil and gas properties and equipment and a $100,000 pipeline, less accumulated depletion and depreciation of $360,173. The decrease in total assets during the year ended December 31, 2009 from the year ended December 31, 2008 $11,957,970 was primarily due to the disposition of the property at Bateman Lake and Louisiana Shelf, and the impairment of the pipeline.
At December 31, 2009, our total liabilities were $2,993,134, comprised of: (i) $1,888,619 in current liabilities; and (ii) $1,104,514 in long term debt and asset retirement obligations. The decrease in liabilities of $833,696 during fiscal year ended December 31, 2009 from fiscal year ended December 31, 2008 was primarily due to the reduction in ARO and other liabilities related to the Bateman Lake and Louisiana Shelf fields.
Stockholders’ equity decreased from $9,000,432 for the year ended December 31, 2008 to $(2,123,842) for fiscal year ended December 31, 2009 due to the current year loss and the sale and impairment of oil and gas and pipeline properties.
Cash Flows from Operating Activities
The change in net cash flows used in operating activities for the year ended December 31, 2009 was affected by a significant decrease in revenues from oil and gas properties, increased expenses for various operations of the company, impairment expenses recorded on the oil and gas assets, and expenses recorded for stock issued for services.
For 2009, net cash flows used in operating activities was $443,908 consisting primarily of a net loss of $12,3339,179. Net cash flows used in operating activities was adjusted by: (i) $153,990 for the non-cash expense of depreciation, depletion and accretion; (ii) $47,475 for the decrease in accounts payable-trade; (iii) $34,499 decrease in prepaid expenses.; (iv) $9,969,383 for the impairment of oil and gas properties and the pipeline; (v) $1,047,310 for common stock issued for services and (vi) $189,635 for the decrease in accrued liabilities.
Cash Flows from Investing Activities
For 2009, net cash flows used in investing activities was $739,414, with the majority of the cash coming from the sale of oil and gas properties, primarily Bateman Lake.
Cash Flows from Financing Activities
We have financed some of our operations from the issuance of equity and debt instruments. We received $20,000 from the sale of common stock, paid balances on a short term note payable of $8,000, and borrowed $117,176 through ten separate loans to unrelated parties, with payment dates ranging from July 17, 2009 to December 1, 2009. We made payments on related party debt of $486,563 and received $55,420 from related parties.
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We expect that working capital requirements will continue to be funded through a combination of our future revenues, existing funds, loans and further issuances of securities. Our working capital requirements are expected to increase in line with the growth of our business. Since inception, our working capital needs have been met through operating activities and from financings and loans from our former President/Chief Executive Officer and majority shareholder, Sam Skipper, and related entities. Additional financings and loans will be required to sustain operations in the future. Mr. Skipper has stated that he will not be able to further finance ECCO Energy in 2010.
There can be no assurance that the Company will be successful in raising the required capital or that other parties will continue to advance funds to the Company. The failure to raise sufficient capital through future debt or equity financings or otherwise will cause the Company to curtail operations, sell assets, sell or merge the company or result in the failure of our business.
WORKING CAPITAL NEEDS
At December 31, 2009, we had a working capital deficit of $1,888,406. We will need to raise additional capital during 2010 to develop the oil and gas properties and fund general corporate working capital needs. Additionally, in 2009 the Company missed payment on (i) a $1,000,000 note, plus accrued interest, in connection with the acquisition of the Pipeline, (ii) a $328,578 note with Ray Nesbitt, plus accrued interest, (iii) a $25,000 note to Louisiana X Partners, plus accrued interest, in connection with the purchase of the Louisiana Shelf property, (iv) a $25,000 note to Bamco Inc, plus accrued interest, in connection with the purchase of the Louisiana Shelf property, (v) a total of $84,000, plus accrued interest, of short term notes to three individuals and (vi) a total of $33,176, plus accrued interest, to Shelby Engineering. As the Company has no debt or equity funding commitments, we will need to rely upon best efforts financings. There can be no assurance that the Company will be successful in raising the required capital. The failure to raise sufficient capital through future debt or equity financings or otherwise will cause the Company to curtail operations, sell assets, or result in the failure of our business.
MATERIAL COMMITMENTS
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve months.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Annual Report, we do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
RECENT ACCOUNTING PRONOUNCEMENTS
We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The Company’s financial statements and footnotes are set forth on pages through.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
ECCO Energy Corp.
Houston, Texas
We have audited the accompanying consolidated balance sheets of ECCO Energy Corp. as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of ECCO Energy Corp.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ECCO Energy Corp., as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has negative working capital and has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
April 15, 2010
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See summary of significant accounting policies and notes to consolidated financial statements.
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See summary of significant accounting policies and notes to consolidated financial statements.
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ECCO ENERGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2009, 2008 and 2007
See summary of significant accounting policies and notes to consolidated financial statements.
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ECCO ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See summary of significant accounting policies and notes to consolidated financial statements
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ECCO ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
ECCO Energy Corp. (“ECCE”) is an independent oil and gas company organized in Nevada actively engaged in oil and gas development, exploration and production with properties and operational focus in the Texas Gulf Coast Region. ECCE’s strategy is to grow its asset base by purchasing producing assets at a discount to reserve value, increasing the production rate of reserves, and converting proved undeveloped and developed non-producing reserves to proved developed producing reserves.
Use of 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 the disclosure of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of revenues and expenses during the reporting period.
Cash and Cash Equivalents
ECCE considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.
Oil and Gas Properties, Full Cost Method
ECCE uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized.
Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities are capitalized as oil and gas property costs. Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. ECCE assesses the realizability of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred. Impairment of unproved properties is assessed based on management's intention with regard to future exploration and development of individually significant properties and the ability of ECCE to obtain funds to finance such exploration and development. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.
Costs of oil and gas properties are amortized using the units of production method. Amortization expense calculated per equivalent physical unit of production amounted to $5.91 and $3.06 per barrel oil equivalent for the years ended December 31, 2009 and 2008, respectively.
In applying the full cost method, ECCE performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “estimated present value,” of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense. As of December 31, 2009, impairment costs of $9,969,383 and $0 were recorded during the years ended December 31, 2009 and 2008 respectively.
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Revenue and Cost Recognition
ECCE uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes to which ECCE is entitled based on our interest in the properties. Costs associated with production are expensed in the period incurred.
Concentrations
Trade accounts receivables are generated from companies with significant oil and gas marketing activities, which would be impacted by conditions or occurrences affecting that industry. In 2009 and 2008, 100% of oil and gas revenues were attributable to one customer. ECCE performs ongoing credit evaluations of its customers and, generally, requires no collateral. ECCE is not aware of any significant credit risk relating to its customers and has not experienced any credit loss associated with such receivables.
Income Taxes
ECCE recognizes deferred tax assets and liabilities under the liability method based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Loss per Share
Basic and diluted net loss per share calculations are calculated on the basis of the weighted average number of common shares outstanding during the year. Common stock equivalents are excluded from the calculation when a loss is incurred as their effect would be anti-dilutive. The basic income per share of common stock is based on the weighted average number of shares issued and outstanding at the date of the financial statements.
Subsequent Events
ECCE evaluated events occurring between the end of our fiscal year, December 31, 2009, and April 15, 2010 when the consolidated financial statements were issued.
On March 1, 2010, a note for $75,000 was issued to Dr. Ron Reece with an interest rate of 6%, due on April 1, 2011. The funds will be used for repairs and maintenance on the Wilson Field properties.
During February, 2010, ECCE issued 356,391 shares to five of the Preferred B shareholders relating to the conversion from the Preferred B Preferred stock to ECCE common stock. There was no gain or loss on the conversion of the shares.
During February, 2010, ECCE cancelled 500,000 shares of stock which was rewarded to two vendors for services
contracted for in 2008. However, their failure to satisfactorily complete their services to our satisfaction resulted in the cancellation of the stock. The original valuation of the shares totaled $275,000.
During February, 2010, ECCE awarded 500,000 shares of common stock to be distributed to various consultants,
and employees. This consists of 150,000 shares being issued to employees for retention and 350,000 to consultants for various services. The shares were valued at $30,000
During February, 2010, ECCE made two payments to Samurai Corp; one payment was for $63,000 and the other for $65,000. The payments were for expenses incurred by Samurai Operating Co. in relation to the development of the Wilson Field.
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New Accounting Standards
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168” or ASC 105-10). SFAS 168 (ASC 105-10) establishes the Codification as the sole source of authoritative accounting principles recognized by the FASB to be applied by all nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS 168 (ASC 105-10) was prospectively effective for financial statements issued for fiscal years ending on or after September 15, 2009, and interim periods within those fiscal years. The adoption of SFAS 168 (ASC 105-10) on July 1, 2009 did not impact American’s results of operations or financial condition. The Codification did not change GAAP; however, it did change the way GAAP is organized and presented. As a result, these changes impact how companies reference GAAP in their financial statements and in their significant accounting policies. American implemented the Codification in this Report by providing references to the Codification topics alongside references to the corresponding standards.
Other than the pronouncements noted above, ECCE does not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
2.
GOING CONCERN
As shown in the accompanying financial statements, we incurred net losses attributable to common shareholders of $13,071,593 and $2,040,477 for 2009 and 2008, respectively. In addition, we had an accumulated deficit of $14,856,083 and a working capital deficit of $1,888,406 as of December 31, 2009. These conditions raise substantial doubt as to our ability to continue as a going concern. Management is working to improve its liquidity and its results from operations by raising additional capital through reworking current wells, and drilling of additional wells to improve future earnings and cash flow. We are also actively attempting to raise funds through debt and equity transactions. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we do not obtain funding, ECCE will cease operations. We are attempting to find a partner to merge with us, or purchase our remaining property.
3.
OIL AND GAS PROPERTIES
OIL AND GAS PROPERTIES
All of ECCE’s 2009 oil and gas properties are located in the United States.
Costs being amortized at December 31, 2009 are as follows:
WILSON PROPERTIES
On July 12, 2006, ECCE acquired a 32% working interest in producing oil and gas properties (“Wilson Properties”). During 2007, ECCE subsequently acquired, through a series of transactions, the remaining working interests in the Wilson Properties resulting in the ownership of 100% of the working interests. Currently, the Wilson properties are ECCE’s only producing properties.
BATEMAN LAKE FIELD
On December 1, 2007, ECCO Energy Corp., a Nevada corporation (the “Company”) entered into a share exchange agreement (the “Share Exchange Agreement”) with Old Jersey Oil Ventures LLC, a New Jersey limited liability company (“Old Jersey”) and Eugene A. Noser, Jr. (“Noser”), who held 100% of the total issued and outstanding interests in Old Jersey (the “Membership Interest”), regarding acquisition by the Company of Old Jersey. In accordance with the terms and provisions of the Share Exchange Agreement, the Company acquired from Noser all of his Membership Interest in exchange for the issuance of 660,000 shares of the Company’s Series C Preferred Stock and 303,936 shares of the Company’s Series D Preferred Stock.
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Old Jersey, together with the Moffat Group, was the holder of approximately $5,900,000 in notes (the “Debt”) payable by VTEX Energy, Inc., a Nevada corporation (“VTEX”), relating to that certain oil, gas and mineral lease no. 1337 located in the State of Louisiana (the “Bateman Lake Field”). Therefore, on January 11, 2008, the Company entered into an assignment of oil, gas and mineral lease (the “VTEX Assignment”) with VTEX pursuant to which VTEX assigned to the Company all of its interest in lease no. 1337 on the Bateman Lake Field in exchange for $1,000. The Company also acquired the debt payable by VTEX to Old Jersey as a result of consummation of the Share Exchange Agreement. The lease consisted of 14 non-producing oil and gas wells. None of the wells were producing during the time that they were owned by ECCE.
ECCE entered into a farmout agreement dated January 11, 2008 (the “Farmout Agreement”) with an independent oil and gas corporation (the IOG), concerning the interest in lease no. 1337 on the Bateman Lake Field. In accordance with the terms of the Farmout Agreement, the IOG had the exclusive right, but not the obligation, to re-enter the Bateman Lake Field for the purpose of sidetracking, deepening, working over or recompleting any of the wells situated on the Bateman Lake Field. Upon consummation of the Farmout Agreement: (i) the IOG agreed to pay ECCE an aggregate $750,000; (ii) ECCE agreed to satisfy any liens on lease no. 1337; and (iii) ECCE entered into an assignment dated January 11, 2008 with the IOG pursuant to which ECCE assigned to the IOG all of the interest in lease no. 1337 on the Bateman Lake Field. ECCE was paid nonrefundable amounts of $261,000 towards the $750,000 in the year ending December 31, 2008. The agreement required the IOG complete a certain number of wells during 2008 and 2009. During the third quarter of 2008, the IOG notified ECCE that the drilling commitments of the Farmout Agreement would not be met within the allotted timeframe, terminating the agreement.
During 2008 and 2009, we unsuccessfully attempted to farm-out the property to another oil and gas company. On July 24, 2009, we negotiated a contract to sell the entire Bateman Lake field to an unaffiliated party for $700,000, plus assumption of the majority of the liens and liabilities related to the properties. During 2009, ECCE recorded an impairment charge of $4,037,875 to adjust the book value to represent the expected realizable value of the properties. The liabilities associated with the oil and gas properties, including asset retirement obligations were transferred with the assets. The sale was completed on August 31, 2009, with $100,000 being paid to ECCE as of that date, with ECCE being issued a note receivable for $600,000. A payment of $433,000 was made on October 15, 2009, with the remaining $167,000 held in escrow pending settlement or payment of certain liens on the property. As of December 31, 2009, ECCE has settled the designated liens, and receiving $121,390 in favorable lien settlement amounts, thus completing the transaction. ECCE recorded a loss on the sale of the Bateman Lake Field of $207,471.
LOUISIANA SHELF PROPERTY
On September 28, 2007, ECCE executed an agreement pursuant to which ECCE acquired all of the assets of Louisiana Shelf Partners LP, a Delaware limited partnership, for $5,000,000 by issuing to the General Partner and limited partners of Louisiana Shelf Partners, 1,000,000 shares of Series B Convertible Preferred Stock, convertible into ECCE restricted common stock at 1 common share per share of Series B Convertible Preferred Stock. Louisiana Shelf Partners owned Louisiana State Lease Number 17742 in Block 4, covering 600 acres in East Cameron Area in Cameron Parish, Louisiana. The #1 well is not connected to any platform or other pipeline and is currently not in production, and the #2 well has not been drilled.
On February 14, 2008, ECCE purchased an additional 25% of the working interest in Louisiana Shelf East Cameron Block 4, from the trustee of assets then held in bankruptcy for $10,000 bringing the total working interest owned by ECCE to 100%. The purchase received final approval in February 2008 by the bankruptcy court, whereupon the interest was purchased from the Trustee of the United States Bankruptcy Court.
During the third quarter of 2009, ECCE determined that the Louisiana Shelf Property was not commercially economical and would not prove to be a successful venture. ECCE recorded an impairment charge of $5,031,508 to reduce the value of the property to $166,000 and attempted to sell the property. During the fourth quarter, ECCE disposed of the property in exchange for the assumption of all liabilities relating to well closing and plugging, as well as the assumption of approximately $166,000 in various payables owed to vendors.
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ACQUISITION OF GAS PIPELINE
In October 2008, ECCE acquired a gas pipeline (“Pipeline”) approximately 13 miles in length located in Jefferson and Harrison Counties, Ohio. The Pipeline was purchased from M- J Oil Company of Paris, Ohio, an unaffiliated third party, by issuing a mortgage note for $1,000,000. The mortgage note bears an 8% annual interest rate. The mortgage is secured by the Pipeline assets. The mortgage was due on September 30, 2009, at which time, the entire unpaid balance of principal and accrued interest was to have been paid. The pipeline services oil and gas properties owned by Samurai Corp, an affiliated company
On February 27, 2009, ECCE entered into an agreement to buy oil and gas producing properties in Ohio, from Samurai Corp, an affiliated company owned by Sam Skipper. Upon further review, due to market conditions pertaining to the price of oil and gas, both Samurai and ECCE decided that the transaction was not in the best interest of shareholders of either company. Therefore, on April 13, 2009 the Board of Directors of both companies decided to terminate the transaction.
A review of the pipeline valuation was performed by management. This was necessary as the asset was not an income producing asset during 2009. A comparison of replacement cost, comparable market value and comparable earnings potential to other pipelines, shows that the expected realizable value of the asset at December 31, 2009 was $100,000. An impairment charge of $900,000 was recorded during the year ended December 31, 2009.
Because the failure to complete the transfer of assets from Samurai to ECCE, the covenants of the Pipeline purchase were violated. On February 28, 2009 M-J Oil Company Inc, of Paris Ohio, obtained a judgment against ECCO Energy for non-compliance with covenants in the original mortgage relating to the purchase of the M-J Oil Company pipeline (“Pipeline”). ECCE is in negotiations with the M-J Oil Company to remove the judgment and to adjust the mortgage terms, which required full payment on September 30, 2009. As of this date, ECCE has not reached a satisfactory agreement with the lender and the note remains in default.
4. LONG AND SHORT TERM DEBT
Debt - Related Parties
ECCE has notes payable to related parties including a note payable to Samurai Energy LLC; a company controlled by ECCE’s CEO, and consisted of the following at December 31, 2009 and 2008.
(1)
In June 2009, ECCE converted accounts payable into a promissory note to Samurai Corp with an interest rate of 5%, and a payment due on the maturity date of January 1, 2012 for the $809,252 balance representing the note with Samurai which was made in June, 2009.
(2)
In December 2009, ECCE combined the promissory note to Samurai Corp dated December, 2007 for $110,706 plus accrued interest, the note previously detailed in (1) for $809,252, along with various advances and payments to Samurai during the fourth quarter of 2009 into a new note dated December 22, 2009 with an interest rate of 5%, and a payment due on the maturity date of December 31, 2011 for a balance of $512,663.
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Debt - Non-Related Parties
(1)
In June 2009, ECCE borrowed $48,000 from four different parties for general corporate purposes. Three of these notes totaling $36,000 were due on August 17, 2009, and one for $12,000 was due on July 17, 2009. None of these notes have been repaid and are in default. No demand has been made for payment. ECCE is continuing to accrue interest on these notes at the stated rate.
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(2)
A total of $45,365 was payable during the third quarter, with the remaining $12,000 due on October 19, 2009 and $10,000 due on December 1, 2009. None of these notes have been repaid and are in default. No demand has been made for payment. ECCE is continuing to accrue interest on these notes at the stated rate.
(3)
ECCE issued 35,000 warrants with the issuance of the note payable. ECCE valued the warrants using the Black-Scholes option model and calculated the relative fair value of the warrants and recorded a discount of $27,689 on the debt for the value of the warrants. The discount was amortized over the life of the note. The assumptions used in the Black-Scholes pricing model for the warrants issued with the debt include (1) discount rate of 1.75%, (2) warrant life of 2 years, (3) expected volatility of 538.77% and (4) zero expected dividends. On March 19, 2010, 30,000 of the warrants expired. All principal and interest became due June 30, 2009. This note has not been repaid and is in default. No demand has been made for payment. ECCE is continuing to accrue interest on this note at the stated rate.
(4)
The notes payable relate to the acquisition of Louisiana Shelf LP. All principal and interest became due September 26, 2008. None of these notes have been repaid and are in default. No demand has been made for payment. ECCE is continuing to accrue interest on these notes at the stated rate. The acquirer accepted responsibility for these notes with the sale of the Louisiana Shelf property.
(5)
The entire unpaid balance of principal and accrued interest was due on September 30, 2009. No payments have been made and this mortgage note is in default. There has been a judgment rendered against ECCE in the amount of the mortgage. See note 5. ECCE is in discussions with the lender to restructure the mortgage. ECCE is continuing to accrue interest on these notes at the stated rate.
The following are debt maturities for the next five years:
5.
ASSET RETIREMENT OBLIGATIONS
In accordance with SFAS 143 ASC 410, “Accounting for Asset Retirement Obligations” ECCE records the fair value of a liability for asset retirement obligations (“ARO”) in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. ECCE accrues an abandonment liability associated with its oil and gas wells when those assets are placed in service. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at ECCE's credit-adjusted risk-free interest rate. No market risk premium has been included in ECCE's calculation of the ARO balance.
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The following is a description of the changes to the Company's asset retirement obligations for the years ended December 31,
6. INCOME TAXES
As of December 31, 2009, ECCO Energy had accumulated net operating losses, and therefore, had no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward is approximately $13,517,594 at December 31, 2009, and will expire in the years 2019 through 2027.
At December 31, 2009, the deferred tax assets consisted of the following:
The change in the valuation allowance for the years ended December 31, 2009 and 2008 totaled approximately $3,839,235 and $392,667, respectively.
7.
SHAREHOLDERS’ EQUITY
Preferred Stock
Series A Convertible Preferred Stock:
On July 17, 2006, in connection with the merger, ECCE issued 100,000 shares of preferred stock to Samuel M. Skipper, a preferred shareholder of ECCE and Chief Executive Officer of ECCE. The preferred stock of ECCE is not convertible to common stock and was valued at $27,000 on the date of issuance and recorded as compensation expense. The preferred stock is entitled to the number of votes equal to all votes of other security holders plus one vote. As a result, Mr. Skipper has voting control of ECCE.
Series B Convertible Preferred Stock:
On September 30, 2007, ECCE issued 1,000,000 shares of the 10,000,000 shares of authorized preferred stock as Series B Preferred Stock, with an initial value of $5.00 to acquire the Louisiana Shelf Property. The Series B Preferred Stock is a new series of preferred stock, which ranks senior and is not subordinated in any respects to the Series A Preferred Stock. As long as any Series B Preferred Stock is outstanding, ECCE is prohibited from issuing any series of stock having rights senior to or ranking on parity with the Series B Preferred Stock without the approval of the holders of two-thirds of the outstanding Series B Preferred Stock. The holders of the outstanding shares of Series B Preferred Stock shall be entitled to receive in preference to the holders of any other shares of capital stock of the Corporation, cumulative dividends when and as if they may be declared by the Board of Directors at a per share equal to 8% per annum of the Initial Value. Additionally, upon occurrence of our liquidation, dissolution or winding up, the holder of shares of Series B Preferred Stock will be entitled to receive, before any distribution of assets is made to holders of our common stock or any other stock ranking junior to the Series C Preferred Stock Preferred Stock as to dividends or liquidation rights, but only after all distributions to holders of Series C Preferred Stock have been made in an amount per share of Series B Preferred Stock equal to 100% of the Initial Value plus the amount of any accrued but unpaid dividends due for each share of Series B Preferred Stock (the “Liquidation Amount”). Lastly, in addition to the rights discussed above of the holders of the Series B Preferred Stock, at any time after June 15, 2008, and provided a triggering event has occurred, each holder of Series B Preferred Stock shall have the right at such holder’s option to require us to redeem for cash all or a portion of such holder’s shares of Series B Preferred Stock at a price per share equal to the Liquidation Amount. A “triggering event” shall mean that the wells owned or operated by the Limited Partnership have generated an aggregate of 1,500,000,000 cubic feet of natural gas. No triggering event has occurred as of the filing of this Annual Report, nor will it occur in the future as ECCE has disposed of the property.
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Convertible Series C and D Preferred Stock
On December 1, 2007, ECCE entered into a Share Exchange Agreement with Old Jersey Oil. Noser held 100% of the Membership Interest of Old Jersey. In accordance with the Share Exchange Agreement, ECCE acquired from Noser all of his Membership Interest in exchange for the issuance of 660,000 shares of Series C Preferred Stock and 303,936 shares of Series D Preferred Stock.
On March 27, 2008, ECCE filed with the Nevada Secretary of State a First Amended Certificate of Designation of Series C Convertible Preferred Stock designating 660,000 shares of the 10,000,000 shares of authorized preferred stock as Series C Preferred Stock, with an initial value of $5.00 (the “Initial Value”). The Series C Preferred Stock had been authorized by ECCE’s Board of Directors as a new series of preferred stock, which ranks senior and is not subordinated in any respects to the Series A or B Preferred Stocks. So long as any Series C Preferred Stock is outstanding, ECCE are prohibited from issuing any series of stock having rights senior to or ranking on parity with the Series C Preferred Stock without the approval of the holders of two-thirds of the outstanding Series C Preferred Stock. The holders of the outstanding shares of Series C Preferred Stock shall be entitled to receive in preference to the holders of any other shares of capital stock of the Corporation, cumulative dividends when and as if they may be declared by the Board of Directors at a per share equal to 8% per annum of the Initial Value. Additionally, upon occurrence of ECCE’s liquidation, the holder of shares of Series C Preferred Stock will be entitled to receive, before any distribution of assets is made to holders of ECCE’s common stock or any other stock ranking junior to the Series C Preferred Stock Preferred Stock as to dividends or liquidation rights, but only after all distributions to holders of Series C Preferred Stock have been made in an amount per share of Series C Preferred Stock equal to 100% of the Initial Value plus the amount of any accrued but unpaid dividends due for each share of Series C Preferred Stock (the “Liquidation Amount).
On March 27, 2008, ECCE filed with the Nevada Secretary of State a First Amended Certificate of Designation of Series D Convertible Preferred Stock designating 303,396 shares of the 10,000,000 shares of authorized preferred stock as Series D Preferred Stock, with an initial value of $5.00 (the “Initial Value”). The Series C Preferred Stock had been authorized by ECCE’s Board of Directors as a new series of preferred stock, which ranks senior and is not subordinated in any respects to the Series A or B or C Preferred Stocks. As long as any Series D Preferred Stock is outstanding, ECCE is prohibited from issuing any series of stock having rights senior to or ranking on parity with the Series C Preferred Stock without the approval of the holders of two-thirds of the outstanding Series D Preferred Stock. The holders of the outstanding shares of Series D Preferred Stock shall be entitled to receive in preference to the holders of any other shares of capital stock of the Corporation, cumulative dividends when and as if they may be declared by the Board of Directors at a per share equal to 8% per annum of the Initial Value. Additionally, upon occurrence of ECCE’s liquidation, the holder of shares of Series B or C Preferred Stock will be entitled to receive, before any distribution of assets is made to holders of ECCE common stock or any other stock ranking junior to the Series D Preferred Stock Preferred Stock as to dividends or liquidations rights, but only after all distributions to holders of Series B or C Preferred Stock have been made in an amount per share of Series B or C Preferred Stock equal to 100% of the Initial Value plus the amount of any accrued but unpaid dividends due for each share of Series D Preferred Stock (the “Liquidation Amount).
Commencing upon the occurrence of a Triggering Event (as defined below), the Corporation shall have the obligation to redeem on a pro-rata basis, but only for cash, in an amount equal to thirty and 19/100 (30.19%) percent of all proceeds received by the Corporation under the provisions of that certain Farmout Agreement between the Corporation and Jurasin Oil & Gas, Inc. (the “Farmout Agreement”) dated January 11, 2008 (“Proceeds”) from the Property (as defined below), all or a portion of the holder’s shares of Series D Convertible Preferred Stock at a price per share of Series D Convertible Preferred Stock equal to the Liquidation Amount (for this purpose, the “Redemption Price”). “Triggering Event” shall be the date on which the Corporation first receives Proceeds. The Property shall mean the Corporation’s interest in State of Louisiana Lease No. 1337 (“Lease No. 1337”) located in St. Mary and Terrebonne Parishes in Louisiana.
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In the event that the Triggering Event has not occurred within nine (9) months from the date of the filing of this designation with the Secretary of State of the State of Nevada or after the Triggering Event no redemptions have occurred for a period of three (3) consecutive calendar months, the Corporation shall have the obligation to redeem on a pro-rata basis, but only for cash, in an amount equal to thirty and 19/100 (30.19%) percent of all net proceeds received by the Corporation from the Property. The term “Net Proceeds” as used in the previous sentence shall be the total receipts by the Corporation less any royalty, overriding royalty, net profits, severance and ad valorem taxes and reasonable lease operating expenses and capital costs attributable to the Property which are usual and customary in the industry. Should the Corporation develop the mineral interests which are subject to the Farmout Agreement in whole or in part and/or enter into a subsequent development arrangement to develop such mineral interests after the termination of the Farmout Agreement, the Corporation shall have the obligation to redeem on a pro-rata basis, but only for cash, in an amount equal to thirty and 19/100 (30.19%) percent of all proceeds received by the Corporation under such development and/or under the provisions of such development arrangement.
ECCE evaluated each of the convertible preferred financial instruments under SFAS No. 133 (ASC 815), EITF 00-19 and EITF 88-5 and concluded that none of the instruments contained derivative instruments or beneficial conversion features.
Common Stock -
On February 10, 2009, ECCE issued for cash 200,000 common shares for $20,000.
On April 27, 2009, ECCE issued 300,000 common shares for services related to obtaining prospective financing valued at $51,000.
On July 1, 2009, ECCE issued 1,830,000 shares to be distributed to various consultants, and employees. This consists of 330,000 shares being issued to employees for retention, and 1,500,000 shares relating to payment for services. The shares were valued at $923,000.
On July 15, 2009, ECCE issued 49,514 shares of common stock to redeem 30,000 shares of ECCO Series C Preferred stock and associated accumulated dividends in arrears of $24,630. The share conversion was recorded using the book value method, in which no gain or loss is recognized by the company
On August 29, 2009, ECCE issued 100,000 common shares for legal services valued at $14,595.
On September 1, 2009, ECCE settled an ongoing lawsuit relating to the sale of ECCO Biofuels in 2007. We issued 40,000 shares of restricted common shares of ECCE stock to the litigants as part of the settlement. These shares were issued on September 1, 2009 and were valued at $5,600.
On September 29, 2009 ECCE issued 50,000 shares for consulting services. The services were valued at $5,500.
On October 19, 2009, ECCE issued 200,000 shares for consulting services valued at $14,000.
On November 16, 2009, ECCO issued 1,625,000 restricted common shares to employees and consultants. The shares were valued at $81,250.
On December 18, 2009, ECCE issued 989,819 shares of common stock in exchange for shares of the preferred C stock and accumulated dividends on the preferred shares. There was no gain or loss on the conversion of the shares. Dividend interest was applied to the accrued preferred dividends payable.
During December, 2009, ECCE issued 690,177 shares of common stock in exchange for shares of the preferred B stock and accumulated dividends on the preferred shares. There was no gain or loss on the conversion of shares.
During the fourth quarter of 2009, 373,107 Preferred B shares were converted and an additional 192,815 Preferred B shares were converted during the first quarter of 2010. The original conversion price was modified from $5.00 per preferred share to $1.00 per preferred share.
During the fourth quarter of 2009, 630,000 Preferred C shares were converted. The original conversion price for dividends was modified from $5.00 per preferred share to $1.00 per preferred share.
During February, 2010, ECCE issued 356,391 shares to five of the Preferred B shareholders relating to the conversion from the Preferred B Preferred stock to ECCE common stock. There was no gain or loss on the conversion of the shares.
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During February, 2010, ECCE cancelled 500,000 shares of stock which was rewarded to two vendors for services contracted for in 2008. However, their failure to satisfactorily complete their services to our satisfaction resulted in the cancellation of the stock. The original valuation of the shares totaled $275,000.
During February, 2010, ECCE awarded 500,000 shares of common stock to be distributed to various consultants, and employees. This consists of 150,000 shares being issued to employees for retention and 350,000 to consultants for various services. The shares were valued at $30,000.
The following table provides a summary of the potential dilution of common stock should ECCE’s Preferred Series B, C and/or D be converted to common stock. These valuations are as of December 31, 2009, and assume a conversion of one share of preferred stock for one share of common stock at the designated valuation price of $5.00 per share.
8. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
During the third quarter, ECCE settled an ongoing lawsuit relating to the sale of ECCO Biofuels in 2007. The settlement called for a $10,000 payment during the third quarter of 2009, which was made in September 2009. ECCE also issued 40,000 shares of restricted common shares of ECCE stock, valued at $5,600, to the plaintiffs as part of the settlement. The settlement also calls for additional payments of $12,500 to be made on each of the following dates: December 4, 2009, March 5, 2010, June 4, 2010 and September 10, 2010. The additional payments total of $50,000 has been accrued as of December 31, 2009. Total settlement expense of $65,600 was recorded as of December 31, 2009. The company did not make the December 4, 2009 or the March 5, 2010 payments and anticipates future litigation involving this amount.
We have not paid our property taxes for 2007, 2008 or 2009 on the Wilson Field in Nueces County, Texas. The County has indicated that it intends to take legal proceedings to collect those taxes. The County has placed tax liens on the property.
On February 28, 2009 M-J Oil Company Inc, of Paris Ohio, obtained a judgment against ECCO Energy for non-compliance with covenants in the original mortgage relating to the purchase of the M-J Oil Company pipeline (“Pipeline”). We are in negotiations with the M-J Oil Company to remove the judgment and to adjust the mortgage terms, which required full payment on September 30, 2009. As of this date, we have not reached a satisfactory agreement with the lender.
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Operating Leases
ECCE moved to 3315 Marquart Street., Suite 206, Houston, Texas 77027 during 2007, and expanded its office space from about 2,000 sq. ft. to 9,750 sq. ft. during 2008. ECCE entered into a new lease agreement through December 31, 2014. The rent for 2009 was negotiated to be $18 per square foot, or approximately $14,625 per month. However, due to market conditions, the monthly rent was reduced to $4,800 per month for 2009. As of March 31, 2009, the monthly rent amount will remain at this amount until market conditions improve.
Environmental Matters
ECCE’s operations and properties are subject to extensive federal, state, and local laws and regulations relating to the generation, storage, handling, emission, transportation, and discharge of materials into the environment. Permits are required for several of ECCE’s operations and these permits are subject to revocation, modification, and renewal by issuing authorities. ECCE’s also is subject to federal, state, and local laws and regulations that impose liability for the cleanup or remediation of property which has been contaminated by the discharge or release of hazardous materials or wastes into the environment. Governmental authorities have the power to enforce compliance with their regulations, and violations are subject to fines or injunctions, or both. Certain aspects of ECCE’s operations may not be in compliance with applicable environmental laws and regulations, and such noncompliance may give rise to compliance costs and administrative penalties. It is not anticipated that ECCE will be required in the near future to expend amounts that are material to the financial condition or operations, but because such laws and regulations are frequently changed and, as a result, may impose increasingly strict requirements, ECCE is unable to predict the ultimate cost of complying with such laws and regulations.
9.
RELATED PARTY TRANSACTIONS
Samurai Operating Company L.L.C., a related party, is the operator of ECCE’s properties and provides production, engineering and maintenance services and charged an operating fee for its services of $24,000 in 2009 and in 2008.
10.
SUBSEQUENT EVENTS
ECCE evaluated events occurring between the end of our fiscal year, December 31, 2009, and April 15, 2010 when the consolidated financial statements were issued.
On March 1, 2010, a note for $75,000 was issued to Dr. Ron Reece with an interest rate of 6%, due on April 1, 2011. The funds will be used for repairs and maintenance on the Wilson Field properties.
During February, 2010, ECCE issued 356,391 shares to five of the Preferred B shareholders relating to the conversion from the Preferred B Preferred stock to ECCE common stock. There was no gain or loss on the conversion of the shares.
During February, 2010, ECCE cancelled 500,000 shares of stock which was rewarded to two vendors for services contracted for in 2008. However, their failure to satisfactorily complete their services to our satisfaction resulted in the cancellation of the stock. The original valuation of the shares totaled $275,000.
During February, 2010, ECCE awarded 500,000 shares of common stock to be distributed to various consultants, and employees. This consists of 150,000 shares being issued to employees for retention and 350,000 to consultants for various services. The shares were valued at $30,000
During February, 2010, ECCE made two payments to Samurai Corp; one payment was for $63,000 and the other for $65,000. The payments were for expenses incurred by Samurai Operating Co. in relation to the development of the Wilson Field.
11.
SUPPLEMENTAL OIL AND GAS INFORMATION-(Unaudited)
Proved oil and gas reserve quantities are based on estimates prepared externally by an independent engineer in accordance with guidelines established by the Securities Exchange Commission (SEC).
There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production. The following reserve data related to the properties represents estimates only and should not be construed as being exact. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, the performance of the reservoirs, as well as extensive engineering judgment. Consequently, reserve estimates are subject to revision as additional data becomes available during the producing life of a reservoir. The evolution of technology may also result in the application of improved recovery techniques, such as supplemental or enhanced recovery projects, which have the potential to increase reserves beyond those currently envisioned.
Estimates of proved reserves are derived from quantities of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing operating and economic conditions and rely upon a production plan and strategy.
Modernization of Oil and Natural Gas Reporting Requirements
Effective for fiscal years ending on or after December 31, 2009, the Securities and Exchange Commission (“SEC”) approved revisions designed to modernize reserve reporting requirements for oil and natural gas companies. In addition, effective for the same period, the Financial Accounting Standards Board issued Accounting Standards Codification Update 2010-03, “Extractive Activities - Oil and Gas (Topic 932) - Oil and Gas Reserve Estimation and Disclosures,” to provide consistency with the new SEC rules. The Company adopted the new requirements effective December 31, 2009.
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(1) This measure is not intended to represent the market value of estimated reserves.
Reserves and pricing were calculated by a qualified independent engineer, Rex Morris. Reserve engineering is inherently a subjective process of estimating underground accumulations of oil, natural gas and NGL that cannot be measured exactly. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Accordingly, reserve estimates may vary from the quantities of oil, natural gas and NGL that are ultimately recovered. Future prices received for production may vary, perhaps significantly, from the prices assumed for the purposes of estimating the standardized measure of discounted future net cash flows. The standardized measure of discounted future net cash flows should not be construed as the market value of the reserves at the dates shown. The 10% discount factor required to be used under the provisions of applicable accounting standards may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and natural gas industry. The standardized measure of discounted future net cash flows is materially affected by assumptions about the timing of future production, which may prove to be inaccurate.
In accordance with SEC regulations, reserves were estimated using the average price during the 12-month period, determined as an unweighted average of the first-day-of-the-month price for each month, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
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Capitalized Costs of Oil and Gas Producing Activities
The following table sets forth the aggregate amounts of capitalized costs relating to the ECCE's oil and gas producing activities and the related accumulated depletion as of December 31, 2009:
Costs Incurred in Oil and Gas Producing Activities
The following table reflects the costs incurred in oil and gas property acquisition, exploration and development activities during the years ended December 31, 2009 and 2008:
The following disclosures concerning the standardized measure of future cash flows from proved oil and gas reserves are presented in accordance with FAS 69. As prescribed by FAS 69, the amounts shown are based on prices and costs at the end of each period and a 10 percent annual discount factor.
Future cash flows are computed by applying fiscal year-end prices of natural gas and oil to year-end quantities of proved natural gas and oil reserves. Future operating expenses and development costs are computed primarily by ECCE’s petroleum engineer by estimating the expenditures to be incurred in developing and producing ECCE’s proved natural gas and oil reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions. Future income taxes are based on currently enacted statutory rates.
The standardized measure of discounted future net cash flows is not intended to represent the replacement costs or fair value of ECCE’s natural gas and oil properties. An estimate of fair value would take into account, among other things, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates of natural gas and oil producing operation.
Reserve estimates were prepared by both external and internal sources.
Standardized Measure of Discounted Future Net Cash Flow
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The following reconciles the change in the standardized measure of discounted net cash flow for the year ended December 31, 2009 and 2008
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation (the "Evaluation"), under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls") as of the end of the period covered by this report pursuant to Rule 13a-15 of the Exchange Act. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm the appropriate corrective actions, if any, including process improvements, were being undertaken. Our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective at the level of operations we experienced in 2009 and were operating at the reasonable assurance level. However, as we grow, we will need to enhance our controls. We intend to take measures in 2010 that will enhance controls over various functions of our operations so as to insure the level of such controls is effective in the future.
Managements’ Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act, as amended, as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
* pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
* provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors;
* and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
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In order to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2009 as required by Sections 404 of the Sarbanes-Oxley Act of 2002, our management commenced an assessment, based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework “). A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In assessing the effectiveness of our internal control over financial reporting, our management, including the chief executive officer and chief financial officer, identified the following deficiencies: (1) Deficiencies in Segregation of Duties. The Chief Executive Officer and the Chief Financial Officer are actively involved in the preparation of the financial statements, and therefore cannot provide an independent review and quality assurance function within the accounting and financial reporting group. The limited number of qualified accounting personnel discussed above results in an inability to have independent review and approval of financial accounting entries. Furthermore, management and financial accounting personnel have wide-spread access to create and post entries in the Company’s financial accounting system. There is a risk that a material misstatement of the financial statements could be caused, or at least not be detected in a timely manner, due to insufficient segregation of duties, and (2) Our financial statement closing process did not identify all the journal entries that needed to be recorded as part of the closing process for certain complex and non-routine transactions. As part of the audit, our independent registered public accounting firm proposed certain entries that should have been recorded as part of the normal closing process. Our internal control over financial reporting did not detect such matters and, therefore, was not effective in detecting misstatements in the financial statements.
To address the material weakness, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented. As a result, we are developing an implementation plan in be put in place whereby in 2010 sufficient testing to satisfy COSO requirements will be performed. The absence of the ability to conclude as to the sufficiency of internal controls is a material weakness.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the SEC that permits the company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
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PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.
Our directors and executive officers, their ages, positions held are as follows:
Name
Age
Position with the Company
Samuel Skipper
President, Chief Executive Officer and a Director
Jesse M. Ozbolt
President, Chief Executive Officer and a Director
N. Wilson Thomas
Chief Financial Officer
Raymond Ward
Chief Operating Officer
Samuel M. Skipper was our President/Chief Executive Officer and a director until October 1, 2009. For the past sixteen years, Mr. Skipper has assisted in the consolidation of private and public companies and the entry of such companies into the public markets. From 1998 to 2003, Mr. Skipper was the founder, chairman of the board and the chief executive officer of VTEX Energy, Inc. From 1990 to 1993, Mr. Skipper was the founder of and served as the president and chief executive officer of ImageTrust, Inc. a public company in the health care industry. Mr. Skipper remains the largest shareholder in ECCE.
Jesse M Ozbolt became our President/Chief Executive Officer and a director on October 1, 2009. Mr. Ozbolt joined ECCO during 2008 as Vice-President Engineering. Prior to joining ECCO he worked with the Oil and Gas Asset Clearing House as Senior Engineer from 1998 through 2007. He has a B.A. in Civil Engineering, Magna Cum Laude, from Duke University. Mr. Ozbolt has over 30 years experience in the Oil and Gas industry, with extensive experience in evaluating prospective property in regard to all technical aspects of energy development. He has worked for such firms as Exxon, Texas Eastern Corp., Enex Resources and The Oil and Gas Asset Clearinghouse.
N. Wilson Thomas was appointed our Chief Financial Officer in November 2007. Mr. Thomas is a CPA and received a BBA from the University of Texas, Austin in 1976. During 2006 and 2007, Mr. Thomas worked as a CPA specializing in representing emerging companies. Prior to 2006, Mr. Thomas spent twenty years in the distribution industry, with sixteen of those years working for SYSCO Corporation as a CFO of a SYSCO subsidiary.
Raymond Ward served as Chief Operating Officer from March 2009 until January 2010. From 2005 to 2009, Mr. Ward served as Secretary and Managing Partner for Republic Petroleum, LLC. From 2003 to 2005, Mr. Ward served as Vice-President of Operations and Production for Millennium Offshore Group. Mr. Ward received his B.S. in Petroleum Engineering from Mississippi State University and is currently a licensed Professional Engineer in the state of Texas.
AUDIT COMMITTEE
As of the date of this Annual Report, we have not appointed members to an audit committee and, therefore, the respective role of an audit committee has been conducted by our board of directors. When established, the audit committee's primary function will be to provide advice with respect to our financial matters and to assist our board of directors in fulfilling its oversight responsibilities regarding finance, accounting, tax and legal compliance. The audit committee's primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as our compliance with laws and regulations; (iv) oversee management's establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our board of directors. The Company has no audit committee financial expert as defined under 17 CFR Section 228.41.
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The board of directors has considered whether the regulatory provision of non-audit services is compatible with maintaining the principal independent accountant's independence.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the SEC. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the reports received by us and on the representations of the reporting persons, we believe that these persons have complied with all applicable filing requirements during the fiscal year ended December 31, 2009.
CODE OF ETHICS
The Company adopted a code of ethics (“Code”) that applies to all of its directors and officers. The Code is being filed as an exhibit to this Annual Report. Copies of the Company’s Code of Ethics are available, free of charge, by submitting a written request to the Company at 3315 Marquart St., Suite 206, Houston, Texas 77027.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our chief executive officer and chief financial officer for fiscal year ended December 31, 2009, our three executive officers during 2008 (collectively, the “Named Executive Officers”):
SUMMARY COMPENSATION TABLE
Note: Mr. Thomas postponed salary payment of $50,000 until 2010. The expense is recorded on the balance sheet under accrued liabilities.
GRANTS OF PLAN-BASED AWARDS
The Company has reserved 100,000 shares of our common stock for issuance under the Plan. No securities or options have been issued pursuant to the Plan. No options have been issued to the named executive officers under the Plan or any other plan.
EMPLOYMENT AGREEMENTS
The Company has not entered into any employment agreements with any of its executive officers.
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DIRECTOR COMPENSATION
During fiscal year ended December 31, 2009, we did not pay any compensation to our directors for their respective position on the board of directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of the date of this Annual Report, the following table sets forth certain information with respect to the beneficial ownership of our common stock and our Series A Preferred Stock (our only class of preferred stock that has voting rights) by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and Series A Preferred Stock, by each of our directors, our Named Executive Officers, and our executive officers and directors as a group. Each person has sole voting and investment power with respect to the shares, except as otherwise indicated. Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As of the date of this Annual Report, there are 15,855,853 shares issued and outstanding.
*Less than one percent.
(1)
Unless otherwise indicated, the business address of the individuals listed is 3315 Marquart St., Suite 206, Houston, Texas 77027.
(2)
Includes: (i) 2,406,000 shares of common stock held of record by Mr. Skipper; (ii) 2,611,500 shares of common stock held of record by Samurai, an entity of which Mr. Skipper controls; and (iii) 102,999 shares of common stock held of record by Samurai Energy LLC, an entity of which Mr. Skipper controls.
(3)
Includes: (i) 125,000 shares of common stock held of record by Mr. Bobigian; and (ii) 1,080,999 shares of common stock held of record by RAB Ventures, Inc., an entity of which Mr. Bobigian controls.
(4)
The Series A Preferred Stock provides that Mr. Skipper shall, at a minimum, have voting power of 50.1% of the issued and outstanding common stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Samurai Operating Company L.L.C., an entity owned by our former president, is the operator of the properties and provides production, engineering and maintenance services and charged an operating fee for its services of $24,000 in 2009 and 2008.
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Sam Skipper acquired 2,406,000 shares of our common stock in 2006 for nominal consideration. Samurai, and entity controlled by Mr. Skipper, acquired 2,611,500 of our shares of common stock in 2006 for nominal consideration. Samurai Energy LLC, an entity controlled by our Mr. Skipper, acquired 102,999 shares of our common stock in 2006 for nominal consideration. Mr. Skipper acquired 100,000 shares of our Series A Preferred Stock for nominal consideration in 27,000, which provides him common stock voting power of at least 50.1%.
Samurai provides loans to the Company on a demand basis from time to time and, at December 31, 2009; the Company owed Samurai Corp $512,663.
The Company subleased its office space from a building that is 40% owned by Mr. Skipper on an adjusted rate of $4,800 during 2009.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During fiscal year ended December 31, 2009, we incurred approximately $75,340 in fees to our principal independent accountants for professional services rendered in connection with the audit of our financial statements for the fiscal year ended December 31, 2008 and for the review of our financial statements for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009.
During 2009, we did not incur any other fees for professional services rendered by our principal independent accountant for all other non-audit services which may include, but is not limited to, tax-related services, actuarial services or valuation services.
During fiscal year ended December 31, 2008, we incurred approximately $83,700 in fees to our principal independent accountants for professional services rendered in connection with the audit of our financial statements for the fiscal year ended December 31, 2008 and for the review of our financial statements for the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008.
During 2008, we did not incur any other fees for professional services rendered by our principal independent accountant for all other non-audit services which may include, but is not limited to, tax-related services, actuarial services or valuation services.
ITEM 15.
ITEM 15. EXHIBITS
The following exhibits are filed with this Annual Report on Form 10-K:
(1)
Incorporated by reference to our Registration Statement on Form 8-A filed with the SEC on December 7, 2005.
(2)
Incorporated by reference to our Report on Form 8-K filed with the SEC on June 30, 2006.
(3)
Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on March 20, 2006.
(4)
Incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 2006.
(5)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 5, 2007.
(6)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 11, 2008.
(7)
Filed herewith.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.