ITEM 1. DESCRIPTION OF BUSINESS
ITEM 1A.
ITEM 1A. RISK FACTORS
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
Subsequent to the merger with Sandstone LLC, ECCE moved to 1110 NASA Parkway, Ste 311, Houston, TX 77058 and vacated the offices on 3315 Marquart Street, Ste. 206, Houston, Texas 77027. The rental contract at 1110 NASA Parkway for 1,379 sq. ft. commenced July 1, 2010 years and terminates on August 31, 2013. The monthly rent increased from $1,781 on September 1, 2011 and increased to $1,839 on September 1, 2012 and will remain at that amount until the lease expires on August 31, 2013.
Our principal assets are oil and gas properties, principally a 1% working interest in oil and gas producing properties located in Live Oak County, Texas. We also have three wells that are unevaluated in Lee County, Texas.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
ECCE has not paid property taxes for 2007, 2008 or 2009 on the Wilson Field in Nueces County, Texas. Samurai Corp. agreed to assume the liabilities for property taxes for 2010 when it acquired the property. The County has initiated legal proceedings to collect those taxes by placing tax liens on the property. As of December 31, 2012, ECCE owed $43,452 for these property taxes included in accounts payable. ECCE is currently in negotiations to settle this liability.
On February 28, 2010 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”). The Company 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, the Company has not reached a satisfactory agreement with the lender, although a settlement is being actively pursued.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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 April 12, 2013, we had 262 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 Annual Report, we have not granted any options under the Plan or any plan.
RECENT SALES OF UNREGISTERED SECURITIES
As of the date of this Annual Report and during fiscal years ended December 31, 2012 and 2011, 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
On June 20, 2011, the Company acquired all of the membership interests of Sandstone Energy, L.L.C. (Sandstone”) in exchange for 17,857,113 shares of common stock of Eagle Ford issued to the former owners of Sandstone. Following the acquisition, the shares issued to the former owners of Sandstone constituted 82% of the Company’s common stock resulting in a change of control. Immediately preceding the acquisition, Eagle Ford shareholder’s held 3,945,027 shares of common stock, which were retained by the holders. The fair value of the shares retained by the shareholders immediately prior to the acquisition was based on the closing price of the Company’s common stock of $0.45 on June 20, 2011 and was determined to be $1,775,262.
On August 23, 2011, Eagle Ford issued stock for the remaining 50% interests in each of SSEP1, SSEP2 and SSEP3 with an accumulated deficit of $1,443,302 in exchange for 8,970,120 shares of Eagle Ford common stock. Eagle Ford now owns 100% of the interests in these ventures. The purchase of the remaining 50% member interest was accounted for as an equity transaction, with no gain or loss recognized. The difference between the fair value of the consideration paid (common stock of Eagle Ford) and the book value of the non-controlling interest was recognized as an adjustment to additional paid-in-capital.
Common stock sales
On January 18, 2012, ECCE sold 357,143 and 71,429 common shares to two individuals for $0.14 per share.
On May 9, 2012, ECCE sold 500,000 shares of common stock to four individuals for $0.10 per share.
On June 6, 2012, ECCE sold 416,667 shares of common stock to Ronald Bain, a consultant of the company, at $0.12 per share, for total proceeds of $50,000.
On September 28, 2012, ECCE sold 166,667 shares of common stock to an individual for $0.09 per share.
During October, 2012 ECCE sold 782,753 shares of common stock to six individuals at an average price of $0.13 per share.
During October, 2012 ECCE also sold 80,808 shares of common stock to two individuals at an average price of $0.25 per share
During November, 2012 ECCE sold 1,575,099 shares to fifteen individuals at an average price of $0.25 per share.
All proceeds were used for general corporate services.
Common stock issued for exchange of debt and accounts payable
On February 23, 2012, ECCE issued 300,000 shares of common stock in exchange for nine notes payable totaling $36,000 and accrued interest of $6,369.
Common stock issued for services
On March 14, 2012, ECCE issued 250,000 shares to four individuals as compensation for technical assistance relating to existing and potential field evaluation, fair valued at $50,000.
On December 12, 2012, ECCE issued 30,000 shares to a market consulting firm in payment for certain services relating to financial consulting related to the equity markets. Fair value of the common stock was valued at $26,400.
Preferred Stock
In addition to our common stock, we are authorized to issue up to 10,000,000 shares of preferred stock, par value $0.001. All outstanding Series A, B, C and D shares were converted to common shares before the year ended December 31, 2011, and no shares have been reissued at year end December 31, 2012.
Warrants
On June 20, 2011, the Company granted 1,000,000 warrants in connection with the conversion of Eagle Ford’s convertible preferred shares prior to the Acquisition by Sandstone (see Note 9). The Company determined that the warrants contained provisions that protect the holders from declines in the Company’s stock price that could result in modification of the exercise price under the warrant based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. As a result, these warrants were not indexed to the Company’s own stock. The fair value of these warrants was recognized as derivative warrant instruments and will be measured at fair value at each reporting period. As of December 31, 2011, the Company determined that, using a lattice model, the fair value of the warrants was $219,582. The Company re-measured the warrants as of December 31, 2012 and determined the fair value to be $188,933. The decrease in fair value has been recognized as an unrealized gain on the change in derivative value of $30,649 for the twelve months ended December 31, 2012.
Warrant activity during the year ended December 31, 2012 is as follows:
In connection with the Reverse Acquisition, the Company assumed 1,000,000 warrants which were issued by Eagle Ford prior to the Reverse Acquisition in connection with the conversion of Eagle Ford’s convertible preferred shares, which also occurred prior to the Reverse Acquisition. The Company determined that the warrants contained provisions that protect the holders from declines in the Company’s stock price that could result in modification of the exercise price under the warrant based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under ASC 815 - 40. As a result, these warrants were not indexed to the Company’s own stock.
The fair value of these warrants was recognized as derivative warrant instruments and will be measured at fair value at each reporting period, see Note 8. As of December 31, 2012, all warrants outstanding and exercisable had an intrinsic value of $0.00, based on the trading price of Eagle Ford’s common stock of $0.29 per share.
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, 2012 and 2011, including the notes to those consolidated 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 consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
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. Over the next twelve months, our strategy is to grow our asset base by investing in oil and gas drilling and production in the Texas-Louisiana Gulf Coast region. Although we do not currently operate any of our wells, we desire to 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 substantial additional capital to meet our current obligations and long term operating requirements and acquisition objectives.
Fiscal Year Ended December 31, 2012 Compared to Fiscal Year Ended December 31, 2011
Revenue
During 2012, we generated revenue of $7,197 compared to revenue of $242,613 during 2011 (a decrease of $235,416). The decrease in revenues during 2012 compared to 2011 was attributable to a decline in total production sales from 1,847 barrels oil equivalent (“BOE”) in 2011 to 489 BOE in 2012, resulting from depletion and the cessation of the minimal production in Lee County, TX during 2011.
Operating Expenses
During 2012, we incurred operating expenses of $2,237,247 compared to $1,420,766 incurred during 2011 (an increase of $816,481). These operating expenses incurred during fiscal year ended December 31, 2012 consisted of: (i) General and administrative expenses of $1,323,536 (2011: $1,242,635); (ii) Depreciation, depletion and accretion of $7,535 (2011: $11,556); (iii) Impairment of oil & gas properties expense of $867,245 (2011: $116,021); and (iv) Lease operating expenses of $38,931 (2011: $48,647).
Salaries and compensation expenses, professional and consulting fees, and general and administrative expenses incurred during 2012 increased primarily due to the increase in compliance costs as a public company and consulting fees related to the acquisition and research on oil and gas properties. General and administrative expenses generally include corporate overhead, financial and administrative contract services, marketing, and consulting costs. The costs also represent a full twelve months of activity, instead of an amount affected by the short year relating to the merger in 2011.
Depreciation and depletion of oil and gas properties decreased during 2012 primarily due to the decline in gas production to 2,935 mcf from 8,646 mcf for the year ended December 31, 2011. As a result of low production and low prices, the Live Oak County, TX field was impaired at year end December 31, 2012.
Our lease operating expenses decreased during fiscal year ended December 31, 2012, and were $38,931 which compares to $48,647 for the year ended December 31, 2011.
Other Income (Expense)
Interest expense of $685,752 (2011: $240,067) increased by $445,685 during 2012 due to the increased debt resulting from the short-term obligations incurred in 2012 and 2011 for the purchase of our oil and gas properties, specifically the East Pearsall field, as well as debt incurred to finance working capital activities.
During 2011, the Company evaluated goodwill for impairment and determined the goodwill was fully impaired amounts to $5,125,081 relating to the acquisition, which did not exist in the current year period 2012,
Unrealized gain on change in derivative value decreased by $188,450 to $30,648 from $219,098 for the year ended December 31, 2012 and 2011, respectively.
Net Loss
Our net loss applicable to common stockholders for 2012 was $2,885,155 or $0.08 per share compared to a net loss of $6,204,323 or $0.26 per share for the year ended 2011 (an increase of $3,319,168) due to reason stated above.
LIQUIDITY AND CAPITAL RESOURCES
Balance Sheet Data
At December 31, 2012, our current assets were $300,091 and our current liabilities were $5,323,271 which resulted in a working capital deficiency (current liabilities over current assets) of $5,023,180. At December 31, 2012, our total liabilities were $12,537,006 consisting of: (i) $592,303 in accounts payable - trade; (ii) $1,362,369 in accrued expenses; (iii) $153,390 in accrued expenses - related party; (iv) $1,772,709 in notes payable to third parties, current; (v) $897,500 in short-term debt - related parties; (vi) $545,000 in convertible debentures; (vii) $188,933 in derivative liabilities; (viii) $24,802 in asset retirement obligations, and (ix) $7,000,000 in a note related to the purchase of the East Pearsall property.
Stockholders’ deficiency decreased from $1,528,964 at December 31, 2011 to a $3,598,699 as of December 31, 2012 ($2,069,735 decrease). The decrease was primarily due to the current year loss which included the impairment charge for two properties.
Cash Flows from Operating Activities
Cash flows used by operations were $1,040,988 during the year ended December 31, 2012, compared to net cash used for operations of $663,628 during the prior year ended, which was an increase in cash used in operations of $377,360, due to higher general and administrative expenses.
Cash Flows from Investing Activities
The Company used net cash for investing activities of $6,451,936 during year ended December 31, 2012, compared to net cash used for investing activities of $111,285 during the prior year ended, which was an increase in cash used in investing activities for the purchase of the East Pearsall field.
Cash Flows from Financing Activities
The Company received cash from financing activities of $7,728,650 during the year ended December 31, 2012, compared to net cash from financing activities of $797,911 during the prior year ended, which was an increase in financing activities of $6,930,739 as compared to prior year. This increase in cash from financing activities is related to the purchase of the East Pearsall field. ECCE also raised cash from the sale of common stock, $696,650, as well as obtaining loans for the purchase of the field.
We expect that working capital requirements will continue to be funded through a combination of our future revenues we expect to generate on various properties, 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 individual investors and related entities. ECCE does not anticipate future funds being available from related entities. We anticipate that additional financings and loans will be required to sustain operations and acquire development properties in the future.
There can be no assurance that the Company will be successful in raising the required capital or that related 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 and result in the failure of our business.
.
WORKING CAPITAL NEEDS
At December 31, 2012, we had a working capital deficit of $5,023,180. We will need to raise additional capital during 2013 to develop the oil and gas properties and fund general corporate working capital needs. ECCE has (i) notes payable of $1,772,709, and has accrued interest of $656,799 , that were past due as of December 31, 2012, (ii) notes payable of $897,500 of notes which is due to related parties due on September 30, 2013, and has accrued interest of $153,390, (iii) convertible debentures of $545,000 that were payable in July 2011 and which as of December 31, 2012 has accrued interest of $159,305 and (iv) a note for $7,000,000 plus $397,945 of accrued interest for the purchase of the East Pearsall Field. 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, outside of any items related to the drilling or completion of the Lee County, Live Oak County and East Pearsall fields.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The Company’s consolidated financial statements and footnotes are set forth on pages through.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2012 and 2011
Consolidated Statements of Operations for the Years Ended December 31, 2012 and 2011
Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Years Ended December 31, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Eagle Ford oil & Gas Corp.
League City, Texas
We have audited the accompanying consolidated balance sheet of Eagle Ford oil & Gas Corp. and its subsidiaries (the “Company”), as of December 31, 2012 and 2011, and the related consolidated statements of operations, deficiency in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We have conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the 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 audits 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 consolidated financial position of Eagle Ford oil & Gas Corp. and its subsidiaries as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, and has an accumulated deficit as of December 31, 2012 and 2011, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ RBSM LLP
RBSM LLP
New York, New York
April 12, 2013
EAGLE FORD OIL AND GAS CORP.
CONSOLIDATED BALANCE SHEETS
See summary of significant accounting policies and notes to consolidated financial statements.
See summary of significant accounting policies and notes to consolidated financial statements.
EAGLE FORD OIL & GAS CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
For the Two Years Ended December 31, 2012
See summary of significant accounting policies and notes to consolidated financial statements.
EAGLE FORD OIL & GAS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See summary of significant accounting policies and notes to consolidated financial statements
EAGLE FORD OIL AND GAS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2012 and
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Eagle Ford Oil & Gas Corp. (“Eagle Ford” or the” Company”) 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 and Louisiana-Gulf Coast Region. Eagle Ford’s strategy is to grow its asset base by purchasing or investing in oil and gas drilling projects in the Texas and Louisiana regions.
On June 20, 2011, pursuant to a Purchase Agreement, Eagle Ford acquired all of the membership interests of Sandstone Energy, L.L.C. (“Sandstone”), an exploration stage entity at the time, in exchange for 17,857,113 shares of common stock of Eagle Ford (the “Reverse Acquisition”). Following the Reverse Acquisition, the shares issued to the former owners of Sandstone constituted 82% of the Company’s common stock.
Sandstone Energy, L.L.C.’s principal assets at the date of the Reverse Acquisition were 50% membership interests in each of Sandstone Energy Partners I, L.L.C. (“SSEP1”), Sandstone Energy Partners II, L.L.C. (“SSEP2”) and Sandstone Energy Partners III, L.L.C. (“SSEP3”). On August 8 and August 11, 2011, Eagle Ford acquired the remaining 50% interests in each of SSEP1, SSEP2 and SSEP3 with an accumulated deficit of $1,443,302 in exchange for 8,970,120 shares of Eagle Ford common stock. Eagle Ford now owns 100% of the interests in these ventures.
Accounting Treatment; Change of Control
As discussed above, in connection with the Reverse Acquisition, Eagle Ford issued 82% of its shares to acquire all of the membership interests in Sandstone resulting in a change in control in which the former holders of all of the membership interests became the majority shareholders of Eagle Ford. The Reverse Acquisition is being accounted for as a “Reverse Acquisition” in which Sandstone is deemed to be the accounting acquirer (“Acquirer”) and Eagle Ford is deemed to be the accounting acquiree (“Acquiree”). Consequently, the assets and liabilities and the historical operations reflected in the accompanying consolidated financial statements prior to the Reverse Acquisition are those of Sandstone and are recorded at the historical cost basis of Sandstone. The consolidated financial statements after completion of the Reverse Acquisition include the assets and liabilities of Sandstone and the Acquiree and the historical operations of Sandstone and the Acquiree and its subsidiaries from the closing date of the Reverse Acquisition. In accordance with ASC 805, the assets and liabilities of the Acquiree at the date of the acquisition have been recorded at fair value.
Eagle Ford continues to be a “smaller reporting company,” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), following the Reverse Acquisition.
Consolidation
The accompanying consolidated financial statements include all accounts of ECCE, and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP 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. Actual results could differ from those estimates.
Eagle Ford’s consolidated financial statements are based on a number of significant estimates, including oil and gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and gas properties; timing and costs associated with its asset retirement obligations; estimates for the realization of goodwill; and estimates of the value of derivative financial instruments.
Reclassifications
Certain reclassifications have been made in the prior period consolidated financial statements to conform to the current period presentation.
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 $2.48 and $3.88 per barrel oil equivalent for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012 the Company in review of the development plans decided to impaired the live oak property and accordingly the Company recorded an impairment to current period operations.
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, 2012 the Company in review of the development plans decided to impaired the Vick 1, Lee County, TX property and accordingly the Company recorded an impairment to current period operations
Impairment costs of $867,245 and $116,021 were recorded during the years ended December 31, 2012 and 2011, respectively.
Revenue and Cost Recognition
ECCE recognizes sales revenues, net of royalties and net profits interests, based on the amount of gas, oil and condensate sold to purchasers when delivery to the purchaser has occurred and title has transferred. This occurs when production has been delivered to a pipeline. The Company follows the sales method to account for natural gas imbalances. Sales may result in more or less than the Company’s share of pro-rata production from certain wells. When natural gas sales volumes exceed the Company’s entitled share and the accumulated overproduced balance exceeds the Company’s share of the remaining estimated proved natural gas reserves for a given property, the Company will record a liability. Historically, sales volumes have not materially differed from the Company’s entitled share of natural gas production and the Company did not have a material imbalance position in terms of volumes or values at December 31, 2012 or 2011. Costs associated with production are expensed in the period incurred.
Depletion
Depletion is provided using the unit-of-production method based upon estimates of proved oil and natural gas reserves with oil and natural gas production being converted to a common unit of measure based upon their relative energy content. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment (ceiling test) indicate that the properties are impaired, the amount of the impairment is deducted from the capitalized costs to be amortized. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins. The amortizable base includes estimated future development costs and where significant, dismantlement, restoration and abandonment costs, net of estimated salvage value.
In arriving at rates under the unit-of-production method, the quantities of recoverable oil and natural gas reserves are established based on estimates made by the Company’s geologists and engineers which require significant judgment, as does the projection of future production volumes and levels of future costs, including future development costs. In addition, considerable judgment is necessary in determining when unproved properties become impaired and in determining the existence of proved reserves once a well has been drilled. All of these judgments may have significant impact on the calculation of depletion expense.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, as necessary, based on past experience and other factors which, in management’s judgment, deserve current recognition in estimating bad debts. Such factors include growth and composition of accounts receivable, the relationship of the allowance for doubtful accounts to accounts receivable and current economic conditions. The determination of the collectability of amounts due from customer accounts requires the Company to make judgments regarding future events and trends. Allowances for doubtful accounts are determined based on assessing the Company’s portfolio on an individual customer and on an overall basis. This process consists of a review of historical collection experience, current aging status of the customer accounts, and the financial condition of Eagle Ford’s customers. Based on a review of these factors, the Company establishes or adjusts the allowance for specific customers and the accounts receivable portfolio as a whole. At December 31, 2012 and 2011, an allowance for doubtful accounts was not considered necessary as all accounts receivable were deemed collectible.
Concentration of Credit Risk
Financial instruments that potentially subject Eagle Ford to concentration of credit risk consist of cash and accounts receivable. Under Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, for the two-year period of January 1, 2011 through December 31, 2012, cash balances in noninterest-bearing transaction accounts at all FDIC-insured depository institutions are provided temporary unlimited deposit insurance coverage. At December 31, 2012, cash balances in interest-bearing accounts are zero.
Sales to a single customer comprised 100% and 73% of Eagle Ford’s total oil and gas revenues for the twelve months ended December 31, 2012 and 2011, respectively. At December 31, 2012 and 2011, Eagle Ford’s accounts receivable from its primary customer was $26,568 and $35,331, respectively. Eagle Ford believes that, in the event that its primary customer is unable or unwilling to continue to purchase Eagle Ford’s production, there are a substantial number of alternative buyers for its production at comparable prices.
Income Taxes
ECCE is a taxable entity and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the temporary differences reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Interest and penalties associated with income taxes are included in selling, general and administrative expense.
ECCE has adopted ASC Topic 740 “Accounting for Uncertainty in Income Taxes” which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its consolidated financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740 states that a tax benefit from an uncertain position may be recognized if it is “more likely than not” that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. As of December 31, 2012, the Company had not recorded any tax benefits from uncertain tax positions.
Loss per Share
Pursuant to FASB ASC Topic 260, Earnings Per Share, basic net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method and conversion of preferred shares. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.
Stock-based Compensation
ECCE measures the cost of employee services received in exchange for stock based on the grant date fair value of the awards under FASB ASC Topic 718, Compensation - Stock Compensation (“ASC 718”). ECCE determines the fair value of shares of nonvested stock (also commonly referred to as restricted stock) based on the last quoted price of the Company’s stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, as defined in ASC 718, if any, are recognized as an addition to paid-in capital.
Financial instruments
The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures.
The three levels are defined as follows:
• Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
• Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
• Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company has determined that the warrants outstanding as of the date of these financial statements include an exercise price “reset” adjustment that qualifies as derivative financial instruments under the provisions of ASC 815-40, Derivatives and Hedging - Contracts in an Entity’s Own Stock.” See Note 8 for discussion of the impact the derivative financial instruments had on the Company’s financial statements and results of operations.
The fair value of these warrants was determined using a lattice model with any change in fair value during the period recorded in earnings as “Other income (expense) - Unrealized gain (loss) on change in warrant derivative value.”
Significant Level 3 inputs used to calculate the fair value of the warrants include the stock price on the valuation date, expected volatility, risk-free interest rate and management’s assumptions regarding the likelihood of a re-pricing of these warrants pursuant to the anti-dilution provision. See Note 8 for further discussion.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2012. There were no transfers of financial assets between levels during the year ended December 31, 2012. The Company held no financial assets or liabilities accounted for at fair value on a recurring basis as of December 31, 2012.
The Company did not identify any other assets and liabilities that are required to be presented on the consolidated balance sheet at fair value.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a loss contingency indicates that it is probable that a loss has been incurred and the amount of the liability can be reasonably estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. The Company expenses legal costs associated with contingencies as incurred.
Environmental Expenditures
The Company is subject to extensive federal, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed.
Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component is fixed or reliably determinable. No such liabilities existed or were recorded at December 31, 2012 and 2011.
New Accounting Pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
2. GOING CONCERN
As shown in the accompanying consolidated financial statements, the Company incurred net losses attributable to common shareholders of $2,885,155 and $6,204,323 for 2012 and 2011, respectively. In addition, the Company had an accumulated deficit of $9,967,267 and a working capital deficit of $5,023,180 as of December 31, 2012. These conditions raise substantial doubt as to ability to continue as a going concern. Management is working to improve its liquidity and its results from operations by raising additional capital through purchasing producing wells, and the drilling of additional wells to improve future earnings and cash flow. The Company is also actively attempting to raise funds through debt and equity transactions, or through a merger. The consolidated financial statements do not include any adjustments that might be necessary if the Company are unable to continue as a going concern. If the Company do not obtain funding, ECCE will cease operations.
3. BUSINESS ACQUISITIONS
Reverse Acquisition
On June 20, 2011, Eagle Ford acquired all of the membership interests of Sandstone in exchange for 17,857,113 shares of common stock of Eagle Ford. Following the Reverse Acquisition, the shares issued to the former owners of Sandstone constituted 82% of the Company’s common stock resulting in a change of control in which Sandstone controls Eagle Ford post-acquisition. The Agreement provided for contingent consideration equal to 6% of Eagle Ford’s then issued and outstanding shares of common stock, determined immediately following the Closing Date, on a fully diluted basis, (the “Contingent Consideration”) to all record owners of Eagle Ford’s common stock immediately prior to the Reverse Acquisition, issued and apportioned to each such owner based upon the percentage of such stock owned immediately prior to the Closing, if and upon successful noncash resolution within one year from Closing Date of an unsatisfied judgment issued against Eagle Ford prior to the acquisition of Sandstone.
For accounting purposes of the Reverse Acquisition, Sandstone is deemed to be the accounting acquirer (“Acquirer”) and Eagle Ford is deemed to be the accounting acquiree (“Acquiree”). Consequently, the assets and liabilities and the operations reflected in the consolidated financial statements prior to the Reverse Acquisition are those of Sandstone and are recorded at the historical cost basis of Sandstone. The consolidated financial statements after completion of the Reverse Acquisition include the assets and liabilities of Sandstone and the Acquiree and the historical operations of Sandstone and the Acquiree and its subsidiaries from the closing date of the Reverse Acquisition.
Immediately preceding the acquisition, Eagle Ford shareholders held 3,945,027 shares of common stock. The purchase consideration to acquire Old Eagle Ford was based on the fair value of the 3,945,027 shares of common stock, (utilizing the closing price of $0.45 on June 20, 2011) which was determined to be $1,775,262. The purchase consideration to acquire Old Eagle Ford also includes the Contingent Consideration discussed above. The Company determined the estimated fair value of the Contingent Consideration as of the acquisition date to be de minims.
In accordance with ASC 805, the assets and liabilities of the Acquiree at the date of the acquisition have been recorded at fair value. The acquisition price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values with the excess being recorded in goodwill. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
The allocation of the purchase price was based on preliminary estimates and is provisional. Estimates and assumptions are subject to change upon the receipt of final tax returns. This final evaluation of net assets acquired is expected to be completed as soon as a final accounting is performed but no later than one year from the acquisition date. Any future changes in the value of the net assets acquired will be offset by a corresponding change in goodwill. As of June 30, 2011, Eagle Ford evaluated goodwill for impairment and determined the goodwill was fully impaired.
Purchase of remaining 50% member interests
On August 8 and August 11, 2011, Eagle Ford acquired the remaining 50% interests in each of SSEP1, SSEP2 and SSEP3 with an accumulated deficit of $1,443,302 in exchange for 8,970,120 shares of Eagle Ford common stock. As a result of the acquisition of the SSEP interests, the Company currently owns the entire 38.75% working interest on 2,315 acres located in Lee County, Texas.
In accordance with ASC 810-10-45-23, the acquisition of the 50% interests in SSEP1, SSEP2 and SSEP3 qualifies as a change in the parent’s ownership while the parent retains its controlling financial interest in the subsidiary. In accordance with this ASC, the purchase of the remaining 50% member interest was accounted for as an equity transaction, with no gain or loss recognized. The difference between the fair value of the consideration paid (common stock of Eagle Ford) and the book value of the noncontrolling interest was recognized as an adjustment to additional paid-in-capital.
4. OIL AND GAS PROPERTIES
The following table sets forth the Company’s costs incurred in oil and gas property acquisition, exploration and development activities for the year ended December 31, 2012. All of the Company’s oil and gas properties (excluding accumulated depletion) are located in the United States.
The Vick No: 1 well is currently a drilled and unevaluated well which in early 2010 had been drilled laterally several hundred feet where it intercepted a fault or fault zone and encountered a saltwater flow of approximately 250 barrels per day. The Company has a 38.75% net working interest as of December 31, 2012. The Vick No. 1 is currently shut-in. As of December 31, 2012, the company does not plan to proceed with any future development of this well. However, should other information become available, ECCE may decide to further explore the development of this well. As of December 31, 2012, an impairment charge of $766,493 (net of accumulated amortization and accretion) was taken against this well.
The Vick No: 2 well is currently a drilled and unevaluated well and was drilled in 2010 as a vertical well and then extended as a horizontal well. Although the well generated initial production, monthly production has declined to approximately 15 bbls, which is enough to hold its lease position. Options to improve production are being considered. The Company has a 38.75% net working interest as of December 31, 2012.
The Alexander No: 1 well is currently a drilled and unevaluated well. Although the well generated initial production from late 2010 to May 2011 when the operator suspended operations for technical and operations evaluation, the production to date has not been consistently sustained to establish proved reserves. The Company has a 38.75% net working interest as of December 31, 2012.
LIVE OAK COUNTY, TEXAS
In August 2010, ECCE purchased a farm-in of a 1% working interest in 2,400 acres and the drilling of two wells in the Eagle Ford Shale formation located in Live Oak County in South Texas for $250,000. The Dena Forehand #2H, the Kellam #2H and the Hammon 1H were drilled and completed and production began during late 2010 and early 2011 and classified as proved reserves. Production has proven to be well below expectations, and ECCE does not intend to pursue additional investments in this field. As of the date of this report, the wells in Live Oak County continue to have minimal oil and gas production.
The reserve report dated January 1, 2011 showed future reserves substantially below the prior year’s report. Therefore an impairment charge of $116,029 was taken on December 31, 2011. The reserve report dated January 1, 2012 showed reserves for future development being negative, primarily due to low natural gas prices during 2012. An impairment charge of $100,752 (net of accumulated amortization and accretion) was taken on December 31, 2012, reducing the value of the field to $0.00. The three wells are still producing, but revenue is insignificant after expenses are deducted. ECCE may owe future amounts on these wells pertaining to any attempts to improve production; however there has been no decision to make such repairs, or improvements.
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, 2010, 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 2010. A comparison of replacement cost, comparable market value and comparable earnings potential to other pipelines, showed 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.
Due to 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.
EAST PEARSALL
On June 4, 2012, ECCE entered into an agreement though a special purpose entity named EFOGC - East Pearsall, L.L.C. (“EFEP”), a Texas limited liability company. ECCE owns 100% of the Class B Membership Interests in EFEP. EFEP completed the acquisition of 85% Working Interest in 3,683 acres in Frio County, Texas from Amac Energy, L.L.C. to develop the Austin Chalk, Buda, Eagle Ford and Pearsall Shale reservoirs. ECCE is attempting to raise funds in order to develop this field. The total investment to date totals $6,464,436 (out of which $12,500 unpaid). As of the date of this filing, ECCE has not been able to raise the needed funds for drilling.
BAYOU CHOCTAW/GFX ENERGY
On August 5, 2011, ECCE, entered into an agreement to purchase 1.5% Working Interest in the Bayou Choctaw Project located in Iberville Parish, Louisiana from GFX Energy, Inc. (GFX). Prior to December 31, 2011, ECCE decided to not further participate in the Bayou Choctaw development. ECCE and GFX decided to use the $100,000 deposited for Bayou Choctaw as a deposit on a future, undetermined endeavor relating to the exploration of oil and gas. ECCE remains in discussion about this investment with GFX Energy, Inc.
5. DEBT
Debt - Related Parties
Notes Payable - Related Parties
Interest expenses to related party for the year ended December 31, 2012 and 2011 is $153,390 and $83,058, respectively.
Notes Payable - Non-Related Parties
On June 20, 2011, the Company assumed $1,918,709 of non-related party notes as a result of the Reverse Acquisition (see Note 3). Accrued and unpaid interest for notes payable to non-related parties at December 31, 2012 and 2011 was $1,054,744 and $513,392, respectively, and is included in accrued expenses on the accompanying consolidated balance sheets.
(1)
Pierre Vorster is a former investor in Sandstone, LLC and owns 178,571 shares of Eagle Ford common stock.
(2)
All principal and interest became due September 30, 2009. This note has not been repaid and is in default. No demand has been made for payment. Eagle Ford is continuing to accrue interest on this note at the stated rate.
(3)
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 Eagle Ford in the amount of the mortgage (see Note 9). Eagle Ford is in discussions with the lender to restructure the mortgage. Eagle Ford is continuing to accrue interest on this note at the stated rate.
(4)
Pursuant to the Reverse Acquisition, the Company assumed notes payable of $36,000 originally issued in 2009 from one party for general corporate purposes. Eagle Ford has continued to accrue interest on these notes at the stated rate. In March 2012, the party agreed to convert $36,000 of principle and $6,369 of accrued interest on these notes into 300,000 shares of Eagle Ford common stock.
(5)
Pursuant to the Reverse Acquisition, the Company assumed these notes payable totaling $267,000 from 4 different parties for drilling on the Wilson Field lease and for general corporate purposes. None of these notes have been repaid and are in default. No demand has been made for payment. Eagle Ford is continuing to accrue interest on these notes at the stated rate. In August 2011, one of these parties agreed to convert $75,000 of debt and $22,994 of interest into 276,140 shares of common stock for a total value of $55,228.
(6)
Prior to the Reverse Acquisition, Eagle Ford borrowed $25,000 from a related party for general corporate purposes. The note is in default and due on demand. Eagle Ford continued to accrue interest on these notes at the stated rate. From July 20, 2011 this note holder is no longer a related party.
(7)
East Pearsall
ECCE borrowed $7,000,000 from Medallion Oil Company LTD (MOC) to purchase the East Pearsall tract from AMAC Energy, which created a Special Purpose Entity (SPE). Upon receipt of the funds, ECCE granted to MOC a lien and security interest on all the assets of the SPE, including the leases up to the investment and any accrued interest. The amount will be paid in full within 12 months, and bears an interest rate of 10.00% APR. There will be an additional distribution of $7,000,000 to MOC in preferred production payments, which may be deferred until after receipt of the initial $7,000,000 and interest payments and then paid per agreed upon sliding scale within 18 months from the closing date or a mutually agreed date.
MOC will retain 6.55% of the 63.75% Net Revenue Interest as an overriding royalty interest (ORRO) after all payments described previously are received by MOC. There may also be a sliding scale on these payments to be negotiated on a reasonable basis to enable ECCE to retain reasonable cash proceeds to enable it to conduct its business with respect to drilling and development of the project.
The overriding royalty interest shall be free and clear of all costs except production taxes. The ORRO will apply to any renewals, extensions, etc. of existing leases and to any new leases acquired within the Area of Mutual Interest. ECCE must satisfy all drilling obligations or otherwise default to the terms included in the final transaction documents. MOC shall have all rights under the SPE documents, including but not limited to the right to foreclose on its lien and security interest and obtain all rights to the Leases. ECCE will reimburse MOC for any legal hours it occurs, up to $10,000.
Included in the AMAC financing agreement, ECCE agrees to cause the drilling of at least one oil and gas well on or prior to 12 months from the date hereof and obtain drilling funds of at least $21,500,000 with a satisfactory drilling partner within nine months of the date hereof, or December 4, 2012.
On October 22, 2012, MOC agreed to modify the agreement with ECCE relating to the issue relating to the date for raising drilling funds. ECCE must raise $10,500,000 for drilling funds by December 4, 2012, instead of the $21,500,000 in the original agreement. As of the date of this report, ECCE has failed to raise the necessary drilling funds. As of the date of this report, MOC has taken no action relating to the failure to raise these funds. ECCE is in discussion with MOC about the terms and payment conditions of the note.
Convertible Debentures
On June 20, 2011, the Company assumed the liability for $545,000 of Secured Convertible Debentures as a result of the Reverse Acquisition (see Note 3). The Secured Convertible Debentures matured on July 26, 2011, and earned interest at a rate of 12%, payable quarterly in 3,000 shares of common stock for each debenture. The Company is in default. There have been no shares issued for the interest payable as of the date of this report, nor have the Debentures been repaid. The interest for these debentures is accrued at the 12% rate and is included in accrued expenses. Accrued and unpaid interest was $159,305 and $93,905 at December 31, 2012 and 2011, respectively related to the convertible debentures. The Debentures are secured by a 1.5% interest in three oil and gas producing wells that are in a 2,400 acre lease in Live Oak County, Texas. The Debentures are convertible at the holders’ option into Eagle Ford restricted common stock at a fixed conversion rate of $0.90 per common share. The Debentures may also be satisfied by transferring the lease to the investors. Eagle Ford is in negotiation with the debenture holders and no agreement has been made as of the date of this report.
Following are maturities on convertible debentures for the next five years:
Gain on settlement of debt
During the year ended December 31, 2011, the Company settled certain of its outstanding notes payable, as further discussed above, in addition to settlement of the outstanding third party advances. The third party advances were settled by two officers of Eagle Ford transferring beneficially owned shares of Eagle Ford common stock. Certain of the outstanding notes payable were settled in exchange for shares of common stock and certain notes payable were forgiven by the note holder, as discussed above. The gain on settlement of debt for the year ended December 31, 2011 was $105,288 which consisted of gain from settlement of third party advances of $82,316, a net gain on settlement of notes payable and accrued interest of $10,549 and gain on settlement of accounts payable of $12,423.
During the year ending December 31, 2012, ECCE converted $36,000 of notes payable plus accrued interest into 300,000 shares of common stock at a minimal gain
6. RELATED PARTY TRANSACTIONS
The Company has a related party loan (see Note 5 above) of $897,500 and $817,500 for the year ended December 31, 2012 and 2011, respectively.
7. ASSET RETIREMENT OBLIGATIONS
In accordance with 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.
The following is a description of the changes to the Company’s asset retirement obligations for the years ended December 31,
8. DERIVATIVE LIABILITY
In connection with the Reverse Acquisition, the Company assumed 1,000,000 warrants which were issued by Eagle Ford prior to the Reverse Acquisition in connection with the conversion of Eagle Ford’s convertible preferred shares, which also occurred prior to the Reverse Acquisition. The Company determined that the warrants contained provisions that protect the holders from declines in the Company’s stock price that could result in modification of the exercise price under the warrant based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under ASC 815 - 40. As a result, these warrants were not indexed to the Company’s own stock. The fair value of these warrants was recognized as derivative warrant instruments and will be measured at fair value at each reporting period. The warrants expire on May 20, 2014.
As of June 20, 2011, the Company determined that, using a lattice model, the fair value of the warrants was $438,680. The Company re-measured the warrants as of December 31, 2011 and determined the fair value to be $219,582; an evaluation at December 31, 2012 re-measured the warrants at $188,933. The decrease in fair value has been recognized as an unrealized gain on the change in derivative fair value of $30,649 for the year ended December 31, 2012.
Activity for the derivative warrant instruments during the year ended December 31, 2012 was:
The assumptions used in the lattice model to determine the fair value of the warrants as of December 31, 2012 were as follows:
(1) The risk-free interest rate was determined by management using the U.S. Treasury zero-coupon yield over the contractual term of the warrant on date of grant.
(2) The volatility factor was determined by management using the historical volatilities of the Company’s stock.
(3) Projected future offering price is based on 12 month historical trading range.
(4) Management determined the dividend yield to be 0% based upon its expectation that there will not be earnings available to pay dividends in the near term.
9. SHAREHOLDERS’ EQUITY
On June 20, 2011, the Company acquired all of the membership interests of Sandstone Energy, L.L.C. (Sandstone”) in exchange for 17,857,113 shares of common stock of Eagle Ford issued to the former owners of Sandstone. Following the acquisition, the shares issued to the former owners of Sandstone constituted 82% of the Company’s common stock resulting in a change of control. Immediately preceding the acquisition, Eagle Ford shareholder’s held 3,945,027 shares of common stock, which were retained by the holders. The fair value of the shares retained by the shareholders immediately prior to the acquisition was based on the closing price of the Company’s common stock of $0.45 on June 20, 2011 and was determined to be $1,775,262.
On August 23, 2011, Eagle Ford issued stock for the remaining 50% interests in each of SSEP1, SSEP2 and SSEP3 with an accumulated deficit of $1,443,302 in exchange for 8,970,120 shares of Eagle Ford common stock. Eagle Ford now owns 100% of the interests in these ventures. The purchase of the remaining 50% member interest was accounted for as an equity transaction, with no gain or loss recognized. The difference between the fair value of the consideration paid (common stock of Eagle Ford) and the book value of the noncontrolling interest was recognized as an adjustment to additional paid-in-capital.
Common stock sales
On January 18, 2012, ECCE sold 357,143 and 71,429 common shares to two individuals for $0.14 per share.
On May 9, 2012, ECCE sold 500,000 shares of common stock to four individuals for $0.10 per share.
On June 6, 2012, ECCE sold 416,667 shares of common stock to Ronald Bain, a consultant of the company, at $0.12 per share, for total proceeds of $50,000.
On September 28, 2012, ECCE sold 166,667 shares of common stock to an individual for $0.09 per share.
During October, 2012 ECCE sold 782,753 shares of common stock to six individuals at an average price of $0.13 per share.
During October, 2012 ECCE also sold 80,808 shares of common stock to two individuals at an average price of $0.25 per share
During November, 2012 ECCE sold 1,575,099 shares to fifteen individuals at an average price of $0.25 per share.
All proceeds were used for general corporate services.
Common stock issued for exchange of debt and accounts payable
On February 23, 2012, ECCE issued 300,000 shares of common stock in exchange for nine notes payable totaling $36,000 and accrued interest of $6,369.
Common stock issued for services
On March 14, 2012, ECCE issued 250,000 shares to four individuals as compensation for technical assistance relating to existing and potential field evaluation, fair valued at $50,000.
On December 12, 2012, ECCE issued 30,000 shares to a market consulting firm in payment for certain services relating to financial consulting related to the equity markets. Fair value of the common stock was valued at $26,400.
Warrants
Warrant activity during the years ended December 31, 2012 and 2011 is as follows:
In connection with the Reverse Acquisition, the Company assumed 1,000,000 warrants which were issued by Eagle Ford prior to the Reverse Acquisition in connection with the conversion of Eagle Ford’s convertible preferred shares, which also occurred prior to the Reverse Acquisition. The Company determined that the warrants contained provisions that protect the holders from declines in the Company’s stock price that could result in modification of the exercise price under the warrant based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under ASC 815 - 40. As a result, these warrants were not indexed to the Company’s own stock.
The fair value of these warrants was recognized as derivative warrant instruments and will be measured at fair value at each reporting period, see Note 8. As of December 31, 2012, all warrants outstanding and exercisable had an intrinsic value of $0.21, based on the trading price of Eagle Ford’s common stock of $0.00 per share.
10. INCOME TAXES
Until the merger in June 2011, the Company was structured as partnerships, with all federal income tax liabilities and benefits passed through to the partners. However, the partnerships were subject to the Texas margin taxes.
As of December 31, 2012, ECCE had accumulated net operating losses, and therefore, had no tax liability. The net deferred tax asset generated by the loss carry-forwards has been fully reserved. The cumulative net operating loss carry-forward and will expire in the year 2032.
At December 31, 2012, the deferred tax assets consisted of the following:
The change in the valuation allowance for the years ended December 31, 2012 totaled $758,217.
The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows as of December 31, 2012:
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
ECCE has not paid property taxes for 2007, 2008 or 2009 on the Wilson Field in Nueces County, Texas. Samurai Corp. agreed to assume the liabilities for property taxes for 2010 when it acquired the property. The County has initiated legal proceedings to collect those taxes by placing tax liens on the property. As of December 31, 2012, ECCE owed $43,452 for these property taxes shown under accounts payable. ECCE is currently in negotiations to settle this liability.
On February 28, 2010 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”). The Company 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, the Company has not reached a satisfactory agreement with the lender, although a settlement is being actively pursued.
Operating Leases
Subsequent to the merger with Sandstone LLC, ECCE moved to 1110 NASA Parkway, Ste 311, Houston, TX 77058 and vacated the offices on 3315 Marquart Street, Ste. 206, Houston, Texas 77027. The landlord at Marquart St. was Marquart St. LLC, a company owned by Rick Bobigian, who was a Director of the Company until July, 2011. Upon the merger, the previous rental contract was terminated, and the outstanding rent payments were cancelled.
The rental contract at 1110 NASA Parkway for 1,379 sq. ft. commenced July 1, 2010 and terminates on August 31, 2013. The monthly rent increased from $1,781 on September 1, 2011 to $1,839 on September 1, 2012, and will remain at that amount until the lease expires on August 31, 2013.
Year 2013: $15,168.
12. SUBSEQUENT EVENTS
On March 19, 2013, ECCE sold 106,383 shares of common stock to one investor for proceeds of $30,000.
Short Term Financing with JMJ Financial Corp.
On April 8, 2013, EEOC signed an agreement providing up to $335,000 in short term financing with JMJ Financial Corp. On April 10, 2013, EEOC obtained a $55,000 withdrawal from this credit line. The net proceeds were $50,000 and include an original issue discount of $5,000. The maturity date is one year from the effective date of each amount borrowed under the terms of the agreement. ECCE is only required to pay interest and principal on the amount actually borrowed. ECCE has ninety days to repay the note with no interest charged or accrued. JMJ Financial has the option to convert the note to ECCE common stock at a rate $0.39 per share or 60% of the lowest trade price in the 25 trading days pervious to the conversion, whichever is lower. Unless otherwise agreed in writing by both parties, at no time will the Lender convert any amount of the Note into common stock that would result in the Lender owning more than 4.99% of the common stock outstanding.
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 2011-03, “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.
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.
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, 2012:
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, 2012:
The following disclosures concerning the standardized measure of future cash flows from proved oil and gas reserves are presented in accordance with ASC 932. As prescribed by ASC 932, 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.
Reserves and pricing were calculated by a qualified independent engineer.
Standardized Measure of Discounted Future Net Cash Flow
The following reconciles the change in the standardized measure of discounted net cash flow for the year ended December 31, 2012
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 2012 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 2013 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 consolidated 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 consolidated 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 consolidated 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.
In order to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2012 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 2012 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.
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
Paul Williams
Chief Executive Officer and a Director
R. Sandy Cunningham
President and Chief Operating Officer
Rick Adams
Director
Thomas Lipar
Chairman of the Board of Directors
N. Wilson Thomas
Chief Financial Officer
Paul Williams was appointed Chief Executive officer of Eagle Ford Oil & Gas Corp on June 21, 2012 upon completion of the merger with Sandstone LLC.
On July 23, 2010, N. Wilson Thomas resigned from his position as Chief Financial Officer of Eagle Ford Oil & Gas Corp., in which he had served since November, 2007 and remained with the company as Controller. Mr. Thomas returned to the position of Chief Financial Officer on February 14, 2011. On June 21, 2011, he resigned from his position as Chief Financial Officer of Eagle Ford Oil & Gas Corp., and remained with the company as Controller. On January 1, 2012, Mr. Thomas returned to the position of Chief Financial Officer. Mr. Thomas is a CPA and a graduate of the University of Texas, Austin.
On July 26, 2010, Rick Adams was appointed as President and Chief Executive Officer of Eagle Ford Oil & Gas Corp. Subsequent to the merger with Sandstone LLC, Mr. Adams resigned from the position of President of ECCE on June 21, 2011 and accepted the position of Chief Financial Officer and remained a Director. Mr. Adams resigned as Chief Financial Officer on January 1, 2012, but remained a Director. Mr. Adams holds a BBA in economics and statistics from Baylor University and an MBA in finance from the University of Saint Thomas.
On July 26, 2010, Imran Maniar, CPA was appointed as Chief Financial and as a Director of Eagle Ford Oil & Gas Corp and served in those positions until February 14, 2011, when he left the company.
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.
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, 2012.
CODE OF ETHICS
The Company adopted a code of ethics (“Code”) that applies to all of its directors and officers. The Code is 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 2951 Marina Bay Drive, Suite 130-369, League City, Texas 77573.
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, 2012, and during 2011 (collectively, the “Named Executive Officers”):
SUMMARY COMPENSATION TABLE
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.
DIRECTOR COMPENSATION
During fiscal year ended December 31, 2012, 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 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 38,730,937 shares issued and outstanding.
(1)Unless otherwise indicated, the business address of the individuals listed is 1110 NASA Parkway, Ste. 311, Houston TX 77058.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Paul Williams, Chief Executive Officer, Board Member and Indirect Beneficial shareholder (10% or more). Mr. Williams received shares of EFOGC via Valor Interest Partners as an indirect beneficial owner due to the EFOGC acquisition of the remaining 50% member interest in Sandstone Energy Partners I, L.L.C. in Aug 2011.
Ralph “Sandy” Cunningham, President and Chief Operating Officer, and Indirect Beneficial shareholder (10% or more). Mr. Cunningham received shares of EFOGC via Valor Interest Partners as an indirect beneficial owner due to the EFOGC acquisition of the remaining 50% member interest in Sandstone Energy Partners I, L.L.C. in Aug 2011.
Thomas Lipar, Chairman of the Board and Indirect Beneficial shareholder (10% or more). Mr. Lipar received shares of EFOGC via TDLOG, L.L.C. as an indirect beneficial owner due to the EFOGC acquisition of the remaining 50% member interest in Sandstone Energy Partners II, L.L.C. in Aug 2011.
Safari Adventure Productions, Inc., Beneficial and Indirect Beneficial shareholder (10% or more). Safari Adventure Productions, Inc. received shares of EFOGC as a direct beneficial owner due to the EFOGC acquisition of the remaining 50% member interest in all three of the Sandstone Energy partnerships in Aug 2011.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During fiscal year ended December 31, 2012, we incurred approximately $87,500 in fees to our principal independent accountants for professional services rendered in connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2011 and for the review of our consolidated financial statements for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012. Expenses also included services rendered relating to the filing of various 8-K’s related to the merger of Sandstone LLC and ECCE during 2011.
During 2012, 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, 2011, we incurred approximately $188,375 in fees to our principal independent accountants for professional services rendered in connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2010 and for the review of our consolidated financial statements for the quarters ended March 31, 2011, June 30, 2011 and September 30, 2011.
During 2011, 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:
Exhibit
Number Description of Exhibit
3.1 Articles of Incorporation, as amended (1)
3.2 Certificate of Amendment to Articles of Incorporation (2)
3.1.2 First Amended Certificate of Designation of Convertible Series B Preferred Stock (4)
3.1.3 First Amended Certificate of Designation of Convertible Series C Preferred Stock (5)
3.1.4 First Amended Certificate of Designation of Convertible Series D Preferred Stock (5)
3.2 Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Agreement and Plan of Merger among Samurai Energy Corp. and ECCO Energy Corp. dated June 26, 2006 (2)
4.3 Assignment, Conveyance, and Bill of Sale with respect to 37% working interest in Wilson Wells (3)
10.1 2005 Directors, Officer and Consultants Stock Option, Stock Warrants and Stock Awards Plan (4)
14.1 Code of Ethics (7)
14.2 Whistleblower Policy (7)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (7)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (7)
32.1 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (7)
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (7)
(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.
(2) Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on March 20, 2006.
(3) 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) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 25, 2008.
(8) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 9, 2008.
(9) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 10, 2008.
(10) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on March 5, 2009.
(11) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on March 20, 2009
(12) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 26, 2009.
(13) Incorporated by reference to our Current Report on S-8 filed with the SEC on June 26, 2009.
(14) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 2, 2009.
(15) Incorporated by reference to our Current Report on Form Def-14C with the SEC on July 6, 2010.
(16) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 27, 2010.
(17) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 20, 2010.
(18) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 30, 2010.
(19) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 17, 2011.
(20) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 21, 2011.
(21) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 24, 2011.
(22) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 20, 2011.
(23) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 12, 2011.
(24) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 19, 2011.
(25) Incorporated by reference to our Current Report on Form 8-KA filed with the SEC on October 5, 2011.
(26) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 3, 2011.
(27) Incorporated by reference to our Current Report on Form 8-KA filed with the SEC on November 4, 2011.
(28) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 10, 2011.
(29) Incorporated by reference to our Current Report on Form 8-KA filed with the SEC on November 16, 2011.
(30) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 21, 2011.
(31) Filed herewith
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.