We have audited the accompanying consolidated
balance sheet of Eagle Ford oil & Gas Corp. and its subsidiaries (the “Company”), as of December 31, 2013 and 2012,
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, 2013. 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, 2013 and 2012, and the consolidated results of its operations and its cash flows
for each of the two years in the period ended December 31, 2013, 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, 2013 and 2012, 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.
See summary of significant accounting policies
and notes to consolidated financial statements.
See summary of significant accounting policies
and notes to consolidated financial statements.
See summary of significant accounting policies
and notes to consolidated financial statements.
See summary of significant accounting policies
and notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2013
and 2012
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.
Eagle Ford continues to
be a “smaller reporting company,” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)..
Consolidation
The
accompanying consolidated financial statements include all accounts of Eagle ford (ECCE) and its subsidiaries: Eagle Ford- East
Pearsall and Sandstone. 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 $-0- and $2.48 per barrel oil equivalent for the years ended December 31, 2013 and 2012, respectively.
As of December 31, 2013 the Company in review of the development plans decided to impair the Sandstone II and Sandstone III properties
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, 2013 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 $2,050,441 and $867,245 were recorded during the years ended December 31, 2013 and 2012, 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, 2013 or 2012. 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, 2013 and 2012, 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, 2012 through December 31, 2013,
cash balances in noninterest-bearing transaction accounts at all FDIC-insured depository institutions are provided temporary unlimited
deposit insurance coverage. At December 31, 2013, cash balances in interest-bearing accounts are zero.
Sales to a single customer
comprised 100% of Eagle Ford’s total oil and gas revenues for the both the year ended December 31, 2013 and 2012. At December 31,
2013 and 2012, Eagle Ford’s accounts receivable from its primary customer was $19,084 and $26,568, 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, 2013, 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, 2013. There were no transfers of financial assets between levels during the
year ended December 31, 2013. The Company held no financial assets or liabilities accounted for at fair value on a recurring basis
as of December 31, 2013.
|
|
Carrying Value at December 31,
|
|
|
Fair Value Measurement at December 31, 2013
|
|
|
|
2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
93,044
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93,044
|
|
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, 2013 and 2012.
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.
As
shown in the accompanying consolidated financial statements, the Company incurred net losses attributable to common shareholders
of $3,916,288 and $2,885,155 for 2013 and 2012, respectively. In addition, the Company had an accumulated deficit of $13,883,555
and a working capital deficit (excess of current liabilities over current assets) minus of $13,710,962 as of December 31, 2013.
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.
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.
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, 2013.
All of the Company’s oil and gas properties (excluding accumulated depletion) are located in the United States.
Well Description
|
|
December 31, 2012
|
|
|
Additions
|
|
|
Impairment (including accumulated amortization and accretion)
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vick 2, Lee County, TX
|
|
$
|
1,308,461
|
|
|
$
|
—
|
|
|
$
|
(1,308,461
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alexander 1, Lee County, TX
|
|
|
741,980
|
|
|
|
—
|
|
|
|
(741,980
|
)
|
|
|
—
|
|
East Pearsall
|
|
|
6,464,436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,464,436
|
|
|
|
$
|
8,514,877
|
|
|
$
|
—
|
|
|
$
|
(2,050,441
|
)
|
|
$
|
6,464,436
|
|
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, 2013. The Vick No. 1 is currently shut-in. As of December 31, 2013, 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 at that time. 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. The
Company has a 38.75% net working interest as of December 31, 2013. As of December 31, 2013, 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 at that time. On December 31, 2013, an impairment charge of $1,308,461 (net of accumulated amortization
and accretion) was taken against this well.
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. As of December 31, 2013, 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 at that
time. The Company has a 38.75% net working interest as of December 31, 2013. On December 31, 2013, an impairment charge of $741,980
(net of accumulated amortization and accretion) was taken against this well.
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, 2012 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, 2013 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, 2012, 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., and anticipates using this
balance in a future, undetermined activity.
HARDIN COUNTY/MERIDIAN CAPITAL VENTURES
During the year ended December
31, 2013, the Company is in the process of making an offer on some property in Hardin County, TX. Meridian Capital Ventures is
going to fund. As of December 31, 2013 the deal has not been finalized yet and therefore $50,000 paid for due diligence services
was accounted as deposit.
Debt – Related
Parties
Notes Payable – Related Parties
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Promissory note to TDLOG – 8% interest; due June 30, 2014;
unsecured (1)
|
|
$
|
817,500
|
|
|
$
|
817,500
|
|
Promissory note to TDLOG – 8% interest; due June 30, 2014;
unsecured (1) Total:
|
|
|
80,000
|
|
|
|
80,000
|
|
Notes Payable – Related Parties
|
|
$
|
897,500
|
|
|
$
|
897,500
|
|
(1)
|
TDLOG, LLC is controlled by Thomas E. Lipar, Chairman of
the Board of Eagle Ford. Note due date was changed to June 30, 2013 from September 30, 2013.
|
Accrued interest expenses on above notes to
related party as of December 31, 2013 and 2012 is $225,190 and $153,390, respectively.
Interest expenses to related party for the
year ended December 31, 2013 and 2012 is $71,800 and $70,342, respectively.
Notes Payable – Non-Related Parties
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Promissory note - 12% interest; due September 30, 2009; not secured (1)
|
|
$
|
328,578
|
|
|
$
|
328,578
|
|
Promissory note - 5% interest; due January 1, 2012; not secured (2).
|
|
|
227,131
|
|
|
|
227,131
|
|
Pipeline mortgage - 8% interest; due September 30, 2009; secured by pipeline (3)
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Promissory notes - 6% interest; due April 1, 2011; not secured (2)
|
|
|
112,000
|
|
|
|
142,000
|
|
Promissory notes - 5% interest; due October 15, 2010; not secured (4)
|
|
|
50,000
|
|
|
|
50,000
|
|
Promissory note – 8% interest; due July 1, 2010; unsecured. (5)
|
|
|
25,000
|
|
|
|
25,000
|
|
Promissory note – Medallion Investment- 10% interest (6)
|
|
|
7,000,000
|
|
|
|
7,000,000
|
|
Promissory note – 12% interest with $3,000 OID; due July 14, 2014 (7)
|
|
|
33,000
|
|
|
|
—
|
|
Promissory note –
12% interest with $3,000 OID; due July 14, 2014 (7)
|
|
|
33,000
|
|
|
|
—
|
|
Total notes payable
|
|
|
8,808,709
|
|
|
|
8,772,709
|
|
Less: Unamortize debt discount portion
|
|
|
(3,218
|
)
|
|
|
—
|
|
Total notes payable, net
|
|
|
8,805,491
|
|
|
|
8,772,709
|
|
Less: current portion of notes payable
|
|
|
(8,805,491
|
)
|
|
|
(8,772,709
|
)
|
Total notes payable – long term
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued and unpaid interest for notes payable
to non-related parties at December 31, 2013 and December 31, 2012 was $1,825,482 and $976,597, respectively, and is included in
accrued expenses on the accompanying consolidated balance sheets.
Interest expenses to non-related party for
the year ended December 31, 2013 and 2012 is $765,400 and $541,040, respectively.
(1)
|
Pursuant to the Reverse Acquisition, the Company assumed these notes payable totaling
$328,578. All principal and interest became due September 30, 2009 for 12% notes. 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.
|
|
|
(2)
|
Pursuant to the Reverse Acquisition, the Company assumed two notes payable (i) $227,131 due on January 1, 2012 for 5% and (ii) $142,000 due on April 1, 2011 for 6% interest for drilling on the Wilson Field lease and for general corporate purposes. Neither of these notes has been repaid in cash and is in default. Eagle Ford is continuing to accrue interest on these notes at the stated rate. During the year ended December 31, 2013, the note holder agreed to convert $30,000 of note on issuance of 81,081 shares of common stock.
On March 12, 2014, the note holder demanded payment on the outstanding portion of the note totaling $339,130. We are currently in negotiations with the note holder regarding a settlement.
|
|
|
(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 11). 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 these notes payable totaling
$50,000 from two different note holders for drilling on the Wilson Field lease and for general corporate purposes. Neither of
these notes has been repaid in cash and is in default. One party has demanded payment on a $25,000 note. Eagle Ford is continuing
to accrue interest on these notes at the stated rate.
|
|
|
(5)
|
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.
|
(6)
|
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 needed to 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. This caused the company to be in default, and as a result, the note has been reclassified from a long term to short term liability. As of the date of this report, MOC has taken no action relating to the failure to raise these funds and has verbally agreed to work with ECCE in order to obtain financing.
|
|
|
(7)
|
On July 18, 2013, ECCE issued two Notes Payable of $33,000 each, for a combined total of $66,000 to two individuals. The notes contained a $3,000 or $6,000 total original issue discount. The notes are due on July 14, 2014, and if they are repaid within ninety days shall accrue no interest. If they are paid after 90 days, then they accrue interest at a rate of twelve percent per annum. The notes may be converted into common stock after 180 days. The Conversion Price is the lesser of $0.39 or 60% of the lowest trade in the 25 trading days previous to the conversion. The notes were not converted by January 14, 2014 and were thus convertible, but have not been converted as of the date of this report.
|
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 had ninety days to repay the note with no interest charged
or accrued.
On July 8, 2013, ECCE repaid the note of JMJ Financial of $55,000 along with interest of $833.
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. 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 September 30, 2013,
nor have the Debentures been repaid. The interest for these debentures is accrued at the 12% rate and is included in accrued expenses.
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. Accrued and unpaid interest was $224,705
and $159,305 at December 31, 2013 and 2012, respectively related to the convertible debentures. Interest expenses on convertible
debenture for the year ended December 31, 2013 and 2012 is $65,400 for each year.
Following are maturities on convertible debentures for the next
five years:
|
|
Principal Amount
|
|
2014
|
|
$
|
545,000
|
|
Thereafter —
|
|
|
—
|
|
Total convertible debt
|
|
$
|
545,000
|
|
Settlement of debt
During the year ending
December 31, 2013 and 2012, ECCE converted $30,000 of note payable into 81,081 shares of common stock and $36,000 of notes payable
plus $6,369 of accrued interest into 300,000 shares of common stock at a minimal gain, respectively.
6.
|
RELATED PARTY TRANSACTIONS
|
The Company has a related party loan (see Note
5 above) of $897,500 for both the years ended December 31, 2013 and 2012.
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,
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations at beginning of year
|
|
$
|
24,802
|
|
|
$
|
24,802
|
|
|
|
|
|
|
|
|
|
|
Liabilities incurred from drilling
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Purchase of properties
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Accretion expense
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations at end of year
|
|
$
|
24,802
|
|
|
$
|
24,802
|
|
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,
2012 and determined the fair value to be $188,933; an evaluation at December 31, 2013 re-measured the fair value of warrants at
$93,044. The decrease in fair value has been recognized as an unrealized gain on the change in derivative fair value of $95,889
for the year ended December 31, 2013.
Activity for the derivative warrant instruments during the year
ended December 31, 2013 was:
|
|
December 31, 2012
|
|
|
Activity During the Period
|
|
|
Decrease in Fair Value
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant instruments
|
|
$
|
188,933
|
|
|
$
|
—
|
|
|
$
|
(95,888
|
)
|
|
$
|
93,045
|
|
Total
|
|
$
|
188,933
|
|
|
$
|
—
|
|
|
$
|
(95,888
|
)
|
|
$
|
93,045
|
|
The assumptions used in the lattice model to determine the fair
value of the warrants as of December 31, 2013 are as follows:
|
|
December 31,
2013
|
|
Exercise price
|
|
$
|
0.44-$0.48
|
|
Risk free discount rate (1)
|
|
|
0.26
|
%
|
Volatility (2)
|
|
|
150
|
%
|
Projected future offering price (3)
|
|
$
|
0.17-$0.47
|
|
Stock price on measurement date
|
|
$
|
0.34
|
|
Expected dividend yields (4)
|
|
|
None
|
|
(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.
|
As of December 31, 2013 and 2012, there were 40,102,647 and 38,624,620
shares of common stock issued and outstanding, respectively.
Common stock sales in 2013
On March 5, 2013, ECCE sold 106,383 shares
of common stock to an individual for $0.282 per share.
On April 19, 2013, ECCE
sold 34,843 shares of common stock to an individual for $0.287 per share.
On April 29, 2013, ECCE
sold 37,313 shares of common stock to an individual for $0.268 per share.
On May 1, 2013 ECCE
sold 93,284 shares of common stock to an individual for $0.268 per share.
On June 6, 2013, ECCE
sold 33,582 shares of common stock to an individual for $0.268 per share.
On June 17, 2013, ECCE
sold 83,858 shares of common stock to two individuals for $0.238 per share.
On August 1, 2013, ECCE
sold 188,680 shares of common stock to an individual for $0.265 per share.
On August 24, 2013,
ECCE sold 72,115 shares of common stock to an individual for $0.208 per share.
On October 17, 2013,
ECCE sold 40,818 shares of common stock to an individual for $0.245 per share.
On October 17, 2013,
ECCE sold 265,306 shares of common stock to three individuals for $0.245 per share.
On November 7, 2013,
ECCE sold 40,816 shares of common stock to one individual for $0.245 per share.
On December 23, 2013
ECCE sold 100,250 shares of common stock to two individuals for $0.245 per share.
All proceeds from stock
sales were used for general corporate purposes.
Common stock issued for exchange of debt and accounts payable
in 2013
On May 28, 2013, ECCE issued 81,081 shares of common stock valued
at $0.37 per share to an existing debt holder in partial payment for his outstanding Note Payable.
Common stock issued for services in 2013
On April 19, 2013, ECCE paid 300,000 shares as compensation in relation
to the marketing efforts of a third party. The shares were valued at $0.36 per share.
Common stock sales in 2012
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
in 2012
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 in 2012
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, 2013 and 2012 is as follows:
|
|
Warrants
|
|
|
Weighted-Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at January 1, 2012
|
|
|
1,000,000
|
|
|
$
|
0.50
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding and exercisable at December 31, 2012
|
|
|
1,000,000
|
|
|
|
0.50
|
|
|
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding and exercisable at December 31, 2013
|
|
|
1,000,000
|
|
|
$
|
0.50
|
|
|
$
|
—
|
|
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 warrants expire in May, 2014.
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, 2013,
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.
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, 2013, 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, 2013, the
deferred tax assets consisted of the following:
|
|
2013
|
|
Deferred tax assets
|
|
|
|
|
Net operating losses carry-forward
|
|
$
|
634,489
|
|
Impairment of oil and gas properties
|
|
|
697,049
|
|
Total Deferred tax assets
|
|
|
1,331,538
|
|
Less: valuation allowance
|
|
|
(1,331,538
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
The change in the valuation allowance for the years ended December
31, 2013 totaled $1,331,538.
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, 2013:
|
|
2013
|
|
Statutory federal income tax rate
|
|
|
(34.0
|
%)
|
State income taxes and other
|
|
|
—
|
|
Valuation allowance
|
|
|
34.0
|
%
|
Effective tax rate
|
|
|
—
|
|
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, 2013, 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.
On March 12, 2014, one of the note holders
sent a letter asking for payment on four notes totaling $339,130. We are in discussion with this note holder about a settlement.
On March 17, 2014, a note holder sent a
letter asking for payment on a $25,000 note. ECCE is in discussions with this note holder about a settlement.
Operating Leases
The rental contract at 1110 NASA Parkway for 1,379 sq. ft. commenced
July 1, 2010 and terminated 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. On August 31, 2013, ECCE renewed the lease
for at another twelve months at a rate of $2,011 per month.
Year
2014: $18,100.
On January 24, 2014,
ECCE sold 122,324 shares of common stock to four investors for proceeds of $20,000.
On January 31, 2014,
ECCE sold 61,162 shares of common stock to an individual for proceeds of $10,000.
On March 12, 2014, ECCE
sold 1,735,310 shares of common stock to six investors for proceeds of $250,000.
All proceeds from above
stock sales were used for general corporate services
On January 14, 2014,
ECCE borrowed $10,000 from Thomas Lipar, the Chairman of the Board of ECCE, in a note expiring on July 13, 2015. The note carries
an interest rate of 8.00% per annum.
On March 12, 2014, one of the note holders
sent a letter asking for payment on four notes totaling $339,130. We are in discussion with this note holder about a settlement.
On March 17, 2014, a note holder sent a
letter asking for payment on a $25,000 note. ECCE is in discussions with this note holder about a settlement.
In March 2104, ECCE
began the process of creating a subsidiary for the purpose of operating oil and gas wells. This subsidiary would bear the responsibility
of performing such tasks as necessary in the operation of any new wells purchased or drilled.
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.
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.
|
|
Gas
|
|
|
Oil
|
|
|
|
(MMcf)
|
|
|
(MBbls)
|
|
Total Proved Reserves:
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
—
|
|
|
|
—
|
|
Impairment of oil and gas properties
|
|
|
—
|
|
|
|
—
|
|
Purchase of oil and gas properties
|
|
|
—
|
|
|
|
—
|
|
Production
|
|
|
—
|
|
|
|
—
|
|
Balance, December 31, 2013
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Proved developed as of December 31, 2013
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Proved developed as of December 31, 2012
|
|
|
—
|
|
|
|
—
|
|
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, 2013:
|
|
2013
|
|
Proved properties
|
|
|
—
|
|
Less accumulated depletion
|
|
|
—
|
|
Net capitalized costs
|
|
$
|
—
|
|
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, 2013:
|
|
2013
|
|
Acquisition costs
|
|
$
|
—
|
|
Development costs
|
|
|
—
|
|
Total Costs Incurred
|
|
$
|
—
|
|
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
|
|
2013
|
|
|
|
|
|
|
Future cash inflows at December 31,
|
|
$
|
0.00
|
|
Future costs-
|
|
|
|
|
Operating
|
|
|
(0.00
|
)
|
Development and abandonment
|
|
|
(0.00
|
)
|
Future net cash flows before income taxes
|
|
|
0.00
|
|
Future income taxes
|
|
|
—
|
|
Future net cash flows before income taxes
|
|
|
0.00
|
|
Discount at 10% annual rate
|
|
|
(0.00
|
)
|
Standardized measure of discounted future net cash flows
|
|
$
|
0.00
|
|
The following reconciles the change in the standardized measure
of discounted net cash flow for the year ended December 31, 2013
|
|
2013
|
|
|
|
|
|
|
Beginning of the year
|
|
|
—
|
|
Purchase of minerals in place
|
|
|
—
|
|
Extensions, discoveries and improved recovery
|
|
|
—
|
|
Revision of quantity estimates
|
|
|
—
|
|
Sales of minerals in place
|
|
|
—
|
|
Net change in prices and production costs (Impairment)
|
|
|
—
|
|
Accretion of discount
|
|
|
—
|
|
Sales, net of production costs
|
|
|
—
|
|
Previously estimated development costs incurred during the period
|
|
|
—
|
|
Change in future development costs
|
|
|
—
|
|
Net change in future income taxes
|
|
|
—
|
|
Ending of year
|
|
$
|
—
|
|