UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C., 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 000-51656
ECCO ENERGY CORP.
(Exact name of registrant as specified in its charter)
| Nevada | 75-2990007 | |||
| (State of other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |||
| 3315 Marquart St., Suite 206 | ||||
| Houston, TX | 77027 | |||
| (Address of Principal Executive Office) | (Zip Code) |
Registrant’s telephone number, including area code: (713) 771-5500
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o | Smaller reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
11,904,954 shares of the registrant’s common stock were outstanding as of August 1, 2009.
TABLE OF CONTENTS
| 3 | ||
| Item 1. | 3 | |
| Item 2 | 10 | |
| Item 3. | 15 | |
| Item 4. | 15 | |
| PART II—OTHER INFORMATION | ||
| Item 2. | 16 | |
| Item 6. | 16 | |
Item 1. | Financial Statements. |
PART I—FINANCIAL INFORMATION
ECCO ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, 2009 | December 31, 2008 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | - | $ | 833 | ||||
| Accounts receivable | 15,000 | - | ||||||
| Prepaid expenses | 14,284 | 72,440 | ||||||
| Assets held for sale | 1,598,864 | - | ||||||
| Total current assets | 1,628,148 | 73,273 | ||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Oil and gas properties, using full cost accounting | 6,334,960 | 12,020,011 | ||||||
| Pipeline transmission properties | 1,000,000 | 1,000,000 | ||||||
| Equipment | 18,764 | 19,703 | ||||||
| Less accumulated depreciation and depletion | (307,581 | ) | (285,725 | ) | ||||
| Total property and equipment, net | 7,046,143 | 12,753,989 | ||||||
| TOTAL ASSETS | $ | 8,674,291 | $ | 12,827,262 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES | ||||||||
| Accounts payable-trade | $ | 221,218 | $ | 197,376 | ||||
| Accounts payable-related parties | - | 444,822 | ||||||
| Accrued expenses | 293,609 | 412,096 | ||||||
| Liabilities associated with assets held for sale | 898,864 | - | ||||||
| Current maturities of long-term debt | 1,426,578 | 1,432,217 | ||||||
| Total current liabilities | 2,840,269 | 2,486,511 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Long term debt | 227,131 | 227,131 | ||||||
| Long term debt – related parties | 1,174,731 | 365,479 | ||||||
| Asset retirement obligations | 125,976 | 747,709 | ||||||
| Total long-term liabilities | 1,527,838 | 1,340,319 | ||||||
| TOTAL LIABILITIES | 4,368,107 | 3,826,830 | ||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, 10,000,000 shares authorized: | ||||||||
| Series A, $.001 par value; 100,000 issued and outstanding | 100 | 100 | ||||||
| Series B, $.001 par value; 1,000,000 issued and outstanding | 1,000 | 1,000 | ||||||
| Series C, $.001 par value; 660,000 issued and outstanding | 660 | 660 | ||||||
| Series D, $.001 par value; 303,936 issued and outstanding | 304 | 304 | ||||||
| Common stock, $.001 par value; 75,000,000 shares authorized; 9,924,954 and 9,425,952 shares issued and outstanding | 9,925 | 9,425 | ||||||
| Additional paid-in-capital | 10,944,221 | 10,873,721 | ||||||
| Accumulated deficit | (6,650,026 | ) | (1,884,778 | ) | ||||
| Total shareholders’ equity | 4,306,184 | 9,000,432 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 8,674,291 | $ | 12,827,262 | ||||
See summary of significant accounting policies and notes to consolidated financial statements.
ECCO ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| REVENUE | $ | 31,817 | $ | 129,237 | $ | 70,233 | $ | 250,530 | ||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Lease operating expenses | 43,929 | 46,325 | 103,740 | 91,439 | ||||||||||||
| General and administrative expenses | 249,223 | 212,054 | 512,180 | 437,073 | ||||||||||||
| Depreciation, depletion and accretion | 45,069 | 16,086 | 101,396 | 34,778 | ||||||||||||
| Impairment expense | 4,037,875 | - | 4,037,875 | - | ||||||||||||
| Total operating expenses | 4,376,096 | 274,465 | 4,755,191 | 563,290 | ||||||||||||
| Net operating loss | (4,344,279 | ) | (145,228 | ) | (4,684,958 | ) | (312,760 | ) | ||||||||
| OTHER EXPENSES | ||||||||||||||||
| Interest expense | (40,205 | ) | (19,004 | ) | (80,290 | ) | (35,546 | ) | ||||||||
| Total other expenses | (40,205 | ) | (19,004 | ) | (80,290 | ) | (35,546 | ) | ||||||||
| Net loss | (4,384,484 | ) | (164,232 | ) | (4,765,248 | ) | (348,306 | ) | ||||||||
| Dividend applicable to preferred stock | (196,394 | ) | (195,369 | ) | (392,788 | ) | (299,538 | ) | ||||||||
Net loss attributable to common shareholders | $ | (4,580,878 | ) | $ | (359,601 | ) | $ | (5,158,036 | ) | $ | (647,844 | ) | ||||
| Basic and diluted loss per share: | $ | (0.47 | ) | $ | (0.04 | ) | $ | (0.53 | ) | $ | (0.07 | ) | ||||
| Weighted average shares outstanding | 9,835,943 | 9,400,297 | 9,685,727 | 9,400,159 | ||||||||||||
See summary of significant accounting policies and notes to consolidated financial statements.
ECCO ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30, | ||||||||
| 2009 | 2008 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (4,765,248 | ) | $ | (348,306 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation, depletion and accretion | 101,396 | 34,778 | ||||||
| Stock issued for services | 51,000 | 5,129 | ||||||
| Impairment expense | 4,037,875 | - | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (15,000 | ) | (21,188 | ) | ||||
| Prepaid expenses | 20,215 | - | ||||||
| Accounts payable – trade | 23,840 | 47,973 | ||||||
| Accounts payable – related parties | 341,843 | 136,315 | ||||||
| Accrued liabilities | 107,114 | 49,344 | ||||||
| Net cash used in operating activities | (96,965 | ) | (95,955 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Acquisitions of oil and gas properties | - | (15,000 | ) | |||||
| Additions to oil and gas properties | (38,095 | ) | (173,585 | ) | ||||
| Proceeds from sale of oil and gas interest under farmout agreement | - | 101,000 | ||||||
| Proceeds from sale of equipment | 75,000 | - | ||||||
| Purchase of equipment | - | (16,815 | ) | |||||
| Net cash used in investing activities | 36,905 | (104,400 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock | 20,000 | - | ||||||
| Proceeds from refund of cancelled insurance premiums financing | 5,841 | - | ||||||
| Proceeds from issuance of debt | 48,000 | 30,000 | ||||||
| Proceeds from issuance of related party debt | - | 90,000 | ||||||
| Payments made on short term debt | (14,614 | ) | - | |||||
| Net cash provided by financing activities | 59,227 | 120,000 | ||||||
| Net change in cash and cash equivalents | ( 833 | ) | (80,355 | ) | ||||
| Cash and cash equivalents, at beginning of year | 833 | 80,355 | ||||||
| Cash and cash equivalents, at end of year | $ | - | $ | - | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 159 | $ | 35,546 | ||||
| Non cash investing and financial activities: | ||||||||
| Equipment purchased on account | - | 6,145 | ||||||
| Accounts payable incurred for plugging and abandonment costs | 22,587 | |||||||
| Reclassification of assets held for sale | 5,636,739 | - | ||||||
| Reclassification of liabilities associated with assets held for sale | 898,864 | - | ||||||
| Note payable issued for related party accounts payable | 809,252 | - | ||||||
| Prepaid insurance premium financing cancelled | 44,866 | - | ||||||
| Note payable issued for prepaid insurance premiums | 6,925 | - | ||||||
| Preferred stock dividends | - | 299,538 | ||||||
See summary of significant accounting policies and notes to consolidated financial statements
ECCO ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | BASIS OF PRESENTATION |
The accompanying unaudited interim consolidated financial statements of ECCO Energy Corp. (“ECCE”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in ECCE’s Annual Report filed with the SEC on Form 10-K.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2008 as reported in the Form 10-K have been omitted.
| 2. | GOING CONCERN |
As shown in the accompanying financial statements, ECCE incurred net losses applicable to common shareholders of $5,158,036 for the six months ended June 30, 2009. In addition, ECCE had an accumulated deficit of $6,650,026 and a working capital deficit of $1,212,121 as of June 30, 2009. These conditions raise substantial doubt as to ECCE’s ability to continue as a going concern. Management is working to raise additional capital through the sale of common stock and/or oil and gas properties, and to utilize these funds to develop existing properties. The financial statements do not include any adjustments that might be necessary if ECCE is unable to continue as a going concern.
| 3. | MANAGEMENT’S FINANCING PLANS |
Since inception, ECCE’s working capital needs have been met through operating activities and from financings and loans from its principal shareholder, Sam Skipper and related entities. ECCE anticipates that additional financings and loans may be required to sustain operations in the future. Since inception, our working capital needs have been met through operating activities and from financings and loans from our President/Chief Executive Officer, Sam Skipper, and related entities. We anticipate that additional financings and loans will be required to sustain operations in the future. There can be no assurance that the Company will be successful in raising the required capital or that Mr. Skipper will continue to advance funds to the Company. Management is exploring various avenues to obtain such funding to develop our properties and pay existing debt including the issuance of new debt, issuance of securities, sales of properties, farmouts and joint ventures.
At June 30, 2009, we had a working capital deficit of $1,212,121. We will need to raise additional capital in the second and later quarters of 2009 to fund general corporate working capital needs. Additionally, in 2009 the Company will be required to (i) repay a $1,000,000 note, plus accrued interest, in connection with the acquisition of the Pipeline, (ii) a $328,578 note with Ray Nesbitt, plus accrued interest, (iii) a $25,000 note to Louisiana X Partners, plus accrued interest, in connection with the purchase of the Louisiana Shelf property, (iv) a $25,000 note to Bamco Inc, plus accrued interest, in connection with the purchase of the Louisiana Shelf property, (vi) four short term notes totaling $48,000 which are due in the third quarter of 2009. 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. There is no assurance that Mr. Skipper will continue to fund the company. The failure to raise sufficient capital through future debt or equity financings or otherwise may cause the Company to curtail operations, sell assets, or result in the failure of our business.
| 4. | ASSETS HELD FOR SALE |
On July 24, 2009, we negotiated a contract to sell the entire Bateman Lake field to an unaffiliated party for $700,000, plus assumption of most significant liens and liabilities related to the properties. The purchaser made a non-refundable deposit of $50,000, and agreed to complete the purchase by August 31, 2009. As the sale price is significantly below the value shown on the balance sheet, we have recorded an impairment charge of $4,037,875 to adjust the book value to represent the fair market of the properties. As the sale will not be complete until the third quarter of 2009, all assets and liabilities associated with the Bateman Lake field are recorded in either an asset account, Assets Held for Sale: $1,598,864; or a liability account, Liabilities for assets held for sale: $898,864. The liabilities associated with the oil and gas properties, including liens and asset retirement obligations will be transferred with the assets. Once the sale is complete, the transaction will be recorded as a sale, and accounted for accordingly.
The following assets and liabilities have been segregated and classified as assets held for sale and liabilities associated with assets held for sale, as appropriate in the Consolidated Balance Sheets as of June 30, 2009. The amounts presented below do not include cash, receivables, or payables, which will be retained by ECCE.
| June 30, 2009 | ||||
| Assets held for sale | ||||
| Oil and gas properties – Bateman Lake | $ | 1,598,864 | ||
| Liabilities associated with assets held for sale | ||||
| Liens | 232,526 | |||
| Asset retirement obligation | �� | 666,338 | ||
| Total liabilities associated with assets held for sale | $ | 898,864 | ||
| 5. | OIL AND GAS PROPERTIES |
BATEMAN LAKE FIELD
ECCE sold an unused platform to a company that has oil and gas production in a field adjacent to our Bateman Lake property in the St. Mary’s Parish region of Louisiana. We sold the property in February 2009 for $75,000 to an unaffiliated operator, which was paid in full by June 30, 2009.
On July 24, 2009, we negotiated a contract to sell the entire Bateman Lake field to an unaffiliated party for $700,000. All assets and liabilities associated with the Bateman Lake field are presented as held for sale.
| 6. | DEBT |
In February 2009, ECCE paid $8,000 to a third party in full payment of a short term note payable. ECCE also cancelled certain financed insurance policies resulting in a reduction of short-term debt of $44,866.
In June 2009, ECCE borrowed $48,000 from four different parties for general corporate purposes. Three of these notes totaling $36,000 are due on August 17, 2009, and one for $12,000 was due on July 17, 2009. The note due on July 17, 2009 has not been repaid and is in default. No demand has been made for payment.
In June 2009, ECCE converted accounts payable into a promissory note to Samurai Corp with an interest rate of 5%, and a due date of January 1, 2012 for the $809,252 balance.
Debt – Related Parties
ECCE has notes payable to related parties including a note payable to Samurai Energy LLC; a company controlled by ECCE’s CEO, and consisted of the following at June 30, 2009 and December 31, 2008.
| June 30, 2009 | December 31, 2008 | |||||||
| Promissory note to Samurai Corp - interest at 5% due January 1, 2012; unsecured | $ | 110,706 | $ | 110,706 | ||||
| Promissory note to Rick Bobigian- interest at 8% due January 1, 2012; unsecured | $ | 254,773 | $ | 254,773 | ||||
| Promissory note to Samurai Corp - interest at 5% due January 1, 2012; unsecured | $ | 809,252 | - | |||||
| Totals related party debt | $ | 1,174,731 | $ | 365,479 | ||||
Debt – Non-Related Parties
| June 30 , 2009 | December 31, 2008 | |||||||
| Promissory note - interest of 12% due June 30, 2009. Secured by Wilson Field Properties. (1) | $ | 328,578 | $ | 328,578 | ||||
| Promissory note - interest of 6% due June 26, 2008; not secured. (2) | $ | 25,000 | $ | 25,000 | ||||
| Promissory note - interest of 6% due June 26, 2008; not secured. (2) | $ | 25,000 | $ | 25,000 | ||||
| Promissory note - interest of 5% due January 1, 2012; not secured. | $ | 227,131 | $ | 227,131 | ||||
| Promissory note - interest of 7% due August17, 2009; not secured. | $ | 12,000 | - | |||||
| Promissory note - interest of 7% due August17, 2009; not secured | $ | 12,000 | - | |||||
| Promissory note - interest of 7% due August17, 2009; not secured | $ | 12,000 | - | |||||
| Promissory note - interest of 7% due July 17, 2009; not secured | $ | 12,000 | - | |||||
| Pipeline Mortgage –interest of 8% due September 30, 2009; secured by pipeline. | $ | 1,000,000 | $ | 1,000,000 | ||||
| Total debt to non-related parties | $ | 1,653,709 | $ | 1,605,709 | ||||
| Total debt | $ | 2,828,440 | $ | 1,971,188 | ||||
| (1) | ECCE issued 35,000 warrants with the issuance of the note payable. ECCE valued the warrants using the Black-Scholes option model and calculated the relative fair value of the warrants and recorded a discount of $27,689 on the debt for the value of the warrants. The discount was amortized over the life of the note. The assumptions used in the Black-Scholes pricing model for the warrants issued with the debt include (1) discount rate of 1.75%, (2) warrant life of 2 years, (3) expected volatility of 538.77% and (4) zero expected dividends. All principal and interest became due June 30, 2009. We are in negotiation to extend the note. No demands have been made for payment. |
| (2) | The notes payable relate to the acquisition of Louisiana Shelf LP. ECCE has not been able to locate these note holders. All principal and interest became due June 26, 2008. No demands have been made for payment. |
| 7. | SHAREHOLDERS’ EQUITY |
On February 10, 2009, ECCE issued for cash 200,000 common shares for $20,000.
On April 27, 2009, ECCE issued for services related to obtaining prospective financing, 300,000 common shares for services valued at $51,000.
On July 11, 2009 ECCE issued 1,980,000 shares to be distributed to various vendors and employees. This consists of 330,000 shares being issued to employees for retention, and payment to vendors of 1,650,000 shares relating to payment for services.
The following table provides a summary of the potential dilution of common stock should our Preferred Series B, C and/or D be converted to common stock. These valuations are as of June 30, 2009, and assume a conversion of one share of preferred for one share of common at the designated valuation price of $5.00 per share.
Preferred Shares | Preferred Shares @$5.00 | Accrued Dividends | Conversion Valuation | Conversion Price | Number of Common Shares after Conversion | |||||||||||||||||||
| Series B | 1,000,000 | $ | 5,000,000 | $ | 700,000 | $ | 5,700,000 | $ | 5.00 | 1,140,000 | ||||||||||||||
| Series C | 660,000 | 3,300,000 | 396,000 | 3,696,000 | $ | 5.00 | 739,200 | |||||||||||||||||
| Series D | 303,936 | 1,519,680 | 182,361 | 1,702,041 | $ | 5.00 | 340,408 | |||||||||||||||||
| Total Common | 1,963,936 | $ | 9,819,680 | $ | 1,278,361 | $ | 11,098,041 | 2,219,608 | ||||||||||||||||
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The statements included or incorporated by reference in this Quarterly Report, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. In some cases, you can identify forward-looking statements by the words “anticipate,” “estimate,” “expect,” “objective,” “projection,” “forecast,” “goal,” and similar expressions. Such forward-looking statements include, without limitation, the statements herein and therein regarding the timing of future events regarding the operations of the Company and its subsidiaries. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors including without limitation the following risk factors:
| - | the cyclical nature of the natural gas and oil industries for both product demand and pricing |
| - | our ability to obtain additional financing |
| - | our ability to successfully and profitably find, produce and market oil and natural gas |
| - | uncertainties associated with the United States and worldwide economies |
| - | substantial competition from larger companies |
| - | the loss of key personnel |
| - | depletion of our producing properties |
| - | operating interruptions (including weather, leaks, explosions and lack of rig availability) |
ECCO Energy Corp.
We are an independent oil and gas company actively engaged in oil and gas development, exploration and production with properties and operational focus in the Gulf Coast Region. Our strategy is to grow our asset base by purchasing producing assets at a discount to reserve value, increasing the production rate of reserves, and converting proved developed non-producing reserves to proved developed producing reserves. Acquisitions to date have provided both producing and non producing assets. Our principal assets are oil and gas properties.
Our shares of common stock are traded on the Over-the-Counter Bulletin Board, with the symbol ECCE.
WILSON PROPERTIES LEASE – NUECES COUNTY, TEXAS
We own 100% of the working interest in the E.C. Wilson and Wilson State Tract Leases (“Wilson Properties”) located in Nueces County, Texas The Wilson field is currently producing oil and gas, and is the only field providing revenue to ECCE. Due to flooding of a portion of the property with salt water, production has declined significantly since the prior year. In order to increase production to prior levels, an additional well will need to be drilled. We anticipate capital expenditures of approximately $465,000 during 2009. These funds will need to be raised in order for the drilling to occur.
BATEMAN LAKE FIELD – ST. MARY’S PARISH, LOUISIANA
The lease consists of 14 non-producing oil and gas wells on Louisiana State Lease No. 1337, in St. Mary’s Parish, Louisiana. As of June 30, 2009, there is no oil and gas production from this concession.
For the past year, ECCE attempted to find drilling partners for the Bateman Lake Field. We have considering farmouts, partial sales and other means to develop the field. As of the date of this report, there has been no agreement reached to begin such a program. Due to current prices for oil and natural gas, the ability to bring this field to productive levels at an economic cost is doubtful.
On July 24, 2009, we negotiated a contract to sell the entire Bateman Lake field to an unaffiliated party for $700,000, plus assumption of most significant liens and liabilities related to the properties. The purchaser made a non-refundable deposit of $50,000, and agreed to complete the purchase by August 31, 2009. As the sale price is significantly below the value shown on the balance sheet, we have recorded an impairment charge of $4,037,875 to adjust the book value to represent the fair market of the properties.
LOUISIANA SHELF PROPERTY – CAMERON PARISH, LOUISIANA
The Louisiana Shelf Property consists of a well completed in shallow waters offshore St. Mary’s Parish in Louisiana, East Cam Block 7, State Lease 17442 #1. Drilling was completed in 2005, but due to hurricane damage to a nearby platform as well as financial problems with the previous owners, the well was never connected to a pipeline. We acquired 75% of the property in 2007 and the balance in 2008 and are attempting to bring the property into production. We are actively looking for investors to either purchase the property, or to join with us in a joint venture to connect the well to a pipeline and then to an existing offshore platform. There is no oil or gas production from this field as of June 30, 2009.
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. There are no payments due until September 30, 2009, at which time, the entire unpaid balance of principal and accrued interest is due. The pipeline services oil and gas properties owned by Samurai Corp, an affiliated company.
Negotiations are underway with Samurai Corp to provide compensation for the use of the ECCE pipeline. A sale or lease of the pipeline is also a possibility.
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.
Because the failure to complete the transfer of assets from Samurai to ECCE, the covenants of the Pipeline purchase were violated. On February 28, 2009 M-J Oil Company Inc, of Paris Ohio, obtained a judgment against ECCO Energy for non-compliance with covenants in the original mortgage relating to the purchase of the M-J Oil Company pipeline (“Pipeline”). We are in negotiations with the M-J Oil Company to remove the judgment and to adjust the mortgage terms, which require full payment on September 30, 2009.
RESULTS OF OPERATIONS
We have incurred recurring losses to date. Over the next twelve months our strategy is to grow our asset base by acquiring producing properties and investing in working interests in non-operated properties. In addition, we plan to use innovative and sound engineering principles to enhance existing production. We will acquire operated as well as non-operated properties that meet or exceed our rate of return criteria. For acquisitions of properties with additional development, exploitation and exploration potential, our focus has been on acquiring operated properties so that we can better control the timing and implementation of capital spending. We will sell properties when management is of the opinion that the sale price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own.
The execution of our growth strategy is dependent on a number of factors including oil and gas prices, the availability of oil and gas properties that meet our economic criteria and the availability of funds on terms that are acceptable to us, if at all. There is no assurance that these factors will occur. We will require additional capital to meet both our long and short term operating requirements.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Our net loss for the six months ended June 30, 2009 was $4,765,248 compared to a net loss of $348,306 for the six months ended June 30, 2008 (an increase of $4,416,942). The net loss applicable to common shareholders was $5,158,036, representing an additional loss pertaining to the dividends on three issues of preferred stock of $392,788.
For the six months ended June 30, 2009, we generated revenue of $70,233 compared to revenue of $250,530 generated for the six months ended June 30, 2008 (a decrease of $180,297). The decrease in revenues for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 was affected by the volume and price we received for the sale of our gas and oil production. For the six months ended June 30, 2009, we sold 10,077 Mcf less of gas at an average price of $3.80 per Mcf. This resulted in an average price decrease of $5.12 per Mcf. For the six months ending June 30, 2009, we sold 155 barrels of oil, compared to 153 barrels last year. Although this was only two barrels less, this resulted in a decline in oil revenues of $8,238 from 2008, as we received $54 less per barrel in 2009. It is doubtful that the Wilson Field will resume production at the 2008 rate during the current fiscal year unless additional wells are drilled.
For the six months ended June 30, 2009, we incurred operating expenses of $4,755,192 compared to $563,290 incurred for the six months ended June 30, 2008 (an increase of $4,191,902). These operating expenses incurred for the six months ended June 30, 2009 consisted of: (i) depreciation and depletion of $101,396; (ii) general and administrative expenses of $512,180; (iii) lease operating expenses of $103,740; and (iv) impairment expense of $4,037,875.
General and administrative expenses incurred for the six months ended June 30, 2009 increased $75,107 from the prior year primarily due to an increase in legal and geophysical consulting fees relating to the company’s planned expansion during the current year.
Depreciation and depletion of oil and gas properties increased by $66,618 for the six months ended June 30, 2009. A decrease in depletion cost related to lower oil and gas production from the Wilson Field was offset by the increase in ARO accretion for our properties.
Our lease operating expenses increased by $12,301 during the six months ended June 30, 2009, which reflected the continued maintenance on the Wilson properties.
On July 24, 2009, we negotiated a contract to sell the entire Bateman Lake field to an unaffiliated party for $700,000, plus assumption of most significant liens and liabilities related to the properties. The purchaser made a non-refundable deposit of $50,000, and agreed to complete the purchase by August 31, 2009. As the sale price is significantly below the value shown on the balance sheet, we have recorded an impairment charge of $4,037,875 to adjust the book value to represent the fair market of the properties
Interest expense increased by $44,744 for the six months ended June 30, 2009 due to loans incurred during fiscal 2008 and 2009.
Three months Ended June 30, 2009 Compared to Three months Ended June 30, 2008
Our net loss for the three months ended June 30, 2009 was $4,384,484 compared to a net loss of $164,232 for the three months ended June 30, 2008 (an increase of $4,220,252). The net loss applicable to common shareholders was $4,580,878, representing an additional loss pertaining to the dividends on three issues of preferred stock of $196,394.
For the three months ended June 30, 2009, we generated revenue of $31,817 compared to revenue of $129,237 generated for the six months ended June 30, 2008 (a decrease of $97,420). The decrease in revenues for the three months ended June 30, 2009 compared to the three months ended June 30, 2008 was affected by the volume and price we received for the sale of our gas and oil production. For the three months ended June 30, 2009, we sold 4,813 Mcf less of gas at an average price of $3.51 per Mcf. This resulted in an average price decrease of $7.44 per Mcf. For the three months ending June 30, 2009, we sold 155 barrels of oil, compared to 0 barrels last year. As noted above, when examined on a six month basis this was only two barrels less, this resulted in a decline in oil revenues of $8,238 from 2008, as we received $54 less per barrel in 2009.
For the three months ended June 30, 2009, we incurred operating expenses of $4,376,096 compared to $274,465 incurred for the three months ended June 30, 2008 (an increase of $4,101,631). These operating expenses incurred for the three months ended June 30, 2009 consisted of: (i) depreciation and depletion of $45,069; (ii) general and administrative expenses of $249,223; (iii) lease operating expenses of $43,929; and (iv) impairment expense of $4,037,875.
General and administrative expenses incurred for the three months ended June 30, 2009 increased $37,169 from the prior year amount of $212,054, primarily due to increases in legal and geophysical consulting fees, and costs associated with procuring additional capital.
Depreciation and depletion of oil and gas properties increased by $28,983 for the three months ended June 30, 2009. A decrease in depletion cost related to lower oil and gas production from the Wilson Field was offset by a significant increase in ARO accretion for our properties.
Our lease operating expenses decreased by $2,396 during the three months ended June 30, 2009, which reflected the end of the large maintenance expenses on the Wilson properties.
On July 24, 2009, we negotiated a contract to sell the entire Bateman Lake field to an unaffiliated party for $700,000, plus assumption of most significant liens and liabilities related to the properties. The purchaser made a non-refundable deposit of $50,000, and agreed to complete the purchase by August 31, 2009. As the sale price is significantly below the value shown on the balance sheet, we have recorded an impairment charge of $4,037,875 to adjust the book value to represent the fair market of the properties
Interest expense increased by $21,201 for the three months ended June 30, 2009 due to loans incurred during fiscal 2008 and 2009.
LIQUIDITY AND CAPITAL RESOURCES
Six Month Period Ended June 30, 2009
At June 30, 2009, our current assets were $1,628,148 and our current liabilities were $2,840,269, which resulted in a working capital deficiency of $1,212,121. At June 30, 2009, our total assets were $8,674,291 consisting of: (i) $29,284 in notes receivable and prepaid expenses; (ii) $1,598,864 in assets held for sale, the Bateman Lake properties; (iii) $7,334,960 in oil and gas properties and a pipeline; and (iv) $18,764 in equipment less (v) accumulated depletion and depreciation of $307,581. There was a decrease of $4,152,971 in total assets from the year ended 2008, resulting primarily from decreases in Prepaid Insurance, the sale of a platform, and an impairment charge of $4,037,875 on the Bateman Lake Field, which lowered the value of Oil and Gas Properties. The proposed sale price of the Bateman Lake Properties is significantly below the value shown on the balance sheet; we have recorded an impairment charge of $4,037,585 to adjust the book value to represent the fair market value of the properties. The asset held for sale balance of $1,598,864 is offset by the liability account related to the assets held for sale account of $898,864.
At June 30, 2009, our total liabilities were $4,368,107 consisting of: (i) $221,218 in accounts payable - trade; (ii) $293,609 in accrued expenses; (iii) $$898,864 in liabilities associated with assets for sale; (iv) $1,426,578 in short - term debt; (v) $1,401,862 in long-term debt; and (vi) $125,976 in asset retirement obligations.
Shareholders’ equity decreased from $9,000,432 at December 31, 2008 to $4,306,184 as of June 30, 2009. This decline of $4,694,248 was primarily due to the loss for the first six months of 2009.
Our working capital deficiency to date has been funded by advances from short term loans from individual investors and from Samurai Operating Company, a related party. Over the next twelve months, assuming funds become available from our financing efforts, we plan to extinguish our short-term debt and spend the necessary sums to begin production on either the several of the properties that we have acquired over the last year, or new properties.
Cash Flows
Cash Flows from Operating Activities
The change in net cash flows used in operating activities for the six months ended June 30, 2009 was affected by a significant decrease in revenues from oil and gas properties, as well as increased expenses for various operations of the company along with the expenses involved in maintenance and production at the Wilson Field.
Cash Flows from Investing Activities
ECCE sold an unused platform to a company that has oil and gas production in a field adjacent to our Bateman Lake property in the St. Mary’s Parish region of Louisiana. We sold the property in February 2009 for $75,000 to an unaffiliated operator.
Cash Flows from Financing Activities
We have financed some of our operations from the issuance of equity and debt instruments. We received $20,000 from the sale of common stock, paid a remaining balance on a short term note payable of $8,000, and borrowed $48,000 through four separate loans, with payment dates of July 17, 2009 for one $12,000 note and August 17, 2009 for the other $36,000.
We expect that working capital requirements will continue to be funded through a combination of our future revenues, existing funds, loans and further issuances of securities. Our working capital requirements are expected to increase in line with the growth of our business. Since inception, our working capital needs have been met through operating activities and from financings and loans from our President/Chief Executive Officer, Sam Skipper, and related entities. We anticipate that additional financings and loans will be required to sustain operations in the future. There can be no assurance that the Company will be successful in raising the required capital or that Mr. Skipper will continue to advance funds to the Company. The failure to raise sufficient capital through future debt or equity financings or otherwise may cause the Company to curtail operations, sell assets, or result in the failure of our business.
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve months, unless substantial additional funds are raised to further the development of our oil and gas properties.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2009, 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
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
Item 4. 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, as amended (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 Samuel Skipper, our Chief Executive Officer, and Wilson Thomas, our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. An evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as June 30, 2009. 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 improvement, were being undertaken. Based on that evaluation, Messrs. Skipper and Thomas concluded that our disclosure controls and procedures were not effective as of June 30, 2009. We continue to require additional safeguards to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are in the process of evaluating and enhancing such controls and procedures, and expect additional controls and procedures to be implemented during the second and third quarters of this year.
There was no change in our internal control over financial reporting during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On February 10, 2009, ECCE issued for cash 200,000 common shares for $20,000.
On April 27, 2009, ECCE issued for services related to obtaining prospective financing, 300,000 common shares for services valued at $51,000.
On July 11, 2009 ECCE issued 1,980,000 shares to be distributed to various vendors and employees. This consists of 330,000 shares being issued to employees for retention, and payment to vendors of 1,650,000 shares relating to payment for services.
The shares were exempt from registration under Section 4(2) of the Securities Act of 1933 because they were issued in a privately negotiated transaction with persons with whom we had prior material business relations and were restricted from resale.
Item 6. Exhibits.
| Exhibit Number | Description |
| Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| Certifications pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ECCO ENERGY CORP. | ||
| Date: August 13, 2009 | By: | /s/ Samuel M. Skipper |
| Samuel M. Skipper | ||
| Title: President and CEO | ||
| Date: August 13, 2009 | By: | /s/ N. Wilson Thomas |
| N. Wilson Thomas | ||
| Title: CFO | ||
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