UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C., 20549
FORM 10-Q
þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
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 þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
15,855,833 shares of the registrant’s common stock were outstanding as of May 13, 2010.
| 3 | ||
| Item 1. | 3 | |
| Item 2 | 12 | |
| Item 3. | 15 | |
| Item 4. | 15 | |
| PART II— OTHER INFORMATION | ||
| Item 2. | 16 | |
| Item 6. | 16 | |
ECCO ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, 2010 | December 31, 2009 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 746 | $ | 213 | ||||
| Accounts receivable – related party | 52,819 | - | ||||||
| Total current assets | 53,565 | 213 | ||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Oil and gas properties, using full cost accounting | 1,162,654 | 1,110,488 | ||||||
| Pipeline transmission properties | 100,000 | 100,000 | ||||||
| Equipment | 18,764 | 18,764 | ||||||
| Less accumulated depreciation and depletion | (368,779 | ) | (360,173 | ) | ||||
| Total property and equipment, net | 912,639 | 869,079 | ||||||
| TOTAL ASSETS | $ | 966,204 | $ | 869,292 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable-trade | $ | 149,177 | $ | 137,173 | ||||
| Accrued expenses | 417,620 | 305,692 | ||||||
| Current maturities of long-term debt | 1,662,754 | 1,445,754 | ||||||
| Short-term debt-related party | 11,000 | - | ||||||
| Total current liabilities | 2,240,551 | 1,888,619 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Long term debt | 227,131 | 227,131 | ||||||
| Long term debt – related parties | 775,835 | 775,836 | ||||||
| Asset retirement obligations | 80,757 | 101,548 | ||||||
| TOTAL LIABILITIES | 3,324,274 | 2,993,134 | ||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| Preferred stock, 10,000,000 shares authorized: | ||||||||
| Series A, $.001 par value; 100,000 issued and outstanding | 100 | 100 | ||||||
| Series B, $.001 par value; 434,078 and 627,000 issued and outstanding at March 31, 2010 and December 31, 2009, respectively | 434 | 627 | ||||||
| Series C, $.001 par value; 30,000 issued and outstanding | 30 | 30 | ||||||
| Series D, $.001 par value; 303,936 issued and outstanding | 304 | 304 | ||||||
| Common stock, $.001 par value; 75,000,000 shares authorized; | ||||||||
| 15,855,833 and 15,499,466 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively | 15,856 | 15,499 | ||||||
| Additional paid-in-capital | 12,919,351 | 12,715,681 | ||||||
| Accumulated deficit | (15,294,145 | ) | (14,856,083 | ) | ||||
| Total shareholders’ deficit | (2,358,070 | ) | (2,123,842 | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’DEFICIT | $ | 966,204 | $ | 869,292 | ||||
See summary of significant accounting policies and notes to consolidated financial statements.
ECCO ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
| REVENUE | $ | 36,049 | $ | 38,416 | ||||
| OPERATING EXPENSES | ||||||||
| Lease operating expenses | 85,795 | 59,811 | ||||||
| General and administrative expenses | 146,113 | 262,958 | ||||||
| Depreciation, depletion and accretion | 8,605 | 56,327 | ||||||
| Total operating expenses | 240,513 | 379,096 | ||||||
| Net operating loss | (204,464 | ) | (340,680 | ) | ||||
| OTHER EXPENSE | ||||||||
| Interest expense | (48,224 | ) | (40,084 | ) | ||||
| Loss on settlement of asset retirement obligation | (21,543 | ) | - | |||||
| Total other expense | (69,767 | ) | (40,084 | ) | ||||
| Net loss | (274,231 | ) | (380,764 | ) | ||||
| Dividends applicable to preferred stock | (86,437 | ) | (196,394 | ) | ||||
| Net loss attributable to common shareholders | $ | (360,668 | ) | $ | (577,158 | ) | ||
| Basic and diluted net loss per share | $ | (0.02 | ) | $ | (0.06 | ) | ||
| Weighted average shares outstanding – basic and diluted | 15,618,255 | 9,533,853 | ||||||
See summary of significant accounting policies and notes to consolidated financial statements.
ECCO ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (274,231 | ) | $ | (380,764 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation, depletion and accretion | 8,605 | 56,327 | ||||||
| Loss on settlement of asset retirement opbligation | 21,543 | - | ||||||
| Common stock issued for services | 43,501 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable – related party | (95,152 | ) | (15,000 | ) | ||||
| Prepaid expenses | - | 13,703 | ||||||
| Accounts payable – trade | 12,005 | 5,969 | ||||||
| Accounts payable – related parties | - | 216,241 | ||||||
| Accrued expenses | 108,428 | 64,380 | ||||||
| Net cash used in operating activities | (175,301 | ) | (39,774 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Additions to oil and gas properties | (52,166 | ) | (37,286 | ) | ||||
| Proceeds from sale of equipment | - | 65,000 | ||||||
| Net cash used in investing activities | (52,166 | ) | (27,714 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock | - | 20,000 | ||||||
| Proceeds from issuance of short term debt | 217,000 | - | ||||||
| Proceeds from related party debt | 11,000 | - | ||||||
| Payments made on short term debt | - | (8,773 | ) | |||||
| Net cash provided by financing activities | 228,000 | 11,227 | ||||||
| Net change in cash and cash equivalents | 533 | (833 | ) | |||||
| Cash and cash equivalents, at beginning of period | 213 | 833 | ||||||
| Cash and cash equivalents, at end of period | $ | 746 | $ | - | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | - | $ | 159 | ||||
| Non cash investing and financial activities: | ||||||||
| Write off of equipment | - | 1,477 | ||||||
| Accounts payable accrued for plugging and abandonment costs | 22,340 | |||||||
| Prepaid insurance premium financing cancelled | - | 44,866 | ||||||
| Note payable issued for prepaid insurance premiums | - | 6,925 | ||||||
| Common shares issued for preferred stock dividends | 163,833 | - | ||||||
| Settlement of asset retirement obligation | 42,334 | - | ||||||
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 disclosures contained in the audited consolidated financial statements for fiscal 2009 as reported in the Form 10-K have been omitted.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization
ECCO Energy Corp. (“ECCE”) is an independent oil and gas company organized in Nevada actively engaged in oil and gas development, exploration and production with properties and operational focus in the Texas Gulf Coast Region. ECCE’s strategy is to grow its asset base by purchasing producing assets at a discount to reserve value, increasing the production rate of reserves, and converting proved undeveloped and developed non-producing reserves to proved developed producing reserves.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of revenues and expenses during the reporting period.
Cash and Cash Equivalents
ECCE considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.
Oil and Gas Properties, Full Cost Method
ECCE uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized. Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities are capitalized as oil and gas property costs. Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. ECCE assesses the real izability 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.
Revenue and Cost Recognition
ECCE uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes to which ECCE is entitled based on our interest in the properties. Costs associated with production are expensed in the period incurred.
Loss per Share
Basic and diluted net loss per share calculations are calculated on the basis of the weighted average number of common shares outstanding during the year. Common stock equivalents are excluded from the calculation when a loss is incurred as their effect would be antidilutive. The basic income per share of common stock is based on the weighted average number of shares issued and outstanding at the date of the financial statements.
New Accounting Standards
ECCE does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
| 3. | LIQUIDITY AND GOING CONCERN |
As shown in the accompanying financial statements, we incurred accumulated net losses attributable to common shareholders of $15,294,145 as of March 31, 2010, and operating costs exceed operating revenues. These conditions raise substantial doubt as to our ability to continue as a going concern. Management is working to improve its liquidity and its results from operations by raising additional capital and through reworking current wells, and drilling of additional wells to improve future earnings and cash flow. We are also actively attempting to raise funds through debt and equity transactions. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we do not obtain funding, ECCE will cease operations. We are attempting to find a partner to merge with us, or purchase our remaining property.
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. 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 March 31, 2010, we had a working capital deficit of $2,186,986. We will need to raise additional capital during 2010 to develop the oil and gas properties and fund general corporate working capital needs. Additionally, in 2009 the Company missed payment on (i) a $1,000,000 note, plus accrued interest, in connection with the acquisition of the Pipeline, (ii) a $328,578 note with Ray Nesbitt, plus accrued interest, (iii) a total of $84,000, plus accrued interest, of short term notes to three individuals, (iv) a total of $33,176, plus accrued interest, to Shelby Engineering, (v) $24,000, plus accrued interest to Rick Bobigian, (vi) $142,000 to Ron Reece, plus accrued interest, and (vii) payments due on the settlement on the settlement of litigation. As the Company has n o debt or equity funding commitments, we will need to rely upon best efforts financings. There can be no assurance that the Company will be successful in raising the required capital. The failure to raise sufficient capital through future debt or equity financings or otherwise will cause the Company to curtail operations, sell assets, or result in the failure of our business.
| 4. | OIL AND GAS PROPERTIES |
During the quarter ending March 31, 2010, ECCE attempted to rework Well 502 at the Wilson Field property. As of the date of filing, the attempt has not been successful. ECCE spent approximately $119,165 on the attempt during the quarter and has capitalized $52,166 of that amount during the quarter. In January, ECCE also incurred expenses of $42,334 in the plugging of an abandoned well on the property.
During February 2010, ECCE made two payments totaling $128,000 to Samurai Corp, the operator of the Wilson properties. The payments were for ECCE’s share of the development costs of the Wilson Field.
| 5. | DEBT |
On March 1, 2010, a note for $142,000 was issued to Dr. Ron Reece with an interest rate of 6%, due on April 1, 2011. The funds will be used for repairs and maintenance on the Wilson Field properties.
During February, 2010, ECCE borrowed $11,000 on a short term basis from Rick Bobigian to cover working capital requirements.
ECCE borrowed $75,000 from E. E. Hudson on a short term note for working capital. The note bears an interest rate of 20% per annum, and is due on January 1, 2011. ECCE also agreed to issue 50,000 shares of common stock to Mr. Hudson, but has not done so at the date of this report. ECCE accrued a liability of $3,500 for this stock issuance, representing the 50,000 shares at a valuation of $.07 based on the closing market price per common share as of the March 1, 2010 date of the note.
ECCE has notes payable to related parties and consisted of the following at March 31, 2010:
| March 31, 2009 | ||||
| Promissory note to Rick Bobigian- interest at 8% due January 1, 2012; unsecured | $ | 263,172 | ||
| Promissory note to Rick Bobigian – interest at 5% due July 1, 2010; unsecured | $ | 11,000 | ||
| Promissory note to Samurai Corp - interest at 5% due January 1, 2012; unsecured | $ | 512,663 | ||
| Less current portion | $ | 11,000 | ||
| Total related party debt | $ | 775,835 | ||
Debt – Non-Related Parties
| March 31, 2010 | ||||
| Promissory notes - interest of 7% due July 17, 2009; not secured (1) | $ | 48,000 | ||
| Promissory notes - interest of 7% due September 10, 2009; not secured (1) | $ | 18,000 | ||
| Promissory note - interest of 7% due September 14, 2009; not secured (1) | $ | 12,000 | ||
| Promissory note - interest of 7% due September 17, 2009; not secured (2) | $ | 6,000 | ||
| Promissory note - interest of 12% due September 30, 2009; secured by Wilson Field Properties. (1) | $ | 328,578 | ||
| Pipeline Mortgage –interest of 8% due September 30, 2009; secured by pipeline (2) | $ | 1,000,000 | ||
| Promissory note - interest of 7% due October 19, 2009; not secured. (1) | $ | 12,000 | ||
| Promissory note - interest of 7% due December 1, 2009; not secured. (1) | $ | 10,000 | ||
| Promissory note - interest of 7% due December 1, 2009; not secured (1) | $ | 9,365 | ||
| Promissory note - interest of 7% due December 1, 2009; not secured (1) | $ | 1,811 | ||
| Promissory note - interest of 5% due January 1, 2012; not secured. | $ | 227,131 | ||
| Promissory notes - interest of 6% due April 1, 2011; secured by Wilson Field Production on Well 502 | $ | 142,000 | ||
| Promissory note - interest of 20% due January 1, 2011; not secured. | $ | 75,000 | ||
| Less current portion | $ | 1,673,754 | ||
| Total long term debt to non-related parties | $ | 227,131 | ||
| Total debt | $ | 2,676,720 | ||
| (1) | None of these notes have been repaid and are in default. No demand has been made for payment. ECCE is continuing to accrue interest on these notes at the stated rate. |
| (2) | The entire unpaid balance of principal and accrued interest was due on September 30, 2009. No payments have been made and this mortgage note is in default. There has been a judgment rendered against ECCE in the amount of the mortgage. ECCE is in discussions with the lender to restructure the mortgage. ECCE is continuing to accrue interest on these notes at the stated rate. |
| 6. | RELATED PARTY TRANSACTIONS |
During the quarter ending March 31, 2010, ECCE made net payments of $144,000 to Samurai Corp, an affiliated company, for lease operating expenses related to Samurai Operating Company performing as the Operator at the Wilson Field. These transactions are in addition to an existing note with Samurai Corp. for $512,663 as of March 31, 2010.
| 7. | SHAREHOLDERS’ EQUITY |
During February 2010, ECCE issued 356,367 common shares to five of the Preferred B shareholders upon conversion from the Preferred B Preferred stock to ECCE common stock.
During February 2010, ECCE cancelled 500,000 shares of stock which was awarded to two vendors for services contracted for in 2008. However, their failure to satisfactorily complete their services to our satisfaction resulted in the cancellation of the stock.
During February 2010, ECCE awarded 500,000 shares of common stock to be distributed to various consultants and employees. This consists of 150,000 shares being issued to employees for retention and 350,000 to consultants for various services. The shares were valued at $40,000, using the grant date fair value of ECCE’s trading price of $.08.
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 March 31, 2010, 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 | 434,078 | $ | 2,170,390 | $ | 574,005 | $ | 2,580,562 | $ | 5.00 | 516,112 | ||||||||||||||
| Series C | 30,000 | 150,000 | 480,884 | 630,884 | $ | 5.00 | 126,177 | |||||||||||||||||
| Series D | 303,936 | 1,519,680 | 273,542 | 1,793,222 | $ | 5.00 | 358,644 | |||||||||||||||||
| Total Common | 768,014 | $ | 3,840,070 | $ | 1,328,431 | $ | 5,004,668 | 1,000,934 | ||||||||||||||||
| 8. | SUBSEQUENT EVENTS |
In April 2010, ECCE borrowed $13,000 from Rick Bobigian for working capital. This note has an interest rate of 5% per annum, and is due on July 31, 2010.
| 9. | COMMITMENTS AND CONTINGENCIES |
During 2009, ECCE settled an ongoing lawsuit relating to the sale of ECCO Biofuels in 2007. The settlement called for an initial $10,000 payment which was made in September 2009. ECCE also issued 40,000 shares of restricted common shares of ECCE stock, valued at $5,600, to the plaintiffs as part of the settlement. The settlement also provides for additional payments of $12,500 to be made on each of the following dates: December 4, 2009, March 5, 2010, June 4, 2010 and September 10, 2010. The additional payments total of $50,000 was accrued as of December 31, 2009. Total settlement expense of $65,600 was recorded as of December 31, 2009. The company did not make the December 4, 2009 or the March 5, 2010 payments and anticipates future litigation involving this amount. Al l payments are personally guaranteed by Sam Skipper.
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.
We have not paid our property taxes for 2007, 2008 or 2009 on the Wilson Field Lease AO810 in Nueces County, Texas. The County has indicated that it intends to take legal proceedings to collect those taxes. The County has placed tax liens on the property.
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 ar e 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 |
| - | 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 |
| - | 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.OB.
WILSON PROPERTIES LEASE – NUECES COUNTY, TEXAS
We own 100% of the working interest in the E.C. Wilson and Wilson State Tract Leases (“Wilson Properties”) located in Nueces County, Texas The Wilson field is currently producing oil and gas, and is the only field providing revenue to ECCE. ECCE’s goal for 2010 is to maintain, or increase production at the Wilson Properties lease. We are currently reviewing plans for future work at the Wilson Field during 2010. These funds, if needed, will have to be raised in order for the drilling to occur.
We have not paid our property taxes for 2007, 2008 or 2009 on the Wilson Field in Nueces County, Texas. The County has indicated that it intends to take legal proceedings to collect those taxes. The County has placed tax liens on the property.
OHIO PIPELINE
In October 2009, 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 pipeline services oil and gas properties owned by Samurai Corp, an affiliated company. 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 Co mpany 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. A sale or lease of the pipeline is also a possibility.
A review of the property’s valuation in 2009 resulted in an impairment charge of $900,000.
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 p rofile 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 expect we will require additional capital to meet our long term operating requirements.
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Our net loss for the three months ended March 31, 2010 was $274,231 compared to a net loss of $380,764 for the three months ended March 31, 2009 (a decrease of $106,533). The net loss attributable to common shareholders was $360,668, representing an additional loss pertaining to the dividends on three issues of preferred stock of $86,437. This is $216,491 less than the loss for the three months ended March 31, 2009, attributable primarily to an $116,845 decrease in general and administrative expenses and the reduction as the dividend on the preferred stock has been reduced by $109,957 due to conversions to common stock.
For the three months ended March 31, 2010, we generated revenue of $36,049 compared to revenue of $38,416 generated for the three months ended March 31, 2009 (a decrease of $2,367). The decrease in revenues for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 was affected by the volume and price we received for the sale of our gas and oil production. For the three months ended March 31, 2010, we sold 1,542 Mcf less of gas at an average price of $5.02 per Mcf. This resulted in an average price increase of $1.00 per Mcf from 2009. ECCE had no oil sales in the first quarter of 2010 or 2009.
For the three months ended March 31, 2010, we incurred operating expenses of $240,513 compared to $379,096 incurred for the three months ended March 31, 2009 (a decrease of $138,583). These operating expenses incurred for the three months ended March 31, 2010 consisted of: (i) depreciation and depletion of $8,605; (ii) general and administrative expenses of $146,113; and (iii) lease operating expenses of $85,795.
General and administrative expenses incurred for the three months ended March 31, 2010 decreased primarily due to the halt of all discretionary spending, as compared to last year when legal and geophysical consulting fees were incurred in relation to the company’s planned expansion during that year.
Depreciation and depletion of oil and gas properties decreased by $47,722 for the three months ended March 31, 2010 primarily due to lower oil and gas production from the Wilson Field, as well as the sale of Bateman Lake and Louisiana Shelf during 2009.
Our lease operating expenses increased by $25,984 during the three months ended March 31, 2010, which reflected the continued maintenance on the Wilson properties.
Interest expense increased by $8,140 for the three months ended March 31, 2010 due to changes in interest rates and an increase in the balance of outstanding loans. ECCE incurred a loss on settlement of its asset retirement obligation beyond the amount previously accrued for the plugging of one of the Wilson Field well.
LIQUIDITY AND CAPITAL RESOURCES
Three Month Period Ended March 31, 2010
At March 31, 2010, our current assets were $53,565 and our current liabilities were $2,240,551, which resulted in a working capital deficiency of $2,186,986. At March 31, 2010, our total assets were $966,204 consisting of: (i) $53,565 which included $746 in cash and $52,819 in accounts receivable from related parties; (ii) $1,262,654 in oil and gas properties and a pipeline; and (iii) $18,764 in equipment less (iv) accumulated depletion and depreciation of $368,779.
At March 31, 2010, our total liabilities were $3,324,275 consisting of: (i) $149,177 in accounts payable - trade; (ii) $417,620 in accrued expenses; (iv) $1,662,754 in short - term debt – third parties; (v) $11,000 in short-term debt-related party; (vi) $1,002,966 in long-term debt; and (vii) $80,757 in asset retirement obligations.
Stockholders’ deficit increased from $2,123,842 at December 31, 2009 to $2,358,070 as of March 31, 2010. This was primarily due to the loss for the first three months of 2010.
Our working capital deficiency to date has been funded by advances from short term loans and purchase of stock from individual investors and from Samurai Operating Company, a related party. There is no assurance that future funds will be available from this source.
Cash Flows
Cash Flows from Operating Activities
The change in net cash flows used in operating activities for the three months ended March 31, 2010 was affected by a significant decrease in general and administrative expenses, which were partially offset by increased expenses for expenses involved in maintenance and production at the Wilson Field.
Cash Flows from Investing Activities
The change in cash flows from investing activities represents the capitalized portion of the work on Wilson Field Well 502.
Cash Flows from Financing Activities
We have financed some of our operations from the issuance of equity and debt instruments. We received $228,000 from three lenders during the quarter ending March 31, 2010.
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 related entities. ECCE does not anticipate future funds being available from this source. 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 related parties will continue to advance funds to the Company. The failure to raise sufficient capital through future debt or equity financings or otherwise will cause the Company to curtail operations, 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.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2010, 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
Not Applicable
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 Jesse M. Ozbolt, 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 Office r, of the effectiveness of the design and operation of our disclosure controls and procedures as March 31, 2010. 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. Ozbolt and Thomas concluded that our disclosure controls and procedures were not effective as of March 31, 2010. 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 for ms. 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 March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
During February 2010, ECCE issued 356,367common shares to five of the Preferred B shareholders uponconversion from the Preferred B Preferred stock to ECCE common stock.
During February 2010, ECCE cancelled 500,000 shares of stock which was awarded to two vendors forservices contracted for in 2008. However, their failure to satisfactorily complete their services to our satisfaction resulted in the cancellation of the stock.
During February 2010, ECCE awarded 500,000 shares of common stock to be distributed to variousconsultants and employees. This consists of 150,000 shares being issued to employees for retention and 350,000 to consultants for various services. The shares were valued at $40,000, using the grant date fair value of ECCE’s trading price of $.08.
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.
| 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: May 17, 2010 | By: | /s/ Jesse M. Ozbolt | |
| Jesse M. Ozbolt | |||
| Title: President and CEO | |||
| Date: May 17, 2010 | By: | /s/ N. Wilson Thomas | |
| N. Wilson Thomas | |||
| Title: CFO | |||
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