UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C., 20549
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 March 31, 2012
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
EAGLE FORD OIL & GAS 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.) | |
| 2951 Marina Bay Dr., Ste 130-369 | ||
| League City, TX | 77573 | |
| (Address of Principal Executive Office) | (Zip Code) |
Registrant’s telephone number, including area code: (281) 383-9648
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). 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. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| 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
36,034,293 shares of the registrant’s common stock were outstanding as of July 18, 2012.
TABLE OF CONTENTS
| PART I—FINANCIAL INFORMATION | Page | |
| Item 1. | Condensed Consolidated Financial Statements (Unaudited) | |
| Condensed Consolidated Balance Sheets at March 31, 2012 (unaudited) and December 31, 2011 | 3 | |
| Condensed Consolidated Statement of Operations for Three months ended March 31, 2012 and 2011(unaudited) | 4 | |
| Condensed Consolidated Statement of Changes in Stockholders’ Deficit for Three months ended March 31, 2012 (unaudited) | 5 | |
| Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2012 and 2011 (unaudited) | 6 | |
| Notes to Condensed Consolidated Financial Statements | 7-21 | |
| 22 | ||
| 26 | ||
| 26 | ||
| 26 | ||
| 27-30 | ||
| Signatures | ||
EAGLE FORD OIL & GAS CORP.
March 31, 2012 (Unaudited) | December 31, 2011 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 5,365 | $ | 23,412 | ||||
| Accounts receivable - production | 48,560 | 48,175 | ||||||
| Prepaid expenses | 17,135 | 32,760 | ||||||
| Total current assets | 71,060 | 104,347 | ||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Oil and gas properties, using full cost accounting | ||||||||
| Costs subject to amortization | 106,500 | 106,500 | ||||||
| Costs not subject to amortization | 2,822,777 | 2,822,777 | ||||||
| Pipeline transmission properties | 30,839 | 30,839 | ||||||
| Less: accumulated depreciation and depletion | (13,541 | ) | (11,556 | ) | ||||
| Total property and equipment, net | 2,946,575 | 2,948,560 | ||||||
| OTHER ASSETS | ||||||||
| Deposits | 100,000 | 100,000 | ||||||
| TOTAL ASSETS | $ | 3,117,635 | $ | 3,152,907 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable – trade | $ | 418,300 | $ | 368,165 | ||||
| Accrued expenses | 791,932 | 745,055 | ||||||
| Accrued expenses to related parties | 83,058 | 83,058 | ||||||
| Notes payable, current portion | 1,824,709 | 1,878,709 | ||||||
| Notes payable to related parties, current portion | 892,500 | 817,500 | ||||||
| Convertible debentures | 545,000 | 545,000 | ||||||
| Total current liabilities | 4,555,499 | 4,437,487 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Derivative liability - warrants | 190,386 | 219,582 | ||||||
| Asset retirement obligations | 24,802 | 24,802 | ||||||
| TOTAL LONG-TERM LIABILITIES | 215,188 | 244,384 | ||||||
| TOTAL LIABILITIES | 4,770,687 | 4,681,871 | ||||||
| Commitments and contingencies | - | - | ||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| Preferred stock, undesignated, 10,000,000 shares authorized, none issued and outstanding | - | - | ||||||
Common stock, $0.001 par value, 75,000,000 shares authorized, 35,072,626 and 34,094,054 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively | 35,073 | 34,094 | ||||||
| Additional paid-in-capital | 5,670,445 | 5,519,054 | ||||||
| Accumulated deficit | (7,358,570 | ) | (7,082,112 | ) | ||||
| TOTAL SHAREHOLDERS’ DEFICIT | (1,653,052 | ) | (1,528,964 | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | 3,117,635 | $ | 3,152,907 | ||||
See summary of significant accounting policies and notes to unaudited condensed consolidated financial statements.
3
EAGLE FORD OIL & GAS CORP.
(Unaudited)
| Three months Ended March 31, | ||||||||
| 2012 | 2011 | |||||||
| REVENUE | $ | 2,191 | $ | 141,680 | ||||
| OPERATING EXPENSES | ||||||||
| Lease operating expenses | 1,806 | 38,805 | ||||||
| General and administrative expenses | 230,325 | 193,862 | ||||||
| Depreciation, depletion and accretion | 1,985 | 439 | ||||||
| Total operating expenses | 234,116 | 233,106 | ||||||
| Net operating loss | (231,925 | ) | (91,426 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest expense | (73,729 | ) | (18,398 | ) | ||||
| Unrealized gain on change in warrant derivative value | 29,196 | - | ||||||
| Total other income (expense) | (44,533 | ) | (18,398 | ) | ||||
| Net loss | (276,458 | ) | (109,824 | ) | ||||
| Net gain attributable to noncontrolling interest | - | (37,706 | ) | |||||
| Net loss attributable to Company. | $ | (276,458 | ) | $ | (147,530 | ) | ||
| Net loss attributable to common shareholders of Company | $ | (276,458 | ) | $ | (147,530 | ) | ||
| Loss per common share (basic and diluted) | $ | (0.01 | ) | $ | ( 0.01 | ) | ||
| Weighted average common shares outstanding (basic and diluted) | 34,617,288 | 17,857,113 | ||||||
See summary of significant accounting policies and notes to unaudited condensed consolidated financial statements.
4
EAGLE FORD OIL & GAS CORP.
For the Three months ended March 31, 2012
(Unaudited)
Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||
| Shares | Par Value | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, December 31, 2011 | 34,094,054 | $ | 34,094 | $ | 5,519,054 | $ | (7,082,112 | ) | $ | (1,528,964 | ) | |||||||||
| Common shares issued for cash | 428,572 | 428 | 59,572 | - | 60,000 | |||||||||||||||
| Common shares issued for exchange of notes payable | 300,000 | 300 | 42,069 | - | 42,369 | |||||||||||||||
| Common shares issued for services | 250,000 | 250 | 49,750 | - | 50,000 | |||||||||||||||
| Net loss | - | - | - | (276,458 | ) | (276,458 | ) | |||||||||||||
| Balance, March 31, 2012 | 35,072,626 | $ | 35,072 | $ | 5,670,445 | $ | (7,358,570 | ) | $ | (1,653,053 | ) | |||||||||
See summary of significant accounting policies and notes to unaudited condensed consolidated financial statements.
5
EAGLE FORD OIL & GAS CORP.
(Unaudited)
| Three months Ended March 31, | ||||||||
| 2012 | 2011 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (276,458 | ) | $ | (109,824 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Share-based compensation | 50,000 | - | ||||||
| Depreciation, and depletion | 1,985 | - | ||||||
| Accretion of asset retirement obligation | - | 439 | ||||||
| Unrealized gain on change in derivative value | (29,196 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable – production | (385 | ) | 198,862 | |||||
| Prepaid expenses | 15,625 | - | ||||||
| Accounts payable – trade | 50,135 | (121,501 | ) | |||||
| Accrued expenses to related parties | 53,247 | - | ||||||
| Net cash used in operating activities | (135,047 | ) | (32,024 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Disposition of oil and gas properties | - | 174,485 | ||||||
| Net cash provided by investing activities | - | 174,485 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of notes payable to related parties | 75,000 | - | ||||||
| Payments made on notes payable | (18,000 | ) | (18,000 | ) | ||||
| Borrowings under notes payable – related party | - | 130,000 | ||||||
| Proceeds from sale of common stock | 60,000 | - | ||||||
| Distributions to shareholders | - | (50,545 | ) | |||||
| Net cash provided by financing activities | 117,000 | 61,455 | ||||||
| Net (decrease) increase in cash and cash equivalents | (18,047 | ) | 203,916 | |||||
| Cash and cash equivalents, at beginning of period | 23,412 | 414 | ||||||
| Cash and cash equivalents, at end of period | $ | 5,365 | $ | 204,330 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | - | $ | - | ||||
| Income taxes paid | $ | - | $ | - | ||||
| Non-cash investing and financial activities: | ||||||||
| Common shares issued to settle notes payable | $ | 42,369 | $ | - | ||||
See summary of significant accounting policies and notes to unaudited condensed consolidated financial statements.
6
EAGLE FORD OIL & GAS CORP.
March 31, 2012 and 2011
(Unaudited)
1. ORGANIZATION
Eagle Ford Oil & Gas Corp. (“Eagle Ford” or the” Company”) is an independent oil and gas company organized in Nevada actively engaged in oil and gas development, exploration and production with properties and operational focus in the Texas and Louisiana-Gulf Coast Region. Eagle Ford’s strategy is to grow its asset base by purchasing or investing in oil and gas drilling projects in the Texas and Louisiana regions.
On June 20, 2011, pursuant to a Purchase Agreement, Eagle Ford acquired all of the membership interests of Sandstone Energy, L.L.C. (“Sandstone”), an exploration stage entity at the time, in exchange for 17,857,113 shares of common stock of Eagle Ford (the “Reverse Acquisition”). Following the Reverse Acquisition, the shares issued to the former owners of Sandstone constituted 82% of the Company’s common stock.
Sandstone Energy, L.L.C.’s principal assets at the date of the Reverse Acquisition were 50% membership interests in each of Sandstone Energy Partners I, L.L.C. (“SSEP1”), Sandstone Energy Partners II, L.L.C. (“SSEP2”) and Sandstone Energy Partners III, L.L.C. (“SSEP3”). On August 8 and August 11, 2011, Eagle Ford acquired the remaining 50% interests in each of SSEP1, SSEP2 and SSEP3 with an accumulated deficit of $1,443,302 in exchange for 8,970,120 shares of Eagle Ford common stock. Eagle Ford now owns 100% of the interests in these ventures.
Accounting Treatment; Change of Control
As discussed above, in connection with the Reverse Acquisition, Eagle Ford issued 82% of its shares to acquire all of the membership interests in Sandstone resulting in a change in control in which the former holders of all of the membership interests became the majority shareholders of Eagle Ford. The Reverse Acquisition is being accounted for as a “Reverse Acquisition” in which Sandstone is deemed to be the accounting acquirer (“Acquirer”) and Eagle Ford is deemed to be the accounting acquiree (“Acquiree”). Consequently, the assets and liabilities and the historical operations reflected in the accompanying consolidated financial statements prior to the Reverse Acquisition are those of Sandstone and are recorded at the historical cost basis of Sandstone. The consolidated financial statements after completion of the Reverse Acquisition include the assets and liabilities of Sandstone and the Acquiree and the historical operations of Sandstone and the Acquiree and its subsidiaries from the closing date of the Reverse Acquisition. In accordance with ASC 805, the assets and liabilities of the Acquiree at the date of the acquisition have been recorded at fair value.
Eagle Ford continues to be a “smaller reporting company,” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), following the Reverse Acquisition.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim condensed consolidated financial statements of Eagle Ford have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission, and should be read in conjunction with Eagle Ford’s Form 8-KA filed on November 4, 2011 with the SEC with respect to the Reverse Acquisition.
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.
The Company’s unaudited condensed consolidated financial statements include all accounts of Eagle Ford and its subsidiaries: Sandstone, SSEP1, SSEP2, and SSEP3. All significant inter-company balances and transactions have been eliminated in consolidation.
7
Nature and Classification of the Noncontrolling Interest in the Unaudited Condensed Consolidated Financial Statements
A noncontrolling interest is the portion of the equity in a subsidiary not attributable, directly or indirectly, to a parent. A noncontrolling interest is the ownership interest held by owners other than the consolidating parent. The noncontrolling interest is reported in the consolidated balance sheets separately from shareholders’ equity. The noncontrolling interest in the current year’s income (loss) is segregated from the net income (loss) attributable to the Company’s shareholders. Noncontrolling equity interests in the consolidated subsidiaries is increased by equity contributions and the proportionate share of the subsidiaries’ earnings and is reduced by dividends, distributions and the proportionate share of the subsidiaries’ incurred losses.
Prior to August 8 and August 11, 2011, the Company held a 50% controlling interest in SSEP1, SSEP2, and SSEP3, and the remaining 50% interest not held by the Company was accounted for as noncontrolling interest. On August 8 and August 11, 2011, the Company acquired the remaining 50% interest, resulting in the Company owning, as of those dates, 100% of SSEP1, SSEP2, and SSEP3 and the removal of noncontrolling interest in the Company’s unaudited condensed consolidated financial statements.
Use of Estimates
The preparation of 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 unaudited condensed 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 to amounts in prior periods to conform with the current period presentation. All reclassifications have been applied consistently to the periods presented.
Cash and Cash Equivalents
Eagle Ford 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
Eagle Ford 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. Eagle Ford 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 Eagle Ford 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.
8
Costs of proved oil and gas properties, including future development costs, if any, are amortized using the units of production method over the estimated proved reserves.
In applying the full cost method, Eagle Ford 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. The Company assessed the realizability of its oil and gas properties and determined that no impairment of its oil and gas properties was necessary as of March 31, 2012.
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.
Asset Retirement Obligations
The Company follows the provisions of the Accounting Standards Codification (“ASC”) 410 - Asset Retirement and Environmental Obligations. The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and is subject to amortization. The Company’s asset retirement obligations relate to the abandonment of oil and gas producing facilities. The amounts recognized are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate.
The following table describes changes in our asset retirement obligation during the three months ended March 31, 2012 and the year ended December 31, 2011.
| Three months Ended March 31, 2012 | For the Year Ended December 31, 2011 | |||||||
| ARO liability at beginning of period, current and noncurrent | $ | 24,802 | $ | 20,072 | ||||
| Liabilities incurred from acquisitions | - | 2,823 | ||||||
| Accretion | - | 1,907 | ||||||
| ARO liability at end of period, current and noncurrent | $ | 24,802 | $ | 24,802 | ||||
9
Revenue and Cost Recognition
Eagle Ford 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 Eagle Ford is entitled based on our interest in the properties. Costs associated with production are expensed in the period incurred.
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.
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 March 31, 2012 and December 31, 2011, an allowance for doubtful accounts was not considered necessary as all accounts receivable were deemed collectible.
Concentration of Credit Risk
Financial instruments that potentially subject Eagle Ford to concentration of credit risk consist of cash and accounts receivable. Under Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, for the two-year period of January 1, 2011 through December 31, 2012, cash balances in noninterest-bearing transaction accounts at all FDIC-insured depository institutions are provided temporary unlimited deposit insurance coverage. At March 31, 2012, cash balances in interest-bearing accounts are zero.
Sales to a single customer comprised 100% and 100% of Eagle Ford’s total oil and gas revenues for the three months ended March 31, 2012 and 2011, respectively. At March 31, 2012 and December 31, 2011, Eagle Ford’s accounts receivable from its primary customer was $48,560 and $48,175, 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.
10
Property and Equipment, other than Oil and Gas Properties
Property and equipment are stated at cost. Additions of new equipment and major renewals and replacements of existing equipment are capitalized. Repairs and minor replacements are charged to operations as incurred. Cost and accumulated depreciation and amortization are removed from the accounts when assets are sold or retired, and the resulting gains or losses are included in operations.
Depreciation of property and equipment is provided using the straight-line method applied to the expected useful lives of the assets:
Estimated useful lives | |
| Pipeline transmission properties | 20 years |
| Machinery and equipment | 3 – 7 years |
| Office furniture, fixtures and equipment | 3 – 5 years |
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, it records deferred income taxes based on temporary differences between the financial reporting and tax bases of assets and liabilities and uses enacted tax rates and laws that the Company expects will be in effect when it recovers those assets or settles those liabilities, as the case may be, to measure those taxes. The Company reviews deferred tax assets for a valuation allowance based upon whether it is more likely than not that the deferred tax asset will be fully realized.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. As of March 31, 2012, the Company did not identify any uncertain tax positions.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the income tax expense (benefit) line item in the statement of operations.
Share-Based Compensation
The Company follows ASC 718 - Compensation - Stock Compensation under which the Company estimates the fair value of each stock option award at the grant date by using the Black-Scholes option pricing model and common shares based on the last quoted market price of the Company’s common 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, if available. 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.
11
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 7 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 repricing of these warrants pursuant to the anti-dilution provision. See Note 7 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 March 31, 2012. There were no transfers of financial assets between levels during the three months ended March 31, 2012.
| Carrying Value at | Fair Value Measurement at March 31, 2012 | |||||||||||||||
| March 31, 2012 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Derivative liability | $ | 190,386 | $ | - | $ | - | $ | 190,386 | ||||||||
The Company did not identify any other assets and liabilities that are required to be presented on the unaudited condensed 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.
12
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 March 31, 2012 and December 31, 2011.
Recent Accounting Pronouncements
Eagle Ford does not expect the adoption of any recently issued accounting pronouncements will have a significant impact on its results of operations, financial position or cash flow.
Subsequent Events
The Company has evaluated all transactions from March 31, 2012 through the issuance date of the financial statements for subsequent event disclosure consideration.
3. LIQUIDITY AND GOING CONCERN
As shown in the accompanying unaudited condensed consolidated financial statements, for the three months ended March 31, 2012, Eagle Ford incurred a net loss attributable to common shareholders of $276,458. During the three months ended March 31, 2012, operating expenses included interest expenses and non cash expenses related to the derivative liability. At March 31, 2012 and December 31, 2011, the Company had a working capital deficit of $4,484,439 and $4,333,140, respectively, and held cash and cash equivalents of $5,365 and $23,412, respectively. 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 investing in the drilling of additional wells to improve future earnings and cash flow. 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 and joint ventures. Management anticipates 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.
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 Eagle Ford’s business. The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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4. BUSINESS ACQUISITIONS
Reverse Acquisition
On June 20, 2011, Eagle Ford acquired all of the membership interests of Sandstone in exchange for 17,857,113 shares of common stock of Eagle Ford. Following the Reverse Acquisition, the shares issued to the former owners of Sandstone constituted 82% of the Company’s common stock resulting in a change of control in which Sandstone controls Eagle Ford post-acquisition. The Agreement provided for contingent consideration equal to 6% of Eagle Ford’s then issued and outstanding shares of common stock, determined immediately following the Closing Date, on a fully diluted basis, (the “Contingent Consideration”) to all record owners of Eagle Ford’s common stock immediately prior to the Reverse Acquisition, issued and apportioned to each such owner based upon the percentage of such stock owned immediately prior to the Closing, if and upon successful noncash resolution within one year from Closing Date of an unsatisfied judgment issued against Eagle Ford prior to the acquisition of Sandstone.
For accounting purposes of the Reverse Acquisition, Sandstone is deemed to be the accounting acquirer (“Acquirer”) and Eagle Ford is deemed to be the accounting acquiree (“Acquiree”). Consequently, the assets and liabilities and the operations reflected in the consolidated financial statements prior to the Reverse Acquisition are those of Sandstone and are recorded at the historical cost basis of Sandstone. The consolidated financial statements after completion of the Reverse Acquisition include the assets and liabilities of Sandstone and the Acquiree and the historical operations of Sandstone and the Acquiree and its subsidiaries from the closing date of the Reverse Acquisition.
Immediately preceding the acquisition, Eagle Ford shareholders held 3,945,027 shares of common stock. The purchase consideration to acquire Old Eagle Ford was based on the fair value of the 3,945,027 shares of common stock, (utilizing the closing price of $0.45 on June 20, 2011) which was determined to be $1,775,262. The purchase consideration to acquire Old Eagle Ford also includes the Contingent Consideration discussed above. The Company determined the estimated fair value of the Contingent Consideration as of the acquisition date to be de minimus.
In accordance with ASC 805, the assets and liabilities of the Acquiree at the date of the acquisition have been recorded at fair value. The acquisition price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values with the excess being recorded in goodwill. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| Cash and equivalents | $ | 832 | ||
| Accounts receivable | 1,500 | |||
| Other current assets | 36,653 | |||
| Oil and gas property | 253,671 | |||
| Goodwill | 5,125,081 | |||
| Total assets acquired | 5,417,737 | |||
| Accounts payable | 144,933 | |||
| Accrued liabilities | 559,765 | |||
| Convertible note | 545,000 | |||
| Notes payable | 1,918,709 | |||
| Notes payable – related parties | 35,077 | |||
| Asset retirement obligation | 311 | |||
| Derivative liability | 438,680 | |||
| Total liabilities assumed | 3,642,475 | |||
| Net assets acquired | $ | 1,775,262 |
The allocation of the purchase price was based on preliminary estimates and is provisional. Estimates and assumptions are subject to change upon the receipt of final tax returns. This final evaluation of net assets acquired is expected to be completed as soon as a final accounting is performed but no later than one year from the acquisition date. Any future changes in the value of the net assets acquired will be offset by a corresponding change in goodwill. As of June 30, 2011, Eagle Ford evaluated goodwill for impairment and determined the goodwill was fully impaired.
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Purchase of remaining 50% member interests
On August 8 and August 11, 2011, Eagle Ford acquired the remaining 50% interests in each of SSEP1, SSEP2 and SSEP3 with an accumulated deficit of $1,443,302 in exchange for 8,970,120 shares of Eagle Ford common stock. As a result of the acquisition of the SSEP interests, the Company currently owns the entire 38.75% working interest on 2,315 acres located in Lee County, Texas.
In accordance with ASC 810-10-45-23, the acquisition of the 50% interests in SSEP1, SSEP2 and SSEP3 qualifies as a change in the parent’s ownership while the parent retains its controlling financial interest in the subsidiary. In accordance with this ASC, the purchase of the remaining 50% member interest was accounted for as an equity transaction, with no gain or loss recognized. The difference between the fair value of the consideration paid (common stock of Eagle Ford) and the book value of the noncontrolling interest was recognized as an adjustment to additional paid-in-capital.
5. 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 three months ended March 31, 2012. All of the Company’s oil and gas properties (excluding accumulated depletion) are located in the United States.
| Well Description | December 31, 2011 | Additions | Impairment/ Dispositions | March 31, 2012 | ||||||||||||
| Vick 1, Lee County, TX | $ | 764,752 | $ | - | $ | - | $ | 764,752 | ||||||||
| Vick 2, Lee County, TX | 1,181,846 | - | - | 1,181,846 | ||||||||||||
| Alexander 1, Lee County, TX | 875,876 | - | - | 875,876 | ||||||||||||
| Live Oak County, TX | 106,803 | - | - | 106,803 | ||||||||||||
| $ | 2,929,277 | - | $ | - | $ | 2,929,277 | ||||||||||
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 Vick No. 1 is currently shut-in and is being evaluated for re-entry to drill and test deeper zones. The Company has a 38.75% net working interest as of March 31, 2012.
The Vick No: 2 well is currently a drilled and unevaluated well and was drilled in 2010 as a vertical well and then extended as a horizontal well. Although the well generated initial production, monthly production has declined to approximately 15 bbls, which is enough to hold its lease position. Options to improve production are being considered. The Company has a 38.75% net working interest as of March 31, 2012.
The Alexander No: 1 well is currently a drilled and unevaluated well. Although the well generated initial production from late 2010 to May 2011 when the operator suspended operations for technical and operations evaluation, the production to date has not been consistently sustained to establish proved reserves. The Company has a 38.75% net working interest as of March 31, 2012.
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LIVE OAK COUNTY, TEXAS
In August 2010, ECCE purchased a farm-in of a 1% working interest in 2,400 acres and the drilling of two wells in the Eagle Ford Shale formation located in Live Oak County in South Texas for $250,000. The Dena Forehand #2H, the Kellam #2H and the Hammon 1H were drilled and completed and production began during late 2010 and early 2011 and classified as proved reserves. Production has proven to be well below expectations, and ECCE does not intend to pursue additional investments in this field. As of the date of this report, the wells in Live Oak County continue to have minimal oil and gas production.
The reserve report dated January 1, 2011 showed future reserves substantially below the prior year’s report. Therefore an impairment charge of $116,029 was taken on December 31, 2011.
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.
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.
BAYOU CHOCTAW
On August 5, 2011, ECCE, entered into an agreement to purchase 1.5% Working Interest in the Bayou Choctaw Project located in Iberville Parish, Louisiana from GFX Energy, Inc. (GFX). Prior to December 31, 2011, ECCE decided to not further participate in the Bayou Choctaw development. ECCE and GFX decided to use the $100,000 deposited for Bayou Choctaw as a deposit on a future, undetermined endeavor relating to the exploration of oil and gas.
6. DEBT
Notes Payable – Related Parties
| March 31, 2012 | December 31, 2011 | |||||||
| Promissory note to TDLOG – 8% interest; due December 31, 2012; unsecured (1) | $ | 817,500 | $ | 817,500 | ||||
| Promissory note to TDLOG – 8% interest; due September 30, 2012; unsecured (1) | 75,000 | - | ||||||
| Total: Notes Payable – Related Parties | $ | 892,500 | $ | 817,500 | ||||
| (1) | TDLOG, LLC is controlled by Thomas E. Lipar, Chairman of the Board of Eagle Ford. |
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Notes Payable – Non-Related Parties
| March 31, 2012 | December 31, 2011 | |||||||
| Promissory note to Pierre Vorster –12.5% interest; due November 18, 2011; unsecured (1) | $ | 52 ,000 | $ | 70,000 | ||||
| Promissory note - 12% interest; due June 30, 2009; not secured (2) | 328,578 | 328,578 | ||||||
| Promissory note - 5% interest; due January 1, 2012; not secured. | 227,131 | 227,131 | ||||||
| Pipeline mortgage - 8% interest; due September 30, 2009; secured by pipeline (3) | 1,000,000 | 1,000,000 | ||||||
| Promissory note – 7% interest; due August 17, 2009; not secured (4) | - | 12,000 | ||||||
| Promissory note - 7% interest; due September 14, 2009; not secured (4) | - | 12,000 | ||||||
| Promissory note - 7% interest; due September 19, 2009; not secured (4) | - | 12,000 | ||||||
| Promissory notes - 6% interest; due April 1, 2011; not secured (5) | 142,000 | 142,000 | ||||||
| Promissory notes - 5% interest; due October 15, 2010; not secured (5) | 50,000 | 50,000 | ||||||
| Promissory note to Rick Bobigian – 8% interest; due July 1, 2010; unsecured. (6) | 25,000 | 25,000 | ||||||
| Total notes payable | 1,824,709 | 1,878,709 | ||||||
| Less: current portion of notes payable | ( 1,824,709 | ) | (1,878,709 | ) | ||||
| Total notes payable – long term | $ | - | $ | - | ||||
On June 20, 2011, the Company assumed $1,918,709 of non-related party notes as a result of the Reverse Acquisition (see Note 4). Accrued and unpaid interest for notes payable to non-related parties at March 31, 2012 and December 31, 2011 was $546,187 and $513,392, respectively, and is included in accrued expenses on the accompanying consolidated balance sheets.
| (1) | Pierre Vorster is a former investor in Sandstone, LLC and owns 178,571 shares of Eagle Ford common stock. |
| (2) | All principal and interest became due June 30, 2009. This note has not been repaid and is in default. No demand has been made for payment. Eagle Ford is continuing to accrue interest on this note at the stated rate. |
| (3) | The entire unpaid balance of principal and accrued interest was due on September 30, 2009. No payments have been made and this mortgage note is in default. There has been a judgment rendered against Eagle Ford in the amount of the mortgage (see Note 9). Eagle Ford is in discussions with the lender to restructure the mortgage. Eagle Ford is continuing to accrue interest on this note at the stated rate. |
| (4) | Pursuant to the Reverse Acquisition, the Company assumed notes payable of $36,000 originally issued in 2009 from one party for general corporate purposes. These notes are in default, and are due on demand. Eagle Ford has continued to accrue interest on these notes at the stated rate. In March 2012, the party agreed to convert $36,000 of principle and $6,369 of accrued interest on these notes into 300,000 shares of Eagle Ford common stock. |
| (5) | Pursuant to the Reverse Acquisition, the Company assumed these notes payable totaling $267,000 from 4 different parties for drilling on the Wilson Field lease and for general corporate purposes. None of these notes have been repaid and are in default. No demand has been made for payment. Eagle Ford is continuing to accrue interest on these notes at the stated rate. In August 2011, one of these parties agreed to convert $75,000 of debt and $22,994 of interest into 276,140 shares of common stock for a total value of $55,228. |
| (6) | Prior to the Reverse Acquisition, Eagle Ford borrowed $25,000 from a related party for general corporate purposes. The note is in default and due on demand. Eagle Ford continued to accrue interest on these notes at the stated rate. As of July 20, 2011 this note holder is no longer a related party. |
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Convertible Debentures
On June 20, 2011, the Company assumed the liability for $545,000 of Secured Convertible Debentures as a result of the Reverse Acquisition (see Note 4). 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. There have been neither shares issued for the interest payable as of the date of this report, nor have the Debentures been repaid. The interest for these debentures is accrued at the 12% rate and is included in accrued expenses. Accrued and unpaid interest was $110,255 at March 31, 2012 related to the convertible debentures. The Debentures are secured by a 1.5% interest in three oil and gas producing wells that are in a 2,400 acre lease in Live Oak County, Texas. The Debentures are convertible at the holders’ option into Eagle Ford restricted common stock at a fixed conversion rate of $0.90 per common share. The Debentures may also be satisfied by transferring the lease to the investors. Eagle Ford is in negotiation with the debenture holders and no agreement has been made as of the date of this report.
Following are maturities on all debt and convertible debentures for the next five years:
| Principal Amount | ||||
| 2012 | $ | 545,000 | ||
| Thereafter | - | |||
| Total convertible debt | $ | 545,000 | ||
Loss on settlement of debt
During the three months ended March 31, 2012, the Company settled certain of its outstanding notes payable, as further discussed above, in addition to settlement of the outstanding third party advances. The loss on settlement of debt for the three months ended March 31, 2012 was $2,631 which consisted of a net loss on settlement of notes payable from an unrelated party.
7. DERIVATIVE LIABILITY
In connection with the Reverse Acquisition, the Company assumed 1,000,000 warrants which were issued by Eagle Ford prior to the Reverse Acquisition in connection with the conversion of Eagle Ford’s convertible preferred shares, which also occurred prior to the Reverse Acquisition. The Company determined that the warrants contained provisions that protect the holders from declines in the Company’s stock price that could result in modification of the exercise price under the warrant based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under ASC 815 – 40. As a result, these warrants were not indexed to the Company’s own stock. The fair value of these warrants was recognized as derivative warrant instruments and will be measured at fair value at each reporting period. 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 March 31, 2012 and determined the fair value to be $190,386. The decrease in fair value has been recognized as an unrealized gain on the change in derivative value of $29,196 for the three months ended March 31, 2012.
Activity for the derivative warrant instruments during the three months ended March 31, 2012 was:
| December 31, 2011 | Activity During the Period | Decrease in Fair Value | March 31, 2012 | |||||||||||||
| Derivative warrant instruments | $ | 219,582 | $ | - | $ | 29,196 | $ | 190,386 | ||||||||
| Total | $ | 219,582 | $ | - | $ | 29,196 | $ | 190,386 | ||||||||
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The assumptions used in the lattice model to determine the fair value of the warrants as of December, 2011 and March 31, 2012 were as follows:
| December 31, 2011 | March 31, 2012 | |||||||
| Exercise price | $ | 0.46-$0.48 | $ | 0.46-$0.49 | ||||
| Risk free discount rate (1) | 0.31 | % | 0.33 | % | ||||
| Volatility (2) | 208 | % | 217 | % | ||||
| Projected future offering price (3) | $ | 0.17-$0.47 | $ | 0.17-$0.42 | ||||
| Stock price on measurement date | $ | 0.22 | $ | 0.19 | ||||
| Expected dividend yields (4) | None | 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. |
8. SHAREHOLDERS’ EQUITY
On June 20, 2011, the Company acquired all of the membership interests of Sandstone Energy, L.L.C. (Sandstone”) in exchange for 17,857,113 shares of common stock of Eagle Ford issued to the former owners of Sandstone. Following the acquisition, the shares issued to the former owners of Sandstone constituted 82% of the Company’s common stock resulting in a change of control. Immediately preceding the acquisition, Eagle Ford shareholder’s held 3,945,027 shares of common stock, which were retained by the holders. The fair value of the shares retained by the shareholders immediately prior to the acquisition was based on the closing price of the Company’s common stock of $0.45 on June 20, 2011 and was determined to be $1,775,262.
On August 23, 2011, Eagle Ford issued stock for the remaining 50% interests in each of SSEP1, SSEP2 and SSEP3 with an accumulated deficit of $1,443,302 in exchange for 8,970,120 shares of Eagle Ford common stock. Eagle Ford now owns 100% of the interests in these ventures. The purchase of the remaining 50% member interest was accounted for as an equity transaction, with no gain or loss recognized. The difference between the fair value of the consideration paid (common stock of Eagle Ford) and the book value of the noncontrolling interest was recognized as an adjustment to additional paid-in-capital.
Common stock sales
On January 18, 2012, ECCE sold 357,143 and 71,429 common shares to two individuals for $0.14 per share.
Common stock issued for exchange of debt and accounts payable
On February 23, 2012, ECCE issued 300,000 shares of common stock in exchange for three notes payable totaling $36,000 and accrued interest of $6,369.
Common stock issued for services
On March 14, 2012, ECCE issued 250,000 shares to four individuals as compensation for technical assistance relating to existing and potential field evaluation, fair valued at $50,000.
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Warrants
Warrant activity during the three months ended March 31, 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 March 31, 2012 | 1,000,000 | $ | 0.50 | $ | - | |||||||
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 7. As of March 31, 2012, all warrants outstanding and exercisable had an intrinsic value of $0, based on the trading price of Eagle Ford’s common stock of $0.19 per share.
9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On February 28, 2009 M-J Oil Company Inc, of Paris Ohio, obtained a judgment of $1,000,000 against Eagle Ford (f/k/a ECCO Energy) for non-compliance with covenants in the original mortgage relating to the purchase of the M-J Oil Company pipeline (“Pipeline”). Eagle Ford 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 the date of this filing, the Company has not reached a satisfactory agreement with the lender, although a settlement is being actively pursued.
Eagle Ford has not paid property taxes for 2007 or 2008 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 March 31, 2012, Eagle Ford owed $43,452 for these property taxes. ECCE is currently in negotiations to settle this liability.
Operating Leases
Subsequent to the merger with Sandstone LLC, ECCE moved to 1110 NASA Parkway, Ste 311, Houston, TX 77058 and vacated the offices on 3315 Marquart Street, Ste. 206, Houston, Texas 77027. The landlord at Marquart St. was Marquart St. LLC, a company owned by Rick Bobigian, who was a Director of the Company until July, 2011. Upon the merger, the previous rental contract was terminated, and the outstanding rent payments were cancelled
The rental contract at 1110 NASA Parkway for 1,379 sq. ft. commenced July 1, 2010 and terminates on August 31, 2013. The monthly rent increased from $1,781 on September 1, 2011 to $1,839. The monthly rent will remain at $1,839 until September 1, 2012 when it will increase to $1,896 until the lease expires on August 31, 2013
12 months ended March 31 2013 $22,410
12 months ended March 31 2014 $ 9,480
10. SUBSEQUENT EVENTS
On May 9, 2012, ECCE sold 500,000 shares of common stock to four individuals for $0.10 per share.
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.
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On June 6, 2012, ECCE issued 461,667 shares to Ronald Bain, a consultant of the company, for Sec. 144 stock sold at $0.12 per share, for total proceeds of $55,400.
The Company evaluated subsequent events through the date the financial statements were issued, and there were no other significant events to report.
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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 to meet our obligations, finance operating deficits and fund acquisitions, exploration and development and continue as a going concern |
| - | 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) |
| - | the cyclical nature of the natural gas and oil industries |
BUSINESS OPERATIONS
We (“Eagle Ford” or the “Company”) are an independent oil and gas company actively engaged in oil and gas development, exploration and production with properties and operational focus in the Texas-Louisiana Gulf Coast Region. Our strategy is to grow our asset base by investing in oil and gas drilling and production in various locations in that region. Our shares of common stock are traded on the Over-the-Counter Bulletin Board, with the symbol ECCE.
RECENT DEVELOPMENTS
Business Acquisitions
On June 20, 2011, pursuant to a Purchase Agreement, Eagle Ford acquired all of the membership interests of Sandstone Energy, L.L.C. (“Sandstone”) in exchange for 17,857,113 shares of common stock of Eagle Ford (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 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.
The Reverse Acquisition is being accounted for as a “reverse acquisition” in which Sandstone is deemed to be the accounting acquirer (“Acquirer”) and Eagle Ford is deemed to be the accounting acquiree (“Acquiree”). Consequently, the assets and liabilities and the historical operations reflected in the accompanying consolidated financial statements prior to the Reverse Acquisition are those of Sandstone and are recorded at the historical cost basis of Sandstone. The consolidated financial statements after completion of the Reverse Acquisition include the assets and liabilities of Sandstone and the Acquiree and the historical operations of Sandstone and the Acquiree and its subsidiaries from the closing date of the Reverse Acquisition. In accordance with ASC 805, the assets and liabilities of the Acquiree at the date of the acquisition have been recorded at fair value.
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As a result of the Reverse Acquisition and the August acquisition of the remaining 50% interests in SSEP1, SSEP2, and SSEP3, the Company’s most significant oil and gas assets at March 31, 2012 were the Company’s interests in Vick No.1, Vick No. 2 and Alexander 1, all located in Lee County, Texas. All of the Company’s wells in Lee County (the Lee County Wells”) are operated by a third party.
Oil & Gas Properties
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 Vick No. 1 is currently shut-in and is being evaluated for re-entry to drill and test deeper zones. The Company has a 38.75% net working interest as of March 31, 2012.
The Vick No: 2 well is currently a drilled and unevaluated well and was drilled in 2010 as a vertical well and then extended as a horizontal well. Although the well production to the end of March 31, 2012 is 11,344 bbls, production has not been consistently sustained to establish proved reserves. In recent months, its production trend has been the following: June – 366 bbls, July – 106 bbls, August – 35 bbls, September – 15 bbls. In October 2011, the well currently produced at a level to approximately 15 bbls to hold its lease position. Options to improve production are being considered including drilling a new well with a perforated liner. The Company has a 38.75% net working interest as of March 31, 2012.
The Alexander No: 1 well is currently a drilled and unevaluated well. Although the well generated initial production of 16,773 bbls 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. During the months subsequent to suspension of the well, the Operator proposed a drilling plan for a 2,500 ft. horizontal side-track to re-initiate commercial production. On September 14, 2011, the Company elected to not participate in the 2,500 ft. horizontal side-track and by doing so; the Consenting Parties will be reimbursed by 300% of cost incurred as an incentive to the Consenting Parties before the Company will be able to participate again in the Alexander. As of the date of this report, it is the understanding of the Company that the production of the Alexander No: 1 well was 215 bbls for September and 32 bbls for October. The Company has a 38.75% net working interest as of March 31, 2012.
During the three months ended March 31, 2012, the Operator performed a small scale 3D seismic shoot and it is currently being processed. The Company is still evaluating the Lee County project for further exploratory and development projects to further establish proved reserves as well as increasing its lease position in the area.
Prior to the Reverse Acquisition, in August 2010, Eagle Ford purchased a farm-in of a 1% working interest in 2,400 acres and the drilling of three wells in the Eagle Ford Shale formation located in Live Oak County in South Texas for $250,000 plus potential additional expenses related to the drilling. The wells were drilled and completed and production began during November and December 2010 and classified as proved reserves. As of the date of this report, the wells in Live Oak County continue to have minimal oil and gas production. We do not anticipate any further drilling in this field.
On August 5, 2011, Eagle Ford entered into an agreement to purchase a 1.5% working interest in the Bayou Choctaw Project, located in Iberville Parish, Louisiana from GFX Energy, Inc. (“GFX”), In December 2011, ECCE determined that the project did not adequately reflect its expansion goals. GFX agreed to terminate the agreement. ECCE currently has a $100,000 deposit with GFX for use in future ongoing projects with GFX.
The Company also plans to acquire additional leases and other oil and gas properties or interests in the Texas-Louisiana Gulf Coast region.
RESULTS OF OPERATIONS
We have incurred recurring losses to date. Over the next twelve months, our strategy is to grow our asset base by investing in oil and gas drilling and production in the Texas-Louisiana Gulf Coast region. Although we do not currently operate any of our wells, we desire to acquire operated as well as non-operated properties that meet or exceed our rate of return criteria. For acquisitions of properties with additional development, exploitation and exploration potential, our focus has been on acquiring operated properties so that we can better control the timing and implementation of capital spending. We will sell properties when management is of the opinion that the sale price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own.
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The execution of our growth strategy is dependent on a number of factors including oil and gas prices, the availability of oil and gas properties that meet our economic criteria and the availability of funds on terms that are acceptable to us, if at all. There is no assurance that these factors will occur. We will require substantial additional capital to meet our current obligations and long term operating requirements and acquisition objectives.
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
For the three months ended March 31, 2012, Eagle Ford recognized revenue of $2,191, a decrease of $139,489 compared to revenue of $141,680 during the three months ended March 31, 2011. The decrease in revenues for the three months ended March 31, 2012 is primarily due to decreased production from the Vick 2 and Alexander 1 wells. Currently, Vick 2 is producing at a level to hold its lease position and options to improve production are being considered including drilling a new well with a perforated liner. The operator of Alexander 1 is currently evaluating the well for completion options. During the three months ended March 31, 2012, we sold no barrels of oil and 925 Mcf of natural gas at an average price of $2.41 per Mcf. During the three months ended March 31, 2011, we sold approximately 4,735 barrels of oil at an average price of $78.94 and no natural gas. As of March 31, 2012, only the Live Oak County wells remained online, as the others are in various stages of completion or evaluation. The initial production from the Lee County wells in 2011 were not from permanent reserves of completed well, rather it was from initial production at a zone that was not capable of long term production.
For the three months ended March 31, 2012, we incurred operating expenses of $234,116, a decrease of $1,010 (0.4%) compared to $233,106 for the three months ended March 31, 2011.
Other income (expenses) increased $26,135 in total, to $(44,533) from $(18,398) for the three months ended March 31, 2012 and 2011, respectively. The $26,135 increase in other income (expenses) is due to a $29,196 unrealized gain on change in derivative value and $(73,729) Interest expenses compared to the prior year period,
Our net loss for the three months ended March 31, 2012 attributable to the Company’s shareholders was $276,458, an increase of $128,928 (87%) compared to a net loss of $147,530 for the three months ended March 31, 2011, due to the reasons notes above.
LIQUIDITY AND CAPITAL RESOURCES
Three Month Period Ended March 31, 2012
At March 31, 2012, our current assets were $71,060 and our current liabilities were $4,555,499, which resulted in a working capital deficiency of $4,484,439.At March 31, 2012, our total liabilities were $4,770,687 consisting of: (i) $418,300 in accounts payable - trade; (ii) $791,932 in accrued expenses; (iii) $83,058 in accrued expenses – related party; (iv) $1,824,709 in notes payable to third parties, current; (v) $892,500 in short-term debt – related parties; (vi) $545,000 in convertible debt; (vii) $190,386 in derivative liabilities; and (viii) $24,802 in asset retirement obligations.
Stockholders’ deficit increased from $1,528,964 at December 31, 2011 to a deficit of $1,653,053 as of March 31, 2012. This deficit was increased by the loss from operations for the first three months of 2012.
Cash Flows
Cash Flows from Operating Activities
Cash used in operations were $135,047 during the three months ended March 31, 2012, compared to net cash used for operations of $32,024 during the prior year period, which was an increase in cash used in operations of $103,023, primarily due to a $166,634 increase in net loss and off set by net increase in accounts payable, accrued expenses, and accrued expenses – related party.
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Cash Flows from Investing Activities
The Company used net cash for investing activities of $0 during the three months ended March 31, 2012, compared to net cash provided by investing activities of $174,485 during the prior year period, which represented funds from the sale of an oil and gas property.
Cash Flows from Financing Activities
The Company received cash from financing activities of $117,000 during the three months ended March 31, 2012, compared to net cash from financing activities of $61,455 during the prior year period, which was an increase from financing activities of $55,545. This increase in cash from financing activities is related to a distribution to shareholders of $50,545 during 2011 with nil distribution in year 2012.
Our Existence and Success Depend upon Future Financings/Going Concern Issues
The independent auditor’s report on our December 31, 2011 financial statements states that our recurring losses raise substantial doubts about our ability to continue as a going concern.
At March 31, 2012, we had a working capital deficit of $4,484,439. We will need to raise additional capital during 2012 to fund general corporate working capital needs, which includes principal and accrued interest on past due notes payable and convertible bonds totaling $4,208,575. We will also need to raise funds to meet commitments with respect to its existing wells in the Lee County Prospect or future wells on that and other prospects.
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 and joint ventures. The Company also intends to continue to negotiate with holders of its current debt to convert such debt into equity or otherwise restructure such debt.
As we have no debt or equity funding commitments, we will need to rely upon best efforts financings. The Company is conducting ongoing discussions with potential lenders, investors and merger partners and acquisition candidates. There can be no assurance that the Company will be successful in raising the required capital in the private placement or from any other source.
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. We anticipate that our 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. We anticipate that additional financings and loans will be required to sustain operations in the future. In addition, we anticipate that for the foreseeable future such financings are likely to rely heavily on the issuance of equity. There can be no assurances that such equity issuances will be at dilution levels that will be highly dilutive to existing holders or our common stock or other stakeholders.
There can be no assurance that we 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.
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve months, outside of any items related to the drilling or completion of the Lee County, Live Oak County and East Pearsall fields.
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OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2012, 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 our Chief Executive Officer, and 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 March 31, 2012. 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, our Chief Executive Officer, and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2012. 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 March 31, 2012 and as of the date of this report, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On January 18, 2012, ECCE sold 357,143 and 71,429 common shares to two individuals for $0.14 per share.
On February 23, 2012, ECCE issued 300,000 shares of common stock in exchange for three notes payable totaling $36,000 and accrued interest of $6,369.
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 May 9, 2012, ECCE sold 500,000 shares of common stock to four individuals for $0.10 per share.
On June 6, 2012, ECCE issued 461,667 shares to Ronald Bain, a consultant of the company, for Sec. 144 stock sold at $0.12 per share, for total proceeds of $55,400.
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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 or other applicable exemptions from registration.
| Exhibit Number | Description |
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.
| EAGLE FORD OIL & GAS CORP. | ||
| Date: July 18, 2012 | By: | /s Paul L. Williams Jr. |
| Paul L. Williams Jr. | ||
Title: Chief Executive Officer | ||
| Date: July 18, 2012 | By: | /s/ N. Wilson Thomas |
| N. Wilson Thomas | ||
Title: Chief Financial Officer | ||
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