See summary of significant accounting policies and notes to unaudited
condensed consolidated financial statements.
See summary of significant accounting policies
and notes to unaudited condensed consolidated financial statements.
See summary of significant accounting policies
and notes to unaudited condensed consolidated financial statements.
See summary of significant accounting policies
and notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2014 and 2013
(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 obtained 100% of the interests in
these ventures, which were subsequently closed.
Eagle Ford continues to be a “smaller
reporting company,” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
The accompanying unaudited interim financial
statements have been prepared by the Company in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission.
The financial information has not been audited and should not be relied upon to the same extent as audited financial statements.
Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. Accordingly, these unaudited interim financial statements should
be read in conjunction with the Company’s financial statements and related notes contained in the Form 10-K for the year
ended December 31, 2013.
In the opinion of management, the unaudited
interim financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of
the interim periods presented. The results of operations for the three months ended March 31, 2014 are not necessarily indicative
of the results of operations to be expected for the full year.
The Company’s unaudited condensed consolidated
financial statements include all accounts of Eagle Ford (ECCE) and its subsidiaries: Eagle Ford – East Pearsall, Sandstone
LLC and Eagle Ford Operating. All significant inter-company balances and transactions have been eliminated in consolidation.
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 to 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.
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, 2014.
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, 2014 and the year ended December 31, 2013.
|
|
Three months
Ended March 31,
2014
|
|
For the Year
Ended December 31,
2013
|
ARO liability at beginning of period, current and noncurrent
|
|
$
|
24,802
|
|
|
$
|
24,802
|
|
Liabilities incurred from acquisitions
|
|
|
—
|
|
|
|
—
|
|
Accretion
|
|
|
—
|
|
|
|
—
|
|
ARO liability at end of period, current and noncurrent
|
|
$
|
24,802
|
|
|
$
|
24,802
|
|
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, 2014 and December 31, 2013, 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. At March 31, 2014, cash balances in interest-bearing
accounts are zero.
Sales to a single customer comprised 100% of
Eagle Ford's total oil and gas revenues for each of the three months ended for both March 31, 2014 and 2013. At March 31, 2014
and December 31, 2013, Eagle Ford's accounts receivable from its primary customer was $16,457 and $19,084, 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.
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, 2014, 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.
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 6 for discussion of the impact the derivative financial instruments had on
the Company’s unaudited condensed consolidated 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 6 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, 2014. There were no transfers of financial assets between levels during the three months ended March 31,
2014.
|
|
Carrying
Value at
March 31,
|
|
Fair
Value Measurement at March 31, 2014
|
|
|
2014
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Derivative
liability - Warrants
|
|
$
|
11,525
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,525
|
|
Derivative liability
- Notes
|
|
$
|
137,313
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137,313
|
|
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.
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, 2014 and December 31, 2013.
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, 2014 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, 2014, Eagle Ford incurred a net loss attributable to common
shareholders of $526,968. During the three months ended March 3
1, 2014, operating expenses included
interest expenses and non cash expenses related to the derivative liability. At March 31, 2014 and December 31, 2013, the Company
had a working capital deficit (current liabilities minus current assets) of $14,001,551 a
nd $13,710,962, respectively,
and held cash and cash equivalents of $83,717 and $3,802, 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.
4. OIL AND GAS PROPERTIES
The following table sets forth the Company’s
costs incurred in oil and gas property acquisition, exploration and development activities for the three months ended March 31,
2014. All of the Company’s oil and gas properties are located in the United States.
Well Description
|
|
December 31,
2013
|
|
Additions
|
|
Impairment/
Dispositions
|
|
March 31,
2014
|
|
|
|
|
|
|
|
|
|
East Pearsall, Frio Co. TX
|
|
$
|
6,464,436
|
|
|
$
|
19,871
|
|
|
$
|
—
|
|
|
$
|
6,484,307
|
|
|
|
$
|
6,464,436
|
|
|
$
|
19,871
|
|
|
$
|
—
|
|
|
$
|
6,484,307
|
|
EAST
PEARSALL
On June
4, 2012, ECCE entered into an agreement though a special purpose entity named EFOGC – East Pearsall, L.L.C., a Texas limited
liability company. ECCE owns 100% of the Class B Membership Interests in EFEP. EFEP completed the acquisition of 85% Working Interest
in 3,683 acres in Frio County, Texas from Amac Energy, L.L.C. to develop the Austin Chalk, Buda, Eagle Ford and Pearsall Shale
reservoirs. ECCE has attempted to raise funds in order to develop this field since the time of purchase. The total investment
to date in this field totals $6,484,307 (out of which $27,121 is unpaid). As of the date of this filing, ECCE has not been able
to raise the needed funds for drilling.
ECCE
is proceeding with obtaining drilling permits, site surveys and other necessary prerequisites to drill the required wells. The
Company’s plans to drill wells on certain leases have been delayed by events outside the Company’s control, which
the Company believes constitute events of force majeure under certain agreements to which the Company is a party. The Company
has provided notice of these events of force majeure to the other parties to the relevant contracts. Those parties disagree
that the events in question constitute events of force majeure. Instead, they believe the Company has, by not meeting a
drilling deadline, breached one or more of the agreements and that the Company should, as a result, relinquish its interest in
a certain lease(s). Negotiations are ongoing.
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. Subsequent
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 gas production.
The
reserve report dated January 1, 2011 showed future reserves substantially below the prior year’s report. Therefore an impairment
charge of $116,029 was taken on December 31, 2011. The reserve report dated January 1, 2013 showed reserves for future development
being negative, primarily due to low natural gas prices during 2013. An impairment charge of $100,752 (net of accumulated amortization
and accretion) was taken on December 31, 2013, reducing the value of the field to $0.00. The three wells are still producing,
but revenue is insignificant after expenses are deducted. ECCE may owe future amounts on these wells pertaining to any attempts
to improve production; however there has been no decision to make such repairs, or improvements.
OHIO
PIPELINE
In
October 2008, ECCE acquired a gas pipeline (“Pipeline”) approximately 13 miles in length located in Jefferson and
Harrison Counties, Ohio. The Pipeline was purchased from M- J Oil Company of Paris, Ohio, an unaffiliated third party, by issuing
a mortgage note for $1,000,000. The mortgage note bears an 8% annual interest rate. The mortgage is secured by the Pipeline assets.
The mortgage was due on March 31, 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, who was President of ECCE at that time. Upon further review, due to market conditions pertaining
to the price of oil and gas, both Samurai and ECCE decided that the transaction was not in the best interest of shareholders of
either company. Therefore, on April 13, 2009 the Board of Directors of both companies decided to terminate the transaction.
A
review of the pipeline valuation was performed by management. This was necessary as the asset was not an income producing asset
during 2010. A comparison of replacement cost, comparable market value and comparable earnings potential to other pipelines, showed
that the expected realizable value of the asset at December 31, 2009 was $100,000. An impairment charge of $900,000 was recorded
during the year ended December 31, 2009.
Due
to the failure to complete the transfer of assets from Samurai to ECCE, the covenants of the Pipeline purchase were violated.
On February 28, 2009 M-J Oil Company Inc, of Paris Ohio, obtained a judgment against ECCO Energy for non-compliance with covenants
in the original mortgage relating to the purchase of the M-J Oil Company pipeline (“Pipeline”). We are in negotiations
with the M-J Oil Company to remove the judgment and to adjust the mortgage terms, which required full payment on March 31, 2009.
As of this date, we have not reached a satisfactory agreement with the lender. M-J Oil Company has taken legal action to pursue
the judgment in the State of Texas, filing a lawsuit in the State of Texas in April, 2014.
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. ECCE remains in discussion about this investment with GFX Energy, Inc., and anticipates using this
balance in a future, undetermined activity.
HARDIN COUNTY/MERIDIAN CAPITAL VENTURES
During the year ended December 31, 2013, the
Company is in the process of making an offer on some property in Hardin County, TX. Meridian Capital Ventures is going to fund.
As of March 31, 2014 the deal has not been finalized yet and therefore $50,000 paid for due diligence services was accounted as
deposit.
A $25,000 balance
is due for various legal, accounting and administrative expenses incurred by the financing firm in connection with the due diligence
review of the property to be purchased.
Eagle Ford Oil & Gas Operating
Company
During March, 2014,
ECCE began the process of registering a new subsidiary, Eagle Ford Oil & Gas Operating Company. The new subsidiary will be
responsible for any drilling and related production activities of the company. As of the date of this report, the subsidiary has
no assets or liabilities.
5. DEBT
Notes Payable – Related Parties
|
|
March 31,
2014
|
|
December 31,
2013
|
Promissory note to TDLOG – 8% interest; due June 30, 2014; unsecured (1)
|
|
$
|
817,500
|
|
|
$
|
817,500
|
|
|
|
|
|
|
|
|
|
|
Promissory note to TDLOG – 8% interest; due June 30, 2014; unsecured (1)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Promissory note to TDLOG – 8% interest; due June 30, 2014; unsecured (1) Total: Notes Payable – Related Parties
|
|
|
80,000
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
907,500
|
|
|
$
|
897,500
|
|
(1)
|
TDLOG,
LLC is controlled by Thomas E. Lipar, Chairman of the Board of Eagle Ford. Note due date was changed to June 30,
2014 from September 30, 2013.
|
Accrued interest expenses on
the above notes to the related party as of March 31, 2014 and December 31, 2013 is $243,311 and $225,190, respectively.
Interest expenses to related party for the month ended March
31, 2014 and 2013 is $18,121 and $17,950, respectively.
Notes Payable – Non-Related Parties
|
|
March 31,
2014
|
|
December 31,
2013
|
Promissory note - 12% interest; due March 31, 2009; not secured (1)
|
|
$
|
328,578
|
|
|
$
|
328,578
|
|
Promissory note - 5% interest; due January 1, 2012; not secured (2).
|
|
|
227,131
|
|
|
|
227,131
|
|
Pipeline mortgage - 8% interest; due September 30, 2009; secured by pipeline (3)
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Promissory notes - 6% interest; due April 1, 2011; not secured (2)
|
|
|
112,000
|
|
|
|
112,000
|
|
Promissory notes - 5% interest; due October 15, 2010; not secured (4)
|
|
|
50,000
|
|
|
|
50,000
|
|
Promissory note to a former Director – 8% interest; due July 1, 2010; unsecured. (5)
|
|
|
25,000
|
|
|
|
25,000
|
|
Promissory note – Medallion Investment- 10% interest (6)
|
|
|
7,000,000
|
|
|
|
7,000,000
|
|
Promissory note – 12% interest with $3,000 OID; due July 14, 2014 (7)
|
|
|
—
|
|
|
|
33,000
|
|
Promissory note –
12% interest with $3,000 OID; due July 14, 2014 (7)
|
|
|
—
|
|
|
|
33,000
|
|
Total notes payable
|
|
|
8,742,709
|
|
|
|
8,808,709
|
|
Less: Unamortize debt discount portion
|
|
|
—
|
|
|
|
(3,218
|
)
|
Total notes payable, net
|
|
|
8,742,709
|
|
|
|
8,805,491
|
|
Less: current portion of notes payable
|
|
|
(8,742,709
|
)
|
|
|
(8,805,491
|
)
|
Total notes payable – long term
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued and unpaid interest for notes payable to non-related parties
at March 31, 2014 and December 31, 2013 was $2,037,853 and $1,825,482 respectively, and is included in accrued expenses on the
accompanying unaudited condensed consolidated balance sheets.
Interest expenses to non-related party for the three months ended
March 31, 2014 and 2013 is $212,371 and $211,171, respectively.
(1)
|
Pursuant
to the Reverse Acquisition, the Company assumed these notes payable totaling $328,578. All principal and interest became due September
30, 2009 for 12% notes. This note has not been repaid and is in default. No demand has been made for payment. Eagle Ford is continuing
to accrue interest on this note at the stated rate.
|
|
|
(2)
|
Pursuant to the Reverse Acquisition,
the Company assumed two notes payable (i) $227,131 due on January 1, 2012 for 5% and (ii) $142,000 due on April 1, 2011 for
6% interest for drilling on the Wilson Field lease and for general corporate purposes. Neither of these notes has been repaid
in cash and is in default. Eagle Ford is continuing to accrue interest on these notes at the stated rate. During the year
ended December 31, 2013, the note holder agreed to convert $30,000 of note on issuance of 81,081 shares of common stock. On
March 12, 2014, the note holder demanded payment on the outstanding portion of the note totaling $339,131 (see Note 8). The
note holder has demanded payment, and we are currently in negotiations regarding a settlement.
|
(3)
|
The entire unpaid balance
of principal and accrued interest was due on September 30, 2009. No payments have been made and this mortgage note is in default.
There has been a judgment rendered against Eagle Ford in the amount of the mortgage (see Note 8). 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.
In April, 2014, the note holder began the process to move the judgment to Texas courts.
|
|
|
(4)
|
Pursuant
to the Reverse Acquisition, the Company assumed these notes payable totaling $50,000 from two different note holders for drilling
on the Wilson Field lease and for general corporate purposes. Neither of these notes has been repaid in cash and is in default.
One party has demanded payment on a $25,000 note. Eagle Ford is continuing to accrue interest on these notes at the stated
rate (see Note 8).
|
|
|
(5)
|
Prior
to the Reverse Acquisition, Eagle Ford borrowed $25,000 from a related party for general corporate
purposes. The note is in default and due on demand. Eagle Ford continued to accrue interest
on these notes at the stated rate. From July 20, 2011 this note holder is no longer a related
party.
|
|
|
(6)
|
East
Pearsall
ECCE
borrowed $7,000,000 from Medallion Oil Company LTD (MOC) to purchase the East Pearsall tract from AMAC Energy, which created
a Special Purpose Entity (SPE). Upon receipt of the funds, ECCE granted to MOC a lien and security interest on all the
assets of the SPE, including the leases up to the investment and any accrued interest. The amount will be paid in full
within 12 months, and bears an interest rate of 10.00% APR. There will be an additional distribution of $7,000,000 to
MOC in preferred production payments, which may be deferred until after receipt of the initial $7,000,000 and interest
payments and then paid per agreed upon sliding scale within 18 months from the closing date or a mutually agreed date.
MOC
will retain 6.55% of the 63.75% Net Revenue Interest as an overriding royalty interest (ORRO) after all payments described
previously are received by MOC. There may also be a sliding scale on these payments to be negotiated on a reasonable basis
to enable ECCE to retain reasonable cash proceeds to enable it to conduct its business with respect to drilling and development
of the project.
The
overriding royalty interest shall be free and clear of all costs except production taxes. The ORRO will apply to any renewals,
extensions, etc. of existing leases and to any new leases acquired within the Area of Mutual Interest. ECCE must satisfy
all drilling obligations or otherwise default to the terms included in the final transaction documents. MOC shall have
all rights under the SPE documents, including but not limited to the right to foreclose on its lien and security interest
and obtain all rights to the Leases. ECCE agreed to reimburse MOC for any legal hours it occurred, up to $10,000.
Included
in the AMAC financing agreement, ECCE agrees to cause the drilling of at least one oil and gas well on or prior to 12
months from the date hereof and obtain drilling funds of at least $21,500,000 with a satisfactory drilling partner within
three months of the date hereof, or December 4, 2012.
On
October 22, 2012, MOC agreed to modify the agreement with ECCE relating to the issue relating to the date for raising
drilling funds. ECCE needed to raise $10,500,000 for drilling funds by December 4, 2012, instead of the $21,500,000 in
the original agreement. As of the date of this report, ECCE has failed to raise the necessary drilling funds. This caused
the company to be in default, and as a result, the note has been reclassified from a long term to short term liability
As of the date of this report, MOC has taken no action relating to the failure to raise these funds and has verbally agreed
to work with ECCE in order to obtain financing.
|
|
|
(7)
|
Re-class to convertible note (refer below
for further details).
|
Convertible Debentures and Notes Payable
|
|
March 31,
2014
|
|
December 31,
2013
|
Convertible debentures (1)
|
|
$
|
545,000
|
|
|
$
|
545,000
|
|
Convertible notes payable (2)
|
|
|
66,000
|
|
|
|
—
|
|
Total convertible debentures and notes payable
|
|
|
611,000
|
|
|
|
545,000
|
|
Unamortized debt discount on convertible notes payable
|
|
|
(22,272
|
)
|
|
|
—
|
|
Total: Convertible debentures and notes payable – net
|
|
|
588,728
|
|
|
|
545,000
|
|
Less: current portion of convertible debentures and notes payable
|
|
|
(588,728
|
)
|
|
|
(545,000
|
)
|
Total convertible debentures and notes payable – long term
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
On June 20, 2011, the Company assumed the liability for $545,000 of Secured Convertible Debentures as a result of the Reverse Acquisition. The Secured Convertible Debentures matured on July 26, 2011, and earned interest at a rate of 12%, payable quarterly in 3,000 shares of common stock for each debenture. The Company is in default. There have been no shares issued for the interest payable as of March 31, 2014, nor have the Debentures been repaid. The interest for these debentures is accrued at the 12% rate and is included in accrued expenses. The Debentures are secured by a 1.5% interest in three oil and gas producing wells that are in a 2,400 acre lease in Live Oak County, Texas. The Debentures are convertible at the holders’ option into Eagle Ford restricted common stock at a fixed conversion rate of $0.90 per common share. The Debentures may also be satisfied by transferring the lease to the investors. Eagle Ford is in negotiation with the debenture holders and no agreement has been made as of the date. Accrued and unpaid interest was $241,055 and $224,705 at March 31, 2014 and December 31, 2013, respectively related to the convertible debentures. Interest expenses on convertible debenture for the three months ended March 31, 2014 and 2013 is $16,350 for each quarter.
|
|
|
(2)
|
On July 18, 2013, ECCE issued two Notes Payable of $33,000 each, for a combined total of $66,000 to two individuals. The notes contained a $3,000 or $6,000 total original issue discount. The notes are due on July 14, 2014, and if they were repaid within ninety days from date of issue, then no interest would accrue. If they were paid after 90 days, then they accrued interest at a rate of twelve percent per annum, due on that date. The notes could be converted into common stock after 180 days, which occurred on January 14, 2014 The Conversion Price is the lesser of $0.39 per share or 60% of the lowest trade in the 25 trading days previous to the conversion. The Note accrues interest at a rate of 12% per annum and matures on July 13, 2014.
|
|
|
|
The Company identified embedded derivatives related to the Convertible Note entered into on January 13, 2014. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Convertible Note, the Company determined a fair value of $38,762 of the embedded derivative. The fair value of the embedded derivative was determined using intrinsic value.
|
|
The initial fair value of the embedded debt derivative of $38,762 was allocated as a debt discount and derivatives liability.
|
|
|
|
The fair value of the described embedded derivative of $137,313 at March 31, 2014 was determined using the Black-Scholes Model with the following assumptions:
|
|
|
|
(1) risk free interest rate of
|
0.28%;
|
|
|
|
|
(2) dividend yield of
|
0%;
|
|
|
|
|
(3) volatility factor of
|
183%;
|
|
|
|
|
(4) an expected life of the conversion feature of
|
6 months, and
|
|
|
|
|
(5) estimated fair value of the company’s common stock of
|
$0.25 per share.
|
|
|
|
|
At March 31, 2014, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $98,551 for the three months ended March 31, 2014.
|
|
|
|
During the three months ended March 31, 2014, the Company amortized $16,490 of debt discount to current period operations as financing expense.
|
6.
DERIVATIVE LIABILITY- WARRANTS
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, which had been reduced to $93,044 by December 31, 2013. The Company re-measured the
warrants as of March 31, 2014 and determined the fair value to be $11,525
.
The decrease in fair
value has been recognized as an unrealized gain on the change in derivative value of $81,519 and loss of $51,536 for the three
months ended March 31, 2014 and March 31, 2013, respectively.
Activity for the derivative warrant and note
instruments during the three months ended March 31, 2014 was:
|
|
December 31,
2013
|
|
Activity
During
the Period
|
|
Decrease
in Fair
Value
|
|
March 31,
2014
|
Derivative warrant instruments
|
|
$
|
93,044
|
|
|
$
|
—
|
|
|
$
|
81,519
|
|
|
$
|
11,525
|
|
Total
|
|
$
|
93,044
|
|
|
$
|
—
|
|
|
$
|
81,519
|
|
|
$
|
11,525
|
|
The assumptions used in the lattice model to
determine the fair value of the warrants as of December 31, 2013 and March 31, 2014 were as follows:
|
|
December 31, 2013
|
|
March 31, 2014
|
Exercise price
|
|
|
$0.45-$0.48
|
|
|
|
$0.39-$0.42
|
|
Risk free discount rate (1)
|
|
|
0.21
|
%
|
|
|
0.28
|
%
|
Volatility (2)
|
|
|
181
|
%
|
|
|
133
|
%
|
Projected future offering price (3)
|
|
|
$0.17-$0.47
|
|
|
|
$0.17-$0.47
|
|
Stock price on measurement date
|
|
$
|
0.29
|
|
|
$
|
0.25
|
|
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.
|
7. SHAREHOLDERS’ EQUITY
As of March 31, 2014 and December 31, 2013, there were 42,021,745
and 40,102,947 shares of common stock issued and outstanding, respectively.
Common stock sales
On January
14, 2014, ECCE sold 183,488 shares of common stock to several individuals for $0.1635 per share.
On March 12, 2014,
ECCE sold 1,735,310 shares of common stock to several individual for $0.144 per share.
All proce
eds from
stock sales were used for general corporate purposes.
Warrants
Warrant activity during the three months
ended March 31, 2014 is as follows:
|
|
Warrants
|
|
Weighted-
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
Outstanding at January 1, 2014
|
|
|
1,000,000
|
|
|
$
|
0.50
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding and exercisable at March 31, 2014
|
|
|
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 6. As of March 31, 2014,
all warrants outstanding and exercisable had an intrinsic value of $0, based on the trading price of Eagle Ford’s common
stock of $0.25 per share and average life of 0.16 years, expiring on May 20, 2014.
8. 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 March 31, 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. In April, 2014, M-J commenced legal action to move the judgment from Ohio to Texas courts.
Eagle Ford has not paid property taxes for
2007, 2008 or 2009 on the Wilson Field in Nueces County, Texas. Samurai Corp. agreed to assume the liabilities for property taxes
for 2010 when it acquired the property. The County has initiated legal proceedings to collect those taxes by placing tax liens
on the property. As of March 31, 2014, Eagle Ford owed $43,452 for these property taxes. ECCE is currently in negotiations to
settle this liability.
On March 12, 2014, one of the note holders sent a letter asking
for payment on four notes totaling $339,130. We are in discussion with this note holder about a settlement.
On March 17, 2014, a note holder sent a letter
asking for payment on a $25,000 note. ECCE is in discussions with this note holder about a settlement.
Operating Leases
The rental contract at 1110 NASA Parkway for 1,379 sq. ft.
commenced July 1, 2010 and terminated on August 31, 2013. The monthly rent increased from $1,781 on September 1, 2011 to $1,839
on September 1, 2012, and will remain at that amount until the lease expires on August 31, 2013. On August 31, 2013, ECCE renewed
the lease for at another year at a rate of $2,011 per month.
Year 2014: $10,055
9. SUBSEQUENT EVENTS
East Pearsall Field
ECCE is proceeding
with obtaining drilling permits, site surveys and other necessary prerequisites to drill the required wells. The Company’s
plans to drill wells on certain leases have been delayed by events outside the Company’s control, which the Company believes
constitute events of force majeure under certain agreements to which the Company is a party. The Company has provided notice
of these events of force majeure to the other parties to the relevant contracts. Those parties disagree that the events
in question constitute events of force majeur
e. Instead, they believe the Company has, by not
meeting a drilling deadline, breached one or more of the agreements and that the Company should, as a result, relinquish its interest
in a certain lease(s). Negotiations are ongoing.