Attached files
| file | filename |
|---|---|
| 8-K/A - CURRENT REPORT - Eagle Ford Oil & Gas Corp | eagleford-8ka_062411.htm |
| EX-99.1 - AUDITED CONSOLIDATED FINANCIAL STATEMENT - Eagle Ford Oil & Gas Corp | ex-99_1.htm |
| EX-99.3 - UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT - Eagle Ford Oil & Gas Corp | ex-99_3.htm |
Exhibit 99.2
CONSOLIDATED FINANCIAL STATEMENTS
Sandstone Energy, L.L.C.
Contents
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Page
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Financial Statements:
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Unaudited Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
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2
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Unaudited Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010, and for the period from May 15, 2006 (Inception) to March 31, 2011
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3
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Unaudited Consolidated Statements of Changes in Members’ Equity (Deficit) for the period from May 15, 2006 (Inception) to March 31, 2011
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4
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Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010, and for the period from May 15, 2006 (Inception) to March 31, 2011
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5
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Notes to Unaudited Consolidated Financial Statements
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6
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SANDSTONE ENERGY, L.L.C.
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31,
2011
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December 31,
2010
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ASSETS
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||||||||
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CURRENT ASSETS
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||||||||
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Cash and cash equivalents
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$
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204,330
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$
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414
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||||
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Accounts receivable - production
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107,065
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305,927
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||||||
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Total current assets
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311,395
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306,341
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PROPERTY AND EQUIPMENT
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||||||||
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Oil and gas properties, using full cost accounting
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||||||
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Costs not subject to amortization
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2,533,537
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2,708,022
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Total property and equipment, net
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2,533,537
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2,708,022
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TOTAL ASSETS
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$
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2,844,932
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$
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3,014,363
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LIABILITIES AND MEMBERS’ EQUITY
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CURRENT LIABILITIES:
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Accounts payable – trade
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$
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1,520
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$
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147,736
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||||
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Accrued expenses
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119,585
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94,870
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||||||
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Third party advances
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115,000
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115,000
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Notes payable
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124,000
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142,000
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Notes payable to related parties
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767,500
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637,500
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Total current liabilities
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1,127,605
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1,137,106
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LONG-TERM LIABILITIES:
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Asset retirement obligations
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20,511
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20,072
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TOTAL LIABILITIES
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1,148,116
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1,157,178
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MEMBERS' EQUITY:
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Sandstone Energy LLC, members’ equity
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255,672
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428,475
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Noncontrolling interest
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1,441,144
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1,428,710
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Total members’ equity
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1,696,816
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1,857,185
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TOTAL LIABILITIES AND MEMBERS’ EQUITY
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$
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2,844,932
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$
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3,014,363
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See summary of significant accounting policies and notes to unaudited consolidated financial statements.
SANDSTONE ENERGY, L.L.C.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months
Ended March 31,
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Period from
May 15, 2006 (Inception) to
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2011
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2010
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March 31, 2011
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REVENUE
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$ | 141,680 | $ | - | $ | 475,793 | ||||||
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OPERATING EXPENSES
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Lease operating expenses
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38,805 | - | 88,854 | |||||||||
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General and administrative expenses
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193,862 | 118,565 | 1,108,041 | |||||||||
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Accretion of asset retirement obligation
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439 | - | 1,611 | |||||||||
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Total operating expenses
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233,106 | 118,565 | 1,198,506 | |||||||||
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Operating loss
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(91,426 | ) | (118,565 | ) | (722,713 | ) | ||||||
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OTHER INCOME (EXPENSE)
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Interest expense
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(18,398 | ) | (7,168 | ) | (113,269 | ) | ||||||
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Total other expenses
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(18,398 | ) | (7,168 | ) | (113,269 | ) | ||||||
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Net loss
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(109,824 | ) | (125,733 | ) | (835,982 | ) | ||||||
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Noncontrolling interest in net loss
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37,706 | (5,650 | ) | 174,745 | ||||||||
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Net loss applicable to Sandstone Energy, L.L.C.
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$ | (147,530 | ) | $ | (120,083 | ) | $ | (1,010,727 | ) | |||
See summary of significant accounting policies and notes to unaudited consolidated financial statements.
SANDSTONE ENERGY, L.L.C.
(An Exploration Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY (DEFICIT)
(Unaudited)
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Total Sandstone Energy, LLC Members ‘Equity (Deficit)
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Noncontrolling Interest
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Total Members’ Equity (Deficit)
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Balance at May 15, 2006 (Inception)
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$
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-
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$
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-
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$
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-
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Net loss
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(70,750)
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-
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(70,750)
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Balance at December 31, 2006
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(70,750)
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-
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(70,750)
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Net loss
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(79,375)
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-
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(79,375)
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Balance at December 31, 2007
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(150,125)
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-
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(150,125)
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Net loss
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(195,509
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)
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-
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(345,634
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)
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Balance at December 31, 2008
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$
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(345,634
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)
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$
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-
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$
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(345,634
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)
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Contributions
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210,000
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210,000
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420,000
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Net loss
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(53,758
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)
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(577
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)
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(54,335
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)
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Balance at December 31, 2009
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(189,392)
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209,423
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20,031
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Contributions
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1,081,672
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1,081,671
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2,163,343
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Net loss
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(463,805
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)
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137,616
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(326,189
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)
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Balance at December 31, 2010
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428,475
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1,428,710
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1,857,185
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Distributions
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(25,273)
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(25,272
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)
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(50,545)
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Net loss
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(147,530
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)
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37,706
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(109,824
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)
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Balance at March 31, 2011
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$
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255,672
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$
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1,441,144
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$
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1,696,816
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See summary of significant accounting policies and notes to unaudited consolidated financial statements.
SANDSTONE ENERGY, L.L.C.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Period from | ||||||||||||
| Three Months
Ended March 31
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May 15, 2006 (Inception) to | |||||||||||
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2011
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2010
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(March 31, 2011
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Operating activities
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Net loss
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$ | (109,824 | ) | $ | (125,733 | ) | $ | (835,982 | ) | |||
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation, depletion and accretion
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439 | - | 1,611 | |||||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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198,862 | (23,006 | ) | (107,065 | ) | |||||||
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Accounts payable and accrued expenses
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(121,501 | ) | 14,132 | 121,105 | ||||||||
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Net cash used in operating activities
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(32,024 | ) | (134,607 | ) | (820,331 | ) | ||||||
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Cash flows from investing activities:
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Additions to oil and gas properties
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- | (244,563 | ) | (2,689,122 | ) | |||||||
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Disposition of oil and gas properties
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174,485 | - | 174,485 | |||||||||
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Net cash provided by (used in) investing activities
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174,485 | (244,563 | ) | (2,514,637 | ) | |||||||
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Cash flows from financing activities:
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Distributions to members
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(50,545 | ) | - | (50,545 | ) | |||||||
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Contributions from members
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- | - | 2,583,343 | |||||||||
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Borrowings under notes payable – related party
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130,000 | 363,564 | 767,500 | |||||||||
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Borrowings under notes payable
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- | - | 250,000 | |||||||||
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Payments on notes payable
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(18,000 | ) | (18,000 | ) | (126,000 | ) | ||||||
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Proceeds from third party advances
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- | - | 140,000 | |||||||||
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Payments on third party advances
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- | - | (25,000 | ) | ||||||||
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Net cash provided by financing activities
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61,455 | 345,564 | 3,539,298 | |||||||||
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Net change in cash and cash equivalents
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203,916 | (33,606 | ) | 204,330 | ||||||||
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Cash and cash equivalents, at beginning of period
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414 | 34,386 | - | |||||||||
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Cash and cash equivalents, at end of period
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$ | 204,330 | $ | 780 | $ | 204,330 | ||||||
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Supplemental cash flow information:
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Interest paid
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$ | - | $ | - | $ | - | ||||||
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Income taxes paid
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$ | - | $ | - | $ | - | ||||||
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Supplemental non-cash information:
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Increase in asset retirement obligation
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$ | - | $ | - | $ | 18,900 | ||||||
See summary of significant accounting policies and notes to unaudited consolidated financial statements.
SANDSTONE ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
1. ORGANIZATION
Sandstone Energy, L.L.C. (“Sandstone Energy” or “the Company”) is an oil and gas exploration and production company headquartered in the metropolitan area of Houston. The Company specializes in acquiring, exploring and developing oil and gas properties along the Gulf Coast of Texas and Louisiana. Sandstone Energy’s sole significant oil and gas asset (the “Lee County Prospect”) includes a 38.75% working interest in 2,315.6 gross acres in Lee County, Texas. The Company currently has two wells producing oil, the Vick #2 and the Alexander #1 on this property. Although the wells generated initial production, production to date has not been consistently sustained to establish proved reserves. These wells are operated by a third party.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Sandstone Energy have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with Eagle Ford’s Form 8-K filed on June 24, 2011 with the SEC with respect to the Acquisition described in Note 7. The consolidated financial statements include all accounts of Sandstone Energy and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
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.
Nature and Classification of the Noncontrolling Interest in the Consolidated Financial Statements
Sandstone Energy holds the controlling interest of an affiliated group. Sandstone Energy has a fifty percent (50%) ownership interest in each of the following consolidated subsidiaries as of March 31, 2011 and December 31, 2010. Sandstone Energy Partners I, LLC; Sandstone Energy Partners II, LLC; and Sandstone Energy Partners III, LLC
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 members’ equity. The noncontrolling interest in the current year’s income (loss) is segregated from the net income (loss) attributable to the controlling members. Noncontrolling equity interests in the consolidating 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Sandstone Energy's consolidated financial statements are based on a number of significant estimates, including the recoverability of unevaluated oil and gas properties, 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.
Exploration Stage Company
The Company is in the exploration stage in accordance with SEC guidance and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC) Topic 915 – Development Stage Entities. Its activities to date have been limited to capital formation, organization, and development of its business.
Cash and Cash Equivalents
Sandstone Energy 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
Sandstone Energy 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. Sandstone Energy 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 Sandstone Energy 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 any future development costs, are amortized using the units of production method over total estimated proved reserves
In applying the full cost method, Sandstone Energy 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. At March 31, 2011 and December 31, 2010 the Company has no proved reserves; thus an impairment test was not performed. The Company assessed the realizability of its unproved properties and determined that no impairment of unproved properties was necessary as of March 31 2011.
Asset Retirement Obligations
The Company follows the provisions of the FASB 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.
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For the Three Months Ended
March 31
|
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2011
|
2010
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|||||||
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Asset retirement liability at January 1
|
$ | 20,072 | $ | 6,300 | ||||
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Accretion expense
|
439 | - | ||||||
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Liabilities incurred from drilling
|
- | - | ||||||
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Liabilities settled—assets sold
|
- | - | ||||||
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Changes in estimates
|
- | - | ||||||
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Asset retirement liability at March 31,
|
$ | 20,511 | $ | 6,300 | ||||
Revenue and Cost Recognition
Sandstone Energy 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 Sandstone Energy is entitled based on its interest in the properties. Costs associated with production are expensed in the period incurred.
Accounts Receivable and Allowance for Doubtful Accounts
The Company establishes provisions for losses on accounts receivables if it is determined, that collection of all or a part of an outstanding balance is not probable. Collectability is reviewed regularly, and an allowance is established or adjusted, as necessary, using the specific identification method. As of March 31, 2011 and December 31, 2010, no allowance for doubtful accounts was deemed necessary.
Income Taxes
The Company is organized as a limited liability company and treated as a pass through entity for tax purposes and as such, is not an income tax paying entity. Accordingly, no provision has been made for income taxes.
Recent Accounting Pronouncements
Sandstone Energy does not expect that the adoption of any recently issued accounting pronouncements will have a significant impact on its results of operations, financial position or cash flow
3. LIQUIDITY AND GOING CONCERN
Since inception, the Company’s recurring operating costs have exceeded operating revenues. The Company is in the exploration stage and has not established a recurring source of revenues and requires a significant amount of additional capital to advance the development of its oil and gas properties. All production to date has been incidental to exploration activities. These conditions raise substantial doubt as to the Company’s 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. The Company is also actively attempting to raise funds through debt and equity transactions. The 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
All of Sandstone Energy’s properties are unevaluated and are not subject to amortization.
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Balance as of
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Balance as of
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|||||||||||||||
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Well Description
|
December 31, 2010
|
Additions
|
Dispositions
|
March 31, 2011
|
||||||||||||
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Vick 1, Lee County, TX
|
744,451 | - | (41,427 | ) | 703,024 | |||||||||||
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Vick 2, Lee County, TX
|
1,129,644 | - | - | 1,129,644 | ||||||||||||
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Alexander 1, Lee Co., TX
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833,927 | - | (133,058 | ) | 700,869 | |||||||||||
| 2,708,022 | - | (174,485 | ) | 2,533,537 | ||||||||||||
The Vick No: 1 well is currently a drilled and unevaluated well and was 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 being evaluated for re-entry to drill and test deeper zones. The Company has a 19.375% net working interest as of March 31, 2011.
The Vick No: A2 well is currently a drilled and unevaluated well and was drilled as a vertical well and then extended as a horizontal well. Although the well generated initial production, production to date has not been consistently sustained to establish proved reserves. Options to initiate production are being considered including drilling a new well with a perforated liner. The Company has a 19.375% net working interest as March 31, 2011.
The Alexander No: 1 well is currently a drilled and unevaluated well. Although the well generated initial production, production to date has not been consistently sustained to establish proved reserves. The Company has a 19.375% net working interest as of March 31, 2011.
During the three months ended March 31, 2011, the Company received a reimbursement of unused prepaid exploration costs from the third party operator of $174,485.
5. NOTES PAYABLE
|
March 31, 2011
|
December 31, 2010
|
|||||||
|
Promissory note to TDLOG – related party - interest at 8% due December 31, 2011; (1)
|
$
|
767,500
|
$
|
637,500
|
||||
|
Promissory note to Pierre Vorster - interest at 12.5% due November 18, 2011; (2)
|
|
124,000
|
|
142,000
|
||||
|
|
|
|||||||
|
Total notes payable
|
$
|
891,500
|
$
|
779,500
|
||||
|
Less current portion of debt
|
891,500
|
779,500
|
||||||
|
|
||||||||
|
Total notes payable – long term
|
$
|
-
|
$
|
-
|
||||
|
(1)
|
On November 10, 2009, the Company entered into a promissory note agreement with TDLOG, L.L.C. in the amount of $800,000, bearing interest at 8%. Principal and interest is due in full by December 31, 2011. The Company received proceeds of $10,000 and $627,500 in 2009 and 2010, respectively. The Company has received additional proceeds of $130,000 through March 31, 2011.
|
|
(2)
|
On November 18, 2008, the Company entered in a promissory note agreement with Pierre Vorster, an individual, in the amount of $250,000, bearing interest at 12.5%. Payment terms were for $30,000 on the one year anniversary of the note with $6,000 monthly payments thereafter until maturity in November 2011. Contemporaneously with the funding of the promissory note, Pierre Vorster received a one percent (1%) membership interest in Sandstone Energy L.L.C. This membership interest was not fair valued and recorded as a discount to the note payable as management concluded that its value was immaterial due to limited activity and development in progress at the time that the note agreement was signed.
|
6. THIRD PARTY ADVANCES
During 2006 and 2007, the Company received advances totaling $140,000 from three individuals for the purpose of acquiring oil and gas leases. These advances were non-interest bearing, short term in nature, with no set repayment terms. The Company paid $20,000, $20,000, and $5,000 on the advances in 2008, 2009, and 2010, respectively. The balance of the third party advances was $115,000 at both December 31, 2010 and March 31, 2011.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease expiring in June 2013, with rental payments of $1,767 per month. Rent expense was $5,301 and $5,301 for the three months ended March 31, 2011 and 2010, respectively.
The Company is involved, from time to time, in various legal proceedings arising out of the conduct of its business. Management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company’s results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s financial condition, results of operations, and cash flows.
8. SUBSEQUENT EVENTS
The Company received additional proceeds of $30,000 under the promissory note agreement with TDLOG, L.L.C. between March 31, 2011 and May 10, 2011.
On June 20, 2011, the Company sold all of its controlling membership interests to Eagle Ford Oil and Gas Corp. (“Eagle Ford”) in exchange for 17,587,113 shares of common stock of Eagle Ford. Following the acquisition, the shares issued to the Company constituted 82% of Eagle Ford’s outstanding common stock, resulting in a change of control in which the Company controls Eagle Ford post-acquisition.
On August 8 and August 11, 2011, Eagle Ford acquired the remaining 50% interests in each of the Sandstone partnerships and therefore owns 100% of the interests in these ventures as of those dates.
On September 30, 2011, two officers of Eagle Ford transferred indirect beneficially owned shares of Eagle Ford common stock in exchange for forgiveness of the outstanding balance of the Third Party Advances. The balance of these advances at September 30, 2011 was $115,000.
Management of the Company has evaluated all transactions through the financial statement issuance date for subsequent event disclosure consideration and concluded that no subsequent events have occurred that will require recognition in the consolidated financial statements or disclosures in the notes to the financial statements, other than the acquisition by Eagle Ford discussed above.