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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C., 20549
 

FORM 10-K
 
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011

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

Securities registered pursuant to Section 12 (b) of the Act:

NONE

Securities registered pursuant to Section 12 (g) of the Act:

Common Stock $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes    x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes    x No

Indicate by check mark whether the registrant (1) has 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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes   o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes    o No

Indicate by check mark if disclosure if delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K 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 the definitions 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 Act).
o Yes    x No

The number of outstanding shares of common stock, as of July 18, 2012, was 36,034,293
 
 

 
 
Table of Contents


 
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FORWARD LOOKING STATEMENTS

The statements included or incorporated by reference in this Annual Report of Eagle Ford Oil & Gas Corp. (“ECCE” or “Company”), 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. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. The Company is under no duty to update any of the forward-looking statements after the date of this report to conform its prior statements to actual results. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors including without limitation the following risk factors:

 
-
the cyclical nature of the natural gas and oil industries
     
 
-
our ability to obtain additional financing
     
 
-
our ability to successfully and profitably find, produce and market oil and natural gas
     
 
-
uncertainties associated with the United States and worldwide economies
     
 
-
substantial competition from larger companies
     
 
-
the loss of key personnel
     
 
-
operating interruptions (including leaks, explosions and lack of rig availability)

This list is not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the sections titled “Item 1. Description of the Business”, “Item 1.A. Risk Factors,” and “Item 7.-Management’s Discussion and Analysis” of this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

Available Information

The Company files annual, quarterly, current reports, proxy statements, and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy documents referred to in this Annual Report on Form 10-K that have been filed with the SEC at the SEC’s Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also obtain copies of our SEC filings by going to the SEC’s website at http://www.sec.gov.


OVERVIEW

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.
 
 
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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.

OUR OPERATIONS

The following table sets forth the Company’s costs incurred in oil and gas property acquisition, exploration and development activities for the twelve months ended December 31, 2011. All of the Company’s oil and gas properties (excluding accumulated depletion) are located in the United States.

 
Well Description
 
December 31,
2010
   
Additions
   
Impairment
   
December 31,
2011
 
 
                       
Vick 1, Lee County, TX
 
$
744,451
   
$
20,301
   
$
-
   
$
764,752
 
Vick 2, Lee County, TX
   
1,129,644
     
52,202
     
-
     
1,181,846
 
Alexander 1, Lee County, TX
   
833,927
     
41,949
     
-
     
875,876
 
Live Oak County, TX
   
-
     
222,832
     
(116,029)
     
106,803
 
Choctaw
   
-
     
100,000
     
-
     
100,000
 
 
 
$
2,708,022
   
$
437,284
   
$
(116,029)
   
$
3,029,277
 

LEE COUNTY, TX

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 December 31, 2011.

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. Options to complete and enhance the wells technical capabilities are being considered. The Company has a 38.75% net working interest as of December 31, 2011.

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 December 31, 2011.
 
 
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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 shows 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.

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 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.


COMPETITION

We encounter competition from other natural gas and oil companies in all areas of our operations, including the acquisition of exploratory prospects and proven properties. Many of our competitors are large, well-established companies that have been engaged in the natural gas and oil business for much longer than we have and possess substantially larger operating staffs and greater capital resources than we do. Our ability to explore for oil and natural gas reserves and to acquire additional properties in the future will be dependent upon our ability to conduct our operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. The Company is also affected by competition for drilling rigs and the availability of related equipment. In the past, the oil and natural gas industry has experienced shortages of drilling rigs, equipment, pipe and personnel, which has delayed development drilling and has caused significant price increases. The Company is unable to predict when, or if, such shortages may occur or how they would affect the drilling programs in the Company participates.
 
 
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OIL AND GAS EXPLORATION REGULATION

The Company’s oil and gas exploration, including future production and related operations are subject to extensive rules and regulations promulgated by federal and state agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry adds to our cost of doing business and affects our profitability. Because such rules and regulations are frequently amended or interpreted differently by regulatory agencies, we are unable to accurately predict the future cost or impact of complying with such laws.

The Company’s oil and gas exploration and future production operations are and will be affected by state and federal regulation of gas production, federal regulation of gas sold in interstate and intrastate commerce, state and federal regulations governing environmental quality and pollution control, state limits on allowable rates of production by a well or pro-ration unit and the amount of gas available for sale, state and federal regulations governing the availability of adequate pipeline and other transportation and processing facilities, and state and federal regulation governing the marketing of competitive fuels. For example, a productive gas well may be “shut-in” because of an over-supply of gas or lack of an available gas pipeline in the areas in which we may conduct operations. State and federal regulations generally are intended to prevent waste of oil and gas, protect rights to produce oil and gas between owners in a common reservoir, control the amount of oil and gas produced by assigning allowable rates of production and control contamination of the environment. Pipelines are subject to the jurisdiction of various federal, state and local agencies.

Regulation of Sale and Transportation of Oil

Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future.

Our sales of crude oil are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. The Federal Energy Regulatory Commission, or the FERC, regulates interstate oil pipeline transportation rates under the Interstate Commerce Act. In general, interstate oil pipeline rates must be cost-based, although settlement rates agreed to by all shippers are permitted and market-based rates may be permitted in certain circumstances. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system (based on inflation) for transportation rates for oil that allowed for an increase or decrease in the cost of transporting oil to the purchaser. A review of these regulations by the FERC in 2000 was successfully challenged on appeal by an association of oil pipelines. On remand, the FERC in February 2003 increased the index slightly, effective July 2001. Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any way that is of material difference from those of our competitors.

Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines’ published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors.

Regulation of Sale and Transportation of Natural Gas

Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 and regulations issued under those Acts by the FERC. In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Deregulation of wellhead natural gas sales began with the enactment of the Natural Gas Policy Act. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act. The Decontrol Act removed all Natural Gas Act and Natural Gas Policy Act price and non-price controls affecting wellhead sales of natural gas effective January 1, 1993.

FERC regulates interstate natural gas transportation rates and service conditions, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas. Since 1985, the FERC has endeavored to make natural gas transportation more accessible to natural gas buyers and sellers. The FERC has stated that open access policies are necessary to improve the competitive structure of the interstate natural gas pipeline industry and to create a regulatory framework that will put natural gas sellers into more direct contractual relations with natural gas buyers by, among other things, unbundling the sale of natural gas from the sale of transportation and storage
 
 
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services. Beginning in 1992, the FERC issued Order No. 636 and a series of related orders to implement its open access policies. As a result of the Order No. 636 program, the marketing and pricing of natural gas have been significantly altered. The interstate pipelines’ traditional role as wholesalers of natural gas has been eliminated and replaced by a structure under which pipelines provide transportation and storage service on an open access basis to others who buy and sell natural gas. Although the FERC’s orders do not directly regulate natural gas producers, they are intended to foster increased competition within all phases of the natural gas industry.

In 2000, the FERC issued Order No. 637 and subsequent orders, which imposed a number of additional reforms designed to enhance competition in natural gas markets. Among other things, Order No. 637 effected changes in FERC regulations relating to scheduling procedures, capacity segmentation, penalties, rights of first refusal and information reporting.

We cannot accurately predict whether the FERC’s actions will achieve the goal of increasing competition in markets in which our natural gas is sold. Additional proposals and proceedings that might affect the natural gas industry are pending before the FERC and the courts. The natural gas industry historically has been very heavily regulated. Therefore, we cannot provide any assurance that the less stringent regulatory approach recently established by the FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers.

Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states on shore and in state waters. Although its policy is still in flux, FERC has reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of getting natural gas to point of sale locations.

Intrastate natural gas transportation is also subject to regulation by state regulatory agencies. The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and scrutiny given to intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers within the state on a comparable basis, we believe that the regulation of similarly situated intrastate natural gas transportation in any states in which we operate and ship natural gas on an intrastate basis will not affect our operations in any way that is of material difference from those of our competitors. Like the regulation of interstate transportation rates, the regulation of intrastate transportation rates affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas.

Operating Hazards and Insurance
 
The oil and natural gas industry involves a variety of operating hazards and risks that could result in substantial losses from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. The Company may be liable for environmental damages caused by previous owners of property it purchases and leases. As a result, the Company may incur substantial liabilities to third parties or governmental entities, the payment of which could reduce or eliminate funds available for acquisitions, development or distributions, or result in the loss of properties. In addition, the Company participates in wells on a non-operated basis and therefore may be limited in its ability to control the risks associated with the operation of such wells.
 
In accordance with customary industry practices, the Company maintains insurance against some, but not all, potential losses. The Company does not obtain separate insurance on non-operated properties in which it holds and interest and such properties may not be insured. The Company cannot provide assurance that any insurance it obtains will be adequate to cover any losses or liabilities. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on the Company’s financial position and results of operations. 

ENVIRONMENTAL REGULATION

Our activities will be subject to existing federal, state and local laws and regulations governing environmental quality and pollution control. Our operations will be subject to stringent environmental regulation by state and federal authorities including the Environmental Protection Agency. Such regulation can increase the cost of such activities. In most instances, the regulatory requirements relate to water and air pollution control measures. Management believes that we are in substantial compliance with current applicable environmental laws and regulations.
 
 
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Waste Disposal

The Resource Conservation and Recovery Act (“RCRA”), and comparable state statutes, affect minerals exploration and production activities by imposing regulations on the generation, transportation, treatment, storage, disposal and cleanup of “hazardous wastes” and on the disposal of non-hazardous wastes. Under the auspices of the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements.

Comprehensive Environmental Response, Compensation and Liability

The federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) imposes joint and several liabilities for costs of investigation and remediation and for natural resource damages, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release into the environment of substances designated under CERCLA as hazardous substances (“Hazardous Substances”). These classes of persons or potentially responsible parties include the current and certain past owners and operators of a facility or property where there is or has been a release or threat of release of a Hazardous Substance and persons who disposed of or arranged for the disposal of the Hazardous Substances found at such a facility. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover the costs of such action. We may also in the future become an owner of facilities on which Hazardous Substances have been released by previous owners or operators. We may in the future be responsible under CERCLA for all or part of the costs to clean up facilities or property at which such substances have been released and for natural resource damages.

Air Emissions

Our operations are subject to local, state and federal regulations for the control of emissions of air pollution. Major sources of air pollutants are subject to more stringent, federally imposed permitting requirements. The Federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants at specified sources. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Federal Clean Air Act and associated state laws and regulations. Oil and gas operations may in certain circumstances and locations are subject to permits and restrictions under these statutes for emissions of air pollutants, including volatile organic compounds, nitrous oxides, and hydrogen sulfide. Alternatively, regulatory agencies could require us to forego construction, modification or operation of certain air emission sources.

Clean Water Act

The Clean Water Act (“CWA”) imposes restrictions and strict controls regarding the discharge of wastes, including mineral processing wastes, into waters of the United States, a term broadly defined. Permits must be obtained to discharge pollutants into federal waters. The CWA provides for civil, criminal and administrative penalties for unauthorized discharges of hazardous substances and other pollutants. It imposes substantial potential liability for the costs of removal or remediation associated with discharges of oil or hazardous substances. State laws governing discharges to water also provide varying civil, criminal and administrative penalties and impose liabilities in the case of a discharge of petroleum or it derivatives, or other hazardous substances, into state waters. In addition, the EPA has promulgated regulations that may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge of wastes, we may be liable for penalties and costs.

The Oil Pollution Act of 1990, or OPA, which amends and augments the Clean Water Act, establishes strict liability for owners and operators of facilities that are the site of a release of oil into waters of the United States. In addition, OPA and regulations promulgated pursuant thereto impose a variety of regulations on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills. OPA also requires certain oil and natural gas operators to develop, implement and maintain facility response plans, conduct annual spill training for certain employees and provide varying degrees of financial assurance.

National Environmental Policy Act

Oil and natural gas exploration and production activities on federal lands are subject to the National Environmental Policy Act, or NEPA. NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an Environmental Assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. All of our current exploration and production activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects.
 
 
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Endangered Species, Wetlands and Damages to Natural Resources

Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands, and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the CWA and CERCLA. Where takings of or harm to species or damages to wetlands, habitat, or natural resources occur or may occur, government entities or at times private parties may act to prevent oil and gas exploration or production or seek damages to species, habitat, or natural resources resulting from filling or construction or releases of oil, wastes, hazardous substances or other regulated materials.

OSHA and Other Laws and Regulations

We are subject to the requirements of the federal Occupational Safety and Health Act (OSHA) and comparable state statutes. The OSHA hazard communication standard, the Emergency Planning and Community Right to Know Act and similar state statutes require that we organize and/or disclose information about hazardous materials stored, used or produced in our operations.

Recent studies have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere. In response to these studies, many nations have agreed to limit emissions of “greenhouse gases” pursuant to the United Nations Framework Convention on Climate Change, also known as the “Kyoto Protocol.” Methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of oil and natural gas, and refined petroleum products, are “greenhouse gases” regulated by the Kyoto Protocol. Although the United States is not participating in the Kyoto Protocol, several states have adopted legislation and regulations to reduce emissions of greenhouse gases. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect our operations and demand for our products. Additionally, the U.S. Supreme Court has ruled, in Massachusetts, et al. v. EPA, that the U.S. Environmental Protection Agency abused its discretion under the Clean Air Act by refusing to regulate carbon dioxide emissions from mobile sources. This Supreme Court decision could result in federal regulation of carbon dioxide emissions and other greenhouse gases, and may affect the outcome of other climate change lawsuits pending in U.S. federal courts in a manner unfavorable to our industry. Currently, our operations are not adversely impacted by existing state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business.

Texas Railroad Commission

The State of Texas has promulgated certain legislative rules pertaining to exploration, development and production of oil and gas that are administered by the Texas Railroad Commission. The rules govern permitting for new drilling, inspection of wells, fiscal responsibility of operators, bonding wells, the disposal of solid waste, water discharge, spill prevention, liquid injection, waste disposal wells, schedules that determine the procedures for plugging and abandonment of wells, reclamation, annual reports and compliance with state and federal environmental protection laws. We believe that we will function in compliance with these rules.
 
Private Lawsuits

In addition to claims arising under state and federal statutes, where a release or spill of hazardous substances, oil and gas or oil and gas wastes have occurred private parties or landowners may bring lawsuits against oil and gas companies under state law. The plaintiffs may seek property damages, personal injury damages, remediation costs or injunctions to require remediation or restoration of contaminated property, soil, groundwater or surface water. In some cases, oil and gas operations are located near populated areas and emissions or accidental releases could affect the surrounding properties and population.

EMPLOYEES

In connection with the Acquisition, Paul L. Williams became our Chief Executive Officer, and Ralph “Sandy” Cunningham Jr., became our President and Chief Operating Officer, of the Company. Also, Mr. Williams and Thomas E. Lipar were added to our Board of Directors, with Mr. Lipar being elected the Chairman of the Board. Richard M. Adams, the Company’s former President and Chief Executive Officers, became our Chief Financial Officer and remained as a member of our Board of Directors.

On February 14, 2011, Imran Maniar, CPA, the Chief Financial Officer and a member of the Board of Directors of Eagle Ford Oil & Gas Corp resigned from ECCE.
 
 
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On December 12, 2011, Mr. Adams announced his resignation as Chief Financial Officer effective January 1, 2012, but remained on the Board of Directors.

On February 14, 2011, N. Wilson Thomas resumed as the Chief Financial Officer, a position he served in From November, 2007 until May 2010. Upon the completion of the merger with Sandstone in June, 2011, Mr. Thomas remained with the company in the position of Controller. On January 1, 2012, Mr. Thomas again resumed the position as Chief Financial Officer.

On July 18, 2011, Rick Bobigian resigned as a director from Eagle Ford Oil & Gas Corp.

ORGANIZATIONAL HISTORY

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, 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 minims.

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  
 
 
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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.

INSURANCE

We currently maintain insurance coverage in amounts that we deem reasonable for our current operations.

RESEARCH & DEVELOPMENT

During each of the last two fiscal years, the Company has not expended any capital on research and development activities.


An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that are facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks.

Risks Related to our Financial Condition

We are an early stage business and, as such, there is a risk of failure.

Any investment in ECCE should be considered a high-risk investment because investors will be placing funds at risk in an early stage business with unforeseen costs, expenses, competition, a history of operating losses and other problems to which start-up ventures are often subject. Investors should not invest in ECCE unless they can afford to lose their entire investment. Your investment must be considered in light of the risks, expenses, and difficulties encountered in establishing a new business in a highly competitive and mature industry. Our limited business history will make it difficult for you to analyze or to aid you in making an informed judgment concerning the merits of an investment in ECCE.

We currently have revenues, but we are not profitable.

For the year ended December 31, 2011, the Company had revenues of $242,613. During this period, the Company had a net loss of $6,218,915. There can be no assurance that the Company will generate positive cash flow from operations or have net income from operations in 2012 or thereafter.

If we are not able to raise additional funds or generate positive cash flows, we may not be able to continue as a going concern.

We have experienced losses and negative cash flows from operations since our inception. These conditions raise substantial doubt about our ability to continue as a going concern and management is attempting to raise additional capital to address our liquidity, or to sell or merge the company. There can be no assurance that we will ever be able to generate positive cash flow from operations.

We will need additional capital in 2012 to implement our business plan and meet our financial obligations.

At December 31, 2011 we had a working capital deficit of $4,333,140. We will need to raise additional capital during 2012 to fund general corporate working capital needs. Additionally, as of June 15, 2012, the Company has not paid principal and accrued interest on past due notes payable totaling of $3,018,399. ECCE owes $545,000 to the convertible bond owners, with a due date of July 26, 2011, and accrued interest of $93,905 which is to be paid in common stock at $0.90 per share. As the Company has no debt or equity funding commitments, we will need to rely upon best efforts financings. There can be no assurance that the Company will be successful in raising the required capital. 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.
 
 
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We will need to obtain additional financing to complete further exploration.

We will require significant additional financing in order to continue our exploration, development and production activities and our assessment of the commercial viability of our properties. Furthermore, if the costs of our planned exploration, development and production programs are greater than anticipated, we may have to seek additional funds through public or private share offerings or arrangements with partners. There can be no assurance that we will be successful in our efforts to raise these required funds, or on terms satisfactory to us. The continued exploration of properties and the development of our business will depend upon our ability to establish the commercial viability of our oil and gas properties and to ultimately develop cash flow from operations and reach profitable operations. Although we have generated revenue from operations, we are experiencing a negative cash flow. Accordingly, the only other sources of funds presently available to us may be through the sale of equity or through debt financing. It is possible that debt financing may not be an alternative to us, due to the general instability of the credit market in the current economic environment. Alternatively, we may finance our business by offering an interest in prospective oil and gas properties to be earned by another party or parties carrying out further exploration and development thereof or to obtain project or operating financing from financial institutions. If we are unable to obtain this additional financing, we will not be able to continue our business activities and our assessment of the commercial viability of our properties. Further, if we are able to establish that development of our properties are commercially viable, our inability to raise additional financing at this stage would result in our inability to place our properties into production and recover our investment.

Risks Related to our Business

We depend on successful exploration, development and acquisitions to maintain revenue in the future.

In general, the volume of production from natural gas and oil properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Except to the extent that we conduct successful exploration and development activities or acquire properties containing proved reserves, or both, our proved reserves will decline as reserves are produced. Our future natural gas and oil production is, therefore, highly dependent on our level of success in finding or acquiring additional reserves. Additionally, the business of exploring for, developing, or acquiring reserves is capital intensive. Recovery of our reserves, particularly undeveloped reserves, will require significant additional capital expenditures and successful drilling operations. Our ability to make the necessary capital investment to maintain or expand our asset base of natural gas and oil reserves will be impaired unless other external sources of capital become available. In addition, we may be required to find partners for any future exploratory activity. To the extent that others in the industry do not have the financial resources or choose not to participate in our exploration activities, we will be adversely affected.

Although certain of our oil and gas properties contain known reserves, we may not discover commercially exploitable quantities of oil or gas on other potential oil and gas properties that would enable us to enter into commercial production, achieve revenues and recover the money we spend on exploration.

There is no assurance that any prospective oil and gas exploration and development programs will result in establishment of reserves. Although our current oil and gas properties are in the production stage, future prospective properties may be only in the development stage and have no known body of reserves. Unproved or proved reserves on these properties may never be determined to be economical. We plan to conduct further exploration and development activities on properties, which may include the completion of feasibility studies necessary to evaluate whether a commercial reserve exists on any of the properties. There is a substantial risk that these exploration activities will not result in discoveries of commercially recoverable reserves of oil and gas. Any determination that properties contain commercially recoverable quantities of oil and gas may not be reached until such time that final comprehensive feasibility studies have been concluded that establish that a reserve is likely to be economic. There is a substantial risk that any preliminary or final feasibility studies carried out by us will not result in a positive determination that such properties can be commercially developed.

Our estimated reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
 
No one can measure underground accumulations of oil, natural gas and NGL in an exact way. Reserve engineering requires subjective estimates of underground accumulations of oil, natural gas and NGL and assumptions concerning future oil, natural gas and NGL prices, production levels and operating and development costs. As a result, estimated quantities of proved reserves and projections of future production rates and the timing of development expenditures may prove to be inaccurate. Independent petroleum engineering firms prepare estimates of our proved reserves. Some of our reserve estimates are made without the benefit of a lengthy production history, which are less reliable than estimates based on a lengthy production history. Also, we make certain assumptions regarding future oil,
 
 
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natural gas and NGL prices, production levels and operating and development costs that may prove incorrect. Any significant variance from these assumptions by actual figures could greatly affect our estimates of reserves, the economically recoverable quantities of oil, natural gas and NGL attributable to any particular group of properties, the classifications of reserves based on risk of recovery and estimates of the future net cash flows. Numerous changes over time to the assumptions on which our reserve estimates are based, as described above, often result in the actual quantities of oil, natural gas and NGL we ultimately recover being different from our reserve estimates.
 
The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated oil, natural gas and NGL reserves. We base the estimated discounted future net cash flows from our proved reserves on an unweighted average of the first-day-of-the month price for each month during the 12-month calendar year and year-end costs. However, actual future net cash flows from our oil and natural gas properties also will be affected by factors such as:
 
 
·
actual prices we receive for oil, natural gas and NGL;
 
·
the amount and timing of actual production;
 
·
the timing and success of development activities;
 
·
supply of and demand for oil, natural gas and NGL; and
 
·
changes in governmental regulations or taxation.
 
In addition, the 10% discount factor, required to be used under the provisions of applicable accounting standards when calculating discounted future net cash flows, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general.

Exploration activities on oil and gas properties may not be commercially successful, which could lead us to abandon our plans to develop the property and our investments in exploration.

Our long-term success depends on our ability to establish commercially recoverable quantities of oil and gas on our properties that can then be developed into commercially viable drilling operations. Oil and gas exploration is highly speculative in nature, involves many risks and is frequently non-productive. These risks include unusual or unexpected geologic formations, and the inability to obtain suitable or adequate machinery, equipment or labor. The success of oil and gas exploration is determined in part by the following factors:
 
 
·
identification of potential reserves based on superficial analysis;
 
·
availability of government-granted exploration permits;
 
·
the quality of management and geological and technical expertise; and
 
·
the capital available for exploration and development.

Substantial expenditures are required to establish proven and probable reserves through drilling and analysis, and to develop the drilling and processing facilities and infrastructure at any site chosen. Whether a property will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the property, such as size, grade and proximity to infrastructure; oil and gas prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of oil and gas and environmental protection. We may invest significant capital and resources in exploration activities and abandon such investments if we are unable to identify commercially exploitable oil and gas reserves. The decision to abandon a project may reduce the future trading price of our common stock and impair our ability to raise financing. We cannot provide any assurance to investors that we will discover or acquire any oil and gas reserves in sufficient quantities on any properties to justify commercial operations. Further, we will not be able to recover the funds that we may spend on exploration if we are not able to establish commercially recoverable quantities of oil and gas.

We actively seek to acquire oil and natural gas properties. Acquisitions involve potential risks that could adversely impact our future growth and our ability to remain a viable entity.
 
Any acquisition involves potential risks, including, among other things:
 
 
·
the risk that reserves expected to support the acquired assets may not be of the anticipated magnitude or may not be developed as anticipated;
 
·
the risk of title defects discovered after closing;
 
 
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·
inaccurate assumptions about revenues and costs, including synergies;
 
·
significant increases in our indebtedness and working capital requirements;
 
·
an inability to transition and integrate successfully or timely the businesses we acquire;
 
·
the cost of transition and integration of data systems and processes;
 
·
the potential environmental problems and costs;
 
·
the assumption of unknown liabilities;
 
·
limitations on rights to indemnity from the seller;
 
·
the diversion of management’s attention from other business concerns;
 
·
increased demands on existing personnel and on our corporate structure;
 
·
customer or key employee losses of the acquired businesses; and
 
·
the failure to realize expected growth or profitability

We are a new entrant into the oil and gas exploration and development industry without a profitable operating history.

Our recent activities have been limited to organizational efforts, obtaining working capital and acquiring and developing a very limited number of properties. As a result, there is limited information regarding production or revenue generation. Further, our future revenues may be limited.

The business of oil and gas exploration and development is subject to many risks and if oil and gas is found in economic production quantities, the potential profitability of future possible oil and gas ventures depends upon factors beyond our control. The potential profitability of oil and gas properties if economic quantities of oil and gas are found is dependent upon many factors and risks beyond our control, including, but not limited to: (i) unanticipated ground conditions; (ii) geological problems; (iii) drilling and other processing problems; (iv) the occurrence of unusual weather or operating conditions and other force majeure events; (v) lower than expected reserve quantities; (vi) accidents; (vii) delays in the receipt of or failure to receive necessary government permits; (viii) delays in transportation; (ix) labor disputes; (x) government permit restrictions and regulation restrictions; (xi) unavailability of materials and equipment; and (xii) the failure of equipment or drilling to operate in accordance with specifications or expectations.

Our drilling operations may not be successful.

In the event we acquire additional oil and gas properties, we intend to test certain zones in wellbores already drilled on the properties and if results are positive and capital is available, drill additional wells and begin production operations from existing and new wells. There can be no assurance that such well re-completion activities or future drilling activities will be successful, and we cannot be sure that our overall drilling success rate or our production operations within a particular area will ever come to fruition and, if it does, will not decline over time. We may not recover all or any portion of our capital investment in the wells or the underlying leaseholds. Unsuccessful drilling activities would have a material adverse effect upon our results of operations and financial condition. The cost of drilling, completing, and operating wells is often uncertain, and a number of factors can delay or prevent drilling operations including: (i) unexpected drilling conditions; (ii) pressure or irregularities in geological formations; (iii) equipment failures or accidents; (iv) adverse weather conditions; and (iv) shortages or delays in availability of drilling rigs and delivery of equipment.

Prospects that we decide to drill may not yield natural gas or oil in commercially viable quantities.

We describe some of our current prospects in this Annual Report. Our prospects are in various stages of preliminary evaluation and assessment and we have not reached the point where we will decide to drill at all on the subject prospects. However, the use of seismic data, historical drilling logs, offsetting well information, and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling and testing whether natural gas or oil will be present or, if present, whether natural gas or oil will be present in sufficient quantities or quality to recover drilling or completion costs or to be economically viable. In sum, the cost of drilling, completing and operating any wells is often uncertain and new wells may not be productive.

We may be unable to identify liabilities associated with the properties or obtain protection from sellers against them.

One of our growth strategies is to capitalize on opportunistic acquisitions of oil and natural gas reserves. However, our reviews of acquired properties are inherently incomplete because it generally is not feasible to review in depth every individual property involved in each acquisition. A detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Further, environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken. We may not be able to obtain indemnification or other protections from the sellers against such potential liabilities, which would have a material adverse effect upon our results of operations.
 
 
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The potential profitability of oil and gas ventures depends upon global political and market related factors beyond our control.

World prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These and other changes and events may materially affect our financial performance. The potential profitability of oil and gas properties is dependent on these and other factors beyond our control.

Production of oil and gas resources if found are dependent on numerous operational uncertainties specific to the area of the resource that affects its profitability.

Production area specifics affect profitability. Adverse weather conditions can hinder drilling operations and ongoing production work. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. Production and treatments on other wells in the area can have either a positive or negative effect on our production and wells. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The content of hydrocarbons is subject to change over the life of producing wells. The marketability of oil and gas from any specific reserve which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include, but are not limited to, the proximity and capacity of oil and gas pipelines, availability of room in the pipelines to accommodate additional production, processing and production equipment operating costs and equipment efficiency, market fluctuations of prices and oil and gas marketing relationships, local and state taxes, mineral owner and other royalties, land tenure, lease bonus costs and lease damage costs, allowable production, and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in us not receiving an adequate return on our invested capital.

We are dependent upon transportation and storage services provided by third parties.

We are dependent on the transportation and storage services offered by various interstate and intrastate pipeline companies for the delivery and sale of our oil and gas supplies. Both the performance of transportation and storage services by interstate pipelines and the rates charged for such services are subject to the jurisdiction of the Federal Energy Regulatory Commission or state regulatory agencies. An inability to obtain transportation and/or storage services at competitive rates could hinder our processing and marketing operations and/or affect our sales margins.

Our results of operations are dependent upon market prices for oil and gas, which fluctuate widely and are beyond our control.

If and when production from oil and gas properties is reached, our revenue, profitability, and cash flow depend upon the prices and demand for oil and natural gas. The markets for these commodities are very volatile and even relatively modest drops in prices can significantly affect our financial results and impede our growth. Prices received also will affect the amount of future cash flow available for capital expenditures and may affect our ability to raise additional capital. Lower prices may also affect the amount of natural gas and oil that can be economically produced from reserves either discovered or acquired. Factors that can cause price fluctuations include: (i) the level of consumer product demand; (ii) domestic and foreign governmental regulations; (iii) the price and availability of alternative fuels; (iv) technical advances affecting energy consumption; (v) proximity and capacity of oil and gas pipelines and other transportation facilities; (vi) political conditions in natural gas and oil producing regions; (vii) the domestic and foreign supply of natural gas and oil; (viii) the ability of members of Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; (ix) the price of foreign imports; and (x) overall domestic and global economic conditions.

The availability of a ready market for our oil and gas depends upon numerous factors beyond our control, including the extent of domestic production and importation of oil and gas, the relative status of the domestic and international economies, the proximity of our properties to gas gathering systems, the capacity of those systems, the marketing of other competitive fuels, fluctuations in seasonal demand and governmental regulation of production, refining, transportation and pricing of oil, natural gas and other fuels.
 
 
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The oil and gas industry in which we operate involves many industry related operating and implementation risks that can cause substantial losses, including, but not limited to, unproductive wells, natural disasters, facility and equipment problems and environmental hazards.

Our success largely depends on the success of our exploitation, exploration, development and production activities. Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control; including the risk that drilling will not result in commercially viable oil or natural gas production. Drilling for oil and natural gas can be unprofitable, not only from dry holes, but from productive wells that do not produce sufficient revenues to return a profit. In addition, our drilling and producing operations may be curtailed, delayed or canceled as a result of other drilling and production, weather and natural disaster, equipment and service failure, environmental and regulatory, and site specific related factors, including but not limited to: (i) fires; (ii) explosions; (iii) blow-outs and surface fractures; (iv) uncontrollable flows of underground natural gas, oil, or formation water; (v) natural disasters; (vi) facility and equipment failures; (vii) title problems; (viii) shortages or delivery delays of equipment and services; (ix) abnormal pressure formations; and (x) environmental hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases. 1(xi) weather related events such as hurricanes can cause disruption of deliveries or destruction of producing facilities, either on or off shore. Such damage may be to our facilities or to facilities operated by other companies needed for the delivery of our production.

If any of these events occur, we could incur substantial losses as a result of: (i) injury or loss of life; (ii) severe damage to and destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of our operations; or (vii) repairs necessary to resume operations.

If we were to experience any of these problems, it could affect well bores, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations. We may be affected by any of these events more than larger companies, since we have limited working capital.

Our producing properties are located in regions which make us vulnerable to risks associated with operating in a limited number of geographic areas, including the risk of damage or business interruptions from hurricanes.

Our properties are geographically located in the Texas Gulf Coast region. As a result, we may be affected by any delays or interruptions in production or transportation in these areas caused by governmental regulation, transportation capacity constraints, natural disasters, regional price fluctuations or other factors.

Such disturbances could in the future have any or all of the following adverse effects on our business:
 
 
·
interruptions to our operations as we suspend any production in advance of an approaching storm;
 
·
damage to our facilities and equipment, including damage that disrupts or delays any production; and
 
·
disruption to any transportation systems we may rely upon for delivery.

Terrorist attacks aimed at our energy operations could adversely affect our business.

The continued threat of terrorism and the impact of military and other government action have led and may lead to further increased volatility in prices for oil and natural gas and could affect these commodity markets or the financial markets used by us. In addition, the U.S. government has issued warnings that energy assets may be a future target of terrorist organizations. These developments have subjected our oil and natural gas operations to increased risks.

The oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring leases.

The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration activities during periods of low oil and natural gas market prices. Our larger competitors may be able to absorb the burden of present and future federal, state, local and other laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our industry, we may be at a disadvantage in bidding for exploratory prospects and producing oil and natural gas properties.
 
 
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We may not be able to keep pace with technological developments in our industry.

The natural gas and oil industry is characterized by rapid and significant technological advancements and introduction of new products and services which utilize new technologies. As others use or develop new technologies, we may be placed at a competitive disadvantage or competitive pressures may force us to implement those new technologies at substantial costs. In addition, other natural gas and oil companies may have greater financial, technical, and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we are able to. We may not be able to respond to these competitive pressures and implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies we use now or in the future were to become obsolete or if we are unable to use the most advanced commercially available technology, our business, financial condition, and results of operations could be materially adversely affected.

The marketability of natural resources will be affected by numerous factors beyond our control, which may result in us not receiving an adequate return on invested capital to be profitable or viable.

The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable.

Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our business operations.

Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend material amounts on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations.

We may not have enough insurance to cover all of the risks that we face and operations of prospects in which we participate may not maintain or may fail to obtain adequate insurance.

We cannot insure fully against pollution and environmental risks. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations. The impact of recent hurricanes has resulted in escalating insurance costs and less favorable coverage terms.

Oil and natural gas operations are subject to particular hazards incident to the drilling and production of oil and natural gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires and pollution and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operation. The occurrence of a significant adverse event that is not fully covered by insurance could result in the loss of our total investment in a particular prospect which could have a material adverse effect on our financial condition and results of operations

Any change to government regulation/administrative practices may have a negative impact on our ability to operate and our profitability.

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably.
 
 
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We may be unable to retain key employees or consultants or recruit additional qualified personnel.

Our extremely limited personnel means that we would be required to spend significant sums of money to locate and train new employees in the event any of our employees resign or terminate their employment with us for any reason. Due to our limited operating history and financial resources, we are entirely dependent on the continued service of Paul Williams, our Chief Executive Officer, Ralph “Sandy” Cunningham, our President, and N. Wilson Thomas, our Chief Financial Officer. Further, we do not have key man life insurance on either of these individuals. We may not have the financial resources to hire a replacement if one or both of our officers were to die. The loss of service of either of these employees could therefore significantly and adversely affect our operations.

We may experience difficulty in achieving and managing future growth.

We may not be successful in upgrading our technical, operations, and administrative resources or in increasing our ability to internally provide certain of the services currently provided by outside sources, and we may not be able to maintain or enter into new relationships with project partners and independent contractors. Our inability to achieve or manage growth may adversely affect our financial condition and results of operations.

Nevada law and our articles of incorporation may protect our directors from certain types of lawsuits.

Nevada law provides that our officers and directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as officers and directors. Our Bylaws permit us broad indemnification powers to all persons against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our officers and directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our officers and directors against claims, including claims arising out of their negligence, poor judgment, or other circumstances.
 
Risks Related to Our Common and Preferred Stock

Sales of a substantial number of shares of our common stock into the public market by stockholders may result in significant downward pressure on the price of our common stock and could affect your ability to realize the current trading price of our common stock.

Sales of a substantial number of shares of our common stock in the public market by stockholders could cause a reduction in the market price of our common stock. As of the date of this Annual Report, we have 36,034,293 shares of common stock issued and outstanding. As of the date of this Annual Report, there are no outstanding shares of our preferred stock. Any significant downward pressure on the price of our common stock as stockholders sell their shares of our common stock could encourage short sales by others. Any such short sales could place further downward pressure on the price of our common stock.

The trading price of our common stock on the OTC Bulletin Board will fluctuate significantly and stockholders may have difficulty reselling their shares.

Effective March 14, 2007, our shares of common stock commenced trading on the Over-the-County Bulletin Board. There is a volatility associated with Bulletin Board securities in general and the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: (i) disappointing results from our discovery or development efforts; (ii) failure to meet our revenue or profit goals or operating budget; (iii) decline in demand for our common stock; (iv) downward revisions in securities analysts’ estimates or changes in general market conditions; (v) technological innovations by competitors or in competing technologies; (vi) lack of funding generated for operations; (vii) investor perception of our industry or our prospects; and (viii) general economic trends.

In addition, stock markets have experienced price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock.

 
18

 
 
Additional issuance of equity securities may result in dilution to our existing stockholders.

Our Articles of Incorporation authorize the issuance of 75,000,000 shares of common stock. We have also issued preferred stock classes A, B, C and D, although only the Class D is still outstanding. The board of directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, your proportionate ownership interest and voting power will be decreased accordingly. Further, any such issuance could result in a change of control.

There is not now, and there may not ever be, an active market for the Company’s common stock.
 
There currently is a limited public market for the Company’s common stock. Further, although the common stock is currently quoted on the Over-the-County Bulletin Board, trading of its common stock may be extremely sporadic. For example, several days may pass before any shares may be traded. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of, the common stock. Accordingly, investors must assume they may have to bear the economic risk of an investment in the common stock for an indefinite period of time. This severely limits the liquidity of the common stock, and would likely have a material adverse effect on the market price of the common stock and on the Company’s ability to raise additional capital.

The Company cannot assure you that our common stock will become liquid or that the common stock will be listed on a securities exchange.
 
Until the common stock is listed on an exchange, the Company expects its common stock to remain eligible for quotation on the Over-the-County Bulletin Board, or on another over-the-counter quotation system, or in the “pink sheets.” In those venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of the common stock. In addition, if the Company fails to meet the criteria set forth in the SEC regulations, various requirements would be imposed by law on broker-dealers who sell the Company’s securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling the common stock, which may further affect the liquidity of the common stock. This would also make it more difficult for the Company to raise additional capital.

Our common stock is classified as a “penny stock” under SEC rules which limits the market for our common stock.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer, and sales person in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for stock that becomes subject to those penny stock rules. If a trading market for our common stock develops, our common stock will probably become subject to the penny stock rules, and shareholders may have difficulty in selling their shares.

We presently do not intend to pay cash dividends on our common stock.

We currently anticipate that no cash dividends will be paid on the common stock in the foreseeable future. Therefore, prospective investors who anticipate the need for immediate income by way of cash dividends from their investment should not purchase our common stock.


None.
 
 
19

 
 

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 years 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.

Our principal assets are oil and gas properties, principally a 1% working interest in oil and gas producing properties located in Live Oak County, Texas. We also have three wells that are unevaluated in Lee County, Texas.


We have not paid our property taxes for 2007, 2008 or 2009 on the Wilson Field in Nueces County, Texas. The County has taken legal proceedings to collect those taxes and has placed tax liens on the property. In the sale of the Wilson Field property to Samurai Corp., ECCE agreed to pay the property taxes for 2007, 2008 and 2009, while Samurai Corp assumed the liability for 2010 property taxes. The balance due is $45,602 as of December 31, 2011.

On February 28, 2010 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, although discussions continue.

 
None.

 
20

 

PART II

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Since March 14, 2007, our shares of common stock have traded on the Over-the-Counter Bulletin Board under the symbol: “ECCE.OB”. The market for our common stock is and will be limited and can be volatile. The following table sets forth the high and low bid prices relating to our common stock on a quarterly basis for the periods indicated as compiled by Pink Sheets LLC. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.

Quarter Ended
 
High Bid
   
Low Bid
 
December 31, 2011
  $ 0.50     $ 0.14  
September 30, 2011
  $ 0.75     $ 0.14  
June 30, 2011
  $ 1.00     $ 0.25  
March 31, 2011
  $ 2.20     $ 0.41  
December 31, 2010
  $ 2.45     $ 0.10  
September 30, 2010
  $ 1.50     $ 0.07  
June 30, 2010
  $ 1.50     $ 0.06  
March 31, 2010
  $ 0.19     $ 0.05  

As of June 15, 2012, we had 250 shareholders of record.

DIVIDEND POLICY

No dividends have ever been declared by the board of directors on our common stock. We do not intend to pay cash dividends on our common stock in the foreseeable future.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS

As of the date of this Annual Report, we have one equity compensation plan titled the 2005 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Awards Plan (the “Plan”). On December 14, 2005, our board of directors approved and adopted the Plan. The Plan provides for the issuance of 100,000 shares of common stock. As of the date of this Annual Report, we have not granted any options under the Plan or any plan.

RECENT SALES OF UNREGISTERED SECURITIES

As of the date of this Annual Report and during fiscal years ended December 31, 2011 and 2010, to provide capital, we sold stock in private placement offerings, issued stock in exchange for our debts or pursuant to contractual agreements as set forth below. The issuances of these equity securities were consummated pursuant to Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder on the basis that such transactions did not involve a public offering and the offerees were sophisticated, accredited investors with access to the kind of information that registration would provide. The recipients of these securities represented its intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. Unless otherwise noted, no sales commissions were paid.

Common Stock

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.
 
 
21

 

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 non-controlling interest was recognized as an adjustment to additional paid-in-capital.

Common stock sales

During July 2011, the Company sold 1,283,781 shares of restricted common stock in a private placement for gross proceeds of $450,634. No placement costs were incurred.

During August 2011, the Company sold 45,455 shares of restricted common stock in a private placement for gross proceeds of $15,000. No placement costs were incurred.

During September 2011, the Company sold 444,211 shares of restricted common stock in a private placement for gross proceeds of $85,200. No placement costs were incurred.

During November 2011, the Company sold 245,359 shares of restricted common stock in a private placement for gross proceeds of $67,617.

During December 2011, the Company sold 402,899 shares of restricted common stock in a private placement for gross proceeds of $82,000.

Common stock issued for exchange of debt and accounts payable

During July 2011, the Company issued 142,337 shares of common stock, with a fair market value of $106,753, based on the closing market price of the Company’s common stock, to settle $68,322 of notes payable and accrued interest. The transaction resulted in a loss on extinguishment of debt of $38,431.

During September 2011, the Company issued 276,140 shares of common stock, with a fair market value of $55,322, based on the closing market price of the Company’s common stock, to settle $97,994 of notes payable and accrued interest, resulting in a gain on extinguishment of debt of $42,672.

During September 2011, the Company issued 20,000 shares of common stock, with a fair market value of $3,000, based on the closing market price of the Company’s common stock, to settle $10,000 of accounts payable relating to investor relations services performed, resulting in a gain on extinguishment of debt of $7,000.

Common stock issued for services

During July 2011 the Company issued 11,906 shares of common stock, with a fair market value of $7,739, based on the closing market price of the Company’s common stock, for legal services performed.

Also during July 2011, the Company issued 200,000 shares of common stock, with a fair market value of $150,000, based on the closing market price of the Company’s common stock, for services performed.

During September 2011, the Company issued 250,000 shares of restricted stock, with a fair market value of $37,500, based on the closing market price of the Company’s common stock, for future private placement services to be performed.

Contributed capital for debt extinguishment and forgiveness

During July 2011, an officer of Eagle Ford agreed to waive interest of $472 and principal of $10,077 on his notes payable issued by Eagle Ford. The forgiveness of this notes payable, related party was recorded as a contribution of capital (See Notes 4 and 5).
 
 
22

 
 
On September 30, 2011, two officers of Eagle Ford transferred beneficially owned shares of Eagle Ford common stock with a fair value of $32,683 at the date of the transfer, in exchange for forgiveness of the $115,000 outstanding balance of the third party advances, resulting in a gain from settlement of the third party advances of $82,317, which is included in gain on settlement of debt in the accompanying consolidated income statement. The $32,683 fair value of the transferred beneficially owned shares is accounted for as additional paid-in-capital.

Preferred Stock

There was no preferred stock issued during the years ended December 31, 2011 and 2010.

Description of Our Preferred Stock

In addition to our common stock, we are authorized to issue up to 10,000,000 shares of preferred stock, par value $0.001. All outstanding Series A, B, C and D shares were converted to common shares before the year ended December 31, 2011.

Series D Preferred Stock

On June 20, 2011, the Company completed the conversion of its Preferred D stock along with all accrued interest for those shares, issuing 363,698 shares of common stock and warrants to purchase 1,000,000 shares of common stock at an exercise price of $0.50 per share in exchange for 727,396 shares of Preferred D stock. The conversion eliminated the last outstanding preferred stock of the Company and was completed before the Acquisition by Sandstone.

Warrants

On June 20, 2011, the Company granted 1,000,000 warrants in connection with the conversion of Eagle Ford’s convertible preferred shares prior to the Acquisition by Sandstone (see Note 9). 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 FASB ASC Topic No. 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 December 31, 2011 and determined the fair value to be $219,582. The decrease in fair value has been recognized as an unrealized gain on the change in derivative value of $219,098 for the twelve months ended December 31, 2011.

Warrant activity during the twelve months ended December 31, 2011 is as follows:

   
Warrants
   
Weighted-Average Exercise Price
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2011
   
-
   
$
-
   
$
-
 
Granted
   
1,000,000
     
0.50
     
-
 
Exercised
   
-
     
-
     
-
 
Expired
   
-
   
$
-
   
$
-
 
Outstanding and exercisable at December 31, 2011
   
1,000,000
   
$
0.50
   
$
-
 

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.
 
 
23

 
 
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 8. As of December 31, 2011, all warrants outstanding and exercisable had an intrinsic value of $0, based on the trading price of Eagle Ford’s common stock of $0.22 per share.


Not required.
 
 
24

 


The summarized financial data set forth below is derived from and should be read in conjunction with our audited consolidated financial statements for fiscal years ended December 31, 2011 and 2010, including the notes to those consolidated financial statements which are included in this Annual Report. The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this Annual Report, particularly in the section entitled “Risk Factors”. Our audited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has negative working capital and has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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.

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.

Fiscal Year Ended December 31, 2011 Compared to Fiscal Year Ended December 31, 2010

Our net loss applicable to common stockholders for 2011 was $6,204,323 or $0.26 per share compared to a net loss of $463,805 or $0.03 per share for the year ended 2010 (an increase of $5,740,518). The net loss for 2011 was $6,218,915, compared to $326,189 in 2010.

During 2011, we generated revenue of $242,613 compared to revenue of $334,113 during 2010 (a decrease of $91,500). The decrease in revenues during 2011 compared to 2010 was attributable to a decline in total production sales from 3,742 barrels oil equivalent (“BOE”) in 2010 to 1,847 BOE in 2011, resulting from depletion and the problems incurred in developing the Live Oak and Lee County fields.

During 2011, we incurred operating expenses of $1,420,766 compared to $617,007 incurred during 2010 (an increase of $803,759). These operating expenses incurred during fiscal year ended December 31, 2011 consisted of: (i) General and administrative expenses of $1,242,635 (2010: $565,786); (ii) Depreciation, depletion and accretion of $13,463 (2010: $1,172); (iii) Impairment of oil & gas properties expense of $116,021 (2010: $0.00); and (iv) Lease operating expenses of $48,647 (2010: $50,049).
 
Salaries and compensation expenses, professional and consulting fees, and general and administrative expenses incurred during 2011 increased primarily due to the increase in compliance costs as a public company and consulting fees related to the reverse merger and other post merger costs. General and administrative expenses generally include corporate overhead, financial and administrative contract services, marketing, and consulting costs.

Depreciation and depletion of oil and gas properties decreased during 2011 primarily due to the decline in gas production (8,646 mcf) and a small increase in oil (4 bbl) production from our Wilson properties, and as a result of the sale of that field. Production in the Live Oak County property began during the quarter ending December 31, 2010.
 
 
25

 

Our lease operating expenses decreased during fiscal year ended December 31, 2011, and were $48,647 which compares to $50,049 for the year ended December 31, 2010.

Interest expense of $240,067 (2010: $43,295) increased by $196,772 during 2011 due to the increased debt resulting from the short-term obligations incurred in 2011 and 2010 for the purchase of our oil and gas properties, as well as debt incurred to finance working capital activities.

During 2011, the Company evaluated goodwill for impairment and determined the goodwill was fully impaired amounts to $5,125,081 relating to the acquisition, which did not exist in the prior year period,.
 
 
During 2011, the other income was also increased by $219,098 due to unrealized gain on change in derivative value and $105,288 due to gain on settlement of debt, which did not exist in the prior year period,

LIQUIDITY AND CAPITAL RESOURCES

Balance Sheet Data

At December 31, 2011, our current assets were $104,347 and our current liabilities were $4,437,487 which resulted in a working capital deficiency of $4,333,140. At December 31, 2011, our total liabilities were $4,681,871 consisting of: (i) $368,165 in accounts payable - trade; (ii) $745,055 in accrued expenses; (iii) $83,058 in accrued expenses – related party; (iv) $1,878,709 in notes payable to third parties, current; (v) $817,500 in short-term debt – related parties; (vi) $545,000 in convertible debentures; (vii) $219,582 in derivative liabilities; and (viii) $24,802 in asset retirement obligations.

Stockholders’ equity decreased from $1,857,185 at December 31, 2010 to a deficit of $1,528,964 as of December 31, 2011 ($3,386,149 decrease). The decrease was primarily due to the write-off of goodwill related to the Reverse Acquisition.

Cash Flows from Operating Activities

Cash flows used by operations were $663,628 during the year ended December 31, 2011, compared to net cash used for operations of $441,066 during the prior year period, which was an increase in cash used in operations of $222,562, primarily due to higher operating expenses, including higher general and administrative expenses.

Cash Flows from Investing Activities

The Company used net cash for investing activities of $111,285 during year ended December 31, 2011, compared to net cash used for investing activities of $2,306,749 during the prior year period, which was a decrease in cash used in investing activities of $2,195,464. This decrease in cash used is primarily due to reduced capital expenditures on oil and gas properties.

Cash Flows from Financing Activities

The Company received cash from financing activities of $797,911 during the year ended December 31, 2011, compared to net cash from financing activities of $2,713,843 during the prior year period, which was a decrease in from financing activities of $1,915,932. This decrease in cash from financing activities is related to the reduced proceeds from sale of our common stock. The $797,911 cash received from financing activities during the year ended December 31, 2011 primarily consists of cash proceeds from sales of common stock of $689,911 and proceeds from issuance of short-term notes to a related party of $180,000 and partially offset by $72,000 repayments of short-term debt.
 
 
We expect that working capital requirements will continue to be funded through a combination of our future revenues we expect to generate on various properties, loans and further issuances of securities. Our working capital requirements are expected to increase in line with the growth of our business. Since inception, our working capital needs have been met through operating activities and from financings and loans from individual investors and related entities. ECCE does not anticipate future funds being available from related entities. We anticipate that additional financings and loans will be required to sustain operations and acquire development properties in the future.
 
 
26

 

There can be no assurance that the Company will be successful in raising the required capital or that related parties will continue to advance funds to the Company. The failure to raise sufficient capital through future debt or equity financings or otherwise will cause the Company to curtail operations and result in the failure of our business.
 
WORKING CAPITAL NEEDS

At December 31, 2011, we had a working capital deficit of $4,333,140. We will need to raise additional capital during 2012 to develop the oil and gas properties and fund general corporate working capital needs. ECCE has notes payable of $1,808,709, including accrued interest of $ 405,923 , that were past due as of December 31, 2011, notes payable of (i) $ 817,500 note which was due to related party on December 31, 2012, and as of that date has accrued interest of $83,058, ( (ii) $70,000 note payable which will become due on November 18, 2012 and as of December 31, 2011 has accrued interest of $72,925 and (iii) convertible debentures of $545,000 that was payable in July 2011 and which is as of December 31, 2011 accrued interest of $93,905. As the Company has no debt or equity funding commitments, we will need to rely upon best efforts financings. There can be no assurance that the Company will be successful in raising the required capital. 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.

MATERIAL COMMITMENTS

   
Payments due by period
 
Contractual Obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Long Term Debt
    -       -       -       -       -  
Convertible Bonds
    5     $ 545,000       -       -       -  
Short Term Notes
    16       2,696,209       -       -       -  
Asset Retirement Obligations
    4       -       -       -     $ 24,802  
Total
          $ 3,241,209       -       -     $ 24,802  

PURCHASE OF SIGNIFICANT EQUIPMENT

We do not intend to purchase any significant equipment during the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this Annual Report, 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.

RECENT ACCOUNTING PRONOUNCEMENTS

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.


The Company’s consolidated financial statements and footnotes are set forth on pages F-1 through F-22.
 
 
27

 


 
F-1

 

 
Board of Directors and Stockholders of
Eagle Ford oil & Gas Corp.
League City, Texas
 
We have audited the accompanying consolidated balance sheet of Eagle Ford oil & Gas Corp. and its subsidiaries (the “Company”), as of December 31, 2011 and 2010, and the related consolidated statements of operations, deficiency in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We have conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eagle Ford oil & Gas Corp. and its subsidiaries as of December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, and has an accumulated deficit as of December 31, 2011 and 2010, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
  /s/ RBSM LLP  
 
New York, New York
July 18, 2012
 
F-2

 

EAGLE FORD OIL AND GAS CORP.
 
 
 
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 23,412     $ 414  
Accounts receivable - production
    48,175       305,927  
Prepaid expenses
    32,760       -  
Total current assets
    104,347       306,341  
                 
Oil and gas properties, using full cost accounting                
Costs subject to amortization
    106 ,500       -  
Costs not subject to amortization
    2,822,777       2,708,022  
Pipeline
    30,839         -
Less accumulated depreciation and depletion
    (11,556 )     -  
Total property and equipment
    2,948,560       2,708,022  
                 
Deposit
    100,000       -  
TOTAL ASSETS
  $ 3,152,907     $ 3,014,363  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
               
                 
CURRENT LIABILITIES
               
Accounts payable - trade
  $ 368,165     $ 147,736  
Accrued expenses
    745,055       73,729  
Accrued expenses - related parties
    83,058       21,141  
Third party advances
    -       115,000  
Notes payable, current portion
    1,878,709       142,000  
Notes payable to related parties, current portion
    817,500       637,500  
Convertible debentures
    545,000       -  
TOTAL CURRENT LIABILITIES
    4,437,487       1,137,106  
                 
LONG-TERM LIABILITIES
               
Derivative liability
    219,582       -  
Asset retirement obligations
    24,802       20,072  
TOTAL LONG-TERM LIABILITIES
    244,384       20,072  
                 
TOTAL LIABILITIES
    4,681,871       1,157,178  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY ((DEFICIT)
               
Preferred stock, undesignated, 10,000,000 shares authorized, none issued and outstanding
    -       -  
Common stock, $0.001 par value, 75,000,000 shares authorized, 34,094,054 and 17,857,113 shares issued and outstanding as of December 31, 2011 and 2010, respectively
    34,094       17,857  
Additional paid-in-capital
    5,519,054       1,273,815  
Accumulated deficit
    (7,082,112 )     (863,197 )
Total Eagle Ford Oil & Gas Corp. shareholders’ (deficit) equity
    (1,528,964 )     428,475  
Non-controlling interest
    -       1,428,710  
TOTAL SHAREHOLDERS’ (DEFICIT) EQUITY
    (1,528,964 )     1,857,185  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ((DEFICIT)
  $ 3,152,907     $ 3,014,363  

See summary of significant accounting policies and notes to consolidated financial statements.
 
 
F-3

 
 
EAGLE FORD OIL AND GAS CORP.
 
   
For the Year Ended
 
   
December 31,
 
   
2011
   
2010
 
             
REVENUE
  $ 242,613     $ 334,113  
                 
OPERATING EXPENSES
               
Lease operating expenses
    48,647       50,049  
General and administrative expenses
    1,242,635       565,786  
Accretion of asset retirement obligation
    1,907       1,172  
Depreciation and depletion
    11,556       -  
Impairment of oil and gas property
    116,021       -  
Total operating expenses
    1,420,766       617,007  
                 
Net operating loss
    (1,178,153 )     (282,894 )
                 
OTHER INCOME (EXPENSE)
               
Impairment of goodwill
    (5,125,081 )     -  
Interest expense
    (240,067 )     (43,295 )
Gain on settlement of debt
    105,288       -  
Unrealized gain on change in warrant derivative value
    219,098       -  
Total other expense
    (5,040,762 )     (43,295 )
                 
Net loss
    (6,218,915 )     (326,189 )
                 
Non-controlling interest in net income (loss)
    14,592       (137,616 )
                 
Net loss attributable to common shareholders
  $ (6,204,323 )   $ (463,805 )
                 
Basic and diluted net loss per share
  $ (0.26 )   $ (0.03 )
                 
Weighted average shares outstanding – basic and diluted
    24,228,293       17,857,113  
 
See summary of significant accounting policies and notes to consolidated financial statements.
 
 
F-4

 
 
EAGLE FORD OIL & GAS CORP.
For the Two Years Ended December 31, 2011

   
Common Stock
   
Additional
Paid-in
    Accumulated    
Non-
controlling
   
Total
Shareholders’
Equity
 
   
Shares
   
Par Value
   
Capital
   
Deficit
   
Interest
   
(Deficit)
 
                                     
Balance, December 31, 2009 (Recapitalized)
    17,857,113     $ 17,857     $ 1,273,815     $ (399,392 )   $ 1,291,094     $ 2,183,374  
                                                 
Net loss
    -       -       -       (463,805 )     137,616       (326,189 )
                                                 
Balance, December 31, 2010
    17,857,113       17,857       1,273,815       (863,197 )     1,428,710       1,857,185  
                                                 
Distributions to shareholders
    -       -       (50,545 )     -       -       (50,545 )
                                                 
Shares issued in Reverse Acquisition
    3,945,027       3,945       1,771,317       -       -       1,775,262  
                                                 
Common shares issued for cash
    2,421,411       2,421       687,490       -       -       689,911  
                                                 
Common shares issued for conversion of debt
    418,477       419       161,656       -       -       162,075  
                                                 
Common shares issued for conversion of payable to stock
    20,000       20       2,980       -       -       3,000  
                                                 
Common shares issued for services
    211,906       212       157,527       -       -       157,739  
                                                 
Common shares issued for deferred financing costs
    250,000       250       37,250       -       -       37,500  
                                                 
Capital contribution for debt forgiveness
                    10,549                       10,549  
                                                 
Capital contribution for debt extinguishment
    -       -       32,683       -       -       32,683  
                                                 
Acquisition of non-controlling interest
    8,970,120       8,970       1,434,332       -       (1,443,302 )     -  
                                                 
Net loss
    -       -       -       (6,218,915 )     14,592       (6,204,323 )
                                                 
Balance, December 31, 2011
    34,094,054     $ 34,094     $ 5,519,054     $ (7,082,112 )   $ -     $ (1,528,964 )
 
See summary of significant accounting policies and notes to consolidated financial statements.
 
 
F-5

 
 
EAGLE FORD OIL & GAS CORP.

   
For the Year Ended
 
   
December 31, 
 
     2011     2010  
Cash flows from operating activities:
           
Net loss
  $ (6,218,915 )   $ (326,189 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and depletion
    11,556       -  
Accretion of asset retirement obligation
    1,907       1,172  
Stock based compensation
    195,239       -  
Impairment of goodwill
    5,125,081       -  
Impairment of oil and gas properties
    116,029       -  
Gain on derivative
    (219,098 )     -  
Gain on settlement of liabilities
    (105,288 )     -  
Amortization of deferred costs
    25,958       -  
Changes in operating assets and liabilities:
               
Accounts receivable - production
    259,252       (305,927 )
Deposit
    (100,000 )     -  
Prepaid expenses
    (22,065 )     -  
Accounts payable and accrued expenses
    183,658       189,878  
Accrued expenses to related parties
    83,058       -  
Net cash used in operating activities
    (663,628 )     (441,066 )
Cash flows from investing activities:
               
Purchase of oil and gas properties
    (112,117 )     (2,306,749 )
Cash received on acquisition
    832       -  
Net cash used in investing activities
    (111,285 )     (2,306,749 )
Cash flows from financing activities:
               
Contributions from Controlling Members
    -       1,081,672  
Contributions from Noncontrolling Members
    -       1,081,671  
Proceeds from sale of common stock
    689,911       -  
Proceeds from refund of cancelled insurance premiums financing
    -       -  
Proceeds from issuance of short term debt, related party
    180,000       -  
Proceeds from issuance of short term debt
    -       627,500  
Payments made on short term debt
    (72,000 )     (72,000 )
Distributions to shareholders
    -       (5,000 )
Net cash provided by financing activities
    797,911       2,713,843  
Net change in cash and cash equivalents
    22,998       (33,972 )
Cash and cash equivalents, at beginning of period
    414       34,386  
Cash and cash equivalents, at end of period
  $ 23,412     $ 414  
Supplemental cash flow information:
               
Interest paid
  $ -     $ -  
Income taxes paid
  $ -     $ -  
                 
Non-cash investing and financial activities:
               
Common stock issued for Reverse Acquisition
  $ 1,775,262     $ -  
Change in asset retirement obligation
  $ 2,512     $ 12,600  
Common shares issued to settle notes payable
  $ 162,075     $ -  
Common shares issued to settle accounts payable
  $ 3,000     $ -  
Common shares issued to purchase non-controlling interest
  $ 2,780,737     $ -  
Debt and accrued interest forgiven by officer recorded as contributed capital
  $ 10,549     $ -  
Personal shares exchanged by officer to settle advances payable
  $ 32,683     $ -  
Distribution to shareholder
  $ 50,545     $ -  
Oil & gas properties purchase but payment outstanding
  $ 20,048     $ -  
Common shares issued to the members of Sandstone Energy, LLC
  $ 1,291,672     $ -  
Net Liabilities assumed on merger
  $ 3,642,475     $ -  
Initial derivative liability
  $ 438,680     $ -  

See summary of significant accounting policies and notes to consolidated financial statements
 
 
F-6

 
 
EAGLE FORD OIL AND GAS CORP.
For the Years Ended December 31, 2011 and 2010

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
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.

Consolidation

The accompanying consolidated financial statements include all accounts of ECCE, and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated 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 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.
 
 
F-7

 

Reclassifications

Certain reclassifications have been made in the prior period consolidated financial statements to conform to the current period presentation.

Cash and Cash Equivalents

ECCE considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

Oil and Gas Properties, Full Cost Method

ECCE uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized.

Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities are capitalized as oil and gas property costs. Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. ECCE assesses the 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 ECCE to obtain funds to finance such exploration and development. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.

Costs of oil and gas properties are amortized using the units of production method. Amortization expense calculated per equivalent physical unit of production amounted to $3.88 and $0 per barrel oil equivalent for the years ended December 31, 2011 and 2010, respectively.

In applying the full cost method, ECCE 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. Impairment costs of $116,021 and $0 were recorded during the years ended December 31, 2011 and 2010, respectively.

Revenue and Cost Recognition

ECCE recognizes sales revenues, net of royalties and net profits interests, based on the amount of gas, oil and condensate sold to purchasers when delivery to the purchaser has occurred and title has transferred. This occurs when production has been delivered to a pipeline. The Company follows the sales method to account for natural gas imbalances. Sales may result in more or less than the Company’s share of pro-rata production from certain wells. When natural gas sales volumes exceed the Company’s entitled share and the accumulated overproduced balance exceeds the Company’s share of the remaining estimated proved natural gas reserves for a given property, the Company will record a liability. Historically, sales volumes have not materially differed from the Company’s entitled share of natural gas production and the Company did not have a material imbalance position in terms of volumes or values at December 31, 2011 or 2010. Costs associated with production are expensed in the period incurred.

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.
 
 
F-8

 

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.

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 December 31, 2011 and December 31, 2010, 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 December 31, 2011, cash balances in interest-bearing accounts are zero.

Sales to a single customer comprised 73% and 100% of Eagle Ford’s total oil and gas revenues for the twelve months ended December 31, 2011 and 2010, respectively. At December 31, 2011 and December 31, 2010, Eagle Ford’s accounts receivable from its primary customer was $35,331 and $305,927, 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.

Income Taxes

ECCE is a taxable entity and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the temporary differences reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Interest and penalties associated with income taxes are included in selling, general and administrative expense.

ECCE has adopted ASC Topic 740 “Accounting for Uncertainty in Income Taxes” which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its consolidated financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740 states that a tax benefit from an uncertain position may be recognized if it is “more likely than not” that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. As of December 31, 2011, the Company had not recorded any tax benefits from uncertain tax positions.
 
 
F-9

 

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.

Stock-based Compensation

ECCE measures the cost of employee services received in exchange for stock based on the grant date fair value of the awards under FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). ECCE determines the fair value of shares of nonvested stock (also commonly referred to as restricted stock) based on the last quoted price of the Company’s 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. 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 8 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 re-pricing of these warrants pursuant to the anti-dilution provision. See Note 8 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 December 31, 2011. There were no transfers of financial assets between levels during the year ended December 31, 2011. The Company held no financial assets or liabilities accounted for at fair value on a recurring basis as of December 31, 2010.
 
 
F-10

 
 
    Carrying Value at
December 31,
   
Fair Value Measurement at December 31, 2011
 
   
  2011
   
Level 1
   
Level 2
   
Level 3
 
                         
Derivative liability
  $ 219,582     $ -     $ -     $ 219,582  
 
The Company did not identify any other assets and liabilities that are required to be presented on the 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 December 31, 2011 and December 31, 2010.

New Accounting Pronouncements

In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009 (which is January 1, 2010 for the Company) except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years (which is January 1, 2011 for the Company). Early application is encouraged. The revised guidance was adopted as of January 1, 2010. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Other than the pronouncements noted above, ECCE does not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
 
 
F-11

 
 
2.
GOING CONCERN
 
As shown in the accompanying consolidated financial statements, the Company incurred net losses attributable to common shareholders of $6,204,323 and $463,805 for 2011 and 2010, respectively. In addition, the Company had an accumulated deficit of $7,082,112 and a working capital deficit of $4,333,140 as of December 31, 2011. These conditions raise substantial doubt as to ability to continue as a going concern. Management is working to improve its liquidity and its results from operations by raising additional capital through purchasing producing wells, and 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, or through a merger. The consolidated financial statements do not include any adjustments that might be necessary if the Company are unable to continue as a going concern. If the Company do not obtain funding, ECCE will cease operations.
 
3.
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 minims.

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
 

 
F-12

 
 
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.

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.


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 twelve months ended December 31, 2011. All of the Company’s oil and gas properties (excluding accumulated depletion) are located in the United States.

 
Well Description
 
December 31,
2010
   
Additions
   
Impairment
   
December 31,
2011
 
 
                       
Vick 1, Lee County, TX
 
$
744,451
   
$
20,301
   
$
-
   
$
764,752
 
Vick 2, Lee County, TX
   
1,129,644
     
52,202
     
-
     
1,181,846
 
Alexander 1, Lee County, TX
   
833,927
     
41,949
     
-
     
875,876
 
Live Oak County, TX
   
-
     
222,832
     
(116,029)
     
106,803
 
Choctaw
   
-
     
100,000
     
-
     
100,000
 
 
 
$
2,708,022
   
$
437,284
   
$
(116,029)
   
$
3,029,277
 

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 December 31, 2011.
 
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 December 31, 2011.
 
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 December 31, 2011.
 
 
F-13

 

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 shows 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.

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 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.
 
 
F-14

 
 
5.
DEBT

Debt – Related Parties

Notes Payable – Related Parties

   
December 31,
2011
   
December 31,
2010
 
             
Promissory note to TDLOG – 8% interest; due December 31, 2012; unsecured (1)
  $ 817,500     $ 637,500  

(1)
TDLOG, LLC is controlled by Thomas E. Lipar, Chairman of the Board of Eagle Ford.

On June 20, 2011, the Company acquired $35,077 of related party notes as a result of the Reverse Acquisition (see Note 3). During the year ended December 31, 2011, Rick Bobigian resigned as a board member of Eagle Ford and was no longer deemed a related party, therefore his note balance $25,000 was reclassified to Notes Payable – Non-Related Parties. Accrued and unpaid interest for notes payable to related parties at December 31, 2011 and December 31, 2010 was $83,058 and $21,141, respectively, and is classified as accrued expenses to related parties on the consolidated balance sheets. In July 2011, Rick Adams agreed to waive interest of $472 and principal of $10,077 for his notes and the forgiveness was recorded as a contribution of capital.

Notes Payable – Non-Related Parties

   
December 31,
2011
   
December 31,
2010
 
Promissory note to Pierre Vorster –12.5% interest; due November 18, 2012; unsecured (1)
  $ 70,000     $ 142,000  
Promissory note - 12% interest; due June 30, 2009; not secured (2)
    328,578       -  
Promissory note - 5% interest; due January 1, 2012; not secured.
    227,131       -  
Pipeline mortgage - 8% interest; due September 30, 2009; secured by pipeline (3)
    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 October 19, 2009; not secured (4)
    12,000       -  
Promissory notes - 6% interest; due April 1, 2011; not secured (5)
    142,000       -  
Promissory notes - 5% interest; due October 15, 2010; not secured (5)
    50,000       -  
Promissory note to Rick Bobigian – 5% interest; due July 1, 2010; unsecured. (6)
    25,000       -  
Total notes payable
    1,878,709       142,000  
Less: current portion of notes payable
    (1,878,709 )     (142,000 )
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 3). Accrued and unpaid interest for notes payable to non-related parties at December 31, 2011 and December 31, 2010 was $513,392 and $57,291, respectively, and is included in accrued expenses on the accompanying consolidated balance sheets.

(1)
Pierre Vorster is a former owner of Sandstone 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 $96,000 originally issued in 2009 from three different parties 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 July 2011, two of these parties agreed to convert $60,000 of principle and $8,322 of accrued interest on these notes into 142,337 shares of Eagle Ford common stock for a total value of $106,753. In March, 2012, three notes totaling $36,000 principal plus $7, 698 accrued interest were settled for 300,000 shares of ECCE 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 $55,322
 
(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.
 
 
F-15

 
 
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 3). 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 no 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 $93,905 at December 31, 2011 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.

As of December 31, 2011, convertible debentures amounting to $545,000 are due and payable. Convertible and other notes payable total $3,242,209.

Gain on settlement of debt

During the year ended December 31, 2011, the Company settled certain of its outstanding notes payable, as further discussed above, in addition to settlement of the outstanding third party advances. The third party advances were settled by two officers of Eagle Ford transferring beneficially owned shares of Eagle Ford common stock. Certain of the outstanding notes payable were settled in exchange for shares of common stock and certain notes payable were forgiven by the note holder, as discussed above. The gain on settlement of debt for the twelve months ended December 31, 2011 was $105,288 which consisted of gain from settlement of third party advances of $82,316, a net gain on settlement of notes payable and accrued interest of $10,549 and gain on settlement of accounts payable of $12,423.

 
F-16

 

6.
RELATED PARTY TRANSACTIONS

On November 11, 2010, Rick Adams, the President of ECCE, loaned the Company $3,017 for working capital. Mr. Adams agreed to forego the principal and interest payment on the loan in July, 2011, thus canceling it (see Note 5).

On December 14, 2010 Rick Adams, the President of ECCE, loaned the Company $7,060 for working capital. Mr. Adams agreed to forego the principal and interest payment on the loan in July, 2011, thus canceling it (see Note 5).

7.
ASSET RETIREMENT OBLIGATIONS

In accordance with ASC 410, “Accounting for Asset Retirement Obligations” ECCE records the fair value of a liability for asset retirement obligations (“ARO”) in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. ECCE accrues an abandonment liability associated with its oil and gas wells when those assets are placed in service. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at ECCE’s credit-adjusted risk-free interest rate. No market risk premium has been included in ECCE’s calculation of the ARO balance.

The following is a description of the changes to the Company’s asset retirement obligations for the years ended December 31,

   
2011
   
2010
 
             
Asset retirement obligations at beginning of year
  $ 20,072     $ 6,300  
                 
Liabilities incurred from drilling
    -       12,600  
                 
Purchase of properties
    2,823       -  
                 
Accretion expense
    1,907       1,172  
                 
Asset retirement obligations at end of year
  $ 24,802     $ 20,072  

 
F-17

 

8.
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 December 31, 2011 and determined the fair value to be $219,582. The decrease in fair value has been recognized as an unrealized gain on the change in derivative value of $219,098 for the year ended December 31, 2011.

Activity for the derivative warrant instruments during the nine months ended December 31, 2011 was:

   
December 31,
2010
   
Activity During the Period
   
Decrease in Fair Value
   
December 31,
2011
 
                         
Derivative warrant instruments
 
$
-
   
$
438,680
   
$
(219,098
)
 
$
219,582
 
Total
 
$
-
   
$
438,680
   
$
(219,098
)
 
$
219,582
 

The assumptions used in the lattice model to determine the fair value of the warrants as of December 31, 2011 were as follows:

   
December 31,
2011
 
Exercise price
  $ 0.46-$0.48  
Risk free discount rate (1)
    0.31 %
Volatility (2)
    208 %
Projected future offering price (3)
  $ 0.17-$0.47  
Stock price on measurement date
  $ 0.22  
Expected dividend yields (4)
 
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.

 
F-18

 
 
9.
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

During July 2011, the Company sold 1,283,781 shares of restricted common stock in a private placement for gross proceeds of $450,643. No placement costs were incurred.

During August 2011, the Company sold 45,455 shares of restricted common stock in a private placement for gross proceeds of $15,000. No placement costs were incurred.

During September 2011, the Company sold 444,211 shares of restricted common stock in a private placement for gross proceeds of $85,200. No placement costs were incurred.

During November 2011, the Company sold 245,359 shares of restricted common stock in a private placement for gross proceeds of $67,617.

During December 2011, the Company sold 402,899 shares of restricted common stock in a private placement for gross proceeds of $82,000.

Common stock issued for exchange of debt and accounts payable

During July 2011, the Company issued 142,337 shares of common stock, with a fair market value of $106,753, based on the closing market price of the Company’s common stock, to settle $68,322 of notes payable and accrued interest. The transaction resulted in a loss on extinguishment of debt of $38,431.

During September 2011, the Company issued 276,140 shares of common stock, with a fair market value of $55,322 based on the closing market price of the Company’s common stock, to settle $97,994 of notes payable and accrued interest, resulting in a gain on extinguishment of debt of $42,672.
 
 During September 2011, the Company issued 20,000 shares of common stock, with a fair market value of $3,000, based on the closing market price of the Company’s common stock, to settle $10,000 of accounts payable relating to investor relations services performed, resulting in a gain on extinguishment of debt of $7,000.

Common stock issued for services

During July 2011 the Company issued 11,906 shares of common stock, with a fair market value of $7,739, based on the closing market price of the Company’s common stock, for legal services performed.

Also during July 2011, the Company issued 200,000 shares of common stock, with a fair market value of $150,000, based on the closing market price of the Company’s common stock, for services performed.
 
During September 2011, the Company issued 250,000 shares of restricted stock, with a fair market value of $37,500, based on the closing market price of the Company’s common stock, for future private placement services to be performed.
 
 
F-19

 
 
Contributed capital for debt extinguishment and forgiveness

During July 2011, an officer of Eagle Ford agreed to waive interest of $472 and principal of $10,077 on his notes payable issued by Eagle Ford. The forgiveness of this notes payable, related party was recorded as a contribution of capital. (See Notes 4 and 5)

On September 30, 2011, two officers of Eagle Ford transferred beneficially owned shares of Eagle Ford common stock with a fair value of $32,683 at the date of the transfer, in exchange for forgiveness of the $115,000 outstanding balance of the third party advances, resulting in a gain from settlement of the third party advances of $82,317, which is included in gain on settlement of debt in the accompanying consolidated income statement. The $32,683 fair value of the transferred beneficially owned shares is accounted for as additional paid-in-capital.

Warrants

Warrant activity during the years ended December 31, 2011 is as follows:

 
 
Warrants
 
 
Weighted-Average Exercise Price
 
 
Aggregate Intrinsic Value
 
Outstanding at January 1, 2011
 
 
-
 
 
$
-
 
 
$
-
 
Granted
 
 
1,000,000
 
 
 
0.50
 
 
 
-
 
Exercised
 
 
-
 
 
 
-
 
 
 
-
 
Expired
 
 
-
 
 
$
-
 
 
$
-
 
Outstanding and exercisable at December 31, 2011
 
 
1,000,000
 
 
$
0.50
 
 
$
-
 

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. See Note 8. As of December 31, 2011, all warrants outstanding and exercisable had an intrinsic value of $0, based on the trading price of Eagle Ford’s common stock of $0.22 per share.

On September 15, 2011, the Company entered into a merchant banking and advisory agreement in which the Company issued 250,000 shares of restricted common stock upon the execution of the agreement. The Company will issue 500,000 performance based common stock warrants with an exercise price of $0.50 and a 5 year term upon receipt of the initial $50,000 funding tranche as set forth in the agreement provided it is within four months of execution of the agreement. Due to a high degree of uncertainty regarding the issuance of these performance based warrants the Company did not record an issuance of the warrants as of the date of execution of the agreement. As of December 31, 2011 and through the issuance of these consolidated financial statements the transaction was void for the other party’s failure to perform.

 
F-20

 
 
10.
INCOME TAXES
 
Until the merger in June 2011, the Company was structured as partnerships, with all federal income tax liabilities and benefits passed through to the partners. However, the partnerships were subject to the Texas margin taxes.
 
As of December 31, 2011, ECCE had accumulated net operating losses, and therefore, had no tax liability. The net deferred tax asset generated by the loss carry-forwards has been fully reserved. The cumulative net operating loss carry-forward was $1,182,319 at December 31, 2011, and will expire in the year 2032.
 
At December 31, 2011, the deferred tax assets consisted of the following:
 
   
2011
 
Deferred tax assets
     
Net operating losses carry-forward
  $ 401,988  
Impairment of oil and gas properties
    39,447  
Total Deferred tax assets
    441,435  
Less: valuation allowance
    (441,435 )
Net deferred tax asset
  $  
 
The change in the valuation allowance for the years ended December 31, 2011 totaled $441,435.
 
The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows as of December 31, 2011:

   
2011
 
Statutory federal income tax rate
    (34.0 %)
State income taxes and other
    -  
Valuation allowance
    34.0 %
Effective tax rate
    -  

 
F-21

 
 
11.
COMMITMENTS AND CONTINGENCIES

Legal Proceedings

ECCE 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 December 31, 2011, ECCE owed $34,468 for these property taxes.

On February 28, 2010 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”). The Company 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 this date, the Company has not reached a satisfactory agreement with the lender.

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.

Year 2012 $20,400
Year 2013 $15,168

12.
SUBSEQUENT EVENTS

ECCE evaluated events occurring between the end of our fiscal year, December 31, 2011, and when the consolidated financial statements were issued.

On January 18, 2012, ECCE sold 357,143 and 71,429 common shares to two individuals for $0.14 per share.

On February 29, 2012, ECCE issued 300,000 shares of common stock in exchange for three notes payable totaling $36,000 and accrued interest of $7,698.

On March 14, 2011, ECCE issued 250,000 shares to four individuals as compensation for technical assistance relating to existing and potential field evaluation.

On March 26, 2012, ECCE borrowed $75,000 , along with an additional $5,000, from TDLOG, a company controlled by Thomas Lipar, the Chairman of the Board of ECCE, for general corporate purposes. The note carried an interest rate of 8.00%, and is due September 30, 2012. On June 13, 2012, TDLOG agreed to convert the note and accrued interest into ECCE common stock at a price of $0.20 per share, but had not done so at the time of this report.

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, LLC to develop the Austin Chalk, Buda, Eagle Ford and Pearsall Shale reservoirs.

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.

 
F-22

 
 
SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)

Proved oil and gas reserve quantities are based on estimates prepared externally by an independent engineer in accordance with guidelines established by the Securities Exchange Commission (SEC).

There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production. The following reserve data related to the properties represents estimates only and should not be construed as being exact. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, the performance of the reservoirs, as well as extensive engineering judgment. Consequently, reserve estimates are subject to revision as additional data becomes available during the producing life of a reservoir. The evolution of technology may also result in the application of improved recovery techniques, such as supplemental or enhanced recovery projects, which have the potential to increase reserves beyond those currently envisioned.

Estimates of proved reserves are derived from quantities of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing operating and economic conditions and rely upon a production plan and strategy.

Modernization of Oil and Natural Gas Reporting Requirements
 
Effective for fiscal years ending on or after December 31, 2009, the Securities and Exchange Commission (“SEC”) approved revisions designed to modernize reserve reporting requirements for oil and natural gas companies. In addition, effective for the same period, the Financial Accounting Standards Board issued Accounting Standards Codification Update 2011-03, “Extractive Activities – Oil and Gas (Topic 932) – Oil and Gas Reserve Estimation and Disclosures,” to provide consistency with the new SEC rules. The Company adopted the new requirements effective December 31, 2009.

Representative NYMEX prices: (1)
       
Natural gas (MMBtu)
 
$
4.01
 
Oil (Bbl)
 
$
96.79
 
 
(1)
This measure is not intended to represent the market value of estimated reserves.

Reserves and pricing were calculated by a qualified independent engineer, Rex Morris. Reserve engineering is inherently a subjective process of estimating underground accumulations of oil, natural gas and NGL that cannot be measured exactly. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Accordingly, reserve estimates may vary from the quantities of oil, natural gas and NGL that are ultimately recovered. Future prices received for production may vary, perhaps significantly, from the prices assumed for the purposes of estimating the standardized measure of discounted future net cash flows. The standardized measure of discounted future net cash flows should not be construed as the market value of the reserves at the dates shown. The 10% discount factor required to be used under the provisions of applicable accounting standards may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and natural gas industry. The standardized measure of discounted future net cash flows is materially affected by assumptions about the timing of future production, which may prove to be inaccurate.
 
 
F-23

 

In accordance with SEC regulations, reserves were estimated using the average price during the 12-month period, determined as an unweighted average of the first-day-of-the-month price for each month, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

   
Gas
   
Oil
 
   
(MMcf)
   
(MBbls)
 
Total Proved Reserves:
 
 
       
Balance, December 31, 2010
    -       -  
Sale of oil and gas properties
    -       -  
Purchase of oil and gas properties
    374,322       -  
Production
    -       -  
Balance, December 31, 2011
    374,322       -  
                 
                 
Proved developed as of December 31, 2011
    374,322       -  
                 
Proved developed as of December 31, 2010
    -       -  

Capitalized Costs of Oil and Gas Producing Activities

The following table sets forth the aggregate amounts of capitalized costs relating to the ECCE’s oil and gas producing activities and the related accumulated depletion as of December 31, 2011:

   
2011
 
Proved properties
    106,803  
Less accumulated depletion
    (9,056 )
Net capitalized costs
  $ 97,747  

Costs Incurred in Oil and Gas Producing Activities

The following table reflects the costs incurred in oil and gas property acquisition, exploration and development activities during the years ended December 31, 2011:

   
2011
 
Acquisition costs
  $ 106,803  
Development costs
    -  
Total Costs Incurred
  $ 106,803  

The following disclosures concerning the standardized measure of future cash flows from proved oil and gas reserves are presented in accordance with ASC 932. As prescribed by ASC 932, the amounts shown are based on prices and costs at the end of each period and a 10 percent annual discount factor.

Future cash flows are computed by applying fiscal year-end prices of natural gas and oil to year-end quantities of proved natural gas and oil reserves. Future operating expenses and development costs are computed primarily by ECCE’s petroleum engineer by estimating the expenditures to be incurred in developing and producing ECCE’s proved natural gas and oil reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions. Future income taxes are based on currently enacted statutory rates.

The standardized measure of discounted future net cash flows is not intended to represent the replacement costs or fair value of ECCE’s natural gas and oil properties. An estimate of fair value would take into account, among other things, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates of natural gas and oil producing operation.

Reserves and pricing were calculated by a qualified independent engineer.
 
 
F-24

 

Standardized Measure of Discounted Future Net Cash Flow

   
2011
 
       
Future cash inflows at December 31,
  $ 1,326,239  
Future costs-
       
Operating
    (197,975 )
Development and abandonment
    (629,185 )
Future net cash flows before income taxes
    499,079  
Future income taxes
    -  
Future net cash flows before income taxes
    499,079  
Discount at 10% annual rate
    (401,627 )
Standardized measure of discounted future net cash flows
  $ 97,452  

The following reconciles the change in the standardized measure of discounted net cash flow for the year ended December 31, 2011

   
2011
 
       
Beginning of the year
  $ -  
Purchase of minerals in place
    322,044  
Extensions, discoveries and improved recovery
    38,808  
Revision of quantity estimates
    (265,861 )
Sales of minerals in place
    -  
Net change in prices and production costs
    12,190  
Accretion of discount
    32,204  
Sales, net of production costs
    (41,889 )
Previously estimated development costs incurred during the period
    -  
Change in future development costs
    -  
Net change in future income taxes
    -  
Ending of year
  $ 97,452  
 
 
F-25

 
 

None


Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (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 Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report pursuant to Rule 13a-15 of the Exchange Act. 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 improvements, were being undertaken. Our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective at the level of operations we experienced in 2011 and were operating at the reasonable assurance level. However, as we grow, we will need to enhance our controls. We intend to take measures in 2012 that will enhance controls over various functions of our operations so as to insure the level of such controls is effective in the future.

Managements’ Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act, as amended, as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

* pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

* provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors;

* and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
 
 
28

 
 
In order to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2011 as required by Sections 404 of the Sarbanes-Oxley Act of 2002, our management commenced an assessment, based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework “). A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In assessing the effectiveness of our internal control over financial reporting, our management, including the chief executive officer and chief financial officer, identified the following deficiencies: (1) Deficiencies in Segregation of Duties. The Chief Executive Officer and the Chief Financial Officer are actively involved in the preparation of the consolidated financial statements, and therefore cannot provide an independent review and quality assurance function within the accounting and financial reporting group. The limited number of qualified accounting personnel discussed above results in an inability to have independent review and approval of financial accounting entries. Furthermore, management and financial accounting personnel have wide-spread access to create and post entries in the Company’s financial accounting system. There is a risk that a material misstatement of the consolidated financial statements could be caused, or at least not be detected in a timely manner, due to insufficient segregation of duties, and (2) Our financial statement closing process did not identify all the journal entries that needed to be recorded as part of the closing process for certain complex and non-routine transactions. As part of the audit, our independent registered public accounting firm proposed certain entries that should have been recorded as part of the normal closing process. Our internal control over financial reporting did not detect such matters and, therefore, was not effective in detecting misstatements in the consolidated financial statements.

To address the material weakness, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented. As a result, we are developing an implementation plan in be put in place whereby in 2012 sufficient testing to satisfy COSO requirements will be performed. The absence of the ability to conclude as to the sufficiency of internal controls is a material weakness.
 
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the SEC that permits the company to provide only management’s report in this annual report.


Not applicable.
 
 
29

 
 
PART III


IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.

Our directors and executive officers, their ages, positions held are as follows:

Name
 
Age
 
Position with the Company
Paul Williams   48   Chief Executive Officer and a Director
R. Sandy Cunningham
 
50
 
President and Chief Operating Officer
Rick Adams (1)
 
42
 
Chief Financial Officer and a Director
Thomas Lipar
 
61
 
Chairman of the Board of Directors
N. Wilson Thomas
 
57
 
Chief Financial Officer

 
(1)
Mr. Adams resigned as Chief Financial Officer on January 1, 2012.

Paul Williams was appointed Chief Executive officer of Eagle Ford Oil & Gas Corp on June 21, 2012 upon completion of the merger with Sandstone LLC.

On July 23, 2010, N. Wilson Thomas resigned from his position as Chief Financial Officer of Eagle Ford Oil & Gas Corp., in which he had served since November, 2007 and remained with the company as Controller. Mr. Thomas returned to the position of Chief Financial Officer on February 14, 2011. On June 21, 2011, resigned from his position as Chief Financial Officer of Eagle Ford Oil & Gas Corp., and remained with the company as Controller. On January 1, 2012, Mr. Thomas returned to the position of Chief Financial Officer. Mr. Thomas is a CPA and a graduate of the University of Texas, Austin.

On July 26, 2010, Rick Adams was appointed as President and Chief Executive Officer of Eagle Ford Oil & Gas Corp. Subsequent to the merger with Sandstone LLC, Mr. Adams resigned from the position of President of ECCE on June 21, 2011 and accepted the position of Chief Financial Officer and remained a Director. Mr. Adams resigned as Chief Financial Officer on January 1, 2012, but remained a Director. Mr. Adams holds a BBA in economics and statistics from Baylor University and an MBA in finance from the University of Saint Thomas.

On July 26, 2010, Imran Maniar, CPA was appointed as Chief Financial and as a Director of Eagle Ford Oil & Gas Corp and served in those positions until February 14, 2011, when he left the company.

AUDIT COMMITTEE

As of the date of this Annual Report, we have not appointed members to an audit committee and, therefore, the respective role of an audit committee has been conducted by our board of directors. When established, the audit committee’s primary function will be to provide advice with respect to our financial matters and to assist our board of directors in fulfilling its oversight responsibilities regarding finance, accounting, tax and legal compliance. The audit committee’s primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as our compliance with laws and regulations; (iv) oversee management’s establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our board of directors. The Company has no audit committee financial expert as defined under 17 CFR Section 228.41.

The board of directors has considered whether the regulatory provision of non-audit services is compatible with maintaining the principal independent accountant’s independence.
 
 
30

 

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Exchange Act requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the SEC. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the reports received by us and on the representations of the reporting persons, we believe that these persons have complied with all applicable filing requirements during the fiscal year ended December 31, 2011.

CODE OF ETHICS

The Company adopted a code of ethics (“Code”) that applies to all of its directors and officers. The Code is filed as an exhibit to this Annual Report. Copies of the Company’s Code of Ethics are available, free of charge, by submitting a written request to the Company at 2951 Marina Bay Drive, Suite 130-369, League City, Texas 77573.


The following table sets forth the compensation paid to our chief executive officer and chief financial officer for fiscal year ended December 31, 2011, and during 2010 (collectively, the “Named Executive Officers”):
 
SUMMARY COMPENSATION TABLE
 
Name and
 
Year
 
Salary
 
Bonus
 
Stock
Awards
 
Option
Awards
 
Non-Equity Incentive Plan
Compensation
 
Non-Qualified Deferred Compensation
Earnings
 
All Other
Compensation
 
Total
 
Principal Position      
($)
 
($)
 
($)
 
($)
 
($)
 
($)
 
($)
 
($)
 
Paul Williams,
 
2011
  216,000   -   -   -   -   -   -   216,000  
Director/ CEO
 
2010
  144,000   -   -   -   -   -       144,000  
                                       
R. Sandy Cunningham
 
2011
  216,000   -   -   -   -   -   -   216,000  
Pres/COO
 
2010
  144,000   -   -   -   -   -   -   144,000  
                                       
Rick Adams, CEO
 
2011
  108,000       -   -   -   -   -   108,000  
                                       
N. Wilson Thomas
 
2011
  36,000   -   -   -   -   -   -   36,000  
CFO
                                     
                                       
Totals 2011
      576,000   -   -   -   -   -   -   576,000  
                                       
Totals 2010
      288,000   -   -   -   -   -   -   288,000  
 
GRANTS OF PLAN-BASED AWARDS

The Company has reserved 100,000 shares of our common stock for issuance under the Plan. No securities or options have been issued pursuant to the Plan. No options have been issued to the named executive officers under the Plan or any other plan.

EMPLOYMENT AGREEMENTS

The Company has not entered into any employment agreements with any of its executive officers.
 

DIRECTOR COMPENSATION

During fiscal year ended December 31, 2011, we did not pay any compensation to our directors for their respective position on the board of directors.
 
 
31

 

 
As of the date of this Annual Report, the following table sets forth certain information with respect to the beneficial ownership of our common stock and our Series A Preferred Stock (our only class of preferred stock that has voting rights) by each stockholder known by us to be the beneficial owner of more than 5% of our common stock by each of our directors, our Named Executive Officers, and our executive officers and directors as a group. Each person has sole voting and investment power with respect to the shares, except as otherwise indicated. Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As of the date of this Annual Report, there are 36,034,293 shares issued and outstanding.
 
Name and Address of Beneficial Owner (1)
 
Shares of Common Stock and Percentage of Voting Power
 
   
No.
   
%
 
Directors & Officers
           
Paul Williams
    3,306,061       9.17  
                 
R. Sandy Cunningham
    3,306,061       9.17  
                 
Richard Adams
    501,000       1.39  
                 
Thomas Lipar
    9,134,810       25.35  
                 
N. Wilson Thomas
    347,500       0.96  
                 
      -       -  
All executive officers & directors as a group (5 persons)
    16,604,032       46.04  
                 
Beneficial Owners of more than 5%
               
Safari Adventure Productions, Inc.
    2,187,496 (2)     6.07  
 
(1)
Unless otherwise indicated, the business address of the individuals listed is 1110 NASA Parkway, Ste. 311, Houston TX 77058.
 

Paul Williams, Chief Executive Officer, Board Member and Indirect Beneficial shareholder (10% or more). Mr. Williams received shares of EFOGC via Valor Interest Partners as an indirect beneficial owner due to the EFOGC acquisition of the remaining 50% member interest in Sandstone Energy Partners I, L.L.C. in Aug 2011.

Ralph “Sandy” Cunningham, President and Chief Operating Officer, and Indirect Beneficial shareholder (10% or more). Mr. Cunningham received shares of EFOGC via Valor Interest Partners as an indirect beneficial owner due to the EFOGC acquisition of the remaining 50% member interest in Sandstone Energy Partners I, L.L.C. in Aug 2011.
 
 
32

 

Thomas Lipar, Chairman of the Board and Indirect Beneficial shareholder (10% or more). Mr. Lipar received shares of EFOGC via TDLOG, L.L.C. as an indirect beneficial owner due to the EFOGC acquisition of the remaining 50% member interest in Sandstone Energy Partners II, L.L.C. in Aug 2011.

Safari Adventure Productions, Inc., Beneficial and Indirect Beneficial shareholder (10% or more). Safari Adventure Productions, Inc. received shares of EFOGC as a direct beneficial owner due to the EFOGC acquisition of the remaining 50% member interest in all three of the Sandstone Energy partnerships in Aug 2011.

Brooks Minx, Indirect Beneficial shareholder (10% or more) President and 100% member interest owner of Safari Adventure Productions, Inc. Received shares of EFOGC via Safari Adventure Productions, Inc. as an indirect beneficial owner due to the EFOGC acquisition of the remaining 50% member interest in all three of the Sandstone Energy partnerships in Aug 2011.

Rick Adams, Chief Financial Officer and former President of ECCE, cancelled outstanding debt due from ECCE and purchased common stock.

The Company subleased its office space through June 2011 from a building that is 100% owned by Mr. Bobigian, who was a director of ECCE. All existing rent due was cancelled and there was no rent paid for either 2011 or 2010.


During fiscal year ended December 31, 2011, we incurred approximately $188,375 in fees to our principal independent accountants for professional services rendered in connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2010 and for the review of our consolidated financial statements for the quarters ended March 31, 2011, June 30, 2011 and September 30, 2011. Expenses also included services rendered relating to the filing of various 8-K’s related to the merger of Sandstone LLC and ECCE.

During 2011, we did not incur any other fees for professional services rendered by our principal independent accountant for all other non-audit services which may include, but is not limited to, tax-related services, actuarial services or valuation services.

During fiscal year ended December 31, 2010, we incurred approximately $42,470 in fees to our principal independent accountants for professional services rendered in connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2010 and for the review of our consolidated financial statements for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010.

During 2010, we did not incur any other fees for professional services rendered by our principal independent accountant for all other non-audit services which may include, but is not limited to, tax-related services, actuarial services or valuation services.


The following exhibits are filed with this Annual Report on Form 10-K:

Exhibit
Number
 
Description of Exhibit
3.1
 
Articles of Incorporation, as amended (1)
3.2
 
Certificate of Amendment to Articles of Incorporation (2)
3.1.2
 
First Amended Certificate of Designation of Convertible Series B Preferred Stock (4)
3.1.3
 
First Amended Certificate of Designation of Convertible Series C Preferred Stock (5)
3.1.4
 
First Amended Certificate of Designation of Convertible Series D Preferred Stock (5)
3.2
 
Bylaws (1)
4.1
 
Form of Common Stock Certificate (1)
 
 
33

 
 
Exhibit
Number
 
Description of Exhibit
4.2
 
Agreement and Plan of Merger among Samurai Energy Corp. and ECCO Energy Corp. dated June 26, 2006 (2)
4.3
 
Assignment, Conveyance, and Bill of Sale with respect to 37% working interest in Wilson Wells (3)
10.1
 
2005 Directors, Officer and Consultants Stock Option, Stock Warrants and Stock Awards Plan (4)
14.1
 
Code of Ethics (7)
14.2
 
Whistleblower Policy (7)
 
 
 
 
 
101.INS
  
XBRL Instance Document
101.SCH
  
XBRL Taxonomy Extension Schema Document
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document
 
(1)
Incorporated by reference to our Registration Statement on Form 8-A filed with the SEC on December 7, 2005.
   
(2)
Incorporated by reference to our Report on Form 8-K filed with the SEC on June 30, 2006.
   
(3)
Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on March 20, 2006.
   
(4)
Incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 26, 2006.
   
(5)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 5, 2007.
   
(6)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 11, 2008.
   
(7)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 25, 2008.
   
(8)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 9, 2008.
   
(9)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 10, 2008.
   
(10)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on March 5, 2009.
   
(11)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on March 20, 2009
   
(12)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 26, 2009.
   
(13)
Incorporated by reference to our Current Report on S-8 filed with the SEC on June 26, 2009.
   
(14)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 2, 2009.
   
(15)
Incorporated by reference to our Current Report on Form Def-14C with the SEC on July 6, 2010.
   
(16)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 27, 2010.
   
(17)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 20, 2010.
   
 
 
34

 
 
(18)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 30, 2010.
   
(19)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 17, 2011.
   
(20)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 21, 2011.
   
(21)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 24, 2011.
   
(22)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 20, 2011.
   
(23)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 12, 2011.
   
(24)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 19, 2011.
   
(25)
Incorporated by reference to our Current Report on Form 8-KA filed with the SEC on October 5, 2011.
   
(26)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 3, 2011.
   
(27)
Incorporated by reference to our Current Report on Form 8-KA filed with the SEC on November 4, 2011.
   
(28)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 10, 2011.
   
(29)
Incorporated by reference to our Current Report on Form 8-KA filed with the SEC on November 16, 2011.
   
(30)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 21, 2011.
   
(31)
Filed herewith

 
 
35

 
 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
EAGLE FORD OIL AND GAS CORP.
       
Dated: July 18, 2012
 
By: /s/ Paul Williams
 
       
   
Paul Williams
 
   
Chief Executive Officer and Director
 
 
Dated: July 18, 2012
 
By: /s/ N. Wilson Thomas
 
   
N. Wilson Thomas
 
   
Chief Financial Officer and Principal Accounting Officer
 
 
36