Encompass
Energy Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware
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74-3252949
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State
or other jurisdiction of incorporation or organization
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(IRS Employer Identification
No.)
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914
North Broadway Avenue, Suite 220
P.O. Box 1218
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Oklahoma
City, OK 73101
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(Address
of principal executive offices, including Zip Code)
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(405)
815-4041
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Registrant’s
telephone number, including area code
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Securities
registered under Section 12(b) of the Exchange Act: None
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Securities
registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
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Yes [_] No [X]
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Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [_]
No [X]
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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.
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Yes [X] No [_]
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Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes [X] No [_]
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Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [_]
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Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company:
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Large accelerated filer [_]
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Accelerated filer [_]
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Non-accelerated filer [_]
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Smaller reporting company [X]
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(Do not check if a
smaller reporting company)
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Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes [X] No [_]
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The aggregate
market value of Common Stock held by non-affiliates of the Registrant as of June 30, 2012, was approximately $987,000.
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As of March
12, 2013, there were 2,056,985 shares of the Registrant’s Common Stock, par value $0.01 per share (“Common Stock”),
outstanding.
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DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the Registrant’s
definitive proxy statement for its 2013 annual meeting of stockholders (expected to be filed within 120 days of the close
of the Registrant’s fiscal year) are incorporated by reference into Part III of this Form 10-K.
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ENCOMPASS
ENERGY SERVICES, INC.
FORM 10-K
Table
of Contents
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Page
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PART I
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1
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Item
1. Business
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1
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Item 1A. Risk Factors
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5
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Item 1B. Unresolved Staff Comments
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5
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Item 2. Properties
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5
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Item 3. Legal Proceedings
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5
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Item 4. Mine Safety Disclosures
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6
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PART II
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6
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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6
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Item
6. Selected Financial Data
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7
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Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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7
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Item
7A. Quantitative and Qualitative Disclosures about Market Risk
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9
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Item
8. Financial Statements and Supplementary Data
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9
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Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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9
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Item
9A. Controls and Procedures
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9
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Item
9B. Other Information
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12
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PART III
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12
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PART
IV
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12
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Item 15. Exhibits and Financial Statements Schedules
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12
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-i-
PART
I
Statements
that we make in this Form 10-K that are not historical or current facts are “forward-looking statements” made pursuant
to the safe harbor provisions in the federal securities laws and judicial interpretations thereof. These statements often can
be identified by the use of terms such as “may,” “will,” “expect,” “anticipate,”
“estimate,” or “continue,” or the negative thereof. Such forward-looking statements speak only as of the
date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However,
forward-looking statements are subject to many risks, uncertainties and important facts beyond our control that could cause actual
results and events to differ materially from historical results of operations and events and those presently anticipated or projected.
We disclaim any obligation to revise any forward-looking statements to reflect events or circumstances after the date of such
statement or to reflect the occurrence of anticipated or unanticipated events.
Item
1. Business.
When
used in this Form 10-K, the terms “we,” “our,” “us,” “the Company” and similar
terms refer to Encompass Energy Services, Inc.
Corporate
History; Prior Change of Control Transaction
We
were formed in December 2007 as a Delaware limited liability company. On February 12, 2008, we were converted from this limited
liability company into a Delaware corporation and changed our name from Ametrine Capital, LLC to Ametrine Capital, Inc. We initially
contemplated doing business as a closed-end, non-diversified management investment company, and we filed an election to be regulated
as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”), with
the intent to invest primarily in the equity and debt securities of non-public U.S. and Israeli-based small and mid-sized companies.
However, we were not successful in raising adequate capital to commence effective operations as a BDC. Through November 2010,
our operations were primarily funded by Tailormade Holdings Ltd (formerly known as Meitav Underwriting Ltd.), which was our majority
stockholder.
Our
former management determined to change our prior business plan and to withdraw our election to be regulated as a BDC, in order
to pursue other business opportunities. On July 26, 2010, the holder of a majority of the shares of our outstanding common
stock authorized and approved a change in our business so that we could cease to be a BDC and also approved our filing of a withdrawal
of our election previously made to the Securities and Exchange Commission (the “Commission”) to be subject to Sections
55 through 65 of the 1940 Act. We subsequently filed a Form N-54C with the Commission on November 19, 2010, in order to withdraw
our election to be subject to Sections 55 through 65 of the 1940 Act.
On
November 30, 2010, our largest stockholder, Tailormade Holdings Ltd., sold its entire interest in the Company (being 4,026,559
shares, or approximately 92% of our issued and outstanding shares of common stock at the time) in a private transaction (the “Change
of Control Transaction”). 3,676,559 shares, or approximately 84% of our outstanding common stock at the time, were acquired
by Deylau, LLC, a Delaware limited liability company owned and controlled by one of our directors, Kristian B. Kos, in the Change
of Control Transaction. The other 350,000 shares transferred in the Change of Control Transaction, or approximately 8% of our
outstanding common stock at the time, were acquired by Debra Herman. Pursuant to the terms of the Change of Control Transaction,
our directors and sole executive officer at the time resigned, and new persons, including Mr. Kos, were appointed to serve as
directors and executive officers.
1
The new management
appointed following the Change of Control Transaction identified and briefly pursued a possible acquisition of certain oil and
gas properties and assets located in Oklahoma from Scintilla, LLC, an entity controlled by David J. Chernicky, who had been appointed
as a director and the chairman of our board of directors immediately following the Change of Control Transaction. In anticipation
of this possible acquisition (the “Scintilla Transaction”), we amended our certificate of incorporation on April 15,
2011, to effectuate a reverse 0.47-for-1 stock split with respect to our outstanding common stock, par value $0.01 per share,
and then we filed an amended and restated certificate of incorporation on April 18, 2011 that changed our corporate name from
Ametrine Capital, Inc. to New Source Energy Group, Inc. and effectuated certain other changes.
Subsequent
to these actions, we were informed by the financial advisor we had engaged to assist with this prospective transaction that the
lender and investment banking firm that we hoped would provide a line of credit to us and assist us in raising a significant amount
of equity financing was now unwilling or unable to proceed with structuring those transactions on our behalf. We were dependent
on access to this line of credit and equity financing to complete the Scintilla Transaction and implement our intended business
plan, and without access to a significant amount of debt and equity financing our board of directors concluded that we were unable
to complete the Scintilla Transaction and directed us to abandon our efforts in this respect on June 30, 2011. Although general
terms were being negotiated with Scintilla, we never entered into any definitive agreement relating to the Scintilla Transaction.
Immediately
following our board of directors’ determination to abandon our pursuit of the Scintilla Transaction, Mr. Chernicky and Phil
B. Albert both resigned from our board of directors, Mr. Kos resigned from his positions as our president and chief executive
officer, and Richard Finley resigned from his positions as our chief financial officer, treasurer and secretary. Our board of
directors appointed Antranik Armoudian as a director to fill one of the resulting vacancies and also to the positions of president,
chief executive officer, chief financial officer, treasurer and secretary effective as of June 30, 2011.
In
connection with our investigation and analysis of the potential Scintilla Transaction, we expended a significant amount of financial
resources. We retained certain professional advisors to conduct various activities on our behalf, including an audit of the financial
results attributable to the identified assets of Scintilla and due diligence with respect to these identified assets, to negotiate
various terms of the potential transaction and begin preparing various regulatory filings that would have been required had the
transaction been completed, and to better position us to raise capital. As a result, we concluded that we had developed a significant
amount of knowledge, information and work product (collectively the “Business Opportunity and Information”) that could
have value to another buyer of the identified assets of Scintilla, and our board of directors directed Mr. Armoudian, as the only
independent member of our board, to negotiate for and on behalf of the Company with respect to the transfer of the Business Opportunity
and Information and to seek an alternative business opportunity which may, or may not, be within the oil and gas industry.
2
On
our behalf, Mr. Armoudian successfully negotiated with New Dominion, LLC, an affiliate of Scintilla, LLC, a payment of $600,000
in exchange for our waiver of further rights with respect to the Business Opportunity and Information and our agreement to reasonably
assist New Dominion, LLC and its affiliates in the exploitation of the Business Opportunity and Information. We entered into an
instrument confirming this waiver on July 18, 2011 and received the $600,000 payment contemporaneously.
Subsequent
to negotiating this waiver, our board of directors approved a name change for our Company to “Encompass Energy Services,
Inc.,” primarily because the board of directors expects us to evaluate and pursue one or more business opportunities in
the oilfield services industry. The board of directors also believed our continued use of the name New Source Energy Group, Inc.
might result in market confusion regarding our current planned operations and business objectives, especially in light of the
existence of another company by the name of New Source Energy Corporation, which acquired the oil and natural gas assets previously
considered for acquisition by us in the Scintilla Transaction. Accordingly, we amended our certificate of incorporation to change
our corporate name to Encompass Energy Services, Inc. on December 2, 2011.
Current
Company Status
We
are not currently engaged in any business operations. We continue to search for and evaluate opportunities in the oilfield services
industry and other industries. If we determine to pursue a particular acquisition in the future, we intend to conduct a customary
due diligence investigation. No acquisition will take place unless and until there is a definitive agreement between us and the
prospective seller(s), due diligence has been completed, and adequate debt and equity financing has been raised. As of the date
of filing this Annual Report, we have not entered into any agreements or understandings (written or oral) for any acquisition
of assets or any debt or equity financing necessary for the completion of any such acquisition and the operation of such assets
following such acquisition.
Given
the uncertainties in connection with any acquisition, we can offer no assurance that we will be able to complete any transaction
and obtain the necessary debt and equity financing on terms acceptable to us. Additionally, it is possible that one or more acquisitions
we may pursue may involve a related party. Although we will attempt to take measures to ensure that the terms of the transaction
are in our best interests, we may elect not to obtain a fairness opinion with respect to such a transaction, and there can be
no assurance that any such transaction ultimately will be fair to our stockholders.
3
There
are many reasons we may not be able to execute upon any business opportunity we identify in the future. These reasons include:
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(i)
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We
may not be able to negotiate an acquisition agreement on terms
that our board of directors finds to be acceptable from a financial
and business perspective.
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(ii)
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Our
due diligence investigation may not be satisfactory and may reflect
significant concerns that cannot be adequately addressed.
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(iii)
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We
may not be able to find adequate debt and/or equity financing
sufficient to consummate the acquisition, and any debt or equity
financing we are able to obtain may not be available on terms
that we find to be acceptable, or the terms may result in greater
interest payment and other obligations that may adversely impact
our operations.
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(iv)
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We
may not be able to raise the equity capital necessary to provide
funds for the continuing operations of our business, and any equity
financing we are able to obtain may not be on terms that we find
to be acceptable, or the terms may result in much greater dilution
than expected.
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(v)
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The
Commission may choose to review our filings, thereby delaying or
halting our ability to complete any corporate restructuring we
may conclude is a necessary condition precedent to completing an
acquisition as contemplated, or at all.
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(vi)
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Other
unforeseen events may occur that make a contemplated transaction
less attractive or more difficult to negotiate, and these events
may be specific to us, or may be regional, national or international
events that affect the equity markets, the debt markets, or other
markets.
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Identifying
and executing upon any business opportunity, whether in the oilfield service industry or another sector, likely will require a
significant amount of capital. We cannot offer any assurance that we will be able to identify or to execute upon another business
opportunity. Instead, we may explore terminating our reporting obligations under the Securities Exchange Act of 1934 (the “Exchange
Act”), or we (and/or our principal stockholders) may seek to dispose of their interests in the Company or otherwise transfer
control of the Company to another person.
To
the extent that we are able to execute upon a business opportunity (whether in the oilfield service industry or another industry),
we will compete with others in that industry and likely be subject to a significant amount of government regulation. We currently
have no patents, patent applications, or other material interest in intellectual property. During the last ten years we have not
produced any products or offered any services, and therefore we are not currently dependent on any material customer relationships.
We do not currently conduct any research and development.
We
do not currently own any real property or engage in any business operations, and therefore environmental compliance is not material
to us. However should we execute upon a business opportunity in the oilfield service industry, our operations may be subject to
extensive rules and regulations promulgated by federal, state, tribal and local authorities and agencies. For example, most jurisdictions
have environmental, health and safety statutes and regulations that could impact an oilfield services business in a number of
ways. Failure to comply with any such rules and regulations can result in substantial penalties. Any increased regulatory burden
will increase our cost of doing business and affect our profitability.
4
Employees
We
currently have one employee, Antranik Armoudian, our president, chief executive officer, chief financial officer, treasurer and
secretary, who does not devote his full business time to our activities. If we are able to execute upon a business opportunity
in the oilfield service industry (or any other industry), we expect that additional employees and/or consultants will be retained
as necessary.
Additional
Information
We
file reports with the Commission as required by Section 13(a) of the Exchange Act. The public may read and copy any materials
filed by the Company with the Commission at its public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission
maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the Commission at www.sec.gov.
We
do not currently maintain a corporate website.
Item
1A. Risk Factors.
Not
required.
Ite
m
1B. Unresolved Staff Comments.
Not
applicable.
Item
2. Properties.
During
the year ended December 31, 2012, and through the date of this Annual Report, the Company owned no real property and no material
personal property. We previously leased office space from our controlling stockholder, Deylau, LLC (which is controlled by one
of our directors, Mr. Kos) located at 914 North Broadway Avenue, Suite 220, Oklahoma City, Oklahoma 73101, as our principal executive
offices, but we assigned our leasehold rights to these premises to Mr. Kos concurrently with our waiver of the Business Opportunity
and Information discussed in Item 1. Our present business operations are not sufficient to require a permanent physical office.
Rather, our executive officer and directors perform their duties on our behalf using other office space available to them, at
no charge to us. We believe this arrangement is suitable for our current needs.
Item
3. Legal Proceedings.
We
are not a party to any legal proceedings, and no such proceedings are known to be contemplated.
5
Item
4. Mine Safety Disclosures
Not
applicable.
PART
II
Item
5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information
Our
common stock has been approved for quotation on the OTC Bulletin Board under the symbol EESI, but despite this fact no active
trading market has developed for our common stock. We are aware of only a limited number of reported trades involving our common
stock since it was approved for quotation on the OTC Bulletin Board on December 28, 2009, and we have been unable to locate a
source of reliable bid price, ask price and quotation data at a reasonable cost.
Holders
The
number of record holders of our common stock, par value $0.01 per share, as of March 12, 2013, was 13.
Dividends
We
have not paid a dividend with respect to our common stock since our inception. We do not expect to pay a dividend on our common
stock in the foreseeable future. There are no contractual restrictions on our ability to pay dividends to our stockholders. However,
the Delaware General Corporation Law restricts our ability to pay dividends. The Delaware General Corporation Law provides that
a Delaware corporation may pay dividends either: (i) out of the corporation’s surplus (as defined by Delaware law);
or (ii) if there is no surplus, out of the corporation’s net profit for the fiscal year in which the dividend is declared
or the preceding fiscal year. Any determination in the future to pay dividends will depend on our financial condition, capital
requirements, results of operations, contractual limitations, legal restrictions and any other factors our board of directors
deems relevant.
Securities
Authorized for Issuance Under Equity Compensation Plans
We
have not adopted any equity compensation plans.
Sales
of Unregistered Equity Securities
All
unregistered sales of equity securities by the Company that occurred during the year ended December 31, 2012, and through the
date of this Annual Report previously have been described in reports filed with the Commission.
6
Repurchases
of Equity Securities
We
did not repurchase any of our equity securities during the fourth quarter of 2012.
Item
6. Selected Financial Data.
Not
required.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Summary
As
previously stated, the Company essentially has been inactive since its formation. Until November 19, 2010 the Company was regulated
as a BDC under the 1940 Act. However, the Company was not able to raise sufficient capital to execute upon its original business
plan. The Company’s election to withdraw as a BDC under the 1940 Act resulted in a change in the Company’s method
of accounting. BDC financial statement presentation and accounting utilizes the value method of accounting used by investment
companies, which allows BDCs to recognize income and value their investments at market value as opposed to historical cost.
Results
of Operations — Years Ended December 31, 2012 and 2011
Revenues
.
We not had any revenues from operations since our inception. However, in July 2011, we received a $600,000 payment from a third
party in exchange for our waiver and related agreements with respect to the Business Opportunity and Information, as discussed
in Item 1 above.
General
and Administrative Expenses
. General and administrative expenses for the year ended December 31, 2012, decreased 38% to $275,077
compared to the year ended December 31, 2011. The decrease in 2012 primarily was attributable to higher expenses in 2011 related
to expenses we incurred in connection with our evaluation and investigation of a proposed business opportunity that we subsequently
abandoned. In 2012, acquisition related expenses were incurred that were substantially less than those incurred in 2011.
We
incurred expenses of $106,323 in 2011 in the form of an impairment of a fixed asset expense.
Interest
Expense
. Interest expense for the year ended December 31, 2012, was $2,537 compared to $5,893 in 2011. Interest expense during
2012 was attributable to related party loans from its primary stockholder to fund operations.
Net
Income
. Our net loss for the year ended December 31, 2012 was $277,614, as compared to a net income of $45,507 for the year
ended December 31, 2011. Net loss in 2012 was attributable to general and administrative costs incurred. Our net income was greater
in 2011 as compared to 2012 solely due to the $600,000 payment received in exchange for our waiver and related agreements with
respect to the Business Opportunity and Information, as previously described in Item 1 above.
7
We
anticipate that we will continue to incur significant net losses as we continue to pursue business opportunities. We will pursue
these business opportunities to the extent that our management has identified opportunities that it believes are worth pursuing,
and to the extent that we have sufficient funds to do so. At the present time, we have no source of revenues from operations,
and we can provide no assurance that we will generate a source of revenues from operations, either as a result of a strategic
transaction, or as a result of developing such a source from within.
Capital
Resources and Liquidity
We
have been without adequate funds since our inception. At December 31, 2012, we had current assets of $4,397 and current liabilities
of $247,236, resulting in net working capital deficit of $242,839. Our assets consist solely of cash and cash equivalents. Cash
used in operating activities during 2012 was $230,121. Since the Change of Control Transaction, we have funded our operations
primarily through loans provided by our majority stockholder, Deylau, LLC. These loans are repayable by us upon demand and bear
interest at 5% per annum. We cannot offer any assurance that Deylau, LLC will be able or willing to continue to advance funds
for our operations, and if it fails to do so, we may not be able to survive unless we obtain funding in sufficient amounts from
other sources.
As
of December 31, 2012, we had total liabilities of $247,236. These liabilities were composed of the stockholder advances described
above, other accounts payable in favor of our majority stockholder, and accounting and legal fees.
Our
limited assets likely are not sufficient to fund our operations through the remainder of 2013. In the short term we expect to
use our limited cash on hand to pay our basic general and administrative costs, and otherwise to rely on our officers, directors
and majority stockholder to advance funds to us. In order for us to be able to pursue and consummate any potential business opportunity
we identify, we will need to identify and obtain one or more outside sources of funding. We expect any business opportunity we
determine to pursue will require a significant amount of capital and sources of liquidity. We cannot offer any assurance that
we will be able to raise any additional funds to help us complete a strategic transaction or fund our planned operations and activities.
Contractual
Obligations
As
described above, we are obligated to repay our majority stockholder for the amounts it has advanced to us (with interest) upon
demand. We initially agreed to pay Mr. Armoudian, who serves as our president, chief executive officer, chief financial officer,
treasurer and secretary, an annual salary of $25,000. As a result of Mr. Armoudian devoting more significant time and effort to
our business than was previously required, our board of directors, through its disinterested member, Kristian Kos, approved an
increase in Mr. Armoudian’s annual salary to $150,000, effective as of October 1, 2012. Mr. Armoudian’s relationship
with us is terminable at will by either party. Apart from the foregoing, we do not presently have any other contractual obligations.
8
Off
Balance Sheet Arrangements
We
have no significant 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 our stockholders.
Critical
Accounting Policies
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make a variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the financial statements and (ii) the reported amounts
of expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates
about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution
of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates
and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions
based upon actual results may have a material impact on our results of operation and/or financial condition.
Our
significant accounting policies are disclosed in Note B to the Financial Statements included in this Form 10-K.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
required.
Item
8. Financial Statements and Supplementary Data.
The
information required by this Item begins on page F-1 found at the end of this Annual Report and is incorporated into this part
by reference.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15 under the Exchange Act, our management carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered in this Annual Report. “Disclosure
controls and procedures” are controls and other procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Commission’s rules and forms. These include, without limitation, controls and procedures designed to ensure
that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management,
including our principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure.
9
This
evaluation was carried out under the supervision and with the participation of our principal executive and financial officer,
who concluded that, because of the material weakness in our internal control over financial reporting described below, our disclosure
controls and procedures were not effective as of December 31, 2012. A material weakness is a deficiency or a combination of deficiencies
in internal control over financial reporting such that there is not a reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or detected on a timely basis.
Management’s
Annual Report on Internal Control over Financial Reporting.
Our
management is also responsible for establishing internal control over financial reporting as defined in Rule 13a-15(f) under the
Exchange Act. “Internal control over financial reporting” is a process designed under the supervision of our principal
executive and financial officer and effected by our board of directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles in the United States. It includes those policies and procedures our management has
determined to be necessary that:
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(i)
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pertain
to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets;
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(ii)
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provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of 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
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(iii)
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provide
reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets
that could have a material effect on our financial statements.
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As
of December 31, 2012, our management assessed the effectiveness of our internal control over financial reporting based on the
criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and Commission guidance on conducting such assessments
by smaller reporting companies and non-accelerated filers. Based on that assessment, our management concluded that such internal
controls and procedures were not effective as of December 31, 2012, and that material weaknesses in internal control over financial
reporting existed as more fully described below.
10
As
defined by Auditing Standard No. 5, “
An Audit of Internal Control Over Financial Reporting that is Integrated with an
Audit of Financial Statements and Related Independence Rule and Conforming Amendments
,” established by the Public Company
Accounting Oversight Board, a material weakness is a deficiency or combination of deficiencies in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will
not be prevented or detected. In connection with the assessment described above, our management identified the following control
deficiencies that constitute material weaknesses as of December 31, 2012:
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(i)
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Lack
of an independent audit committee or audit committee financial
expert, and lack of a majority of independent directors
. Although
we previously established an audit committee, none of the current
members of our board of directors has been appointed to serve on
this committee. We have not identified an audit committee financial
expert on our board of directors, and at the present time we do
not have a majority of independent directors. These factors are
contrary to corporate governance best practices as defined by the
various stock exchanges and may lead to less supervision over management.
|
|
(ii)
|
Inadequate
staffing and supervision within our bookkeeping operations
.
We have only a single employee involved in bookkeeping functions,
and we utilize independent consultants on a part time basis to
supplement our accounting staff. The relatively small number of
people who are responsible for bookkeeping functions prevents
us from segregating duties within our internal control system.
The inadequate segregation of duties is a weakness because it
could lead to the untimely identification and resolution of accounting
and disclosure matters or could lead to a failure to perform timely
and effective reviews, which may result in a failure to detect
errors in spreadsheets, calculations, or assumptions used to compile
the financial statements and related disclosures as filed with
the Commission.
|
|
(iii)
|
Insufficient
installation of information technology to assist in our accounting
functions
. Because of a lack of working capital and personnel,
we have been unable to upgrade our information technology software
and hardware to assist in providing effective controls.
|
Due
to a lack of financial and personnel resources, we are not able to, and do not intend to, immediately take any action to remediate
these material weaknesses. We will not be able to do so until we acquire sufficient financing and staff to do so. We will implement
further controls as circumstances, our cash flow, and our working capital permit.
Notwithstanding
the assessment that our internal control over financial reporting was not effective and that there were material weaknesses as
identified in this report, we believe that our financial statements contained in this Annual Report, fairly present our financial
position, results of operations and cash flows as of the respective dates and for the respective years covered thereby in all
material respects.
When
and if funds are available to us, we expect that we will: (i) appoint additional independent directors to our board of directors
and formally appoint an independent audit committee, which will oversee the establishment and monitoring of required internal
controls and procedures; (ii) create positions to segregate duties consistent with control objectives and increase our personnel
resources; and (iii) hire independent third parties to render expert advice relating to our internal controls and procedures.
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal control over
financial reporting on an ongoing basis and will take further action and implement additional enhancements or improvements, as
funds allow.
11
This
Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting due to the exemption from such requirement for smaller reporting companies.
Changes
in Internal Control over Financial Reporting
During
the fourth quarter of 2012, no change occurred in our internal control over financial reporting that materially affected, or is
likely to materially affect, our internal control over financial reporting.
Item
9B. Other Information.
Not
applicable.
PART
III
In
accordance with the provisions of General Instruction G(3), the information required by Items 10 through 14 of Part III of this
Form 10-K is incorporated herein by reference to the Company’s definitive proxy statement for its 2013 annual meeting of
stockholders (expected to be filed within 120 days of the close of the Company’s fiscal year pursuant to Regulation 14A
of the General Rules and Regulations under the Exchange Act).
PART
IV
Item
15. Exhibits and Financial Statement Schedules.
The
following documents are filed as part of this Annual Report.
|
(i)
|
Financial
Statements
: See Table of Contents to Encompass Energy Services,
Inc. Financial Statements as of December 31, 2012 set forth on
page F-1 of this Annual Report.
|
|
(ii)
|
Exhibits
:
For a list of documents filed as exhibits to this Annual Report,
see the Exhibit Index immediately preceding the exhibits filed
with this Annual Report.
|
12
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Date: March 29, 2013
|
ENCOMPASS ENERGY SERVICES, INC.
|
|
|
|
By: /s/ Antranik Armoudian
|
|
Antranik Armoudian
|
|
President, Chief Executive Officer, Chief Financial Officer,
|
|
Treasurer and Secretary
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the date indicated.
Date: March 29, 2013
|
|
|
/s/ Kristian B. Kos
|
|
Kristian B. Kos, Director
|
|
|
|
|
Date: March 29, 2013
|
|
|
/s/ Antranik Armoudian
|
|
Antranik Armoudian, Director
|
13
ENCOMPASS
ENERGY SERVICES, INC.
FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2012
TABLE
OF CONTENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Balance
Sheets
|
F-3
|
Statements
of Operations
|
F-4
|
Statements
of Comprehensive Income
|
F-5
|
Statements
of Changes in Equity (Deficit)
|
F-6
|
Statements
of Cash Flows
|
F-7
|
Notes
to Financial Statements
|
F-8
to F-15
|
|
|
F-1
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Encompass Energy Services, Inc.
We have
audited the accompanying balance sheets of Encompass Energy Services, Inc. (the “Company”), as of December 31, 2012
and 2011 and the related statements of operations, comprehensive income, changes in equity (deficit), and cash flows for each
of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits 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 the Company’s 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, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Encompass
Energy Services, Inc. as of December 31, 2012 and 2011, and the results of its operations, changes in equity and cash flows for
each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying
financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A. to
the financial statements, the Company has suffered losses from operations and has negative cash flows from operations that raise
substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of these uncertainties.
|
Ziv
Haft.
|
|
Certified Public Accountants (Isr.)
|
|
BDO Member Firm
|
Tel-Aviv,
Israel
March 28, 2013
F-2
ENCOMPASS
ENERGY SERVICES, INC.
BALANCE SHEETS
|
|
December 31
|
|
December 31
|
|
|
2012
|
|
2011
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,397
|
|
|
$
|
59,036
|
|
Prepaid expenses
|
|
|
—
|
|
|
|
19,234
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,397
|
|
|
|
78,270
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
1,422
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,819
|
|
|
$
|
78,270
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
48,199
|
|
|
$
|
11,749
|
|
Related party accounts payable
|
|
|
—
|
|
|
|
10,931
|
|
Related party notes payable
|
|
|
199,037
|
|
|
|
19,393
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
247,236
|
|
|
|
42,073
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note F)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity (deficit):
|
|
|
|
|
|
|
|
|
Authorized shares: 180,000,000 shares of common stocks and 20,000,000 shares of preferred stocks; 2,056,985 shares of common stock were issued and outstanding at December 31, 2012 and 2011
|
|
|
20,569
|
|
|
|
20,569
|
|
Additional paid-in capital
|
|
|
226,654
|
|
|
|
226,654
|
|
Accumulated deficit
|
|
|
(488,640
|
)
|
|
|
(211,026
|
)
|
|
|
|
|
|
|
|
|
|
Total equity (deficit)
|
|
|
(241,417
|
)
|
|
|
36,197
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit)
|
|
$
|
5,819
|
|
|
$
|
78,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the financial statements.
F-3
ENCOMPASS
ENERGY SERVICES, INC.
STATEMENTS OF OPERATIONS
|
|
Year ended December 31,
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
275,077
|
|
|
|
442,277
|
|
Impairment of fixed asset
|
|
|
—
|
|
|
|
106,323
|
|
Gain on sale of business opportunity
|
|
|
—
|
|
|
|
(600,000
|
)
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
275,077
|
|
|
|
(51,400
|
)
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(275,077
|
)
|
|
|
51,400
|
|
|
|
|
|
|
|
|
|
|
Financial expenses
|
|
|
(2,537
|
)
|
|
|
(5,893
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(277,614
|
)
|
|
|
45,507
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(277,614
|
)
|
|
$
|
45,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
2,056,985
|
|
|
|
2,056,985
|
|
Weighted average shares outstanding - diluted
|
|
|
2,056,985
|
|
|
|
2,061,178
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share - basic
|
|
$
|
(0.13
|
)
|
|
$
|
0.02
|
|
Income (loss) per share - diluted
|
|
$
|
(0.13
|
)
|
|
$
|
0.02
|
|
The
accompanying notes are an integral part of the financial statements.
F-4
ENCOMPASS
ENERGY SERVICES, INC.
STATEMENTS OF COMPREHENSIVE INCOME
|
|
Year ended December 31,
|
|
|
2012
|
|
2011
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(277,614
|
)
|
|
$
|
45,507
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
(277,614
|
)
|
|
$
|
45,507
|
|
The
accompanying notes are an integral part of the financial statements.
F-5
ENCOMPASS
ENERGY SERVICES, INC.
STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
|
|
|
Share Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
Amount
|
|
|
|
Additional paid-in capital
|
|
|
|
Accumulated deficit
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
2,056,985
|
|
|
$
|
20,569
|
|
|
$
|
218,154
|
|
|
$
|
(256,533
|
)
|
|
$
|
(17,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
8,500
|
|
|
|
—
|
|
|
|
8,500
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,507
|
|
|
|
45,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
2,056,985
|
|
|
$
|
20,569
|
|
|
$
|
226,654
|
|
|
$
|
(211,026
|
)
|
|
$
|
36,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(277,614
|
)
|
|
|
(277,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
2,056,985
|
|
|
$
|
20,569
|
|
|
$
|
226,654
|
|
|
$
|
(488,640
|
)
|
|
$
|
(241,417
|
)
|
The
accompanying notes are an integral part of the financial statements.
F-6
ENCOMPASS
ENERGY SERVICES, INC.
STATEMENTS OF CASH FLOWS
|
|
Year ended December 31,
|
|
|
2012
|
|
2011
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(277,614
|
)
|
|
$
|
45,507
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Gain on sale of business opportunity
|
|
|
—
|
|
|
|
(600,000
|
)
|
Impairment of fixed asset
|
|
|
—
|
|
|
|
106,323
|
|
Depreciation expense
|
|
|
203
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
8,500
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
19,234
|
|
|
|
(19,234
|
)
|
Accounts payable
|
|
|
36,450
|
|
|
|
(10,504
|
)
|
Related party accounts payable
|
|
|
(10,931
|
)
|
|
|
10,931
|
|
Interest expenses on the related party notes payable
|
|
|
2,537
|
|
|
|
10,490
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(230,121
|
)
|
|
|
(447,987
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of business opportunity
|
|
|
—
|
|
|
|
600,000
|
|
Purchase of property and equipment
|
|
|
(1,625
|
)
|
|
|
(7,920
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(1,625
|
)
|
|
|
592,080
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Related party notes payable, net
|
|
|
177,107
|
|
|
|
(89,500
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
177,107
|
|
|
|
(89,500
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(54,639
|
)
|
|
|
54,593
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD
|
|
|
59,036
|
|
|
|
4,443
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, AT END OF PERIOD
|
|
$
|
4,397
|
|
|
$
|
59,036
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property and equipment acquired in exchange for a note payable to related party
|
|
$
|
—
|
|
|
$
|
103,000
|
|
The
accompanying notes are an integral part of the financial statements.
F-7
ENCOMPASS
ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE
A.
Organization
Encompass
Energy Services, Inc. (the “Company”) is a Delaware corporation formed on February 12, 2008 under the name Ametrine
Capital, Inc. The Company filed an amended and restated Certificate of Incorporation with the Delaware Secretary of State that
changed its legal name to New Source Energy Group, Inc. on April 18, 2011. On December 2, 2011, the Company filed another amendment
to its Certificate of Incorporation with the Delaware Secretary of State that changed its legal name from New Source Energy Group,
Inc. to Encompass Energy Services, Inc. Both the Company’s board of directors and the holder of 1,727,983 shares of the
Company’s common stock (approximately 84% of the issued and outstanding shares thereof) approved the amendment to the Company’s
Certificate of Incorporation to effectuate the name change on October 31, 2011. The approval of this amendment was described in
a Definitive Information Statement on Schedule 14C filed by the Company with the Securities and Exchange Commission and distributed
to the Company’s stockholders on November 10, 2011. Currently, the Company is not engaged in any business operation.
The accompanying
financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered cumulative
losses and negative cash flows from operations since inception. Currently, the Company depends on financing provided by its stockholders.
These conditions give rise to substantial doubt about the Company’s ability to continue as a going concern. The financial
statements do not include any adjustments that may result from the outcome of this uncertainty.
NOTE
B.
Summary
of Significant Accounting Policies
Basis
of presentation.
The accompanying financial statements have been prepared in accordance with accounting principles
generally accepted (“GAAP”) in the United States of America.
Use
of estimates in preparation of financial statements.
The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of expenses during the
reporting periods. Actual results could differ from those estimates.
Cash
and cash equivalents.
Cash and cash equivalents consist of demand deposits and highly liquid investments with original
maturities of three months or less. Cash and cash equivalents are carried at cost which approximates fair value.
Income
taxes.
Deferred taxes are determined utilizing the “asset and liability” method, whereby deferred tax
asset and liability account balances are determined based on differences between financial reporting and the tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected
to reverse. The Company provides a valuation allowance when it’s more likely than not that deferred tax assets will not
be realized in the foreseeable future.
F-8
ENCOMPASS
ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
Fair
value of financial instruments.
The Company discloses fair value measurements for financial and non-financial assets and
liabilities measured at fair value. Fair value is based on the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date.
The accounting
standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into
three broad levels, which are described below:
Level
1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
Level
2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level
3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority
to Level 3 inputs.
Financial
items carried at fair value as of December 31, 2012 and 2011 consisted entirely of cash and cash equivalents and are classified
as Level 1.
Comprehensive
Income.
The Company accounts for comprehensive income in accordance with ASC No. 220, “Comprehensive Income.”
Comprehensive income generally represents all changes in stockholders’ equity during the period except those resulting from
investments by, or distributions to, stockholders.
Recent
accounting pronouncements.
In December 2011, the FASB issued Accounting Standard Update No. 2011-11,
“Balance
Sheet (210): Disclosures about Offsetting Assets and Liabilities,”
which requires additional disclosures about the nature
of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments.
The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods
therein, with retrospective application required. In January 2013, the FASB issued Accounting Standard Update No. 2013-01,
“Clarifying
the Scope of Disclosures about Offsetting Assets and Liabilities.”
The Company believes that the adoption of both the
standard and the update will not have an impact on the Company’s financial statements.
F-9
ENCOMPASS
ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE
C.
Earnings
per Share
|
|
Year ended December 31,
|
|
|
2012
|
|
2011
|
|
|
|
|
|
1. Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(277,614
|
)
|
|
$
|
45,507
|
|
|
|
|
|
|
|
|
|
|
2. Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share – weighted average of shares
|
|
|
2,056,985
|
|
|
|
2,056,985
|
|
Dilutive effect of vested stock options
|
|
|
—
|
|
|
|
4,193
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share – weighted average of shares
|
|
|
2,056,985
|
|
|
|
2,061,178
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share attributed to stockholders
|
|
$
|
(0.13
|
)
|
|
$
|
0.02
|
|
Diluted income (loss) per share attributed to stockholders
|
|
$
|
(0.13
|
)
|
|
$
|
0.02
|
|
NOTE
D.
Income
Taxes
Deferred
income taxes.
Deferred taxes are determined by applying the provisions of enacted tax laws and rates for the
jurisdictions in which the Company operates to the estimated future tax effects of the differences between the tax basis of
assets and liabilities and their reported amounts in the Company’s financial statements. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.
Significant components of the Company’s deferred tax assets are as follows:
|
|
Year ended December 31,
|
|
|
2012
|
|
2011
|
|
|
|
|
|
Operating loss carry forward
|
|
$
|
161,000
|
|
|
$
|
53,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset before valuation allowance
|
|
|
161,000
|
|
|
|
53,000
|
|
Valuation allowance
|
|
|
(161,000
|
)
|
|
|
(53,000
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
Management
currently believes that since the Company has a history of losses it is more likely than not that the deferred tax regarding the
loss carry forwards and other temporary differences will not be realized in the foreseeable future.
Theoretical
tax.
The main reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition
of the benefits from accumulated net operating losses carry-forward due to the uncertainty of the realization of such tax benefits.
F-10
ENCOMPASS
ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
Uncertain
tax position
The Company has recorded no liability for income taxes associated with unrecognized tax benefits at
the date of adoption and have not recorded any liability associated with unrecognized tax benefits during 2012 and 2011. Accordingly,
the Company has not recorded any interest or penalty in regard to any unrecognized benefit.
NOTE
E.
Abandoned
Acquisition Efforts
On June
30, 2011 the board of directors of the Company affirmatively determined that the Company abandoned its efforts to acquire certain
oil and gas assets and interests located in central Oklahoma (the “Oil and Gas Assets”) from an entity owned by the
Company’s former Chairman, David Chernicky. At the time of termination, the Company had not acquired the Oil and Gas Assets
or any interest therein and had not finalized or entered into any definitive agreement to do so. At that time, two of the Company’s
directors (Messrs. Chernicky and Albert) resigned, and another director, Mr. Kos, resigned as an officer of the Company.
During
the period of time that the Company was considering the acquisition of the Oil and Gas Assets, it expended a significant amount
of time and resources in due diligence, contract drafting and negotiation, and other activities related to the potential acquisition
of the Oil and Gas Assets. During this process, the Company (directly and through consultants) developed a significant amount
of knowledge, information and work product (collectively the “Business Opportunity and Information”).
To resolve
the conflicts of interest associated with the possible exploitation of the Business Opportunity and Information by another entity
controlled by Mr. Chernicky, the Company negotiated terms by which the Company waived any rights it had in the Business Opportunity
and Information and agreed to cooperate and provide reasonable assistance with the transfer of the Business Opportunity and Information
to a potential new purchaser (the “Waiver”). The Company delivered the Waiver on July 18, 2011 to New Dominion, LLC
(“New Dominion”), an affiliate of Mr. Chernicky. In consideration for delivering the Waiver, the Company received
$600,000 in cash from New Dominion. Largely as a result of waiving its rights to the Business Opportunity and Information and
electing to potentially pursue other opportunities in the oil and gas industry, the Company changed its name from New Source Energy
Group, Inc. to Encompass Energy Services, Inc. as further described in Note A.
As a
result of the Company’s decision to abandon its efforts to acquire the Oil and Gas Assets, the Business Opportunity and
Information had little to no value to the Company. Consequently, the board of directors determined that this did not constitute
the sale by the Company of any assets but merely a waiver of a business opportunity that the Company could not exploit.
Because
of former relationships between Mr. Kos (the other member of the Company’s board of directors) and New Dominion and its
affiliates, the Company negotiated the terms of the Waiver solely by and through its president and sole disinterested director
Antranik (Nick) Armoudian. Mr. Armoudian was aware of the conflicts of interest and the related party nature of the transactions
at the time that he negotiated and approved the Waiver; however, he believed that under the circumstances that the terms by which
the Company delivered the Waiver were fair and in the Company’s and its stockholders’ best interests.
F-11
ENCOMPASS
ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
The Company
has used the proceeds received as a result of the Waiver primarily for the repayment of loans and other amounts owed by the Company
to Mr. Kos, a former executive officer of the Company and a current member of its board of directors, and certain affiliates of
Mr. Kos, as well as the repayment of certain obligations to other parties.
Now that
the Company has abandoned the potential acquisition of the Oil and Gas Assets, the Company hopes to identify and execute upon
a new business opportunity.
NOTE
F.
Commitments
and Contingencies
On January
17, 2011, the Company entered into an agreement whereby it was required to put $150,000 into escrow in favor of BMO Capital Markets
to cover future expenditures relating to a proposed credit facility in anticipation of a future acquisition. On May 26, 2011,
the Company placed these funds into escrow. As a result of the Company’s transfer of the Business Opportunity and Information,
the Company received a full refund of the funds held in escrow in September 2011.
On July
18, 2011, the Company, in connection with the sale of the Business Opportunity and Information described in Note E, assigned its
office lease to the Company’s president. As a result, the Company recognized an impairment of leasehold improvement assets
and no longer has any office lease future commitments.
NOTE
G.
Related
Party Transactions
During
the year ended December 31, 2011, the Company’s president advanced approximately $380,000 cash and provided $103,000 of
property and equipment to the Company in exchange for a note payable. These were demand loans and accrued interest at 5% per annum.
As of March 31, 2012, the Company had repaid these loans in full.
During
2012, Deylau, LLC, our controlling stockholder, advanced another $196,500 to the Company in exchange for a note payable. This
is a demand loan and accrues interest at 5% per annum. No payments of principal or interest have been made on the 2012 loan advances
as of December 31, 2012.
As described
in Note E, the Company received $600,000 from New Dominion in consideration for its delivery of the Waiver. Mr. Kos, a member
of our Board of Directors and a former officer, previously served as a consultant for New Dominion and received compensation from
New Dominion for his services. Further, two of the Company’s former directors, being Mr. Chernicky and Mr. Albert are affiliates
of New Dominion. However, the Company negotiated the terms of the Wavier solely through Mr. Armoudian.
NOTE
H.
Capital
Stock Transactions
On April
15, 2011, the Company caused an amendment to its Certificate of Incorporation to be filed with the Delaware Secretary of State
to effect a 0.47-for-1 combination of the Company’s outstanding common stock (the “reverse stock split”). Then
on April 18, 2011, the Company filed an Amended and Restated Certificate of Incorporation with the Delaware Secretary of State,
which amended various provisions of the Company’s Certificate of Incorporation, including an amendment to change the company’s
name from Ametrine Capital, Inc. to New Source Energy Group, Inc. Subsequently, the Company filed another Amended and Restated
Certificate of Incorporation with the Delaware Secretary of State, which changed the Company’s name to Encompass Energy
Services, Inc. effective October 31, 2011.
F-12
ENCOMPASS
ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
Reverse
stock split.
The reverse stock split was effective under Delaware law on April 15, 2011. Under Delaware law, upon the
reverse stock split becoming effective, each share of the Company’s common stock that was issued and outstanding automatically
became 0.47 shares without any change in the par value of such shares; 1,000 shares became 470 shares. The reverse stock split
did not serve to decrease or otherwise effect the Company’s authorized capital. No fractional shares were issued in connection
with the reverse stock split. Stockholders who were entitled to a fractional share, if any, instead received a whole share.
The reverse
stock split affected all holders of the Company’s common stock uniformly and did not affect any stockholder’s percentage
ownership interest in the Company, except to the extent the reverse split resulted in any holder being granted a whole share for
any fractional share that resulted from the reverse stock split.
Before
the reverse stock split, 4,376,559 shares were outstanding. Following the reverse stock split, there are approximately 2,056,985
shares outstanding. The loss per share and weighted average shares outstanding presented in the statement of operations have been
restated to reflect the reverse stock split. The share capital and additional paid-in capital have also been restated to reflect
the reverse stock split. Accordingly, $23,197 was reclassified from share capital to additional paid-in capital.
Amended
and restated certificate of incorporation.
The Amended and Restated Certificate of Incorporation and each of the
amendments contained therein became effective under Delaware law on April 18, 2011. The Amended and Restated Certificate of Incorporation
amended several provisions of the Company’s Certificate of Incorporation. Among the amendments effected in the Amended and
Restated Certificate of Incorporation were:
|
·
|
An
increase to the Company’s
authorized capital
to 200,000,000 shares
comprised of 180,000,000
shares of common stock
and 20,000,000 shares
of preferred stock.
|
|
|
|
|
·
|
The
addition of provisions
intended to more accurately
define the limitations
of liability as provided
in Section 102(b)(7)
of the General Corporation
Law of Delaware, as
well as to add provisions
regarding indemnification
and the advancement
of expenses.
|
|
|
|
|
·
|
The
addition of a provision
with respect to the
limitation of liability
of the officers, directors,
and other agents of
the Company and with
respect to the Company’s
indemnification obligations,
may only be amended
by the affirmative
vote of two-thirds
of the votes entitled
to be cast on any proposal
to repeal or modify
such provisions.
|
|
·
|
Other
conforming and/or non-substantive
amendments to the Certificate
of Incorporation.
|
|
|
|
As described
in Note A, the Company changed its name from New Source Energy Group, Inc. to Encompass Energy Services, Inc. on October 31, 2011
and filed another amendment to its Certificate of Incorporation.
F-13
ENCOMPASS
ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE
I.
Changes in Officers and Directors / Outstanding Stock Option
On June
30, 2011, Antranik Armoudian was appointed to the Company’s board of directors and also as the Company’s president,
chief executive officer, chief financial officer, secretary, and treasurer. There was no arrangement or understanding pursuant
to which Mr. Armoudian was appointed as a director or executive officer, except that the Company agreed to pay Mr. Armoudian an
annual salary of $25,000, which the Company’s board of directors subsequently increased to $150,000 effective October 1,
2012. Also on June 30, 2011, the Company granted Mr. Armoudian a stock option to acquire 50,000 shares of the Company’s
common stock at an exercise price of $0.10 per share and exercisable for a ten-year term, expiring June 30, 2021. Ten thousand
shares vested upon the Company completing the transfer of the Business Opportunity and Information, and the remaining 40,000 shares
will vest when, and if, the Company completes the acquisition of another business opportunity and files a current report on Form
8-K (or other appropriate form) reporting such acquisition or transaction.
During
the year ended December 31, 2011, 50,000 stock options were granted (being the option to Mr. Armoudian described above) with a
weighted-average grant date fair value for each option of approximately $0.86. Assumptions used in the Company’s Black-Scholes
valuation model to estimate the grant date fair value were expected volatility of 50%, expected dividends of 0%, expected term
of 5 years, and a risk-free interest rate of 1.75%.
During
the year ended December 31, 2011, the Company recognized expense of $8,500 related to the vesting of 10,000 stock options as described
above. As of December 31, 2011, there was $34,412 of total unrecognized compensation cost related to stock options. That cost
is expected to be recognized if an acquisition of a business opportunity is completed within the next ten years. During the year
ended December 31, 2012, the Company issued no stock options and recognized no stock based compensation.
The following
table summarizes the Company’s stock option activity for the year ended December 31, 2012:
|
|
Year Ended December 31, 2012
|
|
|
Number
of
Options
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
Beginning Balance
|
|
|
50,000
|
|
|
$
|
0.10
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Ending Balance
|
|
|
50,000
|
|
|
$
|
0.10
|
|
F-14
ENCOMPASS
ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
The following
table summarizes information about the Company’s options outstanding and exercisable:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted-Average
|
|
|
|
Weighted-Average
|
Exercise Price
|
|
Options Outstanding
|
|
Remaining Contractual Life
|
|
Exercise Price
|
|
Options Exercisable at Dec. 31, 2012
|
|
Remaining Contractual Life
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.10
|
|
50,000
|
|
8.50
|
|
$ 0.10
|
|
10,000
|
|
8.50
|
|
$ 0.10
|
There
are no family relationships between Mr. Armoudian and any current or former Company executive officer or director. Except for
the salary to be paid to Mr. Armoudian and the option grant described above, there have been no previous transactions between
Mr. Armoudian and the Company and/or any of its current or former affiliates in which Mr. Armoudian had a direct or indirect interest.
F-15
Exhibit
Index
|
|
Incorporated
by Reference
|
|
Exhibit
No.
|
Exhibit
Description
|
Form
|
SEC
File No.
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
3.1(a)
|
Amended
and Restated Certificate of Incorporation of Encompass Energy Services, Inc.
|
8-K
|
000-53499
|
3.1.2
|
04/19/2011
|
|
3.1(b)
|
Certificate
of Amendment to the Certificate of Incorporation of Encompass Energy Services, Inc.
|
8-K
|
000-53499
|
3.1
|
12/05/2011
|
|
3.2
|
Amended
and Restated By-Laws of Encompass Energy Services, Inc.
|
8-K
|
000-53499
|
3.1
|
12/14/2010
|
|
10.1
|
Agreement
dated March 5, 2009, between Standard Registrar & Transfer Company, Inc. and Encompass Energy Services, Inc.
|
N-2/A
|
333-153083
|
(k)
|
03/18/2009
|
|
10.2
|
Waiver
dated July 18, 2011, by Encompass Energy Services, Inc. in favor of New Dominion, LLC
|
8-K
|
000-53499
|
99.1
|
07/22/2011
|
|
14.1
|
Code
of Ethics for Encompass Energy Services, Inc.
|
N-2/A
|
333-153083
|
(r)
|
05/11/2009
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
|
|
|
X
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
|
|
|
|
X
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. § 1350
|
|
|
|
|
X
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. § 1350
|
|
|
|
|
X
|
________________
* Encompass Energy Services, Inc. was previously known both as New Source Energy Group, Inc. and as Ametrine Capital, Inc.
Encompass Energy Services (CE) (USOTC:EESI)
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