NOTES
TO FINANCIAL STATEMENTS
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) at the time 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 cash flow from operations since inception, currently, the Company depends on financing provided
by its stockholders. 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 unaudited financial statements present the financial position at June 30, 2013 and December
31, 2012 and the results of operations for the three and six months ended June 30, 2013 and 2012, and cash flows for the six months
ended June 30, 2013 and 2012 of Encompass Energy Services, Inc. These financial statements include all adjustments, consisting
of normal and recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial
position and the results of operations for the indicated periods. The results of operations for the six months ended June 30,
2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013. Reference is made
to the Company’s financial statements for the year ended December 31, 2012 included in the Company’s Annual Report
on Form 10-K for such period for an expanded discussion of the Company’s financial disclosures and accounting policies.
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.
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.
5
ENCOMPASS
ENERGY SERVICES, INC.
NOTES
TO FINANCIAL STATEMENTS
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 June 30, 2013 and December 31, 2012 consisted entirely of cash and cash equivalents and are
classified as Level 1.
Recent
accounting pronouncements.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out
of Accumulated Other Comprehensive Income. This ASU requires disclosures regarding reclassifications out of accumulated other
comprehensive income in a single location in the financial statements by component. This ASU is effective prospectively for fiscal
years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU, effective January 1,
2013, did not have an impact on the Company’s financial statements.
|
|
Six months ended June 30,
|
|
Three months ended June 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
1. Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(198,391
|
)
|
|
$
|
(68,561
|
)
|
|
$
|
(129,120
|
)
|
|
$
|
(42,762
|
)
|
2. Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share – weighted average of shares outstanding
|
|
|
2,056,985
|
|
|
|
2,056,985
|
|
|
|
2,056,985
|
|
|
|
2,056,985
|
|
Basic and diluted loss per share attributable to stockholders
|
|
$
|
(0.096
|
)
|
|
$
|
(0.033
|
)
|
|
$
|
(0.063
|
)
|
|
$
|
(0.021
|
)
|
6
ENCOMPASS
ENERGY SERVICES, INC.
NOTES
TO FINANCIAL STATEMENTS
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.
As
of June 30, 2013 and December 31, 2012, the Company has provided valuation allowances of approximately $234,000 and $161,000,
respectively, for deferred tax assets resulting from tax loss carryforwards. 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 carryforwards and other temporary
differences will not be realized in the foreseeable future.
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.
7
ENCOMPASS
ENERGY SERVICES, INC.
NOTES
TO FINANCIAL STATEMENTS
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.
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 in that field.
Note F.
|
Related Party Transactions
|
|
|
During
2012, Deylau, LLC, an entity owned and controlled by Kristian Kos, a director of the Company and also its former president, advanced
$196,500 to the Company in exchange for a note payable. Deylau, LLC advanced an additional $50,000 to the Company on this note
during the first six months of 2013. This is a demand loan and accrues interest at 5% per annum. No payments of principal or interest
have been made on the 2012 and 2013 loan advances as of June 30, 2013.
During
the six months ended June 30, 2013, Torus, LLC, an entity in which Deylau, LLC owns a 50% interest, advanced $142,000 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 these advances as of June 30, 2013.
Note G.
|
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
amendment to its Certificate of Incorporation with the Delaware Secretary of State, which changed the Company’s name to
Encompass Energy Services, Inc. on December 2, 2011.
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.
8
ENCOMPASS
ENERGY SERVICES, INC.
NOTES
TO FINANCIAL STATEMENTS
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 in 2011.
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 December
2, 2011 and filed another amendment to its Certificate of Incorporation to effectuate this change.
Note H.
|
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 a business opportunity and files a current report on Form 8-K
(or other appropriate form) reporting such acquisition or transaction.
9
ENCOMPASS
ENERGY SERVICES, INC.
NOTES
TO FINANCIAL STATEMENTS
During
2011, 50,000 stock options were granted (being the option to Mr. Armoudian described above) with a weighted-average grant date
fair value of $0.85824. 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 five years, and a risk-free interest rate of
1.75%.
As
of June 30, 2013, 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 ten years of the grant date.
The
following table summarizes the Company’s stock option activity for the six months ended June 30, 2013:
|
|
Six months ended June 30, 2013
|
|
|
Number of Options
|
|
Weighted-Average Exercise Price
|
Beginning Balance
|
|
|
50,000
|
|
|
$
|
0.10
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Ending Balance
|
|
|
50,000
|
|
|
$
|
0.10
|
|
The
following table summarizes information about the Company’s options outstanding and exercisable as of June 30, 2013:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Exercise
Price
|
|
|
Options
Outstanding
|
|
|
Remaining
Contractual
Life
|
|
|
|
Exercise
Price
|
|
|
|
Options Exercisable at June 30, 2013
|
|
|
|
Remaining Contractual Life
|
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.10
|
|
|
50,000
|
|
|
8
|
|
|
$
|
0.10
|
|
|
|
10,000
|
|
|
|
8
|
|
|
$
|
0.10
|
|
10