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 negative 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
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Basis of presentation.
The accompanying unaudited
financial statements present the financial position at June 30, 2014, and December 31, 2013, and the results of operations for
the three and six months ended June 30, 2014, and 2013, and cash flows for the six months ended June 30, 2014, and 2013, 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, 2014 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2014. Reference is made to the Company’s financial statements
for the year ended December 31, 2013, 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.
6
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, 2014, and December 31, 2013, 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 May
2014, the FASB issued ASU No. 2014-09, Revenue from contracts with customers (Topic 606): The core principle of the
guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To
achieve that core principle, an entity should apply a five step methodology: (1) identify the contract(s) with a customer;
(2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction
price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a
performance obligation. An entity should apply the amendments in this update using one of the following two methods: (1)
retrospectively to each prior reporting period presented (along with some practical expedients); or (2) retrospectively with
the cumulative effect of initially applying this update recognized at the date of initial application. The amendments in this
update will be effective prospectively for annual reporting periods beginning after December 15, 2016, including interim
periods within that reporting period. The Company does not expect a significant impact on the financial statements upon adoption.
7
ENCOMPASS ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
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|
|
Six months
ended June 30,
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|
Three months
ended June 30,
|
|
|
|
2014
|
|
2013
|
|
2014
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|
2013
|
1.
|
Numerator:
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|
|
|
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|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Net loss
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|
$
|
(54,064
|
)
|
|
$
|
(198,391
|
)
|
|
$
|
(23,782
|
)
|
|
$
|
(129,120
|
)
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|
|
|
|
|
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|
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|
|
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|
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|
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2.
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Denominator:
|
|
|
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|
|
|
|
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|
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|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share – weighted average of shares outstanding
|
|
|
2,056,983
|
|
|
|
2,056,983
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|
|
|
2,056,983
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|
|
|
2,056,983
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|
|
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|
|
|
|
|
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|
|
|
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|
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Basic and diluted loss per share attributable to stockholders
|
|
$
|
(0.026
|
)
|
|
$
|
(0.096
|
)
|
|
$
|
(0.012
|
)
|
|
$
|
(0.063
|
)
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|
|
|
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|
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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, 2014, and December 31, 2013,
the Company has provided valuation allowances of approximately $301,000 and $284,000, 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.
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Related Party Transactions
|
During 2012, Deylau, LLC, our controlling stockholder, advanced
another $196,500 to the Company in exchange for a note payable. During 2013, Deylau, LLC, advanced an additional $50,000 to the
Company on this 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 or 2013 loan advances as of June 30, 2014.
During 2013, Torus, LLC, an entity in which
Deylau, LLC owns a 50% interest, advanced $284,000 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, 2014.
8
ENCOMPASS ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
From January 1 through June 30, 2014, Torus,
LLC has advanced an additional $37,705 to the Company on its note payable. No payments of principal or interest have been made
on the 2014 loan advances as of June 30, 2014.
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|
Number of
shares as of June 30,
2014 and 2013
|
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Authorized
|
|
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Issued
and outstanding
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|
|
|
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Common stock, par value $0.01 per share
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|
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180,000,000
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|
|
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2,056,983
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Preferred stock, par value $0.01 per share
|
|
|
|
20,000,000
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|
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—
|
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Common Stock.
Common Stock confers
upon its holders the rights to receive notice to participate and vote in general meetings of the Company, and the right to receive
dividends if declared.
|
Note G.
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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. Effective January 1, 2014, the Company and Mr. Armoudian mutually
agreed to terminate his salary. Mr. Armoudian agreed to remain in his capacities as our president, chief executive officer, chief
financial officer, secretary and treasurer while the Company’s board of directors considers possible successors. To date,
we have been unable to locate suitable successors for these positions.
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.
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%.
9
ENCOMPASS ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2014, there was $34,412 of total
unrecognized compensation cost related to stock options. That cost is expected to be recognized if an acquisition of a business
opportunity is completed within ten years of the grant date.
The following table summarizes the Company’s
stock option activity for the six months ended June 30, 2014:
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|
Six months ended June 30, 2014
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Number of Options
|
|
Weighted-Average Exercise Price
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Beginning Balance
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50,000
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|
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$
|
0.10
|
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|
|
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Granted
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|
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—
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|
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—
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Exercised
|
|
|
—
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|
|
|
—
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Forfeited
|
|
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—
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|
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—
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Ending Balance
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50,000
|
|
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$
|
0.10
|
The following table summarizes information about the Company’s
options outstanding and exercisable as of June 30, 2014:
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Options Outstanding
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Options Exercisable
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|
|
|
|
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Weighted-Average
|
|
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|
|
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|
Weighted- Average
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|
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Exercise
Price
|
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|
Options
Outstanding
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|
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Remaining
Contractual
Life
|
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|
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Exercise
Price
|
|
|
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Options Exercisable at June 30, 2014
|
|
|
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Remaining Contractual Life
|
|
|
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Exercise Price
|
|
$
|
0.10
|
|
|
50,000
|
|
|
7
|
|
|
$
|
0.10
|
|
|
|
10,000
|
|
|
|
7
|
|
|
$
|
0.10
|
|
10