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Energy Services, Inc.
ENERGY SERVICES, INC.
Table of Contents
PART I – FINANCIAL INFORMATION
ENERGY SERVICES, INC.
The accompanying notes are an integral part of these financial statements.
ENERGY SERVICES, INC.
The accompanying notes are an integral part of these financial statements.
ENERGY SERVICES, INC.
ENERGY SERVICES, INC.
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 and 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.
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. 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 March 31, 2012 and December 31, 2011 and the results of operations and cash flows for the three-month periods ended March 31, 2012 and 2011 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 three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012. Reference is made to the Company’s financial statements for the year ended December 31, 2011 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.
ENERGY SERVICES, INC.
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 March 31, 2012 and December 31, 2011 consisted entirely of cash and cash equivalents and are classified as Level 1.
Recent accounting pronouncements. In December 2011, the Financial Accounting Standard Board (“FASB”) issued an accounting standard update 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. The Company believes that the adoption will not have a material impact on its financial statements.
In June 2011, the FASB amended its comprehensive income presentation guidance. The amendment requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The guidance is effective for interim and annual periods beginning after December 15, 2011. In December 2011, the FASB indefinitely deferred certain provisions of this guidance.
In May 2011, the FASB amended its fair value measurements and disclosures guidance. The amendment clarifies the existing guidance and adds new disclosure requirements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The Company believes that the adoption will not have a material impact on its financial statements.
Note C. Loss per Share
ENERGY SERVICES, INC.
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.
As of March 31, 2012 and December 31, 2011, the Company has provided valuation allowances of $62,000 and $53,000, 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.
ENERGY SERVICES, INC.
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.
Note F. Related Party Transactions
The Company’s former president advanced approximately $380,000 cash and provided $103,000 of property and equipment to the Company in exchange for a note payable during 2011. These were demand loans and accrued interest at 5% per annum. As of March 31, 2012, the Company had repaid these loans in full.
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.
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:
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 has agreed to pay Mr. Armoudian an annual salary of $25,000. The Company also 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 5 years, and a risk-free interest rate of 1.75%.
During 2011, the Company recognized expense of $8,500 related to the vesting of 10,000 stock options as described above. As of March 31, 2012, 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.
The following table summarizes the Company’s stock option activity for the three months ended March 31, 2012:
The following table summarizes information about the Company’s options outstanding and exercisable as of March 31, 2012:
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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statements that we make in this Form 10-Q 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.
Encompass Energy Services, Inc. (referred to herein as the “Company,” “we” and correlative terms) has been essentially inactive since its formation. Until November 19, 2010, we were regulated as a business development company under the Investment Company Act of 1940. However, we were not able to raise sufficient capital to execute upon our original business plan and withdrew this election in July 2010.
On November 30, 2010, our largest stockholder sold its entire interest in the Company (approximately 92% of our issued and outstanding shares of common stock) in a private transaction (the “Change of Control Transaction”). Pursuant to the terms of the Change of Control Transaction, our directors and sole executive officer resigned, and new persons were appointed to serve as our directors and executive officers.
Plan of Operations
We are not currently engaged in any business operations. Ultimately, we hope to identify and act upon a business opportunity in the oil and gas or energy production-related industries in the United States, and we currently are considering exploring certain opportunities in the oilfield services industry. However, we have taken no definitive steps to investigate new business opportunities and have not engaged in even preliminary discussions with potential acquirees or third parties. There can be no assurance that we will identify an appropriate business opportunity or corporate transaction or, if one is identified, that we will be able to complete any such transaction.
Results of Operations — Quarters Ended March 31, 2012 and 2011
Revenues. We have not had any revenues from operations since our inception. As of March 31, 2012, we had an accumulated deficit of $(236,825).
General and Administrative Expenses. General and administrative expenses for the quarter ended March 31, 2012, decreased 76% to $25,799, compared to the quarter ended March 31, 2011. The decrease was primarily attributable to higher expenses in the first quarter of 2011 related to expenses we incurred in connection with our evaluation and investigation of a proposed business opportunity that we subsequently abandoned. All of our expenses in the first quarter of 2012 were general and administrative costs (including accounting and legal fees) incurred to fund our limited operations and to satisfy our disclosure obligations under the federal securities laws.
Net Loss. We recognized a net loss of $(25,799) for the quarter ended March 31, 2012, as compared to the $(108,372) net loss recognized for the comparable period in 2011. All operating costs and expenses in both the 2012 and 2011 periods were attributable to general and administrative costs.
We anticipate continued net losses as we continue to evaluate business opportunities. We will pursue these business opportunities to the extent that our management identifies 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 March 31, 2012, we had current assets of $29,017 and current liabilities of $18,619, resulting in net working capital of only $10,398. Assets consist solely of our limited cash on hand and certain prepaid expenses. Cash used in operating activities during the first quarter of 2012 was $26,864. Since the Change of Control Transaction, we have funded our operations primarily through loans provided by our majority stockholder, Deylau, LLC, although there are currently no outstanding loans due. We cannot offer any assurance that Deylau, LLC, or any other related party will be able or willing to continue to advance funds for 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 March 31, 2012, we had total liabilities of $18,619. These liabilities were composed primarily of accounting and legal fees payable.
Our limited assets likely are not sufficient to fund operations through the remainder of 2012. In the short term, we expect to use the limited cash on hand to pay basic general and administrative costs, and otherwise to rely on our officers, directors and majority stockholder to advance funds to us. In order to be able to pursue and consummate any potential business opportunity, we will need to identify and obtain one or more outside sources of funding. Any business opportunity we pursue will require a significant amount of capital and sources of liquidity. We cannot offer any assurance that we will be able to raise sufficient funds necessary to complete a strategic transaction or fund our planned operations and activities.
We have 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, although this relationship is terminable at will by either party. Apart from the foregoing, we do not presently have any other contractual obligations.
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 results of operations and/or financial condition.
Our significant accounting policies are disclosed in Note B to the Financial Statements included in Part I, Item 1 of this Form 10-Q.
Recently Issued Accounting Pronouncements
Information relating to this subject is disclosed in Note B to the Financial Statements included in Part I, Item 1 of this Form 10-Q.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (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 Quarterly 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 Securities and Exchange 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.
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 weaknesses in our internal control over financial reporting described in our Annual Report on Form 10-K for the year ended December 31, 2011, our disclosure controls and procedures were not effective as of March 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.
However, notwithstanding this conclusion, our management believes that the financial statements included in this Quarterly Report present fairly, in all material respects, our consolidated financial position, results of operations and cash flows for the periods presented. Due to our limited personnel we are not able to, and do not intend to, immediately take any action to remediate the material weaknesses our management has identified. However, if we are able to secure funding and execute upon a business opportunity, we expect to take steps to attempt to remediate these material weaknesses.
Changes in Internal Control over Financial Reporting
During the first quarter of 2012, no change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) that materially affected, or is likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any legal proceedings, and no such proceedings are known to be contemplated.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sales of Unregistered Equity Securities
We did not make any unregistered sales of equity securities during the quarter ended March 31, 2012.
Repurchases of Equity Securities
We did not repurchase any of our equity securities during the first quarter of 2012.
For a list of documents filed or furnished as exhibits to this Quarterly Report, see the Exhibit Index immediately preceding the exhibits filed with this Quarterly Report.
Pursuant to the requirements 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.