Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 OR 15(d) of the Securities and Exchange Act of 1934
Date
of
Report (Date of earliest event reported): May 1, 2008
EMVELCO
CORP.
(Exact
name of registrant as specified in charter)
|
Delaware
|
001-12000
|
13-3696015
|
|
(State
or other jurisdiction of
incorporation)
|
(Commission
File
Number)
|
(IRS
Employer
Identification
No.)
|
| |
|
|
1061
½
N.
Spaulding Ave., Los Angeles, California 90046
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone number, including area code: (323) 822-1750
With
a
copy to:
Stephen
M. Fleming, Esq.
Law
Offices of Stephen M. Fleming PLLC
110
Wall
Street, 11th
Floor
New
York,
New York 10005
T:
516.833.5034
F:
516.977.1209
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instructions A.2. below):
o
Written
communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting
material pursuant to Rule
14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement
communications pursuant
to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement
communications pursuant
to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
| Item 1.01 |
Entry into a Material
Definitive Agreement |
| Item 2.01 |
Completion of Acquisition
or
Disposition of Assets |
| Item 2.03 |
Creation of a Direct Financial Obligation or
an
Obligation Under an
Off-Balance Sheet Arrangement of a
Registrant
|
On
May 1,
2008, Emvelco Corp. (the "Company") entered into an Agreement and Plan of
Exchange (the "Agreement") with Davy Crockett Gas Company, LLC (“DCG”) and the
members of Davy Crockett Gas Company, LLC (“DCG Members”). Pursuant to the
Agreement, the Company acquired and, the DCG Members sold, 100% of the
outstanding securities in DCG. DCG is a limited liability company organized
under the laws of the State of Nevada and headquartered in Bel
Air,
California is a newly formed designated LLC
which holds certain development rights for gas drilling in Crockett County,
Texas.
In
consideration for 100% of the outstanding securities in DCG, the Company issued
the DCG Members promissory notes in the aggregate amount of $25,000,000 payable
together with interest in May 2010 (the “DCG Notes”). Additional $5,000,000
in DCG Notes are issuable upon each of the first through fifth wells going
into
production. Further, the DCG Members may be entitled to receive additional
DCG
Notes up to an additional amount of $200,000,000 (the “Additional DCG Notes”)
subject to the revenue generated from the land rights held by DCG located in
Crockett County, Texas less concession fees and taxes. The principal amount
of
Additional DCG Convertible Notes to be issued shall be determined by subtracting
$50,000,000 from the product of DCG’s gross revenue by .50. The conversion price
for the Additional Convertible Notes will be the Company’s market price, which
is the 90 day average closing price prior to the anniversary.
The
DCG
Notes bear interest of 8% and are convertible into shares of common stock,
subject to shareholder approval, at $1.00 per share. If the shareholders of
the Company do not authorize providing the DCG Members with the ability to
convert the DCG Notes or if the DCG Members elect to not convert the DCG Notes,
regardless of whether shareholder approval is obtained, the Company will be
forced to pay all amounts owed under the DCG Notes in May 2010 in
cash.
C.
Properties Ltd., a Barbados company (the “Advisor”) shall be paid a fee for
rendering consulting services in connection with this transaction (the
“Advisor’s Fee”). The Advisor’s Fee is be the greater of (i) five percent (5%)
of the dollar value of the DCG Notes and the Additional DCG Notes issued to
the
DCG Members not to exceed $12,500,000 or (ii) $10,000,000; which is to be paid
by the Company. The Advisor has agreed that in lieu of cash payment it will
receive shares of stock of the Atia Group Ltd. (the “Atia Shares”) of which
200,000,000 shares were transferred by the Company to the Advisor at Closing
effective as of January 1, 2008, 200,000,000 shares were transferred by the
Company to the Advisor upon the first DCG well going into production,
200,000,000 shall be transferred by the Company to the Advisor upon the second
DCG well going into production and 134,060,505 shares shall be transferred
by
the Company to the Advisor upon the third DCG well going into production. In
addition, upon a fourth DCG well going into production, the Company shall
transfer an additional 50,366,671 shares of Atia Group Ltd.
Prior
to
the acquisition of DCG, no relationship existed between the Company and the
DCG
Members and/or their affiliates, directors, officers or any associate of an
officer or director.
DCG
obtained certain drilling rights in Wolfcamp Canyon Sandstone Program (“Wolfcamp
Canyon”), which is located in Crockett County, Texas. Many Canyon
Sandstone gas wells are located on this approximately 9500-acre ranch that
are
part of this field which covers approximately forty (40) square miles in
Crockett County, Texas. The “Canyon Sandstone” gas wells were initially drilled
on 160-acre spacing. However, it became apparent that the wells had a small
radius of drainage and spacing requirements were reduced to 80-acres.
Subsequently, the spacing requirements were reduced to 40 acres, then to 20
acres and currently stand at 10 acres per well.
We
believe that Wolfcamp Canyon has multiple possible pays ranging from the shallow
permian with offset Proved Undeveloped (“PUD”) well locations, to the deep
objectives. Most data that the Board obtained and analyzed to evaluate this
area
is publicly available.
We
believe the reserves located on the Wolfcamp Canyon can be classified as proved
undeveloped. We believe that each well contains approximately 400 MCF (thousand
cubic feet) of recoverable natural gas, which may be increased by using advanced
recovery techniques. Wolfcamp Canyon also has multiple possible pays which
could
benefit from the close proximity to the existing pipeline infrastructure. The
existing pipeline infrastructure may expedite sales and eliminate the need
to
build the infrastructure necessary to transport the recovered gas. We also
believe that the gas produced by the existing wells is rich in heat (BTU)
content which commands a 20% premium pricing in the market.
DCG
holds
an option covering about 180 Drill Sites. We plan on utilizing a drilling
contractor to drill these sites and put them into production. We believe we
can
drill approximately one well every two weeks. We plan on adding a second
drilling rig in the near future which will increase our capabilities to drill
approximately 40 wells per year, subject to obtaining financing for these
operations.
Market
Overview
We
believe the current market conditions for the energy sectors are very strong
from the demand side without sufficient growth in supply to meet the growing
energy needs. Demand increases are happening in virtually all sectors of the
market. These trends are creating opportunities that DCG hopes to capitalize
on.
Some of these opportunities include the consolidation and rationalization of
global energy assets. The emergence of unconventional resources i.e. tight
gas
sands, shale gas, oil sands and coal bed methane to name a few. There are also
niche opportunities in established producing regions in emerging markets. In
the
renewable and alternative energy segments investment opportunities are growing
as a result of global trends that are influencing governmental policies.
Competition
We
operate in the highly competitive oil and gas areas of acquisition and
exploration, areas in which other competing companies have substantially larger
financial resources, operations, staffs and facilities. Such companies may
be
able to pay more for prospective oil and gas properties or prospects and to
evaluate, bid for and purchase a greater number of properties and prospects
than
our financial or human resources permit.
Environmental
Matters
Operations
on properties in which we have an interest are subject to extensive federal,
state and local environmental laws that regulate the discharge or disposal
of
materials or substances into the environment and otherwise are intended to
protect the environment. Numerous governmental agencies issue rules and
regulations to implement and enforce such laws, which are often difficult and
costly to comply with and which carry substantial administrative, civil and
criminal penalties and in some cases injunctive relief for failure to comply.
Some
laws, rules and regulations relating to the protection of the environment may,
in certain circumstances, impose ‘‘strict liability’’ for environmental
contamination. These laws render a person or company liable for environmental
and natural resource damages, cleanup costs and, in the case of oil spills
in
certain states, consequential damages without regard to negligence or fault.
Other laws, rules and regulations may require the rate of oil and gas production
to be below the economically optimal rate or may even prohibit exploration
or
production activities in environmentally sensitive areas. In addition, state
laws often require some form of remedial action, such as closure of inactive
pits and plugging of abandoned wells, to prevent pollution from former or
suspended operations.
Legislation
has been proposed in the past and continues to be evaluated in Congress from
time to time that would reclassify certain oil and gas exploration and
production wastes as ‘‘hazardous wastes.’’ This reclassification would make
these wastes subject to much more stringent storage, treatment, disposal and
clean-up requirements, which could have a significant adverse impact on
operating costs. Initiatives to further regulate the disposal of oil and gas
wastes are also proposed in certain states from time to time and may include
initiatives at the county, municipal and local government levels. These various
initiatives could have a similar adverse impact on operating costs.
The
regulatory burden of environmental laws and regulations increases our cost
and
risk of doing business and consequently affects our profitability. The federal
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
also known as the ‘‘Superfund’’ law, imposes liability, without regard to fault,
on certain classes of persons with respect to the release of a ‘‘hazardous
substance’’ into the environment. These persons include the current or prior
owner or operator of the disposal site or sites where the release occurred
and
companies that transported, disposed or arranged for the transport or disposal
of the hazardous substances found at the site. Persons who are or were
responsible for releases of hazardous substances under CERCLA may be subject
to
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for the federal or state government
to
pursue such claims.
It
is also not uncommon for neighbouring landowners and other third parties to
file
claims for personal injury or property or natural resource damages allegedly
caused by the hazardous substances released into the environment. Under CERCLA,
certain oil and gas materials and products are, by definition, excluded from
the
term ‘‘hazardous substances.’’ At least two federal courts have held that
certain wastes associated with the production of crude oil may be classified
as
hazardous substances under CERCLA. Similarly, under the federal Resource,
Conservation and Recovery Act, or RCRA, which governs the generation, treatment,
storage and disposal of ‘‘solid wastes’’ and ‘‘hazardous wastes,’’ certain oil
and gas materials and wastes are exempt from the definition of ‘‘hazardous
wastes.’’ This exemption continues to be subject to judicial interpretation and
increasingly stringent state interpretation. During the normal course of
operations on properties in which we have an interest, exempt and non-exempt
wastes, including hazardous wastes, that are subject to RCRA and comparable
state statutes and implementing regulations are generated or have been generated
in the past. The federal Environmental Protection Agency and various state
agencies continue to promulgate regulations that limit the disposal and
permitting options for certain hazardous and non-hazardous wastes.
We
believe that the operator of the properties in which we have an interest is
in
substantial compliance with applicable laws, rules and regulations relating
to
the control of air emissions at all facilities on those properties. Although
we
maintain insurance against some, but not all, of the risks described above,
including insuring the costs of clean-up operations, public liability and
physical damage, there is no assurance that our insurance will be adequate
to
cover all such costs, that the insurance will continue to be available in the
future or that the insurance will be available at premium levels that justify
our purchase. The occurrence of a significant event not fully insured or
indemnified against could have a material adverse effect on our financial
condition and operations. Compliance with environmental requirements, including
financial assurance requirements and the costs associated with the cleanup
of
any spill, could have a material adverse effect on our capital expenditures,
earnings or competitive position. We do believe, however, that our operators
are
in substantial compliance with current applicable environmental laws and
regulations. Nevertheless, changes in environmental laws have the potential
to
adversely affect operations. At this time, we have no plans to make any material
capital expenditures for environmental control facilities.
Item
9.01 Financial Statements and Exhibits.
|
(a)
|
Financial
statements of businesses acquired.
|
Unaudited
Financial Statements of Davy Crockett Gas Company LLC for the year ended March
31, 2008
Unaudited
Pro Forma Condensed Combined Financial Statements
|
(b)
|
Pro
forma financial information.
|
Not
applicable
(c)
Shell
company transactions.
Not
applicable
(d)
Exhibits
|
Exhibit
No.
|
Description
of Exhibit
|
| |
|
|
10.1
|
Agreement
and Plan of Exchange with Davy Crockett Gas Company, LLC and the
members
of Davy Crockett Gas Company, LLC dated May 1, 2008
|
| |
|
|
10.2
|
Form
of Convertible
Note dated May 1, 2008
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act 1934, the registrant has
duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
| |
|
|
| |
EMVELCO
CORP. |
|
|
|
| |
By: /s/
YOSSI
ATTIA
|
| |
Name:
Yossi Attia |
| |
Title:
Chief Executive Officer |
| |
|
| Date: |
May
7, 2008
Los
Angeles, California
|
DAVY
CROCKETT GAS COMPANY, LLC
(An
Exploration State Company)
Unaudited
Balance Sheets as of March 31, 2008, and
Unaudited
Statements of Operations, Members’ Equity, and Cash Flows for the
period
from February 22, 2008 (inception) to March 31, 2008
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Unaudited
Financial Statements
As
of
March 31, 2008, and Unaudited
Statements
of Operations, Members’ Equity, and Cash Flows for the
period
from February 22, 2008 (inception) to March 31, 2008
TABLE
OF CONTENTS
| |
|
|
|
Page
|
| |
|
|
Unaudited
Financial Statements:
|
|
| |
|
|
Unaudited
Balance Sheet
|
2
|
|
Unaudited
Statements of Operations3
|
3
|
|
Unaudited
Statement of Members’ Equity 4
|
4
|
|
Unaudited
Statements of Cash Flows5
|
5
|
|
Notes
to Unaudited Financial Statements6
|
6
|
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Unaudited
Balance Sheet
| |
|
March
31,
|
| |
|
2008
|
| |
|
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$
|
10,000
|
|
Total
current assets
|
|
10,000
|
| |
|
|
|
Gas
Rights on Real Property, plant, and equipment (Note 3)
|
|
450,000
|
|
|
|
|
|
Total
assets
|
$
|
460,000
|
| |
|
|
|
LIABILITIES
AND MEMBERS’ EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accrued
Expenses
|
$
|
9,000
|
|
Loan
payable to PMFT member (Note 5)
|
|
200,000
|
|
Loan
payable to Sully member ,
including interest (Note 5)
|
|
252,082
|
| |
|
|
|
Total
current liabilities
|
|
461,082
|
| |
|
|
|
Total
liabilities
|
|
461,082
|
| |
|
|
|
Members’
capital accounts
|
|
(1,082)
|
| |
|
|
|
Total
members' equity
|
|
(1,082)
|
| |
|
|
|
Total
liabilities and members' equity
|
$
|
460,000
|
The
accompanying notes are an integral part of these Financial
Statements.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Unaudited
Statement of Operations
| |
|
|
|
|
| |
|
|
|
Cumulative
|
| |
|
|
|
From
|
| |
|
For
the Period
|
|
February
22,
|
| |
|
From
|
|
2008
|
| |
|
February
22, 2008
|
|
Inception
of
|
| |
|
(inception)
|
|
Exploration
|
| |
|
to
March 31, 2008
|
|
State
|
| |
|
|
|
|
|
Revenues
|
$
|
--
|
$
|
--
|
| |
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
General
and administrative fees
|
|
7,000
|
|
7,000
|
|
Organizational
expenses
|
|
2,000
|
|
2,000
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
9,000
|
|
9,000
|
| |
|
|
|
|
|
Operating
Loss
|
|
(9,000)
|
|
(9,000)
|
| |
|
|
|
|
|
Interest
expense
|
|
(2,082)
|
|
(2,082)
|
| |
|
|
|
|
|
Net
loss
|
$
|
(11,082)
|
$
|
(11,082)
|
| |
|
|
|
|
|
Net
loss per members’ unit
|
$
|
(1.11)
|
|
|
| |
|
|
|
|
|
Weighted
average number of units outstanding
|
|
10,000
|
|
|
| |
|
|
|
|
The
accompanying notes are an integral part of these Financial
Statements.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Unaudited
Statement of Members’ Equity for
Period
from February 22, 2008 (inception) to March 31, 2008
| |
Members’
Capital Accounts
|
| |
|
|
|
|
|
Number
of Units
|
|
Amount
|
|
Inception
of LLC, February 22, 2008
|
10,000
|
$
|
10,000
|
| |
|
|
|
|
Net
loss for period February 22, 2008 (inception) to March 31,
2008
|
--
|
|
(11,082)
|
| |
|
|
|
|
Balances,
March 31, 2008
|
10,000
|
$
|
(1,082)
|
| |
|
|
|
The
accompanying notes are an integral part of these Financial
Statements.
DAVY
CROCKETT GAS COMPANY, LLC.
(An
exploration state company)
Unaudited
Statements of Cash Flows
|
|
| |
|
Cumulative
|
|
|
Cumulative
|
| |
|
From
|
|
|
From
|
| |
|
For
the Period
|
|
|
February
22,
|
| |
|
From
|
|
|
2008
|
| |
|
February
22, 2008
|
|
|
Inception
of
|
| |
|
(inception)
|
|
|
Exploration
|
| |
|
to
March 31, 2008
|
|
|
State
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
|
Net
loss
|
$
|
(11,082)
|
|
$
|
(11,082)
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
(used
in)/provided by operating activities:
|
|
|
|
|
|
|
Accrued
interest on loans payable
|
|
2,082
|
|
|
2,082
|
| |
|
|
|
|
|
|
Changes
in operating assets and liabailities, net:
|
|
|
|
|
|
|
Increase
in accrued expenses
|
|
9,000
|
|
|
9,000
|
|
Net
cash used in operating activities
|
|
--
|
|
|
--
|
| |
|
|
|
|
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
Payments
for rights acquisition costs
|
|
(450,000)
|
|
|
(450,000)
|
|
Net
cash used in investing activities
|
|
(450,000)
|
|
|
(450,000)
|
| |
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Capital
contributions
|
|
10,000
|
|
|
10,000
|
|
Net
Proceeds from loans
|
|
450,000
|
|
|
450,000
|
|
Net
cash provided by financing activities
|
|
460,000
|
|
|
460,000
|
| |
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
10,000
|
|
|
10,000
|
|
Cash
and cash equivalents, beginning of period
|
|
--
|
|
|
--
|
| |
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
$
|
10,000
|
|
$
|
10,000
|
| |
|
|
|
|
| |
|
|
|
|
|
The
accompanying notes are an integral part of these Financial
Statements.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
1.
Organization and Business and Going Concern
The
accompanying financial statements have been prepared on the basis of accounting
principles applicable to a “going concern”, which assume that the Company will
continue in operation for at least one year and will be able to realize its
assets and discharge its liabilities in the normal course of
operations.
Several
conditions and events cast doubt about the Company’s ability to continue as a
“going concern”. The Company is an exploration state company and does not have
sufficient cash to perform its next exploratory steps. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The
Company's future capital requirements will depend on many factors, including
costs of exploration of the properties, cash flow from operations, costs to
complete well production, if warranted, and competition and global market
conditions.
These
financial statements do not reflect adjustments that would be necessary if
the
Company were unable to continue as a “going concern”. While management believes
that the actions already taken or planned, will mitigate the adverse conditions
and events which raise doubt about the validity of the “going concern”
assumption used in preparing these financial statements, there can be no
assurance that these actions will be successful.
If
the
Company were unable to continue as a “going concern”, then substantial
adjustments would be necessary to the carrying values of assets, the reported
amounts of its liabilities, the reported revenues and expenses, and the balance
sheet classifications used.
Davy
Crockett Gas Company, LLC (“DC Gas” or “DCG” or “Company”) is a limited
liability company, which was organized in Nevada on February 22, 2008.
The
Company's members’ capital accounts consist of 10,000 units. As
of
March 31, 2008, 10,000 units are issued and outstanding.
DC
Gas is
headquartered in Bel Air, California.
DC
Gas
has obtained drilling rights from a third party in Wolfcamp Canyon Sandstone
Field in West Texas and intends to enter the natural gas exploration, drilling,
and extraction business. The Company has the option to purchase rights on up
to
180 in-fill drilling locations on about 3,600 acres. The field was first
developed in the 1970s on a 160 acre well spacing and was later reduced so
the
wells have a small radius of drainage. The spacing has subsequently been reduced
to 40 acres, 20 acres, and 10 acres accordingly.
The
Company has obtained a reserve evaluation report from an independent engineering
firm, which classifies the gas reserves as “proven undeveloped”. According to
the independent well evaluation, each well contains approximately 400 MCF
(thousand cubic feet) of recoverable natural gas, which may be increased with
advanced recovery techniques.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
1.
Organization and Business and Going Concern (continued)
The
Company has entered into an Agreement and Plan of Exchange (“Plan of Exchange
Agreement”) dated May 1, 2008 which provides that the members will sell all of
their membership units to Emvelco Corp. (“Emvelco”), a NASDAQ publicly traded
company in exchange for convertible notes that are convertible into 50 million
shares of Emvelco’s common stock upon the Emvelco shareholders holding a
majority of the outstanding shares of common stock of Emvelco approving the
issuance of the EMVELCO Shares upon conversion of the Convertible Notes (the
“Shareholder Approval”)..
Emvelco
may issue additional Convertible Notes that are convertible into up to Two
Hundred and Fifty Million (250,000,000) shares for consideration in this
transaction if certain conditions are satisfied; provided, however, in the
event
that Shareholder Approval has been provided, then Emvelco will issue shares
of
Emvelco as opposed to Convertible Notes. The
future number of shares that may be issued to the members of DCG is contingent
upon the revenue less concessions and taxes of DCG during the five years
following the closing. The number of additional shares shall be issued within
30
days of the first, second, third, fourth and fifth anniversary of the closing
of
the acquisition of DCG. The number of additional shares to be issued shall
be
determined by subtracting $50 million from the product of DCG’s gross revenue
derived from the wells acquired from DCG multiplied by one half. The resulting
number will then be divided by the average market price for the 90 day period
prior to the anniversary date.
If
the
sale is consummated, DC Gas will become a wholly-owned subsidiary of Emvelco
and
the outstanding membership interests will be exchanged by the holders thereof
for the Emvelco Shares. The members of the Company will receive approximately
81% of the shares of Emvelco immediately following the consummation of the
Plan
of Exchange Agreement.
2.
Summary
of Significant Accounting Policies
The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”). The
Company is considered a development-stage entity and has disclosed
inception-to-date information within these financial statements.
Use
of estimates
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts reported
in
the financial statements and accompanying notes. Actual results could differ
from those estimates. The financial statements are the responsibility of the
Company’s management.
Revenue
recognition and cost of revenues
The
Company has not had any revenues or cost of revenues to date.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
2.
Summary
of Significant Accounting Policies (continued)
Cash
and cash equivalents
Cash
and
cash equivalents include cash at bank and money market funds with maturities
of
three months or less at the date of acquisition by the Company.
Gas
Rights on Real Property, plant, and equipment
Depreciation,
depletion and amortization, based on cost less estimated salvage value of the
asset, are primarily determined under either the unit-of-production method
or
the straight-line method, which is based on estimated asset service life taking
obsolescence into consideration. Maintenance and repairs, including planned
major maintenance, are expensed as incurred. Major renewals and improvements
are
capitalized and the assets replaced are retired.
Interest
costs incurred to finance expenditures during the construction phase of
multiyear projects are capitalized as part of the historical cost of acquiring
the constructed assets. The project construction phase commences with the
development of the detailed engineering design and ends when the constructed
assets are ready for their intended use. Capitalized interest costs are included
in property, plant and equipment and are depreciated over the service life
of
the related assets.
The
Company uses the “successful efforts” method to account for its exploration and
production activities. Under this method, costs are accumulated on a
field-by-field basis with certain exploratory expenditures and exploratory
dry
holes being expensed as incurred. Costs of productive wells and development
dry
holes are capitalized and amortized on the unit-of-production method.
The
Company records an asset for exploratory well costs when the well has found
a
sufficient quantity of reserves to justify its completion as a producing well
and where the Company is making sufficient progress assessing the reserves
and
the economic and operating viability of the project. Exploratory well costs
not
meeting these criteria are charged to expense.
Acquisition
costs of proved properties are amortized using a unit-of-production method,
computed on the basis of total proved natural gas reserves. Significant unproved
properties are assessed for impairment individually and valuation allowances
against the capitalized costs are recorded based on the estimated economic
chance of success and the length of time that the Company expects to hold the
properties. The valuation allowances are reviewed at least annually. Other
exploratory expenditures, including geophysical costs, other dry hole costs
and
annual lease rentals, are expensed as incurred.
Unit-of-production
depreciation is applied to property, plant and equipment, including capitalized
exploratory drilling and development costs, associated with productive
depletable extractive properties. Unit-of-production rates are based on the
amount of proved developed reserves of natural gas and other minerals that
are
estimated to be recoverable from existing facilities using current operating
methods.
Under
the
unit-of-production method, natural gas volumes are considered produced once
they
have been measured through meters at custody transfer or sales transaction
points at the outlet valve on the lease or field storage tank.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
2.
Summary
of Significant Accounting Policies (continued)
Gains
on
sales of proved and unproved properties are only recognized when there is no
uncertainty about the recovery of costs applicable to any interest retained
or
where there is no substantial obligation for future performance by the
Company’s. Losses on properties sold are recognized when incurred or when the
properties are held for sale and the fair value of the properties is less than
the carrying value.
Proved
oil and gas properties held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. Assets are grouped at the lowest levels for which there
are identifiable cash flows that are largely independent of the cash flows
of
other groups of assets.
The
Company estimates the future undiscounted cash flows of the affected properties
to judge the recoverability of carrying amounts. Cash flows used in impairment
evaluations are developed using annually updated corporate plan investment
evaluation assumptions for natural gas commodity prices. Annual volumes are
based on individual field production profiles, which are also updated annually.
Cash flow estimates for impairment testing exclude derivative instruments.
Impairment
analyses are generally based on proved reserves. Where probable reserves exist,
an appropriately risk-adjusted amount of these reserves may be included in
the
impairment evaluation. Impairments are measured by the amount the carrying
value
exceeds the fair value.
Restoration,
Removal and Environmental Liabilities
The
Company is subject to extensive federal, state and local environmental laws
and
regulations. These laws regulate the discharge of materials into the environment
and may require the Company to remove or mitigate the environmental effects
of
the disposal or release of natural gas substances at various sites.
Environmental expenditures are expensed or capitalized depending on their future
economic benefit.
Expenditures
that relate to an existing condition caused by past operations and that have
no
future economic benefit are expensed.
Liabilities
for expenditures of a noncapital nature are recorded when environmental
assessments and/or remediation is probable, and the costs can be reasonably
estimated. Such liabilities are generally undiscounted unless the timing of
cash
payments for the liability or component is fixed or reliably
determinable.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
2.
Summary
of Significant Accounting Policies (continued)
The
Company accounts for asset retirement obligations in accordance with SFAS No.
143, "Accounting
for Asset Retirement Obligations” (SFAS
143). SFAS 143 addresses accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires that the fair value of a liability for
an
asset's retirement obligation be recorded in the period in which it is incurred
and the corresponding cost capitalized by increasing the carrying amount of
the
related long-lived asset. The liability is accreted to its then present value
each period, and the capitalized cost is depreciated over the useful life of
the
related asset. The Company will include estimated future costs of abandonment
and dismantlement in the full cost amortization base and amortize these costs
as
a component of our depletion expense in the accompanying financial
statements.
Earnings
per unit
Basic
earnings per share are computed by dividing income (loss) attributable to
members by the weighted-average number of member units outstanding for the
period.
Comprehensive
income
Comprehensive
income includes all changes in equity except those resulting from investments
by
and distributions to members.
Business
segment reporting
The
Company manages its operations in one business segment, the natural gas
exploration, drilling, and extraction business.
Income
taxes
Since
the
Company is a limited liability company, the net income (loss) flows through
to
the members of the Company. Accordingly, the Company does not recognize income
tax expense or tax assets or liabilities.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
3.
Gas
Rights on Real Property, plant, and equipment
On
March
31, 2008, the Company entered into an assignment agreement with a third party
(“AF”) in an-arm-length transaction. A member of the Company, PMFT Holdings,
Ltd. (“PMFT”) paid $200,000 to AF in exchange for the delivery of four term
assignments of an oil and gas lease. The other members of DCG agreed to repay
this member upon receiving its first revenues. Within 60 days of the agreement
DC Gas has an additional right to purchase additional term assignments of oil
and gas leases on additional tracts of land (20 acres) for $50,000. Thereafter,
at intervals not to exceed 60 days, the Company may designate additional tracts
of land for the same price and if the Company purchases and pays for more than
one term assignment for any 60 day interval, DC Gas’ time period for the next
land designation will be increased for each term assignment. If the Company
does
not designate and pay for at least one tract of land during any 60 day period,
the entire agreement and all of the Company’s rights under the agreement will be
terminated. Royalty payments under the agreements set to 26% of the actual
producing. As of March 31, 2008, the Company has capitalized an additional
$250,000 related to the acquisition of this lease.
4.
Notes Payable and Related Party Transaction
In
conjunction with the assignment agreement with AF (see note 3), a member of
the
Company, PMFT loaned $200,000 to the Company on March 31, 2008. The loan bears
interest at 8% per annum and will be repaid in 2008 from the first revenues
of
the Company. The note matures on December 31, 2008.
In
conjunction with the obtaining the assignment agreement with AF (see note 3),
a
member of the Company, Sully LLC, incurred significant time and travel expenses
in the year prior to the announcement of the agreement with AF and the inception
of the Company. On February 22, 2008, the members agreed to consider these
expenditures as a loan payable to the member for $250,000. The loan bears
interest at 8% per annum and the note matures on December 31, 2008.
Interest
expense calculated on the rate of 8% annually was $2,082 for the period February
22, 2008 (inception) to March 31, 2008.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
5.
Members’ Ownership
The
initial cash contribution from the members occurred on February 22, 2008. The
members’ ownership percentages of the Company remained unchanged through March
31, 2008 as follows:
|
Member
|
|
Cash
Contribution at February 22, 2008
|
|
Percentage
owned
|
| |
|
|
|
|
|
PMFT
Holdings, Ltd.
|
$
|
3,000
|
|
30%
|
|
Corporate
Group Services Limited
|
|
3,000
|
|
30%
|
|
Beacon
Financial Corp.
|
|
2,000
|
|
20%
|
|
Sully,
LLC
|
|
2,000
|
|
20%
|
| |
|
|
|
|
|
Totals
|
$
|
10,000
|
|
100%
|
6.
Commitments and Contingencies
(a)
Employment Agreements
As
of
March 31, 2008, the Company has no employment agreement with any of its members
or third parties.
7.
Subsequent events
On
May 1,
2008, the Company entered into an Agreement and Plan of Exchange with Emvelco.
Subject to the satisfaction or waiver of the conditions to closing in the Plan
of Exchange Agreement, Emvelco will acquire DCG from the members of DCG such
that DCG will become a wholly-owned subsidiary of Emvelco. DCG obtained certain
drilling rights in Wolfcamp Canyon Sandstone Field, which is located in Crockett
County, Texas, approximately twenty-five miles south of the town of Ozona,
and
approximately seventy miles north of the town of Del Rio, located in Val Verde
County, Texas. Many Canyon Sandstone gas wells are located on this approximately
9500-acre ranch that are part of the large prolific Canyon Sandstone Field
which
covers approximately forty (40) square miles in southeast Crockett County,
Texas. The “Canyon Sandstone” gas wells were initially drilled on 160-acre
spacing. However, it became apparent that the wells had a small radius of
drainage and spacing requirements were reduced to 80-acres. Further, the spacing
requirements were reduced to 40, 20 acres and now 10 acres, in lieu of
sufficient drainage.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
7.
Subsequent events (continued)
On
the
closing date of the Agreement and Plan of Exchange, Emvelco shall cause to
be
issued convertible notes (“Convertible Notes”), that are convertible into Fifty
Million (50,000,000) shares of Emvelco common stock (the “EMVELCO
Shares”)
upon
the shareholders holding a majority of the outstanding shares of common stock
of
Emvelco approving the issuance of the EMVELCO Shares upon conversion of the
Convertible Notes (the “Shareholder Approval”). Further, in accordance with the
Plan of Exchange Agreement, Emvelco may issue additional Convertible Notes
that
are convertible into up to Two Hundred and Fifty Million (250,000,000) shares
for consideration in this transaction if certain conditions are satisfied;
provided, however, in the event that Shareholder Approval has been provided,
then Emvelco will issue shares of Emvelco as opposed to Convertible Notes.
The
number of additional shares shall be issued within 30 days of the first, second,
third, fourth and fifth anniversary of the closing of the acquisition of DCG.
The number of additional shares to be issued shall be determined by subtracting
$50 million from the product of DCG’s gross revenue of the wells acquired from
DCG multiplied by 50%. The resulting number will then be divided by the market
price which will be the 90 day average prior to the anniversary. As a result,
although the existing shareholders of Emvelco will hold about 9% of the
outstanding shares of common stock of Emvelco, depending upon the results of
DCG, the existing shareholders may then only hold 2% of the issued and
outstanding shares of Emvelco.
The
Plan
of Exchange Agreement provides that, immediately after the Transaction, the
Emvelco board of directors will consist of six directors, three of whom will
be
the current Emvelco directors (Gerald Schaffer, Yossi Attia and Stewart Reich),
one of whom will be a member of DCG (Mike M. Mustafoglu) and two of whom will
be
designated by DCG prior to the closing of the Plan of Exchange Agreement. Upon
completion of Plan of Exchange Agreement, Mike M. Mustafoglu will become Emvelco
Chairman of the Board of Directors. In addition Arthur Flew and John O’Brien
will also be appointed as directors of Emvelco.
The
Members of DCG entered into a shareholder agreement (the “Shareholder
Agreement”) which in essence, sets forth an agreement among the members binding
them on certain matters, including, restrictions in their collective rights
to
dispose of shares of capital stock of Emvelco which they own as a result of
the
Plan of Exchange Agreement or may own in the future and provide for the purchase
of the shares in accordance with the terms and conditions among themselves
which
basically defines a Right of First Refusal on dispositions as well as buy-out
of
parties. At any time after twelve (12) months following the execution of the
Shareholder Agreement, any shareholder can offer to buy the shares of Emvelco
owned by any other shareholder at a certain price.
In
accordance with Plan of Exchange Agreement, Emvelco agreed to pay C. Properties
Ltd., a Babbados company and third party (“Advisor”), who acted as an advisor
for Emvelco in connection with the acquisition of DCG, a fee that shall be
the
greater of (i) five percent (5%) of the dollar value of the shares of Emvelco
common stock issued to the Members not to exceed $12,500,000 or (ii)
$10,000,000. The Advisor has agreed that in lieu of cash payment it will receive
an aggregate of up to 734,060,505 shares of stock of the Atia Group Ltd., a
majority owned subsidiary of Emvelco, of which 200,000,000 shares shall be
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
7.
Subsequent events (continued)
transferred
by Emvelco to the Advisor at closing effective as of January 1st,
2008,
200,000,000 shares be transferred by Emvelco to the Advisor upon the first
DCG
well going into production, 200,000,000 shall be transferred by Emvelco to
the
Advisor upon the second well going into production and 134,060,505 shares shall
be transferred by Emvelco to the Advisor upon the third DCG well going into
production. In addition, upon a fourth well going into production, Emvelco
shall
transfer an additional 50,366,671 shares of Atia Group Ltd. to the
Advisor.
In
addition, concurrent with the closing of the acquisition of DCG, Emvelco will
enter into an employment agreement with Mike M. Mustafoglu (managing member
of
DCG) pursuant to which Mr. Mustafoglu shall serve as the Chairman of the Board
of Directors. The employment agreement will provide for an annual salary of
$240,000, which at the employee’s election, may be paid in stock options with an
exercise price of $0.01, a stock purchase warrant to purchase 10,000,000 shares
of common stock with an exercise price at 50% of the average price of the common
stock over a 30 day period immediately prior to exercise and the right to
participate in a performance pool bonus for key executives of Emvelco, which
such bonus pool shall be equal to 10% of Emvelco’s net income before taxes.
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
8.
Supplemental Oil and Gas Disclosures (Unaudited)
The
accompanying table presents information concerning the Company's natural gas
producing activities as required by Statement of Financial Accounting Standards
No. 69, "Disclosures about Oil and Gas Producing Activities." Capitalized costs
relating to oil and gas producing activities from continuing operations are
as
follows:
|
|
|
As
of March 31, 2008
|
|
Proved
undeveloped natural properties
|
$
|
450,000
|
|
Unproved
properties
|
|
--
|
|
Total
|
|
450,000
|
|
Accumulated
depreciation, depletion, amortization , and impairment
|
|
--
|
|
Net
capitalized costs
|
$
|
450,000
|
All
of
these reserves are located in the AF located in the United States of America.
There have been no natural gas development or production costs incurred in
the
period February 22, 2008 (inception) to March 31, 2008.
Estimated
Quantities of Proved Oil and Gas Reserves
The
following table presents the Company's estimate of its net proved crude oil
and
natural gas reserves as of March 31, 2008 and February 22, 2008 related to
continuing operations. The Company's management emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and gas properties. Accordingly,
the
estimates are expected to change as future information becomes available. The
estimates have been prepared by independent natural gas reserve
engineers.
| |
|
MMCF
(thousand
cubic feet)
|
|
Proved
undeveloped natural gas reserves at February 22, 2008
|
|
--
|
|
Purchases
of drilling rights for minerals in place for period February 22,
2008
(inception) to March 31, 2008 - 4 wells at 400 MCF each
|
|
1,600
|
|
Revisions
of previous estimates
|
|
--
|
|
Extensions
and discoveries
|
|
--
|
|
Sales
of minerals in place
|
|
--
|
|
Proved
undeveloped natural gas reserves at March 31, 2008
|
|
1,600
|
DAVY
CROCKETT GAS COMPANY, LLC
(An
exploration state company)
Notes
to Unaudited Financial Statements
8.
Supplemental Oil and Gas Disclosures (Unaudited)
(continued)
Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
Reserves
The
following disclosures concerning the standardized measure of future cash flows
from proved crude oil and natural gas are presented in accordance with SFAS
No.
69. The standardized measure does not purport to represent the fair market
value
of the Company's proved crude oil and natural gas reserves. An estimate of
fair
market value would also take into account, among other factors, the recovery
of
reserves not classified as proved, anticipated future changes in prices and
costs, and a discount factor more representative of the time value of money
and
the risks inherent in reserve estimates.
Under
the
standardized measure, future cash inflows were estimated by applying period-end
prices at December 31, 2006 adjusted for fixed and determinable escalations,
to
the estimated future production of year-end proved reserves. Future cash inflows
were reduced by estimated future production and development costs based on
year-end costs to determine pre-tax cash inflows.
Future
income taxes were computed by applying the statutory tax rate to the excess
of
pre-tax cash inflows over the tax basis of the properties. Operating loss
carryforwards, tax credits, and permanent differences to the extent estimated to
be available in the future were also considered in the future income tax
calculations, thereby reducing the expected tax expense.
Future
net cash inflows after income taxes were discounted using a 10% annual discount
rate to arrive at the Standardized Measure. Set forth below is the Standardized
Measure relating to proved undeveloped natural gas reserves for the period
ending March 31, 2008:
| |
|
Period
ending March 31, 2008 (in thousands)
|
|
Future
cash inflows, net of royalties
|
$
|
231,230
|
|
Future
production costs
|
|
(38,702)
|
|
Future
development costs
|
|
(25,800)
|
|
Future
income tax expense
|
|
--
|
|
Net
future cash flows
|
|
166,728
|
|
Discount
|
|
(117,475)
|
|
Standardized
Measure of discounted future net cash relating to proved
reserves
|
|
49,253
|
Changes
in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas Reserves:
The
table
above shows the first standardized measure of discounted future net cash flows
for the Company. Accordingly, there are no changes to disclose.
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
selected unaudited pro forma condensed combined financial data are presented
for
illustrative purposes only and are not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the entities been a single entity
during these periods. The selected unaudited pro forma condensed combined
financial data as of and for the period ended on December 31, 2007 are derived
from the unaudited pro forma condensed combined financial data and should
be
read in conjunction with that data. The unaudited pro forma statements also
consider that DCG would have been incorporated on December 31, 2007 with
the
required transactions necessary to become a viable business on that date,
including the notes payable, convertible notes, and advisor fee transaction.
For
more information, please see the section entitled “Unaudited Pro Forma Condensed
Combined Financial Statements” in this proxy statement.
| |
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
Unaudited
Pro Forma Condensed Combined Statement of Operations
Data:
|
|
|
|
|
| |
|
|
Revenues
|
|
$
|
6,950,000
|
|
|
Cost
of revenues
|
|
|
(6,505,506
|
)
|
|
Operating
expenses
|
|
|
(2,564,886
|
)
|
|
Goodwill
impairment on AGL transaction
|
|
|
(10,245,377
|
)
|
|
Interest
and other income, net
|
|
|
1,293,169
|
|
|
Minority
interest in subsidiary losses
|
|
|
238,637
|
|
|
Net
loss available to common stockholders
|
|
|
(10,833,963
|
)
|
|
Basic
and diluted net profit per share
|
|
$
|
(2.29
|
)
|
| |
|
|
Weighted
average shares outstanding
|
|
|
4,734,266
|
|
| |
|
|
|
|
As
of
December
31, 2007
|
|
|
Unaudited
Pro Forma Condensed Combined Balance Sheet Data:
|
|
|
|
|
| |
|
|
Cash,
cash equivalents and short-term investments
|
|
$
|
379,576
|
|
|
Current
assets
|
|
|
18,145,185
|
|
|
Other
assets
|
|
|
62,373,409
|
|
|
Total
assets
|
|
|
80,518,594
|
|
|
Current
liabilities
|
|
|
49,602,963
|
|
|
Long
term obligations, less current portion
|
|
|
11,883,719
|
|
|
Minority
interest in subsidiary’s net assets
|
|
|
8,244,787
|
|
|
Accumulated
deficit
|
|
|
(40,390,551
|
)
|
|
Stockholders'
Equity
|
|
|
10,787,124
|
|