INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
BALANCE SHEET F-3
STATEMENT OF OPERATIONS F-4
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY F-5
STATEMENT OF CASH FLOWS F-6
NOTES TO THE FINANCIAL STATEMENTS F-7 to F-11
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Energy Services Acquisition Corp.
Huntington, West Virginia
We have audited the accompanying balance sheet of Energy Services
Acquisition Corp. (a development stage enterprise) (the "Company") as of
September 6, 2006 and the related statements of operations, stockholders' equity
and cash flows for the period from March 31, 2006 (inception) to September 6,
2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Energy Services Acquisition
Corp. as of September 6, 2006, and the results of its operations and its cash
flows for the period from March 31, 2006 (inception) to September 6, 2006 in
conformity with United States generally accepted accounting principles.
/s/ Castaing, Hussey & Lolan, LLC
New Iberia, LA
September 13, 2006
F-2
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Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Balance Sheet
September 6, 2006
ASSETS
Cash $ 436,427
Cash in trust 48,972,000
Cash held in trust from Underwriter 1,032,000
------------
Total Assets $ 50,440,427
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued offering costs $ 537,033
Note Payable to Stockholder 150,000
Due to Underwriter 1,032,000
------------
Total Liabilities 1,719,033
============
Common stock subject to possible redemption -
1,719,140 shares at redemption value 9,988,200
Commitments
Stockholders' Equity
Preferred stock, $.0001 par value
Authorized 1,000,000 shares; none issued ---
Common Stock, $.0001 par value
Authorized 50,000,000 shares
Issued and outstanding 10,750,000 shares, inclusive of 1,719,140 shares
subject to possible redemption 903
Additional paid-in capital 38,734,491
Deficit accumulated during the development stage (2,200)
------------
Total Stockholders'Equity 38,733,194
------------
Total Liabilities and Stockholders' Equity $ 50,440,427
============
The accompanying notes are an integral part of these financial statements.
F-3
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Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Statement of Operations
For the period from March 31, 2006 (inception) to September 6, 2006
Formation and operating costs $ (2,200)
Net Loss $ (2,200)
Weighted average shares outstanding basic and diluted 2,536,250
Basic and diluted net loss per share $ (0.00)
The accompanying notes are an integral part of these financial statements.
F-4
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Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Statement of Changes in Stockholders' Equity
For the period from March 31, 2006 (inception) to September 6, 2006
Deficit
Common Stock Additional Accumulated
------------ Paid in Treasury During the Stockholders'
Shares Amount Capital Stock Development Stage Equity
----------------------------------------------------------------------------------
Issuance of common stock to initial
stockholders on March 31, 2006
at $.01 Per share 2,500,000 $ 250 $ 24,750 $ 25,000
Return of 350,000 shares on
August 30, 2006 by initial stockholders 1,645,000 $(1,645,000) -
Cancellation of Common Stock to
initial stockholders (350,000) (35) (1,644,965) 1,645,000 -
Sale of Private Placement Warrants 2,000,000 2,000,000
Sale of 8,600,000 units net of underwriter's
discount and offering expenses 8,600,000 860 46,697,634 46,698,494
Sale of underwriter option 100 100
Shares reclassified to "Common Stock
subject to possible redemption" (1,719,140) (172) (9,988,028) (9,988,200)
Net Loss $ (2,200) $ (2,200)
----------- ------ ----------- ----------- --------- ------------
Balance at September 6, 2006 9,030,860 $ 903 $38,734,491 $ - $ (2,200) $ 38,733,194
=========== ====== =========== =========== ========= ============
The accompanying notes are an integral part of these financial statements.
F-5
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Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Statement of Cash Flows
For the period from March 31, 2006 (inception) to September 6, 2006
Cash flow from operating activities
Net Loss $ (2,200)
------------
Net Cash used in operating activities $ (2,200)
------------
Cash flows from Investing Activities
Increase in Cash held in Trust Account (50,004,000)
------------
Cash flows from financing activities
Proceeds from Public Offering 51,600,000
Proceeds from Private Placement of warrants 2,000,000
Proceeds from issuance of underwriting options 100
Proceeds from issuance of common stock to initial stockholders 25,000
Loans from Stockholder 375,000
Payment of Loan from Stockholder (225,000)
Payment of Offering Costs (3,332,473)
------------
Net Cash provided by financing activities 50,442,627
------------
Net increase in cash and cash equivalents at end of period $ 436,427
============
Supplemental disclosure of non-cash financing activity:
Accrued and unpaid offering costs $ 537,033
===========
The accompanying notes are an integral part of these financial statements.
F-6
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Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
1. Organization, Business Operations and Significant Policies
Nature of Business
Energy Services Acquisition Corp. (the "Company") was incorporated in
Delaware on March 31, 2006 as a blank check company whose objective is to
acquire an operating business.
Activity through September 6, 2006 relates to the Company's formation and
the public offering described below. The Company has selected September 30 as
its fiscal year-end.
The registration statement for the Company's initial public offering (the
"Public Offering") (as described in note 2) was declared effective August 29,
2006. The Company consummated the Public Offering on September 6, 2006 and
preceding the consummation of the Public Offering on September 6, 2006, certain
officers, directors and initial shareholders of the Company purchased an
aggregate of 3,076,923 warrants at $0.65 per warrant from the Company in a
private placement (the "private placement"). The warrants sold in the Private
Placement were identical to the warrants sold in the offering, except that the
private placement warrants are not registered at this time. The Company received
net proceeds from the Private Placement and the Offering of approximately
$48,698,494 (note 2).
The Company's management has broad discretion with respect to the specific
application of the net proceeds of this Public Offering, although substantially
all of the net proceeds of this Public Offering are intended to be generally
applied toward consummating a business combination with an operating business
("Business Combination"). Furthermore, there is no assurance that the company
will be able to successfully affect a Business Combination. Upon the closing of
the Public Offering, $50,004,000 (including $1,032,000 for the Underwriters
non-accountable expense allowance) is being held in a trust account ("Trust
Account") and invested in United States Government Securities defined as any
Treasury Bill issued by the United States having a maturity of one hundred and
eighty days or less or in money market funds meeting certain conditions under
Rule 2a-7 promulgated under the Investment Company Act of 1940. Such funds will
be invested in the manner outlined until the earlier of (i) the consummation of
its first Business Combination or (ii) liquidation of the Company. The placing
of the funds in the Trust Account may not protect those funds from third party
claims against the Company. Although the Company will seek to have all vendors,
prospective target businesses or other entities it engages, execute agreements
with the Company waiving any right, title, interest or claim of any kind in or
to any monies held in the Trust Account, there is no guarantee that they will
execute such agreements. If the Company liquidates prior to the consummation of
a Business Acquisition, the officers and directors shall under certain customary
circumstances, be personally liable to pay any debts, obligations and
liabilities of the Company to various vendors, prospective target businesses or
other entities that are owed money by it for services rendered or contracted for
or products sold to it in excess of the working capital not held in the Trust
Fund. Interest or earnings from funds invested in the Trust Account up to
$1,200,000 net of taxes may be used to pay for business, legal and accounting
due diligence on prospective acquisitions, continuing general and administrative
expenses, and income taxes. The Company, after signing a definitive agreement
for the acquisition of a target business, is required to submit such transaction
for stockholder approval. In the event that stockholders owning 20% or more of
the shares sold in the Public Offering vote against the Business Combination and
exercise their conversion rights described below, the Business Combination will
not be consummated. All of the Company's stockholders prior to the public
offering, including all of the officers and directors of the Company ("Initial
Stockholders"), have agreed to vote their 2,150,000 founding shares of common
stock in accordance with the vote of the majority in interest of all other
stockholders of the Company ("Public Stockholders") with respect to any Business
Combination. After consummation of a Business Combination, these voting
safeguards will no longer be applicable.
F-7
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Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
With respect to a Business Combination which is approved and consummated,
any public stockholder presented with the right to approve a Business
Acquisition can instead demand that his stock be converted into his pro rata
share of the Trust Fund upon the consummation of the transaction if he votes
against such transaction. Such Public Stockholders are entitled to receive their
per share interest in the Trust Account computed without regard to the shares
held by the Initial Stockholders.
The Company's Certificate of Incorporation provides for mandatory
liquidation of the Company in the event that the Company does not consummate a
Business Combination within 18 months from the date of the consummation of the
Public Offering, or 24 months from the consummation of the Public offering if
certain extension criteria have been satisfied. In the event of liquidation, it
is likely that the per share value of the residual assets remaining available
for distribution (including Trust Fund assets) will be less than the initial
public offering price per share in the Public Offering.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109
("SFAS No. 109), "Accounting for Income Taxes" which establishes financial
accounting and reporting standards for the effects of income taxes that result
from an enterprise's activities during the current and preceding years. It
requires an asset and liability approach for financial accounting and reporting
for income taxes.
Earnings (Loss) Per Share
Net loss per share is computed on the basis of the weighted average number
of common shares outstanding during the period.
Use of Estimates
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of presentation in the financial statements, cash and cash
equivalents are defined as cash, interest bearing deposits and non interest
bearing demand deposits at financial institutions and trust companies with
maturities of less than one year.
Recently Issued Accounting Pronouncements
Energy Services Acquisition Corp. does not expect the adoption of recently
issued accounting pronouncements to have a significant impact on the Company's
results of operations, financial position or cash flow.
F-8
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Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
2. Public Offering
On September 6, 2006, the Company sold 8,600,000 units ("Units") in the
Public Offering at a price of $6.00 per Unit. Each Unit consists of one share of
the Company's common stock, $.0001 par value, and two Redeemable Common Stock
Purchase Warrants ("Warrants"). Each Warrant entitles the holder to purchase
from the Company one share of common stock at an exercise price of $5.00 per
share commencing on the later of the consummation by the Company of a Business
Acquisition, as defined below, or one year after the Effective Date and
terminating on the fifth anniversary of the date of the Public Offering. The
Company may redeem the Warrants for a redemption price of $0.01 per Warrant at
any time if notice of not less than 30 days is given and the last sale price of
the Common Stock has been at least $8.50 on 20 of the 30 trading days ending on
the third day prior to the day on which notice is given
On the 90th day after the date of the prospectus or earlier, at the
discretion of the Underwriter, the warrants will separate from the units and
begin to trade.
For the warrants, the Company is only required to use its best efforts to
cause a registration statement covering issuance of the shares of common stock
underlying the warrants to be declared effective and, once effective, only to
use its best efforts to maintain the effectiveness of the registration
statement. The Company will not be obligated to deliver securities, and there
are no contractual penalties for failure to deliver securities, if a
registration statement is not effective at the time of exercise. Additionally,
in no event is the Company obligated to settle any warrant, in whole or in part,
for cash in the event it is unable to deliver registered shares of common stock
and, if it is unable to do so, the warrants could expire unexercised. The
holders of warrants do not have the rights or privileges of holders of common
stock, including any voting rights, until such holders exercise their warrants
and receive shares of the Company's common stock.
In connection with the offering, the Company paid the underwriters of the
Public Offering an underwriting discount of 6% of the gross proceeds of the
Public Offering ($3,096,000) and a non-accountable expense allowance of 2% of
the gross proceeds ($1,032,000). However, the underwriters have agreed that the
expense allowance amount will be placed in the Trust Account until the earlier
of the completion of a business combination or the liquidation of the Trust
Account. In the event that the business combination is not consummated, the
underwriter will forfeit the 2.0% being deferred.
The Company also issued to the underwriter at the time of closing of the
Offering a unit purchase option, for $100, to purchase up to 450,000 units at an
exercise price of $7.50. The unit purchase option shall be exercisable any time,
in whole or in part, between the first anniversary date and the fifth
anniversary date of the Public Offering.
For the option, the Company is only required to use its best efforts to
cause a registration statement covering the resale of the units and the
securities comprising the units and, once effective, only to use its best
efforts to maintain the effectiveness of the registration statement. There are
no contractual penalties for failure to effect the registration of the units and
the securities comprising the units. Additionally, in no event, is the Company
obligated to settle the option, the units or the warrants included in the units,
in whole or in part, for cash in the event it is unable to effect the
registration of the units and the securities comprising the units. The holder or
holders of the options do not have the rights or privileges of holders of common
stock, including any voting rights, until such holder or holders exercise the
options and receive shares of the Company's common stock.
The Company intends to account for the fair value of the unit purchase
option, inclusive of the receipt of $100 cash payment, as an expense of the
Public Offering resulting in a charge directly to stockholders' equity. The
Company estimates that the fair value of this unit purchase option is
approximately $1,642,500 ($ 3.65 Per Unit) using a Black-Scholes option pricing
model. The fair value of the unit purchase option granted to the underwriter is
estimated as of the date of grant using the following assumptions: (I) expected
volatility of 75.7 %, (2) risk free interest rate of 5.1 % and (3) expected life
of 5 years.
F-9
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Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
3. Commitments
The Company presently occupies office space provided by an affiliate of one
of the Company's executive officers. Such affiliate has agreed that until the
Company consummates a Business Combination, it will make such office space, as
well as certain office and secretarial services available to the Company, as may
be required by the Company from time to time. The Company has agreed to pay such
affiliate up to $5,000 per month for reimbursement of expenses expended on
behalf of the Company commencing on the date of the effective date of the Public
Offering.
Pursuant to letter agreements with the Company and the Underwriter, the
Initial Stockholders have waived their right to receive distributions with
respect to their founding shares upon the Company's liquidation.
The Company's Initial Stockholders purchased in the aggregate, 3,076,923 of
the Warrants from the Company at a purchase price of $.65 per Warrant
($2,000,000 in the aggregate) in a private placement. These warrants, and the
warrants issued as part of the Units in the Public Offerings, do not have any
liquidation rights.
The Initial Stockholders are entitled to registration rights with respect
to their founding shares pursuant to an agreement signed on the effective date
of the Public Offering. The Holders of the majority of these shares are entitled
to make up to two demands that the Company register these shares at any time and
from time to time, commencing with the date the initial shares are disbursed
from the escrow account. In addition, the Initial Stockholders have certain
"piggyback" registration rights on the registration statements filed subsequent
to the release date from escrow.
At any time and from time to time after the release date from escrow and
prior to the fifth anniversary date hereof, the holders of at least 51 % of the
Registrable Securities initially held by the underwriters may make two written
demands for a Demand Registration.
4. Note Payable
Prior to the offering, the Company issued an unsecured non-interest bearing
promissory note for $150,000 to Marshall T. Reynolds, Chairman and Chief
Executive Officer. The note was repaid on September 6, 2006 from the proceeds of
the Public Offering. On September 6, 2006, Mr. Reynolds loaned the Company
$150,000. The loan will be repaid without interest from working capital and is
also unsecured.
5. Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with
such designations, voting and other rights and preferences as may be determined
from time to time by the Board of Directors.
6. Common Stock
On March 31, 2006, the Company issued 2,500,000 shares to the initial
stockholders. On August 30, 2006 the Company entered into an underwriting
agreement with respect to the public sale of up to 8,600,000 units, reflecting a
reduction in the size of the Public Offering from 10,000,000 units as previously
contemplated to 8,600,000 units. In connection with such modification, and in
order to maintain the percentage ownership of its stockholders prior to the
Public Offering, the Company's initial stockholders surrendered for cancellation
an aggregate of 350,000 shares of common stock. On the date the shares were
surrendered, management determined the fair value of the Company's common stock
to be $4.70 per share.
F-10
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Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
7. Concentration of Credit Risk
At September 6, 2006, the Company maintained a checking account at a
financial institution, the balance of which exceeded the federally insured limit
by $415,042.
8. Income Taxes
Energy Services Acquisition Corp. (ESA) uses the liability method, where
deferred tax assets and liabilities are determined based on the expected future
tax consequences of temporary differences between the carrying amounts of assets
and liabilities for financial and income tax reporting purposes. During the
period March 31, 2006 (inception) to September 6, 2006, ESA incurred net losses
and, therefore, has no tax liability. The net deferred tax asset generated by
the loss carry forward has been fully reserved. The net operating loss carry
forward is $2,200, at September 6, 2006, and will expire in 2026.
At September 6, 2006, deferred tax assets consisted of the following:
Deferred Tax Assets
Net Operating losses $ 330
Less: Valuation allowance (330)
---------
Net Deferred Tax Asset $ 0
=========
F-11