[X]
|
Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
for the quarterly period ended December 31,
2006
|
[
]
|
Transition
report under Section 13 or 15(d) of the Exchange Act for the transition
period from __________ to
__________.
|
NEVADA
|
|
95-4756822
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
|
|
|
|
|
Consolidated
Unaudited Balance Sheets as of December 31, 2006 and December 31,
2005
|
3
|
|
|
|
|
Consolidated
Unaudited Statements of Operations for the Quarters ended December
31,
2006 and December 31, 2005
|
4
|
|
Consolidated
Unaudited Statement of Cash Flows for the Quarters ended December
31, 2006
and six months ended December 31, 2005
|
5
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
7
|
|
|
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
11
|
|
|
|
ITEM
3.
|
CONTROLS
AND PROCEDURES
|
13
|
|
|
|
PART
II - OTHER INFORMATION
|
||
|
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
13
|
ITEM
5.
|
OTHER
EVENTS
|
13
|
|
|
|
ITEM
6.
|
EXHIBITS
|
15
|
|
|
|
SIGNATURES
|
16
|
|
|
December
31,
2006
|
|
June
30,
2006
|
|
||
Assets
|
|
||||||
|
|
|
|
|
|
||
Current
assets:
|
|
|
|
|
|
||
Cash
|
|
$
|
42,177
|
|
$
|
42,062
|
|
Inventories
|
|
|
26,750
|
|
|
-
|
|
Prepaid
expenses
|
|
|
176,372
|
|
|
225,916
|
|
Net
current assets of discontinued operations
|
|
|
514,743
|
|
|
619,565
|
|
Total
current assets
|
|
|
760,042
|
|
|
887,543
|
|
Equipment,
net
|
|
|
3,936,459
|
|
|
4,025,203
|
|
Equipment
of discontinued operations, net
|
|
|
8,851,483
|
|
|
9,338,711
|
|
Other
assets:
|
|
|
|
|
|
|
|
Deposits
& other
|
|
|
3,000
|
|
|
3,000
|
|
Demonstration rotary engines not held for sale
|
|
|
2,310,000
|
|
|
2,310,000
|
|
Rotary engine intellectual assets |
2,167,000
|
2,167,000
|
|||||
Net other assets of discontinued operations |
348,260
|
420,392
|
|||||
Total
other assets
|
|
|
4,828,260
|
|
|
4,900,392
|
|
|
|
$
|
18,376,244
|
|
$
|
19,151,849
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|||||||
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
439,331
|
|
$
|
499,477
|
|
Accrued
liabilities
|
|
|
1,040,876
|
|
|
866,303
|
|
Long-term
debt due within one year
|
2,960,000
|
2,990,000
|
|||||
Loans
payable
|
|
|
270,595
|
|
|
95,000
|
|
Notes
payable and accrued interest subject to conversion into
an indeterminable number of shares of common stock
|
|
|
27,964
|
|
|
71,660
|
|
Derivative
liabilities
|
|
|
806
|
|
|
6,371
|
|
Net
current liabilities of discontinued operations
|
|
|
3,811,624
|
|
|
4,462,069
|
|
Total
current liabilities
|
|
|
8,551,196
|
|
|
8,990,880
|
|
Long-term
debt to related parties
|
|
|
50,000
|
|
|
50,000
|
|
Long-term
debt
|
|
|
2,656,612
|
|
|
1,700,000
|
|
Accrued
Interest
|
|
|
244,949
|
|
|
71,847
|
|
Net
liabilities of discontinued operations
|
1,064,691
|
245,777
|
|||||
Minority
interest
|
|
|
5,288,892
|
|
|
5,306,746
|
|
Net
capital deficiency:
|
|
|
|
|
|
|
|
Preferred
stock; $.001 par value; authorized 200,000 shares;
outstanding 200,000 shares
|
|
|
200
|
|
|
200
|
|
Common
stock; $.001 par value; authorized 500,000,000
shares; issued and outstanding 48,404,481 shares
(28,820,035
shares at June 30, 2006)
|
|
|
48,404
|
|
|
28,820
|
|
Convertible
promissory note and accrued interest
|
|
|
107,140
|
|
|
107,140
|
|
Additional
paid in capital
|
|
|
35,353,776
|
|
|
34,810,660
|
|
Retained
deficit
|
|
|
(34,989,616
|
)
|
|
(32,160,221
|
)
|
Total
stockholders' equity
|
|
|
519,904
|
|
|
2,786,599
|
|
|
|
$
|
18,376,244
|
|
$
|
19,151,849
|
|
|
Three
months ended
December
31
|
Six
months ended
December
31
|
|||||||||||
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
|
|
|||||||||||
|
|
|
|||||||||||
Revenues
|
$
|
-
|
$
|
-
|
$
|
16,200 |
$
|
-
|
|||||
Cost
of goods sold
|
-
|
-
|
20,000 | - | |||||||||
Gross
profit
|
-
|
-
|
(3,800 | ) | - | ||||||||
Operating
expenses:
|
|||||||||||||
General and administrative
|
723,030
|
477,078
|
1,327,120 | 952,189 | |||||||||
Research and development
|
101,026
|
457,926
|
154,849 | 458,573 | |||||||||
824,056
|
935,004
|
1,485,769
|
1,410,762
|
||||||||||
Net
loss from operations
|
(824,056
|
)
|
(935,004
|
)
|
(1,485,769
|
) |
(1,410,762
|
) | |||||
Other
income (expenses):
|
|||||||||||||
Change
in fair value of derivative liabilities
|
(1,438
|
) |
(24,174
|
)
|
3,952
|
(32,982
|
) | ||||||
Interest
expense, net
|
(136,184
|
)
|
(18,899
|
)
|
(247,133
|
) |
(19,261
|
) | |||||
Other
|
-
|
(1,227
|
) |
80,000
|
(1,227
|
) | |||||||
(137,622
|
)
|
(44,350
|
)
|
(163,181
|
) |
(53,520
|
) | ||||||
|
|||||||||||||
Net
income from continuing operations before provision for income
taxes
|
(961,678
|
) |
(979,354
|
) |
(1,648,950
|
) |
(1,464,282
|
) | |||||
Provision
for income taxes
|
3,141 | 12,000 | 3,141 | 12,000 | |||||||||
Net
loss from continuing operations
|
(964,819
|
)
|
(991,354
|
)
|
(1,652,091 | ) | (1,476,282 | ) | |||||
|
|||||||||||||
Net loss of discontinued operations, net of provision for income taxes |
(623,033
|
) |
(202,823
|
) | (1,177,304 | ) | (592,250 | ) | |||||
|
|||||||||||||
Net
loss
|
$ |
(1,587,852
|
)
|
$
|
(1,194,177
|
)
|
$ |
(2,829,395
|
)
|
$ | (2,068,532 | ) | |
Net
loss per common share
|
|
|
|||||||||||
Continuing operations
|
$ | (.024 | ) | $ | (.101 | ) | $ | (.048 | ) | $ | (.173 | ) | |
Discontinued operations
|
(.016 | ) | (.021 | ) | (.044 | ) | (.069 | ) | |||||
$ | (.040 | ) | $ | (.122 | ) | $ | (.092 | ) | $ | (.242 | ) |
|
Three
months ended
December
31
|
Six
months ended
December
31
|
|||||||||||
|
2006
|
2005
|
2006
|
2005
|
|||||||||
Cash
flows from operating activities:
|
|
|
|||||||||||
|
|
|
|||||||||||
Net loss
|
$
|
(1,587,852
|
) |
$
|
(1,194,177
|
) |
$
|
(2,829,395 | ) |
$
|
(2,068,532
|
) | |
Adjustment to reconcile net loss to net cash (used in) operating
activities:
|
|
|
|||||||||||
Provision for uncollectible accounts
|
16,200
|
-
|
16,200 | - | |||||||||
Depreciation & amortization
|
88,744 | - | 88,744 | - | |||||||||
Provision for income taxes |
3,141
|
-
|
3,141 | - | |||||||||
Minority interest |
(18,173
|
) |
-
|
(17,854 | ) | - | |||||||
Change in fair value of derivative liabilities |
1,438
|
24,174
|
(5,565
|
) |
32,982
|
||||||||
Shares issued in exchange for services |
168,878
|
|
469,988
|
|
168,878
|
806,757
|
|||||||
Loss on disposal of equipment | - | 1,277 | - | 1,277 | |||||||||
Changes in assets and liabilities: |
|
||||||||||||
Other assets |
(12,063
|
)
|
60,628
|
|
22,794
|
8,677
|
|||||||
Accounts payable |
83,984
|
(304,496
|
) |
(60,146
|
) |
(38,010
|
) | ||||||
Accrued liabilities | 556,359 | 125,765 | 515,416 | 113,452 | |||||||||
(699,344
|
)
|
(816,841
|
)
|
(2,097,787
|
) |
(1,143,397
|
) | ||||||
Cash
flow from discontinued operations
|
181,698 | 78,694 | 707,361 | 615,273 | |||||||||
Cash
flows from investing activities:
|
|||||||||||||
Advances received from (paid
to) related parties
|
- | 120,578 | - | 53,358 | |||||||||
Discontinued operations |
318,404
|
|
159,768 |
|
72,132 | 55,828 | |||||||
|
318,404
|
280,346
|
72,132 | 109,186 | |||||||||
Cash flows from financing activities: | |||||||||||||
Proceeds from long-term debt
|
250,000
|
1,000,000
|
1,050,000 | 1,000,000 | |||||||||
Principal payments on long-term debt |
-
|
|
(85,292
|
)
|
-
|
|
(88,757 | ) | |||||
Proceeds from sale of common stock | - | - | 260,000 | - | |||||||||
Discontinued operations | (21,591 |
)
|
(127,926 |
)
|
8,409 | (170,614 | ) | ||||||
228,409 | 786,782 | 1,318,409 | 740,629 | ||||||||||
Net change in cash | $ | 29,167 | $ | 328,981 | $ | 115 | $ | 321,691 |
|
Three
months ended
December
31
|
Six
months ended
December
31
|
|||||||||||
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
|
|
|||||||||||
|
|
|
|||||||||||
Cash
at beginning of period
|
$
|
13,010
|
$
|
1,808
|
$
|
42,062 |
$
|
9,098
|
|||||
|
|
|
|||||||||||
Net
change in cash
|
29,167
|
328,981
|
115 | 321,691 | |||||||||
Cash at end of period |
$
|
42,177
|
$
|
330,789
|
$
|
42,177 |
$
|
330,789 | |||||
|
|||||||||||||
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|||||||||||
Notes payable and accrued interest converted to common stock | $ | 43,696 | $ | 175,000 |
|
$ | 43,696 | $ | 175,000 | ||||
|
|
|
|||||||||||
Accrued interest on long-tem debt converted to common stock | $ |
123,388
|
$ |
-
|
$ | 123,388 | $ |
-
|
1.
|
Summary
of significant accounting
policies
|
1.
|
Summary
of significant accounting policies
(continued)
|
1.
|
Summary
of significant accounting policies
(continued)
|
2.
|
Operations
|
3.
|
Notes
payable subject to conversion into an indeterminable number of shares
of
common stock
|
3.
|
Notes
payable subject to conversion into an indeterminable number of shares
of
common stock (continued)
|
4.
|
Long
Term Obligations
|
|
Included
in long term debt is $2,750,000 of notes payable to AJW Offshore,
Ltd; AJW
Partners, LLC AJW Qualified Partners, LLC; and Millennium Capital
Partners
II., LLC. The entire amount is convertible in whole or in part into
shares
of common stock of the Company at the option of the Company at a
conversion price equal to the average of the three lowest closing
bid
prices of the Company’s common stock during the 20 trading days prior to
the date of conversion at a discount of
45%.
|
|
The
Company also granted AJW Offshore, Ltd; AJW Partners, LLC; AJW Qualified
Partners, LLC; and New Millennium Capital Partners II, LLC warrants
for
the purchase of an aggregate of 3,500,000 shares of common stock
of the
Company at an exercise price equal to $.50 per share. The warrants
are
exercisable in whole or in part and warrants for the purchase of
up to
1,400,000 shares expire on November 29, 2009; warrants for the purchase
of
up to 979,380 shares expire on January 17, 2010 if not exercised:
and
warrants for the purchase of 1,120,620 shares shall expire on August
8,
2010. The Company has reserved 3,500,000 shares of its common stock
for
issuance to these warrant holders.
|
|
During
the three months ending, December 31, 2006, as partial repayment
of the
cash advances received from AJW Partners, LLC, AJW Qualified Partners,
LLC, and New Millennium Capital Partners II, LLC, the company issued
3,250,000 shares of its common stock in return for a principle reduction
of $70,125. Subsequent to December 31, 2006 the Company has issued
an
additional 2,250,000 common shares for a further reduction of $49,500.
|
5.
|
Common
stock
|
6.
|
Nacio
Systems, Inc. Spin-Off
|
|
Three
months ended December 31:
|
||||||
|
2006
|
|
2005
|
|
Decrease
|
|
%
|
Sales
|
0
|
|
0
|
|
N/A
|
|
N/A
|
|
Six
months ended December 31:
|
||||||
|
2006
|
|
2005
|
|
Increase
|
|
%
|
Sales
|
16,200
|
|
0
|
|
16,200
|
|
N/A
|
|
Three
months ended December 31:
|
||||||
|
2006
|
|
2005
|
|
Decrease
|
|
%
|
Cost
of sales
|
0
|
|
0
|
|
0
|
|
N/A
|
|
Six
months ended December 31:
|
||||||
|
2006
|
|
2005
|
|
Decrease
|
|
%
|
Cost
of sales
|
20,000
|
|
0
|
|
20,000
|
|
N/A
|
|
Three
months ended December 31:
|
||||||
|
2006
|
|
2005
|
|
Decrease
|
|
%
|
General
and administrative expenses
|
824,056
|
|
935,004
|
|
110,948
|
|
11.87%
|
|
Six
months ended December 31:
|
||||||
|
2006
|
|
2005
|
|
Increase
|
|
%
|
General
and administrative expenses
|
1,481,969
|
|
1,410,762
|
|
71,207
|
|
5.05%
|
|
December
31,
2006
|
|
December
31,
2005
|
|
Increase
|
|
%
|
Accounts
receivable, net
|
16,200
|
|
0
|
|
16,200
|
|
N/A
|
Exhibit
Number
|
|
Description
of Document
|
|
|
|
3.1
|
|
Articles
of Incorporation as Amended *
|
3.2
|
|
By
laws *
|
10.1
|
||
10.2
|
Asset
Acquistion Agreement dated March 28, 2006 between Encompass Holdings,
Inc;
|
|
Rotary
Engines, Inc; Rotary Engines Technologies, Inc; Larry Cooper;
Scott
Webber;
|
||
And
Shirley Harmon. *
|
||
31.1
|
|
|
31.2
|
|
|
32.1
|
|
|
32.2
|
|
|
*
|
Filed
by reference to a prior filing of the
Registrant.
|
March
21, 2006
|
ENCOMPASS
HOLDINGS, INC.
|
|
|
|
|
|
By:
|
/s/
ARTHUR N. ROBINS
Arthur
N. Robins
Chief
Executive Officer
|
|
|
|
|
By:
|
/s/
LESLIE I. HANDLER
Leslie
I. Handler, President
|