Item 1.  Financial Statements

The accompanying notes are an integral part of these consolidated financial statements.

3

The accompanying notes are an integral part of these consolidated financial statements.

4

The accompanying notes are an integral part of these consolidated financial statements.

5

CONSOLIDATION SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation Services, Inc. (the “Company” or “CNSV”) was incorporated in the State of Delaware on January 26, 2007.  The Company was re-incorporated in Nevada on February 8, 2007 however the merger has not been completed. Since its inception, the Company has been engaged in the acquisition, development and exploitation of domestic natural resources including mining and timber.  The Company’s current operations consist of owning and operating oil and gas properties in Kentucky and Tennessee.

Basis of Presentation of Interim Financial Statements

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.  The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. While management of the Company believes that the disclosures presented herein are adequate and not misleading, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2010 included within its Form 10-K as filed with the Securities and Exchange Commission.

Principle of Consolidation

The Company’s subsidiaries include a 100% ownership interest in Vector Energy Services, Inc. presently a non-operating subsidiary.  

On June 2, 2010, CSI Energy, Inc. was incorporated in the State of Nevada as a wholly-owned subsidiary of the Company and is presently non-operating subsidiary.  

On June 2, 2010, CSI Resources, Inc. was incorporated in the State of Nevada as a wholly-owned subsidiary of the Company and presently is a non-operating subsidiary.  

6

CONSOLIDATION SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

The Company’s consolidated financial statements are based on a number of significant estimates including the selection of the useful lives for property and equipment recoverable quantities of oil and gas reserves which are the basis for the calculations of depreciation, depletion, and impairment of property and equipment. Management emphasizes that estimated reserve quantities are inherently imprecise and that estimates of more recent discoveries are more imprecise than those for properties with long production histories.  Accordingly, the Company’s estimates are expected to change as future information becomes available.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.  At September 30, 2011, cash and cash equivalents of $2,623 included cash on hand and cash in depository institutions/commercial banks.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and accounts receivables. Beginning December 31, 2010, all non interest-bearing transaction accounts are now fully insured, regardless of the balance, by the FDIC through December 31, 2012. Interest-bearing accounts are insured up to $250,000. At September 30, 2011, the Company had no cash in accounts that bore interest.

Oil and Gas Properties

The Company uses the successful efforts method of accounting for oil and gas operations.  Under this method of accounting, costs to acquire mineral interests in oil and gas properties, to drill and equip development wells, and to drill and equip exploratory wells that find proved reserves are capitalized.  Depletion and depreciation of capitalized costs for producing oil and gas properties is calculated using the unit-of-production method based on estimates of proved producing oil and gas reserves on a field-by-field basis.  Depletion and depreciation expense for the Company’s oil and gas properties was approximately $42,605 and $90,254 for the nine months ended September 30,  2011and 2010, respectively, and approximately $14,316 and $30,546 for the three months ended September 30, 2011 and 2010, respectively.

7

CONSOLIDATION SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The costs of unproved leaseholds and mineral interests are capitalized pending the results of exploration efforts.  In addition, unproved leasehold costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, the property has been impaired.  This impairment will generally be based on geophysical or geologic data.  For the nine months ended September 30, 2011, there was no impairment of unproved leaseholds.  Due to the perpetual nature of the Company’s ownership of the mineral interests, the drilling of a well, whether successful or unsuccessful, may not represent a complete test of all depths of interest.  Therefore, at the time that a well is drilled, only a portion of the costs allocated to the acreage drilled may be expensed.  As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds.  The costs associated with unproved leaseholds and mineral interests that have been allowed to expire are charged to exploration expense.

The Company evaluates impairment of its property and equipment in accordance with ASC Topic 360, “Long-Lived Assets.”  This standard requires that long-lived assets that are held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  When it is determined that an asset’s estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge must be recorded to reduce the carrying amount of the asset to its estimated fair value.  Fair value is determined by reference to the present value of estimated future cash flows of such properties.  During the nine months ended September 30, 2011 there was no impairment of the Company’s long-lived assets.

Exploration costs, including exploratory dry holes, annual delay rental and geological and geophysical costs, are charged to expense when incurred.

Support Equipment and Facilities

Support equipment and facilities including, furniture, fixtures, automobiles, office equipment, leasehold improvements, and computer software, are stated at cost. Depreciation and amortization of support equipment and facilities is calculated using various accelerated or straight-line methods over the respective expected useful lives.  Depreciation and amortization expense for support equipment and facilities totaled approximately $11,700 and $7,800 for the nine months ended September 30, 2011 and 2010, respectively, and approximately $3,900 and $3,900 for the three months ended September 30, 2011 and 2010, respectively. The cost of normal maintenance and repairs is charged to operating expenses as incurred.  Material expenditures which increase the life of an asset or increase expected recoveries are capitalized and depleted or depreciated over the estimated remaining useful life of the asset.  The cost of equipment sold, or otherwise disposed of, and the related accumulated depletion, depreciation or amortization is removed from the accounts and any gains or losses are reflected in current operations.

8

CONSOLIDATION SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Revenue Recognition

The Company has royalty and working interests in various oil and gas properties which constitute its primary source of revenue.  The Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells.  

The Company follows the “sales method” of accounting for oil and natural gas revenue, so it recognizes revenue on all natural gas or crude oil sold to purchasers, regardless of whether the sales are proportionate to its ownership in the property.  A receivable or liability is recognized only to the extent that the Company has an imbalance on a specific property greater than its share of the expected remaining proved reserves.  

Accounts Receivable

At September 30, 2011, substantially, all of the Company’s accounts receivable consists of accrued revenues from oil and gas production due from third party companies in the oil and gas industry.  The Company has two customers that purchase and distribute substantially all of our oil and gas production. This concentration of customers may impact the Companies’ overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the oil and gas industry.  In determining whether or not to require collateral from a purchaser or joint interest owner, the Company analyzes the entity’s net worth, cash flows, earnings and credit ratings.  Historical credit losses incurred by the Company on receivables have not been significant.

Earnings Per Share

Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. Diluted loss per share is the same as basic loss per share, because the effects of the additional securities, as a result of the net loss for all periods presented, would be anti-dilutive. There were no warrants, options or other potentially dilutive securities outstanding during the nine months ended September 30, 2011 or 2010.

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation.

9

CONSOLIDATION SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable and note payable from related party, approximate fair value due to their short-term nature.

Recent Accounting Pronouncements

Accounting standards or interpretations issued or recently adopted are not expected to a have or did not have, a material impact on the Company’s consolidated financial position, operations or cash flows.

NOTE 2 - GOING CONCERN

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company sustained losses from operations for the nine months period ended September 30, 2011 of $947,250.   Further, the Company has inadequate working capital to maintain or develop its operations, and is dependent upon funds from lenders, investors and the support of certain stockholders. These factors raise substantial doubt about the ability of the Company to continue as a going concern.  The consolidated financial statements herein do not include any adjustments that might result from the outcome of these uncertainties.  

In this regard, Company management is planning to raise additional funds through loans and additional sales of its common stock. The Company's ability to meet its obligations and continue as a going concern is dependent upon its ability to obtain additional financing, achievement of profitable operations and/or the discovery, exploration, development and sale of oil and gas reserves. Although the Company is pursuing additional financing, there can be no assurance that the Company will be able to secure financing when needed or obtain such financing on terms satisfactory to the Company, if at all.

NOTE 3 - ASSET RETIREMENT OBLIGATIONS

The Company records a liability for asset retirement obligations (“ARO”) in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. The Company accrues an abandonment liability associated with its oil and gas wells when those assets are placed in service and when the liability can be estimated. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at the Company’s credit-adjusted risk-free rate. No market risk premium has been included in the Company’s calculation of the ARO balance.

10

CONSOLIDATION SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a description of the changes to the Company’s asset retirement obligations for the nine months ended September 30, 2011:

None of the Company’s wells were plugged or abandoned during the nine months ended September 30, 2011.

NOTE 4 - EQUITY

Common Stock

The Company is authorized to issue 200,000,000 shares of common stock, at $0.001 par value, of which 49,919,289 common shares were issued and outstanding as of September 30, 2011.

Preferred Stock

The Company is authorized to issue 20,000,000 shares of preferred stock, at $0.001 per value, of which no shares were issued and outstanding as of September 30, 2011.

Options

As of September 30, 2011, no options to purchase common stock of the Company were issued and outstanding.

Warrants

As of September 30, 2011, no warrants to purchase common stock of the Company were issued and outstanding.

Private Placements, Other Issuances and Cancellations

The Company periodically issues shares of its common stock, and potentially warrants to purchase shares of common stock, to investors in connection with private placement transactions, as well as to advisors and consultants for the fair value of services rendered.

11

CONSOLIDATION SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On February 28, 2011 the Company issued 250,000 common shares for $25,000 in proceeds and on March 9, 2011 the Company issued 384,616 common shares for $25,000 in proceeds in private placements. The price received in the private placements was $0.10 and $0.065 per share, respectively.

On April 26, 2011, the Board of Directors granted Stephen Thompson 4,000,000 shares of Common Stock under its 2007 Equity Compensation Plan as full compensation for services rendered as Chief Executive Officer of the Company.  The fair value of the shares at the grant date was $320,000 based on the quoted market price of $0.08 per share.

On May 3, 2011, the Company granted Richard Polep 150,000 shares of Common Stock as Director of the Company.  The fair value of the shares at the grant date was $12,000 based on the quoted market price of $0.08 per share.

On May 10, 2011, the Board of Directors granted Gary Kucher 2,825,620 shares of Common Stock in accordance with his employment agreement for services rendered as President of the Company.  The fair value of the shares at the grant date was $310,821 based on the quoted market price per share of $0.11 per share.

NOTE 5 - RELATED PARTY TRANSACTIONS

Our President and another related party had expenses for travel and business related expenses incurred during the nine months ended September 30, 2011 of $25,948.  As of September 30, 2011 $20,948 of these expenses have not been reimbursed and are classified as Accounts payable - related party in the accompanying financial statements.

During the nine months ended September 30, 2011, the Company entered into six note agreements for a total of $72,500 with Stephen Thomson, our former CEO and a shareholder in the Company, to fund operations.  The notes are unsecured, due on demand, carry a 6% (and 7.5%) interest rate and are classified as Notes payable - related party, in the accompanying financial statements.

During the period ended September 30, 2011, the Company entered into note agreement with Leland Energy, LLC, an entity controlled by our former Chief Executive Officer, Stephen Thompson, for $15,000 related to amounts previously advanced to the Company in October 2010.  The note is unsecured, due on demand, carries a 6% interest rate and is classified as Notes payable - related party, in the accompanying financial statements.

Accrued interest of $1,544 related to the notes has been recorded in Accounts payable - related party during the nine months ended September 30, 2011.

12

CONSOLIDATION SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 - ACQUISITIONS

On April 1, 2010, the Company entered into 12 substantially identical asset purchase agreements with various unrelated limited partnerships, which comprised a total of 657 individual sellers and completed the purchase of interests in oil and gas wells located in Kentucky and Tennessee. The Company acquired interests in 39 oil wells and 19 gas wells, (a total of 58 wells), and the related support equipment, located on approximately 1,500 leased acres in Kentucky and Tennessee. Under the agreements, the Company acquired all rights, titles and interests to the sellers’ oil and gas wells and support equipment free and clear of all liabilities, liens and encumbrances. The effective date of the purchase and sale was April 1, 2010.

The following (unaudited) Pro forma consolidated results of operations for the nine months ended September 30, 2010 have been prepared as if the acquisition had occurred at January 1, 2009.

NOTE 7 - SUBSEQUENT EVENTS

In accordance with ASC 855, the Company evaluated subsequent events through the date these financial statements were issued and there were no material subsequent events that required recognition or additional disclosure in these financial statements.

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Management’s Discussion and Analysis contains various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.

Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.

In addition, the foregoing factors may affect generally our business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.

Our Company was originally formed on January 26, 2007 in Delaware. The Company was re-incorporated in Nevada on February 8, 2007. Since its inception the Company has been engaged in the acquisition, development and exploitation of domestic natural resources including mining and timber. As of April 1, 2010, our primary business focus became the exploration and development of oil and natural gas properties as a result of the acquisition of producing oil and gas properties.

On April 1, 2010, the Company acquired interests in 39 oil wells and 19 gas wells, (a total of 58 wells), and the related support equipment, located on approximately 1,500 leased acres in Kentucky and Tennessee. Under the agreements, the Company acquired all rights, titles and interests to the sellers’ oil and gas wells and support equipment free and clear of all liabilities, liens and encumbrances.

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The Company originally filed on July 23, 2010 its two year pre-acquisition audits in compliance with section 2065.6 of the SEC CorpFin Financial Reporting Manual and presented Statement of Revenues and Direct Expenses instead of a full set of financial statements.  

In June 2011, the Office of Chief Accountant (“OCA”) informed the Company that the acquisition on April 1, 2010 should be treated as a predecessor business acquisition.  The OCA also informed the Company that there was a regulatory requirement for the Company, prior to the closing of the transaction on April 1, 2010, to request a pre-clearance letter from the OCA to present Statements of Revenues and Direct Expenses instead of a full set of financial statements for the interests acquired.

On July 8, 2011 the Company sent the required request; however, that pre-clearance letter was denied and the Company is now required to obtain and file pre-acquisition audits for all 12 selling partnerships as predecessor businesses.  The Company anticipates that it will cost the partnerships approximately $20,000 in audit fees to accomplish this requirement and anticipates the audits to be completed in November 2011.  

The Company hired a Reserve Engineer to prepare our Company’s Reserve Report for the April 1, 2010 transaction and the Reserve Report for the December 31, 2010 audit.  The April 1, 2010 reserve report included assumptions based upon business expectations of new wells and well rebuilds which ultimately were not accomplished due to a lack of resources and an uncompleted additional oil & gas acquisition. (See Form 8-K filed on November 18, 2010).  

There was a material difference between the valuation in the April 1, 2010 and December 31, 2010 reserve reports. The second impaired our assets by an additional $3 million.  The Company adopted the conclusions of the second reserve report and further impaired its assets, as indicated by the revised report, to $4.3 million.

Proposed Acquisition

On May 2, 2011 the Company announced that it had, through its wholly-owned subsidiary CSI Resources Inc., entered into a definitive Contribution and Exchange Agreement (the “Agreement”) to acquire Elkhorn Goldfields Inc (“EGI”) and Montana Tunnels Mining Inc (“MTMI”) from Elkhorn Goldfields LLC.

The Purchase Price for the Acquisition is one million (1,000,000) shares of 4% Series A Convertible Preferred Stock of the Company (the “Preferred Shares”) with a face value of $350 Million.  The Preferred Shares are convertible into an aggregate of 90 million shares of common stock, which was calculated on a post reverse split basis (on a pre-reverse split basis this issuance would represent nearly 450 million shares).  The determination of the relative value between the Company and both EGI and MTMI was an arms-length negotiation.  Effectively, at closing Elkhorn will represent approximately 91% of the controlled entity’s common stock on a fully diluted basis. Although it is not a requirement or prerequisite of the Acquisition the Company intends to effect a reverse split of the issued and outstanding common stock so there are not more than 8,500,000 shares of common stock issued and outstanding at the Closing of the Acquisition and prior to the issuance of the Preferred Shares.

15

Any unconverted Preferred Stock upon the second anniversary date of the Closing will be mandatorily converted and shall earn 4% per annum interest from the date of the Closing until converted. Interest is due once annually or at such time as determined by available cash flow and the Board of Directors of the Company.

The Company will transfer ownership and title to its existing oil and gas assets and operations into its wholly-owned subsidiary, CSI Energy, Inc. Upon Closing of the Acquisition the Company will seek a listing on the NYSE Amex or another national securities exchange.

Completion of the Acquisition is contingent upon, among other things, satisfactory completion of due-diligence, receipt of 2010 audited financial statements of Elkhorn, Board approval of the financing by Elkhorn Goldfields, LLC and certain other matters in addition to a separate third party financing of approximately $7.5 million (which can be waived) and other customary closing conditions.

Results of Operations

We use the successful efforts method of accounting for oil and gas operations.  Presently we are producing oil from our Kentucky properties.  Our natural gas wells are not currently producing.

Supplemental Oil and Gas Information - Comparisons of the three months ended September 30, 2011 and 2010

The following information is intended to supplement the unaudited consolidated financial statements included in this report with data that is not readily available from those statements.

Our revenues for the three months ended September 30, 2011 were $74,846 as compared to $70,861 for 2010.  The increase in revenues for the period was attributable to an increase of $18.46 in price per barrel realized for oil sales, partially offset by a decrease in production of 179 barrels.  The decrease in production was due to the Company having no production in several wells in 2011 that produced in 2010.

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Our operating expenses for production activities for the three months ended September 30, 2011 and 2010 were $76,874 (comprised of $58,130 of lease operating expenses and $18,742 of depreciation, depletion and amortization) and $47,696 (comprised of $12,911 of lease operating expenses and $34,785 of depreciation, depletion and amortization), respectively. The increase in lease operating expenses is attributable to higher hauling and workover costs incurred during the 2011 period.  The decrease in depreciation, depletion and amortization is a result of an impairment of our capitalized oil and gas properties in the fourth quarter of 2010.

Our general and administrative expenses for the three months ended September 30, 2011 and 2010 were $110,990 and $524,375, respectively.  The decrease is primarily attributable to stock compensation of $380,000 and legal fees of approximately $35,000 incurred in 2010, compared to stock compensation of $0 and legal fees of approximately $41,700 incurred in 2011.

Supplemental Oil and Gas Information - Comparisons of the nine months ended September 30, 2011 and 2010

The following information is intended to supplement the unaudited consolidated financial statements included in this report with data that is not readily available from those statements.

Our revenues for the nine months ended September 30, 2011 were $239,973 as compared to $137,836 for 2010.  The increase in revenues for the period was attributable to an increase of $26.53 in price per barrel realized for oil sales, partially offset by a decrease in production of 506 barrels.  The lower 2010 production was due to the Company having no production during the three months ended March 31, 2010 as the acquisition of these interests was effective April 1, 2010.

17

Our operating expenses for production activities for the nine months ended September 30, 2011 and 2010 were $213,079 (comprised of $157,285 of lease operating expenses and $55,794 of depreciation, depletion and amortization) and $126,261 (comprised of $27,521 of lease operating expenses and $98,740 of depreciation, depletion and amortization), respectively. The primary reason that lease operating expenses increased is attributed to no oil and gas production during the three months ended March 31, 2010, as the acquisition of these interests was effective April 1, 2010.  The decrease in depreciation, depletion and amortization is a result of an impairment of our capitalized oil and gas properties in the fourth quarter of 2010 and the lack of depreciation, depletion and amortization for the three months ended March 31, 2010.

Our general and administrative expenses for the nine months ended September 30, 2011 and 2010 were $972,600 and $2,166,840, respectively. The decrease is primarily attributable to stock compensation of $1,866,631 and legal fees of approximately $204,000 incurred in 2010, compared to stock compensation of $642,821 and legal fees of approximately $54,000 incurred in 2011.

Liquidity and Capital Resources

Our cash used in operating activities for the nine months ended September 30, 2011 was $137,140 as compared to $142,105 for the nine months ended September 30, 2010.   The decrease in cash flows used in operations was primarily attributable to favorable changes in operating assets and liabilities, primarily related to increases in amounts payable, in 2011 as compared to the 2010 period.

Our cash used by investing activities for the nine months ended September 30, 2011 was $0 as compared to $50,000 for 2010.  The Company did not purchase any equipment during the 2011 period.  

Our cash provided by financing activities for the nine months ended September 30, 2011 was $122,500 as compared to $204,500 for 2010.  The decrease in financing activities was due to the proceeds from the issuance of 631,616 shares of common stock for $50,000 in 2011 compared to 758,850 shares of common stock for $204,500 in the 2010 period. The Company also received proceeds of $72,500 from notes payables in September 30, 2011.  

Our future development plan for our oil and gas assets is uncertain and is dependent on our ability to effectively drill for oil and gas and obtain contract and leasing opportunities on oil and gas properties and/or acquisitions. There are no assurances of the ability of our Company to drill economically producible wells. The process/practice of drilling for oil and gas is cost intensive. Accordingly, it is critical for us to raise sufficient capital to implement our business plan.  We incurred net losses of $947,250and $2,155,305 for the nine months ended September 30, 2011 and 2010, respectively.

18

We believe we will have to rely on public and private equity and debt financings to fund our liquidity requirements over the next twelve months.  We may be unable to obtain any additional financings on terms favorable to us, or obtain additional funding at all. If adequate funds are not available on acceptable terms, and if cash and cash equivalents, together with any income generated from operations, fall short of our liquidity requirements, we may be unable to sustain operations. Continued negative cash flows could create substantial doubt regarding our ability to fully implement our business plan and could render us unable to expand our operations, respond to competitive pressures, or take advantage of acquisition opportunities, any of which may have a material adverse effect on our business. If we raise additional funds through the issuance of equity securities, our stockholders may experience dilution of their ownership interest, and the newly issued securities may have rights superior to those of our common stock. If we raise additional funds by issuing debt, we may be subject to limitations on our operations, including limitations on the payment of dividends.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. However, the Company has losses from operations for the nine months ended September 30, 2011.   Further, the Company has inadequate working capital to maintain or develop its assets, and is dependent upon funds from lenders, investors and the support of certain stockholders.  

These factors raise substantial doubt about the ability of the Company to continue as a going concern.  The consolidated financial statements herein do not include any adjustments that might result from the outcome of these uncertainties.  In this regard, Company management is pursuing additional funds through loans and additional sales of its common stock.

The Company's ability to meet its obligations and continue as a going concern is dependent upon its ability to obtain additional financing, achievement of profitable operations and/or the discovery, exploration, development and sale of oil and gas reserves. Although the Company is pursuing additional financing, there can be no assurance that the Company will be able to secure financing when needed or to obtain such financing on terms satisfactory to the Company, if at all.  We have limited cash and cash equivalents and rely on investment from shareholders and other financing.  We have relied upon advances from our former CEO to fund operating expenses.  We need $75,000 per month to fund operating expenses and professional fees of the company.  

Off-balance sheet arrangements

We have no off-balance sheet arrangements including arrangements that would affect the liquidity, capital resources, market risk support and credit risk support or other benefits.

WHERE YOU CAN FIND MORE INFORMATION

You are advised to read this Quarterly Report on Form 10-Q in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, Current Reports on Form 8-K and proxy statements that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov. Company information is also available at: www.cnsv.info

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our business is currently conducted principally in the United States. As a result, our financial results are not affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. We do not engage in hedging transactions to reduce our exposure to changes in currency exchange rates, although if the geographical scope of our business broadens, we may do so in the future.

Our exposure to risk for changes in interest rates relates primarily to our investments in short-term financial instruments. Investments in both fixed rate and floating rate interest earning instruments carry some interest rate risk. The fair value of fixed rate securities may fall due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Partly as a result of this, our future interest income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that have fallen in estimated fair value due to changes in interest rates. However, as substantially all of our cash equivalents consist of bank deposits and short-term money market instruments, we do not expect any material change with respect to our net income as a result of an interest rate change.

We do not hold any derivative instruments and do not engage in any hedging activities.  

ITEM 4.  CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives. As required by SEC Rule 13a-15(b), our Chief Executive Officer and Chief Financial Officer 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 by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described in Management's Report on Internal Control over Financial Reporting as reported in our Form 10-K for the year ended December 31, 2010.

(b)

Changes in Internal Controls Over Financial Reporting

There have been no changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the quarter ended September 30, 2011.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting the Company, our common stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

ITEM 1A - RISK FACTORS

There were no material changes from the risk factors previously disclosed in Part II, Item 1A, “Risk Factors” in our  Annual Report on Form 10-K for the year ended December 31, 2010 during our nine months ended September 30, 2011.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 28, 2011 the Company issued 250,000 common shares for $25,000 and on March 9, 2011 the Company issued 384,616 common shares for $25,000.

On April 26, 2011, the Board of Directors granted Stephen Thompson 4,000,000 restricted shares of Common Stock under its 2007 Equity Compensation Plan as full compensation for services rendered as Chief Executive Officer of the Company.  The fair value of the shares was $320,000 on April 26, 2011 (grant date) based on the quoted market price per share.

On May 3, 2011, the Company granted Richard Polep 150,000 restricted shares of Common Stock as Director of the Company.  The fair value of the shares was $12,000.

On May 10, 2011, the Board of Directors granted Gary Kucher 2,825,620 restricted shares of Common Stock in accordance with his employment agreement for services rendered as President of the Company.  The fair value of the shares was $310,821 on May 10, 2011.

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The offer and sale of such shares of our common stock were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act and in Section 4(2) of the Securities Act. A legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities during the period ended September 30, 2011.

ITEM 4. RESERVED.

ITEM 5.  OTHER INFORMATION

There is no information with respect to which information is not otherwise called for by this form.

ITEM 6.  EXHIBITS

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

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