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EX-32.1 - CERTIFICATION - MONGOLIA HOLDINGS, INC.cnsv_ex321.htm
EX-31.2 - CERTIFICATION - MONGOLIA HOLDINGS, INC.cnsv_ex312.htm
EX-32.2 - CERTIFICATION - MONGOLIA HOLDINGS, INC.cnsv_ex322.htm
EX-31.1 - CERTIFICATION - MONGOLIA HOLDINGS, INC.cnsv_ex311.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


Form 10-K/A

Amendment No. 2


[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2010


OR


[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from_____________ to _____________.


Commission File No. 333-142105

 

CONSOLIDATION SERVICES, INC.

(Name of small business issuer as specified in its charter)

 

 

Delaware

20-8317863

( State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)


2300 West Sahara Drive, Las Vegas, NV  89102

(Address of principal executive offices)


(702) 949-9449

(Issuer’s telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [  ]   No  [X]


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  [X]   No  [  ]


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  [X]   No  [  ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  [  ]   No  [  ]


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K  (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]



 





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer

[  ]

Accelerated filer

[  ]

Non-Accelerated filer  

[  ]

Small reporting company

[X]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  [  ]   No  [X]


Aggregate market value of the voting stock held by non-affiliates: $932,726 as based on last reported sales price of such stock as of the last business day of the registrant’s most recently completed second fiscal quarter.  The voting stock held by non-affiliates on that date consisted of 37,309,053 shares of common stock.


As of April 10, 2011, there were 42,943,669 shares of common stock, par value $0.001, issued and outstanding.


Documents Incorporated by Reference: None


















2




EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K amends the Annual Report on Form 10-K for the year ended December 31, 2010 (the “Original Report”) and is being filed by Consolidation Services, Inc. (the “Company”) in response to comments by the Securities and Exchange Commission to amend and restate Item 8 of the Original Report to remove the audit report of GBH CPAs, PC. and to label the columns of the financial statements for fiscal years ended December 31, 2010 and December 31, 2009 as “Unaudited.”  As a result, the Company’s Form 10-K for December 31, 2010 is deficient, as well as the consolidated financial statements filed in Forms 10-Q for the periods ending June 30, 2010 and September 30, 2010.  Accordingly, these financial statements should no longer be relied upon, as goodwill should not have been recorded or impaired under the new and final valuation of $4.3 million. The amount of the error is approximately $10.9 million. The net loss would be reduced by $10.9 million, loss per share would be reduced by $0.32 and accumulated deficit would be reduced by $10.9 million.

The Company will amend the Form 10-K, as well as its Form 10-Q for June 30, 2010 and September 30, 2010 to remove the impairment of goodwill as a result of a change in the Registrant’s valuation of its Reserve Report.  The columns of the financial statements included in this report have been relabeled as “Unaudited.”

Unless expressly noted otherwise, the disclosures in this Form 10-K/A continue to speak as of the date of the Original Report, and do not reflect events occurring after the filing of the Original Report.  For additional information on subsequent events, the reader should refer to the Forms 10-K, Forms 10-Q and Forms 8-K the Company has filed in 2010, 2011 and 2012.  The filing of this Form 10-K/A shall not be deemed an admission that the Original Report, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.












3





CONSOLIDATION SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS:

 

December 31,

 

 

2010

 

 

2009

CURRENT ASSETS

 

(Unaudited)

 

 

(Unaudited)

   Cash

 

$

17,236

 

 

$

-

   Accounts receivable

 

 

10,892

 

 

 

-

      Total current assets

 

 

28,128

 

 

 

-

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

   Oil and gas properties, net, including $1,199,286 and $868,826, respectively, of unproved property costs using the successful efforts method of accounting.

 

 

4,462,552

 

 

 

868,826

   Support equipment, net

 

 

773,300

 

 

 

-

   Assets of discontinued operations

 

 

-

 

 

 

6,231,470

    TOTAL ASSETS

 

 

5,263,980

 

 

 

7,100,296

LIABILITIES AND STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

   Accounts payable

 

 

165,916

 

 

 

-

   Advance from related party

 

 

15,000

 

 

 

-

   Liabilities of discontinued operations

 

 

-

 

 

 

2,964,585

      Total current liabilities

 

 

180,916

 

 

 

2,964,585

Asset retirement obligations

 

 

21,562

 

 

 

-

      TOTAL LIABILITIES

 

 

202,478

 

 

 

2,964,585

CONTINGENCIES AND COMMITMENTS

 

 

-

 

 

 

-

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

    Common stock, $.001 par value, 220,000,000 shares authorized;

 

 

 

 

 

 

 

     42,309,053 and 15,257,220 issued and outstanding as of

 

 

 

 

 

 

 

     December 31, 2010 and 2009, respectively

 

 

42,309

 

 

 

15,257

    Additional paid-in capital

 

 

19,564,684

 

 

 

5,842,136

    Noncontrolling interest

 

 

-

 

 

 

501,275

    Common stock subscription

 

 

-

 

 

 

(871,000)

    Accumulated deficit

 

 

(14,545,491)

 

 

 

(1,351,957)

      Total stockholders' equity

 

 

5,061,502

 

 

 

4,135,711

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

5,263,980

 

 

$

7,100,296


 




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


 



F-1




 

CONSOLIDATION SERVICES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

(UNAUDITED)

 

 

 

 

 

2010

 

 

2009

 

 

(Unaudited)

 

 

(Unaudited)

OIL AND GAS REVENUES

 

$

194,251

 

 

$

-

COSTS AND OPERATING EXPENSES:

 

 

 

 

 

 

 

     Lease operating expenses

 

 

86,413

 

 

 

-

     Depreciation, depletion, amortization and accretion

 

 

59,706

 

 

 

-

      Impairment of assets

 

 

10,912,035

 

 

 

-

     General and administrative

 

 

2,329,591

 

 

 

121,114

         Total costs and operating expenses

 

 

13,387,745

 

 

 

121,114

OPERATING LOSS

 

 

(13,193,494)

 

 

 

(121,114)

OTHER EXPENSES

 

 

 

 

 

 

 

      Interest expense

 

 

40

 

 

 

-

 

 

 

 

 

 

 

 

        Total other expense

 

 

40

 

 

 

-

LOSS BEFORE TAXES AND DISCONTINUED OPERATIONS

 

 

(13,193,534)

 

 

 

(121,114)

 

 

 

 

 

 

 

 

LOSS FROM CONTINUING OPERATIONS

 

 

(13,193,534)

 

 

 

(121,114)

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS

 

 

-

 

 

 

(476,282)

 

 

 

 

 

 

 

 

NET LOSS

 

$

(13,193,534)

 

 

$

(597,396)

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interest

 

 

-

 

 

 

36,413

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$

(13,193,534)

 

 

$

(633,809)

BASIC AND DILUTED LOSS PER SHARE,

 

 

 

 

 

 

 

ATTRIBUTABLE TO COMMON SHAREHOLDERS:

 

 

 

 

 

 

 

     Continuing operations

 

$

(0.39)

 

 

$

(0.01)

     Discontinued operations

 

$

-

 

 

$

(0.03)

     Net loss

 

$

(0.39)

 

 

$

(0.04)

  Weighted average number of common shares outstanding, basic and diluted

 

 

34,124,245

 

 

 

15,124,380




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



F-2





CONSOLIDATION SERVICES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

(UNAUDITED)

 

 

 

 

 

 

 

 

 

Additional

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Subscribed

 

 

Non-Controlling

 

 

Accumulated

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Interest

 

 

Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2008

 

 

15,093,970

 

 

$

15,094

 

 

$

5,708,799

 

 

$

(880,000)

 

 

$

512,862

 

 

$

(718,148)

 

 

$

4,638,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common shares repurchased at $1.92 per share

 

 

(6,250)

 

 

 

(6)

 

 

 

(11,994)

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common stock issued for cash

 

 

117,000

 

 

 

117

 

 

 

87,633

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

87,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common stock issued for services at $1.10 per share

 

 

52,500

 

 

 

52

 

 

 

57,698

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

57,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Dividends paid

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

(48,000)

 

 

 

-

 

 

 

(48,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Stock subscription received

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,000

 

 

 

-

 

 

 

-

 

 

 

9,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

36,413

 

 

 

(633,809)

 

 

 

(597,396)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   DECEMBER 31, 2009

 

 

15,257,220

 

 

 

15,257

 

 

 

5,842,136

 

 

 

(871,000)

 

 

 

501,275

 

 

 

(1,351,957)

 

 

 

4,135,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Common stock issued for cash

 

 

858,850

 

 

 

859

 

 

 

203,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

204,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Common stock issued for services

 

 

3,406,111

 

 

 

3,406

 

 

 

1,939,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,942,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common stock issued for asset purchase

 

 

22,786,872

 

 

 

22,787

 

 

 

15,244,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,267,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Spin off of mining operations

 

 

 

 

 

 

 

 

 

 

(3,664,535)

 

 

 

871,000

 

 

 

(501,275)

 

 

 

 

 

 

 

(3,294,810)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,193,534)

 

 

 

(13,193,534)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   DECEMBER 31, 2010

 

 

42,309,053

 

 

$

42,309

 

 

$

19,564,684

 

 

$

-

 

 

$

-

 

 

$

(14,545,491)

 

 

$

5,061,502




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



F-3




 

CONSOLIDATION SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

(UNAUDITED)

 

 

 

 

 

2010

 

 

2009

 

 

(Unaudited)

 

 

(Unaudited)

  Net loss

 

$

(13,193,534)

 

 

$

(597,396)

  Adjustments to reconcile net loss to net cash

 

 

 

 

 

 

 

     used in operating activities:

 

 

 

 

 

 

 

  Discontinued operations

 

 

-

 

 

 

476,282

  Depreciation, depletion, and amortization

 

 

58,314

 

 

 

-

  Impairment of assets

 

 

10,912,035

 

 

 

-

  Common stock issued for services

 

 

1,942,431

 

 

 

57,750

  Accretion of asset retirement obligations

 

 

1,392

 

 

 

-

  Changes in operating assets and liabilities:

 

 

 

 

 

 

 

    Accounts receivable

 

 

(10,892)

 

 

 

-

    Accounts payable

 

 

137,990

 

 

 

-

          Net cash used in operating activities

 

 

(152,264)

 

 

 

(63,364)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

    Purchase of property and equipment

 

 

(50,000)

 

 

 

-

    Net investing activities of discontinued operations

 

 

-

 

 

 

(140.907)

          Net cash used in investing activities

 

 

(50,000)

 

 

 

(140,907)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

   Proceeds from the issuances of common and subscribed stock

 

 

204,500

 

 

 

96,750

   Common stock retired

 

 

-

 

 

 

(12,000)

   Proceeds from note payable - related party

 

 

22,000

 

 

 

-

   Repayments of note payable - related party

 

 

(22,000)

 

 

 

-

   Advance from related party

 

 

15,000

 

 

 

-

   Net financing activities of discontinued operations

 

 

-

 

 

 

119,521

          Net cash provided by financing activities

 

 

219,500

 

 

 

204,271

INCREASE IN CASH

 

 

17,236

 

 

 

-

CASH, BEGINNING OF YEAR

 

 

-

 

 

 

-

CASH, END OF YEAR

 

$

17,236

 

 

$

-

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

   Income Taxes

 

$

-

 

 

$

11,983

   Interest Paid

 

$

40

 

 

$

-

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

Increase in asset retirement obligations

 

$

20,170

 

 

$

-

Issuance of common stock for purchase of assets

 

$

15,267,204

 

 

$

-




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




F-4





CONSOLIDATION SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 is engaged in the exploration and development of oil and gas reserves in Kentucky and Tennessee.  Until January 1, 2010, the Company sole sources of revenues were from its coal mining and timber harvesting operations.  The Company discontinued its coal mining and timber harvesting operations on January 1, 2010 (See “Note 8- Discontinued Operations”).  As a result of its discontinued operations, the Company re-entered the exploration stage on January 1, 2010.  On April 1, 2010, the Company exited the exploration stage as a result of the acquisition of producing oil and gas properties (See “Note 10 - Acquisitions”).


Principles of Consolidation


As of January 1, 2010, the Company spun off all its coal mining operations to Colt Resources, Inc. (“Colt”) a Nevada corporation formed as a wholly-owned subsidiary which included the Company’s subsidiaries which were: (i) a 50% ownership interest in Buckhorn Resources, LLC; and (ii) a 50% ownership interest in LeeCo Development, LLC.


After the spin-off of Colt on January 1, 2010, the Company’s subsidiaries included a 100% ownership interest in Vector Energy Services, Inc.  Vector Energy Services, Inc. is presently not an operating subsidiary.


On June 2, 2010, CSI Energy, Inc. was incorporated in the State of Nevada as a wholly owned subsidiary of the Company for the purpose of acquiring oil and gas assets. CSI Energy, Inc. is presently not an operating subsidiary.


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 oil and gas reserve quantities which are the basis for the calculations of depreciation, depletion, and impairment. The Company’s reserve quantities are determined by an independent petroleum engineering firm. However, 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 December 31, 2010, cash and cash equivalents include cash on hand and cash in depository institutions/commercial banks.




F-5




 

Oil and Gas Properties


The Company uses the successful efforts method of accounting for oil and gas operations.  Under this method of accounting, costs (including related support equipment) 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 oil and gas reserves on a field-by-field basis.  Depletion and depreciation expense for the Company’s oil and gas properties was approximately $58,000 and $0 for the years ended December 31, 2010 and 2009, respectively.


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 years ended December 31, 2010, 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 proven leaseholds.  The costs associated with unproved leaseholds and mineral interests that have been allowed to expire, if any, are charged to exploration expense.


The Company evaluates impairment of its property and equipment in accordance with ASC Topic 360, “Property, Plant, and Equipment” .  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 year ended December 31, 2010 the Company impaired $10,912,035 of goodwill related to the acquisition of producing oil and gas properties (See “Note 10 - Acquisitions”).


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


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.  Other sources of revenues received by the Company include delay rentals and mineral lease bonuses which are recognized as revenue according to the terms of the lease agreements.


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.  




F-6




Accounts Receivable


Substantially all of the Company’s accounts receivable consist of accrued revenues from oil and gas production for the year ended December 31, 2010 from third party companies in the oil and gas industry.  This concentration of customers may be a consideration of 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 may analyze the entity’s net worth, cash flows, earnings and credit ratings.  Historical credit losses incurred by the Company on receivables have not been significant.


Concentrations of Credit Risk


Financial instruments that potentially subject the Company to concentration of credit risk consist of cash. 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 December 31, 2010, the Company had no cash in accounts that bore interest.

 

The Company has two customers that purchase and distribute substantially all of our oil and gas production.


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 due to the Company having a net loss (attributable to its common shareholders) the effects of including any additional common stock equivalents would be anti-dilutive.


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.


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


Recent Accounting Pronouncements


Recent accounting pronouncements that the Company has adopted or that will be required to adopt in the future are summarized below.






F-7




In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the Company with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the Company in the reporting period beginning July 1, 2011. Other than requiring additional disclosures, adoption of this new guidance did not have a material effect on our consolidated financial statements.

 

No other accounting standards or interpretations issued recently are expected to a have a material consequence 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 year ended December 31, 2010 of $13,193,534.   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.  

 

In this regard, the Company 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 to obtain such financing on terms satisfactory to the Company, if at all.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations.  The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.


NOTE 3 - ASSET RETIREMENT OBLIGATIONS


The Company records the fair value of 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. 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.





F-8




The following is a description of the changes to the Company’s asset retirement obligations for the year ended December 31, 2010.


Asset retirement obligation at beginning of the period

 

$

-

 

Additions

 

 

20,170

 

Accretion expense

 

 

1,392

 

Asset retirement obligation at end of period

 

$

21,562

 


NOTE 4 - SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)


In December 2008, the Securities and Exchange Commission (“SEC”) announced revisions to its regulations on oil and natural gas reporting. In January 2009, the Financial Accounting Standards Board issued an accounting standards update which was intended to harmonize the accounting literature with the SEC’s new regulations. The revised regulations were applied in estimating and reporting our reserves as of December 31, 2010.

 

The estimates of proved oil and gas reserves utilized in the preparation of these statements were prepared by American Energy Advisors, Inc., independent petroleum engineers.

 

There are numerous uncertainties inherent in estimating quantities of proved reserves, projecting future rates of production and projecting the timing of development expenditures, including many factors beyond our control.  The reserve data represents only estimates.  Reservoir engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact manner.  The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretations and judgment.  All estimates of proved reserves are determined according to the rules prescribed by the SEC.  These rules indicate that the standard of “reasonable certainty” be applied to the proved reserve estimates.  This concept of reasonable certainty implies that as more technical data becomes available, a positive, or upward, revision is more likely than a negative, or downward, revision.  Estimates are subject to revision based upon a number of factors, including reservoir performance, prices, economic conditions and government restrictions.  In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of that estimate.  Reserve estimates are often different from the quantities of natural gas and oil that are ultimately recovered.  The meaningfulness of reserve estimates is highly dependent on the accuracy of the assumptions on which they were based.  In general, the volume of production from natural gas and oil properties we own declines as reserves are depleted.  Except to the extent we conduct successful development activities or acquire additional properties containing proved reserves, or both, our proved reserves will decline as reserves are produced.    There have been no major discoveries or other events, favorable or adverse, that may be considered to have caused a significant change in the estimated proved reserves since December 31, 2010.  The Company emphasizes that reserve estimates are inherently imprecise. Accordingly, the estimates are expected to change as more current information becomes available. In addition, a portion of the Company’s proved reserves are proved developed non-producing and proved undeveloped, which increases the imprecision inherent in estimating reserves which may ultimately be produced.


All of the Company’s reserves are located in the United States.





F-9




Capitalized costs relating to oil and gas producing activities


 As of December 31, 2010 (Unaudited)

 

 

 

 

 

 

Unproved oil and gas properties

 

 $

1,199,286

 

 

 

 

Proved oil and gas properties

 

 

3,309,880

 

 

 

 

Accumulated depreciation, depletion, and amortization

 

 

(46,614)

 

 

 

 

Net capitalized costs

 

 $

4,462,552


Net capitalized costs related to asset retirement obligations in the amount of $20,170, as of December 31, 2010, was included in net capitalized costs.


 As of December 31, 2009 (Unaudited

 

 

 

 

 

 

Unproved oil and gas properties

 

 $

-

 

 

 

 

Proved oil and gas properties

 

 

868,826

 

 

 

 

Accumulated depreciation, depletion, and amortization

 

 

(-)

 

 

 

 

Net capitalized costs

 

 $

868,826


Net capitalized costs related to asset retirement obligations in the amount of $0, as of December 31, 2009, was included in net capitalized costs.



Costs incurred in oil and gas property acquisition, exploration, and development activities


 Year ended December 31, 2010 (Unaudited)

 

 

 

 

 

Acquisition of properties - proved

 

 $

3,289,710

 

 

 

 

Acquisition of properties - unproved

 

 

330,460

 

 

 

 

Exploration costs

 

 

-

 

 

 

 

Development costs

 

 

805,170

 

 

 

 

Total costs incurred

 

 $

4,425,340


 

F-10





Year ended December 31, 2009 (Unaudited)

 

 

 

 

 

Acquisition of properties - proved

 

 $

-

 

 

 

 

Acquisition of properties - unproved

 

 

-

 

 

 

 

Exploration costs

 

 

-

 

 

 

 

Development costs

 

 

-

 

 

 

 

Total costs incurred

 

 $

-


Estimated Quantities of Proved Oil and Gas Reserves


The following table sets forth proved oil and gas reserves together with the changes therein, proved developed reserves and proved undeveloped reserves for the years ended December 31, 2010 and 2009 (in thousands).  Units of oil are in thousands of barrels (MBbls) and units of gas are in millions of cubic feet (MMcf).  Gas is converted to barrels of oil equivalent (MBoe) using a ratio of six Mcf of gas per Bbl of oil.

 

 

2010

(Unaudited)

 

 

2009

(Unaudited)

 

 

Oil

 

 

Gas

 

 

BOE

 

 

Oil

 

 

Gas

 

 

BOE

Proved reserves:

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Beginning of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revisions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Extensions and discoveries

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Sales of minerals-in-place

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Purchases of minerals-in-place

 

 

109

 

 

 

1,153

 

 

 

300

 

 

 

-

 

 

 

-

 

 

 

-

 

Production

 

 

(3)

 

 

 

-

 

 

 

(3)

 

 

 

-

 

 

 

-

 

 

 

-

 

End of period

 

 

106

 

 

 

1,153

 

 

 

297

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved developed reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

End of period

 

 

77

 

 

 

122

 

 

 

97

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved undeveloped reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

End of period

 

 

29

 

 

 

1,031

 

 

 

200

 

 

 

-

 

 

 

-

 

 

 

-

 


Standardized Measure of Discounted Future Net Cash Flows


The standardized measure of discounted future net cash flows, in management’s opinion, should be examined with caution. The basis for this table is the reserve studies prepared by the Company’s independent petroleum engineering consultants, which contain imprecise estimates of quantities and rates of future production of reserves. Revisions of previous year estimates can



F-11




have a significant impact on these results. Also, exploration costs in one year may lead to significant discoveries in later years and may significantly change previous estimates of proved reserves and their valuation. Therefore, the standardized measure of discounted future net cash flow is not necessarily indicative of the fair value of the Company’s proved oil and natural gas properties.


Future cash inflows for 2010 were computed by applying average price for the year to the year-end quantities of proved reserves. The 2010 average price for the year was calculated using the 12-month period prior to the ending date of the period covered by the report, determined as an un-weighted arithmetic average of the first-day-of-the-month price for each month within such period.  Adjustment in this calculation for future price changes is limited to those required by contractual arrangements in existence at the end of each reporting year. Future development, abandonment and production costs were computed by estimating the expenditures to be incurred in developing and producing proved oil and natural gas reserves at the end of the year, based on year-end costs, assuming continuation of year-end economic conditions. Future income tax expense was computed by applying statutory rates, less the effects of tax credits for each period presented, to the difference between pre-tax net cash flows relating to the Company’s proved reserves and the tax basis of proved properties, after consideration of available net operating loss and percentage depletion carryovers. Discounted future net cash flows have been calculated using a ten percent discount factor. Discounting requires a year-by-year estimate of when future expenditures will be incurred and when reserves will be produced.


The estimated present value of future cash flows relating to proved reserves is extremely sensitive to prices used at any measurement period. The prices used for each commodity for the years ended December 31, 2010 and 2009, as adjusted, were as follows:


As of December 31,

 

Oil (Bbl)

Using NYMX WTI

 

 

Gas (Mcf) Using NYMEX Henry Hub

 

2010 (average price)

 

$

79.20

 

 

$

 4.39

 

2009 (end of year price)

 

$

 N/A

 

 

$

  N/A

 


The information provided in the tables set out below does not represent management’s estimate of the Company’s expected future cash flows or of the value of the Company’s proved oil and gas reserves. Estimates of proved reserve quantities are imprecise and change over time as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The arbitrary valuation prescribed under ASC No. 932 requires assumptions as to the timing and amount of future development and production costs. The calculations should not be relied upon as an indication of the Company’s future cash flows or of the value of its oil and gas reserves.


The following table sets forth the standardized measure of discounted future net cash flows (stated in thousands) relating to proved reserves for the years ended December 31, 2010 and 2009, respectively:


 

 

 

2010

(Unaudited)

 

 

 

2009

(Unaudited)

 

 

 

 

(in thousands)

 

Future cash inflows

 

$

12,548

 

 

$

-

 

Future costs:

 

 

 

 

 

 

 

 

Production

 

 

(6,794)

 

 

 

-

 

Development

 

 

(1,174)

 

 

 

-

 

Income taxes

 

 

-

 

 

 

-

 

Future net cash inflows

 

 

4,580

 

 

 

-

 

10% discount factor

 

 

(2,949)

 

 

 

-

 

Standardized measure of discounted net cash flows

 

$

1,631

 

 

$

-

 




F-12




Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows


The following table sets forth the changes in the standardized measure of future net cash flows discounted at 10% per annum (stated in thousands):


 

 

 

2010

(Unaudited)

 

 

 

2009

(Unaudited)

 

Beginning of period

 

$

-

 

 

$

-

 

Sales of oil and natural gas produced, net of production costs

 

 

(108)

 

 

 

-

 

Extensions and discoveries

 

 

-

 

 

 

-

 

Net change of prices and production costs

 

 

-

 

 

 

-

 

Change in future development costs

 

 

-

 

 

 

-

 

Previous estimated development costs incurred

 

 

-

 

 

 

-

 

Revisions of previous quantity estimates

 

 

-

 

 

 

-

 

Accretion of discount

 

 

-

 

 

 

-

 

Change in income taxes

 

 

-

 

 

 

-

 

Purchases of reserves in place

 

 

1,739

 

 

 

-

 

 

 

 

 

 

 

 

 

 

End of period

 

$

1,631

 

 

$

-

 


NOTE 5- EQUITY


Common Stock


The Company is authorized to issue 220,000,000 shares of common stock, at $0.001 par value, of which 42,309,053 common shares were issued and outstanding as of December 31, 2010.


Options


As of December 31, 2010, no options to purchase common stock of the Company were issued and outstanding.


Warrants


As of December 31, 2010, no warrants to purchase common stock of the Company were issued and outstanding.

 

Convertible Securities

 

At December 31, 2010, there were no convertible securities issued.

 

Private Placements, Other Issuances and Cancellations

 

The Company periodically issues shares of its common stock and 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.


During the year ended December 31, 2010, the Company issued 858,850 common shares for $204,500 in net proceeds in private placements. The price received in the private placements ranged from $0.04 per share to $0.67 per share.




F-13




During the year ended December 31, 2010, the Company issued 3,406,111 common shares with an aggregate fair value of approximately $1,942,431 in exchange for services. The Company assessed the quoted market price of the stock at the grant date and believed that due to the sporadic trading there was not an active market for the Company’s stock and that the quoted market price was not reflective of the fair value of the transactions. The fair value of the common shares issued was based on the weighted average of the price received in private placements of stock issued for cash during the same time frame that the shares were issued for services as the Company determined that this was a more accurate measurement of the fair value of the shares issued. The $1,942,431 of consulting services was expensed as compensation during the years ended December 31, 2010. The weighted average price used to estimate the fair values of the common stock issued for the year ended December 31, 201 was $0.57 per share.


On April 1, 2010, the Company issued 22,786,872 restricted shares of the Company’s common stock for the acquisition of oil and gas properties (See “Note 10- Acquisitions”).


NOTE 6- INCOME TAXES


The provision (benefit) for income taxes from continued operations for the years ended December 31, 2010 and 2009 consist of the following:       


 

 

December 31,

 

 

 

2010

 

 

2009

 

Current:

 

(Unaudited)

 

 

(Unaudited)

 

Federal

 

$

-

 

 

$

-

 

State

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

$

625,537

 

 

$

203,975

 

State

 

 

-

 

 

 

-

 

 

 

 

625,537

 

 

 

203,975

 

Valuation allowance

 

 

(625,537

)

 

 

(203,975

)

Provision benefit for income taxes, net

 

$

-

 

 

$

-

 

 

The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows:


 

 

December 31,

 

 

 

2010

 

 

2009

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Statutory federal income tax rate

 

 

(34.0

%)

 

 

(34.0

%)

State income taxes and other

 

 

0.0

%

 

 

0.0

%

Non-deductible items, net

 

 

29.0

%

 

 

0.0

%

Change in valuation allowance

 

 

5.0

%

 

 

34.0

%

Effective tax rate

 

 

-

 

 

 

-

 


Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following:      





F-14





 

 

December 31,

 

 

 

2009

 

 

2008

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net operating loss carryforward

 

 

625,537

 

 

 

203,975

 

Valuation allowance

 

 

(625,537

)

 

 

(203,975

)

 

 

 

 

 

 

 

 

 

Deferred income tax asset

 

$

-

 

 

$

-

 


The Company has a net operating loss carryforward of approximately $1,839,814 available to offset future taxable income through 2030, subject to limitations of Section 382 of the Internal Revenue Code, as amended. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, because in the opinion of management based upon the earning history of the Company; it is more likely than not that the benefits will not be realized. The Company anticipates it will continue to record a valuation allowance against the losses of certain jurisdictions, primarily federal and state, until such time as we are able to determine it is “more-likely-than-not” the deferred tax asset will be realized. Such position is dependent on whether there will be sufficient future taxable income to realize such deferred tax assets The Company’s effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.

 

Under the Tax Reform Act of 1986, the benefits from net operating losses carried forward may be impaired or limited on certain circumstances. Events which may cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. The effect of any limitations that may be imposed for future issuances of equity securities, including issuances with respect to acquisitions have not been determined.


NOTE 7- RELATED PARTY TRANSACTIONS


A former officer and director of the Company entered into two (2) notes payables, one on March 15, 2010 in the amount of $10,000 and again on March 24, 2010 in the amount of $12,000.  The notes accrued interest at 6% interest and were payable upon demand.  On April 8, 2010, the Company repaid these notes in the amount of $22,000 and $40 of accrued interest.


At January 1, 2010, an affiliated company had advanced the Company $15,322 for working capital. The March 31, 2010 balance of $14,322 (repayment of $1,000 was made by the Company in February 2010) was non-interest bearing, unsecured and due on demand. On April 8, 2010, the Company repaid the outstanding balance.


In October 2010, a shareholder advanced $15,000 at no interest rate and is due and payable upon demand of the holder of that advance.






F-15




On July 13, 2010, the Company’s Board of Directors approved its president’s amended employment agreement. The employment agreement set his monthly salary from July 1, 2010 through September 1, 2010 at $10,000 per month and after September 1, 2010 at $25,000 per month subject to annual increase consistent with the company policy applicable to other senior executives and officers and approval by the board of directors.  Additionally, the Company’s president will be paid 25% of his annual base salary if the Company reaches certain milestones. In addition to shares earned and previously issued to the Company’s president, the Employment Agreement called for the issuance of additional shares on the occurrence of both September 1, 2010 and also on December 1, 2010, which share had not been yet issued in 2010 or by the date of this filing. The Company intends to issue these shares in 2011. The Company’s president will also receive warrants on each anniversary date of his employment agreement, with a five-year term, to purchase 1% of the then issued and outstanding shares of the Company’s common shares exercisable at a price equal to the trailing six-month (prior to grant date) average share trading price.  In the event the Company’s president’s employment is terminated without cause he will receive 12 months of severance pay. The Company’s president has allowed the Company to defer the amounts, above $10,000 a month, from September 2010 until an unspecified date. (See Note 9 Commitments and Contingencies).


NOTE 8- DISCONTINUED OPERATIONS


The Company’s former Board of Directors believed that it was in the best interest of the Company to divide the assets and liabilities of the Company into two separate legal entities, as doing so would serve an important business purpose in that it will facilitate the ability of the separate entities to more readily manage, obtain access to capital and bank lending, facilitate staffing and employment, as well as certain other business decisions, given the substantial differences in the business focuses represented by such assets and liabilities.


In order to accomplish this spin-off, the former Board of Directors and a majority of the voting interest of the Company’s stockholders approved the action as of January 31, 2010 (the “Record Date”).  Consequently, the Company’s stockholders received the same number of shares in Colt (the “Colt Shares”) as they owned in the Company on a pro-rata, one-to-one basis and for no additional consideration.  The Colt Shares are “restricted securities”, exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and which will not be publicly traded.  There were 15,257,220 Company Shares issued and outstanding on the Record Date.  The Separation and Distribution Agreement (the “Spin-Off Agreement”) by and between the Company and Colt was filed with the Securities and Exchange Commission on February 12, 2010.


Accordingly, the Company reclassified the assets, liabilities and operations related to its former coal mining activities as discontinued operations.  Consequently, the accompanying consolidated financial statements reflect the assets, liabilities and operations spun off to Colt Resources, Inc. as net assets of discontinued operations, net liabilities of discontinued operations and operations from discontinued operations in accordance with ASC Topic 360,  Accounting for the Impairment or Disposal of Long Lived Assets . Details of those classifications are shown below.





F-16





 

 

December 31, 2010

 

 

December 31,

2009

 

Net assets of discontinued operations:

 

(Unaudited)

 

 

(Unaudited)

 

Cash

 

$

-

 

 

$

26,966

 

Prepaid expenses

 

 

-

 

 

 

43,313

 

Property and equipment, net

 

 

-

 

 

 

6,161,191

 

Assets of Discontinued Operations

 

$

-

 

 

$

6,231,470

 

 

 

 

 

 

 

 

 

 

Net liabilities of discontinued operations:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

-

 

 

$

802,881

 

Notes payable - related parties

 

 

-

 

 

 

1,209,123

 

Notes payable

 

 

-

 

 

 

952,581

 

Liabilities of Discontinued Operations

 

$

-

 

 

$

2,964,585

 


 

 

Years ended

December 31,

 

 

 

2010

 

 

2009

 

Discontinued operations:

 

(Unaudited)

 

 

(Unaudited)

 

Revenues

 

$

-

 

 

$

238,979

 

Operating expenses

 

 

-

 

 

 

(573,273

)

Interest expense

 

 

-

 

 

 

(141,988

)

Loss from Discontinued Operations

 

$

-

 

 

$

(476,282

)


Commitments and contingencies that were transferred to Colt Resources, Inc. (“Colt”) as a result of the spin-off follows:


1.  On or about June 25, 2009, each of the agreements between the Company and AMS Development LLC, dated August 26, 2008 (with respect to 200,000 shares); Buckhorn Resources, LLC, dated March 20, 2008 (with respect to 1,093,750 shares); and LeeCo Development, LLC, dated June 19, 2008 (with respect to 225,000 shares), was amended to modify the Company’s guarantee obligations and lock-up/leak-out terms regarding the restricted shares of common stock issued as consideration under such agreements and to provide for the Company’s ability to repurchase such shares.  The obligations to repurchase the shares were transferred to Colt under the Spin-Off Agreement.  Under the original agreements, the respective parties would have become eligible to begin selling their respective weekly quotas of shares on the public markets commencing on July 1, 2009 (or with respect to shares sold pursuant to exemptions from registration between October 27, 2008 for five weeks thereafter for AMS Development, LLC; April 1, 2009 through April 1, 2010 for Buckhorn Resources, LLC; and from January 1, 2009 through December 31, 2009 for LeeCo Development, LLC), and if such shares were sold below the guaranteed price per share ($1.92 per share for Buckhorn agreement and $2.00 per share for each of the AMS and LeeCo agreements), the Company would have to pay the difference between such guaranteed price per share and the sale price. The obligations to repurchase the shares were transferred to Colt under the Spin-Off Agreement.





F-17




2.  Citing the economic recession during 2009, the lack of liquidity in the Company stock and the inability to meet certain revenue milestones from underlying properties, the Company and the respective parties agreed to modify these agreements to provide for the stockholders’ ability to sell their pro-rata portion of such shares to the Company in private transactions, as opposed to on the open market, at the price per share provided by the guarantee and the Company would repurchase such shares on a monthly basis using twenty-five percent (25%) of revenue received in connection with the underlying properties, with such repurchases being permitted to commence prior to July 1, 2009.  In the event the Company’s publicly traded stock closed above $2.25 per share for fifteen consecutive trading days immediately prior to such month’s scheduled repurchase, the stockholders could elect to sell that month’s quota in the public markets instead of through the repurchase plan.  The obligations to repurchase the shares were transferred to Colt under the Spin-Off Agreement.


Management considered these contracts to be executory contracts because the payments were contingent upon production from the wells, with the only amounts being recognized in the financial statements as those amounts that would be paid for guaranteed share price remittances or stock repurchases.  Due to the fact that the number of shares to be repurchased was not reasonably estimatable under the contracts, management did not record interest or a liability at December 31, 2009.  Management assessed the terms of the above guarantee share price and re-purchase agreements and determined that there was no derivative liability associated therewith.


3.  Pursuant to the Rights Agreement between the Company and Eastern Kentucky Land Corporation (“EK”) effective September 22, 2008 (the “Rights Agreement”), whereby the Company acquired all right, title and interest in oil, gas and other minerals that may exist on the Buckhorn property, the Company guaranteed the price of $1.925 per share for 415,584 shares in connection with a portion of the purchase price of the Rights Agreement.  Under the lock up terms of the Rights Agreement, EK which received the 415,584 restricted shares is eligible to sell 7,992 shares per week for the period from April 1, 2009 through March 31, 2010, subject to an available exemption from registration or pursuant to registration of the shares.  These shares became eligible to be re-sold under Rule 144 promulgated under the Securities Act on July 1, 2009. If such shares are sold below the guaranteed price per share of $1.925 per share, which is higher than the market price for the Company's public stock a bid and asked price of $1.01 and $1.10 per share, respectively, beginning on October 28, 2009, the Company became liable to pay the difference between the guaranteed price per share and the sale price.  As of the date of this report, Management has not yet renegotiated this obligation or entered into an amendment with respect to such lock-up/leak out terns; however, during 2009 the Company was not obligated to repurchase any shares under the Company's guarantee obligations under the Rights Agreement. The obligations to repurchase the shares were transferred to Colt under the Spin-Off Agreement.


4.  On August 30, 2010, the Company executed a Settlement Agreement by and among Begley Properties, LLC (“Begley”), Buckhorn Resources, LLC (“Buckhorn”), East Kentucky Land Corporation (“EKLC”) and the Company.  Begley, Buckhorn and EKLC are parties to certain litigations involving a claim to quiet title to approximately 500 acres of property in Eastern Kentucky.  As reported by the Company in its Annual Report on Form 10-K for the year ended December 31, 2009, the legal proceedings are captioned:  Begley Properties LLC , Plaintiff v. Buckhorn Resources, LLC and East Kentucky Land Corporation , Defendants, Leslie Circuit Court, Civil Action 05-CI-00275.


Buckhorn was a 50% owned subsidiary of the Company until January 2010, when the Company spun-off its coal mining operations and transferred all of the coal mining assets and liabilities to Colt.   Colt was owned by the shareholders of the Company as of December 31, 2009, after the spin-off the Company retained the oil and gas assets on the properties, subject to a 12.5% royalty due to Colt.




F-18




The Company executed in favor of Begley a quitclaim deed of its right, title and interest to mineral rights in certain property subject to a 40% undivided interest in the oil and gas interests in such property.  Begley, in turn, executed a quitclaim deed in favor of the Company of its right, title and interest to a 40% undivided interest in the oil and gas interests in certain property, subject to a lease to CNX Gas Corporation.  The parties each signed mutual releases from the litigation. Management evaluated the effect of the settlement agreement and determined it had no material effect on the consolidated financial position, consolidated results of operations or cash flows of the Company.


NOTE 9 - COMMITMENTS AND CONTINGENCIES


In May 2010, the Company entered into a consulting agreement for investment banking services with an unrelated third party for an initial term of six months and is automatically extended one year from the closing date of a transaction if the transaction is entered into during the initial six- month term. This agreement expired without extension in or around November 2010.


On July 13, 2010, the Company’s Board of Directors approved its president’s amended employment agreement. The employment agreement set his monthly salary from July 1, 2010 through September 1, 2010 at $10,000 per month and after September 1, 2010 at $25,000 per month subject to annual increase consistent with the company policy applicable to other senior executives and officers and approval by the board of directors.  Additionally, the Company’s president will be paid 25% of his annual base salary if the Company reaches certain milestones.  In addition to shares earned and previously issued to the Company’s president, the Employment Agreement called for the issuance of additional shares on the occurrence of both September 1, 2010 and also on December 1, 2010, which share had not been yet issued in 2010 or by the date of this filing. The Company intends to issue these shares in 2011. The Company’s president will also receive warrants on each anniversary date of his employment agreement, with a five-year term, to purchase 1% of the then issued and outstanding shares of the Company’s common shares exercisable at a price equal to the trailing six-month (prior to grant date) average share trading price.  In the event the Company’s president’s employment is terminated without cause he will receive 12 months of severance pay. The Company’s president has allowed the Company to defer the amounts, above $10,000 a month, from September 2010 until an unspecified date.


On August 2, 2010 the Company entered into a (1) year non-exclusive agreement with Regency Capital Group (“Regency”) as the Company’s financial advisor and finder in connection with the placement of structured debt with respect to future acquisitions and transactions of assets or businesses.  The agreements require the Company to pay the following in connection with Regency’s placement of structured debt with respect to future acquisitions and transactions:


 

·

a total of 250,000 common shares were issued in 2010;

 

·

out of pocket expenses;

 

·

a transaction success fee, on the close of a transaction, calculated as 2% of the aggregate amount of senior debt and 5% of the aggregated amount of mezzanine or subordinated debt placed by Regency.  In the event a single lender provides debt equal to both the senior and subordinated debt in a uni-tranche, the Company will pay a cash transaction fee of 3.5% of the total funding.  At the discretion of the Company, the Company may elect to pay up to 50% of the transaction success fees with the Company’s common stock.

 




F-19




NOTE 10- ACQUISITIONS


On April 1, 2010, the Company entered into 12 substantially identical asset purchase agreements with various unrelated funds 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. As part of the acquisition, the sellers received in aggregate 22,786,872 common shares of the Company’s common stock.

 

The sellers of the working interests and support equipment were not under common control or part of a controlled group prior to the transaction.  The sellers of the assets were partners and shareholders in partnerships and a corporation, respectively, with each partnership and the corporation having a different mix of owners.  Each selling partnership and corporation had separate and distinct agreements and business plans and the integration of the selling individual partnerships and corporation into one entity or as a group would have violated their agreements.  The only common relationship between the sellers is that the working interests and support equipment sold by each of the partnerships and corporation was managed by Leland Kentucky Holdings, Inc. (“Leland”). Leland owned 1% of each of the partnerships and corporation in the sellers group.  There was not a pre-existing relationship between the sellers and the Company prior to the transaction.

 

The Company acquired a substantial amount of proved developed producing reserves in the transaction, which are considered to meet the definition of a business in accordance with FASB codification Topic 805, "Business Combinations", as such, the Company accounted for the acquisition as a business combination.


Management determined that the Company was the acquirer in the business combination in accordance with  FASB codification Topic 805, "Business Combinations", based on the following factors: (i) there was not a change in control of the Company since neither Leland, the managing member of Leland, nor any of the sellers obtained a controlling financial interest (ownership either directly or indirectly of more than 50 percent of the outstanding voting shares of the Company) or the power to control the Company through a lesser percentage of ownership, by contract, lease, agreement with other stockholders, or by court decree; (ii) the Company was the entity in the transaction that issued its equity instruments, and in a business combination, the acquirer usually is the entity that issues its equity interests; (iii) the Company’s pre-transaction directors retained the largest relative voting rights of the Company post-transaction; (iv) the composition of the Company’s current board of directors and management was the result of the appointment by the Company’s pre-transaction directors due to the current board and management’s operational familiarity with the working interests and support equipment purchased.







F-20




The purchase price paid for the Acquisition was 22,786,872 restricted shares of the Company’s common stock. The shares had a quoted market price of $1.03 per share on April 1, 2010 or an aggregate quoted market value of approximately $23 million. However, shares were valued at an aggregate of $15,267,205 (the “Purchase Price”), or $0.67 per share on the basis of a 29.5% discount for restricted securities from the average trading price of $0.95 per share for 185,268 shares traded on the OTC Bulletin Board market in March 2010.  The quoted market value of the Company’s common stock was based on a sporadically traded stock with little or no volume (inactive market) which the Company believes reflected an artificially inflated quoted market price(See “Note 4 - Equity”).The Company assessed the inactive and sporadically traded market for the Company’s common stock and believed that the fair value of the shares issued should be at the value stock was issued for cash to unrelated third parties during the time frame of the acquisition which was $0.67 per share which resulted in a purchase price of $15,267,204.  Accordingly, the common shares issued and the acquisition was recorded based on the valuation of the stock issued for cash to unrelated third parties during the time frame of the acquisition.  The following table summarizes the fair value of the consideration paid by the Company and the fair value amounts assigned to the assets acquired on the acquisition date:


Purchase Price Allocation

 

April 1, 2010

 

Consideration:

 

 

 

Equity instruments (22,786,872 common shares of Consolidation Services, Inc. @ $0.67)

 

$

15,267,204

 

Recognized amounts of identifiable assets acquired:

 

 

 

 

Support equipment

 

 

735,000

 

Oil and gas Properties:

 

 

 

 

  Proved developed producing reserves

 

 

1,218,670

 

  Proved non-producing reserves

 

 

526,830

 

  Proved undeveloped reserves

 

 

1,544,209

 

Probable reserves

 

 

330,460

 

   Goodwill

 

 

10,912,035

 

Total assets

 

$

15,267,204

 

Fair value of total assets

 

$

15,267,204

 

 

The Company calculated the fair value of the assets based upon the Reserve Report prepared for period ended April 1, 2010 using the NYMEX strip pricing for that period.  Further the company assessed this value based on the weighted average cost of capital of 9%.  Goodwill was calculated based upon the difference in fair value of the consideration given of $15,267,204, and the fair value of the assets acquired of $4,355,169.  Immediately the company impaired that goodwill due the company acquiring no identifiable intangible assets and recorded that impairment as an expense to the financial statement

 





F-21




The following (unaudited) Proforma consolidated results of operations have been prepared as if the acquisition had occurred at the first of the period presented:


 

 

Years ended

 

 

 

2010

 

 

2009

 

 

 

(Unaudited)

 

 

(Unaudited)

 

OIL AND GAS REVENUES

 

 

230,251

 

 

 

138,949

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(13,57,534

)

 

 

(640,756

)

 

 

 

 

 

 

 

 

 

Net loss per share basic and diluted

 

$

(0.38

)

 

$

(0.04

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

34,731,814

 

 

 

15,092,538

 



NOTE 11 - SUBSEQUENT EVENTS


In accordance with ASC 855, the Company evaluated subsequent events through the date these financial statements were available to be issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements, except as follows:


On February 28, 2011 the Company issued 250,000 common shares for $25,000 cash proceeds.


On March 9, 2011 the Company issued 384,616 common shares for $25,000 cash proceeds.











F-22




PART IV


ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES


31.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.






















4




SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 

 

 

Consolidation Services, Inc.

 

 

 

 

 

 

Dated:  February 9, 2012

 

/s/ Gary Kucher

 

By:

Gary Kucher

 

Its:

Chief Executive Officer (Principal Executive Officer)

 

 

            In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

Dated: February 9, 2012

 

/s/ Gary Kucher

 

By:

Gary Kucher

 

Its:

Chief Executive Officer

 

 

 

 

 

 

 

 

 

Dated: February 9, 2012

 

/s/ Richard Polep

 

By:

Richard Polep 

 

Its:

Chief Financial Officer,

 

 

Principal Accounting Officer,

 

 

Director

 

 

 

Dated: February 9, 2012

 

/s/ Richard Herstone

 

By:

Richard Herstone

 

Its:

Director

 

 

 

 



 

5