Attached files
file | filename |
---|---|
EX-31.1 - CERTIFICATION - MONGOLIA HOLDINGS, INC. | cnsv_ex311.htm |
EX-32.2 - CERTIFICATION - MONGOLIA HOLDINGS, INC. | cnsv_ex322.htm |
EX-32.1 - CERTIFICATION - MONGOLIA HOLDINGS, INC. | cnsv_ex321.htm |
EX-31.2 - CERTIFICATION - MONGOLIA HOLDINGS, INC. | cnsv_ex312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2010 |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT For the transition period from N/A to N/A |
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, Suite 800, Las Vegas, NV 89102
(Address of principal executive offices)
(702) 949-9449
(Issuers telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required 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 Web site, 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). The registrant has not yet transitioned into this requirement. Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer 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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
| Outstanding at August 10, 2010 |
Common stock, $0.001 par value |
| 39,873,346 |
CONSOLIDATION SERVICES, INC.
INDEX TO FORM 10-Q/A FILING
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
TABLE OF CONTENTS
| PAGE | |
PART I - FINANCIAL INFORMATION |
| |
|
| |
Item 1. Consolidated Financial Statements | 1 | |
| Consolidated Balance Sheets | 2 |
| Consolidated Statements of Operations | 3 |
| Consolidated Statements of Cash Flows | 5 |
| Notes to Consolidated Financial Statements | 6 |
Item 2. Management Discussion & Analysis of Financial Condition and Results of Operations | 20 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 23 | |
Item 4. Controls and Procedures | 23 | |
|
| |
PART II - OTHER INFORMATION |
| |
|
| |
Item 1. Legal Proceedings | 25 | |
Item 1A. Risk Factors | 25 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 25 | |
Item 3. Defaults Upon Senior Securities | 25 | |
Item 4. Removed and Reserved | 25 | |
Item 5. Other information | 26 | |
Item 6. Exhibits | 26 |
CERTIFICATIONS |
|
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
32.2 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
EXPLANATORY NOTE
This Amendment Form 10-Q/A amends the Quarterly Report on Form 10-Q for the three and six months ended June 30, 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 the financial statements. Accordingly, these consolidated financial statements have been restated to value the acquisition based upon the final reserve valuation of $4.3 million.
The consolidated financial statements have been restated to properly reflect the initial valuation of the acquisition of the Leland partnerships on April 1, 2010 based upon an oil and gas reserve valuation of $4.3 million. The acquisition of the Leland partnerships was originally recorded at a valuation of $7,590,139 based on the fair value of the assets in connection with the acquisition.
The consolidated financial statements have also been restated to reflect the authorization of preferred stock which none has been issued or outstanding as of June 30, 2010.
The consolidated financial statements have also been restated to reflect an adjustment to depreciation, depletion, and amortization expense that was previously recorded at $63,995 and reduced by $38,768 for the three and six months ended June 30, 2010 due to the reduced fair value of the oil and gas properties.
The consolidated financial statements have also been restated to furnish predecessor financial statements of the combined Leland partnerships (the Predecessor) for the year ended December 31, 2009, the period from January 1, 2010 through April 1, 2010 and the three and six months period ended June 30, 2009.
The total effect of the adjustments described above for the three and six months ended June 30, 201 was a decrease in the net loss of $38,768 ($0.00 per common share) and $38,768 ($0.00 per common share), respectively, and a decrease in accumulated deficit of $38,768.
In addition to adjustments to the financial statement, the Company restated Item 4 - Controls and Procedures to reflect material weaknesses identified in financial reporting controls related to these adjustments.
Unless expressly noted otherwise, the disclosures in this Form 10-Q/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-Q/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.
- 1 -
CONSOLIDATION SERVICES, INC. |
CONSOLIDATED BALANCE SHEETS |
|
|
| PREDECESSOR | |||||
|
| SUCCESSOR COMPANY | COMPANY | |||||
|
|
|
|
|
| |||
|
| June 30, |
| December 31, | December 31, | |||
|
| 2010 |
| 2009 | 2009 | |||
ASSETS: |
| Restated |
|
|
|
| ||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash |
| $ | 5,965 |
| $ | - | $ | 338 |
Accounts receivable |
|
| 24,266 |
|
| - |
| 6,353 |
Total current assets |
|
| 30,231 |
|
| - |
| 6,691 |
|
|
|
|
|
|
|
|
|
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. |
|
| 4,484,096 |
|
| 868,826 |
| 3,586,932 |
Support equipment, net |
|
| 781,100 |
|
| - |
| 720,809 |
Net assets of discontinued operations |
|
| - |
|
| 6,231,470 |
| - |
TOTAL ASSETS |
|
| 5,295,427 |
|
| 7,100,296 |
| 4,314,432 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
| 44,615 |
|
| - |
| 5,600 |
Net liabilities of discontinued operations |
|
| - |
|
| 2,964,585 |
| - |
Total current liabilities |
|
| 44,615 |
|
| 2,964,585 |
| 5,600 |
|
|
|
|
|
|
|
|
|
Asset retirement obligations |
|
| 16,388 |
|
| - |
| 16,157 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
| 61,003 |
|
| 2,964,585 |
| 21,757 |
|
|
|
|
|
|
|
|
|
CONTINGENCIES AND COMMITMENTS |
|
| - |
|
| - |
| - |
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 20,000,000 shares authorized; |
|
|
|
|
|
|
|
|
no shares were issued and outstanding as of |
|
| - |
|
|
|
|
|
June 30, 2010 and December 31, 2009, respectively |
|
| - |
|
| - |
| - |
Common stock, $.001 par value, 200,000,000 shares authorized; |
|
|
|
|
|
|
|
|
39,873,346 and 15,257,220 issued and outstanding as of |
|
|
|
|
|
|
|
|
June 30, 2010 and December 31, 2009, respectively |
|
| 39,873 |
|
| 15,257 |
| - |
Additional paid-in capital |
|
| 8,161,835 |
|
| 5,842,136 |
| - |
Non-controlling interest |
|
| - |
|
| 501,275 |
| - |
Common stock subscription receivable |
|
| - |
|
| (871,000) |
| - |
Accumulated deficit |
|
| (2,967,284) |
|
| (1,351,957) |
| - |
Total stockholders' equity |
|
| 5,234,424 |
|
| 4,135,711 |
|
|
|
|
|
|
|
|
|
|
|
PARTNERSHIP EQUITIES |
|
|
|
|
|
|
|
|
Total partnership equities |
|
| - |
|
| - |
| 4,292,675 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
| $ | 5,295,427 |
| $ | 7,100,296 | $ | 4,314,432 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 2 -
CONSOLDATION SERVICES, INC. |
CONSOLIDATED STATEMENT OF OPERATIONS |
SUCCESSOR COMPANY |
|
| Three Months Ended |
| Six Months Ended |
| Period From | Period From | |||||||||||
|
| June 30, |
| June 30, |
| April 2, 2010 through | January 1, 2010 through | |||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| June 30, 2010 | April 1, 2010 | |||||||
|
| Restated |
|
|
| Restated |
|
|
|
|
| |||||||
OIL AND GAS REVENUES |
| $ | 66,976 |
| $ | - |
| $ | 66,976 |
| $ | - |
| $ | 66,976 | $ | - | |
COSTS AND OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Lease operating expenses |
|
| 14,610 |
|
| - |
|
| 14,610 |
|
| - |
|
| 14,610 |
| - | |
Depreciation, depletion, amortization and accretion |
|
| 25,187 |
|
| - |
|
| 25,187 |
|
| - |
|
| 25,187 |
| - | |
General and administrative |
|
| 1,601,175 |
|
| 18,753 |
|
| 1,642,466 |
|
| 76,898 |
|
| 1,601,175 |
| 41,291 | |
Total costs and operating expenses |
|
| 1,640,972 |
|
| 18,753 |
|
| 1,682,263 |
|
| 76,898 |
|
| 1,640,972 |
| 41,291 | |
OPERATING INCOME/ (LOSS) |
|
| (1,573,996) |
|
| (18,753) |
|
| (1,615,287) |
|
| (76,898) |
|
| (1,573,996) |
| (41,291) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
OTHER EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense |
|
| - |
|
| - |
|
| 40 |
|
| - |
|
| - |
| 40 | |
Total other expense |
|
| - |
|
| - |
|
| 40 |
|
| - |
|
| - |
| 40 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(LOSS) INCOME BEFORE TAXES AND DISCONTINUED OPERATIONS |
| $ | (1,573,996) |
| $ | (18,753) |
| $ | (1,615,327) |
| $ | (76,898) |
| $ | (1,573,996) | $ | (41,331) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(LOSS) INCOME FROM CONTINUING OPERATIONS |
|
| (1,573,996) |
|
| (18,753) |
|
| (1,615,327) |
|
| (76,898) |
|
| (1,573,996) |
| (41,331) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
LOSS FROM DISCONTINUED OPERATIONS |
|
| - |
|
| (183,601) |
|
| - |
|
| (267,956) |
|
| - |
| - | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
NET (LOSS) INCOME |
| $ | (1,573,996) |
| $ | (202,354) |
| $ | (1,615,327) |
| $ | (344,854) |
| $ | (1,573,996) | $ | (41,331) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
BASIC AND DILUTED LOSS PER COMMON SHARE, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing operations |
| $ | (0.04) |
| $ | (0.00) |
| $ | (0.06) |
| $ | (0.01) |
| $ | (0.06) | $ | (0.00) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Discontinued operations |
| $ | - |
| $ | (0.01) |
| $ | - |
| $ | (0.02) |
| $ | - | $ | - | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss |
| $ | (0.04) |
| $ | (0.01) |
| $ | (0.06) |
| $ | (0.03) |
| $ | (0.06) | $ | (0.00) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average number of common shares outstanding, basic and diluted |
|
| 37,893,753 |
|
| 15,093,970 |
|
| 27,481,881 |
|
| 15,093,970 |
|
| 27,481,881 |
| 15,257,220 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 3 -
CONSOLDATION SERVICES, INC. |
CONSOLIDATED STATEMENT OF OPERATIONS |
PREDECESSOR COMPANY |
|
| Period From |
| Period From |
| Three Months Ended |
| Six Months Ended | ||||
|
| January 1, 2010 through |
| April 2, 2010 through |
| June 30, |
| June 30, | ||||
|
| April 1, 2010 |
| June 30, 2010 |
| 2009 |
| 2009 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
OIL AND GAS REVENUES |
| $ | 67,552 |
| $ | - |
| $ | 104,562 |
| $ | 176,548 |
COSTS AND OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses |
|
| 36,550 |
|
| - |
|
| 31,916 |
|
| 51,334 |
Depreciation, depletion, amortization and accretion |
|
| 25,046 |
|
| - |
|
| 26,488 |
|
| 52,866 |
General and administrative |
|
| 182 |
|
| - |
|
| 3,590 |
|
| 7,431 |
Total costs and operating expenses |
|
| 61,778 |
|
| - |
|
| 61,994 |
|
| 111,631 |
OPERATING INCOME/ (LOSS) |
|
| 5,774 |
|
| - |
|
| 42,568 |
|
| 64,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| - |
|
| - |
|
| - |
|
| - |
Total other expense |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE TAXES AND DISCONTINUED OPERATIONS |
|
| 5,774 |
|
| - |
|
| 42,568 |
|
| 64,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME FROM CONTINUING OPERATIONS |
|
| 5,774 |
|
| - |
|
| 42,568 |
|
| 64,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM DISCONTINUED OPERATIONS |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME |
| $ | 5,774 |
| $ | - |
| $ | 42,568 |
| $ | 64,917 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 4 -
CONSOLIDATION SERVICES, INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| SUCCESSOR COMPANY | PREDECESSOR COMPANY | ||||||||||||||||||
| Six Months Ended |
| Period From |
| Period From | Period From |
| Period From |
| Six Months Ended | ||||||||||
| June 30, |
| January 1, 2010 |
| April 2, 2010 | January 1, 2010 |
| April 2, 2010 |
| June 30, | ||||||||||
| 2010 |
| 2009 |
| through April 1, 2010 |
| through June 30, 2010 | through April 1, 2010 |
| June 30, 2010 |
| 2009 | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | Restated |
|
|
|
| Restated |
|
|
|
|
|
|
| |||||||
Net (loss) income | $ | (1,615,327) |
| $ | (344,854) |
| $ | (41,331) |
| $ | (1,573,996) | $ | 5,774 |
| $ | - |
| $ | 64,917 | |
Adjustments to reconcile income (loss) to net cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Discontinued operations |
| - |
|
| 267,956 |
|
| - |
|
| - |
| - |
|
| - |
|
| - | |
Depreciation, depletion, and amortization |
| 24,840 |
|
| - |
|
|
|
|
| 24,840 |
| 19,032 |
|
| - |
|
| 43,148 | |
Common stock issued for services |
| 1,486,681 |
|
| 22,826 |
|
|
|
|
| 1,486,681 |
| - |
|
| - |
|
| - | |
Accretion of asset retirement obligations |
| 347 |
|
| - |
|
|
|
|
| 347 |
| 6,014 |
|
| - |
|
| 9,718 | |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts receivable |
| (24,266) |
|
| - |
|
|
|
|
| (24,266) |
| (17,055) |
|
| - |
|
| (1,253) | |
Accounts payable |
| 16,690 |
|
| - |
|
| 28,162 |
|
| (11,472) |
| 546 |
|
| - |
|
| 2,656 | |
Net cash (used in) provided by operating activities |
| (111,035) |
|
| (54,072) |
|
| (13,169) |
|
| (97,866) |
| 14,311 |
|
| - |
|
| 119,186 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net investing activities of discontinued operations |
| - |
|
| (109,663) |
|
| - |
|
| - |
| - |
|
| - |
|
| - | |
Purchase of property and equipment |
| (50,000) |
|
| - |
|
| - |
|
| (50,000) |
| - |
|
| - |
|
| (508,931) | |
Net cash used in investing activities |
| (50,000) |
|
| (109,663) |
|
| - |
|
| (50,000) |
| - |
|
| - |
|
| (508,931) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from the issuances of common and subscribed stock |
| 167,000 |
|
| 9,000 |
|
| - |
|
| 167,000 |
| - |
|
| - |
|
| - | |
Net financing activities of discontinued operations |
|
|
|
| 154,735 |
|
| - |
|
| - |
| - |
|
| - |
|
| - | |
Proceeds from note payable |
| 22,000 |
|
| - |
|
| 22,000 |
|
| - |
| - |
|
| - |
|
| - | |
Repayments of note payable |
| (22,000) |
|
| - |
|
| - |
|
| (22,000) |
| - |
|
| - |
|
| - | |
Partner contributions |
| - |
|
| - |
|
| - |
|
| - |
| 2,500 |
|
| - |
|
| 646,069 | |
Partner withdrawals |
| - |
|
| - |
|
| - |
|
| - |
| (8,729) |
|
| - |
|
| (254,774) | |
Net cash provided by (used in) financing activities |
| 167,000 |
|
| 163,735 |
|
| 22,000 |
|
| 145,000 |
| (6,229) |
|
| - |
|
| 391,295 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
INCREASE (DECREASE) IN CASH |
| 5,965 |
|
| - |
|
| 8,831 |
|
| (2,866) |
| 8,082 |
|
| - |
|
| 1,550 | |
CASH, BEGINNING OF PERIOD |
| - |
|
| - |
|
| - |
|
| - |
| 338 |
|
| - |
|
| - | |
CASH, END OF THE PERIOD | $ | 5,965 |
| $ | - |
| $ | 8,831 |
| $ | (2,866) | $ | 8,420 |
| $ | - |
| $ | 1,550 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income Taxes Paid | $ | - |
| $ | - |
| $ | - |
| $ | - | $ | - |
| $ | - |
| $ | - | |
Interest Paid | $ | 40 |
| $ | 18,842 |
| $ | - |
| $ | 40 | $ | - |
| $ | - |
| $ | - | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Supplemental disclosure of non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts payable and related party for cash of discontinued operations | $ | - |
| $ | - |
| $ | 27,924 |
| $ | - | $ | - |
| $ | - |
| $ | - | |
Increase in asset retirement obligations | $ | 16,041 |
| $ | - |
| $ | - |
| $ | 16,041 | $ | - |
| $ | - |
| $ | 9,718 | |
Issuance of common stock for purchase of assets | $ | 4,355,169 |
| $ | - |
| $ | - |
| $ | 4,355,169 | $ | - |
| $ | - |
| $ | - |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 5 -
CONSOLIDATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - RESTATEMENT
The consolidated financial statements have been restated to properly reflect the initial valuation of the acquisition of the Leland partnerships on April 1, 2010 based upon an oil and gas reserve valuation of $4.3 million. The acquisition of the Leland partnerships was originally recorded at a valuation of $7,421,910 based on the fair value of the assets in connection with the acquisition.
The consolidated financial statements have also been restated to reflect the authorization of preferred stock which none has been issued or outstanding as of June 30, 2010.
The consolidated financial statements have also been restated for the three and six months ended June 30, 2010 in response to comments received from Securities and Exchange Commission.
The consolidated financial statements have been restated for June 30, 2010 to reflect the adjustment for Depreciation, Depletion, and Amortization that was previously recorded at $63,995 and reduced by $38,768 for the three and six months ended June 30, 2010.
|
| Three months ended June 30, 2010 | ||||
|
| As Filed |
| Adjustments |
| As Restated |
Balance Sheet |
|
|
|
|
|
|
Oil and gas properties | $ | 7,590,139 | $ | (3,106,043) | $ | 4,484,096 |
Support Equipment and facilities |
| 703,130 |
| 78,070 |
| 781,100 |
Common stock |
| 39,873 | $ | - |
| 39,873 |
Additional paid-in capital |
| 11,228,576 |
| (3,066,741) | $ | 8,161,835 |
|
|
|
|
|
|
|
Accumulated deficit | $ | (3,006,052) |
| 38,768 |
| (2,967,284) |
Statement of Operations |
|
|
|
|
|
|
Lease operating expense | $ | 63,955 | $ | (38,768) | $ | 25,187 |
Net loss | $ | 1,612,764 | $ | (38,768) | $ | 1,573,996 |
Loss per share | $ | (0.04) | $ | (0.00) | $ | (0.04) |
|
| Six months ended June 30, 2010 | ||||
|
| As Filed |
| Adjustments |
| As Restated |
Balance Sheet |
|
|
|
|
|
|
Oil and gas properties | $ | 7,590,139 | $ | (3,106,043) | $ | 4,484,096 |
Support Equipment and facilities |
| 703,130 |
| 78,070 |
| 781,100 |
Common stock |
| 39,873 | $ | - |
| 39,873 |
Additional paid-in capital |
| 11,228,576 |
| (3,066,741) | $ | 8,161,835 |
Accumulated deficit | $ | (3,006,052) |
| 38,768 |
| (2,967,284) |
Statement of Operations |
|
|
|
|
|
|
Lease operating expense | $ | 63,955 | $ | (38,768) | $ | 25,187 |
Net loss | $ | (1,654,095) | $ | 38,768 | $ | (1,615,327) |
|
|
|
|
|
|
|
Loss per share | $ | (0.06) | $ | 0.00 | $ | (0.06) |
The consolidated financial statements have also been restated to reflect the authorization of preferred stock which none has been issued or outstanding as of June 30, 2010.
- 6 -
The consolidated financial statements have also been restated for the period ended June 30, 2011 in response to comments received from Securities and Exchange Commission to furnish predecessor financial statements of the combined Leland partnerships (the Predecessor), in accordance with Regulation S-X 8-02 by including financial statements of the Predecessor for the period from January 1, 2010 through April 1, 2010. See Note 2.
The total effect of the adjustments described above for the three and six months ended June 30, 2010 was a decrease in the net loss of $38,768 ($0.00 per common share) and $38,768 ($0.00 per common share), respectively, and a decrease in accumulated deficit of $38,768.
NOTE 2 - 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 in Kentucky and Tennessee. Until January 1, 2010, the Company primarily sought to generate revenues from its coal related operations. The Company discontinued its coal mining operations on January 1, 2010 (See Note 7 - Discontinued Operations). The Companys coal mining operations and its timber harvesting operations were its primary operations and only sources of revenues. As a result of its discontinued operations, the Company re-entered the exploration stage on January 1, 2010 to begin its oil and gas operations. On April 1, 2010 the Company exited the exploration stage as a result of the acquisition of producing oil and gas properties (See Note 9 - Acquisitions).
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 condensed 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 accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. While management of the Company believes that the disclosures presented herein and adequate and not misleading, these interim condensed 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, 2009 as filed with the Securities and Exchange Commission.
Principle of Consolidation
As of January 1, 2010, the Company spun off all its coal reserve operations to Colt Resources, Inc. (Colt) a Nevada corporation formed as a wholly-owned subsidiary which included the Companys subsidiaries which were: (i) a 50% ownership interest in Buckhorn Resources, LLC; (ii) a 50% ownership interest in LeeCo Development, LLC. After the spin-off of Colt on January 1, 2010, the Companys subsidiaries included a 100% ownership interest in Vector Energy Services, Inc. On June 2, 2010, CSI Resources, Inc was incorporated in the state of Nevada and is a wholly owned subsidiary of the Company. CSI Resources, Inc. is presently not an operating subsidiary.
- 7 -
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 combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Companys consolidated financial statements are based on a number of significant estimates including the selection of the useful lives for property and equipment and the oil and gas reserve quantities which are the basis for the calculations of depreciation, depletion, and impairment of property and equipment. The Companys 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 Companys 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 June 30, 2010, cash and cash equivalents include cash on hand and cash in the bank.
Oil and Gas Properties
The Companies use 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, including development dry holes, 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 provided 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 Companies oil and gas properties was $21,287 and $0, for the three and six months ended June 30, 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 cost of the property has been impaired. This impairment will generally be based on geophysical or geologic data. For the three and six months ended June 30, 2010, there was no impairment of unproved leaseholds. Due to the perpetual nature of the Companys 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 Companies evaluate impairment of their 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 assets 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 three and six months ended June 30, 2010 there was no impairment of the Companies long lived assets.
- 8 -
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 include furniture, fixtures, automobiles, office equipment, leasehold improvements, and computer software and are stated at cost. Depreciation and amortization of support equipment and facilities is calculated using various accelerated or straight-line methods over the expected useful lives. The Company paid 50,000 for additional facilities upgrade in May of 2010. Depreciation and amortization expense for support equipment and facilities totaled $3,900 and $0 for the three and six months ended June 30, 2010 and 2009, respectively.
The cost of normal maintenance and repairs is charged to operating expenses as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation or amortizations are removed from the accounts and any gains or losses are reflected in current operations.
Revenue Recognition
The Companies have royalty and working interests in various oil and gas properties which constitute the primary source of revenue. The Companies recognize oil and gas revenue from their interests in producing wells as oil and gas is sold from those wells. Other sources of revenues received by the Companies include delay rentals and mineral lease bonuses which are recognized as revenue according to the terms of the lease agreements.
Accounts Receivable
Substantially, all of the Companys accounts receivable primarily consists of accrued revenues from oil and gas production for the six months ended June 30, 2010. The Companies accounts receivable are primarily a result of oil and gas sales to third party companies in the oil and gas industry. 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 entitys 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, a result of the net loss 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.
- 9 -
The carrying amounts of the Companys financial instruments, including cash, accounts payable, and accounts payable approximate fair value.
Reclassification
Certain prior period amounts have been reclassified to conform to current year presentations.
Recent Accounting Pronouncements
Recent accounting pronouncements that the Company has adopted or that will be required to adopt in the future are summarized below.
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 impact on our consolidated financial statements.
On February 24, 2010, the FASB issued guidance in the Subsequent Events topic of the FASC to provide updates including: (1) requiring the company to evaluate subsequent events through the date in which the financial statements are issued; (2) amending the glossary of the Subsequent Events topic to include the definition of SEC filer and exclude the definition of Public entity; and (3) eliminating the requirement to disclose the date through which subsequent events have been evaluated. This guidance was prospectively effective upon issuance. The adoption of this guidance did not impact the Companys consolidated results of operations of financial condition.
No other accounting standards or interpretations issued recently are expected to a have a material impact on the Companys consolidated financial position, operations or cash flows.
NOTE 3 - GOING CONCERN
The accompanying 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 three and six month periods ended June 30, 2010 of $1,573,996 and $1,615,327, respectively. 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 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 necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.
- 10 -
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.
NOTE 4 - ASSET RETIREMENT OBLIGATIONS
CNSV 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. CNSV 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 CNSVs credit-adjusted risk-free interest rate. No market risk premium has been included in CNSVs calculation of the ARO balance. CNSV recorded $16,388 and $0 of asset retirement obligations for the six months ended June 30, 2010 and 2009, respectively based on 66 wells on the properties.
The following is a description of the changes to the Companys asset retirement obligations for the six months ended June 30, 2010 and year ended December 31, 2009.
Successor Company
|
| June 30, 2010 |
| December 31, 2009 |
Asset retirement obligation at beginning of the year | $ | - | $ | - |
Additions |
| 16,041 |
| - |
Accretion expense |
| 347 |
| - |
Asset retirement obligation at end of year | $ | 16,388 | $ | - |
Predecessor Company
|
| December 31, 2009 |
Asset retirement obligation at beginning of the period | $ | - |
Additions |
| 10,492 |
Accretion expense |
| 5,665 |
Asset retirement obligation at end of period | $ | 16,157 |
NOTE 5 - EQUITY
Successor Company
Common Stock
The Company is authorized to issue 200,000,000 shares of common stock, at $0.001 par value, of which 39,873,346 common shares were issued and outstanding as of June 30, 2010.
Preferred Stock
- 11 -
The Corporation is authorized to issue two classes of stock to be designated, respectively, Common Stock and Preferred Stock. The total number of shares that the Corporation is authorized to issue is two hundred twenty million (220,000,000) shares. Two hundred million (200,000,000) shares shall be Common Stock and twenty million (20,000,000) shares shall be Preferred Stock, each with a par value of $0.001 per share. Except as otherwise required by statute, the designations and the powers, preferences and rights, and the qualifications or restrictions thereof, of any class or classes of stock or any series of any class of stock of the Corporation may be determined from time to time by resolution or resolutions of the Board of Directors.
Options
As of June 30, 2010, no options to purchase common stock of the Company were issued and outstanding.
Warrants
As of June 30, 2010, 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 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. Absent an arms length transaction with an independent third-party, the value of any such issued shares is based on the trading value of the stock at the date on which such transactions or agreements are consummated. The Company expenses the fair value of all such issuances in the period incurred.
On April 1, 2010, the Company issued 22,786,872 restricted shares of the Companys common stock for the acquisition of oil and gas properties (See Note 9 - Acquisitions).
During the quarter ended June 30, 2010, the Company issued 1,680,000 of common shares for services with an aggregate fair value of approximately $1.4 million based on the quoted market price which was expensed as compensation.
During the quarter ended June 30, 2010, the Company issued 149,254 common shares for $100,000 in cash in a private placement.
Predecessor Company
Contributions:
Upon making a contribution to the capital of the Partnership, each Partner shall be issued the appropriate number of Units. In the event that the Partnership is required to seek additional funding in order to carry out the business in addition to any loans which may be obtained, holders of a majority of the Units outstanding shall at a meeting of Partners called for the purpose or by written consent have the power to sell additional Units at a price or prices to be determined by such majority vote. Provided however, before the Partnership shall sell any additional Units, it shall first offer each existing Partners the right but not the obligation, on a pro-rata basis to purchase additional Units which rich shall remain open for a period not to exceed 30 days.
- 12 -
Draws:
No Partner shall have the right to demand the withdrawal, reduction or return of his/her capital contribution without prior written consent of the other Partners or upon the dissolution and termination of the Partnership; nor shall any Partner have the right to demand and receive property other than cash in return of his/her capital contribution.
Distribution of Distributable cash:
Distributable cash shall be distributed to the Partners in the following order or priority:
a. First, to the Partners in priority to and to the extent of their Adjusted Capital Contributions; and
b. The balance, if any, to the Partners in accordance to allocation of Net Profits
Whenever a vote, agreement, decision, action or determination with respect of management, operation or control of the Partnership is required to be made, a majority of the Units present, in person, by written vote shall constitute approval by the Partners where at least 51% of the units constitute a quorum.
The Partners agreed to engage Leland Kentucky Holdings, Inc. to serve as fiduciary of the Partnerships to ensure that the Partnerships tax returns are properly completed and filed and Form K-1 furnished to the Partners and coordinate with other Partners the scheduling of a Partners meeting. Leland shall act as a managing Partner after election as such by a vote of the Partnerships Units at the Partnerships initial Partnership meeting.
Leland shall not receive any stated salary for its services, but shall receive such compensation for its services as may be from time to time are agreed upon by the Partners. The Partners agree to pay the Managing Partner a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting. Leland shall receive a fractional unit of 1% and share in its proportional share of production revenue of the Partnership.
NOTE 6 - 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 payables 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.
Effective April 2, 2010, the Company announced the appointment of Stephen M. Thompson, Chairman of Board of Directors and Pamela J. Thompson (no relation to Stephen M. Thompson), and Gary Kucher as members of the Board of Directors. On April 7, 2010, Stephen M. Thompson was elected Chief Executive Officer, Pamela Thompson was elected Chief Financial Officer, Secretary and Treasurer and Gary Kucher, was elected President as the new management team. On April 15, 2010, The Companys Board of Directors approved employment agreements for Gary Kucher and Pamela Thompson and authorized the issuance of 570,000 shares of common stock to Gary Kucher and 190,000 shares of common stock to Pamela Thompson. The shares of common stock were valued at $1.03 per share, the quoted market price on the acquisition date, or an aggregate of $767,600.
- 13 -
NOTE 7 - DISCONTINUED OPERATIONS
The Companys 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 Companys stockholders approved the action as of January 31, 2010 (the Record Date). Consequently, the Companys 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.
| June 30, 2010 |
| December 31, 2009 | |||||||||
Net assets of discontinued operations: |
|
|
|
|
|
|
|
| ||||
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 |
|
|
| Six Months Ended |
| ||||||
|
| June 30, 2010 |
|
| June 30, 2009 |
| |||
Discontinued operations: |
|
|
|
|
|
| |||
Revenues |
| $ | - |
|
| $ | 4,266 |
| |
Operating expenses |
|
| - |
|
|
| (234,230 | ) | |
Interest expense |
|
| - |
|
|
| (37,992 | ) | |
Loss from Discontinued Operations |
| $ | - |
|
| $ | (267,956 | ) |
- 14 -
|
| Three Months Ended | |||||
|
| June 30, 2010 |
|
| June 30, 2009 | ||
Discontinued operations: |
|
|
|
|
| ||
Revenues |
| $ | - |
|
| $ | - |
Operating expenses |
|
| - |
|
|
| (165,237) |
Interest expense |
|
| - |
|
|
| (18,364) |
Loss from Discontinued Operations |
| $ | - |
|
| $ | (183,601) |
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 Companys 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 Companys 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 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 Companys publicly traded stock closed above $2.25 per share for fifteen consecutive trading days immediately prior to such months scheduled repurchase, the stockholders could elect to sell that months 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.
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 Companys publicly traded stock closed above $2.25 per share for fifteen consecutive trading days immediately prior to such months scheduled repurchase, the stockholders could elect to sell that months 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.
- 15 -
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-purchases 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 terms; 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, and after the spin-off, the Company retained the oil and gas assets on the properties, subject to a 12.5% royalty due to Colt.
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 8 - 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. The Company will reimburse the consultant for all reasonable out of pocket expenses. The consulting agreement includes the following commitments:
- 16 -
i. |
| The consultant will receive a management fee of 1% of the gross proceeds of a transaction; |
ii. |
| The consultant will receive an expense fee of 0.5% of the gross proceeds of a transaction; |
iii. |
| The consultant will receive a cash transaction fee ranging from 0.5% to 4.0% of the aggregate amount of an acquisition or disposition of assets, including business combinations or mergers and acquisitions; |
iv. |
| The consultant will receive a cash transaction fee ranging from 5.0% to 8.0% and a warrant transaction fee of 8.0% of the aggregate amount of an equity or equity-linked financing transaction; |
v. |
| The consultant will receive a cash transaction fee ranging from 0.5% to 2.0% of the aggregate amount of a debt financing transaction. |
NOTE 9 - ACQUISITIONS
On April 1, 2010, the Company entered into 12 substantially identical asset purchase agreements with various unrelated 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. As part of the acquisition, the sellers received in aggregate 22,786,872 common shares of the Companys 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 Companys pre-transaction directors retained the largest relative voting rights of the Company post-transaction; (iv) the composition of the Companys current board of directors and management was the result of the appointment by the Companys pre-transaction directors due to the current board and managements operational familiarity with the working interests and support equipment purchased.
- 17 -
The purchase price paid for the Acquisition was 22,786,872 restricted shares of the Companys 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 value of the assets acquired of $ 4,355,169 (the Purchase Price), The quoted market value of the Companys 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 Companys common stock and believed that the fair value of the acquisition should be the value of the assets acquired which resulted in a purchase price of $4,355,169 based on the fair value of the oil and gas reserves acquired. 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:
The following table summarizes the consideration paid by Consolidation and the amounts of the assets acquired at the acquisition date:
Purchase Price Allocation |
| April 1, 2010 |
| |
Consideration: |
|
|
| |
Equity instruments (22,786,872 common shares of Consolidation Services, Inc. value based on appraisals) |
| $ | 4,355,169 |
|
Recognized amounts of identifiable assets acquired: |
|
|
|
|
Support equipment |
|
| 735,000 |
|
Oil & 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 |
|
| - |
|
Total assets |
| $ | 4,355,169 |
|
Fair value of total assets |
| $ | 4,355,169 |
|
The Company calculated the fair value of the assets based upon the Reserve Report prepared for the 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%.
The following (unaudited) proforma consolidated results of operations have been prepared as if the acquisition had occurred at January 1, 2009:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2010 |
|
| 2009 |
|
| 2010 |
|
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
OIL AND GAS REVENUES |
|
| 66,976 |
|
|
| 104,562 |
|
|
| 66,976 |
|
|
| 176,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
| (1,573,996 | ) |
|
| (159,786 | ) |
|
| (1,615,327 | ) |
|
| (279,937 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic and diluted |
| $ | (0.04 | ) |
| $ | (0.01 | ) |
| $ | (0.06 | ) |
| $ | (0.02 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of shares outstanding |
|
| 38,067,087 |
|
|
| 15,093,970 |
|
|
| 26,514,849 |
|
|
| 15,093,970 |
|
The proforma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
- 18 -
NOTE 10 - SUBSEQUENT EVENTS
In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events, and have determined that the following events are reasonably likely to impact the financial statements:
On July 13, 2010, the Company approved the modification to Gary Kucher, Presidents employment agreement where as effective July 1, 2010 through September 1, 2010 his monthly salary will increase to $10,000 per month and from and after September 1, 2010 his monthly rate will increase to $25,000 per month subject to annual increase consistent with the company policy applicable to other senior executive and officers and approval by the Board of Directors. Further modified were his bonus criteria which will require Mr. Kucher to be paid 25% of his annual base salary if the company reaches certain milestones. In addition, pursuant to the amendment, Mr. Kucher shall have earned and received beneficial ownership of 570,000 shares of Common Stock under his employment contract. On September 1, 2010, Mr. Kucher shall receive equal to 3% of the then outstanding shares on a fully diluted basis and again on December 1, 2010. Mr. Kucher shall also receive five-year warrants to purchase 1% of the issued and outstanding shares on each of the anniversary dates of the employment agreement exercisable at a price equal to the six-month average share trading price. In the event Mr. Kuchers employment is terminated without cause he shall received 12 months severance pay.
- 19 -
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Managements 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/A, 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 Companys business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, 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 adopted at managements discretion, the most conservative recognition of revenue based on the most astringent guidelines of the SEC. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets. The Companys 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 Companys Annual Report on Form 10-K for the year ended December 31, 2009, 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 formed on January 26, 2007 in Delaware, to engage in the acquisition and consolidation of companies engaged in the foodservice industry (including with respect to organic and natural food products). As discussed in our annual report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2010, in view of the current economic climate and our obligation to maximize value for our stockholders, our primary business focus is oil and gas producing properties.
SPIN - OFF
On January 1, 2010, our Board of Directors concluded that it was in the best interest of our stockholders to divide our assets and liabilities into two separate legal entities. Our Board of Directors believed that this action served an important business purpose in that, given the substantial differences in the business focuses represented by such assets and liabilities, it would facilitate the ability of the separate entities to more readily manage their respective businesses, 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.
- 20 -
In order to accomplish this spin-off, the Board of Directors and a majority of the voting interest of our stockholders approved the action as of January 31, 2010 (the Record Date). Consequently, our stockholders received the same number of shares in Colt (the Colt Shares) as they owned in our 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 will not be publicly traded. There were 15,257,220 shares of our common stock issued and outstanding on the Record Date.
ASSET PURCHASE AGREEMENT
On April 1, 2010, we entered into 12 substantially identical Asset Purchase Agreements (the APAs) with various funds (the Funds) and completed the purchase (the Acquisition) of interests in oil and gas wells located in Tennessee and Kentucky. We acquired interests in 39 oil wells and 19 gas wells located on approximately 1,500 leased acres in Kentucky and Tennessee.
Management believes that the Acquisition provides our Company with increased acres available for future drilling, as well as already drilled operating wells. We have retained the oil and gas rights on the approximate 12,000 acres of land that we spun-off to our wholly-owned subsidiary Colt Resources, Inc. (Colt) on January 1, 2010, subject to a 12.5% overriding royalty granted to Colt on the oil and gas interests. However, by acquiring producing oil and gas properties in exchange for restricted common stock as part of the Acquisition, management contends that we reduced the outlay of capital related to the development costs associated in acquiring oil and gas mineral leases, permitting, licensing, drilling and marketing. There is no assurance that we will be able to obtain the funding required to pursue the development of our oil and gas properties.
Under the APAs, we acquired all right, title and interest to the Funds oil and gas wells free and clear of all liabilities, liens and encumbrances of any character whatsoever. The effective date of the purchase and sale of the assets underlying the APAs, for all but Block Production, Rogers Production and Production Revenue Drilling was April 1, 2010 (May 1, 2010 for the three above exceptions), regardless of when the closing in fact occurred. All representations and warranties made by the parties survive through the second anniversary date of the closing except environmental and tax representations survive through the expiration of the applicable statute of limitations.
Our common stock trades under the symbol CNSV on the OTC Markets.
Results of Operations
We use successful efforts method of account of oil and gas operations. The Company is in the process of acquiring mineral properties or claims located in the States of California. The recoverability of amounts from the properties or claims will be dependent upon the discovery of economically recoverable reserves, confirmation of the our interest in the underlying properties and/or claims, our ability to obtain necessary financing to satisfy the expenditure requirements under the property and/or claim agreements and to complete the development of the properties and/or claims, and upon future profitable production or proceeds for the sale thereof.
Revenues for the three months ended June 30, 2010 increased to $66,976 as compared to $0 for the three months ended June 30, 2009. Revenues for the six months ended June 30, 2010 increased to $66,976 as compared to $0 for the six months ended June 30, 2009. The Companys primary source of revenues is from our oil and gas production.
- 21 -
Our operating expenses for production activities for the three months ended June 30, 2010 and 2009 were $39,787 (comprised of $14,610 of lease operating expenses and $25,187 of depreciation, depletion and amortization) and $0, respectively. The increase in lease operating expenses is attributable to acquisition of oil and gas wells on April 1, 2010.
Costs and operating expenses for the three months ended June 30, 2010 increased to $1,601,175 as compared to $18,753 for the three months ended June 30, 2009. Costs and operating expenses for the six months ended June 30, 2010 increased to $1,642,466 as compared to $76,898 for the six months ended June 30, 2009. Our primary costs and expenses relate to the operation of our oil and gas properties and general and administrative expenses. Additionally, the general and administrative expenses for the three and six months ended June 30, 2010 included approximately $ 1,486,681 related to the issuance of common stock for services and are non-recurring expenses.
Liquidity and Capital Resources
Our cash used in operating activities for the six months ended June 30, 2010 was $111,035 as compared to $54,072 for the six months ended June 30, 2009. The increase was primarily attributable to the increased costs associated with the operation of our oil and gas properties.
Cash used in investing activities for the six months ended June 30, 2010 was $50,000 as compared to $109,663 for the six months ended June 30, 2009. The decrease was related to the spinoff of the prior coal and timber operations.
Our cash provided by financing activities for the six months ended June 30, 2010 was $167,000 as compared to $163,735 for the six months ended June 30, 2009.
Our future revenue plan is uncertain and is dependent on our ability to effectively drill oil and gas and obtain contract and leasing opportunities on oil and gas properties. There are no assurances of the ability of our company to drill economically producible wells. The cost of drilling oil and gas is cost intensive. Accordingly, it is critical for us to raise appropriate capital to implement our business plan. We incurred net losses of $1,615,327 and $344,854 for the six months ended June 30, 2010 and 2009, respectively.
We believe we will have to rely on public and private equity and debt financings to fund our liquidity requirements over the twelve month term. 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, successfully promote our brand, develop our products, 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 payments of dividends.
The accompanying 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 three and six month periods ended June 30, 2010. 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.
- 22 -
These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements herein do not include any adjustments that might result from the outcome of these uncertainties. In this regard, Company management is pursuing necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.
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.
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/A 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/A, Annual Report on Form 10-K/A, and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SECs 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.
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
- 23 -
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 Commissions 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, 2009.
The Companys material weaknesses in financial reporting were:
The inability of the Company to prepare and file its financial statements timely due to its limited financial and personnel resources and delays in the Companys ability to respond to SEC inquiries regarding financial and accounting presentation in its 2010 Form 10K, which was subsequently amended. Further, the amendment to its Form 10K caused the Company to be unable to file the required 2011 financial statements by the reporting deadline of April 15, 2012 and its Form 10-Q for the period ended March 31, 2012 by the reporting deadline of May 15, 2012.
There were no changes in our internal control over financial reporting that occurred during the six months ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This quarterly report does not include an attestation report of the companys registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
- 24 -
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are currently not involved in any litigation except noted below that we believe could have a material adverse effect on our financial condition or results of operations. Other than described below, 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 Companys 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, 2009 and our six months ended June 30, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS SECURITIES
On April 1, 2010, the Company issued 22,786,872 restricted shares of the Companys common stock for the acquisition of oil and gas properties. The shares had a quoted market price of $1.03 per share on April 1, 2010, or an aggregate quoted market value of $23,470,478. The Company initially reported an aggregate purchase price of $15,555,208, 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 in its Form 8-K filed on April 7, 2010. However, after receiving the third party reserve valuation and the equipment appraisal, the Company determined that the more relevant fair value to use for the purchase price based on a third party reserve valuation and a third party equipment appraisal totaling $4,355,169.
During the quarter ended June 30, 2010, the Company issued 1,680,000 of common shares for services with an aggregate fair value of approximately $1.4 million based on the quoted market price which was expensed as compensation.
During the quarter ended June 30, 2010, the Company issued 149,254 common shares for $100,000 in cash in a private placement.
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 June 30, 2010.
- 25 -
ITEM 5. OTHER INFORMATION
There is no information with respect to which information is not otherwise called for by this form.
ITEM 6. EXHIBITS
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
32.2 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
- 26 -
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.
Registrant |
| Consolidation Services, Inc. |
|
|
|
Date: September 19, 2012 |
| By: /s/ Gary D. Kucher |
|
| Gary D. Kucher |
|
| Chief Executive Officer (Principal Executive Officer) |
Registrant |
| Consolidation Services, Inc. |
|
|
|
Date: September 19, 2012 |
| By: /s/ Richard S. Polep |
|
| Richard S. Polep |
|
| Chief Financial Officer (Principal Financial Officer) |
- 27 -