Basis of Presentation of Interim Financial Statements

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. While management of the Company believes that the disclosures presented herein are adequate and not misleading, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2013, included within its Form 10-K, as filed with the Securities and Exchange Commission.

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 calculation 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.

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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, 2014, cash and cash equivalents include cash on hand and cash in depository institutions/commercial banks.  

Accounts Receivable

The Company’s accounts receivable consists of accrued revenues from oil and gas production from third party companies in the oil and gas industry.  This concentration of customers may be a consideration of the Company’s 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.

Oil and Gas Properties

The Company uses the successful efforts method of accounting for oil and gas operations.  Under this method of accounting, costs to acquire mineral interests in oil and gas properties, to drill and equip development wells, and to drill and equip exploratory wells that find proved reserves are capitalized.  Depletion 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.  

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.  Due to the perpetual nature of the Company’s ownership of the mineral interests, the drilling of a well, whether successful or unsuccessful, may not represent a complete test of all depths of interest.  Therefore, at the time that a well is drilled, only a portion of the costs allocated to the acreage drilled may be expensed. As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds. The costs associated with unproved leaseholds and mineral interests that have been allowed to expire are charged to exploration expense.

Long-lived assets are 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.  

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

Revenue Recognition

Oil and Gas Revenue

The Company has royalty and working interests in various oil and gas properties which constitute its sole 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.   

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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.

Equipment Rental Revenue

The Company will recognize revenue from its equipment rental business when all of the following have occurred: persuasive evidence that an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured.

Loss Per Common Share

Basic income (loss) per common 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 common share is the same as basic loss per share due to the net loss incurred by the Company (attributable to its common shareholders).

For the six months ended June 30, 2014 and 2013, the following stock options, stock warrants and convertible debt to purchase shares of common stock were excluded from the computation of diluted net loss per share, as the inclusion of such shares would be anti-dilutive:

Stock-Based Compensation

The Company measures stock-based compensation at the grant date based on the fair value of the award and recognize it as expense over the vesting or service period, as applicable, of the stock award using the straight-line method.

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, advances from related party and convertible debt approximates fair value due to their short-term nature.

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Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash. Interest-bearing accounts are insured up to $250,000. At June 30, 2014, the Company had no cash in accounts over $250,000.

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

Recent Accounting Pronouncements  

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.

Subsequent Events

The Company evaluated subsequent events through the date these financial statements were available to be issued.

NOTE 3 - 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 has sustained recurring losses from operations including an accumulated deficit of $11,993,769 and a net loss for the six months ended June 30, 2014 of $501,324.  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 4 - OIL AND GAS PROPERTIES

During the six months ended June 30, 2014 and 2013, the Company did not purchase or dispose of any oil and gas properties.

During the six months ended June 30, 2014 and 2013, the Company recorded depletion and depreciation expense of $1,632 and $1,709, respectively, on the oil and gas properties.  

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Net oil and gas properties by classification at June 30, 2014 and December 31, 2013 were:

Support facilities and equipment

The Company owns support facilities and equipment which serve its oil and gas production activities.  The equipment is depreciated over the useful life of the underlying oil and gas property.  The following table details the support facilities and equipment as of June 30, 2014 and December 31, 2013:

NOTE 5 - LICENSE

On March 21, 2013, the Company through its wholly owned subsidiary, Mongolia Equipment Rental Corporation, a Delaware Corporation (the “Franchisee”) entered into an International Franchise Agreement (the “Franchise Agreement”) with Hertz Equipment Rental Corporation and Hertz Equipment Rental System (collectively “Franchisor”).  

Under the Franchise Agreement, the Franchisee will operate a business of renting, selling and maintaining equipment primarily for use in construction, materials handling and commercial and industrial activities (“Equipment Rental Business”) under the unique plan or system of the Franchisor (the “System”) in the country of Mongolia.

The license granted to Franchisee under the Franchise Agreement commenced on July 1, 2013 and continues for a period of ten (10) years, unless renewed or sooner terminated pursuant to the Franchise Agreement.  

The Franchise Agreement provides that so long as the Franchise Agreement remains in place and for one-year after the expiration or termination of the Franchise Agreement: (i) Franchisor will not establish or license another to establish an Equipment Rental Business in the country of Mongolia; and (ii) Franchisor will not establish or license another to establish a truck rental business under the System (“Truck Rental Business”) in the country of Mongolia without first having afforded Franchisee a non-transferrable right of first refusal to establish a Truck Rental Business in the country of Mongolia. In addition, Franchisee shall have a right of first opportunity (prior to Franchisor entering into any substantive discussions or negotiations with any other party) to acquire the franchise for any Equipment Rental Business in the country of Burma (a/k/a Myanmar).

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In consideration for the license provided under the Franchise Agreement, during the year ended December 31, 2013, the Franchisee paid Franchisor a license fee of $45,000 and also will (i) pay a continuing monthly license fee equal to 6% of Franchisee’s gross revenue, but not less than $135,000 per year; and (ii) an amount equal to 1% of all sums received by Franchisee related to (a) the sale, trade-in or other disposal of used equipment, and (b) the sale of any new equipment or product lines that have been previously approved by Franchisor. The monthly license fee is owed to the Franchisor beginning July 1, 2014 (one year after the commencement date of the license agreement).  In addition, Franchisee shall be required to spend annually an amount equal to not less than 1% of the Franchisee’s gross revenue for local advertising and promotion of the Equipment Rental Business in Mongolia.

At June 30, 2014, the Company has not generated revenue from the Franchise Agreement.  During the six months ended June 30, 2014, the Company recorded $2,250 of amortization expense of its license. At June 30, 2014 and December 31, 2013, the Company had accumulated amortization of $4,500 and $2,250, respectively.

NOTE 6 - 12% SECURED CONVERTIBLE PROMISSORY NOTES

In December 2013, the Company issued two 12% secured convertible promissory notes totaling $150,000, due twelve months from date of issuance. The interest on the convertible promissory notes is 12% per annum, payable quarterly. The convertible promissory notes are secured by all of the assets of the Company and are convertible into shares of common stock at the option of the holder at a conversion price of $1.00 per share. The note holders were also issued warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.00 which expire five years from the issuance date.  The relative fair value of the warrants at the grant date was $49,917, and is recorded as debt discount and will be accreted to interest expense over the twelve-month term of the notes.  

In January 2014, the Company issued two secured convertible promissory notes for cash proceeds of $100,000 in total. The notes are due in twelve months and are convertible into shares of common stock at the option of the holder at conversion price of $1.00. The notes bear interest at 12% that is payable quarterly.  The notes are secured by all of the assets of the Company. The note holders were also issued warrants to purchase 200,000 shares of the Company’s common stock at an exercise price of $1.00 with a five-year term. The relative fair value of the warrants at the grant date was $41,126 and is recorded as a debt discount and will be accreted to interest expense over the twelve-month term of the notes.

In April 2014, the Company issued a secured convertible promissory note for cash proceeds of $100,000. The note is due in twelve months and is convertible into shares of common stock at the option of the holder at conversion price of $1.00. The note bears interest at 12% that is payable quarterly.  The note is secured by all of the assets of the Company. The note holder was also issued warrants to purchase 200,000 shares of the Company’s common stock at an exercise price of $1.00 with a five-year term. The relative fair value of the warrants at the grant date was $50,937 and is recorded as a debt discount and will be accreted to interest expense over the twelve-month term of the note.

In June 2014, the Company issued a secured convertible promissory note for cash proceeds of $50,000. The note is due in twelve months and is convertible into shares of common stock at the option of the holder at conversion price of $1.00. The note bears interest at 12% that is payable quarterly.  The note is secured by all of the assets of the Company. The note holder was also issued warrants to purchase 100,000 shares of the Company’s common stock at an exercise price of $1.00 with a five-year term. The relative fair value of the warrants at the grant date was $25,707 and is recorded as a debt discount and will be accreted to interest expense over the twelve-month term of the note.

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During the six months ended June 30, 2014, the Company amortized $58,918 of debt discount to interest expense on these obligations.

The Company analyzed the convertible promissory notes and warrants for derivative accounting consideration and determined that derivative accounting does not apply to these instruments.

Convertible notes payable consist of the following as of June 30, 2014 and December 31, 2013:

NOTE 7- RELATED PARTY TRANSACTIONS

Notes payable - related party

During the six months ended June 30, 2014 and 2013, the Company entered into notes payable with a stockholder totaling $0 and $187,000, respectively. All of the notes payable are due on demand, have no periodic payment terms and bear interest at an interest rate of 6% - 7.5% per annum. As of June 30, 2014 and December 31, 2013, amounts due for these notes payable were $731,198.

The Company recorded $21,600 and $17,537 of interest expense related to these notes payable during the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014 and December 31, 2013, the Company owed $82,236 and $59,270, respectively, of interest to the stockholder.

Accounts payable - related party

The Company owes compensation to its CEO pursuant to his employment agreement.  The amount owed is due on demand and does not bear interest. At June 30, 2014 and December 31, 2013, amounts due to the CEO were $701,602 and $604,844, respectively, and are recorded as accounts payable - related parties in the consolidated balance sheets.

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NOTE 8 - 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.

The following is a description of the changes to the Company’s asset retirement obligations for the six months ended June 30, 2014 and 2013.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Chief Executive Officer Employment Agreement

The Company entered into an amended employment agreement with its CEO on January 11, 2013 that expires on July 1, 2016 and automatically renews on an annual basis unless terminated pursuant to the agreement.  The agreement provides for:

i.

A monthly salary of $25,000 per month.

ii.

A cash bonus of 25% of his annual base salary each year if the Company reaches the following milestones (none of which were attained in 2013):

a.

The Company posts annual gross revenues on a consolidated basis of at least $4,000,000;

b.

The Company's earnings before the deduction of income taxes and amortization expenses (“EBITA”), including cash extraordinary items but before officer's bonuses, on a consolidated basis for any year is at least $1,000,000; or

c.

The completion of annual funding, including equity and debt, of at least $3,000,000.

iii.

The issuance of options (the employment agreement refers to them as warrants) on each anniversary date of the employment agreement, with a five-year exercise period, to purchase 1% of the then issued and outstanding shares of the Company exercisable at a price equal to the trailing six-month average share trading price prior to grant date.

iv.

An expense allowance of $3,060 per month.

v.

12 months of severance pay and all warrants for the following year, in the event the executive is terminated without cause.  

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NOTE 10- STOCKHOLDERS’ EQUITY

Common Stock Issued for Services

In March 2014, the Company issued 45,000 shares of common stock to a trade creditor in exchange and release of $45,000 of indebtedness. The exchange price was $1.00 per common share, which was the fair value of the services provided by the trade creditor.

During the six months ended June 30, 2013, the Company issued 1,400,000 shares of common stock for services to employees, of which 400,000 shares were earned in 2012 and recorded as a $32,000 common stock payable as of December 31, 2012 and the remaining 1,000,000 shares of common stock were granted during the six months ended June 30, 2013.  The Company recorded stock compensation expense of $80,000 during the six months ended June 30, 2013 in connection with the grant of these 1,000,000 shares of common stock based on the fair value of the common stock on the grant dates.

On January 11, 2013, the Board of Directors granted 200,000 shares of the Company’s common stock to each member of the Board as compensation for serving as a member of the Board until the Company’s 2014 Annual Shareholder’s Meeting. A total of 800,000 shares of common stock were issued. As of the grant date, shares of the Company’s common stock were quoted at $0.08 per share.  The Company recorded $64,000 of stock compensation expense during the six months ended June 30, 2013 in connection with the issuance of these shares.

Stock Options

On July 1, 2013, the Company issued its CEO fully vested options to purchase 146,676 shares of common stock of the Company with an exercise price of $0.30 per share. The stock price on the grant date was $0.51 per share. The options were valued on the date of the grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest rate 0.88%, (2) term of 5 years, and (3) expected stock volatility of 287.46%. As a result, the fair value of these options on the grant date was $75,242 which the Company recorded as stock-based compensation expense during the year ended December 31, 2013.   The intrinsic value of the stock options at the issuance date and June 30, 2013 was $30,802 and $0, respectively.  The weighted average remaining contractual terms were 4.25 years for these stock options at June 30, 2014.

Stock Warrants

During June 2014, the Company issued its holders of convertible debt fully vested warrants to purchase 200,000 shares of common stock of the Company with an exercise price of $1.00 per share. The stock price on the grant date was $0.53. The warrants were valued on the date of the grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest of 1.71%, (2) term of 5 years, and (3) expected stock volatility of 287.46%.  As a result, the relative fair value of these warrants on the grant date was $25,707, which the Company recorded as debt discount during the six months ended June 30, 2014.  The intrinsic value of the warrants at the issuance date and June 30, 2014 was $52,909. The weighted average remaining contractual terms were 5.0 years for these warrants at June 30, 2014.

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During April 2014, the Company issued its holders of convertible debt fully vested warrants to purchase 200,000 shares of common stock of the Company with an exercise price of $1.00 per share. The stock price on the grant date was $0.52 per share. The warrants were valued on the date of the grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest rate of 1.69%, (2) term of 5 years, and (3) expected stock volatility of 287.46%.  As a result, the relative fair value of these warrants on the grant date was $50,937, which the Company recorded as debt discount during the six months ended June 30, 2014.  The intrinsic value of the warrants at the issuance date and June 30, 2014 was $103,820. The weighted average remaining contractual terms were 4.8 years for these warrants at June 30, 2014.

During January 2014, the Company issued its holders of convertible debt fully vested warrants to purchase 200,000 shares of common stock of the Company with an exercise price of $1.00 per share. The stock price on the grant date was $0.35 per share. The warrants were valued on the date of the grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest rate of 1.60%, (2) term of 5 years, and (3) expected stock volatility of 287.46%.  As a result, the relative fair value of these warrants on the grant date was $41,125, which the Company recorded as debt discount during the six months ended June 30, 2014.  The intrinsic value of the warrants at the issuance date and June 30, 2014 was $69,853. The weighted average remaining contractual terms were 4.8 years for these warrants at June 30, 2014.

During December 2013, the Company issued its holders of convertible debt fully vested warrants to purchase 300,000 shares of common stock of the Company with an exercise price of $1.00 per share. The stock price on the grant date was $0.25 per share. The warrants were valued on the date of the grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest rate 1.55%, (2) term of 5 years, and (3) expected stock volatility of 287.46%. As a result, the relative fair value of these warrants on the grant date was $49,917, which the Company recorded as debt discount during the year ended December 31, 2013. The intrinsic value of the warrants at the issuance date and June 30, 2013 was $0 and $0, respectively. The weighted average remaining contractual terms were 4.7 years for these warrants at June 30, 2014.

NOTE 11 - SEGMENT INFORMATION

Consolidation Services, Inc. has two reporting segments and corporate overhead:

·

Oil and Gas - the Company has oil and gas assets and liabilities, located in Kentucky and Tennessee.  Prior to 2013, all of the Company’s business activities were derived from this segment.

·

Equipment Rental - the Company will operate a business of renting, selling and maintaining equipment primarily for use in mining, construction, materials handling and commercial and industrial activities under an international franchise agreement with Hertz Equipment Rental Corporation and Hertz Equipment Rental System in Mongolia that is currently in effect.

·

Corporate Overhead - the Company’s investment holding including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional business.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performances based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. The reportable segments are strategic business units that offer different technology and marketing strategies. Most of the businesses were developed internally and management remains the same. To date, the Company’s operations are principally in the United States. At this time, no single foreign country or geographic area is significant to the consolidated financial statements, although a shift in focus to develop the Mongolian segment may be required in the future.

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Consolidated revenues from external customers, operating loss, and identifiable assets were as follows:

NOTE 12 - SUBSEQUENT EVENTS

On July 1, 2014, the Company issued its Chief Executive Officer options to purchase 152,126 shares of common stock of the Company at a price of $0.40 per share in accordance with his Employment Agreement. The stock price for the grant date was $0.40 per share. The options were valued on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions: (1) risk free interest rate 287% (2) term of 5 years and (3) expected stock volatility of    287%. As a result, the fair value of these options on the grant date was $60,774.

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

Statement Regarding Forward-Looking Disclosures

Certain statements contained in this report, including, without limitation, statements containing the words, "likely," "forecast," "project," "believe," "anticipate," "expect," and other words of similar meaning, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.  Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

General

Hydrocarbons Holdings

On February 21, 2013, the Company entered into a Bill of Sale and Assignment, Release and Assumption Agreement with Hydrocarbons Holdings, Inc. (“HH”), a Delaware corporation and wholly-owned subsidiary of the Company whereby substantially all of the Company’s oil and gas assets and liabilities were transferred to HH effective as of February 28, 2013.

Mongolia Equipment Rental Corporation

On March 21, 2013, Consolidation Services, Inc. (the “Company”) through its wholly owned subsidiary, Mongolia Equipment Rental Corporation, a Delaware corporation (the “Franchisee”) entered into an International Franchise Agreement (the “Franchise Agreement”) with Hertz Equipment Rental Corporation and Hertz Equipment Rental System (collectively “Franchisor”).  

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Under the Franchise Agreement the Franchisee will operate a business of renting, selling and maintaining equipment primarily for use in construction, materials handling and commercial and industrial activities (“Equipment Rental Business”) under the unique plan or system of the Franchisor (the “System”) in the country of Mongolia.

The license granted to Franchisee under the Franchise Agreement commenced on July 1, 2013 and continues for a period of ten (10) years, unless renewed or sooner terminated.  The Franchisee shall have the option to renew the license for two (2) successive five (5) year terms, subject to the terms of the then current Hertz Equipment Rental System International Franchise Agreement, and provided such terms shall preserve Franchisee’s right to renew for an additional two successive five year periods and will not require the payment of an initial fee by Franchisee and the Franchisee is not in default on the Franchise Agreement.

The Franchise Agreement provides that so long as the Franchise Agreement remains in place and for one-year after the expiration or termination of the Franchise Agreement: (i) Franchisor will not establish or license another to establish an Equipment Rental Business in the country of Mongolia; and (ii) Franchisor will not establish or license another to establish a truck rental business under the System (“Truck Rental Business”) in the country of Mongolia without first having afforded Franchisee a non-transferrable right of first refusal to establish a Truck Rental Business in the country of Mongolia. In addition, Franchisee shall have a right of first opportunity (prior to Franchisor entering into any substantive discussions or negotiations with any other party) to acquire the franchise for any Equipment Rental Business in the country of Burma (a/k/a Myanmar).

In consideration for the license provided under the Franchise Agreement, Franchisee paid Franchisor: (i) an initial fee of $45,000; (ii) will pay a continuing monthly license fee equal to 6% of Franchisee’s gross revenue, but not less than $135,000 per annum, commencing on July 1, 2014; and (iii) an amount equal to 1% of all sums received by Franchisee related to (a) the sale, trade-in or other disposal of used equipment, and (b) the sale of any new equipment or product lines that have been previously approved by Franchisor. In addition, Franchisee shall be required to spend annually an amount equal to not less than 1% of the Franchisee’s gross revenue for local advertising and promotion of the Equipment Rental Business in Mongolia.

At June 30, 2014, the Company has not earned any revenue on the Franchise Agreement.

Supplemental Oil and Gas Information - Comparisons of the three months ended June 30, 2014 and 2013

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

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Results of Operations For the Three Months ended June 30, 2014 and 2013

We use the successful efforts method of accounting for oil and gas operations.  Presently we are producing oil from our Kentucky properties.  

Our revenues for the three months ended June 30, 2014 were $15,937 as compared to $34,075 for 2013.  Our revenues are from the sale of our oil and gas production.  During the three months ended June 30, 2014, we produced approximately 153 barrels and received an average price per barrel of $104.16 while during the same period in 2013, we produced 353 barrels and received an average price per barrel of $89.29. The decrease was due to workover being performed on several of the Company's wells, causing production to decrease.

Our operating expenses for production activities for the three months ended June 30, 2014 and 2013 were $20,221 (comprised of $17,301 of lease operating expenses and $2,920 of depreciation, depletion, accretion and amortization) and $34,248 (comprised of $32,888 of lease operating expenses and $1,360 of depreciation, depletion, accretion and amortization), respectively. Our primary operation is the drilling and production of our oil and gas properties. The wells in Kentucky are shallow wells (approximately 1,300 feet) and require minimal maintenance. The decrease in lease operating expenses is attributable to decrease hauling and work-over costs incurred during 2014.  

Our general and administrative expenses for the three months ended June 30, 2014 and 2013 were $181,096 and $199,229, respectively.  The increase is primarily attributable to an increase in compensation to management personnel.

Supplemental Oil and Gas Information - Comparisons of the six months ended June 30, 2014 and 2013

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

Results of Operations For the Six Months ended June 30, 2014 and 2013

We use the successful efforts method of accounting for oil and gas operations.  Presently we are producing oil from our Kentucky properties.  

Our revenues for the six months ended June 30, 2014 were $37,104 as compared to $58,470 for 2013.  Our revenues are from the sale of our oil and gas production.  During the six months ended June 30, 2014, we produced approximately 370 barrels and received an average price per barrel of $100.28 while during the same period in 2013 we produced 619 barrels and received an average price per barrel of $85.88. The decrease was due to workover being performed on several of the Company's wells, causing production to decrease.

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Our operating expenses for production activities for the six months ended June 30, 2014 and 2013 were $33,130 (comprised of $28,072 of lease operating expenses and $5,058 of depreciation, depletion, accretion and amortization) and $68,604 (comprised of $63,857 of lease operating expenses and $4,747 of depreciation, depletion, accretion and amortization), respectively. Our primary operation is the drilling and production of our oil and gas properties. The wells in Kentucky are shallow wells (approximately 1,300 feet) and require minimal maintenance. The decrease in lease operating expenses is attributable to decrease hauling and work-over costs incurred during 2014.  

Our general and administrative expenses for the six months ended June 30, 2014 and 2013 were $406,720 and $496,353, respectively.  The decrease is primarily attributable to a decrease in compensation to management personnel.

Liquidity and Capital Resources

At June 30, 2014, the Company had cash of $39,287 versus $119,999 at December 31, 2013.

Our cash used in operating activities for the six months ended June 30, 2014 was $330,712 as compared to $136,002 for the six months ended June 30, 2013.   The increase in cash flows used in operations was primarily attributable due to payments made for accounts payable and accrued liabilities during the six months ended June 30, 2014 compared to the six months ended June 30, 2013, when excluding stock-based compensation.

Our cash used in investing activities for the six months ended June 30, 2014 was $0 as compared to $45,000 for 2013.  The Company spent $45,000 to purchase the Hertz licensing agreement during the six months ended June 30, 2013.

Our cash provided by financing activities for the six months ended June 30, 2014 was $250,000 from convertible notes as compared to the Company received $187,000 from notes payable for 2013.  

At June 30, 2014 and December 31, 2013, the Company owed $400,000 and $150,000, respectively, of convertible notes payable which bear interest at 12% and are due 1 year from the issuance dates.  

The total of notes payable due to a stockholder is $701,602 at June 30, 2014 and December 31, 2013, respectively.  All of the notes payable are due on demand, have no periodic payment terms and bear interest at interest rates of 6% - 7.5% per annum.

Our future development plan for our oil and gas assets is uncertain and is dependent on our ability to effectively drill for oil and gas and obtain contract and leasing opportunities on oil and gas properties and/or acquisitions. There are no assurances of the ability of our Company to drill economically producible wells. The process/practice of drilling for oil and gas is cost intensive. Accordingly, it is critical for us to raise sufficient capital to implement our business plan.  We incurred net losses of $501,324 and $524,024 for the six months ended June 30, 2014 and 2013, respectively.

At June 30, 2014, we have not generated any revenue from the Hertz licensing agreement.

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

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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. The Company had a loss from operations for the six months ended June 30, 2014.   Further, the Company had inadequate working capital to maintain or develop its assets, and is dependent upon funds from lenders, investors and the support of certain stockholders.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  The consolidated financial statements herein do not include any adjustments that might result from the outcome of these uncertainties.  In this regard, Company management is pursuing additional funds through loans and additional sales of its common stock.

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

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

WHERE YOU CAN FIND MORE INFORMATION

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

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.

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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

Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last day of the fiscal period covered by this report, June 30, 2014. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our principal executive officer and our principal financial officer, are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).  Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published in Internal Control-Integrated Framework, is known as the COSO Report. Our principal executive officer and our principal financial officer have chosen the COSO framework on which to base its assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of June 30, 2014.

Changes in internal controls over financial reporting

There were no changes in our internal control over financial reporting that occurred during the six months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A - RISK FACTORS

There were no material changes during our six months ended June 30, 2014 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, 2013.

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

During the six month period ended June 30, 2014, the Company granted 45,000 restricted shares of Common Stock of the Company for the payment of accounts payable.  The fair value of the shares on the grant date was $45,000. 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(a)(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. There was no placement agent or underwriter involved and no sales commissions were paid.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities during the six months ended June 30, 2014.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.  OTHER INFORMATION

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

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ITEM 6.  EXHIBITS

* Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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