UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q

(Mark One)



x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30, 2012.

or



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from _______________________ to ___________________________



Commission File Number: 000-327350



X:\TQData\VINEYARD\Live Jobs\2012\08 Aug\16 Aug\Shift III\Colombia Energy 10-Q\Draft\03-ProductionCOLOMBIA
ENERGY RESOURCES, INC.

(Exact name of registrant as specified
in its charter)



|Delaware                                                       |  | 87-0567033                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|One Embarcadero Center, Suite 500, San Francisco, CA           |  | 94111                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(415) 460-1165

(Registrant’s telephone number, including
area code)



Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. x Yes  ̈ 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).

Yes  ̈ No x



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



|Large accelerated filer  ̈ | Accelerated filer  ̈        
|------------------------- | ---------------------------
|                          |                            
|Non-accelerated filer  ̈   | Smaller 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 oNo x



Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date: 24,394,636 shares of common stock, par value $0.001 per share, were
outstanding as of August 9, 2012.











COLOMBIA ENERGY RESOURCES, INC.

FORM 10-Q

JUNE 30, 2012



TABLE OF CONTENTS



|PART I. FINANCIAL INFORMATION                                                                      | 3 
|-------------------------------------------------------------------------------------------------- | --
|                                                                                                   |   
|Item 1.  Financial Statements                                                                      | 3 
|                                                                                                   |   
|Item 2.  Management’s Discussion and Analysis of Financial Condition and Results
    of Operations | 22
|                                                                                                   |   
|Item 3.  Qualitative and Quantitative Disclosures About Market Risk                                | 27
|                                                                                                   |   
|Item 4.  Controls and Procedures                                                                   | 27
|                                                                                                   |   
|PART II. OTHER INFORMATION                                                                         | 27
|                                                                                                   |   
|Item 1A.  Risk Factors                                                                             | 27
|                                                                                                   |   
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.                              | 28
|                                                                                                   |   
|Item 4.  Mine Safety Disclosures                                                                   | 29
|                                                                                                   |   
|Item 6.  Exhibits                                                                                  | 29
|                                                                                                   |   
|SIGNATURES                                                                                         | 29



2







PART I. FINANCIAL INFORMATION

Item
1. Financial Statements

COLOMBIA
ENERGY RESOURCES, INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                                |  | June 30,    |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | - | ------------ | -
|                                                                                                                                                                                                                                |  | 2012        |             |   | 2011         |  
|                                                                                                                                                                                                                                |  | (Unaudited) |             |   | (1)          |  
|ASSETS                                                                                                                                                                                                                          |  |             |             |   |              |  
|Current assets:                                                                                                                                                                                                                 |  |             |             |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                       |  | $           | 2,460,879   |   |              | $
|Prepaid expenses and other current assets                                                                                                                                                                                       |  |             | 1,553,118   |   |              |  
|Inventory                                                                                                                                                                                                                       |  |             | 362,714     |   |              |  
|Total current assets                                                                                                                                                                                                            |  |             | 4,376,711   |   |              |  
|Property and equipment, net:                                                                                                                                                                                                    |  |             |             |   |              |  
|Land                                                                                                                                                                                                                            |  |             | 1,253,757   |   |              |  
|Mineral rights and mining concessions                                                                                                                                                                                           |  |             | 8,430,299   |   |              |  
|Equipment                                                                                                                                                                                                                       |  |             | 2,312,911   |   |              |  
|Construction in progress                                                                                                                                                                                                        |  |             | 875,786     |   |              |  
|Total                                                                                                                                                                                                                           |  |             | 12,872,753  |   |              |  
|Less- accumulated depreciation                                                                                                                                                                                                  |  |             | (188,318    | ) |              |  
|Property and equipment, net                                                                                                                                                                                                     |  |             | 12,684,435  |   |              |  
|Goodwill                                                                                                                                                                                                                        |  |             | 230,264     |   |              |  
|Other assets                                                                                                                                                                                                                    |  |             | -           |   |              |  
|TOTAL ASSETS                                                                                                                                                                                                                    |  | $           | 17,291,410  |   |              | $
|                                                                                                                                                                                                                                |  |             |             |   |              |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                            |  |             |             |   |              |  
|Current liabilities:                                                                                                                                                                                                            |  |             |             |   |              |  
|Accounts payable and accrued liabilities                                                                                                                                                                                        |  | $           | 1,943,456   |   |              | $
|Convertible notes payable (net of discount)                                                                                                                                                                                     |  |             | 430,000     |   |              |  
|Interest payable                                                                                                                                                                                                                |  |             | 80,926      |   |              |  
|Derivative liability - embedded conversion feature                                                                                                                                                                              |  |             | -           |   |              |  
|Total current liabilities                                                                                                                                                                                                       |  |             | 2,454,382   |   |              |  
|Long-term liabilities:                                                                                                                                                                                                          |  |             |             |   |              |  
|Long-term portion of mining concession payable                                                                                                                                                                                  |  |             | 1,400,000   |   |              |  
|Contingent earn out liability                                                                                                                                                                                                   |  |             | 2,678,580   |   |              |  
|Asset retirement obligation                                                                                                                                                                                                     |  |             | 42,492      |   |              |  
|Total long-term liabilities                                                                                                                                                                                                     |  |             | 4,121,072   |   |              |  
|Total liabilities                                                                                                                                                                                                               |  |             | 6,575,454   |   |              |  
|Commitment and contingencies (note 9)                                                                                                                                                                                           |  |             |             |   |              |  
|Colombia Energy Resources, Inc. Stockholders' equity:                                                                                                                                                                           |  |             |             |   |              |  
|Series A convertible preferred stock, $.001 par value, Authorized 5,000,000
    shares; issued and outstanding 2,900,500 shares as of June 30, 2012 and December 31, 2011, aggregate liquidation preference
    of $43,507,500. |  |             | 2,901       |   |              |  
|                                                                                                                                                                                                                                |  |             |             |   |              |  
|Common stock, $.001 par value, 100,000,000 shares authorized, 24,026,318 shares and 23,537,006
    shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively.                                       |  |             | 24,026      |   |              |  
|Additional paid-in capital                                                                                                                                                                                                      |  |             | 42,419,917  |   |              |  
|Accumulated deficit                                                                                                                                                                                                             |  |             | (32,926,828 | ) |              |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                                   |  |             | 98,415      |   |              |  
|Total Colombia Energy Resources, Inc. stockholders'
    equity                                                                                                                                                                  |  |             | 9,618,431   |   |              |  
|Non-controlling interest                                                                                                                                                                                                        |  |             | 1,097,525   |   |              |  
|Total equity                                                                                                                                                                                                                    |  |             | 10,715,956  |   |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS'
    EQUITY                                                                                                                                                                                  |  | $           | 17,291,410  |   |              | $



See accompanying notes to unaudited condensed consolidated
financial statements.

(1) Derived from the Company's audited December 31, 2011 consolidated
balance sheet.



3







COLOMBIA ENERGY RESOURCES,
INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)



|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  | From inception on |            
|------------------------------------------------------------------------------------------------------ |  | ------------------------ | ---------- | - | -------------------------- | - | ----------- | ---------------- |  | - | ---------- | - |  | ----------------- | -----------
|                                                                                                       |  | For the Six Months Ended |            |   | For the Three Months Ended |   |             | November 6, 1996 | 
|                                                                                                       |  | June 30,                 |            |   | June 30,                   |   |             | through June 30, | 
|                                                                                                       |  | 2012                     |            |   | 2011                       |   |             | 2012             |  |   | 2011       |   |  | 2012              |            
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Revenue                                                                                                |  | $                        | 823        |   |                            | $ | -           |                  |  | $ | 823        |   |  | $                 | -          
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Cost of goods sold                                                                                     |  |                          | 1,086      |   |                            |   | -           |                  |  |   | 1,086      |   |  |                   | -          
|Gross profit                                                                                           |  |                          | (263       | ) |                            |   | -           |                  |  |   | (263       | ) |  |                   | -          
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Expenses:                                                                                              |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|General and administrative                                                                             |  |                          | 6,740,167  |   |                            |   | 4,097,818   |                  |  |   | 3,448,893  |   |  |                   | 2,221,913  
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Loss before other income (expenses)                                                                    |  |                          | (6,740,430 | ) |                            |   | (4,097,818  | )                |  |   | (3,449,156 | ) |  |                   | (2,221,913 
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Other income (expenses):                                                                               |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Unrealized gain (loss) on change in fair value of derivative liability-embedded
    conversion feature |  |                          | (4,000     | ) |                            |   | 6,360       |                  |  |   | -          |   |  |                   | (85,640    
|Inducement expense                                                                                     |  |                          | -          |   |                            |   | (678,550    | )                |  |   | -          |   |  |                   | (678,550   
|Realized gain on foreign currency, net                                                                 |  |                          | 180,907    |   |                            |   | -           |                  |  |   | 180,907    |   |  |                   | -          
|Interest expense, net                                                                                  |  |                          | (165,204   | ) |                            |   | (2,089,278  | )                |  |   | (314,100   | ) |  |                   | (888,006   
|Total other income (expenses), net                                                                     |  |                          | 11,703     |   |                            |   | (2,761,468  | )                |  |   | (133,193   | ) |  |                   | (1,652,196 
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Loss before income tax and non-controlling interest                                                    |  |                          | (6,728,727 | ) |                            |   | (6,859,286  | )                |  |   | (3,582,349 | ) |  |                   | (3,874,109 
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Provision for income tax                                                                               |  |                          | -          |   |                            |   | -           |                  |  |   | -          |   |  |                   | -          
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Net loss before non-controlling interest                                                               |  |                          | (6,728,727 | ) |                            |   | (6,859,286  | )                |  |   | (3,582,349 | ) |  |                   | (3,874,109 
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Loss attributable to non-controling interest                                                           |  |                          | 264,723    |   |                            |   | -           |                  |  |   | 158,605    |   |  |                   | -          
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Net loss                                                                                               |  |                          | (6,464,004 | ) |                            |   | (6,859,286  | )                |  |   | (3,423,744 | ) |  |                   | (3,874,109 
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Preferred stock deemed dividend                                                                        |  |                          |            |   |                            |   | (9,134,754  | )                |  |   | -          |   |  |                   | (9,134,754 
|Preferred stock dividend paid in cash and stock                                                        |  |                          | (837,529   | ) |                            |   | (100,764    | )                |  |   | (337,186   | ) |  |                   | (100,764   
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Net loss attributable to common shareholders                                                           |  |                          | (7,301,533 | ) |                            |   | (16,094,804 | )                |  |   | (3,760,930 | ) |  |                   | (13,109,627
|Other comprehensive loss:                                                                              |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Foreign currency translation adjustment                                                                |  |                          | 304,337    |   |                            |   | 123,485     |                  |  |   | 152,540    |   |  |                   | 85,724     
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Total comprehensive loss                                                                               |  | $                        | (6,997,196 | ) |                            | $ | (15,971,319 | )                |  | $ | (3,608,390 | ) |  | $                 | (13,023,903
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Basic and diluted loss per common share                                                                |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Net Loss attributable to common shareholders                                                           |  | $                        | (0.29      | ) |                            | $ | (0.68       | )                |  | $ | (0.15      | ) |  | $                 | (0.55      
|                                                                                                       |  |                          |            |   |                            |   |             |                  |  |   |            |   |  |                   |            
|Weighted average common shares                                                                         |  |                          | 25,368,101 |   |                            |   | 23,708,676  |                  |  |   | 25,494,746 |   |  |                   | 23,888,793 



See accompanying notes to unaudited condensed consolidated
financial statements.



4







COLOMBIA ENERGY RESOURCES,
INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS

( UNAUDITED )



|                                                                                                                                          |  | For the six months ended June 30, |            |   | From inception on  November 6, 1996 |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | ----------------------------------- | -
|                                                                                                                                          |  | 2012                              |            |   | 2011                                |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Operating Activities                                                                                                                      |  |                                   |            |   |                                     |  
|Net loss                                                                                                                                  |  | $                                 | (6,464,004 | ) |                                     | $
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Adjustments to reconcile net loss to net cash
    used by operating activities:                                                           |  |                                   |            |   |                                     |  
|Stock compensation cost                                                                                                                   |  |                                   | 490,268    |   |                                     |  
|Amortization of discount on notes payable                                                                                                 |  |                                   | 15,283     |   |                                     |  
|Amortization of debt issuance cost                                                                                                        |  |                                   | 75,364     |   |                                     |  
|Inducement expenses for convertion of convertible notes payable                                                                           |  |                                   | -          |   |                                     |  
|Unrealized loss(gain) on change in fair value of derivative liability-embedded
    conversion feature                                     |  |                                   | 4,000      |   |                                     |  
|Depreciation expense                                                                                                                      |  |                                   | 120,836    |   |                                     |  
|Non-controlling interest                                                                                                                  |  |                                   | (382,018   | ) |                                     |  
|Other                                                                                                                                     |  |                                   | 600        |   |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Changes in assets and liabilities:                                                                                                        |  |                                   |            |   |                                     |  
|Prepaid expenses and other current assets                                                                                                 |  |                                   | (244,267   | ) |                                     |  
|Inventory                                                                                                                                 |  |                                   | (362,715   | ) |                                     |  
|Accounts payable and accrued expenses                                                                                                     |  |                                   | (1,130,961 | ) |                                     |  
|Other assets                                                                                                                              |  |                                   | -          |   |                                     |  
|Accrued interest payable                                                                                                                  |  |                                   | (11,589    | ) |                                     |  
|Long-term portion of mining concession payable                                                                                            |  |                                   | 309,165    |   |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Net cash used in operating activities                                                                                                     |  |                                   | (7,580,037 | ) |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Investing Activities                                                                                                                      |  |                                   |            |   |                                     |  
|Acquisition of mineral rights, mining concessions and property and equipment                                                              |  |                                   | (563,654   | ) |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Net cash used in investing activities                                                                                                     |  |                                   | (563,654   | ) |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Financing Activities                                                                                                                      |  |                                   |            |   |                                     |  
|Proceeds from issuance of Series A preferred stock                                                                                        |  |                                   | -          |   |                                     |  
|Preferred stock issuance cost                                                                                                             |  |                                   | -          |   |                                     |  
|Proceeds from issuance of convertible notes payable                                                                                       |  |                                   | -          |   |                                     |  
|Repayment of convertible notes payable                                                                                                    |  |                                   | (265,000   | ) |                                     |  
|Proceeds from issuance of common stock and subscribed capital stock                                                                       |  |                                   | -          |   |                                     |  
|Proceeds from exercise of stock options and stock warrants                                                                                |  |                                   | -          |   |                                     |  
|Cash dividends paid                                                                                                                       |  |                                   | (435,076   | ) |                                     |  
|Advance to (payment from) officer and shareholder                                                                                         |  |                                   | -          |   |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Net cash provided by (used in) financing
    activities                                                                                   |  |                                   | (700,076   | ) |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Net increase (decrease) in cash and cash equivalents before exchange rate
    impact                                                      |  |                                   | (8,843,767 | ) |                                     |  
|Effect of exchange rates on cash                                                                                                          |  |                                   | 48,410     |   |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Cash & cash equivalents at beginning of period                                                                                            |  |                                   | 11,256,236 |   |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Cash & cash equivalents at end of period                                                                                                  |  | $                                 | 2,460,879  |   |                                     | $
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Supplemental disclosure of cashflow information:                                                                                          |  |                                   |            |   |                                     |  
|Interest paid                                                                                                                             |  |                                   | 393,408    |   |                                     |  
|                                                                                                                                          |  |                                   |            |   |                                     |  
|Supplemental disclosure of noncash financial information:                                                                                 |  |                                   |            |   |                                     |  
|Deemed dividend on Series A preferred stock                                                                                               |  | $                                 | -          |   |                                     | $
|Conversion of the carrying value of notes payable and embedded derivative
    (net of discount) into     Series A     preferred     stock |  | $                                 | -          |   |                                     | $
|Stock dividends issued                                                                                                                    |  | $                                 | 402,453    |   |                                     | $
|Contingent earn our liability and non-controling interest issued in Ruku
    acquisition                                                  |  | $                                 | -          |   |                                     | $
|Inducement expense                                                                                                                        |  | $                                 | -          |   |                                     | $
|Initial fair value of of derivative liability-embedded conversion feature                                                                 |  | $                                 | -          |   |                                     | $
|Issuance of stock warrants in connection with debt                                                                                        |  | $                                 | -          |   |                                     | $
|Issuance of common stock in connection with conversion of note payable                                                                    |  | $                                 | -          |   |                                     | $
|Extinguishment of payable to a related party                                                                                              |  | $                                 | -          |   |                                     | $
|Issuance of common stock for services                                                                                                     |  | $                                 | -          |   |                                     | $



See accompanying notes to unaudited condensed consolidated
financial statements.



5







COLOMBIA ENERGY RESOURCES, INC. AND
SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS



| | 1. | ORGANIZATION
                                                                                     AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------



Description of Business and Principles
of Consolidation



Colombia Energy Resources, Inc. (the “Company”)
is engaged in the business of acquiring, developing and operating metallurgical coal assets in the Republic of Colombia, South
America. The Company owns coal mining concession contracts, which grant us the right to explore and exploit coal deposits, in
the departments of Boyacá and Santander, areas well-known for their metallurgical coal formations, and is currently operating
and developing metallurgical coal mines and conducting exploration of our coal deposits.



Although the Company commenced limited
production in December 2011, it is still considered an exploration stage company under the criteria set forth by the Securities
and Exchange Commission (“SEC”) since it has not yet demonstrated the existence of proven or probable reserves, as
defined by the SEC, at its Rukú Mining Complex in Socota, Colombia or at any of its other properties. As a result, and
in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for exploration
stage companies, all expenditures for exploration and evaluation of the Company’s properties are expensed as incurred and
unless mineralized material is classified as proven or probable reserves, substantially all expenditures for mine and exploration
activities have been and will continue to be expensed as incurred. Certain expenditures, such as for mining equipment or other
general-purpose equipment, may be capitalized, subject to evaluation of the possible impairment of the asset. The Company expects
to remain as an exploration stage company for the foreseeable future. The Company will not exit the exploration stage unless and
until it demonstrates the existence of proven or probable reserves that meet the SEC guidelines.



The definition of proven and probable
reserves is set forth in SEC Industry Guide 7. Proven reserves are reserves for which (a) quantity is computed from dimensions
revealed in outcrops, trenches, workings or drill holes; (b) grade and/or quality are computed from the results of detailed sampling;
and (c) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined
that size, shape, depth and mineral content of reserves are well-established. Probable reserves are reserves for which quantity
and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection,
sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than
that for proven reserves, is high enough to assume continuity between points of observation. In addition, reserves cannot be considered
proven and probable until they are supported by a feasibility study, indicating that the reserves have had the requisite geologic,
technical and economic work performed and are economically and legally extractable at the time of the reserve determination.



The Company’s current operations
are focused on production, exploration and development activities. The Company has retained leading engineering and geological
services firms in the U.S. and Colombia to conduct exploration work in selected concessions owned by the Company. The Company’s
team of executives, advisors and partners is comprised of experienced entrepreneurs and business professionals in U.S. and Colombia
that have a broad breadth of experience in coal mining and substantial industry relationships.



Through its wholly-owned subsidiaries,
the Company owns 100% of Colombia Clean Power S.A.S. (formerly known as Energia Andina Santander Resources S.A.S.), a Colombian
company established to acquire and develop coal concessions. Colombia Clean Power S.A.S.’ corporate offices are located
in Bogota, Colombia.



The accompanying unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.



6







Company History and Basis of Reporting



The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the Company's audited consolidated financial statements and accompanying
notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012. The
accompanying (a) consolidated balance sheet as of December 31, 2011, which has been derived from the audited consolidated financial
statements, and (b) unaudited condensed consolidated financial statements have been prepared pursuant to SEC Rule 8-03 of Regulation
S-X. As a result, while the Company believes the disclosures made are adequate to make the information not misleading, certain
information and note disclosures normally included in audited financial statements prepared in accordance with U.S. GAAP have
been condensed or omitted pursuant to those rules and regulations.



The unaudited results of operations for
the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire year.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements recognize all adjustments
of a normal recurring nature considered necessary to fairly state the Company’s consolidated financial position as of June
30, 2012, and its consolidated results of operations and comprehensive income (loss) for the three and six months ended June 30,
2012, and cash flows for the six months ended June 30, 2012.



The Company was incorporated in the State
of Nevada on November 6, 1996 under the name “Freedom Resources Enterprises, Inc.” to engage in the business of self-help
publications and workshops. Between November 1996 and September 2005 the Company generated minimal revenues, and in October 2005,
the Company ceased all business operations. From October 2005 to early May 2010, the Company did not engage in any business activities.
Prior to this period, the Company’s management had been evaluating potential business opportunities that might be available
to the Company to preserve its shareholders’ investment in its common shares.



On May 6, 2010, the Company entered into
a subscription agreement (the “Subscription Agreement”) with LIFE Power & Fuels, LLC (“LIFE”), pursuant
to which it issued to LIFE 19,080,000 (post-split) shares of its common stock, which shares represented approximately 94.1% of
its issued and outstanding shares of common stock at such time, elected one new director to its board of directors and changed
its management team. Concurrently with the closing of the transactions contemplated by the Subscription Agreement, the Company
ceased to be a shell company, as defined in Rule 12b-2 of the Exchange Act, and adopted a new plan of operations. Subsequently,
LIFE sold approximately 4,800,000 shares of the Company's common stock to certain related parties. Also, in March 2011, LIFE distributed
2,159,996 shares of the Company’s common stock to LIFE’s limited partner investors. As of June 30, 2012, LIFE owned
approximately 26.1% (adjusted for dilution of shares) of the outstanding shares of the Company.



On July 28, 2010, the Company affected
a reverse stock split of two shares for every five shares of common stock outstanding. Accordingly, outstanding shares and share
price of common stock and stock options were adjusted to account for the effects of the reverse stock split.



Effective July 28, 2010, the Company changed
its name from Freedom Resources Enterprises, Inc. to “Colombia Clean Power & Fuels, Inc.”



In June 2011 we completed a non-public
offering of units in which each unit consisted of 10,000 shares of Series A Preferred Stock convertible into an aggregate
of 50,000 shares of common stock at any time and a five-year stock purchase warrant entitling the holder thereof to
purchase 3,500 shares of Common Stock for $0.01 per share. Certain holders of 10% convertible promissory notes in the aggregate
amount of $7,305,000 converted their notes into 730,500 shares of Series A Preferred Stock and were also granted warrants to purchase
255,675 shares of our common stock.   In addition, the Company issued an aggregate of 2,200,000 shares of Series A Preferred
Stock and warrants to purchase 1,022,175 shares of Common Stock in consideration of aggregate cash proceeds of $22,000,000. Aggregate
cash fees of $1,139,855 were paid to the placement agents.  In addition, the placement agents were issued five-year
warrants, substantially similar to the warrants sold in the offering, to purchase an aggregate of 480,000 shares of common stock
for an exercise price of $2.00 per share. The securities sold in this offering have not been registered under the Securities
Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.



7







On September 6, 2011, shareholders owning
a majority of the voting control of the Company authorized, by written consent, an amendment to the articles of incorporation
to change the name of the Company from “Colombia Clean Power & Fuels, Inc.” to “Colombia Energy Resources,
Inc.” and authorized the change of domicile of the Company from the State of Nevada to the State of Delaware through the
merger of the Company with and into a Delaware corporation formed solely for the purpose of changing domicile. The effective date
of the change of domicile and name change was November 4, 2011.



On November 7, 2011, the quotation of
the Company’s common stock on the OTC QX was approved.



Going Concern



The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity with U.S. GAAP which contemplates continuation of the Company as a going
concern. The Company has incurred recurring losses since the date of inception that resulted in an accumulated deficit attributable
to common stockholders of $32,926,828 as of June 30, 2012. At that date, the Company had $2,460,879 of available cash, which is
not adequate to meet its capital expenditures and operating requirements over the next 12 months (please refer to Liquidity and
Capital Resources on page 24 for additional information). Accordingly, the Company is dependent upon obtaining funds from investors.
These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management plans to raise
additional funds through the issuance of notes or shares of stock in the second half of 2012 in order to meet its capital expenditures
and operating requirements. However, there is no assurance that the Company will be successful in raising the additional funds
it needs. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the
outcome of these uncertainties.



Use of Estimates



The preparation of the consolidated financial
statements in conformity with U.S. GAAP 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.



Cash and Cash Equivalents



The Company considers all highly-liquid
investments with maturities of three months or less at the date of purchase to be cash equivalents. As of June 30, 2012 and December
31, 2011, there were no cash equivalents.



Other Current Assets and Other Assets



Other current assets and other assets
include direct expenses incurred, including the fair value of stock warrants issued to brokers, as a result of the Company’s
Note financing (see Note 4). Placement agent fees and other direct costs incurred in this transaction have been amortized over
the life of the Notes. As of June 30, 2012, these costs have been fully amortized.



Inventory



As of June 30, 2012, inventory principally
consists of raw coal extracted from the Ruku mine and is carried at the lower of cost or market. Coal inventory costs include
labor, supplies, equipment, operating overhead and other related costs.



Property and Equipment



Property and equipment, which include
ten mining concessions in the states of Santander and Boyaca, Colombia and construction in progress, are stated at cost. Mining
concessions will be amortized using the units-of-production method based upon recoverable proven and probable reserves of the
mine and when the Company commences operation at a specific concession. Equipment is depreciated using the straight-line method
over the estimated useful life of the asset of 5 years. Repairs and maintenance are charged to expense as incurred, and costs
of significant renewals and improvements are capitalized.



8







Impairment of Long-Lived Assets



Long-lived assets, such as property and
equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
or asset group may not be recoverable. Events that trigger a test for recoverability include material adverse changes in projected
revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant
negative industry or economic trends. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount
of the asset exceeds the fair value of the asset. The Company did not recognize any impairment charges during the periods presented.



Mineral Exploration and Development
Costs



The Company accounts for mineral exploration
costs in accordance with Accounting Standards Codification (ASC) No. 930, Extractive Activities- Mining. All exploration
expenditures are expensed as incurred. Expenditures to acquire new mines (e.g. purchase of mining concessions), to define further
mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and will be amortized on
a units of production basis over proven and probable reserves.



Asset Retirement Obligations



The Company follows ASC 410-20, Asset
Retirement Obligations, which applies to obligations associated with the retirement of tangible long-lived assets that result
from the acquisition, construction and development of assets. ASC 410-20 requires that we record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of
the related long-lived asset.



Derivative Instruments



The Company issued convertible notes payable
that were considered hybrid financial instruments that blend the characteristics of both equity and debt securities. They embodied
settlement alternatives available to the holder providing for either redemption of the principal and interest for cash at maturity
(“Forward Component”) or conversion into the Company’s common stock (“Embedded Conversion Feature”
or “ECF”).  The convertible notes payable also embodied contingent equity-linked share price protections
on the ECF in the form of down-round, anti-dilution adjustments to the conversion price during the term to maturity. The Company
determined that the convertible notes payable contain an embedded derivative feature that is bifurcated and accounted for as a
derivative instrument in accordance with ASC No. 815-40, Derivatives and Hedging-Contracts in Entity’s Own Equity.
The embedded conversion feature has been carried at fair value and marked-to-market at the end of each reporting period. The Company
uses the binomial lattice model to estimate the fair value of the embedded conversion feature. See Note 4.



Foreign Currency Translation



The Company and its wholly-owned Dutch
and Spanish subsidiaries, Energia Andina Santander Resources Coop UA and Energia Andina Resources España, S.L., maintain
accounting records using U.S. dollars. Colombia Clean Power S.A.S., the Company’s principal Colombian subsidiary, maintains
accounting records in Colombian Pesos.



The financial statements of Colombia Clean
Power S.A.S. are translated into U.S. dollars using the closing rate method. The balance sheet items are translated into U.S.
dollars using the exchange rates at the respective balance sheet dates. The capital account is translated at the historical exchange
rate prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for
the year. All exchange differences are presented as currency translation adjustment within the “consolidated statements
of stockholders equity”. The foreign currency translation gain or loss resulting from the translation of the financial statements
expressed in Colombian Pesos to U.S. dollars is reported as a currency translation adjustment and as a component of “other
comprehensive income (loss)” in the consolidated financial statements.



9







Earnings (Loss) Per Share



Earnings (loss) per share are presented
in accordance with the provisions of the ASC No. 260, Earnings Per Share. ASC No. 260 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.



Basic earnings (loss) per share excludes
dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average common shares
outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted into common stock using the treasury method.
The basic and diluted earnings (loss) per share were the same for the three and six-month periods ended June 30, 2012 and 2011,
because the Company was in a net loss position.



The Company’s issued and outstanding
common shares as of June 30, 2012 do not include the underlying shares exercisable with respect to the 1,651,100 outstanding warrants
exercisable at $0.01 per share. However, the Company has given effect to the issuance of these warrants in computing basic loss
per share in accordance with ASC No. 260.



As of June 30, 2012, the Company had outstanding
stock warrants, restricted stock units, and stock options exercisable to purchase, and convertible preferred stock that were convertible
into an aggregate of 21,723,139 shares of common stock that were considered anti-dilutive because of the net loss.



Segments



The Company operates in one business segment.
The Company and its subsidiaries’ assets are located primarily in the United States of America and in Colombia.



As of June 30, 2012, long-term assets
of approximately $12,000,000 and $900,000 are in Colombia and in the United States, respectively. As of December 31, 2011, long-term
assets of approximately $10,600,000 and $800,000 were in Colombia and in the United States, respectively.



For the six-month period ended June 30,
2012, the Company generated $823 in revenue from coal sales in Colombia.



Reclassification



Certain balances in the prior period’s
financial statements were reclassified to conform to the current period’s presentation.



Concentration
of Credit Risk



Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash and cash equivalents. Cash and cash equivalents are deposited
with high credit quality financial institutions to minimize credit risk; however, the Company may periodically exceed federal
deposit insurance limits.



Income
Taxes



Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
periods in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change
in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.



10







The Company recognizes liabilities for
uncertain positions based upon the provisions of ASC No. 740, Income Taxes. The Company recognizes the effect of income
tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in
the period in which the change in judgment occurs. The Company accounts for interest and penalties generated by income tax contingencies
as interest expense in the consolidated statements of operations and comprehensive loss.



The Company’s subsidiaries are subject
to foreign taxation.



Share-Based
Compensation



The Company accounts for share-based compensation
in accordance with ASC No. 718, Compensation-Stock Compensation, which establishes accounting for stock-based awards exchanged
for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award,
and is recognized as expense on a straight-line basis over the employee requisite service period, which is generally four years.
The Company’s stock compensation is generally accounted for as an equity instrument.



ASC No. 718 requires forfeitures to be
estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates.
Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will
also impact the amount of compensation expense to be recognized in future periods.



Fair
Value of Financial Instruments



For financial instruments consisting of
cash and cash equivalents, accounts payable and accrued liabilities, the carrying amounts are reasonable estimates of fair value
due to their relative short maturities. Based on borrowing rates available to the Company, the convertible notes payable approximate
their fair value. The fair value of derivative liability was determined using Level 3 inputs described below.



The Company adopted amendments to the
accounting standard addressing the measurement of the fair value of financial assets and financial liabilities. Under this standard,
fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit
price”) in an orderly transaction between market participants at the measurement date.



In determining fair values of all reported
assets and liabilities that represent financial instruments, the Company uses the carrying market values of such amounts. The
standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect
assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources.
Unobservable inputs reflect a reporting entity’s pricing an asset or liability developed based on the best information available
in the circumstances. The fair value hierarchy consists of the following three levels:



Level 1–instrument
valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.



Level 2–instrument
valuations are obtained from readily-available pricing sources for comparable instruments.



Level 3–instrument
valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.



At June 30, 2012, the Company’s
only previous financial liability, embedded conversion feature, was carried at fair value of $0 using Level 3 inputs, because
the notes matured in the period ended June 30, 2012. The following table shows the changes in Level 3 liability measured at fair
value on a recurring basis for the six-month period ended June 30, 2012:



11







|                                                                       |  | Derivative  |          |   |         |  
|---------------------------------------------------------------------- |  | ----------- | -------- | - | ------- | -
|                                                                       |  | Liability - |          |   |         |  
|                                                                       |  | Embedded    |          |   |         |  
|                                                                       |  | Conversion  |          |   | Total   |  
|                                                                       |  | Feature     |          |   | Level 3 |  
|Balance, December 31, 2011                                             |  | $           | 264,000  |   |         | $
|Unrealized loss on change in fair value                                |  | $           | 4,000    |   |         | $
|Reclass to additional paid in capital on maturity of convertible notes |  | $           | (268,000 | ) |         | $
|Balance, June 30, 2012                                                 |  | $           | -        |   |         | $



Recent Accounting Pronouncements



There were no accounting pronouncements
or changes in accounting pronouncements during the six-month period ended June 30, 2012, that are of significance to the Company.



| | 2. | ACQUISITION
                                                                                     OF MINING ASSETS
| | -- | -----------------------------------------------------------------------------------------------------------------



North Block Mining Project



On July 19, 2010 the Company entered into
an agreement to purchase two coal concessions (Ingeominas Titles GG7-111 and GG7-11522X). The concessions have been fully paid
for and are listed under the Company’s name on the official website of the Colombian mining authority, Ingeominas. Under
the terms of the contract, the Company will pay to the sellers a royalty payment of $2.00 per ton of coal extracted under the
term of the concession. This royalty payment applies to all coal mined by our Company from these concessions.



On October 20, 2010 the Company entered
into an agreement to purchase an additional coal concession (Ingeominas title FLG-092). The Company has paid to the seller $515,000
and owes an additional $1,000,000 payable in five quarterly payments of $200,000. A portion of these amounts will offset against
the per ton royalty described below. In addition, the Company has paid to Ingeominas $114,502, which represents past due governmental
fees owed by the seller. Also, as per the terms of the contract, the Company will pay to the seller a royalty payment of $2.00
per ton of coal extracted under the term of the concession. This royalty payment applies to all coal mined by our Company from
this concession; 50% of this royalty will be applied to amortize the $1,200,000 in concession payments.



Otanche Mining Project



On February 11, 2011, the Company made
a deposit of $100,000 to purchase three additional coal concessions in the state of Boyaca, Colombia. The aggregate purchase price
of these concessions was $2,500,000, of which $888,862 has been paid as of June 30, 2012. An amount of $222,277 was due upon the
Colombian Institute of Mining and Geology’s approval of a third mining license; this was paid on January 15, 2012. An amount
of $111,138 is due upon the earlier of the recording and publication of the assignment in the National Mining Register or 90 days
following the prior payment and the balance of $1,500,000 is payable in three payments of approximately $500,000 every 6 months
thereafter. There will also be an ongoing royalty payment to the sellers of $2.75 per ton of coal mined.



12







Rukú Mining Complex



On August 22, 2011, the Company entered
into an agreement to purchase a 70% working interest in two coal mining concessions located near Socota, Colombia from Howerd
Milton Cubides Botia (the “Assignor”). The agreement also included the right to a concession being permitted and another
one in the process of being purchased. These concessions cover approximately 222 acres and included a coal mine that has been
operating for eighteen years producing metallurgical coal for the local market. In October 2011, the agreement was amended with
both parties agreeing that the Assignor would continue to provide capital and operating expenditures on the mining property through
October 18, 2011. Thereafter, the Company gained operating control of the mining properties. Operating funds will be provided
by each party in proportion to its interest in the mining concessions, provided that the Company has agreed to fund the project
in full and receive 50% of the proceeds allocable to the Assignor until the additional funds provided by us are repaid.



The acquisition was considered to be a
purchase of a business and was accounted for as a purchase business combination effective when the Company obtained control of
the mining assets on October 18, 2011. Accordingly, the results of operations of the acquired business are included in the
Company’s consolidated financial statements beginning on October 18, 2011, the date when the Company obtained control of
the mining assets.



The cost of acquiring the 70% interest
is based on a series of contingent payments over the next three years related to the number of proven tons of reserves as determined
by an independent engineer’s review of our exploration program multiplied by certain dollar amounts per ton. The Company
initially paid $500,000 to the Assignor upon signing of the agreement in August 2011. Upon obtaining control on October 18, 2011,
the Company determined the fair value at October 18, 2011 of the mining rights and other assets acquired, net of liabilities to
be $4,540,828. This was allocated to the assets acquired and liabilities assumed based on estimated fair values of the assets
acquired and liabilities assumed. The purchase price allocation was as follows:



|Assets Acquired and Liabilities Assumed |  |   |           |  
|--------------------------------------- |  | - | --------- | -
|Property and equipment                  |  | $ | 827,238   |  
|Concession mining rights                |  |   | 3,484,000 |  
|Goodwill                                |  |   | 230,264   |  
|Taxes payable                           |  |   | (674      | )
|                                        |  | $ | 4,540,828 |  
|                                        |  |   |           |  
|Total Purchase Price                    |  |   |           |  
|Cash paid                               |  | $ | 500,000   |  
|Contingent earnout liabilities          |  |   | 2,678,580 |  
|Noncontrolling interest                 |  |   | 1,362,248 |  
|                                        |  | $ | 4,540,828 |  



On February 2, 2012, our Colombian subsidiary
entered into a contract with Dairo Ruben Herrera Perez and Ariel Salcedo Leal in connection with the assignment of mining concession
contract FI7-081. The concession is adjacent to our Rukú Mining Complex and will allow more efficient access to Rukú’s
coal resources and ultimately, lower operating costs and improved safety. The concession has 17 hectares (42 acres) and metallurgical
coal resources similar in quality to Rukú’s. Its permit, FI7-081, is currently in the construction or preoperative
phase. Compensation for the property includes $167,079 paid at signing of the agreement on February 3, 2012 and additional $111,386
due upon governmental approval of the concession’s transfer to our Colombian subsidiary, which the Company anticipates later
this year.



13







Boavita Mining Project



On October 7, 2011, our Colombian subsidiary
entered into an agreement (the “Option Agreement”) with Americana de Minerales de Exploracion S.A.S. (“AMERALEX”)
for the option to purchase all of the rights of AMERALEX in mining concession FFB-081 covering approximately 1,550 hectares (approximately
3,830 acres) located in the jurisdiction of the Municipalities of Boavita and La Uvita, Department of Boyacá, Republic
of Colombia (the “Boavita Mining Concession”). Once INGEOMINAS approves the mining plan, we have up to 24 months to
conduct exploration of the entire concession, evaluate and characterize the coal deposit, and exercise the option. The purchase
price will be determined based upon the determination of proven and probable reserves using standard methodology. We are obligated
to pay an agreed amount upon reaching a firm purchase arrangement and approval of the mining plan. We are obligated to pay an
agreed amount nine months after the first payment. Upon completion of the exploration work, and if we exercise the option to acquire
the concession, we are obligated to make an additional payment. Beginning 30 months after the initial payment under the Agreement,
we are obligated to make annual payments; however, the total aggregate purchase price will be limited to the final calculation
of proven and probable reserves, not to exceed an agreed maximum amount.



On December
27, 2011, we entered into an operations agreement with AMERALEX which allows for the immediate start of mining operations on the
Boavita Mining Concession once INGEOMINAS, the Colombian state mining authority, approves the mining plan, which occurred on March
13, 2012. As compensation to AMERALEX for this right, we paid $100,000 on the date the agreement was entered into and have agreed
to pay $150,000 upon approval of the agreement by our company’s board of directors. We have also agreed to pay AMERALEX
a 5% royalty on monthly sales, 50% of which will be offset by the $250,000 in upfront payments. On March 15, 2012 the agreement
was amended to extend its term 90 days and further define the manner in which the royalty is calculated.



| | 3. | ACCOUNTS
                                                                                     PAYABLE AND ACCRUED EXPENSES
| | -- | --------------------------------------------------------------------------------------------------------------------------



Accounts payable and accrued liabilities
of $1,943,456 and $1,697,875 as of June 30, 2012 and December 31, 2011, respectively, are broken down as follows:



|                                             |  | June 30, 2012 |           |  | December 31, 2011 |  
|-------------------------------------------- |  | ------------- | --------- |  | ----------------- | -
|Accounts payable                             |  | $             | 467,403   |  |                   | $
|Mining concessions payable (current portion) |  |               | 1,319,285 |  |                   |  
|Accrued payroll                              |  |               | 156,768   |  |                   |  
|TOTAL                                        |  | $             | 1,943,456 |  |                   | $



| | 4. | CONVERTIBLE
                                                                                     NOTES PAYABLE
| | -- | --------------------------------------------------------------------------------------------------------------



In multiple closings, the most recent
taking place on December 21, 2010, the Company issued $8,000,000 aggregate principal amount of 10% convertible promissory notes
(the “Notes”). The proceeds of the Notes offering were used to fund exploration-stage activities of the Company, including
the identification, analysis and negotiation for coal resources in Colombia that meet the Company’s criteria for mining,
processing and export potential.



The Notes are secured by the Company’s
interest in the business operation of its subsidiary in Colombia. The Notes accrue interest at an annual rate of 10%. Principal
and interest were due on June 30, 2012 and paid on and shortly thereafter that date. An amount of $430,000 was outstanding as
of June 30, 2012, and was paid in full in July 2012.



The notes were considered hybrid financial
instruments that blend characteristics of both equity and debt securities. They embodied settlement alternatives available to
the holder providing for either redemption of the principal and interest for cash at maturity (“Forward Component”)
or conversion into the Company’s common stock (“Embedded Conversion Feature” or “ECF”).  The
Notes also embodied contingent equity-linked share price protections on the ECF in the form of down-round, anti-dilution adjustments
to the conversion price during the term to maturity. As a result, the Company determined that the Notes contained certain embedded
derivative features. The Company’s evaluation resulted in the conclusion that the compound derivative financial instrument
required bifurcation and separately accounted for the embedded conversion option as a derivative liability, carried at fair value
and marked-to-market each reporting period. The aggregate fair value of the embedded conversion feature was estimated at $3,072,000
on the date of issuance of the Notes.  At June 30, 2012 and December 31, 2011, the fair value of the embedded conversion
feature was estimated at $0 and $264,000 respectively. The fair value of the embedded conversion feature liability pertaining
to the Notes that was converted to preferred stock was adjusted as an increase in preferred stock. The initial value of the embedded
conversion feature was recorded as discount in notes payable and has been accreted to interest expense method through the maturity
or conversion date of the Notes. The balance of the unamortized discount related to the ECF was $0 and $75,366 as of June 30,
2012 and December 31, 2011, respectively.



14







At the closings
of the Notes issuance, the Company also issued to the Notes investors five-year warrants to purchase an aggregate of 3,200,000
shares of common stock for a purchase price of $0.01 per share. The total number of outstanding warrants issued in the Notes offering
was 676,000 and 726,000 as of June 30, 2012 and December 31, 2011 respectively. The stock warrants were initially recorded as
discount on notes payable and were allocated based upon their relative fair values on the date of the issuance, which aggregated
to $2,388,790. The fair value of the stock warrants were calculated using the Black-Scholes pricing model. The discount in notes
payable is being amortized to interest expense through the maturity or conversion date of the Notes. The portion of unamortized
discount pertaining to the Notes that were converted to preferred stock was adjusted as a reduction to preferred stock.
The balance of the unamortized discount related to the warrants was $0 and $15,282 as of June 30,
2012 and December 31, 2011, respectively.



| | 5. | STOCKHOLDERS’
                                                                                     EQUITY
| | -- | ---------------------------------------------------------------------------------------------------------



Subscription Agreement with LIFE



On May 6, 2010, the
Company entered into a Subscription Agreement with LIFE. Pursuant to the Subscription Agreement, the Company sold an aggregate
of 19,080,000 (post-split) shares (the “Shares”) of its common stock to LIFE for an aggregate purchase price of $100,000,
which funds were used to eliminate the Company’s then current liabilities. The Shares represented 94.1% of the Company’s
issued and outstanding shares of common stock immediately following the transaction, and the transaction resulted in a change
in control of the Company.



Reverse Stock Split



On July 28, 2010, the Company executed
a reverse stock split of its common stock in which two new shares of common stock were issued for every five shares of common
stock held as of the date of the reverse stock split. This reverse split has been applied retrospectively in the consolidated
financial statements.



Convertible Series A Preferred Stock



On June 1, 2011, the first closing of
a private placement of a minimum of 200 units and a maximum of 300 units for a purchase price of $100,000 per unit was completed.  Each
Unit consists of 10,000 shares of our Series A Preferred Stock, which shares initially are convertible into an aggregate
of 50,000 shares of common stock at any time and a five-year stock purchase warrant entitling the holder thereof to
purchase 3,500 shares of Common Stock for $.01 per share. At the first closing of the offering, certain holders of 10% convertible
promissory notes converted their notes into shares of Series A Preferred Stock and were also granted warrants to purchase shares
of common stock at the rate of 3,500 shares for each $100,000 aggregate principal amount of notes converted.   In the
first closing, an aggregate of 2,920,500 shares of Series A Preferred Stock and warrants to purchase 1,022,175 shares of Common
Stock were issued, in consideration of aggregate cash proceeds of $22,000,000 and the conversion of notes in the aggregate principal
amount of $7,305,000. Holders of the Series A preferred stock are entitled to certain rights and preferences over the common stock
as described below. Aggregate cash fees of $1,139,855 were paid to the placement agents at the first closing.  In addition,
the placement agents were issued five-year warrants, substantially similar to the warrants sold in the offering, to purchase an
aggregate of 480,000 shares of common stock for an exercise price of $2.00 per share.



Dividends are payable on the Series A
Preferred Stock at the rate per share (as a percentage of the Stated Rate, which is originally $10.00) of 9% per annum, payable
quarterly, in arrears, on each March 15, June 15, September 15 and December 15. For dividend payment dates occurring prior to
June 1, 2013, the dividend is payable one-third in cash and two-thirds in common stock. Thereafter, the dividend is payable, at
the option of the Company, either 100% in cash or one-third in cash and two-thirds in stock.



15







The Series A Preferred Stock votes with
the common stock as a single class and each holder of shares of Series A Preferred Stock shall be entitled to a number of votes
equal to the number of shares of common stock into which such shares of Series A Preferred Stock could be converted. Each share
of Series A Preferred Stock is convertible at any time at the holder's option into a number of shares of our common stock equal
to $10.00 divided by the conversion price (initially $2.00), or initially five shares, subject to adjustment for stock splits,
stock dividends, distributions, subdivisions and combinations.



The Series A Preferred Stock is subject
to mandatory conversion by the company commencing November 30, 2012, if the closing bid price of the company’s common stock
exceeds 2.5 times the then-applicable conversion price for 60 consecutive days. The Series A Preferred Stock is also subject to
mandatory conversion beginning on the date that 60% or more of the shares of Series A Preferred issued on June 1, 2011 have been
converted to common stock through voluntary conversion.



The Amended Certificate of Designation
provides that in the event of the liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, the
holders of shares of Series A Preferred Stock then outstanding would be entitled to receive, out of assets available for distribution
to stockholders, before any payment is made or any assets distributed to the holders of our common stock or any other class or
series of preferred stock that is junior to the Series A Preferred Stock, an amount per share of the Series A Preferred Stock
equal to $15.00 as a liquidation preference. A consolidation or merger with another entity or the sale or other disposition of
all or substantially all of the assets under specified circumstances would be deemed to be a liquidation, dissolution or winding
up of our company. However, these events are solely within Company control.



Stock Options



The Company is seeking to recruit and
retain experienced professionals from the global energy, natural resource development and mining industries. The Company will
seek to offer compensation that is commensurate with the qualifications of future employees and advisors, including the ability
to offer equity participation with vesting provisions typical of early-stage public companies. On May 12, 2010, the Board of Directors
adopted the 2010 Equity Incentive Plan (“Incentive Plan”), which gives the Company the ability to grant stock options,
stock appreciation rights (“SARs”), restricted stock and stock bonuses (collectively, “Awards”) to employees
or consultants of the Company or of any subsidiary of the Company and to non-employee members of the Company’s board of
directors of the Company or the Company’s subsidiaries. The Incentive Plan was amended on August 31, 2011.



The Board of Directors has authorized
6,133,334 shares of common stock for issuance under the Incentive Plan. In the event of any change in the number of shares of
Company common stock outstanding by reason of any stock dividend or split, reverse stock split, recapitalization, merger, consolidation,
combination or exchange of shares or similar corporate change, the maximum number of shares of common stock with respect to which
the Board of Directors may grant awards, appropriate adjustments will be made to the shares subject to the Incentive Plan and
to any outstanding Awards. Shares available for Awards under the Incentive Plan may be either newly-issued shares or treasury
shares. If an Award or portion thereof shall expire or terminate for any reason without having been exercised in full, the unexercised
shares covered by such Award shall be available for future grants of Awards under the Incentive Plan.



The aggregate grant date fair value of
stock option awards granted was determined in accordance with ASC Topic 718. The Company uses the Black-Scholes Options Pricing
Model (Black-Scholes) to estimate fair value of its stock-based awards. Black-Scholes requires various judgmental assumptions,
including estimating stock price volatility, expected option life and forfeiture rates. If the Company had made different assumptions,
the amount of its deferred stock-based compensation, stock-based compensation expense, net loss and net loss per share amounts
could have been significantly different. The Company believes that it has used reasonable methodologies, approaches and assumptions
to determine the fair value of its common stock and that deferred stock-based compensation and related amortization were recorded
properly for accounting purposes. If any of the assumptions used change significantly, stock-based compensation expense may differ
materially in the future from that recorded in the current period.



16







The following table sets forth the number of options granted
and outstanding and the weighted average exercise price stock option activity for the six months ended June 30, 2012:



|                                                    |  |                   |           |   |                  |   |      | Weighted average | 
|--------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | ---- | ---------------- | 
|                                                    |  | Number of shares  |           |   | Weighted average |   |      | remaining        | 
|                                                    |  | subject to option |           |   | exercise price   |   |      | contractual term | 
|Outstanding at December, 31, 2011                   |  |                   | 3,738,334 |   |                  | $ | 2.86 |                  | 
|Granted during the period                           |  |                   | 367,200   |   |                  | $ | 3.10 |                  | 
|Forfeited / canceled / expired during the period    |  |                   | (187,500  | ) |                  | $ | 2.27 |                  | 
|Exercised during the period                         |  |                   | -         |   |                  | $ | -    |                  | 
|Outstanding at June 30, 2012                        |  |                   | 3,918,034 |   |                  | $ | 2.82 |                  | 
|Exercisable at June 30, 2012                        |  |                   | 1,098,885 |   |                  | $ | -    |                  | 
|Shares vested and expected to vest at June 30, 2012 |  |                   | 3,918,034 |   |                  | $ | 2.82 |                  | 



The weighted-average exercise price per
share for the options granted during the six month period ended June 30, 2012 and 2011 was $3.10 per share and $3.17 per share,
respectively. The total intrinsic value of options exercisable during the six months ended June 30, 2012 and 2011 was $57,750
and $256,200, respectively.



During the six months ended June 30, 2012
and 2011, the total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price
paid by the employee to exercise the options) was $0 and $57,500, respectively, and the total amount of cash received from exercise
of these options was $0 and $7,250, respectively. The total grant date fair value of stock options vested during the six months
ended June 30, 2012 and 2011 was $0.3 million and $0.5 million, respectively. Stock compensation expense was $490,268 and $596,478
during the six months ended June 30, 2012 and 2011, respectively, and $1,708,231for the cumulative period from November 6, 1996
(date of inception) through June 30, 2012.



The following table summarizes information
about stock options outstanding and exercisable as of June 30, 2012:



|         |      |  | Stock Options Outstanding |  |           |               |  |  | Stock Options Exercisable | 
|-------- | ---- |  | ------------------------- |  | --------- | ------------- |  |  | ------------------------- | 
|         |      |  |                           |  |           | Weighted-     |  |  |                           | 
|         |      |  |                           |  |           | Average       |  |  | Weighted-                 | 
|Range of |      |  | Number                    |  |           | Remaining     |  |  | Average                   | 
|Exercise |      |  | of Shares                 |  |           | Contractual   |  |  | Exercise                  | 
|Price    |      |  | Outstanding               |  |           | Life in Years |  |  | Price                     | 
|$        | 0.05 |  |                           |  | 530,000   |               |  |  | 4.0                       | 
|$        | 1.50 |  |                           |  | 175,000   |               |  |  | 4.4                       | 
|$        | 1.70 |  |                           |  | 117,200   |               |  |  | 4.6                       | 
|$        | 2.50 |  |                           |  | 1,908,334 |               |  |  | 4.7                       | 
|$        | 3.00 |  |                           |  | 50,000    |               |  |  | 4.6                       | 
|$        | 5.00 |  |                           |  | 1,137,500 |               |  |  | 4.6                       | 
|         |      |  |                           |  | 3,918,034 |               |  |  |                           | 



Stock Warrants



The Company issued warrants to purchase
an aggregate of 3,200,000 shares of common stock to investors in the Notes offering. Of those warrants, 676,000 shares had not
been exercised as of June 30, 2012. All of the warrants issued to investors in the Notes offering expire on June 30, 2015 and
have an exercise price of $0.01 per share. The value of these warrants at issuance had been accounted for in shareholder’s
equity as an increase in additional paid in capital.



In connection with the Notes financing,
the Company issued stock warrants to purchase an aggregate of 340,640 shares of common stock to the security brokers in the Notes
offering on December 23, 2010.  All of the warrants issued to the security brokers expire on December 20, 2015 and have
an exercise price of $2.50 per share.



17







As part of the first closing of the Series
A Preferred Stock Financing, the Company issued stock warrants to purchase an aggregate of 1,025,675 shares of common stock to
the investors in the Stock Financing on June 1, 2011.  Of those warrants, 975,100 shares had not been exercised as of
June 30, 2012. All of the warrants issued to the Series A preferred stock investors expire on June 1, 2016 and have an exercise
price of $0.01 per share. In addition, 480,000 in stock warrants were issued to security brokers in the stock offering. All of
the warrants issued in connection with the Stock Financing expire on June 1, 2016 and have an exercise price of $2.00 per share.
  Except for the warrants issued to the holders of the converted notes payable, the fair value of the warrants issued to
the holders of Series A preferred stock and to the security brokers was reported as an increase and decrease in additional paid-in
capital. The fair value of the warrants issued to the holders of the Notes that were converted to Series A preferred stock was
estimated at $682,753 using the Black-Scholes pricing model, and was accounted for as an increase in additional paid-in capital
and expense.



A summary of the stock warrants activity for the six-month
period ended June 30, 2012 is presented below:



|                                 |  | Number of Shares |           |   | Excercise Price |  
|-------------------------------- |  | ---------------- | --------- | - | --------------- | -
|Outstanding at December 31, 2011 |  |                  | 2,725,240 |   |                 | $
|Granted                          |  |                  | -         |   |                 | $
|Exercised                        |  |                  | (53,500   | ) |                 | $
|Cancelled                        |  |                  | -         |   |                 | $
|Outstanding at June 30, 2012     |  |                  | 2,671,740 |   |                 | $



At June 30, 2012, the range of warrant prices for shares under
warrants and the weighted-average remaining contractual life is as follows:



|                         |      |  | Stock Warrants Outstanding   |  |           | Stock Warrants Exercisable                            | 
|------------------------ | ---- |  | ---------------------------- |  | --------- | ----------------------------------------------------- | 
|Range of  Exercise Price |      |  | Number of Shares Outstanding |  |           | Weighted-
Average Remaining Contractual
Life in Years | 
|$                        | 0.01 |  |                              |  | 1,651,100 |                                                       | 
|$                        | 1.89 |  |                              |  | 100,000   |                                                       | 
|$                        | 2.00 |  |                              |  | 580,000   |                                                       | 
|$                        | 2.50 |  |                              |  | 340,640   |                                                       | 
|                         |      |  |                              |  | 2,671,740 |                                                       | 



Restricted Stock Units



The Board of
Directors has authorized a compensation plan for non-employee directors of the Company beginning January 1, 2012. Under the plan
directors would receive cash compensation of $4,000 per month and $6,250 per month for the Chairman. In addition, each non-employee
board member would receive restricted stock in the form of restricted stock units (“RSUs”) for each year of service
based upon the fair market value of the stock on the grant date. The RSUs would be granted on the date of the annual meeting of
shareholders. The vesting period for the restricted stock units would expire at end of the director’s term which would normally
be the next annual meeting of shareholders.



On January 3,
2012, RSU’s of 214,200 were awarded to the non-employee directors of the Company. The RSU’s vested on the date of
the annual shareholders meeting which was May 8, 2012. On this date, an additional 416,665 in RSU’s were awarded to the
outside directors. The total fair value related to the 214,200 RSU’s outstanding on June 30, 2012 was $220,222.



18







| | 6. | EARNINGS (LOSS) PER SHARE
| | -- | -------------------------



The elements for calculation of earnings
(loss) per share for the three and six-month periods ended June 30, 2012 and 2011 were as follows:



|                                                              |  | Six Months Ended June 30 |            |   | Three Months Ended June 30 |  
|------------------------------------------------------------- |  | ------------------------ | ---------- | - | -------------------------- | -
|                                                              |  | 2012                     |            |   | 2011                       |  
|Net Loss Attributable to Common Shareholders                  |  | $                        | (7,301,533 | ) |                            | $
|                                                              |  |                          |            |   |                            |  
|Weighted Average Shares Used in Basic and Diluted Calculation |  |                          | 25,368,101 |   |                            |  
|                                                              |  |                          |            |   |                            |  
|Loss Per Share Basic and Diluted                              |  | $                        | (0.29      | ) |                            | $



The Company’s issued and outstanding
common shares as of December 30, 2011 do not include for the underlying shares exercisable with respect to the issuance of the
warrants exercisable at $0.01 per share. However, the Company has given effect to the issuance of these warrants in computing
loss per share in accordance with ASC No. 260.



| | 7. | RELATED
                                                                                     PARTY TRANSACTIONS
| | -- | ---------------------------------------------------------------------------------------------------------------



At June 30, 2012, LIFE owned approximately
26.1% (adjusted for dilution of shares) of the outstanding shares of the Company.



As described in Note 4, the Company had
a convertible note payable to LIFE totaling $80,000 as of December 31, 2010. The note was converted to preferred shares as part
of the Stock Financing.



On August 3, 2010, the Company entered
into a 3-year management and services agreement with LIFE pursuant to which LIFE agreed to provide certain corporate, financial,
and merger and acquisition advisory services to the Company and assistance with securing equipment leases and other equipment
financing through June 30, 2013. Under the terms of the contract, LIFE is paid a fee equal to the lesser of 1% of gross coal sales
or $2 per ton of coal sold with a minimum monthly fee of $25,000 plus expenses. As of July 18, 2012, the fee was reduced to $12,500
per month. Total management fees and expenses during the six-month period ended June 30, 2012 were $178,299 compared with $160,000
for the six-month period ended June 30, 2011. The accrued management fees payable as of June 30, 2012 and December 31, 2011 were
$25,000 and $25,000, respectively, included in “Accounts Payable & Accrued Liabilities” in the Consolidated Balance
Sheets.



| | 8. | COMMITMENTS
                                                                                     AND CONTINGENCIES
| | -- | ------------------------------------------------------------------------------------------------------------------



Mining Concessions



On July 19, 2010 the Company entered into
an agreement to purchase two coal concessions (Ingeominas Titles GG7-111 and GG7-11522X). As of June 30, 2012, the concessions
have been fully paid for and are listed under the Company’s name on the official website of the Colombian mining authority,
Ingeominas. Under the terms of the contract, the Company will pay to the sellers a royalty payment of $2.00 per ton of coal extracted
under the term of the concession. This royalty payment applies to all coal mined by the Company from these concessions.



19







On October 20, 2010 the Company entered
into an agreement to purchase an additional coal concession (Ingeominas title FLG-092) that forms the North Block Mining Project.
The Company has paid to the seller $515,000 and owes an additional $1,000,000 payable in five quarterly payments of $200,000.
In addition, the Company has paid to Ingeominas $114,502, which represents past due governmental fees owed by the seller. Also,
as per the terms of the contract, the Company will pay to the sellers a royalty payment of $2.00 per ton of coal extracted under
the term of the concession. This royalty payment applies to all coal mined by the Company from this concession.



On February 11, 2011, the Company deposited
$100,000 for three additional coal concessions in the state of Boyaca, Colombia. The aggregate purchase price of these concessions
was $2,500,000, of which $888,862 has been paid as of June 30, 2012. An amount of $222,277 was due upon the Colombian Institute
of Mining and Geology’s approval of a third mining license; this was paid on January 15, 2012. An amount of $111,138 is
due upon the earlier of the recording and publication of the assignment in the National Mining Register or 90 days following the
prior payment and the balance of $1,500,000 is payable in three payments of approximately $500,000 every 6 months thereafter.
There will also be an ongoing royalty payment to the sellers of $2.75 per ton of coal mined.



All the mining concessions are in the
exploration phase. While in the exploration and construction phase, royalties to the government are owed based on the applicable
minimum wage rate times the number of hectares. Once the concessions enter the production phase, royalties owed to the government
are equal to 5% of revenues. Each concession has a 30 year production phase, less the total time spent in exploration and construction.



Management and Services Agreement with
LIFE



On August 3, 2010, we entered into a Management
and Services Agreement with LIFE Power & Fuels LLC, a Delaware limited liability company and one of our principal shareholders,
pursuant to which LIFE agreed to provide certain corporate,  financial, and merger and acquisition advisory services
and assistance with securing equipment leases and other equipment financing.  In exchange for its services, LIFE is
entitled to receive a monthly fee equal to the lesser of 1% of our gross coal sales or $2 per ton of coal sold by us; provided,
however, that such monthly fee shall not be less than $25,000.  As of July 17, 2012, the fee was reduced to $12,500
per month. The term of the Management Agreement was initially 36 months, but the agreement shall automatically renew for successive
12-month periods unless it is terminated by either party in writing. Upon termination, and for a period of five years thereafter,
LIFE will continue to be entitled to receive an amount equal to the lesser of 1% of our gross coal sales or $2 per ton of coal
sold by us from all mines and coking facilities on concessions acquired or coke projects initiated during the term of the Management
Agreement. During the initial term of this agreement, we have agreed to pay a minimum of $900,000 to LIFE.



Lease Commitments



The Company and its subsidiary in Colombia
lease their current office facilities under non-cancelable operating lease agreements that expire in 2016. The future minimum
lease payments under these operating leases are as follows:



|                         |  | Bogota Quantum  |         |  | San Anselmo, CA |   |       | Minimum       | 
|------------------------ |  | --------------- | ------- |  | --------------- | - | ----- | ------------- | 
|                         |  | Operating Lease |         |  | Operating Lease |   |       | Lease Payment | 
|Year ending December 31: |  |                 |         |  |                 |   |       |               | 
|2013                     |  | $               | 197,377 |  |                 | $ | 5,130 |               | 
|2014                     |  |                 | 197,377 |  |                 |   | -     |               | 
|2015                     |  |                 | 197,377 |  |                 |   | -     |               | 
|2016                     |  |                 | 115,136 |  |                 |   | -     |               | 
|Total                    |  | $               | 707,267 |  |                 | $ | 5,130 |               | 



20







Asset Retirement
Obligation



In Colombia,
the Company is subject to certain environmental and regulatory obligations which will require the Company to restore the mine
properties after the mining has been completed. Three months prior to the expected date of completion, the Company is required
to provide a plan for restoration and abandonment and estimate its cost. At June 30, 2012 the Company has estimated its asset
retirement obligation to be $42,942.



| | 9. | SUBSEQUENT
                                                                                     EVENTS
| | -- | ------------------------------------------------------------------------------------------------------



The Company has
evaluated subsequent events through the date that the unaudited interim consolidated financial statements were issued. The Company
is not aware of any subsequent events which would require recognition or disclosure in the unaudited interim financial statements.



21







Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations



Management’s Discussion and Analysis
of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of income. This
section should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, and our interim
financial statements and accompanying notes to these financial statements.



Forward-Looking Statement Notice



The statements contained in this report
that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on
currently available information. Forward-looking statements include the information concerning our possible or assumed future
results of operations, business strategies, need for financing, competitive position, potential growth opportunities, potential
operating performance improvements, ability to retain and recruit personnel, the effects of competition and the effects of future
legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified
by the use of forward-looking terminology such as the words “believes,” “intends,” “may,”
“should,” “anticipates,” “expects,” “could,” “plans,” or comparable
terminology or by discussions of strategy or trends. Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Such statements by
their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could
differ materially from those described in such forward-looking statements.



Among the factors that could cause actual
future results to differ materially are the risks and uncertainties discussed in this report. While it is not possible to identify
all factors, we continue to face many risks and uncertainties including, but not limited to, the cyclicality of the coal industry,
global economic and political conditions, global productive capacity, customer inventory levels, changes in commodity pricing,
changes in product costing, changes in foreign currency exchange rates, competitive technology positions and operating interruptions
(including, but not limited to, labor disputes, leaks, fires, explosions, unscheduled downtime, transportation interruptions,
war and criminal or terrorist activities). Mining operations are subject to a variety of existing laws and regulations relating
to exploration and development, permitting procedures, safety precautions, property reclamation, employee health and safety, air
and water quality standards, pollution and other environmental protection controls, all of which are subject to change and are
becoming more stringent and costly to comply with. Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those
expected. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information,
future events or otherwise.



Description of Business



We currently engage in the business of
acquiring and developing metallurgical coal mines in the Republic of Colombia, South America. We own and control mining concessions
in the departments of Boyaca and Santander which were selected because of their large metallurgical coal resources and their location
near the Magdalena River, which is expected in the near future to be a major shipping route for our coal to certain export markets.



Colombian coal is recognized worldwide
for its high-heat-value, low-ash and low-sulfur contents. Investment and development of sustainable coal mining is an important
priority for the Colombian government; coal is the nation’s second largest export item after oil. In Colombia, the sub-soils
are owned by the state. Private companies operate coal mines under concession contracts with the state. Colombia is the world’s
tenth largest producer and fourth largest exporter of coal, with an estimated 7 billion metric tons (“MT”) of recoverable
reserves and 17 billion MT of potential reserves.



Business Developments



During the second quarter of 2012, we
had the following major developments:



22







| | · | On
                                                                                                               June 12, 2012,
                                                                                                               the Board of Directors
                                                                                                               approved an arrangement
                                                                                                               whereby senior
                                                                                                               management and
                                                                                                               other employees,
                                                                                                               at the discretion
                                                                                                               of the Chief Executive
                                                                                                               Officer, will take
                                                                                                               a portion of their
                                                                                                               salary, as determined
                                                                                                               by the CEO, in
                                                                                                               shares of common
                                                                                                               stock of the Company,
                                                                                                               for six months
                                                                                                               starting in July
                                                                                                               2012. In addition,
                                                                                                               members of the
                                                                                                               Board of Directors
                                                                                                               will also take
                                                                                                               the entire cash
                                                                                                               portion of their
                                                                                                               board compensation
                                                                                                               in shares of common
                                                                                                               stock of the Company
                                                                                                               during this six-month
                                                                                                               period. The shares
                                                                                                               to be issued to
                                                                                                               directors and employees
                                                                                                               in lieu of cash
                                                                                                               compensation will
                                                                                                               be issued monthly
                                                                                                               in an amount equal
                                                                                                               to 1.25 times the
                                                                                                               value of the cash
                                                                                                               compensation based
                                                                                                               upon the prior
                                                                                                               three days’
                                                                                                               average closing
                                                                                                               price prior to
                                                                                                               the issuance of
                                                                                                               the shares.
| | - | 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------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On
                                                                                                               July 19, 2012 our
                                                                                                               Colombian subsidiary
                                                                                                               Colombia Clean
                                                                                                               Power SAS (“CCP”)
                                                                                                               entered into an
                                                                                                               option contract
                                                                                                               covering mining
                                                                                                               concession contract
                                                                                                               FFB-081 and related
                                                                                                               assets. This contract
                                                                                                               replaces the earlier
                                                                                                               option contract
                                                                                                               for this concession
                                                                                                               signed on October
                                                                                                               7, 2011. Under
                                                                                                               the new agreement
                                                                                                               we have until October
                                                                                                               16, 2012, to complete
                                                                                                               preliminary geological
                                                                                                               and mining exploration
                                                                                                               work to determine
                                                                                                               whether the deposit
                                                                                                               has the expected
                                                                                                               mineral resources
                                                                                                               and to determine
                                                                                                               its operational
                                                                                                               and social viability.
                                                                                                               If this preliminary
                                                                                                               program does not
                                                                                                               conclude that the
                                                                                                               expected mineral
                                                                                                               resources are available
                                                                                                               or can be extracted
                                                                                                               economically, we
                                                                                                               have an additional
                                                                                                               18 months, with
                                                                                                               an extra period
                                                                                                               of up to six months,
                                                                                                               to determine the
                                                                                                               probable and proven
                                                                                                               reserves existing
                                                                                                               within the deposit.
                                                                                                               We can exercise
                                                                                                               the option to purchase
                                                                                                               all of the rights
                                                                                                               and mining obligations
                                                                                                               of the concession
                                                                                                               and related assets
                                                                                                               through the completion
                                                                                                               of this exploratory
                                                                                                               work. This new
                                                                                                               contract establishes
                                                                                                               two different scenarios
                                                                                                               for payment of
                                                                                                               the concession
                                                                                                               and related assets
                                                                                                               transfer. The first
                                                                                                               is a $45,000,000
                                                                                                               fixed price due
                                                                                                               in installments
                                                                                                               over four years;
                                                                                                               the second scenario
                                                                                                               is one where the
                                                                                                               purchase price
                                                                                                               determination is
                                                                                                               subject to the
                                                                                                               establishment of
                                                                                                               proven reserves
                                                                                                               through drilling
                                                                                                               and exploration.
                                                                                                               The purchase price
                                                                                                               is capped at $85,000,000.
                                                                                                               CCP has the option
                                                                                                               to choose either
                                                                                                               scenario by October
                                                                                                               15, 2012. The new
                                                                                                               agreement does
                                                                                                               not affect the
                                                                                                               existing association
                                                                                                               contract dated
                                                                                                               March 15, 2012
                                                                                                               for mining exploration
                                                                                                               on this concession.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | As
                                                                                                               reported in the
                                                                                                               Company’s
                                                                                                               first quarter 2012
                                                                                                               Form 10-Q, the
                                                                                                               Company resumed
                                                                                                               production at its
                                                                                                               Ruku Mining Complex
                                                                                                               on April 17, 2012,
                                                                                                               after being halted
                                                                                                               temporarily in
                                                                                                               February due to
                                                                                                               vandalism. Total
                                                                                                               coal production
                                                                                                               during the quarter
                                                                                                               ended, June 30,
                                                                                                               2012 amounted to
                                                                                                               2,219 tons.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | During
                                                                                                               June and July 2012,
                                                                                                               the Company delivered
                                                                                                               approximately 3,000
                                                                                                               tons of coal to
                                                                                                               a third-party customer,
                                                                                                               located in Boyaca.
                                                                                                               The Company currently
                                                                                                               has an Account
                                                                                                               Receivable of approximately
                                                                                                               $200,000 with this
                                                                                                               customer.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Exploration



Exploration of our properties for purposes
of mine planning and resource evaluation is and will continue to be a high priority. The initial exploration work in each area
has been concentrated along coal seam outcrops and in mine workings at Boavita and Rukú. At Otanche, general exploration
drilling has been underway in part of the area for over one year.



Exploration Stage Company



We are considered an exploration stage
company under the SEC criteria since we have not demonstrated the existence of proven or probable reserves at any of our properties.
Accordingly, as required by the SEC guidelines and U.S. GAAP for companies in the exploratory stage, substantially all of our
investment in mining properties to date have been expensed and therefore do not appear as assets on our balance sheet. We therefore
also expensed exploration and development expenditures in the first six months of 2012 related to our properties. Certain expenditures,
such as expenses for mining or other general purpose equipment, may be capitalized, subject to our evaluation of the possible
impairment of the asset.



23







Six-Month Period Ended June 30, 2012 and 2011



Our revenues since inception total
$4,383 and we have a cumulative net loss of $21,862,924 from inception through June 30, 2012. We had revenue from coal sales
for the six months ended June 30, 2012 totaling $823 as compared to zero for the first six months of 2011. For the six months
ended June 30, 2012, our net loss was $6,464,004 compared to $6,859,286 for the same period in 2011. The decrease in our net
loss was due to lower other expenses, principally lower net interest expense, and the absence of inducement expenses, which
the Company incurred in the 2011 period, partially offset by increased general and administrative expenses, largely due to
increased employee expense, outside professional services for mine engineering, legal, and accounting services related to our
recommencing operations at Ruku, during the first quarter of 2012, as well as interest expense related to our Convertible
Note offering completed in December 2010. Expenses during the six months ended June 30, 2012, consisted of $6,740,167 in
general and administrative expense and total other income, net of $11,703. Expenses during the same period in 2011 consisted
of $4,097,818 in general and administrative expenses and $2,761,468 in total other expenses, net, including $2,089,278 in net
interest expense. Net loss attributable to common shareholders in the six months ended June 30, 2012 amounted to $7,301,533
(or $0.29 per share) compared to a Net loss attributable to common shareholders of $16,094,804 (or $0.68 per share) in the
six months ended June 30, 2011, based on weighted averages of 25,368,101 and 23,708,676 in shares outstanding during the
respective periods.





|                                                  |  | Six Months Ended June 30, |          
|------------------------------------------------- |  | ------------------------- | ---------
|                                                  |  | 2012                      |          
|Gross Profit                                      |  | $                         | (263     
|                                                  |  |                           |          
|General and Adminstrative Expenses:               |  |                           |          
|Drilling and exploration expenses                 |  |                           | 722,022  
|Payroll expenses                                  |  |                           | 2,646,143
|Professional fees                                 |  |                           | 2,099,382
|Office administration                             |  |                           | 788,323  
|Travel, meals, entertainment and relocations      |  |                           | 283,126  
|Insurance, depreciation and other expenses        |  |                           | 201,171  
|Total General and Administrative expenses         |  |                           | 6,740,167
|                                                  |  |                           |          
|Unrealized loss (gain) on change in fair value of |  |                           |          
|derivative liability-embedded conversion feature  |  |                           | 4,000    
|Inducement Expense                                |  |                           | -        
|Interest and other expense (income), net          |  |                           | (15,703  
|                                                  |  |                           |          
|Net loss before non-controlling interest          |  |                           | 6,728,727
|                                                  |  |                           |          
|Loss attributable to non-controlling interest     |  |                           | 264,723  
|                                                  |  |                           |          
|Net loss                                          |  | $                         | 6,464,004
|                                                  |  |                           |          





Expenses for the six-month period ended
June 30, 2012 decreased from the comparable period in 2011 due to the following:



| | · | $142,496 decrease in drilling and exploration expenses, which reflects reduced expenditures at
Ruku and Otanche;
| | - | ----------------------------------------------------------------------------------------------------------------

| | · | $1,416,620 increase in salaries, benefits and payroll expenses which reflect the start-up of operations
at the Ruku mine during the fourth quarter of 2011 and an increase in professional staff at the head office in Bogota in conjunction
with our expanded operations;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | $531,564 increase in professional fees, primarily for legal, accounting, engineering, geological,
environmental and community social responsibility consulting services, as we expanded our operations;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | $616,572 increase in office administration, which reflects higher rent, utilities, telecommunications,
internet services and office maintenance and supplies as a result of our relocation to larger office space in the fourth quarter
of 2011, and increased security expenses as a result of the Ruku mine start-up and the vandalism event which occurred in February
2012;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | $84,456 increase in travel, meals, entertainment and relocations related to the addition of personnel
and the expansion of operations;
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| | · | $135,633 increase in insurance, depreciation and other expenses principally due to the investment
in leasehold improvements at our larger, new offices and mine-related equipment;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a $4,000 loss, in the six-month period of 2012, compared to a $6,360 gain, in the six-month period
of 2011, on the change in the fair value of derivative liability-embedded conversion feature of the Notes, where such notes have
either been converted to our Series A convertible preferred stock or been repaid;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the absence of $678,550 in inducement expense, which was incurred in the 2011 six-month period;
| | - | -----------------------------------------------------------------------------------------------

| | · | a $2,104,981 decrease in interest and other expense, net, as during the six-month period of 2012,
the Company recognized a $180,907 foreign currency translation gain which more than offset net interest expense of $165,254, which
compares to the $2,089,278 in interest expense, net, incurred in the six-month period ended June 30, 2011, the decrease in such
expense primarily reflecting the conversion of a majority of the Notes into Series A convertible preferred stock in June and July
2011, with the remainder repaid in June and July 2012; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a $264,723 net loss attributable to a non-controlling interest, reflecting the start-up of operations
at the Ruku mine.
| | - | -----------------------------------------------------------------------------------------------------------------------









Three-Month Period Ended June 30, 2012 and 2011



For the three months ended June 30, 2012,
our net loss was $3,423,744 compared to $3,874,109 for the same period in 2011. Expenses during the three months ended June 30,
2012, consisted of $3,448,893 in general and administrative expense and $133,193 in total other expenses, net. Expenses during
the same period in 2011 consisted of $2,221,913 in general and administrative expenses and other expenses, net of $1,652,196,
including $888,006 in net interest expense and $678,550 in inducement expense. Net loss attributable to common shareholders in
the three months ended June 30, 2012 amounted to $3,760,930 (or $0.15 per share) compared to a Net loss attributable to common
shareholders of $13,109,627 (or $0.55 per share) in the three months ended June 30, 2011, which included a Preferred Stock Deemed
Dividend of $9,134,754. Per share amounts were based on weighted average shares outstanding in the three-month periods of 2012
and 2011 of 25,494,746 and 23,888,793 respectively.



24









|                                                  |  | Three Months Ended June 30, |          
|------------------------------------------------- |  | --------------------------- | ---------
|                                                  |  | 2012                        |          
|Gross Profit                                      |  | $                           | (263     
|                                                  |  |                             |          
|General and Adminstrative Expenses:               |  |                             |          
|Drilling and exploration expenses                 |  |                             | 354,015  
|Payroll expenses                                  |  |                             | 1,432,918
|Professional fees                                 |  |                             | 984,744  
|Office administration                             |  |                             | 434,627  
|Travel, meals, entertainment and relocations      |  |                             | 122,561  
|Insurance, depreciation and other expenses        |  |                             | 120,028  
|Total General and Administrative expenses         |  |                             | 3,448,893
|                                                  |  |                             |          
|Unrealized loss (gain) on change in fair value of |  |                             |          
|derivative liability-embedded conversion feature  |  |                             | -        
|Inducement Expense                                |  |                             | -        
|Interest and other expense (income), net          |  |                             | 133,193  
|                                                  |  |                             |          
|Net loss before non-controlling interest          |  | $                           | 3,582,349
|                                                  |  |                             |          
|Loss attributable to non-controlling interest     |  |                             | 158,605  
|                                                  |  |                             |          
|Net loss                                          |  | $                           | 3,423,744
|                                                  |  |                             |          





Expenses for the three months ended June
30, 2012 decreased from the comparable period of 2011 due to the following:



| | · | $178,415 decrease in drilling and exploration expenses, which reflects reduced expenditures at
Ruku and Otanche;
| | - | ----------------------------------------------------------------------------------------------------------------

| | · | $783,309 increase in salaries, benefits and payroll expenses which reflect the start-up of operations
at the Ruku mine during the fourth quarter of 2011 and an increase in professional staff at the head office in Bogota in conjunction
with our expanded operations;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | $210,061 increase in professional fees, primarily for legal, accounting, engineering, geological,
environmental and community social responsibility consulting services, as we expanded our operations;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | $373,715 increase in office administration, which reflects higher rent, utilities, telecommunications,
internet services and office maintenance and supplies as a result of our relocation to larger office space in the fourth quarter
of 2011, and increased security expenses as a result of the Ruku mine start-up and the vandalism event which occurred in February
2012;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | $14,333 decrease in travel, meals, entertainment and relocations, reflecting a reduction in relocation
expenses;
| | - | ----------------------------------------------------------------------------------------------------------------

| | · | $52,643 increase in insurance, depreciation and other expenses principally due to the investment
in leasehold improvements at our larger, new offices and mine-related equipment;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the absence of a $85,640 unrealized loss change in the fair value of the derivative liability-embedded
conversion feature of the Notes, recognized in the six-month period of 2011, where such notes have either been converted to our
Series A convertible preferred stock or been repaid;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the absence of $678,550 in inducement expense, which was incurred in the 2011 six-month period;
| | - | -----------------------------------------------------------------------------------------------

| | · | a $754,813 decrease in interest and other expense, net, as during the three months ended June 30,
2012, the Company recognized a $180,907 foreign currency translation gain which partially offset net interest expense of $314,100,
which compares to the $888,006 in interest expense, net, incurred in the three-month period ended June 30, 2011, the decrease in
such expense primarily reflecting the conversion of a majority of the Notes into Series A convertible preferred stock in June and
July 2011, with the remainder repaid in June and July 2012; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a $158,605 net loss attributable to a non-controlling interest, reflecting the start-up of operations
at the Ruku mine.
| | - | -----------------------------------------------------------------------------------------------------------------------





Liquidity and Capital Resources



At June 30, 2012, we had $2,460,879 in
cash and $1,922,329 in working capital. At June 30, 2012, we also had total long term liabilities of $4,121,072. We anticipate
funding our operating expenses with additional financings of debt and/or equity securities.



Management expects that we will be dependent,
for the near future, on additional capital to fund our operating expenses and anticipated growth. Our operating losses have been
funded through the issuance of equity securities and borrowings. We will need additional funding in order to continue our business
operations. Our cash balance as of July 31, 2012 was $933,000. While we have significantly reduced payroll and other costs, the
cash balance is not sufficient to fund more than two months of operations. While we continually look for additional financing
sources, in the current economic environment, the procurement of outside funding is extremely difficult and there can be no assurance
that such financing will be available, or, if available, that such financing will be at a price that will be acceptable to us.
Failure to generate sufficient revenue or raise additional capital would have an adverse impact on our ability to achieve our
longer-term business objectives, and would adversely affect our ability to continue operating as a going concern.



Off Balance-Sheet Arrangements



There are no 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.



Critical Accounting Policies and
Estimates



The following are the Companies critical accounting policies
and estimates:



Use of Estimates



The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount
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.



25







Cash and Cash Equivalents



The Company considers all highly-liquid
investments with maturities of three months or less at the date of purchase to be cash equivalents.



Property and Equipment



Property and equipment, which include ten mining concessions
in the departments of Santander and Boyaca Colombia and construction in progress, are stated at cost. Mining concessions will
be amortized using the units-of-production method based upon recoverable proven and probable reserves of the mine and when the
Company commences operation. Equipment is depreciated using the straight-line method over the estimated useful life of the asset
of 5 years. Repairs and maintenance are charged to expense as incurred, and costs of significant renewals and improvements are
capitalized.



Impairment of Long-Lived Assets



Long-lived assets, such as property and
equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
or asset group may not be recoverable. Events that trigger a test for recoverability include material adverse changes in projected
revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant
negative industry or economic trends. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount
of the asset exceeds the fair value of the asset.



Mineral Exploration and Development Costs



We account for mineral exploration costs
in accordance with Accounting Standards Codification (ASC) No. 930, Extractive Activities - Mining. All exploration expenditures
are expensed as incurred. Expenditures to acquire new mines (e.g. purchase of mining concessions), to define further mineralization
in existing ore bodies, and to expand the capacity of operating mines, are capitalized and will be amortized on a units of production
basis over proven and probable reserves.



Asset Retirement Obligations



The Company follows ASC 410-20, Asset
Retirement Obligations, which applies to obligations associated with the retirement of tangible long-lived assets that result
from the acquisition, construction and development of assets. ASC 410-20 requires that we record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of
the related long-lived asset.



Earnings (Loss) Per Share



Earnings (loss) per share are presented
in accordance with the provisions of the ASC No. 260, Earnings Per Share. ASC No. 260 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.



Income Taxes



Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
periods in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.



26







The Company recognizes liabilities for
uncertain positions based upon the provisions of ASC No. 740, Income Taxes. The Company recognizes the effect of income
tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in
the period in which the change in judgment occurs. The Company accounts for interest and penalties generated by income tax contingencies
as interest expense in the consolidated statements of operations.



Share-Based Compensation



The Company accounts for share-based compensation
in accordance with ASC No. 718, Compensation-Stock Compensation, which establishes accounting for stock-based awards exchanged
for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award,
and is recognized as expense on a straight-line basis over the employee requisite service period, which is generally four years.
The Company’s stock compensation is generally accounted for as an equity instrument.



ASC No. 718 requires forfeitures to be
estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates.
Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will
also impact the amount of compensation expense to be recognized in future periods.



Recent Accounting Pronouncements



There are no recent accounting pronouncements
applicable to the Company.



Item
3. Qualitative and Quantitative Disclosures About Market Risk



Not applicable.



Item 4. Controls
and Procedures



Evaluation of disclosure controls
and procedures



Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of
the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective
in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and
forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.



Changes in internal control over
financial reporting



There has been no change in our internal
control over financial reporting, as defined in Rules 13a-15(f) of the Exchange Act, during our most recent fiscal quarter ended
June 30, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



PART II. OTHER INFORMATION



Item
1A. Risk Factors



You should consider carefully the following
risks and other information in this Quarterly Report, including the financial statements, as well as in our most recent Annual
Report on Form 10-K. If any of the following risks actually occur, our business, financial condition and operating results could
be adversely affected.



27







We have limited cash available for
operations and if we are unable to secure additional funding quickly we may be unable to continue our current business operations.



As of July 31, 2012, we had approximately
US$933,000 in cash available to fund our operations. We expect that these funds together with revenues from coal sales and anticipated
funding from operations and equipment lease financing will be sufficient to meet our cash flow requirements for approximately
two months. If we are unable to secure additional funding, we may not be able to continue our current operations or we may be
required to change our current business plan. We presently do not have any sources of additional funding. We may be unable to
secure additional financing on terms acceptable to us, or at all. Our inability to raise additional funds on a timely basis could
prevent us from achieving our business objectives and could have a negative impact on our business, financial condition, results
of operations and the value of our securities. If we raise additional funds by issuing additional equity or convertible debt securities,
the ownership of existing stockholders may be diluted and the securities that we may issue in the future may have rights, preferences
or privileges senior to those of the current holders of our common or preferred stock. Such securities may also be issued at a
discount to the fair market value of our common stock, resulting in possible further dilution to the book value per share of our
common stock. If we raise additional funds by issuing debt, we could be subject to debt covenants that could place limitations
on our operations and financial flexibility. Certain of our outstanding securities contain protections from issuances of additional
securities below $2.00 per share which could result in additional shares being issued in the event of sales of equity or equity-linked
securities below such price.



We have substantial commitments associated
with the acquisition of our current mining properties which if not met could result in breach of the agreements and loss of the
mining concessions.



During the period ending December 31,
2012, we have future obligations to pay an aggregate of approximately US$2,300,000 to satisfy the payment terms of the acquisition
contracts for our current mining concessions. We do not have sufficient funds available to meet all of these obligations and will
require additional funding to satisfy these contractual payments. Without the additional funding and if we are unable to negotiate
more lenient payment terms, we may not be able to retain all of our mining concessions. We currently have no arrangements to extend
any payments under these purchase contracts and there is no assurance that we would be able to negotiate such arrangements or
if we are able to negotiate extensions of the required payments, that we would be able to do so under terms which would be acceptable
or advantageous to us. Any arrangements to extend payments may require increased future payments or the issuance of additional
consideration which could have a material negative effect on our future cash flow requirements.



Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.



On June 12, 2012, the Board of Directors
approved an arrangement whereby senior management and other employees, at the discretion of the Chief Executive Officer, will
take a portion of their salary, as determined by the CEO, in shares of common stock of the Company, for six months starting in
July 2012. In addition, members of the Board of Directors will also take the entire cash portion of their board compensation in
shares of common stock of the Company during this six-month period. The shares to be issued to directors and employees in lieu
of cash compensation will be issued monthly in an amount equal to 1.25 times the value of the cash compensation based upon the
prior three days average traded price prior to the issuance of the shares. The Board of Directors has granted authority to the
CEO to lengthen the period of time during which stock may be issued in lieu of cash compensation by mutual agreement between the
CEO and each member of senior management, employee or director. On July 1, 2012, 122,887 shares of common stock were issued to
various employees and 60,026 shares of common stock were issued to the outside directors of the Company in lieu of cash compensation.
Each of the recipients of Common Stock was an accredited investor at the time of the share issuance. The shares were issued without
registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(a)(5)
and/or Section 4(a)(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving any public offering.
No selling commissions were paid in connection with the dividend distributions.



28







On June 15, 2012, stock dividend payments
were made to the 26 holders of Series A Preferred Stock totaling 217,542 shares of common stock. Each of the holders of the Series
A Preferred Stock was an accredited investor at the time of the dividend distribution. The shares were issued without registration
under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(a)(5) and/or Section
4(a)(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving any public offering. No selling
commissions were paid in connection with the dividend distributions.



Item
4. Mine Safety Disclosures



There are no reportable events required
pursuant to this item.



Item
6. Exhibits



The exhibits required by this item are
set forth on the Exhibit Index attached hereto.



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.



|                | Colombia Energy Resources, Inc. |                                                                                         
|--------------- | ------------------------------- | ----------------------------------------------------------------------------------------
|                |                                 |                                                                                         
|                |                                 |                                                                                         
|August 17, 2012 | By:                             | /s/ Ronald G. Stovash                                                                   
|                |                                 | Ronald G. Stovash, President and Chief
 Executive Officer (Principal Executive
 Officer)



|August 17, 2012 | By: | /s/ Brian L. Miller                                                                                                     | 
|--------------- | --- | ----------------------------------------------------------------------------------------------------------------------- | 
|                |     | Brian L. Miller, Chief Financial Officer
        (Principal Financial Officer and
        Principal Accounting Officer) | 



29







EXHIBIT INDEX



[Jim: Let me know if there were any material agreements
entered into during the first quarter that haven’t been filed as exhibits before]



|Exhibit
    Number |  | Description of Exhibit                                                                                                         
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------
|                   |  |                                                                                                                                
|31.1               |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                             
|                   |  |                                                                                                                                
|31.2               |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                             
|                   |  |                                                                                                                                
|32.1               |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
    1350)
|                   |  |                                                                                                                                
|32.2               |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
    1350)
|                   |  |                                                                                                                                
|101. INS           |  | XBRL Instance Document(1)                                                                                                      
|                   |  |                                                                                                                                
|101. SCH           |  | XBRL Taxonomy Extension Schema Document(1)                                                                                     
|                   |  |                                                                                                                                
|101. CAL           |  | XBRL Taxonomy Extension Calculation Linkbase Document(1)                                                                       
|                   |  |                                                                                                                                
|101. DEF           |  | XBRL Taxonomy Extension Definition Linkbase Document(1)                                                                        
|                   |  |                                                                                                                                
|101. LAB           |  | XBRL Taxonomy Extension Label Linkbase Document(1)                                                                             
|                   |  |                                                                                                                                
|101. PRE           |  | XBRL Taxonomy Extension Presentation Linkbase Document(1)                                                                      



|(1) | XBRL Interactive Data files with detailed tagging will be filed by amendment to
    this Quarterly Report on Form 10-Q within 30 days of the filing date of this Quarterly Report on Form 10-Q, as permitted by
    Rule 405(a)(2) of Regulation S-T.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30