**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

**Form 10 - K/A**

**Amendment No. 3**

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

**For the fiscal year ended December 31, 2010**

OR

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

For the transition period from_____________ to _____________.

Commission File No. 333-142105

 

**CONSOLIDATION SERVICES, INC.**

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

 

| Delaware

20-8317863

( State or other jurisdiction of incorporation or organization)

( IRS Employer Identification No.)

2300 West Sahara Drive, Suite 800, Las Vegas, NV 89102

(Address of principal executive offices)

 (702) 949-9449

(Issuer’s telephone number)

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

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

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

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

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

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

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

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

Large accelerated filer

[  ]

Accelerated filer

[  ]

Non-Accelerated filer  

[  ]

Small reporting company

[X]

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

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

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

**Documents Incorporated by Reference: None
**EXPLANATORY NOTE**

This Amendment No. 3 on Form 10-K amends the Annual Report on Form 10-K for the year ended December 31, 2010 (the “Original Report”) and is being filed by Consolidation Services, Inc. (the “Company”) in response to comments by the Securities and Exchange Commission to amend and restate the financial statements.  Accordingly, these consolidated financial statements have been restated to remove the impairment of goodwill and value the acquisition based upon the final reserve valuation of $4.3 million. 

The consolidated financial statements have been restated to properly reflect the initial valuation of the acquisition of the Leland partnerships based upon an oil and gas reserve valuation of $4.3 million.  The acquisition of the Leland partnerships were originally recorded at a valuation of $15,267,204 based on the fair value of the common stock consideration and goodwill was recorded for $10,912,035 in connection with the acquisition.  Immediately following the acquisition, the Company recorded an impairment of the goodwill.  The consolidated financial statements have been restated to eliminate the initial valuation and subsequent impairment of goodwill.  

The consolidated financial statements have also been restated to reflect the authorization of preferred stock which none has been issued or outstanding as of December 31, 2010.  As originally reported, the Company reported the difference between the trading price of the common stock and the fair value of the assets as goodwill.  The amount of the goodwill which created this error is approximately $10.9 million. The net loss was reduced by $10.9 million, loss per share was reduced by $0.32, accumulated deficit was reduced by $10.9 million and additional paid-in capital was reduced by $10.9 million.

The consolidated financial statements have also been restated for the year ended December 31, 2010 in response to comments received from Securities and Exchange Commission to furnish predecessor financial statements of the combined Leland partnerships (the ”Predecessor”), in accordance with Regulation S-X 8-02 by including (i) audited financial statements of the Predecessor for the year ended December 31, 2009, and for the period from January 1, 2010 through April 1, 2010, the date the Leland partnerships were acquired by the Company and (ii) a discussion of the Predecessor’s financial condition and results of operations for the year ended December 31, 2009, and for the period from January 1, 2010 through April 1, 2010.

The Company will amend its Form 10-Q for June 30, 2010 and September 30, 2010 to remove the impairment of goodwill as a result of a change in the Registrant’s valuation of its Reserve Report and to present the proper Predecessor presentation.   Unless expressly noted otherwise, the disclosures in this Form 10-K/A continue to speak as of the date of the Original Report, and do not reflect events occurring after the filing of the Original Report.  For additional information on subsequent events, the reader should refer to the Forms 10-K, Forms 10-Q and Forms 8-K the Company has filed in 2010, 2011 and 2012.  The filing of this Form 10-K/A shall not be deemed an admission that the Original Report, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

ii

**Consolidation Services, Inc.**

**FORM 10-K ANNUAL REPORT**

**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010 and 2009**

**TABLE OF CONTENTS**

PART I

 

Item 1. Business

1

Item 1A. Risk Factors

7

Item 1B. Unresolved Staff Comments

19

Item 2. Properties

19

Item 3. Legal Proceedings

19

Item 4. Removed and Reserved

20

 

 

PART II

 

 

 

Item 5. Market for the Registrant’s Securities and Related Matters

20

Item 6. Selected Financial Data

22

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

32

Item 8. Financial Statements and Supplementary Data

32

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

33

Item 9A. Controls and Procedures

33

Item 9B. Other Information

34

 

 

PART III

 

 

 

Item 10. Directors, Executive Officers and Corporate Governance

34

Item 11. Executive Compensation

37

Item 12. Security Ownership of Certain Beneficial Owners and Management

41

Item 13. Certain Relationships and Related Transactions

41

Item 14. Principal Accountant Fees and Services

42

 

 

PART IV

 

 

 

Item 15. Exhibits and Financial Statement Schedules

43

 

iii

**PART I**

**ITEM 1 - BUSINESS**

**Statement Regarding Forward-Looking Disclosure**

 

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

**General**

 

Consolidation Services, Inc. (the “Company” or “CNSV”) was incorporated in the State of Delaware on January 26, 2007. Since formation, the Company has been engaged in the acquisition, development and exploitation of domestic natural resources. Until January 1, 2010, the Company ’s sole sources of revenues were from its coal mining and timber harvesting operations.  The Company discontinued its coal mining and timber harvesting operations on January 1, 2010 (See “Note 9 - Discontinued Operations” of the accompanying consolidated financial statements included herein at PART II, ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA).  As a result of its discontinued operations, the Company re-entered the exploration stage on January 1, 2010 seeking to identify exploitation opportunities of its existing mineral rights in Tennessee and to identify additional oil & gas and other natural resource acquisition opportunities .  On April 1, 2010, the Company exited the exploration stage as a result of the acquisition of producing oil and gas properties in Kentucky and Tennessee. The Company’s current operations consist primarily of the exploration and development of those oil and gas mineral reserves.  
**Kentucky and Tennessee Properties**

On April 1, 2010, the Company entered into 12 substantially identical asset purchase agreements with various unrelated partnerships which comprised a total of 657 individual sellers and completed the purchase of interests in oil and gas wells located in Kentucky and Tennessee. 

1

The Company acquired interests in 39 oil wells and 19 gas wells, a total of 58 wells and the related support equipment, located on approximately 1,500 leased acres in Kentucky and Tennessee. Under the agreements, the Company acquired all rights, titles and interests to the sellers’ oil and gas wells and support equipment free and clear of all liabilities, liens and encumbrances. The effective date of the purchase and sale was April 1, 2010. As part of the acquisition, 657 sellers received in aggregate of 22,786,872 common shares of the Company’s common stock.  Management believes that the acquisition of the assets, included in the 12 asset purchase agreements, provides our Company with increased acres available for future drilling, as well as already drilled operating wells.  

**Separation and Distribution Agreement**

On February 12, 2010, the Company filed a Current Report on Form 8-K which disclosed the Spin-off and includes as an exhibit the Separation and Distribution Agreement (the “Spin-Off Agreement”) dated as of January 1, 2010 by and between the Company and Colt, which is incorporated by reference herein.  The following summary of the Spin-Off Agreement is not complete and is subject to and qualified in its entirety by reference to, the provisions of the Spin-Off Agreement.

Effective as of January 1, 2010, for tax and accounting purposes, the Company transferred and assigned to Colt all of the assets (“Colt Assets”) relating to the coal mining business of the Company as well as all other assets owned by the Company, except for oil and gas rights minus 12.5% overriding royalty payments to Colt in the oil and gas assets retained by the Company. Colt assumed the liabilities of CNSV (“Colt Liabilities”) which are generally all liabilities of the Company as of December 31, 2009, except for the obligation to file regulatory filings and taxes; the Company’s coal mining business and any liabilities arising out of the operations of Colt’s business after January 1, 2010; and any and all liabilities of the Company under which it is an obligor by reason of any guarantee or contractual commitment.  The consideration for the Spin-off was all of the shares of Colt common stock to be distributed to the Company’s stockholders of record as of January 31, 2010.  Together with an Information Statement, Colt has issued certificates representing 100% of the shares of Colt common stock to each shareholder of the Company’s Common Stock on the Record Date on a pro-rata basis, of one (1) share of Colt common stock for each one (1) share of the Company’s Common Stock so held by such record holder.  The certificates for the Colt common stock was to be delivered directly to each record holder by mail at their respective addresses as listed in the Company’s transfer agent’s books and records.

The Company and Colt both acknowledged that Colt is and shall continue to be a non-reporting privately held company and that there will not be a public market in the Colt common stock, nor is one expected to develop, and that the Colt common stock that CNSV shareholders of record received was “restricted securities.”  Both parties agreed that: (1) the Colt common stock would have the appropriate restrictive legends which described the transfer restrictions related thereto; and (ii) Colt’s stock transfer books would include “stop transfer” instructions that indicate such transfer limits.

**Patents and Trademarks**

We do not own, either legally or beneficially, any patent or trademark.

2

**Marketing and Business Strategy**

 

The Company has three main priorities regarding the growth of its current operations and assets: (1) the development and further exploitation of our most recently acquired oil & gas operations in Kentucky and Tennessee; (2) evaluation of our legacy (pre-2010) oil & gas mineral rights in Tennessee to determine potential for exploitation and development; (3) the ongoing pursuit to identify unique acquisition and development opportunities in thenatural resource sector.
**Research and Development**

We have not allocated funds for conducting research and development activities. We do not anticipate allocating funds for research and development in the immediate future.

**Oil and Gas Overview**

We occasionally pursue oil and gas drilling opportunities through joint ventures with industry partners as a means of limiting our drilling risk. Our prospects are generally brought to us by other oil and gas companies or individuals. We identify and evaluate prospective oil and gas properties to determine both the degree of risk and the commercial potential of the project. We seek projects that offer a mix of low risk with a potential of steady reliable revenue as well as projects with a higher risk, but that may also have a larger return. In additional to reserve reports and other 3rd party evaluations, we strive to use modern technology such as 3-D seismic, where applicable, to help us identify potential oil and gas reservoirs and to mitigate our risk. We seek to maximize the value of our asset base by exploring and developing properties that have both production and reserve growth potential. We seek out other industry partners to maintain a balanced working interest in all of our projects.

**Competitive Business Conditions**

 

The oil and gas exploration and production industry is highly competitive.  In the Kentucky and Tennessee area, we will compete with several large and well-known public and private companies, which have substantially greater financial and operational resources than we are expected to have.  Competition for equipment, personnel and services is expected to be intense.  Accordingly, these competitors may be able to spend greater amounts on acquisitions of oil and gas properties of merit, on exploration of their properties and on development of their properties. In addition, they may be able to afford more geological and other expertise in the targeting and exploration of oil and gas properties. This competition could result in competitors having properties of greater quality and interest to prospective investors who may finance additional exploration and development. This competition could have an adverse effect on our ability to achieve the financing necessary for us to conduct further exploration of properties we may acquire or in which we currently have an interest.

We will also compete with other junior oil and gas exploration companies for financing from a limited number of investors that are prepared to make investments in junior oil and gas exploration companies. The presence of competing junior oil and gas exploration companies may have an adverse effect on our ability to raise additional capital in order to fund our exploration programs if investors are of the view that investments in competitors are more attractive based on the merit of the oil and gas properties under investigation and the price of the investment 

3

offered to investors.  Additionally, there is competition for other resources, including, but not limited to, professional geologists, camp staff, helicopter or float planes, mineral exploration supplies and drill rigs.

Our success depends on the successful acquisition, exploration and development of commercial grade mineral rights, oil and gas leases or natural resource properties as well as the prevailing prices for oil and natural gas to generate future revenues and operating cash flow. Oil and natural gas prices have been extremely volatile in recent years and are affected by many factors outside of our control. The volatile nature of the energy markets makes it difficult to estimate future prices of oil and natural gas; however, any prolonged period of depressed prices would have a material adverse effect on our results of operations and financial condition. Such pricing factors are largely beyond our control, and may result in fluctuations in our earnings. We believe there are significant opportunities available to us in the oil and gas exploration and development industry. 

**Marketing/Distribution**

 

The Company has entered into contracts with various oil and gas operations for the purpose of extracting oil and gas reserves and to market and distribute such extractions for resale.  The company has several relationships with operators such as Barrett Oil Purchasing, Inc. and Coomer Oil LLC.  These operators purchase our extracted oil and gas.  

**Government Regulation**

*Oil and Gas operations:*

The exploration and development of oil and gas properties are subject to various types of federal, state and local laws and regulations. These laws and regulations govern a wide range of matters, including the drilling and spacing of wells, allowable rates of production, restoration of surface areas, plugging and abandonment of wells and specific requirements for the operation of wells.

The oil and gas operators with whom the Company intends to contract with are obligated to conduct drilling operations in compliance with all applicable Federal, state and local laws and regulations. Such regulation includes requiring local permits for the drilling of wells; maintaining bonding requirements in order to drill or operate wells; implementing spill prevention plans; submitting notification and receiving permits relating to the presence, use and release of certain materials incidental to oil and gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface usage and the restoration of properties upon which wells have been drilled, the plugging and abandoning of wells. Our operations are or will also be subject to various conservation matters, including the regulation of the size of drilling and spacing units or proration units, the number of wells which may be drilled in a unit and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally limit the venting or flaring of gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations 

4

is to limit the amounts of oil and gas we may be able to produce from the wells and to limit the number of wells or the locations at which we may be able to drill.

While it is not possible to quantify the costs of compliance by the Company or its operators with all applicable federal and state laws, those costs are expected to be significant. Although the Company’s operators typically accrue adequate amounts to cover these costs, their future operating results would be adversely affected if they later determined these accruals to be insufficient.

Our failure to comply with any laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of injunctive relief or both. Moreover, changes in any of these laws and regulations could have a material adverse effect on our business. In view of the many uncertainties with respect to current and future laws and regulations, including their applicability to us, we cannot predict the overall effect of such laws and regulations on future operations.

**Environmental Laws**

 

The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend is expected to continue. These laws and regulations may require the acquisition of a permit or other authorization before construction, mining or drilling commences and for certain other activities; limit or prohibit construction, mining, drilling and other activities on certain lands lying within wilderness and other protected areas; and impose substantial liabilities for pollution resulting from our operations. The permits required for such mining and drilling operations are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations are subject to fines, penalties or injunctions.  

We are subject to numerous environmental laws and regulations.  We strive to comply with all applicable environmental, health and safety laws and regulations are currently taking the steps indicated above.  We believe that our operations are in compliance with all applicable laws and regulations on environmental matters.  These laws and regulations, on federal, state and local levels, are evolving and frequently modified and we cannot predict accurately the effect, if any, they will have on its business in the future.  In many instances, the regulations have not been finalized, or are frequently being modified. Even where regulations have been adopted, they are subject to varying and contradicting interpretations and implementation. In some cases, compliance can only be achieved by capital expenditure and we cannot accurately predict what capital expenditures, if any, may be required.

Legislation has been proposed in the past and continues to be evaluated in Congress from time to time that would reclassify certain oil and gas exploration and production wastes as “hazardous wastes.” This reclassification would make these wastes subject to much more stringent storage, treatment, disposal and cleanup requirements, which could have a significant adverse effect on our operating costs. Initiatives to further regulate the disposal of oil and gas wastes are also proposed in certain states from time to time and may include initiatives at the county, municipal and local government levels. These various initiatives could have a similar adverse effect on our operating costs.

5

Environmental laws and regulations may require the acquisition of a permit or other authorization before construction, mining or drilling commences and for certain other activities; limit or prohibit construction, mining, drilling and other activities on certain lands lying within wilderness and other protected areas; and impose substantial liabilities for pollution resulting from our operations. The permits required for such drilling operations are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations are subject to fines, penalties or injunctions.  These obligations and responsibilities are those of the oil and gas operators with whom the Company will enter into agreements.

 

The Company (or its subsidiaries) and its lessees will be subject to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, and similar state laws that impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment.  These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liabilities for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. As the owner of the land upon which drilling and other energy-related operations are anticipated to take place, the Company (or its subsidiaries) may be held strictly liable as a responsible party under CERCLA, along with any of its lessees.  Furthermore, neighboring landowners and other third parties may file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.  

The Company’s oil and gas operators will be subject to the Federal Clean Water Act and corresponding state laws which affect operations by imposing restrictions on discharges into regulated waters. Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters. New requirements under the Federal Clean Water Act and corresponding state laws could cause the Company’s oil and gas operators to incur significant additional costs that adversely affect our future operating results.

The Company’s oil and gas operators will be subject to Resource Conservation and Recovery Act (“RCRA”).  RCRA, which was enacted in 1976, affects U.S. mining operations by establishing “cradle to grave” requirements for the treatment, storage and disposal of hazardous wastes. Typically, the only hazardous materials found on a mine site are those contained in products used in vehicles and for machinery maintenance. Oil and natural gas resources underlying the Company (or its subsidiaries) properties may be considered hazardous waste material under RCRA.

The Company’s (or its subsidiaries) lessees may be affected by the Federal Endangered Species Act and counterpart state legislation protect species threatened with possible extinction. Protection of endangered species may have the effect of prohibiting or delaying the Company (or its subsidiaries) and its lessees from obtaining mining permits and may include restrictions on timber harvesting, road building and other mining or forestry activities in areas containing the affected species. A number of species indigenous to Central Appalachia are protected under the Endangered Species Act.  The Company (or its subsidiaries) does not believe there are any 

6

species protected under the Endangered Species Act that would materially and adversely affect our ability to drill for oil and gas on our properties.  Additional species on the Company (or its subsidiaries) properties may receive protected status under the Endangered Species Act and additional currently protected species may be discovered within its properties.  

**Facilities**

The Company maintains an office at 2300 West Sahara Drive, Suite 800, Las Vegas, NV 89102 and the lease is a monthly rate of $157 per month and we have a one year lease agreement.  

**Employees**

The Company has three employees the CEO, President, and CFO.

**ITEM 1A. - RISK FACTORS.**

As a smaller reporting company we are not required to provide a statement of risk factors. However, we believe this information may be valuable to our shareholders for this filing. We reserve the right to not provide risk factors in our future filings. Our primary risk factors and other considerations include:

***We have a limited operating history and limited historical financial information upon which you may evaluate our performance.***

We only have a limited history and we are subject to all risks inherent in a developing business enterprise.  Our likelihood of success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with a new business in general and those specific to the mineral exploration and extraction businesses and the competitive and regulatory environment in which we operate. You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of exploration.  We may not successfully address these risks and uncertainties or successfully implement our operating and acquisition strategies.  If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment.  Even if we accomplish these objectives, we may not generate positive cash flows or profits we anticipate in the future.

***Our financial statements have been prepared assuming that the Company will continue as a going concern.  ***

The accompanying financial statements to this report have been prepared assuming the Company will continue as a going concern.  As discussed in the notes to the accompanying audited financial statements, the Company’s nominal revenues and losses from operations since inception raise substantial doubt about the Company’s ability to continue as a going concern.

In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues.  Management’s plan include investing in and developing potential natural 

7

resources that may exist on or under the Company’s properties in Tennessee and Kentucky, and/or to acquire additional revenue producing assets.  Management intends to use advances from related parties, asset based lending, borrowing, or financing from the issuance or exercise of its securities to mitigate the effects of its cash position, however, no assurance can be given that such sources of financing, if and when required, will be available.  

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

***Our strategy of developing the existing exploration properties and acquiring additional mineral rights may not produce positive financial results for us.***

Our strategy of developing the existing exploration properties and acquiring additional mineral rights is subject to a variety of risks, including the:

·

Inability to locate valuable minerals at the properties;

·

Failure or unanticipated delays in developing the exploration properties where we have mineral rights;

·

Property ownership rights on the property where the mineral rights are located;

·

Inability to negotiate favorable mineral rights agreements on satisfactory terms and conditions;

·

Increases in the prices of equipment due to increased competition for acquisition opportunities or other factors; and 

·

Inability to sell any extracted minerals 

If we are not able to successfully address these risks, it would materially harm our business to the point of having to cease operations and impair the value of our common stock to the point investors may lose their entire investment.

***If we do not obtain new financings in an amount sufficient to pursue development activities at the Company’s properties, and to pursue the acquisition of mineral rights and other natural resources, our operations will be reduced.***

To date we have relied on recent private placement financings in order to fund exploration and development of the Company’s properties.  We will continue to require additional financing to complete our plan of operations for development work at the properties and to pursue the acquisition of mineral rights and other natural resource opportunities.  While our financing requirements may be reduced if we successfully extract valuable minerals, any impairment in our ability to raise additional funds through financings would reduce the available funds for the development of the properties, including additional exploration activities, with the result that our plan of operations may be adversely affected and potential recoveries reduced or delayed.

***We face intense competition.***

We compete against many other energy and natural resource companies, some of which have considerably greater resources and abilities. These competitors may have greater marketing 

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and sales capacity, established distribution networks, significant goodwill and global name recognition.  They also have significantly longer operating histories and more established relationship within the energy and natural resource industry.  They can use their experience and resources against us in a variety of competitive ways.  Although we intend to offer a competitively priced model to acquire assets and/or companies, there can be no assurance that any future price competition by our competitors, if it develops, will not have a material adverse effect on our operations which would prevent us from carrying out our acquisition strategy.  

***Our business strategy, in part, depends upon our ability to complete and manage acquisitions of assets and/or of other companies.***

Our business strategy, in part, is to grow through acquisition of assets and/or other businesses, which depend on our ability to identify, negotiate, complete and integrate suitable acquisitions.  (See Item 1 Business.) Even if we complete an acquisition we may experience: 
·

difficulties in integrating any assets and/or acquired companies, personnel and products into our existing business; 
·

delays in realizing the benefits of the acquired company or products; 
·

significant demands on the Company’s management, technical, financial and other resources;  
·

diversion of our management’s time and attention to unexpected problems; 
·

higher costs of integration than we anticipated; 
·

difficulties in retaining key employees of the acquired businesses who are necessary to manage these acquisitions; and/or 
·

anticipated benefits of acquisitions may not materialize as planned. 

***We depend significantly upon the continued involvement of our present management.***

Our success depends to a significant degree upon the involvement of our management, who are in charge of our strategic planning and operations. We may need to attract and retain additional talented individuals in order to carry out our business objectives. In order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified managerial and field personnel having experience in the oil and gas production, mineral exploration and development and other natural resource businesses. The competition for such persons could be intense and there are no assurances that these individuals will be available to us.
***Current economic recession and political turmoil could materially adversely affect the Company***. 

 

The Company’s future operations and performance depend significantly on worldwide economic and political conditions. Uncertainty about current global economic conditions poses a risk as consumers and businesses have postponed spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our potential energy resources, of which there are no assurances such exist in economically feasible quantities or qualities, and a resulting drop in the prices of such items, actual demand for energy and natural resources could also differ materially from the Company’s expectations.  Other factors that could influence demand include continuing increases in fuel and other energy costs, conditions in the residential real estate and mortgage 

9

markets, the financial crisis, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors.  These and geopolitical events such as war and terrorist actions could have a material adverse effect on demand for the Company’s products and services and on the Company’s financial condition, operating results, and cash flows. 

***Our business is subject to extensive regulation.***

As many of our activities are subject to federal, state and local regulation, and as these rules are subject to constant change or amendment, there can be no assurance that our operations will not be adversely affected by new or different government regulations, laws or court decisions applicable to our operations.

***Government regulation and liability for environmental matters may adversely affect our business and results of operations.***

Crude oil, natural gas and other natural resource extraction operations are subject to extensive federal, state and local government regulations, which may be changed from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of crude oil and natural gas wells below actual production capacity in order to conserve supplies of crude oil and natural gas. There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation and disposal of crude oil and natural gas, byproducts thereof and other substances and materials produced or used in connection with crude oil and natural gas operations. In addition, we may inherit liability for environmental damages caused by previous owners of property we purchase or lease. As a result, we may incur substantial liabilities to third parties or governmental entities. We are also subject to changing and extensive tax laws, the effects of which cannot be predicted. The implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on us.

***The crude oil and natural gas reserves we will report in our SEC filings will be estimates and may prove to be inaccurate.***

There are numerous uncertainties inherent in estimating crude oil and natural gas reserves and their estimated values. The reserves we will report in our filings with the SEC will only be estimates and such estimates may prove to be inaccurate because of these uncertainties. Reservoir engineering is a subjective and inexact process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable crude oil and natural gas reserves depend upon a number of variable factors, such as historical production from the area compared with production from other producing areas and assumptions concerning effects of regulations by governmental agencies, future crude oil and natural gas prices, future operating costs, severance and excise taxes, development costs and work-over and remedial costs. Some or all of these assumptions may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of crude oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected there from prepared by different engineers or by the same 

10

engineers but at different times may vary substantially. Accordingly, reserve estimates may be subject to downward or upward adjustment. Actual production, revenue and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.

***Crude oil and natural gas development, re-completion of wells from one reservoir to another reservoir, restoring wells to production and drilling and completing new wells are speculative activities and involve numerous risks and substantial and uncertain costs.***

Our growth will be materially dependent upon the success of our future development program. Drilling for crude oil and natural gas and reworking existing wells involves numerous risks, including the risk that no commercially productive crude oil or natural gas reservoirs will be encountered. The cost of drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors beyond our control, including:

·

unexpected drilling conditions;

·

pressure or irregularities in formations;

·

equipment failures or accidents;

·

inability to obtain leases on economic terms, where applicable;

·

adverse weather conditions;

·

compliance with governmental requirements; and

·

shortages or delays in the availability of drilling rigs or crews and the delivery of equipment.

Drilling or reworking is a highly speculative activity. Even when fully and correctly utilized, modern well completion techniques such as hydraulic fracturing and horizontal drilling do not guarantee that we will find crude oil and/or natural gas in our wells. Hydraulic fracturing involves pumping a fluid with or without particulates into a formation at high pressure, thereby creating fractures in the rock and leaving the particulates in the fractures to ensure that the fractures remain open, thereby potentially increasing the ability of the reservoir to produce oil or gas. Horizontal drilling involves drilling horizontally out from an existing vertical well bore, thereby potentially increasing the area and reach of the well bore that is in contact with the reservoir. Our future drilling activities may not be successful and, if unsuccessful, such failure would have an adverse effect on our future results of operations and financial condition. We cannot assure you that our overall drilling success rate or our drilling success rate for activities within a particular geographic area will not decline. We may identify and develop prospects through a number of methods, some of which do not include lateral drilling or hydraulic fracturing, and some of which may be unproven. The drilling and results for these prospects may be particularly uncertain. Our drilling schedule may vary from our capital budget. The final determination with respect to the drilling of any scheduled or budgeted prospects will be dependent on a number of factors, including, but not limited to:

·

the results of previous development efforts and the acquisition, review and analysis of data;

·

the availability of sufficient capital resources to us and the other participants, if any, for the drilling of the prospects;

11

·

the approval of the prospects by other participants, if any, after additional data has been compiled;

·

economic and industry conditions at the time of drilling, including prevailing and anticipated prices for crude oil and natural gas and the availability of drilling rigs and crews;

·

our financial resources and results;

·

the availability of leases and permits on reasonable terms for the prospects; and

·

the success of our drilling technology.

We cannot assure you that these projects can be successfully developed or that the wells discussed will, if drilled, encounter reservoirs of commercially productive crude oil or natural gas. There are numerous uncertainties in estimating quantities of proved reserves, including many factors beyond our control.

***Crude oil and natural gas prices are highly volatile in general and low prices will negatively affect our financial results.***

Our revenues, operating results, profitability, cash flow, future rate of growth and ability to borrow funds or obtain additional capital, as well as the carrying value of our properties, are substantially dependent upon prevailing prices of crude oil and natural gas. Lower crude oil and natural gas prices also may reduce the amount of crude oil and natural gas that we can produce economically. Historically, the markets for crude oil and natural gas have been very volatile, and such markets are likely to continue to be volatile in the future. Prices for crude oil and natural gas are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for crude oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control, including:

·

worldwide and domestic supplies of crude oil and natural gas;

·

the level of consumer product demand;

·

weather conditions;

·

domestic and foreign governmental regulations;

·

the price and availability of alternative fuels;

·

political instability or armed conflict in oil producing regions;

·

the price and level of foreign imports; and

·

overall domestic and global economic conditions.

It is extremely difficult to predict future crude oil and natural gas price movements with any certainty. Declines in crude oil and natural gas prices may materially adversely affect our financial condition, liquidity, ability to finance planned capital expenditures and results of operations. Further, oil and gas prices do not move in tandem.

***If we are unable to hire, retain or motivate qualified personnel, consultants and advisors, we may not be able to grow effectively.***

 

Our performance will be largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization. Competition for such qualified employees is intense. If we do not succeed in attracting excellent personnel or in 

12

retaining or motivating them, we may be unable to grow effectively. In addition, our future success will depend in large part on our ability to retain key consultants and advisors. Our inability to retain their services could negatively affect our business and our ability to execute our business strategy.

 

***If the cost of recovering mineralized material at the properties is higher than anticipated, then our financial condition and ability to pursue additional exploration will be adversely affected.***

We have proceeded with petroleum engineering and geological surveys and sampling.  If the actual costs are greater than anticipated, then cash used in the exploration activities at the properties will be greater than anticipated.  An increase in the funds used in sampling and surveying activities will cause us to have fewer funds for other expenses, such as administrative and overhead expenses and exploration of our other mineral properties.  In this event, our financial condition will be adversely affected and will have fewer funds with which to pursue our exploration programs. 

***Exploration activities are inherently hazardous.***

Mineral exploration activities involve many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome.  Operations that we undertake will be subject to all the hazards and risks normally incidental to the exploration for minerals, any of which could result in work stoppages, damage to property and possible environmental damage.  The nature of these risks are such that liabilities might result in us being forced to incur significant costs that could have a material adverse effect on our financial condition and business prospects. 

***There may be challenges to the titles to our property.***

Titles to mineral rights in the United States involves certain inherent risks due to the impossibility of determining the validity of unpatented claims from real estate records, as well as the potential for problems arising from the frequently ambiguous conveyance history characteristic of many mineral rights.  Although we believe we have conducted reasonable investigations (in accordance with standard industry practice) of the validity of ownership of and the ability of certain holders of certain claims to transfer to certain rights and other interests therein to us, there can be no assurance that we hold good and marketable title to all of our U.S. mineral rights, leases or properties.  There may be challenges to the title to our properties.  If there are title defects with respect to any of the properties, we might be required to compensate other persons or perhaps reduce or change our interest in the affected property.  Also, in any such case, the investigation and resolution of title issues would divert management's time from ongoing development programs.  Any significant successful challenges to our mineral rights would cause us to cease operations and for our investors to lose some or all of their investment.  We have conducted limited reviews of title and obtained representations regarding ownership from holders of mineral rights.  Our practice will be, if possible, to obtain title insurance with respect to our major mineral rights. This insurance however may not be sufficient to cover loss of investment or guarantee of future profits.

13

***Some of our officers and directors have other business ventures.***

As disclosed in their biographies contained herein, some of our officers and directors work with other companies in addition to their work for us. 

***Climate change and related regulatory responses may effect our business.***

 

Climate change as a result of emissions of greenhouse gases is a significant topic of discussion and may generate U.S. federal and other regulatory responses in the near future. It is impracticable to predict with any certainty the effects of climate change on our business or the regulatory responses to it, although we recognize that they could be significant. However, it is too soon for us to predict with any certainty the ultimate consequences, either directionally or quantitatively, of climate change and related regulatory responses.

 

To the extent that climate change increases the risk of natural disasters or other disruptive events in the areas in which we operate, we could be harmed. While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that can be disruptive to our business, our plans may not fully protect us from all such disasters or events.

 

***Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and pose challenges for our management.***

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated there under, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

We are subject to all governmental rules, laws and regulations relating to the mining industry in the U.S., and we fully intend to comply therewith.  However, there is no assurance the governmental agencies having jurisdiction over us, our operations and properties, will not enact laws, rules and/or regulations in the future which may have an adverse effect on us and our operations. 

**Risks Related to our Securities**

***The market price for our common stock may be volatile, and you may not be able to sell our stock at a favorable price or at all.***

Many factors could cause the market price of our common stock to rise and fall, including: 

·

actual or anticipated variations in our quarterly results of operations; 

14

·

changes in market valuations of companies in our industry;
·

changes in expectations of future financial performance;
·

fluctuations in stock market prices and volumes;
·

issuances of dilutive common stock or other securities in the future;
·

the addition or departure of key personnel;
·

announcements by us or our competitors of acquisitions, investments or strategic alliances; and
·

the increase or decline in the price of oil and natural gas. 

 

It is possible that the proceeds from sales of our common stock may not equal or exceed the prices you paid for the shares plus the costs and fees of making the sales. 

***Substantial sales of our common stock, or the perception that such sales might occur, could depress the market price of our common stock.***

We cannot predict whether future issuances of our common stock or resale in the open market will decrease the market price of our common stock. The consequence of any such issuances or resale of our common stock on our market price may be increased as a result of the fact that our common stock is thinly, or infrequently, traded. The exercise of any options, or the vesting of any restricted stock that we may grant to directors, executive officers and other employees in the future, the issuance of common stock in connection with acquisitions and other issuances of our common stock may decrease the market price of our common stock. 

***Holders of our common stock have a risk of potential dilution if we issue additional shares of common stock in the future.***

Although our Board of Directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any future issuance of our common stock, the future issuance of additional shares of our common stock would cause immediate, and potentially substantial, dilution to the net tangible book value of those shares of common stock that are issued and outstanding immediately prior to such transaction.  Any future decrease in the net tangible book value of our issued and outstanding shares could have a material effect on the market value of the shares. 

***We do not intend to pay cash dividends to our stockholders, so you will not receive any return on your investment in our Company prior to selling your interest in the Company.***

The Company has never paid any cash dividends to our stockholders. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future.  As a result, you will not receive any return on your investment prior to selling your shares in our Company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our Company. 

15

***Certain shares of our common stock are restricted from immediate resale.  The lapse of those restrictions, coupled with the sale of the related shares in the market, or the market’s expectation of such sales, could result in an immediate and substantial decline in the market price of our common stock.***

Most of our shares of common stock are restricted from immediate resale in the public market.  The restricted shares are restricted in accordance with Rule 144, which states that if unregistered, restricted securities are to be sold, a minimum of one year must elapse between the later of the date of acquisition of the securities from the issuer or from an affiliate of the issuer, and any resale of those securities in reliance on Rule 144.  The Rule 144 restrictive legend remains on the stock until the holder of the stock holds the stock for longer than six months (unless an affiliate) and meets the other requirements of Rule 144 to have the restriction removed.  The sale or resale of those shares in the public market, or the market’s expectation of such sales, may result in an immediate and substantial decline in the market price of our shares.  Such a decline will adversely affect our investors, and make it more difficult for us to raise additional funds through equity offerings in the future. 

***Our management has discretion as to how to use any proceeds from the sale of securities.  ***

We reserve the right to use any funds obtained from any sale of our securities in any manner which our management deems to be in the best interests of the company and our shareholders in order to address changed circumstances or opportunities.  As a result of the foregoing, our success will be substantially dependent upon the discretion and judgment of management with respect to application and allocation of the net proceeds from any offering of our securities.  Investors for the common stock offered will be entrusting their funds to our management, upon whose judgment and discretion the investors must depend. 

***Our common stock is subject to restrictions on sales by broker-dealers and penny stock rules, which may be detrimental to investors.***

 

Our common stock is subject to Rules 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell our common stock to persons other than established customers and “accredited investors” (as defined in Rule 501(a) of the Securities Act). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their Shares of our common stock. 

 

Additionally, our common stock is subject to SEC regulations applicable to “penny stocks.” Penny stocks include any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule proscribed by the SEC relating to the penny stock market must be delivered by a broker-dealer to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for our common stock. The regulations also require that monthly statements be sent to holders of a penny stock 

16

that disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock. 

**Anti-Takeover, Limited Liability and Indemnification Provisions**

***Certificate of Incorporation and By-laws.***

Under our certificate of incorporation, our Board of Directors may issue additional shares of common or preferred stock. Any additional issuance of common or preferred stock could have the effect of impeding or discouraging the acquisition of control of us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price for their shares, and thereby protects the continuity of our management. Specifically, if in the due exercise of its fiduciary obligations, the Board of Directors were to determine that a takeover proposal was not in our best interest, shares could be issued by our Board of Directors without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by: 

·

diluting the voting or other rights of the proposed acquirer or insurgent stockholder group, 

·

putting a substantial voting bloc in institutional or other hands that might undertake to support the incumbent Board of Directors, or 

·

effecting an acquisition that might complicate or preclude the takeover. 

Our certificate of incorporation also allows our Board of Directors to fix the number of directors in the bylaws. Cumulative voting in the election of directors is specifically denied in our certificate of incorporation. The effect of these provisions may be to delay or prevent a tender offer or takeover attempt that a stockholder may determine to be in his or its best interest, including attempts that might result in a premium over the market price for the shares held by the stockholders. 

***Delaware Anti-Takeover Law.***

We are subject to the provisions of Section 203 of the Delaware General Corporation Law concerning corporate takeovers. This section prevents many Delaware corporations from engaging in a business combination with any interested stockholder, under specified circumstances. For these purposes, a business combination includes a merger or sale of more than 10% of our assets, and an interested stockholder includes a stockholder who owns 15% or more of our outstanding voting stock, as well as affiliates and associates of these persons. Under these provisions, this type of business combination is prohibited for three years following the date that the stockholder became an interested stockholder unless: 

·

the transaction in which the stockholder became an interested stockholder is approved by the Board of directors prior to the date the interested stockholder attained that status; 

17

·

on consummation of the transaction that resulted in the stockholder’s becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction was commenced, excluding those shares owned by persons who are directors and also officers; or 

·

on or subsequent to that date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. 

This statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us. 

***Limited Liability and Indemnification.***

Our certificate of incorporation eliminates the personal liability of our directors for monetary damages arising from a breach of their fiduciary duty as directors to the fullest extent permitted by Delaware law. This limitation does not affect the availability of equitable remedies, such as injunctive relief or rescission. Our certificate of incorporation requires us to indemnify our directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. 

Under Delaware law, we may indemnify our directors or officers or other persons who were, are or are threatened to be made a named defendant or respondent in a proceeding because the person is or was our director, officer, employee or agent, if we determine that the person: 

·

conducted himself or herself in good faith, reasonably believed, in the case of conduct in his or her official capacity as our director or officer, that his or her conduct was in our best interests, and, in all other cases, that his or her conduct was at least not opposed to our best interests; and 

·

in the case of any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. 

These persons may be indemnified against expenses, including attorneys fees, judgments, fines, including excise taxes, and amounts paid in settlement, actually and reasonably incurred, by the person in connection with the proceeding. If the person is found liable to the corporation, no indemnification will be made unless the court in which the action was brought determines that the person is fairly and reasonably entitled to indemnity in an amount that the court will establish. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us under the above provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 

18

**SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.**

**ITEM 1B - UNRESOLVED STAFF COMMENTS  **

The Company has an unresolved comment letter dated July 13, 2011 in which there are outstanding comments to be cleared by the Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934.  The filing of this amendment is intended to respond to those open comments.  The Company has responded to all other outstanding comments presented by the Commission staff.   

**ITEM 2 - PROPERTIES**

The Company has an office at 2300 West Sahara Drive, Suite 800, Las Vegas, NV 89102.  The one-year lease is for approximately 200 square feet of office space at a monthly rate of $157 per month~~.~~
**ITEM 3 - LEGAL PROCEEDINGS**

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

In February 9, 2011, the State of California entered an Order against Leland Energy, Inc., Leland Kentucky Holding, Inc., Stephen M. Thompson, Annex Drilling Fund LLP, The Appalachian Drilling Fund II, LLP, BC-2 Drilling Fund, LLP, Block City Drilling Fund, LLP, Energy Production Revenue Drilling Fund, LLP, Green County Energy Fund, LLP, Knox Drilling Fund, LLP, Know Drilling Fund II, LLP, Production Revenue Drilling Fund, LLP, and Rogers Production Revenue Fund, LLP for claims that the parties violated Corporations Code 25401.  The State of California alleged that the offering materials omitted material facts, that on August 11, 1981 the Wisconsin Commissioner of Securities issued an Order of Prohibition against Stephen Thompson for securities violation and on September 5, 2002 issued another Order of Prohibition against Stephen Thompson and Leland Energy. Also, on May 13, 2003 the Pennsylvania Securities Commission issued a Cease and Desist Order against Leland Energy   prohibiting the offering or sale of securities unless they retain counsel knowledgeable in securities laws applicable to filings with the Commission.

19

Leland Energy, Inc. has settled this matter which requires Leland Energy, Inc. to pay monthly payments of $18,000 for a total of $1,314,477.23 in restitution and $51,500 in penalties to individual partners in the partnerships.  The payments commence on May 1, 2012 for a period of five (5) years until paid in full. Leland neither admitted nor denied the allegations claimed but believes it is in the best interest of Leland and a sound business decision to settle this matter for all of the parties.

The Company was not a party to these proceedings and did not assume any liabilities of the above mentioned partnerships.  In the opinion of legal counsel, the State of California has no recourse against the Company. 

**ITEM 4 - (REMOVED AND RESERVED)**

 

 

**PART II**
**ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

Our common stock has been traded on the OTCBB since on or about December 12, 2007 and there currently is a limited public trading market for our common stock.  Prior to that date, our common stock was not actively traded in the public market.  Our common stock is listed on the OTCBB under the symbol "CNSV".  

 

The following table sets forth, for the periods indicated, the high and low bid quotations for our common stock on the OTCBB as reported by various Bulletin Board market makers.  The quotations reflect inter-dealer prices, without adjustments for retail mark-ups, mark-downs, or commissions and may not necessarily reflect actual transactions.

 

**Period**

 

**High**

**Trade**

 

 

**Low**

**Trade**

 

2010

 

 

 

 

 

 

Fourth Quarter

 

$

.23

 

 

$

.23

 

Third Quarter

 

$

.245

 

 

$

.245

 

Second Quarter

 

$

.50

 

 

$

.50

 

First Quarter

 

$

1.10

 

 

$

1.10

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

Fourth Quarter

 

$

1.20

 

 

$

0.65

 

Third Quarter

 

$

1.15

 

 

$

0.75

 

Second Quarter

 

$

1.15

 

 

$

1.15

 

First Quarter

 

$

1.15

 

 

$

0.61

 

 

On April 13, 2011 there were 626 stockholders of record and 42,943,669 shares of our common stock issued and outstanding and the closing price per share was $.07.  

 

20

To date, the Company has never declared or paid any cash dividends on our capital stock and we do not expect to pay any cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

 

**Recent Sales of Unregistered Securities**

 

All issuances of restricted securities by the Company during the year ended December 31, 2010 were previously reported on Current Reports on Form 8-K or the Company’s Quarterly Reports on Form 10-Q.  

**Securities Authorized for Issuance Under Equity Compensation Plans**

***Equity Compensation Plan Information***

The following table provides information regarding the status of our existing equity compensation plans at December 31, 2010.

**Plan category**

** **

**Number of**

**shares of**

**common**

**stock to be**

**issued on**

**exercise of**

**outstanding**

**options,**

**warrants**

**and rights**

 

 

**Weighted-**

**average**

**exercise**

**price of**

**outstanding**

**options,**

**warrants**

**and rights**

 

 

**Number of**

**securities**

**remaining**

**available for**

**future**

**issuance**

**under equity**

**compensation**

**plans**

**(excluding**

**securities**

**reflected in**

**the previous**

**columns)**

** **

Equity compensation plans approved by security holders  (1)

 

 

-0-

 

 

 

-0-

 

 

 

5,000,000

 

Equity compensation plans not approved by security holders

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

Total

 

 

-0-

 

 

 

-0-

 

 

 

5,000,000

 

(1) Consists of our 2007 Employee Stock Incentive Plan.

**Issuer Repurchases**

The Company does not have any securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.

21

**ITEM 6 - SELECTED FINANCIAL DATA**

The following information has been summarized from financial information included elsewhere and should be read in conjunction with such financial statements and notes thereto.

Summary of Statements of Operations and Financial Position of CNSV

Years Ended December 31, 2010 and 2009

 

 

December 31, 

 

 

2010

 

2009

 

 

Restated

 

 

Revenues

$

  194,251

$

-

Operating and Other Expenses

 

(2,475,750)

 

(633,809)

 

 

 

 

 

Net Loss

$

(2,281,499)

$

(633,809)

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

December 31,

 

 

2010

 

2009

 

 

Restated

 

 

Current Assets

$

28,128

$

-

Total Assets

 

5,263,980

 

7,100,296

Current Liabilities

 

180,916

 

2,964,585

Non Current Liabilities

 

21,562

 

-

Total Liabilities

 

202,478

 

2,964,585

Working Capital (Deficit)

 

(152,788)

 

(2,964,585)

Shareholders’ Equity 

$

5,061,502

$

4,135,711

**ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**

***Statement Regarding Forward-Looking Disclosure***

 

*Certain statements contained in this report, including, without limitation, statements containing the words, "likely," "forecast," "project," "believe," "anticipate," "expect," and other words of similar meaning, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.  Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are*

22

*reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.*

***General***

 

CNSV was formed on January 26, 2007 to engage in the acquisition, development and exploitation of natural resource and energy-related assets.  Until January 1, 2010, the Company sought to generate revenues from our coal-mining related operations and through the harvesting of timber.

**Plan of Operations**

On February 12, 2010, the Company filed a Current Report on Form 8-K which disclosed the Spin-off and includes as an exhibit the Separation and Distribution Agreement (the “Spin-Off Agreement”) dated as of January 1, 2010 by and between the Company and Colt, which is incorporated by reference herein.  The following summary of the Spin-Off Agreement is not complete and is subject to and qualified in its entirety by reference to, the provisions of the Spin-Off Agreement.

Effective as of January 1, 2010, for tax and accounting purposes, the Company transferred and assigned to Colt all of the assets (“Colt Assets”) relating to the coal mining business of the Company as well as all other assets owned by the Company, except for oil and gas rights minus 12.5% overriding royalty payments to Colt in the oil and gas assets retained by the Company.  The Company is in the process of filing the necessary assignments, mineral deeds, or similar filings with the appropriate Government Entities (as defined) in order to reflect the royalty assignments.  Colt assumed the liabilities of CNSV (“Colt Liabilities”) which are generally all liabilities of the Company as of December 31, 2009, except for the obligation to file regulatory filings and taxes; the Company’s coal mining business and any liabilities arising out of the operations of Colt’s business after January 1, 2010; and any and all liabilities of the Company under which it is an obligor by reason of any guarantee or contractual commitment.  The consideration for the Spin-off was all of the shares of Colt common stock to be distributed to the Company’s stockholders of record as of January 31, 2010.  Together with an Information Statement, Colt has issued certificates representing 100% of the shares of Colt common stock to each shareholder of the Company’s Common Stock on the Record Date on a pro-rata basis, of one (1) share of Colt common stock for each one (i) share of Company’s Common Stock so held by such record holder.  The certificates for the Colt common stock shall be delivered directly to each record holder by mail at their respective addresses as listed in the Company’s transfer agent’s books and records.

The Company and Colt both acknowledged that Colt is and shall continue to be a non-reporting privately held company and that there will not be a public market in the Colt common stock, nor is one expected to develop, and that the Colt common stock that record holders receive shall be “restricted securities.”  In that connection both parties agree: (1) the Colt common stock shall have the appropriate restrictive legends which describe the transfer restrictions related 

23

thereto; and (ii) Colt’s stock transfer books shall include “stop transfer” instructions that indicate such transfer limits.

Since April 1, 2010, the Company has been engaged solely in the exploitation of our oil and gas mineral rights in Kentucky and Tennessee.  In addition, the Company’s business strategy includes an ongoing search to identify unique opportunities to acquire and develop additional oil & gas mineral rights and operations and/or other natural resources opportunities, with a goal of increasing current revenue and long-term value.  The Company also owns oil and gas mineral rights on an additional 12,000 acres (approximately) in Eastern Kentucky

At this stage, our activities have been limited to pursuing our strategy to identify and acquire additional natural resource opportunities including but not limited to oil & gas mineral rights, leases and operations. There can be no assurance at this stage that the Company will acquire assets using restricted securities now or in the future, or that we will have access to cash to acquire other assets and interests.  If we are unable to acquire assets using our securities, we intend to leverage our existing assets, as well as seek to raise capital though the sale of equity and/or debt securities.  Our ultimate success will depend on our ability to acquire assets and raise additional capital on a timely basis in order to take advantage of opportunities which become available to us.  In any event, there can be no assurance that we will be able to develop rights or resources which may exist on our properties in economically feasible quantities, if at all, or that such potential resources can be extracted. 

On April 1, 2010, the Company entered into 12 substantially identical asset purchase agreements with various unrelated partnerships which comprised a total of the individual sellers and completed the purchase of interests in oil and gas wells located in Kentucky and Tennessee. The Company acquired interests in 39 oil wells and 19 gas wells, a total of 58 wells and the related support equipment, located on approximately 1,500 leased acres in Kentucky and Tennessee. Under the agreements, the Company acquired all rights, titles and interests to the sellers’ oil and gas wells and support equipment free and clear of all liabilities, liens and encumbrances. The effective date of the purchase and sale was April 1, 2010. As part of the acquisition, the sellers received an aggregate of 22,786,872 common shares of the Company’s common stock.  Management believes that the acquisition of the assets, included in the 12 asset purchase agreements, provides our Company with increased acres available for future drilling, as well as already drilled operating wells.  

**Off-Balance Sheet Arrangements**

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

 

**Critical Accounting Policies**

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are as follows:

24

***Use of Estimates and Assumptions***

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

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

***Oil and Gas Properties***

The Company uses the successful efforts method of accounting for oil and gas operations.  Under this method of accounting, costs to acquire mineral interests in oil and gas properties, to drill and equip development wells, and to drill and equip exploratory wells that find proved reserves are capitalized.  Depletion and depreciation of capitalized costs for producing oil and gas properties is calculated using the unit-of-production method based on estimates of proved oil and gas reserves on a field-by-field basis.  Depletion and depreciation expense for period ended April 1, 2010 was $0, period ended December 31, 2010 of $58,000 and year ended December 31, 2010 was approximately $58,000 and  2009  was $ 0, respectively.

The costs of unproved leaseholds and mineral interests are capitalized pending the results of exploration efforts.  In addition, unproved leasehold costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, the property has been impaired.  This impairment will generally be based on geophysical or geologic data.  For the year ended December 31, 2010 there was no impairment of unproved leaseholds.  Due to the perpetual nature of the Company’s ownership of the mineral interests, the drilling of a well, whether successful or unsuccessful, may not represent a complete test of all depths of interest.  Therefore, at the time that a well is drilled, only a portion of the costs allocated to the acreage drilled may be expensed.  As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds.  The costs associated with unproved leaseholds and mineral interests that have been allowed to expire are charged to exploration expense.

The Company evaluates impairment of its property and equipment in accordance with ASC Topic 3605, *“Long-Lived Assets*”.  This standard requires that long-lived assets that are held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  When it is determined that an asset’s estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge must be recorded to reduce the carrying amount of the asset to its estimated fair value.  Fair value is determined by reference to the present value of 

25

estimated future cash flows of such properties.  During the year ended December 31, 2010 management had no impairment of the Company’s long lived assets. 

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

The cost of normal maintenance and repairs is charged to operating expenses as incurred.  Material expenditures which increase the life of an asset or increase expected recoveries are capitalized and depleted or depreciated over the estimated remaining useful life of the asset.  The cost of properties sold, or otherwise disposed of, and the related accumulated depletion, depreciation or amortization is removed from the accounts and any gains or losses are reflected in current operations.

***Revenue Recognition***

The Company has royalty and working interests in various oil and gas properties which constitute its primary source of revenue.  The Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells.  Other sources of revenues received by the Company include delay rentals and mineral lease bonuses, which are recognized as revenue according to the terms of the lease agreements.

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

***Accounts Receivable***

Substantially, all of the Company’s accounts receivable consists of accrued revenues from oil and gas production for the year ended December 31, 2010 from third party companies in the oil and gas industry.  This concentration of customers may be a consideration of the Companies’ overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the oil and gas industry.  In determining whether or not to require collateral from a purchaser or joint interest owner, the Company analyzes the entity’s net worth, cash flows, earnings and credit ratings

***Fair Value of Financial Instruments***

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

The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, and accounts payable approximate fair value.

26

***Asset retirement obligations***

The Company plans to recognize liabilities for statutory, contractual or legal obligations, including those associated with the reclamation of mineral and mining properties and any plant and equipment, when those obligations result from the acquisition, construction, development or normal operation of the assets. Initially, a liability for an asset retirement obligation will be recognized at its fair value in the period in which it is incurred. Upon initial recognition of the liability, the corresponding asset retirement cost will be added to the carrying amount of the related asset and the cost will be amortized as an expense over the economic life of the asset using either the unit-of-production method or the straight-line method, as appropriate. Following the initial recognition of the asset retirement obligation, the carrying amount of the liability will be increased for the passage of time and adjusted for changes to the amount or timing of the underlying cash flows needed to settle the obligation.

 

***Income Taxes***

Deferred income taxes are provided based on the provisions of ASC Topic 740, "*Accounting for Income Taxes*", to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.  

The Company adopted the provisions of ASC Topic 740; "Accounting For Uncertainty In Income Taxes-An Interpretation Of ASC Topic 740 ("Topic 740").  Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. At December 31, 2010, the Company did not record any liabilities for uncertain tax positions.

**Supplemental Oil and Gas Information**

 

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

27

**Successor Company**

 

 

Year Ended December 31, 

 

 

 

2010

 

 

2009

 

Production

 

 

 

 

 

 

Oil (Bbls)

 

 

2,819

 

 

 

     -

 

Gas (Mcf)

                      

 

-

 

 

 

-

 

Barrels of Oil Equivalent (BOE)

 

 

2,819

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Average Prices

 

 

 

 

 

 

 

 

Oil ($/Bbl)

 

$

68.90

 

 

$

-

 

Gas ($/Mcf)

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

Average Lifting Cost

 

 

 

 

 

 

 

 

Per Boe

 

$

30.65

 

 

$

-

 

**Predecessor Company**

 

 

Year Ended December 31,

 

 

2009

Production

 

 

Oil (Bbls)

 

 

4,648.

Gas (Mcf)

                                     

 

-

Barrels of Oil Equivalent (BOE)

 

 

4,648

 

 

 

 

Average Prices

 

 

 

Oil ($/Bbl)

 

$

74,72

Gas ($/Mcf)

 

$

-

 

 

 

 

Average Lifting Cost

 

 

 

Per Boe

 

$

20.59

**Results of Operations - Successor Company**

 

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

Our revenues for the period ended April 1, 2010 were $0, period ended December 31, 2010 and year ended December 31, 2010 were $194,251 as compared to $0 for 2009.  Our revenues are from the sale of our oil and gas production.  During the year ended December 31, 2010 we produced approximately 2,819 barrels and received an average price per barrel of $68.90. 

Our operating expenses for production activities for the period ended April 1, 2010 were $0 and period ended and year ended December 31, 2010 were $146,119 (comprised of $86,413 of lease operating expenses and $59,706 of depreciation, depletion and amortization) as compared to $0 for 2009.  Our primary operation is the drilling and production of our oil and gas 

28

properties.  The wells in Kentucky are shallow wells (approximately 1,300 feet) and require minimal maintenance. 

Our general and administrative expenses for the period ended April 1, 2010 were $41,291, period ended December 31, 2010 were $2,288,300, and year ended December 31, 2010 were $2,329,591 as compared to $121,114 for 2009.   The increase in general and administrative expenses was due to the additions to our management team and the hiring of consultants in connection with the planned acquisition of Grayson Services, Inc which was terminated, as well as in anticipation of future acquisitions.  We pay our employees and consultants largely in common shares as our cash availability is currently limited. 

We recorded a loss from discontinued operations for the year ended December 31, 2009 of $476,282. The Company is currently engaged in the exploration and development of oil in Tennessee.  Until January 1, 2010, the Company’s sole sources of revenues were from its coal mining and timber harvesting operations.  The Company discontinued its coal mining and timber harvesting operations on January 1, 2010 (See “Note 9 - Discontinued Operations” to the accompanying Unaudited Consolidated Financial Statements).   The Company’s coal mining operations and its timber harvesting operations were its primary operations and only sources of revenues for the year ended December 31, 2009.   

We incurred net losses of $41,331 for the period ended April 1, 2010, $2,240,168   for the period ended December 31, 2010, and $2,281,499 for the year ended December 31, 2010 as compared to $597,396 for year ended December 31, 2009, due to the factors discussed above.

**Results of Operations - Predecessor Company**

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

Our revenues for the period ended April 1, 2010 were $67,552 and year ended December 31, 2009 were $347,282.  Our revenues are from the sale of our oil and gas production.  During the period ended April 1, 2010, we produced approximately 685 barrels and received an average price per barrel of $98.62 and for the year ended December 31, 2009 we produced approximately 4,648 barrels and received an average price per barrel of $74.72. 

Our operating expenses for production activities for the period ended April 1, 2010 were $61,596 (comprised of $36,550 of lease operating expenses and $25,046 of depreciation, depletion and amortization) and for the year ended December 31, 2009 were $208,040 (comprised of $99,742 of lease operating expenses and $108,298 of depreciation, depletion and amortization).  Our primary operation is the drilling and production of our oil and gas properties.  The wells in Kentucky are shallow wells (approximately 1,300 feet) and require minimal maintenance.     

Our general and administrative expenses for the period ended April 1, 2010 were $182 and for the year ended December 31, 2009 were $8,376.   The decrease in general and administrative expenses was due to the fact that there were limited employees to run the free flowing wells.  

29

Our impairment of oil and gas properties for the period ended April 1, 2010 were $0 and year ended December 31, 2009 was $545,616 and impairment of non-operating assets of the Leland Energy note of $2,500,000.  The impairment of the non-operating assets was a note with a combined partnership of Leland Energy that agreed to write off the note as part of the agreement of the acquisition of the oil and gas properties by Consolidations Services Inc.    

We incurred net income of $5,774 for the period ended April 1, 2010 and a net loss of $2,914,750 for the year ended December 31, 2009, due to factors discussed above.

**Liquidity and Capital Resources - Successor Company**

Our cash used in operating activities for the period ended April 1, 2010 was $13,169, used in operating activities for the period ended December 31, 2010 was $139,095, and used in operating activities for year ended December 31, 2010 was $152,264  as compared to $63,364 for the year ended December 31, 2009.   The increase in cash used in operating activities was primarily attributable to higher general administrative expenses for employees and services for 2010 as compared to 2009.

Cash used in investing activities for the period ended April 1, 2010 was $0, period ended December 31, 2010 was $50,000, and year ended December 31, 2010 was $50,000 as compared to $140,907 for the year ended December 31, 2009.  For the period ended December 31, 2010, the Company invested $50,000 in additional support equipment to be used in its oil and gas operations.  For the year ended December 31, 2009, the Company invested $140,907 in assets to be used in its prior coal and timber operations.  

Our cash provided by financing activities for the period ended April 1, 2010 was $22,000, for the period ended December 31, 2010 was $197,500, and for the year ended December 31, 2010 was $219,500, as compared to $204,271 for the year December 31, 2009.  The increase in financing activities was due to the proceeds from the issuance of common stock of $204,500 as compared to $96,750 for December 31, 2010 and 2009, respectively.  A shareholder advanced funds in the amount of $37,000 and that advance was repaid in the amount of $22,000 for the year ended December 31, 2010.  

**Liquidity and Capital Resources - Predecessor Company**

Our cash provided by operating activities for the period ended April 1, 2010 was $14,311 and for the year ended December 31, 2009 was $237,112.   The increase in cash provided by operating activities was primarily attributable to the operating costs for operating the oil and gas properties. 

Cash used in investing activities for the period ended April 1, 2010 was $0 and for the year ended December 31, 2009 was $1,037,862.  The Company raised funds from a partnership to resume oil and gas drilling on the combine partnerships leases.   

Our cash used in financing activities for the period ended April 1, 2010 and our cash provided by financing activities for the year ended December 31, 2009 was $782,591.  The Company received $2,500 in cash contributed from a partnership interest and had partnership withdrawals of $8,729 for the period ended April 1, 2010. The Company received $1,292,139 in 

30

cash contribution from a partnership interest and had partnership withdrawals of $509,548 for the year ended December 31, 2009.  

Our plan of operations is uncertain and is dependent on our ability to effectively drill oil and gas and obtain contract and leasing opportunities on oil and gas properties. There are no assurances of the ability of our company to drill economically producible wells. The process/practice of drilling oil and gas is cost intensive. Accordingly, it is critical for us to raise sufficient capital to implement our business plan.  We incurred net losses of $41,331 for the period ended April 1, 2010, $2,240,168 for the period ended December 31, 2010 and for the year ended December 31, 2010 was $2,281,499 as compared to $597,396 for the years ended and 2009, respectively. 

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

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern.  As discussed in the notes to the accompanying audited consolidated financial statements, the Company sustained losses from operations for the year ended December 31, 2010 of $2,281,499.  Further, the Company has inadequate working capital to maintain or develop its assets, and is dependent upon funds from lenders, investors and the support of certain stockholders.  

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

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

31

**ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

As a smaller reporting company we are not required to provide the information required by this Item.

**ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

Reports of Independent Registered Public Accounting Firms

F-1

 

 

Successor Company Consolidated Balance Sheets as of December 31, 2010 (restated) and 2009 and Predecessor Company as of December 31, 2009

F-3

 

 

Successor Company Consolidated Statements of Operations for the period ended April 1, 2010, period ended December 31, 2010 (restated), year ended December 31, 2010 (restated), and 2009 and Predecessor Company for the period ended April 1, 2010 and year ended December 31, 2009

F-4

 

 

Successor Company Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010 and 2009

F-5

 

 

Predecessor Company Statement of Partnership Equity as of December 31, 2009

F-6

 

 

Successor Company Consolidated Statements of Cash Flows for the period ended April 1, 2010, period ended December 31, 2010 (restated), year ended December 31, 2010, and 2009 and Predecessor Company for the period ended April 1, 2010 and year ended December 31, 2009

F-7

 

 

Notes to Consolidated Financial Statements

F-8

32

**Report of Independent Registered Public Accounting Firm**

 

To the Board of Directors and Stockholders

Consolidation Services, Inc.

Las Vegas, Nevada

 

We have audited the accompanying consolidated balance sheets of Consolidation Services, Inc. (the “Company” or “Successor”) as of December 31, 2010 and 2009,and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. The combined balance sheet of the Leland Partnerships (“Predecessor Company”) as of December 31, 2009 and the related combined statements of operations, partners’ capital and cash flows for the year ended December 31, 2009 and for the period from January 1, 2010 through April 1, 2010 were audited by other auditors.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Successor as of December 31, 2010 and 2009 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company sustained losses from operations for the year ended December 31, 2010 of $2,281,499.   Further, the Company has inadequate working capital to maintain or develop its operations, and is dependent upon funds from lenders, investors and the support of certain stockholders. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to those matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 1 to the consolidated financial statements, the accompanying consolidated financial statements as of and for the year ended December 31, 2010 have been restated.

/s/ GBH CPAs, PC

 

www.gbhcpas.com

Houston, Texas

April 14, 2011 except for the effects of the restatement discussed in Note 1 which is May 31, 2012

  

F-1

**S.E. Clark & Company, P.C.**

Registered Firm:  Public Company Accounting Oversight Board

Independent Auditors’ Report

Leland Energy, Inc.

Leland Kentucky Holdings, Inc.

Managing Partners for the Managed Group

We have audited the accompanying combined December 31, 2009 and April 1, 2010 balance sheets of the entities "Predecessor Company" whose assets were sold to Consolidation Services, Inc. as of April 1, 2010 and the related combined statements of operations, changes in partnership equities and cash flows for the periods then ended. These financial statements are the responsibility of the Managing Partners. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position at December 31, 2009 and April 1, 2010 of the entities whose assets were sold to Consolidation Services, Inc. as of April 1, 2010, and the combined results of their operations, changes in partnership equities, and cash flows for the periods then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ S.E. Clark & Company, P.C.

Tucson, Arizona

February 29, 2012

Member: National Association of Certified Valuation Analysts

742 N. Country Club Road, Tucson, AZ 85716  (520) 323-7774, Fax (520) 323-8174, seclarkcpa@aol.com

F-2

**CONSOLIDATION SERVICES, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

 

 

 

**PREDECESSOR**

 

 

 

**SUCCESSOR COMPANY**

**COMPANY**

 

 

 

 

 

ASSETS:

 

 

**December 31,**

 

 

 

 

**2010**

 

**2009**

**December 31, 2009**

 

 

 

Restated

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

   Cash

 

 

$

17,236

 

$

-

$

338

   Accounts receivable

 

 

 

10,892

 

 

-

 

6,353

      Total current assets

 

 

 

28,128

 

 

-

 

6,691

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

 

 

   Oil and gas properties, net, including $1,199,286 and $868,826, respectively, of

 

 

 

 

 

 

 

 

 

      unproved property costs using the successful efforts method of accounting.

 

 

 

4,462,552

 

 

868,826

 

3,586,932

   Support equipment, net

 

 

 

773,300

 

 

-

 

720,809

   Net assets of discontinued operations

 

 

 

-

 

 

6,231,470

 

-

    TOTAL ASSETS

 

 

 

5,263,980

 

 

7,100,296

 

4,314,432

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

   Accounts payable

 

 

 

165,916

 

 

-

 

5,600

   Advance from related party

 

 

 

15,000

 

 

-

 

-

   Net liabilities of discontinued operations

 

 

 

-

 

 

2,964,585

 

-

      Total current liabilities

 

 

 

180,916

 

 

2,964,585

 

5,600

 

 

 

 

 

 

 

 

 

 

Asset retirement obligations

 

 

 

21,562

 

 

-

 

16,157

 

 

 

 

 

 

 

 

 

 

      TOTAL LIABILITIES

 

 

 

202,478

 

 

2,964,585

 

21,757

 

 

 

 

 

 

 

 

 

 

CONTINGENCIES AND COMMITMENTS

 

 

 

-

 

 

-

 

-

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

  Preferred shares. $0.001 par value, 20,000,000 shares authorized;

 

 

 

 

 

 

 

 

 

     0 issued and outstanding as of December 31, 2010 and 2009, respectively

 

 

 

-

 

 

-

 

-

  Common stock, $0.001 par value, 200,000,000 shares authorized;

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

     December 31, 2010 and 2009, respectively

 

 

 

42,309

 

 

15,257

 

-

  Additional paid-in capital

 

 

 

8,652,649

 

 

5,842,136

 

-

  Noncontrolling interest

 

 

 

-

 

 

501,275

 

-

  Common stock subscription receivable

 

 

 

-

 

 

(871,000)

 

-

  Accumulated deficit

 

 

 

(3,633,456)

 

 

(1,351,957)

 

-

      Total stockholders' equity

 

 

 

5,061,502

 

 

4,135,711

 

 

 

 

 

 

 

 

 

 

 

 

PARTNERSHIP EQUITIES

 

 

 

 

 

 

 

 

 

      Total partnership equities

 

 

 

-

 

 

-

 

4,292,675

 

 

 

 

 

 

 

 

 

 

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

$

5,263,980

 

$

7,100,296

$

4,314,432

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

F-3

**CONSOLDATION SERVICES, INC.**

**CONSOLIDATED STATEMENT OF OPERATIONS**

 

 

 

 

 

 

 

 

**SUCCESSOR COMPANY**

**PREDECESSOR COMPANY**

 

 

**Period From**

 

**Period From**

 

**Year Ended**

 

**Year Ended**

**Period From**

 

**Year Ended**

 

 

**January 1, 2010 through**

 

**April 2, 2010 through**

 

**December 31,**

 

**December 31,**

**January 1, 2010 through**

 

**December 31,**

 

 

**through April 1, 2010**

 

**through December 31, 2010**

 

** 2010**

 

** 2009**

**through April 1, 2010**

 

** 2009**

 

 

 

 

Restated

 

Restated

 

 

 

 

 

OIL AND GAS REVENUES

 

$

-

 

$

194,251

 

$

194,251

 

$

-

$

67,552

 

$

347,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COSTS AND OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Lease operating expenses

 

 

-

 

 

86,413

 

 

86,413

 

 

-

 

36,550

 

 

99,742

     Depreciation, depletion, amortization and accretion

 

 

-

 

 

59,706

 

 

59,706

 

 

-

 

25,046

 

 

108,298

     Impairment of oil and gas properties

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

545,616

     General and administrative 

 

 

41,291

 

 

2,288,300

 

 

2,329,591

 

 

121,114

 

182

 

 

8,376

         Total costs and operating expenses

 

 

41,291

 

 

2,434,419

 

 

2,475,710

 

 

121,114

 

61,778

 

 

762,032

OPERATING (LOSS) INCOME 

 

 

(41,291)

 

 

(2,240,168)

 

 

(2,281,459)

 

 

(121,114)

 

5,774

 

 

(414,750)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Impairment of non-operating assets - Leland Energy note

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

2,500,000

      Interest expense

 

 

40

 

 

-

 

 

40

 

 

-

 

-

 

 

-

        Total other expense

 

 

40

 

 

-

 

 

40

 

 

-

 

-

 

 

2,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME BEFORE TAXES AND DISCONTINUED OPERATIONS

 

 

(41,331)

 

 

(2,240,168)

 

 

(2,281,499)

 

 

(121,114)

 

5,774

 

 

(2,914,750)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME  FROM CONTINUING OPERATIONS

 

 

(41,331)

 

 

(2,240,168)

 

 

(2,281,499)

 

 

(121,114)

 

5,774

 

 

(2,914,750)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS

 

 

-

 

 

-

 

 

-

 

 

(476,282)

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

 

$

(41,331)

 

$

(2,240,168)

 

$

(2,281,499)

 

$

(597,396)

$

5,774

 

$

(2,914,750)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss attributable to noncontrolling interest

 

 

-

 

 

-

 

 

-

 

 

36,413

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

 

$

(41,331)

 

$

(2,240,168)

 

$

(2,281,499)

 

$

(633,809)

$

5,774

 

$

(2,914,750)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED LOSS PER SHARE, 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ATTRIBUTABLE TO CONSOLIDATION SERVICES AND ITS COMMON SHAREHOLDERS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Continuing operations

 

$

(0.00)

 

$

(0.07)

 

$

(0.07)

 

$

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Discontinued operations

 

$

-

 

$

-

 

$

-

 

$

(0.03)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Net loss

 

$

(0.00)

 

$

(0.07)

 

$

(0.07)

 

$

(0.04)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Weighted average number of common shares outstanding, basic and diluted

 

 

15,257,220

 

 

34,124,245

 

 

34,124,245

 

 

15,124,380

 

 

 

 

 

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

F-4

**CONSOLIDATION SERVICES, INC.**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - SUCCESSOR COMPANY**

**FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Additional**

 

**Common Stock**

 

 

 

 

 

 

**Preferred Stock**

 

**Common Stock**

 

**Paid-in**

 

**Subscription**

 

**Non-Controlling**

 

**Accumulated**

 

 

 

**Shares**

 

**Amount**

 

**Shares**

 

**Amount**

 

**Capital**

 

**Receivable**

 

**Interest**

 

**Deficit**

 

**Total**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   DECEMBER 31, 2008

-

 

$        -

 

15,093,970

 

$      15,094

 

$      5,708,799

 

$    (880,000)

 

$   512,862

 

$     (718,148)

 

$4,638,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common shares repurchased at $1.92 per share

-

 

-

 

(6,250)

 

(6)

 

(11,994)

 

-

 

-

 

-

 

(12,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common stock issued for cash

-

 

-

 

117,000

 

117

 

87,633

 

-

 

-

 

-

 

87,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common stock issued for services at $1.10 per share 

-

 

-

 

52,500

 

52

 

57,698

 

-

 

-

 

-

 

57,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Dividends paid 

-

 

-

 

-

 

-

 

-

 

 

 

(48,000)

 

-

 

(48,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Stock subscription received 

-

 

-

 

 

 

 

 

 

 

9,000

 

 

 

 

 

9,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net loss

-

 

-

 

-

 

-

 

-

 

-

 

36,413

 

(633,809)

 

(597,396)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   DECEMBER 31, 2009

-

 

-

 

15,257,220

 

15,257

 

5,842,136

 

(871,000)

 

501,275

 

(1,351,957)

 

4,135,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Spin off of mining operations 

 

 

 

 

 

 

 

 

(3,664,535)

 

871,000

 

(501,275)

 

 

 

(3,294,810)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net loss during the re-entry of exploration stage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,331)

 

(41,331)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   JANUARY 1, 2010 THROUGH APRIL 1, 2010

-

 

$          -

 

15,257,220

 

$      15,257

 

$     2,177,601

 

$             -

 

$           -

 

$  (1,393,288)

 

$   799,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Common shares issued for cash

-

 

-

 

858,850

 

859

 

203,641

 

 

 

 

 

 

 

204,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Common stock issued for services

-

 

-

 

3,406,111

 

3,406

 

1,939,025

 

 

 

 

 

 

 

1,942,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common stock for asset purchase 

-

 

-

 

22,786,872

 

22,787

 

4,332,382

 

 

 

 

 

 

 

4,355,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,240,168)

 

(2,240,168)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   APRIL 2, 2010 THROUGH DECEMBER 31, 2010

-

 

$          -

 

42,309,053

 

$      42,309

 

$     8,652,649

 

$            -

 

$           -

 

$  (3,633,456)

 

$5,061,502

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

F-5

**CONSOLIDATION SERVICES, INC.**

**CONSOLIDATED STATEMENT OF CHANGES IN PARTNERSHIP EQUITY - PREDECESSOR COMPANY**

**FOR THE YEAR ENDED DECEMBER 31, 2009 AND THROUGH THE PERIOD ENDED APRIL 1, 2010**

 

**Total**

 

**Partnership**

 

**Equity**

 

 

 

   DECEMBER 31, 2008

$

6,424,834

 

 

 

   Contribution

 

1,292,139

 

 

 

   Withdrawals

 

(509,548)

 

 

 

   Net loss

 

(2,914,750)

 

 

 

   DECEMBER 31, 2009

 

4,292,675

 

 

 

   Contribution

 

2,500

 

 

 

   Withdrawals

 

(8,729)

 

 

 

   Net income

 

5,774

 

 

 

   APRIL 1, 2010

$

4,292,220

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

F-6

**CONSOLIDATION SERVICES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

**SUCCESSOR COMPANY**

**PREDECESSOR COMPANY**

 

**Period From**

 

**Period From**

 

**Year Ended**

 

**Year Ended**

**Period From**

 

** Year Ended**

 

**January 1, 2010 through**

 

**April 2, 2010 through**

 

** December 31,**

 

** December 31,**

**January 1, 2010 through**

 

** December 31,**

 

**through April 1, 2010**

 

**through December 31, 2010**

 

**2010**

 

**2009**

**through April 1, 2010**

 

**2009**

 

 

 

Restated

 

Restated

 

 

 

 

 

  Net (loss) income

$

(41,331)

 

$

(2,240,168)

 

$

(2,281,499)

 

$

(597,396)

$

5,774

 

$

(2,914,750)

  Adjustments to reconcile net loss to net cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Discontinued operations

 

-

 

 

-

 

 

-

 

 

476,282

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Depreciation, depletion, and amortization

 

-

 

 

58,314

 

 

58,314

 

 

-

 

19,032

 

 

102,633

  Common stock issued for services

 

-

 

 

1,942,431

 

 

1,942,431

 

 

57,750

 

-

 

 

-

  Accretion of asset retirement obligations

 

-

 

 

1,392

 

 

1,392

 

 

-

 

6,014

 

 

5,665

  Impairment of non-operating assets - Leland Energy note

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

2,500,000

  Impairment of oil and gas properties

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

545,616

  Changes in operating assets and liabilities:

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

    Accounts receivable

 

-

 

 

(10,892)

 

 

(10,892)

 

 

-

 

(17,055)

 

 

(6,353)

    Accounts payable

 

28,162

 

 

109,828

 

 

137,990

 

 

-

 

546

 

 

4,301

          Net cash (used in) and provided by operating activities

 

(13,169)

 

 

(139,095)

 

 

(152,264)

 

 

(63,364)

 

14,311

 

 

237,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Net investing activities of discontinued operations

 

-

 

 

-

 

 

-

 

 

(140,907)

 

-

 

 

(1,037,862)

    Purchase of property and equipment

 

-

 

 

(50,000)

 

 

(50,000)

 

 

-

 

-

 

 

-

          Net cash used in investing activities

 

-

 

 

(50,000)

 

 

(50,000)

 

 

(140,907)

 

-

 

 

(1,037,862)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Proceeds from the issuances of common and subscribed stock

 

-

 

 

204,500

 

 

204,500

 

 

96,750

 

-

 

 

-

   Common stock retired

 

-

 

 

-

 

 

-

 

 

(12,000)

 

-

 

 

-

   Net financing activities of discontinued operations

 

-

 

 

-

 

 

-

 

 

119,521

 

-

 

 

-

   Proceeds from note payable

 

22,000

 

 

-

 

 

22,000

 

 

-

 

-

 

 

-

   Repayments of note payable

 

-

 

 

(22,000)

 

 

(22,000)

 

 

-

 

-

 

 

-

   Advance from related party

 

-

 

 

15,000

 

 

15,000

 

 

-

 

-

 

 

-

   Partner contribution

 

-

 

 

-

 

 

-

 

 

-

 

2,500

 

 

1,292,139

   Partner withdrawal

 

-

 

 

-

 

 

-

 

 

-

 

(8,729)

 

 

(509,548)

          Net cash provided by and (used in) financing activities

 

22,000

 

 

197,500

 

 

219,500

 

 

204,271

 

(6,229)

 

 

782,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH

 

8,831

 

 

8,405

 

 

17,236

 

 

-

 

8,082

 

 

(18,159)

CASH, BEGINNING OF YEAR

 

-

 

 

-

 

 

-

 

 

-

 

338

 

 

18,497

CASH, END OF YEAR

$

8,831

 

$

8,405

 

$

17,236

 

$

-

$

8,420

 

$

338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**SUPPLEMENTAL CASH FLOW INFORMATION:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Income Taxes

$

-

 

$

-

 

$

-

 

$

11,983

$

-

 

$

-

   Interest Paid

$

40

 

$

-

 

$

40

 

$

-

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Supplemental disclosure of non-cash investing and financing activities**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and related party for cash of discontinued operations

$

27,924

 

$

-

 

$

-

 

$

-

$

-

 

$

-

Increase in asset retirement obligations

$

-

 

$

20,170

 

$

20,170

 

$

-

$

-

 

$

10,492

Issuance of common stock for purchase of assets

$

-

 

$

4,355,169

 

$

4,355,169

 

$

-

$

-

 

$

-

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

F-7

**CONSOLIDATION SERVICES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1 - RESTATEMENT**

The consolidated financial statements have been restated to properly reflect the initial valuation of the acquisition of the Leland partnerships on April 1, 2010 based upon an oil and gas reserve valuation of $4.3 million.  The acquisition of the Leland partnerships was originally recorded at a valuation of $15,244,417 based on the fair value of the common stock consideration and goodwill was recorded for $10,912,035 in connection with the acquisition.  Immediately following the acquisition, the Company recorded an impairment of the goodwill.  The consolidated financial statements have been restated to eliminate the initial valuation and subsequent impairment of goodwill.  

The consolidated financial statements have also been restated to reflect the authorization of preferred stock which none has been issued or outstanding as of December 31, 2010.

As originally reported, the Company reported the difference between the trading price of the common stock and the fair value of the assets as goodwill.  The amount of the goodwill which created this error is approximately $10.9 million.  The net loss was reduced by $10.9 million, loss per share was reduced by $0.32, accumulated deficit was reduced by $10.9 million and additional paid-in capital was reduced by $10.9 million.

The consolidated financial statements have also been restated for the year ended December 31, 2010 in response to comments received from Securities and Exchange Commission to furnish predecessor financial statements of the combined Leland partnerships (the ”Predecessor”), in accordance with Regulation S-X 8-02 by including (i) audited financial statements of the Predecessor for the year ended December 31, 2009, and for the period from January 1, 2010 through April 1, 2010, the date the Leland partnerships were acquired by the Company and (ii) a discussion of the Predecessor’s financial condition and results of operations for the year ended December 31, 2009, and for the period from January 1, 2010 through April 1, 2010.

 

 

**December 31, 2010**

 

 

**As Filed**

 

**Adjustments**

 

**As Restated**

Common stock

 

$       42,309

 

$                      -

 

$        42,309

Additional paid-in capital

 

19,564,684

 

(10,912,035)

 

8,652,649

Accumulated deficit

 

(14,545,491)

 

10,912,035

 

(3,633,456)

Impairment of assets

 

10,912,035

 

(10,912,035)

 

-

Net loss

 

(13,193,534)

 

10,912,035

 

(2,281,499)

Loss per share

 

$        (0.39)

 

$                0.32

 

$          (0.07)

F-8

**NOTE 2 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

Consolidation Services, Inc. (the “Company” or “CNSV”) was incorporated in the State of Delaware on January 26, 2007. The Company is engaged in the exploration and development of oil and gas reserves in Kentucky and Tennessee.  Until January 1, 2010, the Company sole sources of revenues were from its coal mining and timber harvesting operations.  The Company discontinued its coal mining and timber harvesting operations on January 1, 2010 (See “Note 9 - Discontinued Operations”).  As a result of its discontinued operations, the Company re-entered the exploration stage on January 1, 2010.  On April 1, 2010, the Company exited the exploration stage as a result of the acquisition of producing oil and gas properties (See “Note 11 - Acquisitions”).

Basis of Presentation - Predecessor

The accompanying financial statements have been prepared in accordance with the Generally Accepted Accounting Principles in the United States of America ("GAAP").

We acquired the Leland Partnerships (our predecessor company) and at the time of the acquisition on April 1, 2010, we had minimal assets and no operations. Accordingly, we have included the predecessor combined financial statements of the Leland Partnerships in the accompanying financial statements for purposes of complying with the rules and regulations of the Securities and Exchange Commission as required by S-X Rule 8-02.

Principles of Consolidation

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

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

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

Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

F-9

The Company’s consolidated financial statements are based on a number of significant estimates including the oil and gas reserve quantities which are the basis for the calculations of depreciation, depletion, and impairment. The Company’s reserve quantities are determined by an independent petroleum engineering firm. However, management emphasizes that estimated reserve quantities are inherently imprecise and that estimates of more recent discoveries are more imprecise than those for properties with long production histories.  Accordingly, the Company’s estimates are expected to change as future information becomes available.

Cash and Cash Equivalents

  

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.  At December 31, 2010, cash and cash equivalents include cash on hand and cash in depository institutions/commercial banks.  

Oil and Gas Properties

The Company uses the successful efforts method of accounting for oil and gas operations.  Under this method of accounting, costs (including related support equipment) to acquire mineral interests in oil and gas properties, to drill and equip development wells, and to drill and equip exploratory wells that find proved reserves are capitalized.  Depletion and depreciation of capitalized costs for producing oil and gas properties is calculated using the unit-of-production method based on estimates of proved oil and gas reserves on a field-by-field basis. Depletion and depreciation expense for period ended April 1, 2010 was $0, for the period ended December 31, 2010, and the year ended December 31, 2010 was $58,000 and 2009  was $ 0.

The costs of unproved leaseholds and mineral interests are capitalized pending the results of exploration efforts.  In addition, unproved leasehold costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, the property has been impaired.  This impairment will generally be based on geophysical or geologic data.  For the year ended December 31, 2010, there was no impairment of unproved leaseholds.  Due to the perpetual nature of the Company’s ownership of the mineral interests, the drilling of a well, whether successful or unsuccessful, may not represent a complete test of all depths of interest. Therefore, at the time that a well is drilled, only a portion of the costs allocated to the acreage drilled may be expensed.  As unproved leaseholds are determined to be productive, the related costs are transferred to proven leaseholds.  The costs associated with unproved leaseholds and mineral interests that have been allowed to expire, if any, are charged to exploration expense.

The Company evaluates impairment of its property and equipment in accordance with ASC Topic 360,*“Property, Plant, and Equipment”*.  This standard requires that long-lived assets that are held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  When it is determined that an asset’s estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge must be recorded to reduce the carrying amount of the asset to its estimated fair value.  Fair value is determined by reference to the present value of estimated future cash flows of such properties. During the year ended December 31, 2010 the Company had no impairment of its oil and gas properties.  

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

F-10

Revenue Recognition

The Company has royalty and working interests in various oil and gas properties which constitute its primary source of revenue.  The Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells.  Other sources of revenues received by the Company include delay rentals and mineral lease bonuses, which are recognized as revenue according to the terms of the lease agreements.

 

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

Accounts Receivable

Substantially all of the Company’s accounts receivable consists of accrued revenues from oil and gas production for the year ended December 31, 2010 from third party companies in the oil and gas industry.  This concentration of customers may be a consideration of the Companies’ overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the oil and gas industry.  In determining whether or not to require collateral from a purchaser or joint interest owner, the Company may analyze the entity’s net worth, cash flows, earnings and credit ratings.  Historical credit losses incurred by the Company on receivables have not been significant.

Concentrations of Credit Risk

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

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

Earnings Per Share

Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. Diluted loss per share is the same as basic loss per share because due to the Company having a net loss (attributable to its common shareholders) the effects of including any additional common stock equivalents would be anti-dilutive.

F-11

Fair Value of Financial Instruments

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

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

Recent Accounting Pronouncements  

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

 

No other accounting standards or interpretations issued recently are expected to a have a material consequence on the Company’s consolidated financial position, operations or cash flows.

**NOTE 3 - GOING CONCERN**

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. However, the Company sustained losses from operations for the period ended April 1, 2010 of $41,331 and for the period ended December 31, 2010 of $2,240,168 with a total loss for the year ended December 31, 2010 of $2,281,499.   Further, the Company has inadequate working capital to maintain or develop its operations, and is dependent upon funds from lenders, investors and the support of certain stockholders.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  

 

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

F-12

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

 **NOTE 4 - ASSET RETIREMENT OBLIGATIONS**

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

The following is a description of the changes to the Company’s asset retirement obligations for the period ended April 1, 2010 and year ended December 31, 2010.

**Successor Company**

Asset retirement obligation for the period ended 

 

April 1, 2010

 

 

December 31, 2010

 

Additions

$

    - 

        

$

20,170

 

Accretion expense

 

- 

 

 

1,392

 

Asset retirement obligation at end of period

$

- 

 

$

21,562

 

**Predecessor Company**

 

 

April 1, 2010

 

 

December 31, 2009

 

Asset retirement obligation for the period ended 

$

16,157

 

$

-

 

Additions

 

- 

        

 

10,492

 

Accretion expense

 

6,041 

 

 

5,665

 

Asset retirement obligation at end of period

$

22,171 

 

$

16,157

 

 

F-13

**NOTE 5 - SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)**

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

 

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

 

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

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

F-14

**Capitalized costs relating to oil and gas producing activities**

 **As of December 31, 2010: Successor Company**

 

 

 

 

 

 

Unproved oil and gas properties

 

 $

1,199,286

 

 

 

 

Proved oil and gas properties

 

 

3,309,880

 

 

 

 

Accumulated depreciation, depletion, and amortization

 

 

(46,614)

 

 

 

 

Net capitalized costs

 

 $

4,462,552

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

 **As of December 31, 2009: Successor Company**

 

 

 

 

 

 

Unproved oil and gas properties

 

 $

-

 

 

 

 

Proved oil and gas properties

 

 

868,826

 

 

 

 

Accumulated depreciation, depletion, and amortization

 

 

(-)

 

 

 

 

Net capitalized costs

 

 $

868,826

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

 **As of December 31, 2009: Predecessor Company**

 

 

 

 

 

 

Unproved oil and gas properties

 

 $

1,261,241

 

 

 

 

Proved oil and gas properties

 

 

2,411,992

 

 

 

 

Accumulated depreciation, depletion, and amortization

 

 

(86,301)

 

 

 

 

Net capitalized costs

 

 $

3,586,932

Net capitalized costs related to asset retirement obligations in the amount of $16,157, as of December 31, 2009, was included in net capitalized costs.

F-15

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

 **Year ended December 31, 2010: Successor Company**

 

 

 

 

 

Acquisition of properties - proved

 

 $

3,289,710

 

 

 

 

Acquisition of properties - unproved

 

 

330,460

 

 

 

 

Exploration costs

 

 

-

 

 

 

 

Development costs

 

 

805,170

 

 

 

 

Total costs incurred

 

 $

4,425,340

**Year ended December 31, 2009: Successor Company**

 

 

 

 

 

Acquisition of properties - proved

 

 $

              -

 

 

 

 

Acquisition of properties - unproved

 

 

-

 

 

 

 

Exploration costs

 

 

-

 

 

 

 

Development costs

 

 

-

 

 

 

 

Total costs incurred

 

 $

-

**Year ended December 31, 2009: Predecessor Company**

 

 

 

 

 

Acquisition of properties - proved

 

 $

               -

 

 

 

 

Acquisition of properties - unproved

 

 

-

 

 

 

 

Exploration costs

 

 

-

 

 

 

 

Development costs

 

 

-

 

 

 

 

Total costs incurred

 

 $

-

 

F-16

**Estimated Quantities of Proved Oil and Gas Reserves**

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

 

 

**2010**

**(Unaudited)**

 

 

**2009**

**(Unaudited)**

 **Successor Company**

 

**Oil**

 

 

**Gas**

 

 

**BOE**

 

 

**Oil**

 

 

**Gas**

 

 

**BOE**

Proved reserves:

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Beginning of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revisions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Extensions and discoveries

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Sales of minerals-in-place

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Purchases of minerals-in-place

 

 

109

 

 

 

1,153

 

 

 

300

 

 

 

-

 

 

 

-

 

 

 

-

 

Production

 

 

(3)

 

 

 

-

 

 

 

(3)

 

 

 

-

 

 

 

-

 

 

 

-

 

End of period

 

 

106

 

 

 

1,153

 

 

 

297

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved developed reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

End of period

 

 

77

 

 

 

122

 

 

 

97

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved undeveloped reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

End of period

 

 

29

 

 

 

1,031

 

 

 

200

 

 

 

-

 

 

 

-

 

 

 

-

 

 **Predecessor Company**

 

**2009**

 

 

**Oil (Bbl)**

 

 

**Gas (Mcf)**

 

 

**MBOE**

Proved reserves:

 

95

 

 

1,964

 

 

423

Beginning of period

 

 

 

 

 

 

 

 

 

 

 

Revisions

 

 

28

 

 

 

(951)

 

 

 

(131)

Extensions and discoveries

 

 

 

 

 

 

 

 

 

 

 

Sales of minerals-in-place

 

 

 

 

 

 

 

 

 

 

 

Purchases of minerals-in-place

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

(3)

 

 

 

 

 

 

 

(3)

End of period

 

 

120

 

 

 

1,013

 

 

 

289

 

 

 

 

 

 

 

 

 

 

 

 

Proved developed reserves:

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

73

 

 

 

1,964

 

 

 

401

End of period

 

 

92

 

 

 

1,013

 

 

 

261

 

 

 

 

 

 

 

 

 

 

 

 

Proved undeveloped reserves:

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

22

 

 

 

 

 

 

 

22

End of period

 

 

28

 

 

 

 

 

 

 

28

F-17

**Standardized Measure of Discounted Future Net Cash Flows**

The standardized measure of discounted future net cash flows, in management’s opinion, should be examined with caution. The basis for this table is the reserve studies prepared by the Company’s independent petroleum engineering consultants, which contain imprecise estimates of quantities and rates of future production of reserves. Revisions of previous year estimates can have a significant impact on these results. Also, exploration costs in one year may lead to significant discoveries in later years and may significantly change previous estimates of proved reserves and their valuation. Therefore, the standardized measure of discounted future net cash flow is not necessarily indicative of the fair value of the Company’s proved oil and natural gas properties.

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

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

**Successor Company**

**As of December 31,**

 

**Oil (Bbl)**

**Using NYMX WTI**

 

 

**Gas (Mcf) Using NYMEX Henry Hub**

 

2010 (average price)

 

$

79.20

 

  

$

 4.39

 

2009 (end of year price)

 

$

 N/A

 

 

$

  N/A

 

**Predecessor Company**

**As of December 31,**

 

**Oil**

 

 

**Gas**

 

2009 (average price)

 

**$**

55.80

 

 

$

3.10

 

2008 end of year price

 

**$**

43.20

 

 

$

6.01

 

F-18

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

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

**Successor Company**

 

 

 

**2010**

 

 

 

**2009**

 

 

 

 

**(in thousands)**

 

Future cash inflows

 

$

12,548

 

 

$

-

 

Future costs:

 

 

 

 

 

 

 

 

Production

 

 

(6,794)

 

 

 

-

 

Development

 

 

(1,174)

 

 

 

-

 

Income taxes

 

 

-

 

 

 

-

 

Future net cash inflows

 

 

4,580

 

 

 

-

 

10% discount factor

 

 

(2,949)

 

 

 

-

 

Standardized measure of discounted net cash flows

 

$

1,631

 

 

$

-

 

**Predecessor Company**

 

**2009**

 

Future cash inflows

 

$

11,735

 

Future costs:

 

 

 

 

Production

 

 

(6,850)

 

Development

 

 

 

 

Income taxes

 

 

 

 

Future net cash inflows

 

 

4,885

 

10% discount factor

 

 

(3,125)

 

Standardized measure of discounted net cash flows

 

$

1,760

 

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

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

F-19

**Successor Company**

 

 

 

 

 

 

 

 

 

 

 

**2010**

 

 

 

**2009**

 

Beginning of period

 

$

-

 

 

$

-

 

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

 

 

(108)

 

 

 

-

 

Extensions and discoveries

 

 

-

 

 

 

-

 

Net change of prices and production costs

 

 

-

 

 

 

-

 

Change in future development costs

 

 

-

 

 

 

-

 

Previous estimated development costs incurred

 

 

-

 

 

 

-

 

Revisions of previous quantity estimates

 

 

-

 

 

 

-

 

Accretion of discount

 

 

-

 

 

 

-

 

Change in income taxes

 

 

-

 

 

 

-

 

Purchases of reserves in place

 

 

1,739

 

 

 

-

 

 

 

 

 

 

 

 

 

 

End of period

 

$

1,631

 

 

$

-

 

**Predecessor Company**

 

 

**2009**

 

Beginning of period

 

$

2,008

 

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

 

 

(52)

 

Extensions and discoveries

 

 

 

 

Net change of prices and production costs

 

 

(209)

 

Change in future development costs

 

 

 

 

Previous estimated development costs incurred

 

 

 

 

Revisions of previous quantity estimates

 

 

(188)

 

Accretion of discount

 

 

201

 

Change in income taxes

 

 

 

 

Purchases of reserves in place

 

 

 

 

 

 

 

 

 

End of period

 

$

1,760

 

F-20

**NOTE 6- EQUITY**

**Successor Company**

Common Stock****

The Company is authorized to issue 200,000,000 shares of common stock, at $0.001 par value, of which 42,309,053 common shares were issued and outstanding as of December 31, 2010.

Options

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

Warrants

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

 

Convertible Securities

 

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

 

Private Placements, Other Issuances and Cancellations

 

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

During the year ended December 31, 2010, the Company issued 858,850 common shares for $204,500 in net proceeds in private placements. The price received in the private placements ranged from $0.04 per share to $0.67 per share.  During the year ended December 31, 2010, the Company issued 3,406,111 common shares with an aggregate fair value of approximately $1,942,431 in exchange for services. The Company assessed the quoted market price of the stock at the grant date and believed that due to the sporadic trading there was not an active market for the Company’s stock and that the quoted market price was not reflective of the fair value of the transactions. The fair value of the common shares issued was based on the weighted average of the price received in private placements of stock issued for cash during the same time frame that the shares were issued for services as the Company determined that this was a more accurate measurement of the fair value of the shares issued. The $1,942,431 of consulting services was expensed as compensation during the year ended December 31, 2010. The weighted average price used to estimate the fair values of the common stock issued for the year ended December 31, 201 was $0.57 per share.

On April 1, 2010, the Company issued 22,786,872 restricted shares of the Company’s common stock for the acquisition of oil and gas properties (See “Note 11- Acquisitions”).

F-21

**Preferred Stock**

The Corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares that the Corporation is authorized to issue is two hundred twenty million (220,000,000) shares. Two hundred million (200,000,000) shares shall be Common Stock and twenty million (20,000,000) shares shall be Preferred Stock, each with a par value of $0.001 per share. Except as otherwise required by statute, the designations and the powers, preferences and rights, and the qualifications or restrictions thereof, of any class or classes of stock or any series of any class of stock of the Corporation may be determined from time to time by resolution or resolutions of the Board of Directors.

**Predecessor Company**

Contributions:

Upon making a contribution to the capital of the Partnership, each Partner shall be issued the appropriate number of Units. In the event that the Partnership is required to seek additional funding in order to carry out the business in addition to any loans which may be obtained, holders of a majority of the Units outstanding shall at a meeting of Partners called for the purpose or by written consent have the power to sell additional Units at a price or prices to be determined by such majority vote. Provided however, before the Partnership shall sell any additional Units, it shall first offer each existing Partners the right but not the obligation, on a pro-rata basis to purchase additional Units which rich shall remain open for a period not to exceed 30 days.  

Draws:

No Partner shall have the right to demand the withdrawal, reduction or return of his/her capital contribution without prior written consent of the other Partners or upon the dissolution and termination of the Partnership; nor shall any Partner have the right to demand and receive property other than cash in return of his/her capital contribution.  

Distribution of Distributable cash:

Distributable cash shall be distributed to the Partners in the following order or priority:

a.

First, to the Partners in priority to and to the extent of their Adjusted Capital Contributions; and

b.

The balance, if any, to the Partners in accordance to allocation of Net Profits 

Whenever a vote, agreement, decision, action or determination with respect of management, operation or control of the Partnership is required to be made, a majority of the Units present, in person, by written vote shall constitute approval by the Partners where at least 51% of the units constitute a quorum.  

F-22

The Partners agreed to engage Leland Kentucky Holdings, Inc. to serve as fiduciary of the Partnerships to ensure that the Partnership’s tax returns are properly completed and filed and Form K-1 furnished to the Partners and coordinate with other Partners the scheduling of a Partners’ meeting. Leland shall act as a managing Partner after election as such by a vote of the Partnership’s Units at the Partnership’s initial Partnership meeting.

Leland shall not receive any stated salary for its services, but shall receive such compensation for its services as may be from time to time are agreed upon by the Partners. The Partners agree to pay the Managing Partner a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting.  Leland shall receive a fractional unit of 1% and share in its proportional share of production revenue of the Partnership.  

**NOTE 7- INCOME TAXES**

**Successor Company**

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

 

 

December 31,

 

 

 

2010

 

 

2009

 

Current:

 

 

 

 

 

 

Federal

 

$

-

 

 

$

-

 

State

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

$

615,510

 

 

$

203,975

 

State

 

 

-

 

 

 

-

 

 

 

 

615,510

 

 

 

203,975

 

Valuation allowance

 

 

(615,510

)

 

 

(203,975

)

Provision benefit for income taxes, net

 

$

-

 

 

$

-

 

 

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

 

 

December 31,

 

 

 

2010

 

 

2009

 

 

 

 

 

 

 

 

Statutory federal income tax rate

 

 

(34.0

%)

 

 

(34.0

%)

State income taxes and other

 

 

0.0

%

 

 

0.0

%

Non-deductible items, net

 

 

29.0

%

 

 

0.0

%

Change in valuation allowance

 

 

5.0

%

 

 

34.0

%

Effective tax rate

 

 

-

 

 

 

-

 

F-23

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

  

 

 

December 31,

 

 

 

2010

 

 

2009

 

 

 

 

 

 

 

 

Net operating loss carryforward

 

 

1,142,873

 

 

 

527,263

 

Valuation allowance

 

 

(1,142,873

)

 

 

(527,263

)

 

 

 

 

 

 

 

 

 

Deferred income tax asset

 

$

-

 

 

$

-

 

The Company has a net operating loss carryforward of approximately $1,142,873 available to offset future taxable income through 2030, subject to limitations of Section 382 of the Internal Revenue Code, as amended. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, because in the opinion of management based upon the earning history of the Company; it is more likely than not that the benefits will not be realized. The Company anticipates it will continue to record a valuation allowance against the losses of certain jurisdictions, primarily federal and state, until such time as we are able to determine it is “more-likely-than-not” the deferred tax asset will be realized. Such position is dependent on whether there will be sufficient future taxable income to realize such deferred tax assets The Company’s effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.

 

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

**Predecessor Company**

In accordance with the provisions of the Partnership agreements the allocation of net income is as follows:

Net Profit for any fiscal year shall be allocated to the Partners in the following order and priority:

a.

First, to the Partners in proportion to the cumulative Net Loss previously allocated to the Partners, until the Net Profit allocated to the Partners equals the cumulative Net Loss previously allocated to the Partners;

b.

Second, 100% of all revenue less all operational expenses, taxes, rents, supplies, as well as management,  consulting, tech support, payroll, and commissions.

F-24

Net Loss for any fiscal year shall be allocated to the Partners in the following order and priority:

a.

First, to the extent Net Profit has been allocated for any prior year, Net Loss shall be allocated to offset any Net Profit allocated above, such allocation to be in the same proportion as Net Profit was allocated;

b.

Second, to the Partners, pro-rata, in proportion to the positive balance of the Partners Capital Accounts, until it is reduced to zero; and,

c.

Thereafter, the balance, if any, to the Partners in proportion to the number of Units owned by each. 

In accordance with the provisions of the partnership agreements of Managed Group, net capital appreciation or depreciation of the partnerships is allocated to all partners in proportion to each partner’s opening capital account for each accounting period, as defined in the limited partnership agreements.

 

April 1, 2010

 

December 31, 2009

 

Net Income (Loss)

      $5,774

 

($2,914,750)

 

Permanent Differences - impairment of oil and gas properties

-

 

   545,616

 

Temporary Differences - depletion expense

                      (4,052)

 

    30,037

 

Taxable income (loss) to be distributed 

 $1,722

 

($2,339,097)

 

**NOTE 8- RELATED PARTY TRANSACTIONS**

**Successor Company**

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

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

In October 2010, a shareholder advanced $15,000 at no interest rate and is due and payable upon demand of the holder of that advance.   On July 13, 2010, the Company’s Board of Directors approved its president’s amended employment agreement. The employment agreement set his monthly salary from July 1, 2010 through September 1, 2010 at $10,000 per month and after September 1, 2010 at $25,000 per month subject to annual increase consistent with the company policy applicable to other senior executives and officers and approval by the board of directors.  Additionally, the Company’s president will be paid 25% of his annual base salary if the Company reaches certain milestones. In addition to shares earned and previously issued to the Company’s president, the Employment Agreement called for the issuance of additional shares on the occurrence of both September 1, 2010 and also on December 1, 2010, which share had not been yet issued in 2010 or by the date of this filing. The Company intends to issue these shares in 2011. The Company’s president will also receive warrants on each anniversary date of his 

F-25

employment agreement, with a five-year term, to purchase 1% of the then issued and outstanding shares of the Company’s common shares exercisable at a price equal to the trailing six-month (prior to grant date) average share trading price.  In the event the Company’s president’s employment is terminated without cause he will receive 12 months of severance pay. The Company’s president has allowed the Company to defer the amounts, above $10,000 a month, from September 2010 until an unspecified date. (See Note 10 - Commitments and Contingencies).

**Predecessor Company**

As of December 31, 2009 the only common relationship between the partnerships is that each of the partnerships and corporation was managed by Leland Kentucky Holdings, Inc. (“Leland”). Leland owned 1% of each of the partnerships in the Managed Group.  The Managed Group is voted on an annual basis by the partnerships’ groups. The partnership groups provide advances and receive advances from the management company at no interest rate and are due upon demand.  As of December 31, 2009 there were no advances received or advances paid from the management corporation.  

During 2009, the Managed Group, specifically Energy Production Revenue Fund LLP entered into a $2,500,000 Collateralized Promissory Note with Leland Energy, Inc. a related party, more fully disclosed in Note 3 above.  As of December 31, 2009 and April 1, 2010 the note was determined to be uncollectible and the collateral was subsequently exchanged for the note collateral with the acquisition transaction.

**NOTE 9- DISCONTINUED OPERATIONS**

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

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

F-26

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

Details of those classifications are shown below.

 

**December 31, 2010**

 

**December 31,**

**2009**

**Net assets of discontinued operations:         **

 

**(Unaudited)**

 

 

**(Unaudited)**

 

Cash                

 

$

-

 

 

$

26,966

 

Prepaid expenses

 

 

-

 

 

 

43,313

 

Property and equipment, net

 

 

-

 

 

 

6,161,191

 

Assets of Discontinued Operations

 

$

-

 

 

$

6,231,470

 

 

 

 

 

 

 

 

 

 

Net liabilities of discontinued operations:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

-

 

 

$

802,881

 

Notes payable - related parties

 

 

-

 

 

 

1,209,123

 

Notes payable

 

 

-

 

 

 

952,581

 

Liabilities of Discontinued Operations

 

$

-

 

 

$

2,964,585

 

 

** **

**Years ended**

**December 31,**

** **

** **

** **

**2010**

** **

** **

**2009**

** **

**Discontinued operations:**

 

**(Unaudited)**

 

 

**(Unaudited)**

 

Revenues

 

$

-

 

 

$

238,979

 

Operating expenses

 

 

-

 

 

 

(573,273

)

Interest expense

 

 

-

 

 

 

(141,988

)

Loss from Discontinued Operations

 

$

-

 

 

$

(476,282

)

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

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

F-27

from January 1, 2009 through December 31, 2009 for LeeCo Development, LLC), and if such shares were sold below the guaranteed price per share ($1.92 per share for Buckhorn agreement and $2.00 per share for each of the AMS and LeeCo agreements), the Company would have to pay the difference between such guaranteed price per Citing the economic recession during 2009, the lack of liquidity in the Company stock and the inability to meet certain revenue milestones from underlying properties, the Company and the respective parties agreed to modify these agreements to provide for the stockholders’ ability to sell their pro-rata portion of such shares to the Company in private transactions, as opposed to on the open market, at the price per share provided by the guarantee and the Company would repurchase such shares on a monthly basis using twenty-five percent (25%) of revenue received in connection with the underlying properties, with such repurchases being permitted to commence prior to July 1, 2009.  In the event the Company’s publicly traded stock closed above $2.25 per share for fifteen consecutive trading days immediately prior to such month’s scheduled repurchase, the stockholders could elect to sell that month’s quota in the public markets instead of through the repurchase plan.  The obligations to repurchase the shares were transferred to Colt under the Spin-Off Agreement.

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

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

3.  Pursuant to the Rights Agreement between the Company and Eastern Kentucky Land Corporation (“EK”) effective September 22, 2008 (the “Rights Agreement”), whereby the Company acquired all right, title and interest in oil, gas and other minerals that may exist on the Buckhorn property, the Company guaranteed the price of $1.925 per share for 415,584 shares in connection with a portion of the purchase price of the Rights Agreement.  Under the lock up terms of the Rights Agreement, EK which received the 415,584 restricted shares is eligible to sell 7,992 shares per week for the period from April 1, 2009 through March 31, 2010, subject to an available exemption from registration or pursuant to registration of the shares.  These shares became eligible to be re-sold under Rule 144 promulgated under the Securities Act on July 1, 2009. If such shares are sold below the guaranteed price per share of $1.925 per share, which is higher than the market price for the Company's public stock a bid and asked price of $1.01 and $1.10 per share, respectively, beginning on October 28, 2009, the Company became liable to pay 

F-28

the difference between the guaranteed price per share and the sale price.  As of the date of this report, Management has not yet renegotiated this obligation or entered into an amendment with respect to such lock-up/leak out terms; however, during 2009 the Company was not obligated to repurchase any shares under the Company's guarantee obligations under the Rights Agreement. The obligations to repurchase the shares were transferred to Colt under the Spin-Off Agreement.

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

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

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

**NOTE 10 - COMMITMENTS AND CONTINGENCIES**

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

On July 13, 2010, the Company’s Board of Directors approved its president’s amended employment agreement. The employment agreement set his monthly salary from July 1, 2010 through September 1, 2010 at $10,000 per month and after September 1, 2010 at $25,000 per month subject to annual increase consistent with the company policy applicable to other senior executives and officers and approval by the board of directors.  Additionally, the Company’s president will be paid 25% of his annual base salary if the Company reaches certain milestones.  In addition to shares earned and previously issued to the Company’s president, the Employment Agreement called for the issuance of additional shares on the occurrence of both September 1, 2010 and also on December 1, 2010, which share had not been yet issued in 2010 or by the date of this filing. The Company intends to issue these shares in 2011. The Company’s president will also receive warrants on each anniversary date of his employment agreement, with a five-year term, to purchase 1% of the then issued and outstanding shares of the Company’s common 

F-29

shares exercisable at a price equal to the trailing six-month (prior to grant date) average share trading price.  In the event the Company’s president’s employment is terminated without cause he will receive 12 months of severance pay. The Company’s president has allowed the Company to defer the amounts, above $10,000 a month, from September 2010 until an unspecified date.

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

 

·

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

 

·

out of pocket expenses;

 

·

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

**NOTE 11- ACQUISITIONS**

On April 1, 2010, the Company entered into 12 substantially identical asset purchase agreements with various unrelated partnerships which comprised a total of 657 individual sellers and completed the purchase of interests in oil and gas wells located in Kentucky and Tennessee. The Company acquired interests in 39 oil wells and 19 gas wells, a total of 58 wells and the related support equipment, located on approximately 1,500 leased acres in Kentucky and Tennessee. Under the agreements, the Company acquired all rights, titles and interests to the sellers’ oil and gas wells and support equipment free and clear of all liabilities, liens and encumbrances. The effective date of the purchase and sale was April 1, 2010. As part of the acquisition, the sellers received in aggregate 22,786,872 common shares of the Company’s common stock.

 

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

 

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

F-30

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

The purchase price paid for the Acquisition was 22,786,872 restricted shares of the Company’s common stock. The shares had a quoted market price of $1.03 per share on April 1, 2010 or an aggregate quoted market value of approximately $23 million. However, shares were valued at an aggregate value of the assets acquired of $ 4,355,169 (the “Purchase Price”), The quoted market value of the Company’s common stock was based on a sporadically traded stock with little or no volume (inactive market) which the Company believes reflected an artificially inflated quoted market price(See “Note 4 - Equity”).The Company assessed the inactive and sporadically traded market for the Company’s common stock and believed that the fair value of the acquisition should be the value of the assets acquired which resulted in a purchase price of $4,355,169 based on the fair value of the oil and gas reserves acquired.  The following table summarizes the fair value of the consideration paid by the Company and the fair value amounts assigned to the assets acquired on the acquisition date:

**Purchase Price Allocation**

 

April 1, 2010

 

**Consideration:**

 

 

 

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

 

$

4,355,169

 

**Recognized amounts of identifiable assets acquired:**

 

 

 

 

Support equipment

 

 

735,000

 

Oil and Gas Properties:

 

 

 

 

  Proved developed producing reserves

 

 

1,218,670

 

  Proved non-producing reserves

 

 

526,830

 

  Proved undeveloped reserves

 

 

1,544,209

 

Probable reserves

 

 

330,460

 

Total assets

 

$

4,355,169

 

**Fair value of total assets**

 

$

4,355,169

 

 

The Company calculated the fair value of the assets based upon the Reserve Report prepared for period ended April 1, 2010 using the NYMEX strip pricing for that period.  Further the Company assessed this value based on the weighted average cost of capital of 9%.   

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

F-31

** **

** **

**Years ended December 31,**

 

** **

** **

**2010**

** **

** **

**2009**

 

 

 

**(Unaudited)**

 

 

**(Unaudited)**

 

OIL AND GAS REVENUES

 

 

261,803

 

 

 

347,282

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(2,275,775)

 

 

 

(3,548,559)

 

 

 

 

 

 

 

 

 

 

Net loss per share basic and diluted

 

$

(0.07)

 

 

$

(0.09)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

34,124,245

 

 

 

37,911,252

 

**NOTE 12 - SUBSEQUENT EVENTS**

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

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

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

F-32

**ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  **

None

**ITEM 9A - CONTROLS AND PROCEDURES**

Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last day of the fiscal period covered by this report, December 31, 2010. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2010 due to the difference in valuations received from our reserve engineer that effected the valuations of the assets acquired.  

Our principal executive officer and our principal financial officer, are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published in *Internal Control-Integrated Framework*, is known as the COSO Report. Our principal executive officer and our principal financial officer, have chosen the COSO framework on which to base its assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2010. 

There were no changes in our internal control over financial reporting that occurred during the last quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report. 

33

It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. 

**Changes in Internal Control over Financial Reporting**

There have not been any changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act, during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting.

**ITEM 9B - OTHER INFORMATION**

None

 

**PART III**
**ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

*Directors and Executive Officers*

The following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions held by each person, and the date such person became a director or executive officer. Our executive officers are elected annually by the Board of Directors. The directors serve one year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers.

**Name**

 

Age

 

Position(s)

 

 

 

 

 

Stephen M. Thompson

 

62

 

Chief Executive Officer, Chairman of the Board

 

 

 

 

 

Gary D. Kucher

 

47

 

President, Director

 

 

 

 

 

Pamela J. Thompson 

 

47

 

Chief Financial Officer, Secretary, Treasurer, Director

 

 

 

 

 

Richard S. Polep

 

71

 

Director

34

**Stephen M. Thompson -**Effective April 2, 2010, Mr. Thompson was elected Chairman of the Board and on April 7, 2010, he was elected Chief Executive Officer of the Company,****Mr. Thompson has been founder, major shareholder, President and CEO of Leland Energy, Inc. since 2006.  He has been involved in the domestic energy industry for over thirty years.  He is knowledgeable and experienced in all phases of the oil and gas industry including leasing activities, ownership and operations of drilling rigs, syndication and field operations. Mr. Thompson has current or previous business interests and relationships in investment banking, international art publishing and the gaming industry.  Mr. Thompson has served on the Board of Directors of Global Business Services, Inc.

**Gary D. Kucher -** Mr. Kucher has been Chief Executive Officer since April 26, 2011 and from April 2010 has been President and a Director.  He is a seasoned executive with numerous appointments, directorships and consulting roles with both public and private companies in a variety of industries and business sectors. Mr. Kucher has a strong background in investment banking; having held securities licenses, Series 7 and Series 24. He has provided consulting for business acquisitions and other commercial finance transactions to financial and strategic buyers, stock offerings, spin-offs, leveraged buy-outs and joint-venture arrangements. Mr. Kucher has sourced and executed M&A deals for leading technology companies and selected venture investments.  He has also advised banking, insurance, finance and investment banking companies on M&A and equity deals.  Since 2008, Mr. Kucher has served as Managing Director of MB&A Capital, Beverly Hills, California.  MB&A is an international business advisory.

Between 2006 and 2008 Mr. Kucher was CEO of Branded Media Corporation, a New York City based media and advertising holding Company and Chairman of the Board of its wholly owned subsidiary Executive Media Network, which sells advertising to “Fortune 500” clients deploying ads in airport executive lounges throughout the U.S. and Europe.

In 2005, Mr. Kucher co-founded Genius Interactive, a social network development company focused on providing rich online environments that encouraged achievement and accomplishment.  He continues to serve on the Board of Directors of Genius Interactive Inc.

From 2000 to 2004, Mr. Kucher was CEO and Chairman of the Board of Manex Entertainment with facilities in Hollywood and Alameda, California and over 300 employees.  The Company provided production services, facilities and equipment to over 50 film and television productions and created the Academy Award winning visual effects for “*The Matrix*” and “*What Dreams May Come*”. 

Mr. Kucher has also served on the Board of Directors of Visual Network Design Inc., dba Rackwise.

35

**Pamela J. Thompson -**Effective April 2, 2010, Mr. Thompson (no relation to Stephen Thompson) was elected to the Board of Directors on April 7, 2010, she was elected Chief Financial Officer, Secretary, Treasurer of the Company.  Ms. Thompson formed Pamela J. Thompson, CPA, P.C. in 1990 and has over 20 years of experience in SEC compliance, tax and accounting for publicly traded companies.  She has served as Chief Financial Officer, Secretary Treasurer, and a member of the Board of Directors of several public companies traded on NASDAQ and the OTC Bulletin Board.  Ms. Thompson started her career in 1986 with the international accounting firm of Arthur Andersen and was subsequently with Pannell Kerr Forester, and one of the larger regional firms Eide, Bailey and Company. Her Sarbanes-Oxley Section compliance implementation experience has been focusing assisting publicly traded companies with performing risk assessment on critical business process and documenting business process controls.  

Ms. Thompson holds a Bachelor of Science from Minnesota State - Moorhead in Accountancy, in 1986.  She is a Certified Public Accountant in the State of Arizona and a Certified Fraud Examiner Candidate, a member of the Arizona Society of Certified Public Accountants, and Association of Certified Fraud Examiners.    Ms. Thompson has been featured in *Arizona Women’s Success Magazine, National Basketball Players Association Magazine, Behind the Bench: National Basketball Wives Association Magazine, New Jersey Star, Arizona Republic in May, 2004, February and September, 2011, and The Wall Street Journal April, 2004.*

Ms. Thompson was previously the subject of an administrative proceeding of the SEC related to her role as a transfer agent, not as an accountant, in April of 2005, File No. 3-12969.  This proceeding has not affected her continuing status as a Certified Public Accountant.  Management accordingly did not consider it relevant to her ability to function as a financial officer of the Company   On August 3, 2011, Pamela J. Thompson resigned as Chief Financial Officer and was replaced with Richard S. Polep as Chief Financial Officer as disclosed in Form 8-K dated August 8, 2011.

**Richard S. Polep -**Mr. Polep has over 45 years experience in public accounting and has substantial experience in financial reporting and disclosure rules and regulations of the Securities and Exchange Commission, including internal controls, initial public offerings, private offerings, corporate acquisitions and reorganizations.  

 

Mr. Polep spent 31 years with Grant Thornton LLP, which is ranked number five in international accounting firms.  He was a partner with that firm for 24 years.  He then joined SingerLewak LLP as an audit and quality control partner and was there for eleven years.  Since January 2010, he has been a sole-practitioner performing consulting services for publicly traded and privately held companies as well as accounting and auditing firms.

 

Mr. Polep has industry experience in manufacturing and distribution, financial services, oil and gas, life sciences, technology, hospitality, and gaming.  He has also served as an expert witness.  

 

Mr. Polep graduated from the University of Southern California in 1961 with a Bachelor of Science degree in Accounting and has been an instructor for the California Society of CPAs.  He is active in the AICPA and is a former member of the AICPA Securities and Exchange Commission Practice Section Executive Committee.   

36

Other Directorships

None of our officers and directors are directors of any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.

Audit Committee

We do not currently have an audit committee.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company.  Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.  

Board Meetings and Committees

During the fiscal year ended December 31, 2010, the Board of Directors met several times and took written action on several other occasions.  All the members of the Board attended the meetings.  The written actions were by unanimous consent

Code of Ethics

We have adopted a code of ethics that applies to all of our executive officers, directors and employees. Code of ethics codifies the business and ethical principles that govern all aspects of our business. This document will be made available in print, free of charge, to any shareholder requesting a copy in writing from the Company and it attached hereto as Exhibit 14.1  

**ITEM 11 - EXECUTIVE COMPENSATION**

**Executive Officers and Directors**

The following tables set forth certain information concerning all compensation paid, earned or accrued for service by (i) our Principal Executive Officer and Principal Financial Officer and (ii) all other executive officers who earned in excess of $100,000 in the three fiscal years ended December 31, 2010,  and each of the other two most highly compensated executive officers of the Company who served in such capacity at the end of the fiscal year whose total salary and bonus exceeded $100,000 (collectively, the “Named Executive Officer”):

37

  

**Principal**

**Position**

**Year**

**Salary**

**($)**

**Bonus**

**($)**

**Stock**

**Awards**

**($) ***

**Option Awards**

**($) ***

**Non-Equity**

**Incentive Plan**

**Compensation**

**($)**

**Nonqualified**

**Deferred**

**Compensation**

**($)**

**All Other**

**Compensation**

**($)**

**Total**

**($)**

 

 

 

 

 

 

 

 

 

 

Stephen M. Thompson

2010

-

-

-

-

-

-

-

-

Chairman of the Board and President

2009

-

-

-

-

-

-

-

-

 

 

 

 

 

 

 

 

 

 

Pamela J. Thompson 

2010

58,500

-

238,010 (1)

-

-

-

-

296,510

Chief Financial Officer, Secretary, Treasurer, and Director

2009

-

-

-

-

-

-

-

-

 

 

 

 

 

 

 

 

 

 

Gary Kucher

2010

90,000

-

711,360 (2)

-

-

-

-

801,360

President and Director 

2009

-

-

-

-

-

-

-

-

 

 

 

 

 

 

 

 

 

 

Richard Polep,

2010

-

-

28,500 (3)

-

-

-

-

28,500

Director

2009

-

-

-

-

-

-

-

-

 

 

 

 

 

 

 

 

 

 

Johnny R. Thomas,  

2010

-

-

-

-

-

-

-

-

CEO and president (4)

2009

-

-

-

-

-

-

-

-

 

2008

-

-

-

-

-

-

-

-

 

 

 

 

 

 

 

 

 

 

John C. Francis,

2010

-

-

-

-

-

-

-

-

CFO and Vice President (5)

2009

60,000

-

-

-

-

-

-

60,000

 

2008

-

-

-

-

-

-

-

-

*

Based upon the aggregate grant date fair value calculated in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“FAS”) No. 123R, Share Based Payment.  Our policy and assumptions made in valuation of share based payments are contained in the Notes to our December 31, 2010 financial statements.  The monies shown in the “option awards” column is the total calculated value for each individual.  The shares of our common stock issued to our officers and directors were restricted shares and federal and state securities laws place restrictions on the ability of our officers and directors to sell our common stock.  

(1)

Represents the 380,000 shares Ms. Thompson received in 2010, Ms. Thompson does not have beneficial ownership of these common shares; 

(2)

Represents the 1,140,000 shares Mr. Kucher received in 2010; 

(3)

Represents the 50,000 shares Mr. Polep received in 2010;  

(4) 

Served as principal executive officer from January 26, 2007 (inception) through April 6, 2010; and, 

(5) 

Served as principal financial officer from January 26, 2007 (inception) through April 6, 2010. 

38

Employment Contracts

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

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers as of December 31, 2010:

 

**Option Awards**

**Stock Awards**

**Name**

**Number of Securities Underlying Unexercised Options**

**(#)**

**Exercisable**

**Number of Securities Underlying Unexercised Options**

**(#)**

**Unexercisable**

**Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options**

**(#)**

**Option Exercise Price**

**($)**

**Option Expiration Date**

**Number of Shares or Units of Stock That Have Not Vested**

**(#)**

**Market Value of Shares or Units of Stock That Have Not Vested**

**($)**

**Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested**

**(#)**

**Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested**

**($)**

 

 

 

 

 

 

 

 

 

 

Stephen M. Thompson

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

 

 

 

 

 

 

 

 

 

 

Pamela J. Thompson 

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

 

 

 

 

 

 

 

 

 

 

Gary Kucher

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

 

 

 

 

 

 

 

 

 

 

Richard Polep

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

- 0 -

39

**Compensation of Directors**

We issue our director Richard Polep 50,000 common shares each, per year, as compensation for serving on our Board of Directors.  The following table sets forth director compensation as of December 31, 2010:

**Name**

**Fees Earned**

**or Paid in**

**Cash**

**($)**

**Stock Awards**

**($) ***

**Option**

**Awards**

**($) ***

**Non-Equity**

**Incentive Plan**

**Compensation**

**($)**

**Nonqualified**

**Deferred**

**Compensation**

**Earnings**

**($)**

**All Other**

**Compensation**

**($)**

**Total**

**($)**

 

 

 

 

 

 

 

 

Stephen M. Thompson

0-

0

0-

0

0

0

0

 

 

 

 

 

 

 

 

Pamela J. Thompson 

0-

0

0

0

0

0

0

 

 

 

 

 

 

 

 

Gary Kucher

0-

0

0

0

0

0

0

 

 

 

 

 

 

 

 

Richard Polep

0-

28,500 (1)

0

0

0

0

28,500 (1)

*

Based upon the aggregate grant date fair value calculated in accordance with the Accounting Codification Standard Topic 718 “Share-Based Payments.  Our policy and assumptions made in valuation of share based payments are contained in the notes to our financial statements. The monies shown in the “option awards” column is the total calculated value for each individual.

 

(1)

Richard Polep was appointed to our Board of Directors on May 12, 2010.  Represents the 50,000 shares Mr. Polep received as our Director.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers as of December 31, 2010:

 

**Option Awards**

**Stock Awards**

**Name**

**Number of Securities Underlying Unexercised Options**

**(#)**

**Exercisable**

**Number of Securities Underlying Unexercised Options**

**(#)**

**Unexercisable**

**Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options**

**(#)**

**Option Exercise Price**

**($)**

**Option Expiration Date**

**Number of Shares or Units of Stock That Have Not Vested**

**(#)**

**Market Value of Shares or Units of Stock That Have Not Vested**

**($)**

**Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested**

**(#)**

**Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested**

**($)**

 

 

 

 

 

 

 

 

 

 

Stephen M. Thompson

-

-

-

-

-

-

-

-

-

 

 

 

 

 

 

 

 

 

 

Pamela J. Thompson 

-

-

-

-

-

-

-

-

-

 

 

 

 

 

 

 

 

 

 

Gary Kucher

-

-

-

-

-

-

-

-

-

 

 

 

 

 

 

 

 

 

 

Richard Polep

-

-

-

-

-

-

-

-

 

40

**ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

The following table sets forth, as of December 31, 2010, certain information with respect to the Company’s equity securities owned of record or beneficially by (i) each Officer and Director of the Company; (ii) each person who owns beneficially more than 10% of each class of the Company’s outstanding equity securities; and (iii) all Directors and Executive Officers as a group.

**Common Stock**

**Title of Class**

**Name and Address**

**of Beneficial Owner (3)**

**Amount and Nature of**

**Beneficial Ownership**

**Percent**

**of Class (1)**

Common Stock

Johnny R. Thomas

2,390,000 (1,2,3,4) 

5.69% 

Common Stock

Gary D. Kucher (3)

1,140,000 (1,2,3,5)

2.69% 

Common Stock

Richard S. Polep (3)

50,000 (1, 2,3)

<1%

Common Stock

Stephen M. Thompson (3)

-(1,2,3)

-

Common Stock

Pamela J. Thompson (3)

-(1,2,3)

-

Common Stock

All Directors and Officers

As a Group (4 persons)

1,190,000 (2) 

2.81%

(1)

Unless otherwise indicated, the address of the shareholder is Consolidation Services, Inc. 2300 West Sahara Drive # 800, Las Vegas, NV 89102. 

(2)

Unless otherwise indicated, based on 42,309,053 shares of common stock issued and outstanding.  Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person.

(3)

Indicates our officers or directors.

(4)

Includes 2,390,000 shares held in the name of JTR Trust an entity controlled by Johnny Thomas.

(5)

Includes 1,140,000 shares held in the name of Dolphin Marine, Inc. an entity partially controlled by Gary Kucher.

There are no current arrangements which will result in a change in control.

**ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE  **

We do not have an audit, compensation, or nominating committee.

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

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

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

41

See “Employment Contracts” above, for the terms of Gary Kucher’s employment contract as President of the Company.  See “Compensation of Directors” above, for terms of compensation to Richard Polep, a director of the Company. 

Stephen Thompson through Leland Energy Holdings, Inc. is the managing member of the 12 acquired partnerships.  However, Mr. Thompson does not hold any controlling interest, controlling management, or any form of control over those partnerships.  

**ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES**

*Audit and Restated Fees*

During the year ended December 31, 2010, GBH CPAs., billed us $15,000 in fees for professional services for the audit of our financial statements in our Form 10-K and review of financial statements included in our Form 10-Q’s, as applicable.  During the year ended December 31, 2010, GBH CPAs billed us $15,000 in fees for professional services for the audit and review of our financial statements.  

*Tax Fees*

During the year ended December 31, 2010, GBH CPAs billed us $0 for professional services for tax preparation.  During the year ended December 31, 2010, GBH CPAs billed us $0 for professional services for tax preparation.    

*All Other Fees*

During the year ended December 31, 2010, GBH CPAs billed us $15,000 for other fees.  During the year ended December 31, 2010, GBH CPAs billed us $15,000 for other fees.    

Of the fees described above for the year ended December 31, 2010, 100% were approved by the entire Board of Directors.

42

**PART IV**

**ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

3.1 

 

Articles of Incorporation of Consolidation Services, Inc.(1) 

3.2 

 

Articles of Amendment to Articles of Incorporation (1)

3.3 

 

Bylaws of Consolidation Services, Inc. (1)

4.1

 

Form of Class A Common Stock Purchase Warrant(1)

4.2

 

Form of Class B Common Stock Purchase Warrant(2)

4.3

 

Form of Class C Common Stock Purchase Warrant(2)

4.4

 

Form of Subscription Agreement, dated February 9, 2007(2)

10.1

 

Real Estate Sale and Purchase Agreement, dated January 8, 2008, between Larry Bruce Herald and Consolidation Services, Inc.(5)

10.2

 

Agreement to Assign Real Estate Purchase Option, dated January 8, 2008.(5)

10.3

 

Property Agreement, by and among Consolidation Services, Inc. and Billy David Altizer, Pat E. Mitchell, Howard Prevette, William Dale Harris and Buckhorn Resources LLC effective March 20, 2008 and entered  into on March 27, 2008(3)

10.4

 

Option Oil, Gas and Mineral Agreement, dated as of March 31, 2008, by and among Consolidation Services, Inc. and Eastern Kentucky Land Corporation (the “EK Option Agreement”), with the Oil, Gas and Mineral Agreement, dated as of March 29, 2008, by and among Consolidation Services, Inc. and Eastern Kentucky Land Corporation (the “Rights Agreement”), attached as Exhibit A to the Option Agreement.(4)

10.5

 

Extension of Real Estate Option to Purchase Agreement, dated June 13, 2008, between the Company and Larry Bruce Herald.(5)

10.6

 

Stock Purchase Agreement (“Agreement”) is entered into as of July 1, 2008, by and among Vector Energy Services, Inc., John C. Francis, and Consolidation Services, Inc.(6)

10.7

 

Development Agreement, dated August 26, 2008, between Consolidation Services, Inc. and AMS Development, LLC.(7)

10.8

 

Form of Promissory Note, dated August 25, 2008, made by Consolidation Services, Inc. to Larry Bruce Herald.(7)

10.9

 

Form of Mortgage, dated August 25, 2008, between Consolidation Services, Inc. and Larry Bruce Herald.(7)

10.10

 

LeeCo Agreement, entered into as of September 11, 2008, by and among Consolidation Services, Inc., Altizer, Mitchell, and LeeCo Development, LLC.(8)

10.11

 

Agreement between the Company and Larry Bruce Herald, dated on or about May 27, 2009.(9)

10.12

 

Amendment to August 26, 2008 Agreement between the Company and AMS Development LLC, dated June 25, 2009.(9)

10.13

 

Amendment to March 20, 2008 Agreement between the Company and Buckhorn Resources LLC, dated June 25, 2009.(9)

10.14

 

Amendment to June 19, 2008 Agreement between the Company and LeeCo. Development LLC, dated June 25, 2009.(9)

10.15

 

Separation and Distribution Agreement by and between Consolidation Services, Inc. and Colt Resources, Inc.(10)

*14.1

 

Code of Ethics

16.1

 

Letter from Moore and Associates, Chartered, dated August 11, 2009 to the Commission regarding statements included in Form 8-K for August 7, 2009.

*21.1

 

Subsidiaries of Registrant

*31.1

 

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

 *31.2

 

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

*32.1

 

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

*32.2

 

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

43

(1)  Incorporated by reference from the Company's Form SB-2 filed with the Commission on April 13, 2007.

(2)  Incorporated by reference from the Company's Amendment No. 1 to Form SB-2 filed with the Commission on June 12, 2007.

(3)  Incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on March 31, 2008.

(4)  Incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on April 2, 2008.

(5)  Incorporated by reference to the Company's Current Report on Form 8-K/Amendment No. 1 filed with the Commission on June 30, 2008.

(6)  Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, filed with the Securities and Exchange Commission on August 1, 2008.

(7) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on August 28, 2008.

(8) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on September 17, 2008.

(9)  Incorporated by reference to the Company's Report on Form 10-Q for the period ended June 30, 2009.

(10) Incorporated by reference to the Company's Current Report on Form 8-K for February 9, 2010 filed with the Commission on February 12, 2010.

* Filed herewith

44

**SIGNATURES**

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

 

**   Consolidation Services, Inc.**

 

 

 

 

 

 

Dated:  June 4, 2012

 

/s/ Gary D. Kucher

 

By:

Gary D. Kucher 

 

Its:

Chief Executive Officer, Principal Executive Officer, President, Director

 

 

 

Dated:   June 4, 2012

 

/s/ Richard S. Polep

 

By:

Richard S. Polep  

 

Its:

Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer, Director  

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

Dated:  June 4, 2012

 

/s/ Gary D. Kucher

 

By:

Gary D. Kucher 

 

Its:

Chief Executive Officer, President,  Director

 

 

 

Dated:  June 4, 2012

 

/s/ Richard S. Polep

 

By:

Richard S. Polep  

 

Its:

Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer, Director  

 

 

 

 

 

 

Dated:  June 4, 2012

 

/s/ Richard Herstone 

 

By:

Richard Herstone

 

Its:

Director 

45** |
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