1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act
of 1934
For the Quarter Ended: September 30, 2004
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act
of 1934
For the Transition Period from _____________ to ____________
Commission File Number 0-25951
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CONSOLIDATED ENERGY INC.
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(Name of Small Business Issuer in its charter)
Nevada 86-0852222
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
9900 West Sample Road, Suite 300, Coral Springs, Florida 33065
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(Address of principal executive offices and Zip Code)
(954) 755-6620
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No
--- --- --- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, Par Value $0.001 9,564,609
- ------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of September 30, 2004
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED ENERGY INC.
FINANCIAL STATEMENTS
(UNAUDITED)
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
However, in the opinion of management, all adjustments (which include only
normal recurring accruals) necessary to present fairly the financial position
and results of operations for the periods presented have been made. These
financial statements should be read in conjunction with the accompanying
notes, and with the historical financial information of the Company.
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Consolidated Energy Inc.
Consolidated Balance Sheets
Unaudited
Sep 30, 2004 Dec 31, 2003
ASSETS ----------- -----------
Current Assets:
Cash $ 42,902 $ 174,432
Accounts Receivables 47,174 -
Other Current Assets 23,732 19,141
----------- -----------
Total Current Assets 113,808 193,573
----------- -----------
Fixed Assets:
Lease Cost Warfield 5,070,935 3,889,963
Equipment, net of depreciation 1,899,500 1,368,817
----------- -----------
Total Fixed Assets 6,970,435 5,258,780
----------- -----------
Other Assets:
Deferred Royalty 495,358 507,358
Prepaid Royalty and Mining Permits 37,500 76,915
----------- -----------
Total Other Assets 532,858 584,273
----------- -----------
Total Assets $ 7,617,101 $ 6,036,626
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable and Accrued Expenses $ 1,475,740 $ 493,424
Royalty Payable 292,684 48,786
Convertible Debentures 709,399 1,266,400
Notes Payable 514,016 514,017
----------- -----------
Total Current Liabilities 2,991,839 2,322,627
----------- -----------
Long-Term Liabilities:
Notes Payable 182,076 271,610
Notes Payable - Related Party 503,960 -
Deferred Royalties 1,022,132 1,268,118
----------- -----------
Total Long-Term Liabilities 1,708,168 1,539,728
----------- -----------
Total Liabilities 4,700,007 3,862,355
----------- -----------
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY
Common Stock,50,000,000 authorized shares,
with par value of $.001, 9,564,609 and
7,358,000 shares issued and outstanding 9,565 7,358
Additional Paid-in-Capital 5,732,583 3,509,862
Retained Earnings (2,825,054) (1,342,949)
----------- -----------
Total Stockholders' Equity (Deficit) 2,917,094 2,174,271
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,617,101 $ 6,036,626
=========== ===========
The accompanying notes are an integral part of these financial statements.
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Consolidated Energy Inc.
Consolidated Statement of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
Sep 30, 2004 Sep 30, 2003 Sep 30, 2004 Sep 30, 2003
----------- ----------- ----------- -----------
Revenues:
Revenues $ 1,143,459 $ 83,109 $ 2,180,868 $ 83,109
----------- ----------- ----------- -----------
Total Revenues 1,143,459 83,109 2,180,868 83,109
Cost of Revenues:
Cost of Revenues 768,611 154,110 2,365,464 154,110
----------- ----------- ----------- -----------
Gross Profit 374,848 (71,001) (184,596) (71,001)
Expenses:
Legal & Professional Fees 67,689 112,607 143,281 137,481
Consulting Fees 55,910 30,820 217,474 117,186
Depreciation & Amortization 175,810 28,108 503,907 28,108
Other Expenses 154,144 34,737 350,348 35,538
----------- ----------- ----------- -----------
453,553 206,272 1,215,010 318,313
----------- ----------- ----------- -----------
Net Income from Operations (78,705) (277,273) (1,399,606) (389,314)
Other Expenses:
Interest Expenses (11,596) (10,650) (82,499) (10,650)
----------- ----------- ----------- -----------
Provision for Income Taxes:
Income Tax Benefit (Expense) - - - -
----------- ----------- ----------- -----------
Net Income (Loss) $ (90,301) $ (287,293) $ (1,482,105) $ (399,964)
=========== =========== =========== ===========
Basic and Diluted Earnings Per Common Share $ (0.01) $ (0.06) $ (0.16) $ (0.09)
=========== =========== =========== ===========
Weighted Average number of Common Shares
used in per share calculations 9,564,609 5,216,333 9,373,317 4,527,444
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
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Consolidated Energy Inc.
Consolidated Statement of Cashflows
(Unaudited)
Nine Months Ended Sep 30,
2004 2003
----------- -----------
Cash Flows from Operating Activities:
Net Income (Loss) $ (1,482,105) $ (399,964)
Adjustments to reconcile net loss to net cash
provided (used) to operating activities:
Depreciation & Amortization 503,907 28,108
Stock Issued for Services 102,000 175,750
Accounts Receivable (47,174) -
Prepaid Expenses (4,591) -
Deferred Royalties 12,000 -
Prepaid Royalties 39,415 -
Accrued Interest - 10,650
Royalties Payable 243,898 -
Accounts Payable 982,315 40,730
----------- -----------
Net Cash Used in Operating Activities $ 349,665 (144,726)
----------- -----------
Cash Flows from Investing Activities:
Fixed Assets (1,060,562) -
----------- -----------
Net Cash Used in Investing Activities (1,060,562) -
----------- -----------
Cash Flows from Financing Activities:
Deferred Royalties (245,986) -
Convertible Debentures 469,919 -
Additional Paid In Capital 25,000 -
Notes Payable - related Party 503,960 -
Notes Payable 89,534 180,021
----------- -----------
Net Cash Provided for Financing Activities 842,427 180,021
----------- -----------
Net Increase (Decrease) in Cash 131,530 35,295
Cash Balance, Beginning of Period 174,432 -
----------- -----------
Cash Balance, End of Period $ 42,902 $ 35,295
=========== ===========
Supplemental Disclosures:
Cash Paid for interest $ 82,499 $ 10,650
Cash Paid for income taxes $ - $ -
Stock Issued for Services $ 102,000 $ 175,750
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED ENERGY INC.
Notes to the Financial Statements
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2004 and 2003
and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is
suggested that these condensed financial statements be read in conjunction
with the financial statements and notes thereto included in the Company's
December 31, 2003 audited financial statements. The results of operations for
periods ended September 30, 2004 and 2003 are not necessarily indicative of
the operating results for the full years.
Earnings per Common Share
The Company adopted Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share," which simplifies the computation of earnings per share requiring
the restatement of all prior periods.
Basic earnings per share are computed on the basis of the weighted average
number of common shares outstanding during each year.
NOTE 2 - GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has not established revenues sufficient to cover its
operating costs and allow it to continue as a going concern as of September
30, 2004.
NOTE 3 - COMMON STOCK
During the quarter ended September 30, 2004, the Company did not issue any
common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
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This report may contain "forward-looking" statements. Examples of forward-
looking statements include, but are not limited to: (a) projections of
revenues, capital expenditures, growth, prospects, dividends, capital
structure and other financial matters; (b) statements of plans and objectives
of our management or Board of Directors; (c) statements of our future economic
performance; (d) statements of assumptions underlying other statements and
statements about us and our business relating to the future; and (e) any
statements using the words "anticipate," "expect," "may," "project," "intend"
or similar expressions.
Business of the Company
- -----------------------
On September 12, 2003, Consolidated Energy, Inc. (the "Company") acquired
Eastern Consolidated Energy, Inc., a privately-held Kentucky Corporation
("Eastern"). Eastern's assets acquired by the Company include a coal lease in
Martin County, Kentucky that has been developed and is now operating. The
mine itself is known as the Warfield mine.
Eastern has completed the first and second phase of underground mine
development in the Alma seam of coal at the Warfield mine. This first and
second phase of mine development was completed in July of 2004. This mine
development will enable Eastern to have two active working sections even
though at present only one section is in production. However the second
prepared section provides for immediate additional production as soon as
Eastern acquires high production equipment which can be placed in this dormant
but prepared mining section. The current active section is being mined using
one production shift and one maintenance shift. Earlier, the company had
employed a second production shift in the Alma seam. However, management, in
order to conserve manpower, suspended the second production shift until the
company is able to upgrade the mining equipment. A single production shift is
currently mining using low production equipment which allows Eastern to
produce as much as 10,000 tons of mined coal per month. Management
anticipates that when high production equipment is obtained and installed into
both existing sections, Eastern will employ two production shifts and one
maintenance shift per section. When these four production shifts are
implemented, management expects that production will reach 50,000 to 60,000
tons per month from the Alma seam at Warfield. Much of the coal currently
being produced is being sold via spot sales week to week.
Eastern completed the negotiations and executed an agreement with American
Electric Power (AEP) for a long-term coal supply contract for Kentucky Power
Company's ("KPC") Big Sandy Plant on September 25, 2004. The contract has a
face value of more than $73,000,000 with additional incentives. The contract
provides that ECEI will deliver to the Big Sandy plant a minimum of 40,000
tons per month from one of several coal reserves held by ECEI beginning no
later than March 1st 2005 and continuing until February 29th 2008. Eastern is
solidifying plans to access two separate reserves held by Eastern which
contain coal capable of satisfying the coal contract with AEP.
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One of the coal reserves held by Eastern, which contains coal with the quality
necessary to satisfy the AEP contract, is referred to as the Pond Creek coal
reserve. The Pond Creek reserve is located 90 feet directly under the Alma
seam at Warfield. Eastern has completed initial engineering which would allow
Eastern to slope down from the existing Alma mine at Warfield, into the Pond
Creek seam. The slope construction, which calls for three separate slopes,
and the subsequent Pond Creek mining activity will be conducted by Eastern's
existing management and labor.
Eastern initiated discussions with the N & S Railroad in an effort to obtain
an existing rail siding strategically located near the Warfield mine. Eastern
plans to conduct additional discussions to secure an appropriately located
rail loading site. Management believes that a rail siding will allow Eastern
to increase the number of customers with interest in the Warfield production.
This increased number of potential customers will help insure future sales
from the increased coal production at Warfield.
Eastern has determined that a coal preparation or coal "washing facility" is
needed at the Warfield mine in order to maximize the profitability of the
Warfield operation. Eastern's engineers have developed a plan for the
installation of a washing facility at the Warfield mine. We are still
expecting to have permits related to the construction of a washing facility in
hand by the fourth quarter of 2004. Management believes that the washing costs
associated with washing the Warfield coal will be between three and four
dollars per ton, and estimates that the value of the coal will be elevated
approximately twelve to fifteen dollars per ton.
Eastern Kentucky has historically been an enormous supplier of natural gas and
still contains some of the most abundant gas reserves in the nation. In order
to capitalize on this opportunity, Consolidated has acquired 400 acres which
are permitted in Morgan County to explore and develop the gas reserves. The
Company will refurbish one existing gas well which shows significant
production capacity. The Company is making plans to establish a delivery line
to the main gas line from the existing well and the anticipated other wells
which have already been permitted. This main line is approximately one half
mile from the 400 acre reserve. This gas activity is consistent with
management's long term plan to become a multifaceted energy supplier. The
Company will fund this activity by selling a percentage of the working
interest in the gas wells being developed. As funding is available, the
Company's plans are to continue the further acquisition of gas and oil leases
for further exploration, development and production in the region.
Eastern is being operated as a wholly-owned subsidiary of the Company. The
results of operations below reflect the financial condition of the combined
entities, including the operations of the subsidiary. Because neither the
Company nor Eastern had any operations prior to September 2003, the comparison
of prior year periods is not relevant to the discussion of operations.
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Discussion and Analysis of Financial Condition and Results of Operations
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For the Nine Month Period Ended September 30, 2004
- --------------------------------------------------
For the nine month period ended September 30, 2004, the Company had revenues
of $2,180,868, with cost of revenues of $2,365,464 for a gross loss of
$184,596. Expenses for the nine months ended September 30, 2004 totaled
$1,215,010, consisting of legal and professional fees, consulting fees,
depreciation and amortization and other expenses. Including interest expenses
of $82,499, the Company reported a net loss from operations of $1,482,105, or
$.16 per share.
Management hopes to increase revenues over the next twelve months through an
increase in mining activities. Operating expenses are expected to increase as
well through increased payroll. This anticipated increase in payroll is
associated with the addition of a second shift in the Alma seam and the
addition of a second mining section. There will also be in increase in mining
consumables, including replacement parts, equipment and utilities, due to
increased production activities.
Liquidity and Capital Resources
- -------------------------------
To date, the Company has funded operations through the issuance of notes
payable and convertible debentures. The Company has also issued stock for
services in lieu of cash.
At September 30, 2004, the Company had current assets of $113,808, consisting
of $42,902 in cash, $47,174 in accounts receivable and $23,732 in other
assets. The Company had current liabilities of $2,991,839, consisting of
$1,475,740 in accounts payable and accrued expenses, $292,684 in royalty
payable, $709,399 in convertible debentures, and $514,016 in notes payable,
for a working capital deficit of $2,878,031.
At September 30, 2004, the Company had long-term liabilities of $1,708,168
consisting of notes payable and deferred royalties.
At September 30, 2004, the Company had fixed assets of $6,970,435 consisting
of the Warfield Mine lease and equipment (net of depreciation). The Company
had other assets of $532,858, consisting of deferred royalty and prepaid
royalty and mining permits.
Management intends to retire the short term debt through revenues generated by
increase production from; (1) adding shifts to the existing Alma seam mining
operation; (2) opening an additional mining section within the same Alma seam,
and (3) by issuing convertible debentures.
For the period ended September 30, 2004, cash flows used by operating
activities totaled $349,665. Cash used by investing activities totaled
$1,060,562 for the purchase of mining equipment. Cash provided by financing
activities totaled $842,427, including proceeds from notes payable, the
issuance of convertible debentures, and additional paid in capital, offset by
payments on deferred royalties.
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In addition to the liabilities associated with the acquisition of mining
operations, the Company has incurred significant consulting expenses related
to its search for alternative business opportunities as well as ongoing
expenses associated with maintaining its corporate status and professional
fees associated with accounting and legal costs required to maintain its SEC
filing obligations and corporate status. At September 30, 2004, the Company's
revenues are not sufficient to cover its operating costs, therefore there is
substantial doubt about its ability to continue as a going concern.
Management's plans to address this problem include the increase in production
activities discussed above, and:
1. Issuing additional convertible debentures and/or obtaining funding through
other arrangements;
2. Developing an arrangement with others that will allow Eastern to collect
royalty payments for mining operations conducted on reserves that are
contiguous with Eastern's reserves;
3. Signing sub-leases for coal reserves controlled by Eastern for which
Eastern expects to receive royalty payments when these reserves are mined and
sold.
Merger with Saudi American Minerals, Inc.
- -----------------------------------------
In June 2003, the Company signed a definitive agreement with Saudi American
Minerals Inc. ("Saudi American") to acquire 100% ownership of Saudi American
with an effective date to coincide with an effective date of the S-4 which is
being prepared and will be filed with the SEC. The Company has been assembling
a registration statement on Form S-4 related to the planned acquisition of
Saudi American Minerals Inc. ("Saudi American"). The Company hopes to submit
the S-4 to the SEC for review as soon as possible.
Management intends to fund the cost of the acquisition by issuing convertible
debentures or through increased revenues from mining operations. The
acquisition will be complete upon receiving an effective date on the
registration statement on Form S-4 to be filed with the SEC.
ITEM 3. CONTROLS AND PROCEDURES
Our principal executive and financial officer has participated with management
in the evaluation of effectiveness of the controls and procedures required by
paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act as of the
end of the period covered by this report. Based on that evaluation, our
principal executive and financial officer believes that our disclosure
controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under
the Exchange Act) are effective as of the end of the period covered by the
report. There have been no changes in our internal controls that have
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting during the period covered by this
report.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On October 22, 2004, the Company received a resignation letter from director
Steven A. Hicks from the board of directors. Mr. Hicks has resigned to pursue
other opportunities.
On September 25, 2004, Eastern Consolidated Energy Inc. ("Eastern") a wholly
owned subsidiary of Consolidated Energy Inc. (the "Company") executed an
agreement with American Electric Power (AEP) for a coal supply contract for
Kentucky Power Company's Big Sandy Plant. The contract provides that Eastern
will deliver to the Big Sandy Plant, a minimum of 40,000 tons per month from
one of several coal reserves held by Eastern beginning no later than March 1,
2005 and continuing until February 29, 2008.
Additionally, the contract allows for Eastern to delivery up to 20,000 tons
per month at the option of Eastern commencing October 1, 2004 and continuing
until the primary contract begins March 1, 2005.
The full text of the agreement is attached as an exhibit to this filing.
ITEM 6. EXHIBITS
Exhibit 10.15 Coal Purchase and Sale Agreement
Exhibit 31.01 - Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.02 - Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.01 - Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.02 - Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONSOLIDATED ENERGY INC.
Date: November 12, 2004 By: /S/David Guthrie, President
(Principal Executive Officer)
Date: November 12, 2004 By: /S/Barry W. Tackett, CFO
(Principal Financial Officer)