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: March 31, 2005
[ ] 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.
----------------------------------------------
(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)
12508 West Atlantic Blvd., Coral Springs, Florida 33071
-------------------------------------------------------
(Address of principal executive offices and Zip Code)
(954) 575-1471
----------------------------------------------------
(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 14,092,626
- ------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of March 13, 2005
2
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.
RESTATEMENT OF FINANCIAL STATEMENTS
- -----------------------------------
In the course of preparing financial statements for the year ended December
31, 2004, the Company changed auditors effective April 1, 2005 (See Current
Report on Form 8-K filed with the Commission on April 5, 2005). The new
auditors have applied significant adjustments to the previously issued
financial statements and restated the financial statements for the period
ended December 31, 2003. Details of the accounting adjustments are included in
footnote 3 to the financial statements included in the Company's annual report
for the year ended December 31, 2004.
The attached interim financial statements for the three months ended March 31,
2005 below reflect the restated numbers for fiscal 2003, and include details
of the effects of that restatement and adjustments made to the previously
issued financial statements for the three months ended March 31, 2004. See
Note 5: Restatement of Prior Quarter's Results.
3
Consolidated Energy Inc.
Consolidated Balance Sheets
Unaudited
ASSETS
Mar 31, 2005 Dec 31, 2004
----------- -----------
CURRENT ASSETS
Cash $ 2,864,851 $ 4,392
Accounts Receivable - Other 75,000 75,000
Prepaid Expenses 493 400
----------- -----------
TOTAL CURRENT ASSETS 2,940,344 79,792
----------- -----------
BUILDING, EQUIPMENT AND COAL LEASES
Building and Equipment, Net of Depreciation 5,790,220 1,515,677
Coal Leases, Net of Amortization 1,343,226 98,157
----------- -----------
TOTAL BUILDING, EQUIPMENT AND
COAL LEASES, NET 7,133,446 1,613,834
----------- -----------
OTHER ASSETS
Restricted Cash 51,200 49,900
Prepaid Royalty 46,167 11,666
Other Assets 27,000 32,500
----------- -----------
TOTAL OTHER ASSETS 124,367 94,066
----------- -----------
TOTAL ASSETS $ 10,198,157 $ 1,787,692
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Consolidated Energy Inc.
Consolidated Balance Sheets
Unaudited
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mar 31, 2005 Dec 31, 2004
----------- -----------
CURRENT LIABILITIES
Cash Overdrafts $ - $ 400,623
Accounts Payable 699,595 426,427
Accrued Liabilities 501,805 2,550,574
Royalties Payable 350,898 369,374
Notes Payable - 182,737
Current Portion Capital Lease 1,045,000 -
Convertible Debentures 561,528 588,010
Payable to Related Parties 256,711 560,906
Notes Payable to Related Party 659,339 659,339
----------- -----------
TOTAL CURRENT LIABILITIES 4,074,876 5,737,990
LONG-TERM LIABILITIES
Deferred Royalties Payable 166,501 168,962
Senior 6% Secured Notes Payable 5,581,735 -
Long Term Portion Capital Lease 492,030 -
----------- -----------
TOTAL LIABILITIES 10,315,142 5,906,952
----------- -----------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common Stock, $.001 Par Value, 50,000,000 Shares
Authorized, 13,606,776 and 10,327,428 Shares
Issued and Outstanding at March 31, 2005 and
December 31, 2004, respectively 13,607 10,327
Additional Paid-in-Capital 8,315,536 3,686,035
Retained Deficit (8,446,128) (7,815,622)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (116,985) (4,119,260)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 10,198,157 $ 1,787,692
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2005 2004
----------- -----------
REVENUES
Coal Sales $ 433,033 $ 671,584
----------- -----------
TOTAL REVENUES 433,033 671,584
COST OF REVENUE 385,499 797,526
----------- -----------
GROSS PROFIT (LOSS) 47,534 (125,942)
EXPENSES
Operating Expenses 555,899 785,338
Depreciation and Amortization 115,829 66,348
Interest Expense, Net of $1,098,868 Capitalized
Interest in 2005 6,411 48,461
----------- -----------
TOTAL EXPENSES 678,139 900,147
----------- -----------
LOSS BEFORE INCOME TAXES (630,605) (1,026,089)
PROVISION FOR INCOME TAXES
----------- -----------
NET LOSS $ (630,605) $ (1,026,089)
=========== ===========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.05) $ (0.13)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
Basic and Diluted 12,686,939 7,918,000
=========== ===========
The accompanying notes are an integrated part of these consolidated financial
statements.
6
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (630,506) $ (1,026,089)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities
Depreciation and Amortization 115,829 66,348
Stock Issued for Services 624,000
Amortization of Debt Discount 2,875
Changes in Operating Assets and Liabilities
Prepaid Expenses (93) 3,702
Accounts Receivable (102,879)
Prepaid Royalties (34,501)
Other Assets 5,500 47,627
Cash Overdrafts (400,623) (33,007)
Accounts Payable and Accrued Liabilities 310,783 518,253
Royalties Payable (18,476) (34,123)
Deferred Royalties Payable (2,461)
Purchase of Restricted Cash (1,300)
----------- -----------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (652,973) 63,832
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment (1,933,883) (391,976)
Interest Capitalized (100,093)
Coal Lease Cost Capitalized (925,690)
----------- -----------
NET CASH (USED) BY
INVESTING ACTIVITIES (2,959,666) (391,976)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment On Notes Payable (182,737)
Proceeds From Convertible Debentures, Net 7,097,500
Advances From (Payments To) Related Parties (304,195) 196,828
Payment on Capital Leases (137,470)
Proceeds From Stock Sales 125,000
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 6,473,098 321,828
----------- -----------
NET (DECREASE) INCREASE IN CASH 2,860,459 (6,316)
CASH BALANCE, BEGINNING OF PERIOD 4,392 6,316
----------- -----------
CASH BALANCE, END OF PERIOD $ 2,864,851 $
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Three Months Ended March 31,
2005 2004
----------- -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Debt Discount Capitalized as Equipment $ (679,067) $ -
Debt Discount Capitalized as Lease Cost (319,708) -
Reduction in Debt Discount 998,775 -
Equipment From Capital Lease (1,674,500) -
Increase in Capital Lease 1,674,500 -
Lease Cost From Stock Issued (2,500) -
Stock Issued For Lease 2,500 -
Reduction in Accrued Liabilities for Stock Issued (2,082,500) -
Common Stock Issued For Settlement of
Accrued Liabilities 750 -
Additional Paid-In-Capital From Stock Issued 2,081,750 -
Conversion of Debentures to Common Stock (50,000) (682,001)
Conversion of Accrued Interest to Common Stock (3,884) (160,927)
Common Stock Issued for Debentures 30 947
Additional Paid-In-Capital from Stock Issued
For Debentures 53,854 841,981
Debt Discount on Issuance of Convertible
Debentures (2,493,897) -
Additional Paid-In-Capital from Debt Discount 2,493,897 -
----------- -----------
$ - $ -
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid During the Year For
Interest $ 100,093 $ 48,461
=========== ===========
Income Taxes $ - $ -
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
8
CONSOLIDATED ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying reviewed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. All such
adjustments are of a normal and recurring nature. These financial statements
should be read in conjunction with the audited financial statements as of
December 31, 2004. Operating results for the quarter ended March 31, 2005 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2005.
Management of the Company has determined that the Company's operations are
comprised of one reportable segment as that term is defined by SFAS No. 131
"Disclosures About Enterprise and Related Information." Therefore, no
separate segment disclosures have been included in the accompanying notes to
the financial statement.
NOTE 2: GENERAL
During February of 2005, the Company temporarily suspended mining operations
of the Alma coal seam of the Warfield mine in order to cut a slope down to the
Pond Creek Coal seam which lies approximately 90 feet below the Alma coal
seam. Coal mining in the Alma seam is expected to resume in the later half of
2005.
NOTE 3: USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect reported amounts in the consolidated
financial statements. The most significant of the Company's estimates is the
determination of the amount of amortization of mine costs using the units of
production. These estimates are based on information available as of the date
of the financial statements. Therefore, actual results could differ materially
from those estimates used in the preparation of these financial statements.
NOTE 4: REVENUE RECOGNITION
Revenues from coal sales are recognized when title passes to the customer as
coal is shipped. Some coal supply agreements provide for price adjustments
based on variations in the quality characteristics of the coal shipped. In
most cases, the customer's analysis of the coal quality is binding and the
results of the analysis are received on a delayed basis. In that case, the
Company estimates the amount of the quality adjustment and adjusts the
estimate to actual when quality adjustments are received from a customer.
Historically, such adjustments have not been material.
9
CONSOLIDATED ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5: RESTATEMENT OF PRIOR QUARTERS RESULTS
During the course of the audit of the year ended December 31, 2004 financial
statements, accounting adjustments were made to the previously issued
financial statements. The following sets forth the Statement of Operations
for the three months ended March 31, 2004 as previously reported and
applicable restatement adjustments for that period:
Restatement
As Reported Adjustments As Restated
----------- ----------- -----------
Revenues $ 671,584 $ - $ 671,584
Cost of Revenues 797,526 - 797,526
----------- ----------- -----------
Gross Loss (125,942) - (125,942)
----------- ----------- -----------
Legal and Professional Fees 46,634 - 46,634
Consulting Fees 58,761 592,000 (a) 650,761
Operating Expenses 87,943 - 87,943
Depreciation & Amortization 156,588 (90,240)(b) 66,348
Interest Expense 48,461 - 48,461
----------- ----------- -----------
Total Expenses 398,387 501,760 900,147
----------- ----------- -----------
Net Loss $ (524,329) $ (501,760) $ (1,026,089)
=========== =========== ===========
(a) This represents the difference in the quoted market value of common stock
issued for services and the amount which was recorded as expense.
(b) This represents a reduction in amortization expense of the Warfield Mine
due to the decrease in lease cost and the adjustment to the depreciation
expense on mine equipment.
NOTE 6: STOCK TRANSACTIONS
On January 3, 2005, the Company issued 550,000 shares of its common stock for
services rendered during the year that ended December 31, 2004. The value of
the stock issued, $1,072,500 (which approximates the value quoted in the
OTCBB) has been recorded as an expense in the year ended December 31, 2004,
with a corresponding increase in accrued liabilities.
On March 23, 2005, the Company authorized the issuance of 200,000 shares of
its common stock for services, which were performed during the year that ended
December 31, 2002. The value of the stock to be issued, $1,010,000 (which
approximates the value quoted in the OTCBB) has been recorded as an expense in
the year that ended December 31, 2004, with a corresponding increase in
accrued liabilities.
On January 3, 2005, the Company issued 2,500,000 shares of its common stock to
Eastern Land Development. LLC, an entity owned by Larry Hunt, Jeff Miller and
Jay Lasner for the acquisition of the Coal Burg Seam, Taylor Seam, Richardson
Seam and the Broas Seam of coal on the Dempsey Heirs Leases.
The Company issued 29,368 shares of it common stock upon the conversion of
$50,000 debenture and $3,885 of accrued interest.
10
CONSOLIDATED ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7: ISSUANCE OF 6% CONVERTIBLE NOTES
On February 22, 2005, the Company sold $7,000,000 of the Company's 6% senior
secured convertible notes, due in 2008 ("Notes"), warrants to purchase
2,058,824 shares of the Company's common stock and Additional Investment
Rights ("AIRs"). The warrants are exercisable for five years from the date of
issuance and have an initial exercise price of $1.70. The notes are secured
by any and all assets and properties of the Company, whether now owned or
herein after acquired.
The AIRs give the purchasers of the notes the right to acquire an additional
$7,000,000 of notes prior to the later of (i) the earlier of (a) the 14th day
following the date the Company first executes a second coal supply contract
with American Electric Power, and (b) the 90th day following the date the
registration statement is declared effective and (ii) May 25, 2005.
During March 2005, $750,000 of the AIRs were exercised by a portion of the
convertible note holders.
NOTE 8: GOING CONCERN
The Company's consolidated 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, thereby raising substantial doubts about its
ability to continue as a going concern. During February and March of 2005, the
Company sold $7,750,000 of its 6% senior secured convertible notes to outside
investors. Upon receipt of the proceeds from the sale of convertible notes,
the Company suspended mining operations and began preparation to mine an
additional coal seam in its Warfield mine. Mining operations should resume in
August or September 2005 and production from the two coal seams, according to
management's estimates, should be sufficient to allow the Company to earn a
profit from operations. Management is currently exploring ways in which to
finance a coal washing plant at the Warfield mine, which would further enhance
the sales value of the mined coal. The estimated cost of the plant is
approximately $4,000,000.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
- ---------------------------------------------------------
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, the Company signed an agreement to acquire Eastern
Consolidated Energy, Inc., a privately-held Kentucky Corporation ("Eastern").
The mining equipment was delivered to the site the last week of August 2003
and mining operations started in September 2003.
Since the above acquisition, the Company, through its wholly owned subsidiary
Eastern Consolidated Energy, Inc. ("Eastern") is a producer and marketer of
Appalachian coal, which is supplied to domestic electric utilities. Coal
sales are made through the spot market and through long-term supply contracts.
The Company also is involved in gas and oil exploration and development
through its wholly owned subsidiary Eastern Consolidated Oil and Gas, Inc.
The Company has interests in one producing gas well drilled in November 2004
with additional wells planned.
In June 2003, the Company signed an agreement to acquire Saudi American
Minerals, Inc., a company with a so-called "clean coal" technology. The
effective date of the acquisition is subject to a registration statement being
filed and effective, which filing has been delayed due to financing and other
considerations. Once the acquisition is completed, the Company intends to
complete development of the technology and seek licensing arrangements.
Results of Operations for the period ended March 31, 2005 compared to 2004
- --------------------------------------------------------------------------
For the period ended March 31, 2005, the Company had revenues of $443,033 with
cost of revenues of $385,499 for a gross profit of $47,534. Operating
expenses totaled 678,139 for a net loss of $630,605, or $.05 per share. For
the period ended March 31, 2004, the Company had revenues of $671,584 with
cost of revenues of $797,526, for a loss of $125,942. Expenses for the three
months ended March 31, 2004 totaled $900,147 for net loss of $1,026,089, or
$.13 per share.
Revenues and expenses were down in the current quarter compared to the prior
year period because management suspended mining operations in February and
began preparation to mine an additional coal seam in its Warfield mine.
Management expects that mining operations in should resume in May or June 2005
but not later than August 2005, and anticipates that production from the two
coal seams should be sufficient to allow the Company to earn a profit from
operations. The Company is currently exploring ways in which to finance a
coal washing plant at the Warfield mine to further enhance the sales value of
the mined coal.
12
In January 2005, the Company issued 2,500,000 shares of its common stock to
acquire rights to additional reserves in the Coal Burg Seam, Taylor Seam,
Richardson Seam and Broas Seam of coal on the Dempsey Heirs Leases estimated
at approximately 21,500,000 tons. The acquisition was booked at $2,500, the
par value of the stock issued. Management hopes to begin mining these new
reserves in the next 12 to 15 months.
Liquidity and Capital Resources
- -------------------------------
To date, the Company has funded operations primarily through the issuance of
notes payable, convertible debentures and convertible notes. The Company has
also issued stock for services in lieu of cash.
On January 11, 2005, the Company closed a financing transaction for $2,500,000
in bridge financing to be used exclusively for the purchase of equipment and
to fund expenditures for the consummation of mining activities at the
Company's Warfield Mine. The financing consisted of a senior secured
promissory note (the "Note") for the face amount of $2,500,000 with an
interest rate of 9% per annum and a payment date (principal and interest) of
March 31, 2005. Gryphon Master Fund, LP and GSSF Master Fund, LP, both
Bermuda limited partnerships, are (collectively) the payee on the note (the
"Payee").
In consideration for the Note, the Company paid a commitment fee of $50,000 to
the Payee and a flat fee of $10,000 to Payee as reimbursement for fees and
expenses incurred in connection with the negotiation, preparation and delivery
of the Note, all deducted from the proceeds of funding the Note. As additional
consideration, the Company has issued to Payee a warrant (the "Warrant") for
the purchase of an aggregate of 514,706 shares of the Company's common stock
at an exercise price of $1.70 per share, exercisable for five years.
On February 24, 2005, the Company executed a financing transaction for
aggregate gross proceeds of $7,000,000, with additional investment rights of
up to an additional $7,000,000, such financing to be used for the purchase of
equipment and to fund expenditures for the consummation of mining activities
at the Company's Warfield Mine. The financing is in the form of 6% senior
secured convertible promissory notes (the "Notes") for an aggregate total face
amount of $7,000,000 and a term of three years. The Notes may be converted to
common stock at a conversion price of $1.70 per share. Holders of the Notes
are Gryphon Master Fund, L.P. and GSSF Master Fund, LP ("Gryphon"), Lonestar
Partners, L.P., WS Opportunity International Fund, Ltd., WS Opportunity Fund
(QP), L.P., WS Opportunity Fund, L.P., Renaissance US Growth Investment Trust
PLC, and BFS US Special Opportunities Trust PLC (all collectively the
"Holders"). As additional consideration, the Company has issued to the Holders
warrants (the "Warrants") for the purchase of an aggregate of 2,058,824 shares
of the Company's common stock at an exercise price of $1.70 per share,
exercisable for five years. The conversion price of the Notes, and the
exercise price of the Warrants, are subject to certain normal and customary
anti-dilution adjustment provisions and also include a one-time reset date
provision with a floor price of $1.00 per share.
Subsequent to the date of the financial statements included in this report, in
April 2005, two of the above Holders exercised additional investment rights
for the purchase of Notes totaling $750,000. Subsequent to the date of the
financial statements included in this report, placement agent warrants for the
purchase of 713,223 shares issued in connection with the above financing
transactions were exercised pursuant to cashless exercise provisions for the
issuance of 485,850 shares.
13
The Holders of the Notes and Warrants, and the placement agent have
registration rights in connection with the transactions. Accordingly, the
Company filed a registration statement on Form SB-2 on May 13, 2005 to
register a total of 7,618,204 shares, including shares underlying the Notes if
converted, the shares underlying the Warrants and the shares issued to the
placement agent in connection with the transactions.
At this filing date, the Company has used approximately $2,527,000 of the
proceeds to repay an outstanding bridge loan (principal and interest) from
Gryphon. The Company has also paid a flat fee of $30,000 to Gryphon as
reimbursement for fees and expenses incurred in connection with the
negotiation, preparation and delivery of the Notes and related investment
documents.
In addition to the above fees and warrants, the Company has paid the placement
agent, Stonegate Securities, Inc., a total of $540,000 cash and issued an
aggregate of 485,850 shares of the Company's common stock to Scott R. Griffith
and Jesse B. Shelmire IV (242,925 shares each). The cash paid and shares
issued were per the terms of a non-exclusive Placement Agency Agreement (filed
a an exhibit to the Company's Current Report on Form 8-K dated January 11,
2005).
In connection with the above transaction, the Company has executed a security
agreement (the "Security Agreement") giving the Holders a security interest in
and to any and all of the Company's assets and properties ("Collateral" as
defined in the Security Agreement). Each of the Company's subsidiaries has
also executed a Guaranty for the Company's obligations under the Notes.
At March 31, 2005, the Company had current assets of $2,940,244 consisting of
cash of $2,864,851, $75,000 in accounts receivable and $493 in prepaid
expenses. The Company had current liabilities of $4,074,876, consisting of
$699,596 in accounts payable, $501,805 in accrued liabilities, $350,898 in
royalties payable, $1,045,000 in current capital lease, $561,528 in
convertible debentures, $256,711 payable to related parties, and $659,339 in a
note payable to a related party, for a working capital deficit of $1,134,532.
The Company intends to continue its mine development and restart mining and
production as soon as possible to begin generating revenues.
At March 31, 2005, the Company had long-term liabilities of $166,501 in
deferred royalties payable, $492,030 for the long term portion of a capital
lease, and $5,581,735 for its senior 6% secured notes payable.
At March 31, 2005, the Company had fixed assets of building and equipment of
$5,790,220 (net of depreciation) and coal leases of $1,343,226 (net of
amortization. The Company had other assets of $124,367, consisting of
restricted cash, prepaid royalty and other assets.
For the period ended March 31, 2005, cash flows used by operating activities
totaled $652,973. Cash used by investing activities totaled $2,959,666,
primarily for the purchase of mining equipment, plus the capitalized cost of a
coal lease. Cash provided by financing activities totaled $6,473,098,
primarily from the proceeds of the senior 6% convertible notes, offset by
payment of notes payable, payments to related parties, and payment of capital
leases.
The balance of the proceeds received from the financing transaction described
above is budgeted to allow the Company to:
- access the Pond Creek coal seam at Warfield;
- acquire the equipment necessary to mine the Pond Creek seam;
- prepare to construct a coal washing facility at Warfield;
- begin engineering and permitting of other coal seams at Warfield.
14
A portion of the proceeds received from the transaction is currently being
used to provide working capital and materials necessary to construct three
slopes and the ancillary ventilation necessary to allow the Company to access
the Pond Creek coal seam. This construction project is scheduled to be
complete by the end of the second quarter of 2005.
A portion of the proceeds received from the transaction was used to secure the
equipment which will be used to mine the Pond Creek coal seam. This equipment
is scheduled to arrive in May of 2005.
A portion of the net proceeds has been used to prepare the site and to secure
the equipment associated with the planned coal washing facility. This
facility is scheduled to be completed in time to wash the coal being produced
from the Pond Creek coal seam.
Clean Coal Technology and 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 acquisition of Saudi
American will be accomplished with a stock exchange of two Consolidated shares
for three Saudi American shares. The total number of Saudi American shares
owned and outstanding is 20,685,517. The total number of Consolidated shares
used to obtain all of the Saudi American shares is 13,791,420. The
acquisition will have the effect of transferring to CEI Holdings, a wholly
owned subsidiary of Consolidated, one hundred percent (100%) of the ownership
and rights to the items owned by or assigned to Saudi American, including USA
patent #6,447,559 issued on September 10th of 2002 for so-called clean coal
technology. The filing of the registration statement has been delayed while
Consolidated has been seeking funding for operations. Consolidated is
currently preparing a registration statement that relates to the financing
agreement that the Company entered into in February 2005. The Company intends
to complete the acquisition transaction by filing a registration statement on
Form S-4 as soon as the current registration statement is complete.
ITEM 3. CONTROLS AND PROCEDURES
Our principal executive and financial officers 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 and the
information from the our new auditors, our principal executive and financial
officers cannot reasonably conclude that our disclosure controls and
procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange
Act) were effective as of the end of the period covered by the report.
In the course of performing an audit on our consolidated financial statements
for the year ended December 31, 2004, Killman, Murrell & Company, our auditors
("Killman"), have identified certain conditions that they consider to be
significant deficiencies in the design or operation of internal controls that
constitute "reportable conditions" under standards established by the American
Institute of Certified Public Accountants. On May 11, 2005, Killman provided
us with a letter outlining these conditions, including certain items that may
be considered material weaknesses. The disclosure below outlines these items
with the actions we have taken and are taking to address the conditions.
15
1. During the year ended December 31, 2004, a bank account was maintained by
an individual who is not an officer, employee or director. The transactions
for this account were not properly reflected on our books and records. We have
since revised our banking practices to ensure that our bank accounts will
always be maintained by an authorized officer, employee or director. The
books and records will be properly maintained to reflect all transactions in a
timely fashion.
2. During the year ended December 31, 2004, equipment purchases were
authorized by an individual who is not an officer, employee or director,
without prior approval by an officer or the board of directors. We have since
revised our authorization procedures to require prior approval of purchases by
an authorized officer up to $5,000, and by the board of directors above that
amount. Such purchases will be supported by documentation from the vendor.
3. Since inception, we have had transactions with related parties and/or
common shareholders, including the issuance of common stock for the assignment
of coal leases. We assigned a market value to the common stock issued based
on the potential value of the reserves covered by the leases without regard to
the historical cost basis to the related parties or shareholders. Our
auditors believe that the historical cost basis as determined under GAAP is
the appropriate valuation method for all such transactions unless the fair
value of the stock issued or assets acquired is objectively measurable and the
transferor's stock ownership following the transaction is not so significant
that the transferor retains a substantial indirect interest in the assets as a
result of stock ownership in the company. We have accepted the conclusions of
our auditor and intend to use the appropriate valuation method on any similar
transactions in the future.
4. Since inception, we have issued common stock for services rendered to us.
The valuation of this stock has been inconsistent and not necessarily related
to the stock's market price. We will henceforth value such issuances based on
the listed closing price of the stock on the date we agree to issue such stock
without any discount or adjustment.
5. We have received cash advances from individuals based on future promises
to repay the cash advances based on coal mined from our Warfield lease. We
recorded these advances as loans (notes payable) instead of the sale of
mineral interests. Henceforth, we will review any such transactions in detail
to ascertain the appropriate accounting treatment.
We are in the process of making certain additional changes to improve our
internal controls, including:
- Controlling the use of company credit cards;
- Reconciling bank accounts to properly reflect wire transfers;
- More frequent balancing of subsidiary and consolidated general ledgers and
immediate investigation of out of balance conditions;
- More complete detailing supporting amounts for prepaid items and
depreciation schedules; and
- More complete detailing of royalties accrued and paid.
We are also moving our executive office to our operations site, which should
facilitate the accounting communications and the consolidation of accounting
procedures. In addition, we are considering whether we need additional
accounting personnel.
16
Despite the material weaknesses identified, our principal executive and
financial officers believe that there are no material inaccuracies or
omissions of material facts necessary to make the statements included in this
report not misleading in light of the circumstances under which they are made.
To overcome the material weaknesses, our principal executive and financial
officers directed our internal accounting staff to provide additional
substantive accounting information and data to our auditors in conjuction with
their audit of the consolidated financial statements for the year ended
December 31, 2004, and in connection with the preparation of the consolidated
financial statements for the current quarter.
Other than the above, 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to the requirements of Item 701 of Regulation SB, the Company is
disclosing the issuance of securities during the quarter ended March 31, 2005
that were not registered under the Securities Act as follows:
In January 2005, the Company issued 225,000 shares of its common stock to
Barry Tackett for consulting services in fiscal 2004.
In January 2005, the Company issued 225,000 shares of its common stock to
Joseph Jacobs for consulting services in fiscal 2004.
In January 2005, the Company issued a total of 75,000 shares of its common
stock (25,000 shares each) to Carl Baker, Joseph Jacobs, Edward Jennings and
Barry Tackett for service as directors during fiscal 2004.
In January 2005, the Company issued 2,500,000 shares of its common stock to
Eastern Land Development, LLC, an entity owned by Larry Hunt, Jeff Miller and
Jay Lasner, for the acquisition of the Coal Burg Seam, Taylor Seam, Richardson
Seam and Broas Seam of coal on the Dempsey Heirs Leases.
In March 2005, the Company issued 200,000 shares of its common stock to a
consultant for services which were performed during the year that ended
December 31, 2002.
In March 2005, the Company issued 29,348 shares of its common stock pursuant
to the conversion of an outstanding debenture.
In the three months ended March 31, 2005, the Company issued warrants for the
purchase of an aggregate of 3,242,648 shares of its common stock at an
exercise price of $1.70 per share in connection with a bridge loan financing
in January, and subsequent 6% convertible note financing in February. The
Company also issued an aggregate of $7,000,000 in notes that may be
convertible into 4,117,647 shares of the Company's common stock at an exercise
price of $1.70 per share upon the occurrence of certain events.
17
Subsequent Events
- -----------------
In April 2005, two investors in the Company's February 2005 private placement
exercised their additional investment rights for an aggregate of $750,000 in
6% senior secured promissory notes that may be convertible into 441,176 shares
of the Company's common stock at an exercise price of $1.70 upon the
occurrence of certain events. In connection with the additional investment,
the Company issued warrants for the purchase of 44,116 shares of its common
stock at an exercise price of $1.70 to the placement agent.
In April 2005, the placement agent exercised all of the 713,223 warrants
issued to date to the placement agent through a cashless exercise provision in
exchange for the issuance of 485,850 shares of the Company's common stock.
The above shares were issued were issued in reliance on the exemption from
registration and prospectus delivery requirements of the Act set forth in
Section 3(b) and/or Section 4(2) of the Securities Act and the regulations
promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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: May 16, 2005 By: /S/David Guthrie, President
(Principal Executive Officer)
Date: May 16, 2005 By: /S/Barry W. Tackett, CFO
(Principal Financial Officer)