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, 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)
76 George Road, P.O. Box 537, Betsy Layne, Kentucky 41605
---------------------------------------------------------
(Address of principal executive offices and Zip Code)
(859) 488-0070
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Common Stock, Par Value $0.001 14,808,246
- ------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of September 30, 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 nine months ended September
30, 2005 below reflect the restated numbers for fiscal 2004, and include
details of the effects of that restatement and adjustments made to the
previously issued financial statements for the nine months ended September 30,
2004. See Note 5: Restatement of Prior Quarter's Results.
3
Consolidated Energy Inc.
Consolidated Balance Sheets
ASSETS
Sep 30, 2005 Dec 31, 2004
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash $ 63,611 $ 4,392
Accounts Receivable 72,967 -
Accounts Receivable - Other - 75,000
Prepaid Expenses 4,011 400
----------- -----------
TOTAL CURRENT ASSETS 140,589 79,792
----------- -----------
BUILDING, EQUIPMENT AND COAL LEASES
Building and Equipment, Net of Depreciation 9,642,835 1,515,677
Coal Leases, Net of Amortization 6,020,708 98,157
----------- -----------
TOTAL BUILDING, EQUIPMENT AND
COAL LEASES, NET 15,663,543 1,613,834
----------- -----------
OTHER ASSETS
Restricted Cash 51,200 49,900
Prepaid Royalty 51,166 11,666
Other Assets 64,908 32,500
----------- -----------
TOTAL OTHER ASSETS 167,274 94,066
----------- -----------
TOTAL ASSETS $ 15,971,406 $ 1,787,692
=========== ===========
See accompanying notes.
4
Consolidated Energy Inc.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Sep 30, 2005 Dec 31, 2004
----------- -----------
(Unaudited)
CURRENT LIABILITIES
Cash Overdrafts $ - $ 400,623
Accounts Payable 1,004,863 426,427
Accrued Liabilities 1,155,679 2,550,574
Royalties Payable 326,402 369,374
Notes Payable 546,429 182,737
Current Portion Capital Lease 1,327,666 -
Convertible Debentures 702,438 588,010
Payable to Related Parties - 560,906
Note Payable to Related Party 722,717 659,339
Deferred Revenue 226,253 -
----------- -----------
TOTAL CURRENT LIABILITIES 6,012,447 5,737,990
LONG-TERM LIABILITIES
Deferred Royalties Payable 161,582 168,962
Long Term Notes Payable 74,675 -
Senior 6% Secured Notes Payable 10,594,546 -
----------- -----------
TOTAL LIABILITIES 16,843,250 5,906,952
----------- -----------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common Stock, $.001 Par Value, 50,000,000 Shares
Authorized, 14,808,246 and 10,327,428 Shares
Issued and Outstanding at September 30, 2005
December 31, 2004, respectively 14,808 10,327
Additional Paid-in-Capital 10,571,052 3,686,035
Retained Deficit (11,457,704) (7,815,622)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (871,844) (4,119,260)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 15,971,406 $ 1,787,692
=========== ===========
See accompanying notes.
5
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
Sep 30, 2005 Sep 30, 2004 Sep 30, 2005 Sep 30, 2004
----------- ----------- ----------- -----------
REVENUES
Coal Sales $ 920,739 $ 1,143,459 $ 1,816,305 $ 2,180,868
----------- ----------- ----------- -----------
TOTAL REVENUES 920,739 1,143,459 1,816,305 2,180,868
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of Revenue,
Excluding Depreciation and Amortization 1,082,942 1,057,339 1,959,506 2,654,192
Operating Expenses 1,248,379 312,300 2,897,778 1,467,660
Depreciation & Amortization 158,676 77,709 418,175 209,601
Loss on Disposal of Assets - - 72,833 -
Interest Expense, net of $1,736,474
Capitalized Interest in 2005 88,310 102,517 110,095 689,003
----------- ----------- ----------- -----------
TOTAL COSTS AND EXPENSES 2,578,307 1,549,865 5,458,387 5,020,456
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,657,568) (406,406) (3,642,082) (2,839,588)
PROVISION FOR INCOME TAXES - - - -
----------- ----------- ----------- -----------
NET LOSS $ (1,657,568) $ (406,406) $ (3,642,082) $ (2,839,588)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE (0.11) (0.04) (0.27) (0.30)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
Basic and Diluted 14,423,529 9,564,609 13,669,645 9,373,317
=========== =========== =========== ===========
See accompanying notes.
6
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended Sep 30,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (3,642,082) $ (2,839,588)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities
Depreciation and Amortization 418,175 209,601
Stock Issued for Services 244,776 824,000
Amortization of Debt Discount 23,518 596,833
Loss on Disposal of Assets 72,833 -
Changes in Operating Assets and Liabilities
Prepaid Expenses (3,611) (4,591)
Accounts Receivable 2,033 (47,174)
Inventory - -
Prepaid Royalties (39,500) 35,244
Other Assets (32,408) 7,304
Cash Overdrafts (400,623) (56,884)
Accounts Payable and Accrued Liabilities 1,272,719 1,032,581
Royalties Payable (42,972) (15,819)
Deferred Royalties Payable (7,380) -
Deferred Revenue 226,254 -
Purchase of Restricted Cash (1,300) -
----------- -----------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (1,909,568) (258,493)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment (6,002,315) (755,936)
Coal Lease Cost Capitalized (4,471,036) -
Proceeds from Sale of Assets 18,000 -
----------- -----------
NET CASH (USED) BY
INVESTING ACTIVITIES (10,455,351) (755,936)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Payable Borrowing 907,410 223,331
Payment On Notes Payable (403,910) -
Proceeds From Convertible Debentures, Net 12,765,000 400,000
Advances From Related Parties 686,720 427,684
Payment to Related Parties (1,184,248) -
Payment on Capital Leases (346,834) -
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 12,424,138 1,051,015
----------- -----------
NET (DECREASE) INCREASE IN CASH 59,219 36,586
CASH BALANCE, BEGINNING OF PERIOD 4,392 6,316
----------- -----------
CASH BALANCE, END OF PERIOD $ 63,611 $ 42,902
=========== ===========
See accompanying notes.
7
CONSOLIDATED ENERGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Nine Months Ended Sep 30,
2005 2004
----------- -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Debt Discount Capitalized as Equipment $ (830,746) $ -
Debt Discount Capitalized as Lease Cost (381,844) -
Reduction in Debt Discount 1,212,590 -
Equipment From Capital Lease (1,674,500) -
Increase in Capital Lease 1,674,500 -
Lease Cost From Stock Issued (1,072,500) (700)
Stock Issued For Lease 2,925 700
Additional Paid-In Capital From Lease 1,069,575 -
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 (100,000) (957,000)
Conversion of Accrued Interest to Common Stock (6,678) (20,599)
Common Stock Issued for Debentures 59 1,082
Additional Paid-In-Capital from Stock Issued
For Debentures 106,619 976,517
Debt Discount on Issuance of Convertible
Debentures (3,383,044) -
Additional Paid-In-Capital from Debt Discount 3,383,044 -
Equipment Purchased with Note Payable (125,770) (514,017)
Notes Payable Issued for Equipment 125,770 514,017
Notes Payable Converted to Debenture (190,910) -
Debenture Issued for Notes Payable 190,910 -
Cashless Conversion of Underwriter Warrants
Par Value of Common Stock 652 -
Additional Paid-In-Capital (652) -
----------- -----------
$ - $ -
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid During the Year For
Interest $ 167,384 $ 82,499
=========== ===========
Income Taxes $ - $ -
=========== ===========
See accompanying notes.
8
CONSOLIDATED ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying 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 and nine months ended
September 30, 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 may
potentially be compromised of three reportable segments as that term is
defined by SFAS No. 131 "Disclosures About Enterprise and Related
Information." The three segments are: (1) Coal Segment; (2) Oil and Gas
Segment; and (3) "Clean Coal" Technology Segment. However, only the Coal
Segment meets the quantitative threshold of being a reportable segment
because, since from the inception of the Company, it has had no revenue or
investment in the "Clean Coal" Technology Segment and only $3,000 in revenue
and no investment in the Oil and Gas Segment, therefore, no separate segment
disclosures have been included in the accompanying notes to the financial
statements since all activity has been reported in the Coal Segment.
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.
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 method. 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
Revenue from coal sales is 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 one day delayed basis. The Company
records its revenue based on actual quality adjustments received from its
customers.
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 nine months ended September 30, 2004 as previously reported and
applicable restatement adjustments for that period:
Restatement
As Reported Adjustments As Restated
----------- ----------- -----------
Revenues $ 2,180,868 $ - $ 2,180,868
Cost of Revenues 2,365,464 288,728 (c) 2,654,192
----------- ----------- -----------
Gross Loss (184,596) (288,728) (473,324)
----------- ----------- -----------
Legal and Professional Fees 143,281 - 143,281
Consulting Fees 217,474 722,000 (a) 939,474
Operating Expenses 350,348 34,557 (c) 384,905
Depreciation & Amortization 503,907 (294,306)(b) 209,601
Interest Expense 82,499 606,504 (d) 689,003
----------- ----------- -----------
Total Expenses 1,297,509 1,068,755 2,366,264
----------- ----------- -----------
Net Loss $ (1,482,105) $ (1,357,483) $ (2,839,588)
=========== =========== ===========
(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.
(c) This represents the expensing of mine cost which had been capitalized.
(d) This represents interest cost for beneficial conversion features
associated with convertible debt.
The following table sets forth the restated quarterly results for the 2004
quarters.
Three Months Six Months Nine Months
Ended Ended Ended
Mar 31, 2004 June 30, 2004 Sep 30, 2004
----------- ----------- -----------
Revenues $ 671,584 $ 1,037,409 $ 2,180,868
Cost of Revenues 797,526 1,596,853 2,654,192
----------- ----------- -----------
Gross Loss (125,942) (559,444) (473,324)
----------- ----------- -----------
Legal and Professional Fees 46,634 75,592 143,281
Consulting Fees 650,761 883,564 939,474
Operating Expenses 87,943 196,204 384,905
Depreciation and Amortization 66,348 131,892 209,601
Interest Expense 507,407 586,486 689,003
----------- ----------- -----------
Total Expenses 1,359,093 1,873,738 2,366,264
----------- ----------- -----------
Net Loss $ (1,485,035) $ (2,433,182) $ (2,839,588)
=========== =========== ===========
10
CONSOLIDATED ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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, 2004. 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.
During the nine months ended September 30, 2005, the Company issued 58,678
shares of it common stock upon the conversion of $100,000 debenture and $6,678
of accrued interest.
In the nine months ended September 30, 2005, the Company issued 95,000 shares
of its common stock for services, valued at $244,776 (which approximates the
value quoted in the OTCBB) and has been recorded as an expense.
In accordance with the terms of the "Placement Agency Agreement" entered into
with Stonegate Securities, Inc., ("Stonegate") the Company allowed Stonegate's
owners to exercise 1,066,175 warrants in a cashless exercise, resulting in the
issuance of 652,140 shares of the Company's common stock.
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 the 6% senior secured convertible notes. During March 2005,
$750,000 of the AIRs were exercised by a portion of the convertible note
holders, and in June 2005, an additional $6,000,000 of the AIRs were
exercised.
11
CONSOLIDATED ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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. The Company is in the process of
raising additional funds to complete the mine development and cover its
overhead costs until such time as enough revenue is generated to cover all
operating costs.
12
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").
Since the acquisition, the Company, through its wholly owned subsidiary
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. At this
filing date, the Company is negotiating a release from the agreement and
seeking an alternative arrangement. See "Clean Coal Technology and Saudi
American Minerals, Inc." below.
Results of Operations for the three and nine months ended September 30, 2005
compared to 2004
- -----------------------------------------------------------------------------
For the three months ended September 30, 2005, the Company had revenues of
$920,739. Costs and expenses totaled $2,578,307 for a net loss of $1,657,568,
or $.11 per share. For the three months ended September 30, 2004, the Company
had revenues of $1,143,459. Costs and expenses for the three months ended
September 30, 2004 totaled $1,549,865 for net loss of $406,406, or $.04 per
share.
Cost of revenue for the three months ended September 30, 2005 increased
$25,603 from $1,057,339 the prior year to $1,082,942. The makeup of the cost
of revenue changed significantly as the cost of revenue in the three months
ended September 30, 2004 included only costs of coal mined from Company owned
coal mines. The cost of revenue in the three months ended September 30, 2005
includes $403,000 of coal purchased from other coal suppliers and $55,000 of
coal washing expense. These increases were offset by decreases in the cost of
Company mined coal consisting of a $383,000 decrease in the coast of wages to
mine coal, a $81,000 decrease in repairs and a $119,000 decrease in payroll
burden costs. Trucking expense increased $164,000 due to the increased
trucking expenses associated with the purchased coal.
Operating expenses for the three months ended September 30, 2005 were
significantly higher than the prior year period primarily due to increases in
consulting fees from $55,910 to $194,649 and legal and accounting fees from
$67,689 to $161,191. These increases were associated primarily with the
Company's financing activities during 2005.
12
For the nine months ended September 30, 2005, the Company had revenues of
$1,816,305. Costs and expenses totaled $5,458,387 for a net loss of
$3,642,082, or $.27 per share. For the nine months ended September 30, 2004,
the Company had revenues of $2,180,868. Costs and expenses for the nine months
ended September 30, 2004 totaled $5,020,456 for net loss of $2,839,588, or
$.30 per share.
Cost of revenue for the nine months ended September 30, 2005 decreased from
$2,654,192 to $1,959,506. As discussed above, the makeup of the cost of
revenue changed significantly as the cost of revenue during the nine months
ended September 30, 2004 included only costs of coal mined from Company owned
coal mines. The cost of revenue in the nine months ended September 30, 2005
included increases of $403,000 in cost of purchased coal, $55,000 in cost of
coal washing, and $118,526 in trucking expenses. The above increases were
offset by reductions in labor and associated payroll burden of $1,074,000,
commissions of $70,000, coal taxes of $66,000, and repairs and supplies of
$76,000.
Operating expenses increased to $2,897,778 for the nine months ended September
30, 2005 from $1,467,660 in the prior year period. All significant increases
were due to expenses incurred in connection with the Company's financing
efforts. Consulting fees decreased from $939,474 for the nine months ended
September 30, 2004 to $460,179 in 2005. Legal and accounting fees increased in
the period to $514,721 from $143,281 for the same period in 2004.
Revenues were down in the nine months ended September 30, 2005 compared to the
prior year period because management suspended mining operations in February
and began slope construction and other preparations to mine an additional coal
seam in its Warfield mine. Mining operations resumed on a limited basis in
June 2005 to allow management to make several mining and coal quality
evaluations and assessments. Currently, all mining operations have been
suspended until such time as the wash facility is completed and ready to
process coal.
The Alma seam is scheduled to engage two production shifts per day as soon as
the Warfield washing facility is complete and ready to process coal.
Management anticipates that production from the Alma and Pond Creek coal seams
should be sufficient to allow the Company to earn a profit from operations.
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.
In the nine months ended September 30, 2005, the Company executed a financing
transaction and received aggregate gross proceeds of $13,750,000. The
financing has been used to retire an outstanding bridge note, 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") convertible to
common stock at a conversion price of $1.70 per share. As additional
consideration, the Company issued to the initial purchasers of the Notes
warrants (the "Warrants") for the purchase of an aggregate of 2,573,529 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.
In connection with the financing, the Company issued placement agent warrants
for the purchase of 1,066,175 shares. All of the placement agent warrants
were subsequently exercised pursuant to cashless exercise provisions for the
issuance of 652,140 shares.
14
The Holders of the Notes and Warrants, and the placement agent have
registration rights in connection with the transactions. The Company filed a
registration statement on Form SB-2 on August 5, 2005 to register a total of
11,313,904 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.
The Company has used approximately $2,527,000 of the proceeds to repay an
outstanding bridge loan. 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 connection with the above transaction, to date the Company has
paid the placement agent, Stonegate Securities, Inc., a total of $825,000 cash
in addition to placement agent warrants described above per the terms of a
non-exclusive Placement Agency Agreement (filed as an exhibit to the Company's
Current Report on Form 8-K dated January 11, 2005).
Also 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 September 30, 2005, the Company had current assets of $140,589 consisting
of cash of $63,611, $72,967 in accounts receivable and $4,011 in prepaid
expenses. The Company had current liabilities of $6,012,447, consisting of
$1,004,863 in accounts payable, $1,155,679 in accrued liabilities, $326,402 in
royalties payable, $546,429 in notes payable, $1,327,666 in current capital
lease obligations, $702,438 in convertible debentures, $722,717 in a note
payable to a related party, and $226,253 in deferred revenue, for a working
capital deficit of $5,871,858.
At September 30, 2005, the Company had long-term liabilities of $161,582 in
deferred royalties payable, $74,675 for long term notes payable, and
$10,594,546 for its senior 6% secured notes payable.
At September 30, 2005, the Company had fixed assets of building and equipment
of $9,642,835 (net of depreciation) and coal leases of $6,020,708 (net of
amortization). The Company had other assets of $167,274, consisting of
restricted cash, prepaid royalty and other assets.
For the period ended September 30, 2005, cash flows used by operating
activities totaled $1,909,568. Cash used by investing activities totaled
$10,455,351, primarily for the purchase of mining equipment, plus the
capitalized cost of a coal lease.
Cash provided by financing activities totaled $12,424,138, primarily from the
proceeds of the senior 6% convertible notes, plus proceeds from notes payable
and advances from related parties, offset by payment of notes payable,
payments to related parties, and payment of capital leases.
The proceeds received from the financing transaction described above was
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.
15
A portion of the proceeds received from the transaction has been 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 was originally scheduled to be
near completion by the end of the third quarter of 2005 but has been delayed
as explained below.
The Pond Creek mine development which began in late February 2005, involved a
ventilation development plan and a slope development plan. The ventilation
development plan called for increasing the height of the existing Alma mine
intake and return air entries along with the connecting corridors. The
planned increase was from approximately 40 inches in height to approximately
108 inches in height. This increase in height was scheduled for 1100 feet in
both corridors and the connecting corridors. Management initially estimated
that the overall plan would require 90 days to complete.
However, in late April 2005, the ventilation development crew, while
developing the ventilation improvement plan, encountered a geological fault
after completing approximately 1000 feet of both the fresh and return air
corridors. The condition threatened the ongoing useful life of the Alma mine.
Management decided in early May 2005 that it was imperative that the Company
mitigate the negative affects of the geological fault in order to secure the
coal reserves contained in the Alma coal seam. As a result of the ventilation
development changes, management redesigned the actual slope portion of the
project to allow the slopes to be relocated approximately 100 feet away from
the geological fault. The slope construction portion of the project was
re-engaged and each of the three slopes has advanced significantly towards the
scheduled 600 feet. The corrective action began in early May and has required
approximately $3.5 million to address.
Slope construction is currently progressing on a two shift per day schedule
while Alma coal seam production is progressing on a one shift per day
schedule. To date, Slope #1 has progressed 424 feet, Slope #2 has progressed
550 feet and Slope #3 has progressed 428 feet. Slope #3 is anticipated to
access the Pond Creek coal seam within the next several cuts.
A portion of the proceeds received from the financing transaction was used to
secure the equipment which will be used to mine the Pond Creek coal seam. A
number of pieces of equipment arrived in the second quarter 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. The wash
plant construction project was initiated in mid March 2005. The initial plan
provided for a certain location and equipment type. However, during the
rework of the Pond Creek project, management was able to negotiate to have a
significant amount of Alma coal washed by third parties. Management sought to
have this product washed in order to verify the laboratory reports obtained
earlier. Information obtained during this process indicated that the Company
could potentially realize greater profits from the washed coal if some
adjustments were made to the initial wash plant plans. In early June 2005,
management determined to change the design, final location, and overall size
of the proposed wash plant to accommodate this new information. As a result
of these changes, the overall budgeted cost of the wash plant was increased by
approximately 12.5% (from $4 million to $4.5 million) and completion has been
delayed. The wash plant erecting contractor is behind schedule but has
indicated that construction is over 80% complete and estimates that the
construction will be completed no later than January 15, 2006.
The events described above have caused delays and increased estimated
development costs significantly. As a result, management has been seeking
additional financing in order to (1) sustain operations and (2) complete mine
development and construction of the coal washing plant.
16
On September 23, 2005, the Company executed a promissory note (the "Bridge
Note") payable to Cordillera Fund L.P. ("Cordillera") for an aggregate
principal amount of up to $1,500,000. In connection with the Bridge Note, the
Company entered into a Consent and Waiver with the holders of certain 6%
senior secured convertible promissory notes (the "6% Notes") executed on
February 24, 2005 (the "6% Note Holders"), whereby the 6% Note Holders
consented to the Bridge Note transactions and waived, until resolution of the
Bridge Note transactions, the application of any of the provisions of the 6%
Notes and related transaction documents. In addition, the 6% Note Holders
entered into a Bridge Forbearance with the Company whereby the 6% Note Holders
agreed to forebear from exercising any of their rights or remedies under the
6% Note and the related securities purchase agreement, security agreement and
any other related transaction documents for a period of ten business days.
On October 6, 2005, the Company signed an extension to the above Bridge
Forbearance until the earliest to occur of the following: (i) November 18,
2005, (ii) the expiration and termination of the Bridge Note, or (iii) the
completion by the Company of a new financing. Prior to the November 18, 2005
expiration, the Company signed an additional extension that expires December
2, 2005.
The Company has not established revenues sufficient to cover its operating
costs, and, accordingly, the report of its auditor at December 31, 2004
contains a statement that there is substantial doubt about its ability to
continue as a going concern. At this filing date, the Company is still seeking
financing. If financing is secured, the Company believes it will also have
sufficient capital to complete mine development, complete the wash plant, and
upgrade the equipment necessary to substantially increase the production
capability of the Alma seam. If such funding is received and the Company
successfully completes its planned increase in production, management believes
the Company will have adequate resources for operations for the next twelve
months. If such funding is not received, the Company may be forced to suspend
or cease operations.
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
registration which was being prepared to be filed with the SEC. At this
filing date, the Company has negotiated with Saudi American to terminate the
acquisition agreement and enter into an alternative arrangement, pending
funding, for a 25% interest in Saudi American's technology.
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. That evaluation was performed
subsequent to the implementation of the changes detailed below that were
designed to address certain specific material weaknesses identified by our
auditors in conjunction with their audit of our consolidated financial
statements for the year ended December 31, 2004.
During the quarter ended September 30, 2005, we have made the following
changes to our internal controls:
We have moved our executive office closer to our operations site, which should
facilitate the accounting communications and the consolidation of accounting
procedures. We have also added additional accounting personnel. We have
completed the consolidation of all accounting records into the new office.
17
We have made 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.
Based on the above changes, our principal executive and financial officers
have concluded 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 this report.
The above changes in our internal controls have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting during the period covered by this report. However, in connection
with the preparation of the consolidated financial statements for the current
quarter, our principal executive and financial officers directed our internal
accounting staff to provide additional substantive accounting information and
data. Therefore, despite the changes in our internal controls made in response
to 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In March 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.
In June 2005 investors in the Company's February 2005 private placement
exercised their additional investment rights for an aggregate of $6,000,000 in
6% senior secured promissory notes that may be convertible into 3,529,942
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 352,994 shares of its common
stock at an exercise price of $1.70 to the placement agent.
In July 2005, the placement agent exercised all of the remaining warrants
issued to date through a cashless exercise provision in exchange for the
issuance of 166,290 shares of the Company's common stock.
In the nine months ended September 30, 2005, the Company issued an aggregate
of 58,678 shares of its common stock pursuant to the conversion of outstanding
debentures. The Company also issued to an aggregate of 95,000 shares of its
common stock to consultants for services performed during the period.
18
In the second quarter of 2005, the Company approved the issuance of 200,000
shares of its common stock pursuant to a repurchase agreement with the holder
of a 20% working interest in the Warfield Mine. The shares were issued in
July 2005.
The above shares 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: November 21, 2005 By: /S/David Guthrie, President
(Principal Executive Officer)
Date: November 21, 2005 By: /S/Barry W. Tackett, CFO
(Principal Financial Officer)