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PART I

ITEM 1 - BUSINESS

Statement Regarding Forward-Looking Disclosure

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

General

Mongolia Holdings, Inc. (the “Company” or “MNHD”) was incorporated in the State of Delaware on January 26, 2007 under the name Consolidation Services, Inc..

Until January 1, 2010, the Company’s sole sources of revenues were from its coal mining and timber harvesting operations on approximately 12,000 contiguous acres in Tennessee. It also held the mineral rights for oil & gas on those properties. The Company discontinued its coal mining and timber harvesting operations on January 1, 2010 via a spin-off while maintaining its oil and gas rights in the Company (“Legacy Properties”). On April 1, 2010, the Company executed an acquisition of producing oil and gas properties in Kentucky and Tennessee. The Company’s current operations consist primarily of the maintenance and production of those oil and gas mineral reserves.  It has not begun exploration or production of its oil and gas rights on its Legacy Properties. On August 19, 2014, the Company changed its name to Mongolia Holdings, Inc to reflect its current business

Hydrocarbons Holdings

On February 21, 2013, the Company entered into a Bill of Sale and Assignment, Release and Assumption Agreement with Hydrocarbons Holdings, Inc. (“HH”), a Delaware corporation and wholly-owned subsidiary of the Company whereby substantially all of the Company’s oil and gas assets and liabilities were transferred to HH effective as of February 28, 2013.

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Mongolia Equipment Rental Corporation

On March 21, 2013, the Company through its wholly owned subsidiary, Mongolia Equipment Rental Corporation, a Delaware corporation (the “Franchisee”) entered into an International Franchise Agreement (the “Franchise Agreement”) with Hertz Equipment Rental Corporation and Hertz Equipment Rental System (collectively “Franchisor”).  

Under the Franchise Agreement the Franchisee will operate a business of renting, selling and maintaining equipment primarily for use in construction, materials handling and commercial and industrial activities (“Equipment Rental Business”) under the unique plan or system of the Franchisor (the “System”) in the country of Mongolia.

The license granted to Franchisee under the Franchise Agreement originally commenced on July 1, 2013 and continued for a period of ten (10) years, unless renewed or sooner terminated.  The Franchisee shall have the option to renew the license for two (2) successive five (5) year terms, subject to the terms of the then current Hertz Equipment Rental System International Franchise Agreement, and provided such terms shall preserve Franchisee’s right to renew for an additional two successive five year periods and will not require the payment of an initial fee by Franchisee and the Franchisee is not in default of the Franchise Agreement.

On December 16, 2014, the Franchisee entered into an amendment (the “Amendment”) to the Franchise Agreement. The Amendment changed the Commencement Date, as such term is defined under the Franchise Agreement, from July 1, 2013 to December 31, 2014.

The Franchise Agreement provides that so long as the Franchise Agreement remains in place and for one-year after the expiration or termination of the Franchise Agreement: (i) Franchisor will not establish or license another to establish an Equipment Rental Business in the country of Mongolia; and (ii) Franchisor will not establish or license another to establish a truck rental business under the System (“Truck Rental Business”) in the country of Mongolia without first having afforded Franchisee a non-transferrable right of first refusal to establish a Truck Rental Business in the country of Mongolia. Franchisee shall have a right of first opportunity (prior to Franchisor entering into any substantive discussions or negotiations with any other party) to acquire the franchise for any Equipment Rental Business in the country of Burma (a/k/a Myanmar).

In consideration for the license provided under the Franchise Agreement, Franchisee will pay Franchisor: (i) an initial fee of $45,000; (ii) a continuing monthly license fee equal to 6% of Franchisee’s gross revenue, but not less than $135,000 per annum; and (iii) an amount equal to 1% of all sums received by Franchisee related to (a) the sale, trade-in or other disposal of used equipment, and (b) the sale of any new equipment or product lines that have been previously approved by Franchisor. In addition Franchisee shall be required to spend annually an amount equal to not less than 1% of the Franchisee’s gross revenue for local advertising and promotion of the Equipment Rental Business in Mongolia.

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Hertz Equipment Rental Mongolia -- Overview

Strategy

We have secured the exclusive license to operate a Hertz Equipment Rental franchise business utilizing proprietary Hertz Equipment brands, training and systems throughout the country of Mongolia.  Hertz proprietary system (the “Hertz System”) combines information technology, management processes and other management tools that maximize operating efficiencies in the equipment rental business. The Hertz System is focused on customer service differentiation, customer segmentation, rate management, fleet management and disciplined cost control. This strategy calls for a consistently superior standard of service to customers; an increasing proportion of revenues derived from larger accounts; a targeted presence in construction, infrastructure, mining, industrial and specialty markets; and the profitable deployment of rental assets for optimal return on investment.

We intend to commence these operations in the summer of 2015.  

We intend to focus on creating an efficient and competitive Hertz Equipment Rental business operation in Mongolia through diligent management of the rental process, enhanced customer service capabilities and sustained cost efficiencies. Specifically we will focus on:

a.

Superior customer service levels;

b.

Longer term rentals to larger international and Mongolian mining and construction customers and to government infrastructure development and maintenance projects;

c.

Industrial customers in and around Ulaanbaatar where we believe that our Hertz brand and full service inventory will give us a competitive advantage;

d.

Power generation, water pumps, air conditioning and heating;

e.

Hertz and equipment vendor training modules for employees:

f.

The Hertz System proprietary information technology and procedures; and

g.

Hertz System efficiency practices for maximizing equipment utilization by reducing the average number of equipment units unavailable for rent.

Industry Overview and Economic Outlook

We intend to primarily serve four principal end markets for construction equipment rental in Mongolia: infrastructure development & maintenance; commercial construction; industrial construction (mining); and residential construction:

a.

Infrastructure development and maintenance; including roads, bridges, tunnels, power plans, airports, railroads, business parks and other government projects;

b.

Industrial/non-construction rentals to manufacturers, transportation, utilities, retail, mine site construction and other industries;

c.

Commercial (or private non-residential) construction rentals related to the construction and remodeling of office, lodging, healthcare and other commercial facilities; and

d.

Residential construction.

Based on our analysis of leading industry forecasts and broader economic indicators, we expect that all of our end markets will continue growing. Mongolia is predicted to return to being one of the fastest growing economies in the world. We believe, based on our analysis that the equipment rental industry can achieve geographically year-over-year revenue growth based on forecasts for Mongolia over the next 7 to 10 years.

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Advantages in Mongolia

We believe that we will benefit from the following competitive advantages:

Larger and More Diverse Rental Fleet Compared to the Existing Rental Market. The large and diverse fleet we intend to deploy will allow us to serve large customers that require substantial quantities and/or wide varieties of equipment. We believe our ability to serve such customers should allow us to outperform the competition and achieve a market leadership position.

We will manage our rental fleet using the Hertz System, utilizing an approach that focuses on satisfying customer demand and optimizing utilization levels. We will closely monitor repair and maintenance expense and will identify, based on Hertz experience with a large and diverse fleet, the optimum time to dispose of an asset. Our fleet will be maintained in-house according to its manufacturer's recommended maintenance and Hertz guidelines.

Significant Purchasing Power. Through Hertz Equipment and their purchase of large amounts of equipment, contractor supplies and other items, we may enjoy more favorable pricing, warranty and other terms with vendors than our competition in Mongolia.

HERC Global Customers. Our sales force will be dedicated to establishing and expanding relationships with large companies, particularly those with a national and international presence. International customers may more easily recognize our “Hertz Equipment Rental” brand than our competition or may already be a satisfied customer of Hertz in another market. We will offer our new and existing Hertz Equipment customers the benefits of a consistent level of service across Mongolia, a wide selection of equipment and a single point of contact for all their equipment needs.

Operating Efficiencies. Our HERC Franchise should allow us to benefit from the following operating efficiencies, among others:

The Hertz System. We will have a proprietary, detailed and state of the art system to support our operation. This information technology infrastructure is designed to facilitate our ability to make rapid and informed decisions, respond quickly to changing market conditions and source new equipment quickly. We will have access to information technology specialists to support our systems.

Strong Brand Recognition. As a Franchisee of Hertz Equipment, one of the largest equipment rental companies in the world, we will have strong brand recognition, which will help us to attract new customers and build customer loyalty.

Strong and Motivated Management. We believe that we will be able to hire operation managers who are knowledgeable and experienced in the industry. We will empower them, within budgetary guidelines, to make day-to-day decisions concerning operational matters. The management team will have the tools to monitor district and regional performance with extensive systems and controls, including performance benchmarks and detailed monthly operating reviews. Management compensation will be structured to incentivize our employees to obtain measurable results.

Employee Training Programs. We are dedicated to providing training and development opportunities to our employees. Our employees will have access, through programs supplied by Hertz, to enhance their skills with a wide range of available training, including safety training, sales and leadership training, mechanic and operator equipment-related training from our suppliers and online courses covering a variety of topics designed to enhance our employee’s job performance.

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Risk Management and Safety Programs. Our risk management department will be staffed by experienced professionals directing the procurement of insurance, managing claims made against the Company, and developing loss prevention programs to address workplace safety, driver safety and customer safety. This department’s primary focus will be on the protection of our employees and assets, as well as protecting the Company from liability for accidental loss.

Products and Services

Our anticipated principal products and services are described below.

Equipment Rental. We intend to offer rental equipment on an hourly, daily, weekly or monthly basis. The types of standard Hertz equipment we can offer include:

·

Aerial Equipment (mobile platform lifts, personnel lifts and bucket trucks)

·

Air Equipment (portable and towable compressors and accessories, air tools and hammers, sandblast equipment and accessories)

·

Compaction and Paving Equipment (plate and rammer tampers, rollers, concrete and asphalt compacting and paving equipment)

·

Concrete and Masonry Equipment (concrete and mortar mixers, vibrators, saws, trowel machines, power buggies and surfacing equipment)

·

Cranes (truck mounted and carry deck cranes)

·

Earthmoving Equipment (dozers, loaders, tractors, backhoes, maintainers, trenchers, skid steers, excavators, boring and tunneling equipment and accessories)

·

Electrical Equipment (generators, electrical tools and lighting equipment and accessories)

·

Material Handling Equipment (construction and industrial forklifts, winches, hoists and jacks)

·

Pumping Equipment (centrifugal, diaphragm, trash and submersible pumps and accessories)

·

Storage Containers

·

Temperature Control Equipment

·

Trucks and Trailers (flatbed and box dumps, water trucks and water trailers, towable open trailers and pickup trucks)

·

Welding Equipment (welders and accessories)

·

Trench Shoring Equipment

·

Scaffolding

Sales of Rental Equipment. We intend to routinely sell used rental equipment and invest in new equipment in order to manage repair and maintenance costs, as well as the composition and size of our fleet. We also intend to sell used equipment in response to customer demand for the equipment. We will manage our fleet utilizing the Hertz System. The rate at which we replace used equipment with new equipment will depend on a number of factors, including changing general economic conditions, service changes, growth opportunities, the market for used equipment, the age of our fleet and the need to adjust fleet composition to meet customer demand.

Sales of New Equipment. Where demand exists and when permitted under our current Franchise arrangement, we will sell new equipment. Additionally, we intend to investigate obtaining exclusive distributorships from select manufacturers that do not currently have existing sales representatives in Mongolia.

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Contractor Supplies Sales. We will sell a variety of contractor supplies including parts, construction consumables, tools, small equipment and safety supplies. Our target customers for contractor supplies will be our existing rental customers.

Service and Other Revenues. We will also offer repair, maintenance and rental protection services and sell parts for equipment that is owned by our customers. Our target customers for these types of ancillary services will be our current rental customers, as well as those who purchase both new and used equipment from us.

Customers

We anticipate that our customer base will primarily range from large to medium domestic and international mining, construction and real estate development companies to government infrastructure projects.

Our customers may include:

a. mining companies that use equipment for construction of facilities for mining operations, roads for transportation of resources, goods and services; and facilities for housing and lifestyle of workers stationed in remote regions of Mongolia.

b. construction companies that use equipment for constructing and renovating commercial buildings, warehouses, industrial and manufacturing plants, office parks, residential developments and other facilities;

c. industrial companies, such as manufacturers, transportation, oil and gas and utilities, that use equipment for plant maintenance, upgrades, expansion and construction; and

d. municipalities that require equipment for a variety of purposes such as the construction of roads, power plants, airports, railroad construction and other infrastructure development.

Our business is expected to be seasonal, with demand for our rental equipment tending to be lower in the severe cold of the Mongolian winter months.

Sales and Marketing

We intend to market our products and services through multiple channels as described below.

Sales Team. Our sales representatives will be responsible for calling on existing and potential Hertz customers, as well as assisting our customers in planning for their equipment needs. We will have ongoing programs for training our employees in sales and service skills and on strategies for maximizing the value of each transaction.

Global Accounts Program. Our sales force will be dedicated to establishing and expanding relationships with existing Hertz customers that have or intend to start business operations in Mongolia. Our sales team will closely coordinate its efforts with Hertz Equipment’s international client sales department.

Online Rentals and Sales. Our customers will be able to rent or buy equipment online 24 hours a day, seven days a week, at our Hertz online rental portal, which can be found at HertzEquip.com under the dropdown menu MONGOLIA tab.

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Advertising. We may promote our business through local and national advertising in various media, including trade publications, yellow pages, the Internet, radio and direct mail. We will also regularly participate in industry trade shows and conferences and sponsor a variety of local promotional events.

Suppliers

Hertz Equipment maintains preferred vendor relationships with a sufficient number of suppliers per category of equipment that we will be able to satisfy our anticipated volume and business requirements. Through Hertz, we believe there will be sufficient and timely new product available at competitive pricing to meet anticipated customer demand. Additionally, we will have access to used equipment for sale from Hertz company-owned locations in China and other locations to fill more immediate customer needs.

The Hertz System

In support of our rental business, we will utilize the Hertz System, a proprietary Hertz Equipment information technology and management system that will facilitate rapid and informed decision-making and enable us to respond quickly to changing market conditions. Leveraging information technology to achieve greater efficiencies and improve customer service is a critical element of the Hertz Equipment strategy. Management personnel can access these systems 24 hours a day.

The Hertz System will:

a. enable personnel to (i) determine equipment availability, (ii) access all equipment and arrange for equipment to be delivered directly to the customer, (iii) monitor business activity on a real-time basis and (iv) obtain customized reports on a wide range of operating and financial data, including equipment utilization, rental rate trends, maintenance histories and customer transaction histories;

b. permit customers to access their accounts online; and

c. allow management to obtain job enhancing reports highlighting specific and detailed  operational and financial data.

The Hertz System and website will be supported by the IT department at Hertz. Hertz will train our personnel; occasionally upgrade and customize our information technology and system procedures; provide hardware and technology support; operate a support desk to assist personnel in the day-to-day use of the information technology; extend the Hertz System to newly built or acquired locations; and manage our Hertz Equipment website.

Competition

The Mongolian equipment rental industry is highly fragmented. Our competitors will primarily include small, independent businesses with one or two pieces of equipment, a newly opened regional competitor that operates in the south, and equipment vendors and dealers who both sell and rent equipment directly to customers. We believe we are well positioned to take advantage of this environment.

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Environmental and Safety Regulations

Our operations may be subject to regulations governing environmental protection and occupational health and safety matters. These may regulate issues such as wastewater, storm water, solid and hazardous wastes and materials, and air quality. Our proposed operations generally do not raise environmental risks, but we will use and store hazardous materials as part of maintaining our rental equipment fleet and the overall operations of our business, dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from above-ground storage tanks located at certain of our locations. Under current or future environmental and safety laws, we could sometime in the future be liable for, among other things, (i) the costs of investigating and remediating contamination at our sites as well as sites to which we sent hazardous wastes for disposal or treatment, regardless of fault, and (ii) fines and penalties for non-compliance.

Hydrocarbons Holdings - Overview

HH could occasionally pursue oil and gas drilling opportunities through joint ventures with industry partners as a means of limiting our drilling risk. HH’s prospects are generally brought to us by other oil and gas companies or individuals. HH identifies and evaluates prospective oil and gas properties to determine both the degree of risk and the commercial potential of the project. HH seeks projects that offer a mix of low risk with a potential for steady reliable revenue as well as projects with a higher risk that may have a larger return. In addition to reserve reports and other 3^rd party evaluations, HH strives to use modern technology such as 3-D seismic, where applicable, to help them identify potential oil and gas reservoirs and to mitigate risk. HH seeks to maximize the value of its asset base by exploring and developing properties that have both production and reserve growth potential. HH sometimes seeks industry partners to maintain a balanced working interest in all of their projects.

Competitive Business Conditions

The oil and gas exploration and production industry is highly competitive. In the Kentucky and Tennessee area, HH competes with several large and well-known public and private companies, which have substantially greater financial and operational resources than HH has.  Competition for equipment, personnel and services is expected to be intense.  Accordingly, these competitors may be able to spend greater amounts on acquisitions of oil and gas properties of merit, on exploration of their properties and on development of their properties. In addition, they may be able to obtain more geological and other data in the exploration of oil and gas properties. This could result in competitors having properties of greater quality and value to prospective investors. This competition could have an adverse effect on HH’s ability to identify or finance further exploration of properties, in which they currently have an interest or may seek to acquire.

HH also competes with other junior exploration and production (E&P) companies for financing from investors that have an interest in deploying capital into junior E&P companies. The presence of competing junior E&P companies may have an adverse effect on HH’s ability to raise additional capital in order to fund its exploration and development programs if investors are of the view that investments in competitors are more attractive.  Additionally, there is competition for other resources, including, but not limited to: petroleum engineers, geologists, camp staff, helicopters, mineral exploration supplies and drill rigs.

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

Marketing/Distribution

HH has existing contracts with oil and gas service providers for the extraction of oil and gas and for the transportation, purchase and sale of the production. HH utilizes Barrett Oil Purchasing, Inc., which purchases its extracted oil and gas.  

Government Regulation

Oil and Gas operations:

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

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

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

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

Environmental Laws

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

HH is subject to numerous environmental laws and regulations. HH strives to comply with all applicable environmental, health and safety laws and regulations. HH believes that its operations are in compliance with all applicable environmental laws and regulations. Federal, state and local laws and regulations are frequently modified and HH cannot predict accurately the effect, if any, they will have on its business in the future. In many instances, the regulations have not been finalized and continue to evolve. Even where regulations have been adopted, they are subject to varying and contradicting interpretations and implementation. In some cases, compliance can only be achieved by capital expenditure and HH cannot accurately predict what capital expenditures, if any, may be required.

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

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

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

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

HH could be affected by the Federal Endangered Species Act and counterpart state legislation protect species threatened with possible extinction. Protection of endangered species may have the effect of prohibiting or delaying HH (or its subsidiaries) and its lessees from obtaining mining permits and may include restrictions on timber harvesting, road building and other mining or forestry activities in areas containing the affected species. A number of species indigenous to Central Appalachia are protected under the Endangered Species Act.  HH does not believe there are any species protected under the Endangered Species Act that would materially and adversely affect its ability to drill for oil and gas on its properties. Additional species on HH’s properties may receive protected status under the Endangered Species Act and additional currently protected species may be discovered within its properties.  

Patents and Trademarks

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

Employees

The Company currently has six executive staff members, including its Chief Executive Officer, President, Chief Financial Officer, Chief Operating Officer, Executive Vice President, and Vice President - Operations.

ITEM 1A. - RISK FACTORS

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

Risks Related to Doing Business in Mongolia

There are many factors that can affect the future performance of the Company in Mongolia.  These factors include, but are not limited to external factors, such as:

·

interest rates in financial markets outside Mongolia;

·

the impact of changes in the credit rating of Mongolia;

·

the impact of changes in the international prices of commodities;

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·

economic conditions in Mongolia’s major export markets;

·

the decisions of international financial institutions, such as the International Monetary Fund (“IMF”), Asian Development Bank (“ADB”) and World Bank, regarding the terms  of their financial assistance to Mongolia;

·

armed conflicts, terrorist attacks and acts of war;

·

the general state of the global economy;

·

as well as internal factors, such as:

·

general economic and business conditions in Mongolia;

·

changes in Government policies and regulations;

·

additional present and future exchange rates of the Tugrik, the national currency of Mongolia;

·

the impact of business cycles and downturns in Mongolia;

·

foreign currency reserves;

·

the level of domestic debt;

·

domestic inflation;

·

the ability of Mongolia to implement important economic and structural reforms;

·

the levels of foreign direct and portfolio investment;

·

delays in the development of mining and infrastructure assets, which would affect equipment leasing;

·

pending and potential future disputes with investment partners relating to important mines;

·

extreme climatic events affecting Mongolia;

·

the levels of domestic interest rates;

·

the social and political situation in Mongolia;

·

longer payment cycles and greater difficulty in account receivable collections;

·

time and resources required to comply with both foreign regulatory requirements and the U.S. Foreign Corrupt Practices Act; and

·

difficulty in maintaining effective communications with employees and customers due to distance, language and cultural barriers.

The Company cautions that these and other factors could cause actual results to differ materially from those contained in any forward-looking statement. Therefore, undue reliance should not be placed on them.

Establishing a new business may be more difficult, costly or time consuming than expected, which may adversely affect our results and negatively affect the value of our stock.

The success of new operations in Mongolia will depend, in part, on our ability to secure licensing, permits, facilities, personnel, financing and customers. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated operations or benefits may not be realized fully, or at all, or may take longer to realize than expected, and the value of our common stock may be affected adversely.

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

Our success depends to a significant degree upon the involvement of our management, who are in charge of our strategic planning and operations and have prior experience in the equipment rental business.  The Company itself has no prior experience in the equipment rental industry.  We will need to attract and retain talented individuals in order to implement our equipment rental business in Mongolia.   In order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified managerial and field personnel having experience in the equipment rental business and/or oil and gas production, mineral exploration and development and other natural resource businesses. The competition for such persons could be intense and there are no assurances that these individuals will be available to us. In addition, our future success will depend in large part on our ability to retain key consultants and advisors. Our inability to retain their services could negatively affect our business and our ability to execute our business strategy.

General Business Risks

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

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

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

The accompanying financial statements to this report have been prepared assuming the Company will continue as a going concern.  The Company’s ability to meet its obligations and continue as a going concern is dependent upon its ability to obtain additional financing; achievement of profitable operations; the discovery, exploration, development, and sale of oil and gas reserves; and the successful deployment of its Hertz Equipment Rental operations in Mongolia.  As discussed in the notes to the accompanying audited financial statements, the Company’s losses from operations since inception raise substantial doubt about the Company’s ability to continue as a going concern.

Management’s plans include initiating operations in the equipment rental business in Mongolia during the summer of 2015 through its wholly owned subsidiary, Mongolia Equipment Rental Corporation; investing in and developing potential natural resources that may exist on or under the properties owned by HH (a wholly owned subsidiary of the Company) in Tennessee and Kentucky, and/or to acquire additional revenue producing assets.  Management intends to use advances from related parties, asset based lending, borrowing, or financing from the issuance or exercise of its securities to increase its cash position; however, no assurance can be given that such sources of financing, if and when required, will be available.  

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

We will incur increased costs and demands upon management as a result of complying with the laws and regulations that affect public companies, which could materially adversely affect our results of operations, financial condition, business and prospects.

As a public company, we incur significant legal, accounting and other expenses, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, as well as rules implemented by the Securities and Exchange Commission (the “SEC”).

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting.  In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies.  If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act of 2002, that may interfere with the ability of investors to trade our securities and our ability to list our shares on any national securities exchange.

The increased costs associated with operating as a public company have and will continue to increase our net loss and may require us to reduce costs in other areas of our business. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our results of operations, financial condition, business and prospects.   

If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud.  Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud.  If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed.  Notwithstanding our diligence, certain internal controls deficiencies may not be detected.  As a result, any internal control deficiencies may adversely affect our financial condition, results of operations and access to capital.

Turnover of members of our management and our ability to attract and retain key personnel may affect our ability to efficiently manage our business and execute our strategy.

Our success is dependent, in part, on the experience and skills of our management team, and competition in our industry and the business world for top management talent is generally significant. Although we will try to generally have competitive pay packages, we can provide no assurance that our efforts to attract and retain senior management staff will be successful. Moreover, given the volatility in our stock price, it may be more difficult and expensive to recruit and retain employees, particularly senior management, through grants of stock or stock options. This in turn could place greater pressure on the Company to increase the cash component of its compensation packages, which may adversely affect our operating results. If we are unable to fill and keep filled all of our senior management positions, or if we lose the services of any key member of our senior management team and are unable to find a suitable replacement in a timely fashion, we may be challenged to effectively manage our business and execute our strategy.

14

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

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

· Inability to locate valuable minerals at the properties;

· Failure or unanticipated delays in developing the exploration properties where HH has mineral rights;

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

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

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

· Inability to sell any extracted minerals

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

If we do not obtain new financings in an amount sufficient to establish our equipment rental operations and pursue development activities at HH’s properties, our operations will be curtailed.

To date, we have relied on recent private placement financings in order to fund exploration and development of the Company’s properties.  We are presently without funds to carry out our plan of operations. Any impairment in our ability to raise additional funds through financings would reduce our ability to fund our equipment rental operations with the result that our plan of operations may be adversely affected and potential recoveries reduced or delayed.  

Our HH subsidiary’s business faces intense competition.

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

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

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

·

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

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·

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

·

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

·

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

·

higher costs of integration than we anticipated;

·

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

·

anticipated benefits of acquisitions may not materialize as planned.

Economic conditions and political turmoil could materially adversely affect the Company.

The Company’s future operations and performance depend significantly on worldwide economic and political conditions. Uncertainty about global economic conditions poses a risk as consumers and businesses postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products, of which there are no assurances such exist in economically feasible quantities or qualities.  A resulting drop in the demand for equipment rental in Mongolia and the prices of such items and in the actual demand for energy and natural resources could also differ materially from the Company’s expectations. Other factors that could influence demand include fuel and other energy costs, conditions in the residential real estate and mortgage markets, financial crisis, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors, both in the U.S. and Mongolia. These and geopolitical events such as war and terrorist actions could have a material adverse effect on demand for the Company’s products and services and on the Company’s financial condition, operating results, and cash flows.

Our business is subject to extensive regulation.

As many of our activities are subject to federal, state and local regulation in the U.S. and Mongolia and as these rules are subject to constant change or amendment, there can be no assurance that our operations will not be adversely affected by new or different government regulations, laws or court decisions applicable to our operations. We are also subject to changing and extensive tax laws, the effects of which cannot be predicted.

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

Crude oil, natural gas and other natural resource extraction operations are subject to extensive federal, state and local government regulations, which may be changed from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of crude oil and natural gas wells below actual production capacity in order to conserve supplies of crude oil and natural gas. There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation and disposal of crude oil and natural gas, byproducts thereof and other substances and materials produced or used in connection with crude oil and natural gas operations. In addition, we may inherit liability for environmental damages caused by previous owners of property we purchase or lease. As a result, we may incur substantial liabilities to third parties or governmental entities. Our equipment rental operations have less impact on the environment and are subject to fewer environmental regulations.  However, in both the U.S. and Mongolia, the implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on us.

16

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

Notwithstanding our entering the equipment rental business in Mongolia, until such time as these intended operations are operating, our growth may still depend upon the success of our HH subsidiary’s future development program. Drilling for crude oil and natural gas and reworking existing wells involves numerous risks, including the risk that no commercially productive crude oil or natural gas reservoirs will be encountered. The cost of drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors beyond our control, including:

·

unexpected drilling conditions;

·

pressure or irregularities in formations;

·

equipment failures or accidents;

·

inability to obtain leases on economic terms, where applicable;

·

adverse weather conditions;

·

compliance with governmental requirements; and

·

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

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

through a number of methods, some of which do not include lateral drilling or hydraulic fracturing, and some of which may be unproven. The drilling and results for these prospects may be particularly uncertain. Our drilling schedule may vary from our capital budget. The final determination with respect to the drilling of any scheduled or budgeted prospects will be dependent on a number of factors, including, but not limited to:

·

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

·

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

·

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

·

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

·

our financial resources and results;

·

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

·

the success of our drilling technology.

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

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

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

·

worldwide and domestic supplies of crude oil and natural gas;

·

the level of consumer product demand;

·

weather conditions;

·

domestic and foreign governmental regulations;

·

the price and availability of alternative fuels;

·

political instability or armed conflict in oil producing regions;

·

the price and level of foreign imports; and

·

overall domestic and global economic conditions.

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

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

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

Exploration activities are inherently hazardous.

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

18

There may be challenges to the titles to our property.

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

If we lose the services of our Chief Executive Officer our operations would be disrupted and our business would be materially harmed.

Our operations rely significantly on the continued services of our CEO, Gary Kucher.  He successfully identified, negotiated and executed the Franchise Agreement with Hertz Equipment Rental Corporation.  If we were to lose his services, our ability to execute our business plan would be materially impaired until a replacement could be retained.

In addition, as disclosed in their biographies contained herein, some of our officers and directors work with other companies in addition to their work for us.  If any of their services become unavailable that, too, may have a material adverse effect on the Company.

Climate change and related regulatory responses may affect our business.

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

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

19

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

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

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

Risks Related to our Securities

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

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

·

actual or anticipated variations in our quarterly results of operations;

·

changes in market valuations of companies in our industry;

·

changes in expectations of future financial performance;

·

fluctuations in stock market prices and volumes;

·

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

·

the addition or departure of key personnel;

·

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

·

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

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

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

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

20

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

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

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

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

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

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

Because our directors and officers are among our largest stockholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from those of our other stockholders.

Our directors and officers and/or their affiliates beneficially own or control approximately 25.10% of the issued and outstanding common stock.  In addition, the holdings of our directors and executive officers may increase in the future upon vesting or other maturation of exercise rights under any of the options or warrants they may hold or in the future be granted or if they otherwise acquire additional shares of our common stock. As a result, in addition to their board seats and offices, such persons will have significant influence over and control all corporate actions requiring stockholder approval, irrespective of how the Company ’ s other stockholders, may vote, including the following actions:

21

·

to elect or defeat the election of our directors;

·

to amend or prevent amendment of our Certificate of Incorporation or By-laws;

·

to effect or prevent a merger, sale of substantially all assets or other corporate transaction; and

·

to control the outcome of any other matter submitted to our stockholders for vote.

In addition, these persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.

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

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

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

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

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

22

Anti-Takeover, Limited Liability and Indemnification Provisions

Certificate of Incorporation and By-laws.

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

·

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

·

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

·

effecting an acquisition that might complicate or preclude the takeover.

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

Our certificate of incorporation allows for our board of directors to create series of preferred stock without further approval by our stockholders, which could act as an anti-takeover device.

Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock without stockholder approval.  Our Board of directors also has the authority to issue up to 20 million shares of preferred stock without further stockholder approval.  As a result, our board of directors could authorize the issuance of series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.  In addition, our board of directors could authorize the issuance of series of preferred stock that have greater voting power than our common stock or that are convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.  Unless the nature of a particular transaction and applicable statute require such approval, the Board of Directors has the authority to issue these shares without stockholder approval subject to approval of the holders of our preferred stock.  The issuance of preferred stock may have the effect of delaying or preventing a change in control of the Company without any further action by the stockholders.

23

Delaware Anti-Takeover Law.

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

·

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

·

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

·

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

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

Limited Liability and Indemnification.

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

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

·

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

·

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

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

24

Litigation Fee Shifting

On November 20, 2014, the Company amended its bylaws to provide, to the fullest extent permitted by law (i) for the shifting of litigation expenses to an unsuccessful plaintiff in certain intra-corporate litigation who does not obtain a judgment on the merits that substantially achieves in substance and amount, the full remedy sought, and (ii) that a plaintiff in intra-corporate litigation is required to pay all of its own litigation expenses, and will not be entitled to recover such litigation expenses from the Company, regardless of whether the plaintiff is successful. There is pending legislation in Delaware to prohibit the fee-shifting provision. While it is unclear whether this fee-shifting provision is and will remain enforceable under Delaware law, the adoption of this provision could have the effect of deterring stockholders of the Company from commencing litigation with the Company and may also discourage attempts to acquire us.

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

ITEM 1B - UNRESOLVED STAFF COMMENTS  

None

ITEM 2 - PROPERTIES

The Company has an office at Bayangol 4th Khoroo, Jasrai Street 27/1 2nd Floor Ulaanbaatar, Mongolia 16051, which is a one year lease for approximately 65 square meters at a monthly rate of $900 and at 2300 West Sahara Drive, Suite 800, Las Vegas, Nevada 89102, which is a month to month lease for approximately 200 square feet at a monthly rate of $225.

ITEM 3 - LEGAL PROCEEDINGS

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

ITEM 4 - MINING SAFETY DISCLOSURES

Not applicable

25

PART II

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

Price Range of Common Stock

There currently is a limited public trading market for our common stock. Our common stock is traded in the OTC Markets under the symbol "MNHD".

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

On May 18, 2015, there were 580 stockholders of record and 16,462,553 shares of our common stock issued and outstanding. The closing price per share was $0.51.  

Dividends

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

Recent Sales of Unregistered Securities

All issuances of restricted securities by the Company during the year ended December 31, 2014, except as noted below, were previously reported on Current Reports on Form 8-K or the Company’s Quarterly Reports on Form 10-Q.  

In November 2014, the Company issued 200,000 shares of common stock with an aggregate value of $80,000 to members of the Company’s Advisory Board for services rendered in accordance with the Advisory Board Agreement.

26

In December 2014, the Company issued 25,000 shares of common stock with an aggregate value of $6,250 to a member of the Company’s Advisory Board for services rendered in accordance with the Advisory Board Agreement. In addition, the Company issued 200,000 shares of common stock with an aggregate value of $43,750 to a new board member of the Company’s Board of Directors for services rendered in accordance with his Appointment Agreement. Also, the Company issued 150,000 shares of common stock with an aggregate value of  $37,500 to two note holders for extension fees in accordance with the Extension Agreement

In January 2015, the Company issued 100,000 shares of common stock with an aggregate value of $39,000 to two note holders for extension fees in accordance with the Extension Agreement.

In March 2015, the Company issued 150,000 shares of common stock with an aggregate value of $66,000 to two note holders for extension fees in accordance with the Extension Agreement. In addition the Company issued 200,000 shares of common stock with an aggregate value of $88,000 to a new board member of the Company’s Board of Directors for services rendered in accordance with his Appointment Agreement.

Stock Transfer Agent

Our Stock Transfer Agent is Empire Stock Transfer and is located at 1859 Whitney Mesa Drive, Henderson, NV  89014, Telephone: 702-818-5898

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

The following table provides information regarding the status of our existing equity compensation plans at December 31, 2014.

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

27

Issuer Repurchases

None.

ITEM 6 - SELECTED FINANCIAL DATA

Not required

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

Statement Regarding Forward-Looking Disclosures

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

General

The Company was incorporated in the State of Delaware on January 26, 2007 under the name Consolidation Services, Inc. Until January 1, 2010, the Company’s sole sources of revenues were from its coal mining and timber harvesting operations on approximately 12,000 contiguous acres in Tennessee. It also held the mineral rights for oil and gas on those properties. The Company discontinued its coal mining and timber harvesting operations on January 1, 2010 via a spin off while maintaining its oil and gas assets in the Company (“Legacy Properties”). On April 1, 2010, the Company executed an acquisition of producing oil and gas properties in Kentucky and Tennessee. The Company’s current operations consist primarily of the maintenance and production of those oil and gas mineral reserves. It has not begun exploration or production of its oil and gas rights on its Legacy Properties.  On August 19, 2014, the Company changed its name to Mongolia Holdings, Inc. to reflect its current business.

28

Plan of Operations

Hydrocarbons Holdings

On February 21, 2013, the Company entered into a Bill of Sale and Assignment, Release and Assumption Agreement with Hydrocarbons Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“HH”), whereby substantially all of the Company’s oil and gas assets and liabilities were transferred to HH effective February 28, 2013.

On April 1, 2010, the Company entered into 12 substantially identical asset purchase agreements with various unrelated partnerships, which were held by a total of 657 individual sellers and it completed the purchase of interests in oil and gas wells located in Kentucky and Tennessee. The Company acquired interests in 39 oil wells and 19 gas wells, a total of 58 wells, and the related support equipment, located on approximately 1,500 leased acres in Kentucky and Tennessee. Under the agreements, the Company acquired all rights, titles and interests to the sellers’ oil and gas wells and support equipment free and clear of all liabilities, liens and encumbrances. The effective date of the purchase and sale was April 1, 2010. As part of the acquisition, 657 sellers received in aggregate 5,696,718 shares of the Company’s common stock.

Mongolia Equipment Rental Corporation

On March 21, 2013, the Company through its wholly owned subsidiary, Mongolia Equipment Rental Corporation, a Delaware corporation (the “Franchisee”) entered into an International Franchise Agreement (the “Franchise Agreement”) with Hertz Equipment Rental Corporation and Hertz Equipment Rental System (collectively “Franchisor”).  

Under the Franchise Agreement the Franchisee will operate a business of renting, selling and maintaining equipment primarily for use in construction, materials handling and commercial and industrial activities (“Equipment Rental Business”) under the unique plan or system of the Franchisor (the “System”) in the country of Mongolia.

The license granted to Franchisee under the Franchise Agreement originally commenced on July 1, 2013 and continued for a period of ten (10) years, unless renewed or sooner terminated.  The Franchisee shall have the option to renew the license for two (2) successive five (5) year terms, subject to the terms of the then current Hertz Equipment Rental System International Franchise Agreement, and provided such terms shall preserve Franchisee’s right to renew for an additional two successive five year periods and will not require the payment of an initial fee by Franchisee and the Franchisee is not in default of the Franchise Agreement.

On December 16, 2014, the Franchisee entered into an amendment (the “Amendment”) to the Franchisee Agreement.  The Amendment changed the Commencement Date, as such term is defined under the Franchise Agreement, from July 1, 2013 to December 31, 2014.

The Franchise Agreement provides that so long as the Franchise Agreement remains in place and for one-year after the expiration or termination of the Franchise Agreement: (i) Franchisor will not establish or license another to establish an Equipment Rental Business in the country of Mongolia; and (ii) Franchisor will not establish or license another to establish a truck rental business under the System (“Truck Rental Business”) in the country of Mongolia without first having afforded Franchisee a non-transferrable right of first refusal to establish a Truck Rental Business in the country of Mongolia. Franchisee shall have a right of first opportunity (prior to Franchisor entering into any substantive discussions or negotiations with any other party) to acquire the franchise for any Equipment Rental Business in the country of Burma (a/k/a Myanmar).

29

In consideration for the license provided under the Franchise Agreement, Franchisee will pay Franchisor: (i) an initial fee of $45,000; (ii) a continuing monthly license fee equal to 6% of Franchisee’s gross revenue, but not less than $135,000 per annum; and (iii) an amount equal to 1% of all sums received by Franchisee related to (a) the sale, trade-in or other disposal of used equipment, and (b) the sale of any new equipment or product lines that have been previously approved by Franchisor. In addition Franchisee shall be required to spend annually an amount equal to not less than 1% of the Franchisee’s gross revenue for local advertising and promotion of the Equipment Rental Business in Mongolia.

Supplemental Oil and Gas Information

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

Results of Operations

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

Our revenues for the years ended December 31, 2014 and 2013 were $41,677 and $124,509, respectively.  Our revenues are from the sale of our oil and gas production.  During the year ended December 31, 2014, we produced approximately 370 barrels and received an average price per barrel of $100.28. During the year ended December 31, 2013 we produced 1,254 barrels and received an average price per barrel of $99.28.

Our operating expenses for production activities for the year ended December 31, 2014 were $41,830 (comprised of $35,020 of lease operating expenses and $6,810 of depreciation, depletion, amortization and accretion) as compared to $141,262 (comprised of $131,349 of lease operating expenses and $9,913 of depreciation, depletion, amortization and accretion) for the year ended December 31, 2013.  Our sole operation is the drilling and production of our oil and gas properties. The wells in Kentucky are shallow wells (approximately 1,300 feet) and require minimal maintenance. During the years ended December 31, 2014 and 2013, the Company impaired its oil and gas properties and support equipment by $114,000 and $0, respectively. The impairment recorded during 2014 was due to reductions in the future estimated recoverable reserves as a result of sporadic production and declining prices.   

30

We sold equipment with $0 basis for $15,000 during the year ended December 31, 2013 and had no sales of equipment during the year ended December 31, 2014.

Our general and administrative expenses for the years ended December 31, 2014 and 2013 were $1,164,990 and $1,048,775, respectively. The increase in general and administrative expenses was primarily due to higher stock compensation. We have paid our employees and consultants in common shares to preserve our limited available cash.

We incurred net losses of $1,497,638 and $1,091,086 for the years ended December 31, 2014 and 2013, respectively, due to the factors discussed above.

Liquidity and Capital Resources

Our cash used in operating activities for the years ended December 31, 2014 and 2013 was $608,338 and $265,598, respectively.  The increase in cash used in operating activities in 2014 was due to the Company incurring higher travel, general and administrative costs.

Our cash provided by (used in) investing activities for the years ended December 31, 2014 and 2013 was $0 and ($45,000), respectively.  The decrease in investing activities was due to the purchase of the Hertz licensing agreement during 2013.

Our cash provided by financing activities for the years ended December 31, 2014 and 2013 was $525,000 and $418,000, respectively.  During the years ended December 31, 2014 and 2013, the Company entered into notes payable with a stockholder in exchange for cash proceeds of $0 and $268,000, respectively. During 2014, the Company entered into convertible debt agreements with third parties for proceeds of $525,000, which included 1,050,000 warrants with a relative fair value of $256,982, which was treated as a debt discount.  During 2013, the Company also entered into convertible debt agreements with third parties for proceeds of $150,000, which included 300,000 warrants with a relative fair value of $49,917, which was treated as a debt discount.

The Company’s plan of operations is uncertain and is dependent on its ability to identify additional acquisition candidates and to effectively maintain, explore and drill oil and gas wells on existing properties and to successfully implement the equipment rental operations in Mongolia. These activities would require the Company to raise sufficient capital, if available. There is no assurance of the ability of the Company to access investment capital, secure additional acquisitions or drill economically producing wells. The process/practice of drilling oil and gas wells is cost intensive. It is critical for the Company to source sufficient capital to implement the its business plan.  

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

31

In February and March 2015, the Company issued two secured convertible promissory notes for cash proceeds of $50,000. The notes are due in twelve months and are convertible into shares of common stock at the option of the holders at a conversion price of $1.00 and the notes bear interest at 12%, that is payable quarterly. The note holders were also issued warrants to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $1.00 with a five year term. In addition, the Company entered into a General Loan Agreement with XacBank, a Mongolia Bank. The Bank shall open a line of credit with the maximum principal amount of $10,000,000 for a term of sixty (60) months at an interest rate of 12% per annum and a commitment fee of 1% per annum of the undisbursed amount under the Credit Line. The credit line will be used to acquire construction and other equipment in connection with the Hertz Equipment Rental business.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. As discussed in the notes to the accompanying audited consolidated financial statements, the Company sustained losses from operations.  The Company incurred net losses of $1,497,638 and $1,091,086 for the years ended December 31, 2014 and 2013, respectively, and an accumulated deficit of $12,990,083 at December 31, 2014.  Further, the Company has inadequate working capital to maintain or develop its assets, and is dependent upon funds from lenders, investors and the support of certain stockholders.  

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

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

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies

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

Use of Estimates and Assumptions

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

32

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

Oil and Gas Properties

The Company uses the successful efforts method of accounting for oil and gas operations.  Under this method of accounting, costs to acquire mineral interests in oil and gas properties, to drill and equip development wells, and to drill and equip exploratory wells that find proved reserves are capitalized. Depletion of capitalized costs for producing oil and gas properties is calculated using the unit-of-production method based on estimates of proved oil and gas reserves on a field-by-field basis.  

The costs of unproved leaseholds and mineral interests are capitalized pending the results of exploration efforts.  In addition, unproved leasehold costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, the property has been impaired.  This impairment will generally be based on geophysical or geologic data.  Due to the perpetual nature of the Company’s ownership of the mineral interests, the drilling of a well, whether successful or unsuccessful, may not represent a complete test of all depths of interest.  Therefore, at the time that a well is drilled, only a portion of the costs allocated to the acreage drilled may be expensed.  As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds.  The costs associated with unproved leaseholds and mineral interests that have been allowed to expire are charged to exploration expense.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  When it is determined that an asset’s estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge must be recorded to reduce the carrying amount of the asset to its estimated fair value.  Fair value is determined by reference to the present value of estimated future cash flows of such properties.  During the years ended December 31, 2014 and 2013 the Company recorded an impairment of long-lived assets in the amount of $114,000 and $0, respectively.  

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

Revenue Recognition

Oil and Gas

The Company has royalty and working interests in various oil and gas properties which constitute its sole source of revenue.  The Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells.  

33

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

Equipment Rental

The Company will recognize revenue from its equipment rental business when all of the following have occurred: persuasive evidence that an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured.

Asset Retirement Obligations

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

Share-Based Compensation

For share-based compensation, the measurement of the cost of services received in exchange for an award of an equity instrument is based on the grant-date fair value of the award.  Compensation cost is recognized when the event occurs.  The Black-Scholes option-pricing model is used to estimate the fair value of options granted.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

34

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

35

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

  of Mongolia Holdings, Inc.

We have audited the accompanying consolidated balance sheet of Mongolia Holdings, Inc. (the “Company”) as of December 31, 2014, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mongolia Holdings, Inc., as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has sustained recurring losses from operations and needs to raise additional funds to meet its obligations and sustain its operations.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Marcum LLP

Marcum LLP

New York, NY

June 5, 2015

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Mongolia Holdings, Inc.

Las Vegas, Nevada

We have audited the accompanying consolidated balance sheet of Mongolia Holdings, Inc. (the “Company”) as of December 31, 2013, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mongolia Holdings, Inc. as of December 31, 2013 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

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

/s/ GBH CPAs, PC

GBH CPAs, PC

www.gbhcpas.com

Houston, Texas

March 28, 2014

F-2

MONGOLIA HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

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

F-3

MONGOLIA HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

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

F-4

MONGOLIA HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

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

F-5

MONGOLIA HOLDINGS, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

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

F-6

MONGOLIA HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS

Mongolia Holdings, Inc. (the “Company” or “MNHD”) was incorporated in the State of Delaware on January 26, 2007 under the name Consolidation Services, Inc. The Company is engaged in the exploration and development of oil and gas reserves in Kentucky and Tennessee. The Company is endeavoring to expand its operations into the heavy equipment rental business in Mongolia, through an exclusive Hertz Equipment Rental franchise license it posses for that country.

Principles of Consolidation

The consolidated financial statements include the accounts of Mongolia Holdings, Inc. and its wholly-owned subsidiaries: Equipment Rental, LLC; HERC, LLC; Hydrocarbons Holdings, Inc.; Vector Energy Services, Inc. (not an operating company in 2013 or 2014); CSI Energy, Inc. (not an operating company in 2013 or 2014); CSI Resource, Inc. (not an operating company in 2013 or 2014); HERC, LLC (Mongolia); Equipment Rental, LLC (Mongolia); and Mongolia Equipment Rental Corporation. All significant intercompany transactions are eliminated.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates and Assumptions

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

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At December 31, 2014 and 2013, cash and cash equivalents include cash on hand and cash in depository institutions/commercial banks. The Company did not have any cash equivalents as of December 31, 2014 or 2013.

F-7

Accounts Receivable

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

Oil and Gas Properties

The Company uses the successful efforts method of accounting for oil and gas operations.  Under this method of accounting, costs to acquire mineral interests in oil and gas properties, to drill and equip development wells, and to drill and equip exploratory wells that find proved reserves are capitalized.  Depletion of capitalized costs for producing oil and gas properties is calculated using the unit-of-production method based on estimates of proved oil and gas reserves on a field-by-field basis.  

The costs of unproved leaseholds and mineral interests are capitalized pending the results of exploration efforts. In addition, unproved leasehold costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, the property has been impaired.  This impairment will generally be based on geophysical or geologic data.  Due to the perpetual nature of the Company’s ownership of the mineral interests, the drilling of a well, whether successful or unsuccessful, may not represent a complete test of all depths of interest.  Therefore, at the time that a well is drilled, only a portion of the costs allocated to the acreage drilled may be expensed. As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds. The costs associated with unproved leaseholds and mineral interests that have been allowed to expire are charged to exploration expense.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  When it is determined that an asset’s estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge must be recorded to reduce the carrying amount of the asset to its estimated fair value.  Fair value is determined by reference to the present value of estimated future cash flows of such properties.  

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

Revenue Recognition

Oil and Gas Revenue

The Company has royalty and working interests in various oil and gas properties which constitute its sole source of revenue.  The Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells and collection is reasonably assured.

F-8

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

Equipment Rental Revenue

The Company will recognize revenue from its equipment rental business when all of the following have occurred: persuasive evidence that an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. The Company did not have any equipment rental revenue in 2014 or 2013.

Loss Per Common Share

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

For the years ended December 31, 2014 and 2013, the following stock options, warrants and shares issuable upon conversion of debt to purchase shares of common stock were excluded from the computation of diluted net loss per share, as the inclusion of such shares would be anti-dilutive:

Stock-Based Compensation

The Company measures the fair value of stock based compensation awards made to employees and directors, including stock option awards at the date of grant using a Black-Scholes model. Restricted stock awards are recorded at the fair market value of the stock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service period.

The Company accounts for warrant grants to non-employees whereby the fair value of such warrants are determined using a Black-Scholes model at the earlier of the date at which the non-employee’s performance is complete or a performance commitment is recorded.

Fair Value of Financial Instruments

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

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The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable, advances from related party, and convertible debt approximates fair value due to their short-term nature, based on similar terms in the market.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash. Interest-bearing accounts are insured by the FDIC up to $250,000. The Company limits cash balances in U.S. banks so in general it does not exceed $250,000. The Company’s bank account balances in Mongolia of approximately $4,000 are not insured. At December 31, 2014 and 2013, the Company had no cash in U.S. accounts over $250,000.

The Company has two customers that purchase and distribute substantially all of its oil and gas production as follows:

Recent Accounting Pronouncements  

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), which creates Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, ASU 2014-09 supersedes the cost guidance in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, ASU 2014-09 requires enhanced financial statement disclosures over revenue recognition as part of the new accounting guidance. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early application is not permitted. The Company is currently evaluating the provisions of ASU 2014-09 and assessing the impact, if any, it may have on its financial position and results of operations.

In June 2014, FASB issued Accounting Standards Update 2014-12, Compensation - Stock Compensation (Topic 718), which clarifies accounting for share-based payments for which the terms of an award provide that a performance target could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The updated guidance clarifies that such a term should be treated as a performance condition that affects vesting. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The guidance will be effective for the annual periods (and interim periods therein) ending after December 15, 2015. Early application is permitted. The Company is currently evaluating the effects of ASU 2014-12 on the financial statements.

F-10

In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern. The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-300-Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, which has been deleted. The Company is currently evaluating the effects of ASU 2014–15 on the financial statements.

In November 2014, the FASB issued ASU No. 2014-16 (Topic 815) - Derivatives and Hedging, which provides clarification on how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features in evaluating the host contract and that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. ASU 2014-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendment should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the year for which the amendments are effective. Early adoption is permitted. Management believes that adoption of this statement is not expected to have a material effect on the accompanying financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. Early adoption permitted for financial statements that have not been previously issued. The adoption of this statement will impact future presentation and disclosures of the financial statements.

Management does not believe that these or any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed financial statements.

Subsequent Events

The Company evaluated subsequent events through the date these financial statements were available to be issued.

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NOTE 3 - GOING CONCERN

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. However, the Company has sustained recurring losses from operations including an accumulated deficit of $12,990,083 as of December 31, 2014 and a net loss for the year ended December 31, 2014 of $1,497,638.  Further, the Company has inadequate working capital to maintain or develop its operations, and is dependent upon funds from lenders, investors and the support of certain stockholders.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  

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

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

NOTE 4 - OIL AND GAS PROPERTIES

During the years ended December 31, 2014 and 2013, the Company did not purchase or dispose of any oil and gas properties.

Changes in oil and gas properties for the years ended December 31, 2014 and 2013 were:

Net oil and gas properties by classification at December 31, 2014 and 2013 were:

F-12

Impairment of oil and gas properties

During the years ended December 31, 2014 and 2013, the Company impaired $114,000 and $0, respectively, of its proved oil and gas properties.  The impairment was due to reductions in the future estimated recoverable reserves as a result of sporadic production during 2014.  

Support facilities and equipment

The Company owns support facilities and equipment, which serve its oil and gas production activities.  The equipment is depreciated using the straight-line method, over the useful life of the underlying oil and gas properties, ranging from five years to fifty years.  The following table details the change in supporting facilities and equipment for the years ended December 31, 2014 and 2013:

Depreciation expense for the years ended December 31, 2014 and 2013 was $1,882 and $2,509, respectively.

NOTE 5 - LICENSE

On March 21, 2013, the Company through its wholly owned subsidiary, Mongolia Equipment Rental Corporation, a Delaware Corporation (the “Franchisee”) entered into an International Franchise Agreement (the “Franchise Agreement”) with Hertz Equipment Rental Corporation and Hertz Equipment Rental System (collectively “Franchisor”).  On December 16, 2014, the Franchisee entered into an amendment (the “Amendment”) to the Franchise Agreement. The Amendment changed the Commencement Date, as such term is defined under the Franchise Agreement, from July 1, 2013 to December 31, 2014.

Under the Franchise Agreement, the Franchisee will operate a business of renting, selling and maintaining equipment primarily for use in construction, materials handling and commercial and industrial activities (“Equipment Rental Business”) under the unique plan or system of the Franchisor (the “System”) in the country of Mongolia.

The license granted to Franchisee under the Franchise Agreement commenced on December 31, 2014 and continues for a period of ten (10) years plus the right to two 5-year extensions, unless renewed or sooner terminated pursuant to the Franchise Agreement.  

The Franchise Agreement provides that so long as the Franchise Agreement remains in place and for one-year after the expiration or termination of the Franchise Agreement: (i) Franchisor will not establish or license another to establish an Equipment Rental Business in the country of Mongolia; and (ii) Franchisor will not establish or license another to establish a truck rental business under the System (“Truck Rental Business”) in the country of Mongolia without first having afforded Franchisee a non-transferrable right of first refusal to establish a Truck Rental Business in the country of Mongolia. Franchisee shall have a right of first opportunity (prior to Franchisor entering into any substantive discussions or negotiations with any other party) to acquire the franchise for any Equipment Rental Business in the country of Burma (a/k/a Myanmar).

F-13

In consideration for the license provided under the Franchise Agreement, during the year ended December 31, 2013, the Franchisee paid Franchisor a license fee of $45,000 and also will (i) pay a continuing monthly license fee equal to 6% of Franchisee’s gross revenue, but not less than $135,000 per year; and (ii) an amount equal to 1% of all sums received by Franchisee related to (a) the sale, trade-in or other disposal of used equipment, and (b) the sale of any new equipment or product lines that have been previously approved by Franchisor. The monthly license fee is owed to the Franchisor beginning December, 2015 (one year after the contractual commencement date, as amended).  In addition, Franchisee shall be required to spend annually an amount equal to not less than 1% of the Franchisee’s gross revenue for local advertising and promotion of the Equipment Rental Business in Mongolia.  

The Company has not generated revenue from the Franchise Agreement.  The License Fee is amortized by the Company on a straight-line basis over the initial 10 year term.  During the years ended December 31, 2014 and 2013, the Company recorded $3,375 and $2,250, respectively of amortization expense of its license.

NOTE 6 - 12% SECURED CONVERTIBLE PROMISSORY NOTES

In September 30 2013, the Company authorized a private placement of investment units at the rate of $50,000 per unit consisting of (a)$50,000 of 12% secured convertible promissory notes, due twelve months from issue date, unless extended, and interest payable quarterly, convertible into 50,000 shares of the Company’s common stock, par value $0.001, at the rate of $1.00 per share and (b) 100,0000 detachable warrants to purchase one share each of common stock at an exercise price of $1.00 per share, expiring five years from their date of issuance. The Company may issue up to $1,000,000 of units in this offering. The units are being offered on a “best efforts” basis, by the Company during an offering period which commenced on December 1, 2013 and continues until June 30, 2015, unless extended.

The interest on the convertible promissory notes is payable quarterly. The notes are secured by all of the assets of the Company. The relative fair value of the warrants at the grant date is recorded as debt discount and is accredited to interest expense over the twelve month term of the notes. The Company analyzed the convertible promissory notes and warrants for derivative accounting consideration and determined that derivative accounting does not apply.

In the year ended December 2013, the Company issued notes totaling $150,000 and warrants totaling 300,000. The relative fair value of the warrants at the grant date was $49,917. In the year ended December 2014, the Company issued notes totaling $525,000 and warrants totaling 1,050,000. The relative fair value of the warrants at the grant date was $256,982. During the years ended December 31, 2014 and 2013, the Company amortized $179,242 and $0, respectively, of debt discount to interest expense on these obligations.

Secured convertible promissory notes consist of the following as of December 31, 2014 and 2013:

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NOTE 7- RELATED PARTY TRANSACTIONS

Notes payable - stockholders

During 2013, the Company entered into additional notes payable with its former Chief Executive Officer (“CEO”) and stockholder, totaling $268,000. These additional notes payable are due on demand, have no periodic payment terms and bear interest at an interest rate of 6% - 7.5% per annum. As of December 31, 2014 and 2013, cumulative amounts due to the former Chief Executive Officer were $731,198 and $731,198, respectively.

The Company recorded $37,457 and $39,398 of interest expense related to these notes payable during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, the Company owed $97,664 and $60,207, respectively, of interest to the stockholder.

Accounts payable - Related parties

The Company owes compensation to its current CEO pursuant to his employment agreement.  The amount owed is due on demand and does not bear interest. At December 31, 2014 and 2013, amounts due to the CEO were $798,361 and $602,439, respectively, and is recorded as accounts payable - related parties in the consolidated balance sheets.

The Company also owes a Director $0 and $2,405 at December 31, 2014 and 2013, respectively, and this is recorded as accounts payable - related parties in the consolidated balance sheets.

NOTE 8 - ASSET RETIREMENT OBLIGATIONS

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

The following is a description of the changes to the Company’s asset retirement obligations for the years ended December 31, 2014 and 2013.

F-15

NOTE 9 - INCOME TAXES

The Company had no income tax expense due to operating losses incurred for the years ended December 31, 2014 and 2013.

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

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

The Company has a net operating loss carry-forward of approximately $6,886,800 available to offset future taxable income through 2034, which may be subject to limitations of Section 382 of the Internal Revenue Code. The Company has provided a valuation allowance against the full amount of the net operating loss, because in the opinion of management based upon the earning history of the Company, it is more likely than not that the benefits will not be realized. The Company anticipates it will continue to record a valuation allowance against the losses of certain jurisdictions, primarily federal, until such time as we are able to determine it is “more-likely-than-not” the deferred tax asset will be realized. Such position is dependent on whether there will be sufficient future taxable income to realize such deferred tax assets.  The Company’s effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.

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

F-16

The Company is in the process of filing its federal tax returns for the years ended December 31, 2012, December 31, 2013 and December 31, 2014. The operating losses for these years will not be available to reduce future taxable income until the returns are filed. The Company’s federal income tax returns for the years 2012-2014 are subject to examination by the U.S. Internal Revenue Service. The Company has not filed a state tax return for two states in which it has assets and may be subject to being taxed in those states. However, the Company has incurred losses and would probably not owe any tax in those states

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Chief Executive Officer and President Employment Agreements

The Company entered into an amended employment agreement with its CEO on January 11, 2013 that expires on July 1, 2016 and automatically renews on an annual basis unless terminated pursuant to the agreement.  The agreement provides for:

i. A monthly salary of $25,000 per month.

ii. A cash bonus of 25% of his annual base salary each year if the Company reaches the following milestones (none of which were attained in 2014 or 2013):

a.

The Company posts annual gross revenues on a consolidated basis of at least $4,000,000;

b.

The Company's earnings before the deduction of income taxes and amortization expenses (“EBITA”), including cash extraordinary items but before officer's bonuses, on a consolidated basis for any year is at least $1,000,000; or

c.

The completion of annual funding, including equity and debt, of at least $3,000,000.

iii. The issuance of options (the employment agreement refers to them as warrants) on each anniversary date of the employment agreement, with a five-year exercise period, to purchase 1% of the then issued and outstanding shares of the Company exercisable at a price equal to the trailing six-month average share trading price prior to grant date.

iv. An expense allowance of $3,060 per month.

v. 12 months of severance pay and immediate grant of the following year options, in the event the executive is terminated without cause.  

For the years ended December 31, 2014 and 2013, the Company paid $146,000 and $120,000 respectively of salary to the CEO and recorded salary payable of $156,000 and $180,000 respectively for the portion of unpaid salary.  The Company also recorded $36,517 and $36,517 of expense related to the expense allowance during 2014 and 2013, respectively.

On July 1, 2013, the Company issued stock options to the CEO to purchase 147,676 shares of common stock at an exercise price of $0.30 with a grant date fair value of $75,241.

On July 1, 2014, the Company issued stock options to the CEO to purchase 152,126 shares of common stock at an exercise price per share of $0.40 with a grant date fair value of $60,850. These were recorded as compensation expense.

F-17

On December 15, 2014, Bradley Siniscalchi was appointed President of the Company, with an effective date of June 15, 2015.  As President, Mr. Siniscalchi shall devote his full working time to the Company and shall manage the Company’s Hertz Equipment Rental business in Mongolia and other operational affairs of the Company, and shall report to Gary Kucher, the Chief Executive Officer. From May 2014 until his appointment as President, he served as a member of Advisory Board of the Company. The employment term is through June 14, 2018 and the initial annual compensation is $250,000, which increases to $300,000 over the course of the employment term.  Mr. Siniscalchi will be paid a one-time signing bonus of $25,000 and may be paid bonuses each year of up to 25% per year, if the Company meets certain performance goals.  Mr. Siniscalchi shall receive a warrant to purchase 700,000 shares of restricted common stock of the Company at a price equal to $1.00 a share for a period of 5 years from the effective date of the Employment Agreement, 100,000 of which shall vest immediately and the remainder to vest in equal installments over three years from the date of the Employment Agreement.  The Employment Agreement also contains a one year limited non-compete clause.

Consulting Agreements

On December 1, 2012, the Company entered into a consulting agreement with Carl Casareto (“COO”).  The COO had been retained to serve as the Company’s Chief Operations Officer for up to 20 hours per week. The agreement was for one year, ending on December 1, 2013, unless terminated earlier or extended. Upon expiration of the agreement, the Company continued to pay the COO until January 2015 on a month to month basis but no longer utilizes his services and has replaced him as the Company’s COO. In consideration of the services he provided, the Company agreed to pay the COO $7,000 per month (“Base Compensation”).  In addition to the Base Compensation, the Company had agreed to pay the COO a bonus of twenty five percent (25%) of Casareto’s annual Base Compensation, if during the term of the Agreement; i) the Company posted annual gross revenues on a consolidated basis of at least $5,000,000; ii) the Company’s EBITA, including cash extraordinary items but before officer’s bonuses, on a consolidated basis for any given year was at least $1,000,000; or iii) the completion of annual funding, including equity and debt, of at least $3,000,000 (none of which were achieved in 2013 or 2012).

On January 11, 2013, the Company granted the COO 200,000 shares of the Company’s common stock.  During the year ended December 31, 2013, the Company recorded stock compensation expense of $16,000 in 2013, based on the trading price of the stock on the grant date of $0.08 per share.

During January 2013, the Company entered into a one-year consulting agreement with Richard S. Polep to serve as the Company’s Chief Financial Officer (“CFO”).  In consideration of the services the CFO provided by serving as CFO of the Company from August 8, 2011 until December 31, 2012, the Company granted the CFO 400,000 shares of the Company’s common stock.  In consideration for the services the CFO provides for 2013, the Company granted the CFO an additional 400,000 shares of the Company’s common stock. The Company and the CFO are in the process of negotiating a consulting agreement for 2015. The Company recorded stock compensation expense of $64,000 based on the trading price of the stock on the grant date of $0.08 per share, of which $32,000 had been accrued and was expensed in 2012, and $32,000 was recorded as an expense during the year ended December 31, 2013.

Effective August 1, 2013, the Company entered into a one-year consulting agreement with Michael Telford to serve as an Executive Vice President (the “EVP”) of the Company. Upon expiration of the agreement, the Company continues to pay the EVP on a month to month basis. The EVP has been retained to serve the Company for up to 20 hours per week. In consideration for the services, the Company has agreed to grant 200,000 shares of the Company’s common stock to the EVP.  As of the grant date, shares of the Company’s common stock were quoted at $0.51 per share.  The Company has recorded $102,000 of stock compensation expense in 2013 in connection with the grant of these shares.

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NOTE 11- STOCKHOLDERS’ EQUITY

Preferred Stock

The Company’s preferred stock has a par value of $0.001, 20,000,000 shares authorized; none issued or outstanding.

Common stock issued for services

During the year ending December 31, 2014, the Company issued 250,000 shares of common stock to Advisory Board members for services rendered per an Advisory Board Agreement. The exchange price ranged from $0.25 to $0.43 per common share or $97,000 in the aggregate, which was the fair value of the shares issued at the time of issuance.

On December 30, 2014, the Company issued 150,000 shares of common stock to two convertible debt holders for an extension to the term of their notes. The exchange price was $0.25 per common share or $37,500 in the aggregate, which was the fair value of the shares issued at the time of issuance.

During the year ending December 31, 2014, the Board of Directors issued 200,000 shares to a new member of the Board of Directors as compensation for serving as a member of the Board. As of the grant date, shares of the Company’s common stock ranged from $0.25 to $0.43 per share. The Company recorded a $543,750 of compensation expense during the year ended December 31, 2014 in connection with the issuance of these shares.

On November 6, 2014, the Company issued 100,000 shares of common stock to a consultant for services to be rendered for the twelve months ended October 24, 2015. The exchange price was $0.43 per common share, or $40,000 in the aggregate, which was the fair value of the shares issued at time of issuance

In March 2014, the Company issued 45,000 shares of common stock to a trade creditor for release of $45,000 of indebtedness. The issuance price was $1.00 per common share, which was the fair value of the services provided by the trade creditor.

During the year ended December 31, 2013, the Company issued 1,600,000 shares of common stock for services to employees, of which 400,000 shares were earned in 2012 and recorded as a $32,000 common stock payable as of December 31, 2012 and the remaining 1,200,000 shares of common stock were granted during 2013.  The Company recorded stock compensation expense of $182,000 during the year ended December 31, 2013 in connection with the grant of these 1,200,000 shares of common stock based on the fair value of the common stock on the grant dates.

During the year ended December 31, 2013, the Board of Directors granted 1,000,000 shares of the Company’s common stock to members of the Board as compensation for serving as a member of the Board.  As of the grant date, shares of the Company’s common stock were quoted at $0.08 and $0.50 per share.  The Company recorded $164,000 of stock compensation expense during the year ended December 31, 2013 in connection with the issuance of these shares.

F-19

Stock Options

On July 1, 2014, the Company issued its CEO fully vested options to purchase 152,126 shares of common stock of the Company with an exercise price of $0.40 per share. The stock price on the grant date was $0.40 per share. The options were valued on the date of the grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest rate 0.88%, (2) term of 5 years, and (3) expected stock volatility of 287.46%. As a result, the fair value of these options on the grant date was $60,850 which the Company recorded as stock-based compensation expense during the year ended December 31, 2014. The intrinsic value of the stock options at July 1, 2014, the issuance date and December 31, 2014 was $0 and $0, respectively. The weighted average remaining contractual terms were 4.5 years for these stock options at December 31, 2014.

On July 1, 2013, the Company issued its CEO fully vested options to purchase 146,676 shares of common stock of the Company with an exercise price of $0.30 per share. The stock price on the grant date was $0.51 per share. The options were valued on the date of the grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest rate 0.88%, (2) term of 5 years, and (3) expected stock volatility of 287.46%. As a result, the fair value of these options on the grant date was $75,242 which the Company recorded as stock-based compensation expense during the year ended December 31, 2013.  The intrinsic value of the stock options at July 1, 2013, the issuance date and December 31, 2013 was $30,802 and $0, respectively.  The weighted average remaining contractual terms were 4.5 years for these stock options at December 31, 2013.

Stock Warrants

During the year ended December 31, 2014, the Company issued secured convertible promissory notes for cash proceeds of $525,000. The notes are due in twelve months and are convertible into shares of common stock at the option of the holder at a conversion price of $1.00. The notes bear interest at 12% that is payable quarterly.  The notes are secured by all of the assets of the Company. The note holders were also issued warrants to purchase 1,050,000 shares of the Company’s common stock at an exercise price of $1.00 with a five-year term. The stock price on the grant date ranged from $0.22 to $0.53. The warrants were valued on the date of the grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest of 1.41% to 1.69%, (2) term of 4.25 to 5 years, and (3) expected stock volatility of 287.46% and 320.89%.  As a result, the relative fair value of the warrants at the grant date was $256,982 and is recorded as debt discount and will be accreted to interest expense over the twelve-month term of the note. The intrinsic value of the warrants at the issuance date and December 31, 2014 was $0 and $0, respectively. The weighted average remaining contractual terms were 4.50 years for these warrants at December 31, 2014.

F-20

On December 16, 2013, the Company issued secured convertible promissory notes for cash proceeds of $150,000. The notes are due in twelve months and are convertible into shares of common stock at the option of the holders at conversion price of $1.00. The notes bear interest at 12% that is payable quarterly.  The notes are secured by all of the assets of the Company. The note holders were also issued warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.00 with a five-year term.  The stock price on the grant date was $0.25 per share. The warrants were valued on the date of the grant using the Black-Scholes option pricing model with the following assumptions: (1) risk free interest rate 1.55%, (2) term of 5 years, and (3) expected stock volatility of 287.46%. As a result, the relative fair value of these warrants on the grant date was $49,917, which the Company recorded as debt discount during the year ended December 31, 2013. The intrinsic value of the warrants at the issuance date and December 31, 2013 was $0 and $0, respectively. The weighted average remaining contractual terms were 4.90 years for these warrants at December 31, 2013.

A summary of Warrants activity for the years ended December 31, 2014 and 2013 is presented below:

The Company values all warrants using the Black-Scholes option-pricing model.  Critical assumptions for the Black-Scholes option-pricing model include the market value of the stock price at the time of issuance, the risk-free interest rate corresponding to the term of the warrant, the volatility of the Company’s stock price, dividend yield on the common stock, as well as the exercise price and term of the warrant.  The warrants are not subject to any form of vesting schedule and, therefore, are exercisable by the holders anytime at their discretion during the life of the warrant.  No discounts were applied to the valuation determined by the Black-Scholes option-pricing model.

NOTE 12 - SEGMENT INFORMATION

Mongolia Holdings, Inc. has two reporting segments and corporate overhead:

·

Oil and Gas - the Company has oil and gas assets and liabilities, located in Kentucky and Tennessee.  Prior to 2013, all of the Company’s business activities were derived from this segment.

·

Equipment Rental - the Company will operate a business of renting, selling and maintaining equipment primarily for use in construction, materials handling and commercial and industrial activities under an international franchise agreement with Hertz Equipment Rental Corporation and Hertz Equipment Rental System in Mongolia.

·

Corporate Overhead - the Company’s investment holding including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional businesses.

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The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. The reportable segments are strategic business units that offer different technology and marketing strategies. Most of the businesses were developed internally and management remains the same. To date, the Company’s operations are principally in the United States. At this time, no single foreign country or geographic area is significant to the consolidated financial statements, although a shift in focus to develop the Mongolian segment may be required in the future.

Consolidated revenues from external customers, operation loss, and identifiable assets were as follows:

NOTE 13 - SUBSEQUENT EVENTS

In May 2015, the Company failed to pay two separate quarterly interest payments, which resulted in an Event of Default (as defined). The remedy of which raised the interest rate on the obligations from 12% to 15%.

Jeffrey Leach replaced Carl Casareto as the Company’s Chief Operating Officer effective May 28, 2015. As COO, Mr. Leach shall devote his full working time to the Company and shall assist in the financing and deployment the Company’s Hertz Equipment Rental business in Mongolia and other operational affairs of the Company, and shall report to Gary Kucher, the Chief Executive Officer and the Board of Directors.  The Company entered into an employment agreement with Mr. Leach on May 28, 2015 (the “Employment Agreement”). The employment term commences on May 15, 2015 through May 14, 2020 and the initial annual compensation is U.S.$200,000.  Mr. Leach will be issued a one-time signing bonus of 200,000 shares of the Company’s common stock and may be paid bonuses each year of up to 50% of his base compensation per year, if the Company meets certain performance goals.  

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In April 2015, the State of Washington issued a Statement of Charges and Notice Intent To Enter Order To Cease And Desist, To Impose Fines And To Charge Costs against one of the former Officers of the Company and has included the names Consolidation Services, Inc., aka Mongolia Holdings Inc. along with 33 other co-defendants. The fees and charges amount to $12,500 for the Company. The Company maintains that it has not participated in the wrongdoing alleged, but in any case do not believe this matter will have a material adverse effect on the Company and intends to defend against the allegations vigorously.

In March 2015, the Company issued 150,000 shares cumulatively to two Convertible Debt holders in exchange for an extension to the term of their notes.

In March 2015, the Company issued a secured convertible promissory note for cash proceeds of $25,000. The note is due in twelve months and is convertible into shares of common stock at the option of the holder at conversion price of $1.00. The note bears interest at 12% that is payable quarterly.  The note is secured by all of the assets of the Company. The note holder was also issued warrants to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 with a five-year term.

In February 2015, the Company issued a secured convertible promissory note for cash proceeds of $25,000. The note is due in twelve months and is convertible into shares of common stock at the option of the holder at conversion price of $1.00. The note bears interest at 12% that is payable quarterly.  The note is secured by all of the assets of the Company. The note holder was also issued warrants to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 with a five-year term.  

In January 2015, the Company issued 100,000 shares cumulatively to two Convertible Debt holders in exchange for an extension to the term of their notes.

Appointment of Allen Andersen to the Board of Directors

On March 3, 2015, Mongolia Holdings, Inc., a Delaware corporation (the “Company”), appointed Allen Andersen to the Company’s Board of Directors (the “Board”).  As compensation for Mr. Andersen to serve on the Board until the next annual meeting of stockholders of the Company, the Board issued Mr. Andersen 200,000 shares of common stock of the Company.

Entry Into A Material Definitive Agreement with XacBank

On January 22, 2015, Rental Equipment, LLC (the “Borrower”), a wholly owned subsidiary of Mongolia Holdings, Inc., a Delaware corporation (the “Company”), entered into a General Loan Agreement (the “Loan Agreement”) with XacBank, a Mongolian Bank (the “Bank”).

Under the terms of the Loan Agreement, upon the Borrower’s compliance with the Bank’s requirements set forth therein, the Bank shall open a line of credit (the “Credit Line”) for the account of Borrower at the Bank with the maximum principal amount of $10,000,000 USD (the “Maximum Principal”) for a term of sixty (60) months from the date of the Loan Agreement (the “Term”).  The Credit Line will have interest rate of 12% per annum (the “Interest”) for any amounts disbursed thereunder, as well as a commitment fee (the “Commitment Fee”) equal to 1% per annum of undisbursed amount under the Credit Line.

The Borrower will use the Credit Line to acquire construction and other equipment (the “Equipment”) in connection with the Borrower and its affiliates’ Hertz Equipment Rental business (the “Business”), for which they are an authorized franchisee.  The Credit Line may be used to finance up to 80% of the acquisition price of the Equipment, provided Borrower can finance the balance with its own assets.  Before the Bank will disburse any funds under the Credit Line, the Borrower must furnish the Bank with rental agreements in connection with the Business to demonstrate the Borrower’s ability to repay the Credit Line to the Bank.  

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The Bank and the Company will enter into a new sub-contract upon each disbursement under the Credit Line, which will set forth the repayment schedule of the funds disbursed thereunder.

Upon the sale during the Term of any Equipment acquired using the Credit Line, the proceeds of such sale shall be used to pay down Borrower’s obligations under the Loan Agreement.  At the end of the Term, Borrower shall pay all remaining unpaid Interest, Commitment Fees, and the principal of the Credit Line.

The Borrower will enter into a separate pledge agreement with Bank under which it will pledge the Equipment purchased with the proceeds of the Credit Line to the Bank.  In addition, the Company is a guarantor of all of Borrower’s obligations under the Loan Agreement.

The Loan Agreement contains customary representations, warranties, and covenants, and requires Borrower and the Company to maintain a debt service coverage ratio of 1.2.  The Bank will charge a one-time non-refundable service fee of $50,000, which shall be deducted from the first disbursement under the Credit Line.  Furthermore, if the Loan Agreement is materially amended at the Borrower’s request, the Borrower shall be charged a service fee in the amount of 0.3% of the undisbursed amount under the Credit Line.

As of the date of this report, no funds have been drawn down on the Credit Line.

NOTE 14 - SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)

The estimates of proved oil and gas reserves utilized in the preparation of these statements were prepared by American Energy Advisors, Inc. (“American”), independent petroleum engineers using reserve definitions and pricing requirements prescribed by the SEC.  American used a combination of production performance and offset analogies, along with estimated future operating and development costs as provided by the Company and based upon historical costs adjusted for known future changes in operations or developmental plans, to estimate our reserves.

There are numerous uncertainties inherent in estimating quantities of proved reserves, projecting future rates of production and projecting the timing of development expenditures, including many factors beyond our control.  The reserve data represents only estimates.  Reservoir engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact manner.  The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretations and judgment.  All estimates of proved reserves are determined according to the rules prescribed by the SEC.  These rules indicate that the standard of “reasonable certainty” be applied to the proved reserve estimates.  This concept of reasonable certainty implies that as more technical data becomes available, a positive, or upward, revision is more likely than a negative, or downward, revision.  Estimates are subject to revision based upon a number of factors, including reservoir performance, prices, economic conditions and government restrictions.  In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of that estimate.  Reserve estimates are often different from the quantities of natural gas and oil that are ultimately recovered.  The meaningfulness of reserve estimates is highly dependent on the accuracy of the assumptions on which they were based.  In general, the volume of production from natural gas and oil properties we own declines as reserves are depleted. Except to the extent we conduct successful development activities or acquire additional properties containing proved reserves, or both, our proved reserves will decline as reserves are produced.    There have been no major discoveries or other events, favorable or adverse, that may be considered to have caused a significant change in the estimated proved reserves since December 31, 2014.

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The Company emphasizes that reserve estimates are inherently imprecise. Accordingly, the estimates are expected to change as more current information becomes available. In addition, a portion of the Company’s proved reserves are proved developed non-producing and proved undeveloped, which increases the imprecision inherent in estimating reserves which may ultimately be produced.

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

Capitalized costs relating to oil and gas producing activities:

Net capitalized costs related to asset retirement obligations in the amount of $1,775, as of December 31, 2014, was included in net capitalized costs.

Net capitalized costs related to asset retirement obligations in the amount of $1,775, as of December 31, 2013, was included in net capitalized costs.

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

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Estimated Quantities of Proved Oil and Gas Reserves

The following table sets forth proved oil and gas reserves together with the changes therein, proved developed reserves and proved undeveloped reserves for the years ended December 31, 2014 and 2013.  Units of oil are in thousands of barrels (MBbls) and units of gas are in millions of cubic feet (MMcf).  Gas is converted to barrels of oil equivalent (MBoe) using a ratio of six Mcf of gas per Bbl of oil.