UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number000-28305
ENERGY QUEST INC.
(Exact name of small business issuer as specified in its charter)
Nevada | 91-1880015 |
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
organization) | |
850 South Boulder Hwy., Suite 169 | |
Henderson, Nevada | 89015 - 7564 |
(Address of principal executive offices) | (Zip Code) |
(702) 568 4131
(Issuer's telephone number)
_______________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant was require to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 14, 2008, the registrant’s outstanding common stock consisted of4,923,249shares.
Table of Contents
1
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Our unaudited interim consolidated financial statements are stated in US dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. All dollar amounts in this report refer to US dollars unless otherwise indicated. When we refer to Energy Quest, we, our or us, we are referring to Energy Quest Inc.
Energy Quest Inc.
(A Development Stage Company)
September 30, 2008
2
Energy Quest Inc.
(A Development Stage Company)
Consolidated Balance Sheets (unaudited)
September 30, | December 31, | |||||
2008 | 2007 | |||||
$ | $ | |||||
Assets | ||||||
Current Assets | ||||||
Cash and cash equivalents | 1,300 | 1,733 | ||||
Restricted cash | – | 80,000 | ||||
Prepaid expenses | 181,579 | 454 | ||||
Other current assets | – | 2,064 | ||||
Total Current Assets | 182,879 | 84,251 | ||||
Intangible Asset | 3,029,621 | 31,336 | ||||
Total Assets | 3,212,500 | 115,587 | ||||
Liabilities and Stockholders' Equity (Deficit) | ||||||
Current Liabilities | ||||||
Accounts payable and accrued liabilities | 43,986 | 61,603 | ||||
Accounts payable - related parties | 532,816 | 249,505 | ||||
Stock payable | – | 161,583 | ||||
Note payable | 22,140 | 21,197 | ||||
Shareholder advances | 289,315 | 289,934 | ||||
Total Liabilities | 888,257 | 783,822 | ||||
Stockholders' Equity (Deficit) | ||||||
Preferred Stock | ||||||
Authorized: 1,000,000 shares, with a $0.01 par value; none issued | – | – | ||||
Common Stock | ||||||
Authorized: 200,000,000 shares, with a $0.001 par value; | ||||||
Issued: 4,923,249 shares (December 31, 2007 - 2,565,549 shares) | 4,923 | 2,566 | ||||
Additional Paid-in Capital | 7,509,364 | 3,976,922 | ||||
Accumulated Other Comprehensive Loss | (43 | ) | (105 | ) | ||
Stock Subscriptions Receivable | – | (60,500 | ) | |||
Deficit Accumulated During the Development Stage | (5,190,001 | ) | (4,587,118 | ) | ||
Total Stockholders’ Equity (Deficit) | 2,324,243 | (668,235 | ) | |||
Total Liabilities and Stockholders’ Equity (Deficit) | 3,212,500 | 115,587 |
The accompanying notes are an integral part of these consolidated financial statements.
F-1
Energy Quest Inc.
(A Development Stage Company)
Consolidated Statements of Operations and Other Comprehensive Loss (unaudited)
Period from | |||||||||||||||
For the Three | For the Three | For the Nine | For the Nine | December 14, 2004 | |||||||||||
Months Ended | Months Ended | Months Ended | Months Ended | (Date of Inception) | |||||||||||
September 30, | September 30, | September 30, | September 30, | to September 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | |||||||||||
$ | $ | $ | $ | $ | |||||||||||
Revenue | – | – | – | – | 5,164 | ||||||||||
Expenses | |||||||||||||||
Consulting and management fees | 137,501 | 191,863 | 326,832 | 330,722 | 4,110,368 | ||||||||||
General and administrative | 10,848 | 15,002 | 38,674 | 40,148 | 317,895 | ||||||||||
Professional fees | 28,908 | 8,795 | 103,725 | 122,214 | 369,558 | ||||||||||
Research and development | 36,189 | – | 46,111 | – | 46,111 | ||||||||||
213,446 | 215,660 | 515,342 | 493,084 | 4,843,932 | |||||||||||
Loss before the following: | (213,446 | ) | (215,660 | ) | (515,342 | ) | (493,084 | ) | (4,838,768 | ) | |||||
Interest income | (1,508 | ) | 762 | – | 1,322 | 2,085 | |||||||||
Interest expense | (782 | ) | – | (7,541 | ) | – | (8,284 | ) | |||||||
Gain on write-off of debt | – | – | – | – | 5,826 | ||||||||||
Loss on restricted cash | – | – | (80,000 | ) | – | (80,000 | ) | ||||||||
Loss on write-off of receivable | – | – | – | – | (193,922 | ) | |||||||||
Net loss | (215,736 | ) | (214,898 | ) | (602,883 | ) | (491,762 | ) | (5,113,063 | ) | |||||
Other comprehensive loss | |||||||||||||||
Foreign currency translation adjustment | 29 | (2,033 | ) | 62 | (4,780 | ) | (43 | ) | |||||||
Total Comprehensive Loss | (215,707 | ) | (216,931 | ) | (602,821 | ) | (496,542 | ) | (5,113,106 | ) | |||||
Net Loss Per Share – Basic and Diluted | (0.04 | ) | (0.10 | ) | (0.16 | ) | (0.24 | ) | |||||||
Weighted Average Shares Outstanding – | |||||||||||||||
Basic and Diluted | 4,858,000 | 2,165,000 | 3,797,000 | 2,092,000 |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Energy Quest Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows (unaudited)
Accumulated from | |||||||||
For the Nine | For the Nine | December 14, 2004 | |||||||
Months Ended | Months Ended | (Date of Inception) to | |||||||
September 30, | September 30, | September 30, | |||||||
2008 | 2007 | 2008 | |||||||
$ | $ | $ | |||||||
Cash Flows Used In Operating Activities | |||||||||
Net loss | (602,883 | ) | (491,762 | ) | (5,113,063 | ) | |||
Adjustments to reconcile net loss to net cash used | |||||||||
in operating activities: | |||||||||
Stock-based compensation | – | 180,658 | 2,165,113 | ||||||
Shares issued for expenses | 127,625 | – | 1,535,630 | ||||||
Gain on write-off of debt | – | – | (5,826 | ) | |||||
Write-off on restricted cash | 80,000 | – | 80,000 | ||||||
Loss on write-off of loan receivable | – | – | 193,922 | ||||||
Changes in operating assets and liabilities: | |||||||||
Prepaid expenses and other current assets | 2,064 | – | (454 | ) | |||||
Accrued interest | – | (1,301 | ) | – | |||||
Accounts payable and accrued liabilities | (16,706 | ) | 117,897 | 15,300 | |||||
Due to related parties | 284,470 | 123,468 | 533,975 | ||||||
Net Cash Used in Operating Activities | (125,430 | ) | (71,040 | ) | (595,403 | ) | |||
Investing Activities | |||||||||
Loan receivable | – | – | (193,922 | ) | |||||
Net cash acquired on business acquisition | – | – | 565 | ||||||
Change in restricted cash | – | – | (80,000 | ) | |||||
Purchase of intangible assets | – | – | (25,000 | ) | |||||
Net Cash Used In Investing Activities | – | – | (298,357 | ) | |||||
Financing Activities | |||||||||
Proceeds from issuance of common stock | 125,000 | 30,000 | 454,144 | ||||||
Loans payable | – | 120,915 | 441,024 | ||||||
Net Cash Provided By Financing Activities | 125,000 | 150,915 | 895,168 | ||||||
Effect of Exchange Rate Changes on Cash | (3 | ) | 219 | (108 | ) | ||||
Increase (decrease) in Cash and Cash Equivalents | (433 | ) | 80,094 | 1,300 | |||||
Cash and Cash Equivalents, beginning | 1,733 | 4,694 | – | ||||||
Cash and Cash Equivalents, end | 1,300 | 84,788 | 1,300 | ||||||
Supplemental Disclosures | |||||||||
Cash paid for taxes | – | – | – | ||||||
Cash paid for interest | – | – | – | ||||||
Non-Cash Financing and Investing Activities | |||||||||
Common stock issued for intangible asset | 3,000,000 | – | 3,000,204 | ||||||
Stock subscription receivable | (60,500 | ) | 60,500 | – | |||||
Common stock issued for stock payable | 161,550 | – | – |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Energy Quest Inc.
(A Development Stage company)
Notes to the Consolidated Financial Statement
1. | Basis of Presentation | |
The accompanying unaudited interim financial statements of Energy Quest, Inc. (“Energy Quest”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Energy Quest’s Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2007 as reported in the Form 10-K have been omitted. | ||
2. | Going Concern | |
These financial statements have been prepared on the assumption that the company is a going concern, meaning it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations. Different bases of measurement may be appropriate when a company is not expected to continue operations for the foreseeable future. The company’s continuation as a going concern is dependent upon its ability to attain profitable operations and generate funds there-from, and/or raises equity capital or borrowings sufficient to meet current and future obligations. Management plans to raise equity financings over the next twelve months to finance operations. There is no guarantee that the company will be able to complete any of these objectives. The company has incurred losses from operations since inception and at September 30, 2008, has a working capital deficiency and an accumulated deficit that creates substantial doubt about the company’s ability to continue as a going concern. | ||
3. | Related Party Transactions | |
a. | As at September 30, 2008, $20,012 (December 31, 2007 - $21,171) is owed to a company with a common director. This amount is unsecured, non-interest bearing and has no terms of repayment. | |
b. | As at September 30, 2008, $86,903 (December 31, 2007 - $50,705) is owed to a related party consultant for expenses paid on behalf of the company. | |
c. | During the nine-month period ended September 30, 2008, the company recorded $112,500 (2007 - $75,851) for management services provided by the President of the company. At September 30, 2008, $184,781 (December 31, 2007 - $57,480) is included in due to related parties. | |
d. | During the nine-month period ended September 30, 2008, the company recorded $65,000 (2007 - $57,788) for management services provided by the former Treasurer of the company. At September 30, 2008, $155,288 (December 31, 2007- $57,788) is included in due to related parties. | |
e. | During the nine-month period ended September 30, 2008, the company recorded $85,832 (2007 - $Nil) for management services provided by the CFO of the company. At September 30, 2008, $85,832 (December 31, 2007 - $Nil) is included in due to related parties. | |
4. | Shareholder Advances | |
As at September 30, 2008, $289,315 (December 31, 2007 – $289,934) is owed to shareholders. This amount is unsecured, non-interest bearing and due on demand. | ||
5. | Stock Compensation Plans | |
On January 22, 2008, the company adopted the 2008 Stock Compensation Plan (the “Stock Plan”) under which the company is authorized to issue up to 1,000,000 shares of common stock of the company to employees, executives and consultants. No options were issued under this plan for the nine months ended September 30, 2008. | ||
On January 22, 2008, the company adopted the 2008 Non-Qualified Stock Option Plan (the “Option Plan”) under which the company is authorized to issue up to 1,000,000 options to employees, executives and consultants to purchase shares of common stock of the company. No options were issued under this plan for the nine months ended September 30, 2008. |
F-4
Energy Quest Inc.
(A Development Stage company)
Notes to the Consolidated Financial Statement
6. | Commitments | |
a. | On September 19, 2008, the company entered into an agreement with Access Energy Technologies (“Access”) for the provision of assistance and advice to the company on acquiring contracts in Korea. The agreement is for a period of three years and can be renewed annually thereafter, unless terminated by either party by written notice. Pursuant to the agreement, the company will pay the cost of marketing or any other costs incurred by Access with prior approval of the company. | |
b. | On July 24, 2007, the company entered into an agreement with I-Coda Group for the manufacture of units using the company’s gasification technology for a one year term. The agreement is to be renewed annually unless terminated by either party on two months notice. Pursuant to the agreement, I-Coda has agreed to manufacture and package gasification units, for which the company will pay the cost of manufacturing the units plus 15% and all taxes. The company paid and charged to research and development the 1st annual bill of $36,000 by issuance of 100,000 shares of common stock at fair value of $0.36 per share on August 29, 2008. | |
7. | Common Stock | |
a. | On April 26, 2007, the company issued 57,500 shares of common stock in consideration for a promissory note (stock subscription receivable) in the amount of $60,500. On July 1, 2008, the company issued 50,000 common shares of the company and signed a consulting agreement with the issuer of the promissory note to receive consulting services in lieu of cash. Upon the cancellation of the promissory note, the company adjusted its common stock, additional paid in capital and stock subscriptions receivable by $60,500. The fair value of these shares for services totalled approximately $245,000; for the nine months ended September 30, 2008, approximately $64,000 was charged to consulting services and at September 30, 2008, approximately $181,000 was recorded as prepaid expenses. | |
b. | On April 30, 2008, the company issued 107,700 shares of common stock with warrants attached, pursuant to a private placement. The company received $1.50 per share of common stock for total proceeds of $161,550. The fair value of the warrants was approximately $95,000. Each warrant has an exercise price of $2.00 and will expire in one year from the date of issuance of the warrant certificate. The company evaluated the terms of the attached warrants and concluded that the terms did not result in derivative accounting. | |
c. | On April 30, 2008, the company issued 115,000 shares of common stock pursuant to a private placement. The company received $1.00 per share of common stock for total proceeds of $115,000. | |
d. | On May 5, 2008, the company issued 2,000,000 shares at $1.50 per share, the fair value of the stock on the date the agreement was consummated, of unregistered restricted common stock for a one time payment for the purchase of two patents acquired under a purchase/assignment agreement entered into in March 2008. At September 30, 2007, the total cost of $3,000,000 is recorded as an intangible asset. | |
e. | On June 3, 2008, the company issued 25,000 shares of common with a fair value of $31,250 for services received. | |
f. | On June 11, 2008, the company issued 10,000 shares of common stock pursuant to a private placement. The company received $1.00 per share of common stock for total proceeds of $10,000. | |
g. | On August 29, 2008, the company issued 100,000 shares of common stock with a fair value of $36,000 for services received. (See Note 6(b)). |
F-5
Energy Quest Inc.
(A Development Stage company)
Notes to the Consolidated Financial Statement
8. | Warrants |
The company issued 107,700 warrants during the nine month period ended September 30, 2008. The fair value of the warrants issued was estimated at the date of issue using the Black-Scholes option pricing model and the weighted average fair value of the warrants issued during the period ended September 30, 2008 was $0.88 (2007 - $Nil). The company recorded the fair value of $94,597 (2007 - $Nil) as additional paid-in capital. | |
The weighted average assumptions used are as follows: |
September 30, 2008 | September 30, 2007 | ||
Expected dividend yield | 0% | N/A | |
Risk-free interest rate | 2.10% | N/A | |
Expected volatility | 227% | N/A | |
Expected option life (in years) | 1.00 | N/A |
Option pricing models require the input of highly subjective assumptions including the expected price volatility. The subjective input assumptions can materially affect the fair value estimate.
A summary of the changes in the company’s share purchase warrants is presented below:
September 30, 2008 | December 31, 2007 | ||||||||||||
Weighted | Weighted | ||||||||||||
Average | Average | ||||||||||||
Exercise | Exercise | ||||||||||||
Number | Price | Number | Price | ||||||||||
Balance, beginning of year | – | – | – | – | |||||||||
Issued | 107,700 | $ | 2.00 | – | – | ||||||||
Exercised | – | – | – | – | |||||||||
Forfeited / Expired | – | – | – | – | |||||||||
Balance, end of period | 107,700 | $ | 2.00 | – | – |
The following share purchase warrants are outstanding:
Exercise | September 30, | ||
Expiry Date | Price | 2008 | |
April 28, 2009 | $ 2.00 | 107,700 | |
107,700 |
9. | Subsequent Event |
On October 15, 2008, the company entered into an agreement with CO.F.A.M.M. (“COFAMM”) for the provision of assistance and advice to the company on acquiring contracts in Italy, Romani, Greece, Morocco, Middle East and Hungary. The agreement is for a period of three years and can be renewed annually thereafter, unless terminated by either party by written notice. Pursuant to the agreement, the company will pay the cost of marketing or any other costs incurred by COFAMM with prior approval of the company. |
F-6
ITEM 2. Management Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor Statement
This report on Form 10-Q contains certain forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.
These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements. The following discusses our financial condition and results of operations based upon our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States. It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein.
The following discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q. The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.
Overview
We are engaged in the development and production of hydrogen-enriched alternative fuels. We plan to employ gasification technologies and catalytic conversion processes to produce clean fuels. We design, build, lease and in some cases operate the gasification technologies with broad potential application within the energy field. Our various technologies allow for the use of steam for reformation of coal and other carbonaceous feedstocks, conversion of waste solid fuel sources into gaseous form and allow for incineration of waste in an environmentally friendly manner.
We have one wholly-owned subsidiary, Syngas Energy Corp., and its principal business involves an integrated gasification production system technology that combines modern gasification with turbine technologies to produce synthetic gas, hydrogen or electricity.
2
Liquidity and Capital Resources
As of September 30, 2008, we had cash of $1,300 and a working capital deficiency of $705,378. As at September 30, 2008 our accumulated deficit was $5,190,001. For the three months ended September 30, 2008 our net loss was $215,736 compared to $214,898 during the same period in 2007. This decrease was due mostly to lower consulting and management fees. For the nine months ended September 30, 2008 our net loss was $602,883 compared to $491,762 for the same period in 2007. The increase in net loss between these periods was mostly due to an increase in research and development and a loss on restricted cash.
Our loss was funded by proceeds from shareholder loans and sales of our securities. During the nine months ended September 30, 2008, we raised $286,550 through financing activities and our cash position decreased by $433.
We used net cash of $125,430 in operating activities for the nine months ended September 30, 2008 compared to net cash of $71,040 in operating activities for the same period in 2007. We did not use any money in investing activities for the nine months ended September 30, 2008 nor did we use any money for investing activities during the same period in 2007. The effect of exchange rates on cash was a decrease in cash of $3 for the nine months ended September 30, 2008 compared to an increase of $219 during nine months ended September 30, 2007.
During the nine months ended September 30, 2008 our monthly cash requirement was approximately $13,967, compared to approximately $7,893 for the same period in 2007. We expect to require a total of approximately $3,780,000 to fully carry out our business plan over the next twelve months beginning October 2008 as set out in this table:
Description | Estimated Expense |
Marketing our gasification technologies | $200,000 |
Continued improvement of our PyStR™ and other technologies | $1,200,000 |
Further commercializing our gasification technologies | $400,000 |
Manufacturing of Modular Bio-energy units | $400,000 |
Payment of accounts payable and accrued liabilities | $580,000 |
General and administrative expenses | $500,000 |
Professional fees | $100,000 |
Consulting fees | $200,000 |
Investor relations expenses | $100,000 |
Patent application costs (including legal fees) | $100,000 |
Total | $3,780,000 |
3
We intend to meet our cash requirements for the next 12 months through external sources: a combination of debt financing and equity financing through private placements. We are currently not in good short-term financial standing. We anticipate that we may not generate any revenues in the near future and we will not have enough positive internal operating cash flow until we can generate substantial revenues, which may take the next few years to fully realize. There is no assurance we will achieve profitable operations. We have historically financed our operations primarily by cash flows generated from the sale of our equity securities and through cash infusions from officers and outside investors in exchange for debt and/or common stock.
On September 4, 2007, we entered into a 0% convertible debenture due September 4, 2012 with Jain Vasant whereby Mr. Vasant agreed to loan us $120,000,000. At any time after September 4, 2012 and until September 4, 2017 Mr. Vasant has the right to convert all, or a portion of, the principal amount of the convertible debenture into our common shares at a conversion price of $50.00 per share. Pursuant to the convertible debenture the funds will be transferred to us within 10 business days after the convertible debenture documents are successfully posted on Euroclear. On October 27, 2008 we received a letter from Mr. Vasant providing us with an update as to the disbursement of funds. Mr. Vasant has informed us that we will receive the first tranche of the debenture funds, $40 million, between December 12 to 20th, 2008. We will receive the second tranche, $40 million on January 15, 2009 and the final tranche of $40 million on February 15, 2009. As of November 14, 2008, the transaction has not yet closed and we have not yet received any funds.
Once the $120,000,000 debenture transaction is closed, we will have enough capital to meet our cash requirements over the next twelve months. However, we cannot guarantee that the agreement will be successfully closed on a timely basis. If the agreement fails to close, we intend to raise the balance of our cash requirements (approximately $3,780,000) from private placements, loans, or possibly a registered public offering (either self-underwritten or through a broker-dealer) within the next few months. At this time we do not have any commitments from any broker-dealer to provide us with financing. There is no guarantee that we will be successful in raising any capital. There is no assurance that we will be able to obtain such additional funds on favorable terms, if at all. If we fail in raising capital, our business may fail and we may curtail or cease our operations.
Results of Operations for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 and from inception to September 30, 2008.
4
Limited Revenues
Since our inception on December 14, 2004 to September 30, 2008, we have earned limited revenue of $5,164. As of September 30, 2008, we have an accumulated deficit of $5,190,001 and we did not earn any revenues during the three months ending on September 30, 2008. At this time, our ability to generate any significant revenues continues to be uncertain. Our financial statements contain an additional explanatory paragraph in Note 2, which identifies issues that raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Net Loss
We incurred a net loss of $215,736 for the three months ended September 30, 2008, compared to a net loss of $214,898 for the same period in 2007. This decrease in net loss is mostly due to lower consulting and management fees. From inception on December 14, 2004 to September 30, 2008, we have incurred a net loss of $5,113,063. Our basic and diluted loss per share was $0.04 for the three months ended September 30, 2008, and $0.10 for the same period in 2007.
Expenses
Our total operating expenses decreased from $215,660 to $213,446 for the three months ended September 30, 2008 compared to the same period in 2007. This decrease in expenses is mostly due to lower consulting and management fees. Since our inception on December 14, 2004 to September 30, 2008, we have incurred total operating expenses of $4,843,932.
Our consulting and management fees decreased $54,362 from $191,863 to $137,501 for the three months ended September 30, 2008 compared to the same period in 2007. This decrease was largely due to lower payments made to our management. Since our inception on December 14, 2004 until September 30, 2008 we have spent $4,110,368 on consulting and management fees.
Our general and administrative expenses consist of bank charges, travel, meals and entertainment, office maintenance, communication expenses (internet, fax, and telephone), courier, postage costs, office supplies. Our general and administrative expenses decreased $4,154 from $15,002 to $10,848 for the three months ended September 30, 2008 compared to the same period in 2007. Since our inception on December 14, 2004 until September 30, 2008 we have spent $317,895 on general and administrative expenses.
We incurred $36,189 in research and development expenses for the three months ended September 30, 2008 and we did not spend any money on research and development during the three months ended September 30, 2007. Since our inception on December 14, 2004 until September 30, 2008 we have spent $46,111 on research and development. Going forward, we anticipate that we will spend approximately $1,600,000 on research and development during the next 12 months.
5
Our professional fees, consisting primarily of legal, accounting and auditing fees, increased by $20,113 to $28,908 for the three months ended September 30, 2008 from $8,795 for the same period in 2007, mainly due to increased legal and auditing services provided in the three month periods ended September 30, 2008.
Results of Operations for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.
No Revenues
We did not earn any revenues during the nine months ending on September 30, 2008 or during the same period in 2007. At this time, our ability to generate any significant revenues continues to be uncertain.
Net Loss
We incurred a net loss of $602,883 for the nine months ended September 30, 2008, compared to a net loss of $491,762 for the same period in 2007. This increase in net loss is mostly due to an increase in research and development as well as a loss on restricted cash. Our basic and diluted loss per share was $0.16 for the nine months ended September 30, 2008, and $0.24 for the same period in 2007.
Expenses
Our total operating expenses increased to $515,342 from $493,084 for the nine months ended September 30, 2008 compared to the same period in 2007. This increase in expenses is mostly due to higher research and development expenses.
Our consulting and management fees decreased $3,890 from $330,722 to $326,832 for the nine months ended September 30, 2008 compared to the same period in 2007. This increase was largely due to lower payments made to our management.
Our general and administrative expenses consist of bank charges, travel, meals and entertainment, office maintenance, communication expenses (internet, fax, and telephone), courier, postage costs, office supplies. Our general and administrative expenses decreased $1,474 from $40,148 to $38,674 for the nine months ended September 30, 2008 compared to the same period in 2007.
We incurred $46,111 in research and development expenses for the nine months ended September 30, 2008 and we did not spend any money on research and development during the nine months ended September 30, 2007.
Our professional fees, consisting primarily of legal, accounting and auditing fees, decreased by $18,489 to $103,725 for the nine months ended September 30, 2008 from $122,214 for the same period in 2007, mainly due to less legal and auditing services provided in the nine month period ended September 30, 2008.
6
Inflation
The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.
Off-Balance Sheet Arrangements
As of September 30, 2008, we had no off-balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risks.
Not applicable.
ITEM 4. Control and Procedures
Not applicable
ITEM 4T. Control and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), we carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based upon that evaluation, the CEO and CFO has concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic filings with the SEC, subject to the various limitations on effectiveness set forth below under the heading, “Limitations On The Effectiveness Of Internal Controls,” such that the information relating to us, required to be disclosed in Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
7
Limitations On The Effectiveness Of Internal Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, and/or the degree of compliance with the policies or procedures may deteriorate.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings.
As of November 14, 2008 there are no any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we or any of our subsidiaries are a party or of which any of our properties is the subject. Also, our management is not aware of any legal proceedings contemplated by any governmental authority against us.
ITEM 2. Unregistered Sales of Equity Securities.
For the period ended September 30, 2008, we have issued the following securities pursuant to exemptions from registration requirements:
- On August 29, 2008, we issued 100,000 shares of common stock at the fair market value of $0.36 per share. The shares were issued as payment for our first annual bill, pursuant to an agreement with I-Coda Group for the manufacture of units using our gasification technology. These shares were issued in reliance upon Regulation S of the Securities Act of 1933.
Our reliance upon the exemption under of Regulation S of the Securities Act was based on the fact that the sale of the securities was completed in an "offshore transaction", as defined in Rule 902(h) of Regulation S. We did not engage in any directed selling efforts, as defined in Regulation S, in the US in connection with the sale of the securities.
8
Each investor was not a US person, as defined in Regulation S, and was not acquiring the securities for the account or benefit of a US person.
Additionally, the investors were given adequate access to sufficient information about us to make an informed investment decision. None of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
9
ITEM 6. Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
ENERGY QUEST INC. | |
(REGISTRANT) | |
Date: November 14, 2008 | /s/Wilf Ouellette |
Wilf Ouellette | |
President, Chief Executive Officer, | |
Director | |
(Authorized Officer for Registrant) | |
Date: November 14, 2008 | /s/Vasant K, Jain |
Vasant K, Jain | |
Chief Financial Officer, Director, | |
Principal Accounting Officer |
10