UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ]ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF TH E SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-28305
ENERGY QUEST INC.
(Exact name of registrant as specified in its charter)
| Nevada | 91-1880015 |
| (State or Other Jurisdiction of Incorporation of Organization) | (I.R.S. Employer Identification No.) |
| 850 South Boulder Hwy., Suite 169 Henderson, Nevada 89015-7564 | (702) 568 4131 |
| (Address of principal executive offices) (ZIP Code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:Common Stock
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No[ x ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No[ x ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant as required 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [ ]No[ x ]
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 Act) Yes [ ] No[ x ]
As of June 30, 2008, which was the last business day of the registrant’s most recent second fiscal quarter, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was$4,971,433.02based on the closing sale price of $1.03 per share on that date.
Number of common shares outstanding at April 10, 2009:9,555,270
TABLE OF CONTENTS
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PART I
Item 1. Description of Business
Forward-looking Statements
This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable laws, including the securities laws of the United States, we do not intend to update any of the forward-looking statements so as to conform these statements to actual results.
As used in this annual report, the terms "we", "us", "our", “the Company”, and "Mantra" mean Mantra Venture Group Ltd., unless otherwise indicated.
All dollar amounts refer to US dollars unless otherwise indicated.
Overview
We were incorporated as a Nevada company on June 20, 1997. We changed our corporate name to Energy Quest Inc. on May 31, 2007. We are a development stage company in the development and production of hydrogen-enriched alternative fuels in an environmentally responsible manner. We plan to employ gasification technologies and catalytic conversion processes to produce clean fuels. We design, build, lease and in some cases operate the following gasification technologies with broad potential application within the energy field:
Our principal offices are located at 850 South Boulder Highway, Suite 169, Henderson, Nevada. Our fiscal year end is December 31. 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. Syngas Energy was incorporated as a British Columbia company on December 14, 2004.
Development
On July 1, 2008, Steve Eilers, a Director and our Secretary and Treasurer, submitted his resignation notice to us, effective immediately. Also, on July 1, 2008, we appointed Mr. Ron Foster as a Director and to serve as our Secretary and Treasurer.
On April 21, 2008, we appointed Mr. Peter J. Stephens as a director and to serve on the Board of Directors of the Company.
In March 2008 we entered into a non binding letter of intent with Etanol del Pacifico Sur S.A. (EPSSA). The letter sets forth the basic terms and conditions under which we expect to enter into a joint venture with EPSSA for the construction of an 82,000 liter per day waste biomass gasification synthetic diesel plant in Las Cabras, Chile. Currently, we are still in negotiations with EPSSA for a definitive and binding agreement.
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In March 2008 our Board of Directors approved the construction of a portable PyStRTMHydrogen unit for demonstration to the petroleum industry in Alberta.
On February 8, 2008 we engaged Malone & Bailey PC as our new independent registered public accounting firm, because Morgan & Company, Chartered Accountants, submitted its resignation and ceased services as the independent registered public accounting firm for us.
On February 5, 2008 Gilles H. Imbeault, a member of our Board of Directors, notified us of his decision to resign his positions as a director and our Vice President of Finance and concurrently, we accepted the resignation letter of Gilles H. Imbeault as a director and the Vice President of Finance.
On January 2, 2008 we appointed Mr. Jain as our Chief Financial Officer and director.
On September 4, 2007, we entered into a 0% convertible debenture due September 4, 2012 with Vasant Jain whereby Mr. Jain agreed to loan $120,000,000 to us. 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. As of April 2, 2009 all approvals for transference of funds have been completed and the closing date is anticipated to occur shortly.
Our Products and Services
Pyrolysis Steam Reformer (“PyStR™”)
In 2005, through our wholly owned subsidiary Syngas Energy, we acquired world-wide exclusive licenses to develop, produce and market PyStR™, a low cost proprietary hydrogen production technology. On June 7, 2007, we completed carbon dioxide sequestration technology, a component of our PyStR™ technology. In March 2008 our Board of Directors approved the construction of a portable PyStRTMHydrogen unit for demonstration to the petroleum industry in Alberta.
We obtained the exclusive rights to a new, innovative hydrogen generation technology referred to as the PyStR™ (PyroliticSteamReforming) process. This process can directly produce high purity hydrogen from biomass and other carbonaceous feed-stocks such as oil sands, coal and petroleum coke. The PyStR™ technology involves the simultaneous pyrolysis and steam reforming of virtually any carbon-based material. Its products include separate high purity streams of hydrogen, carbon dioxide and nitrogen produced in a relatively low cost stainless steel or refractory lined vessel.
The PyStR™ technology is an inexpensive and simple method of reforming hydrocarbons (carbonaceous materials) and calcining lime to chemically separate hydrogen and carbon dioxide into two separate streams. It converts common cheap ingredients (coal or wood, air, water) into near pure streams of hydrogen (H2), carbon dioxide (CO2) and nitrogen (N2). It produces no flue gas.
We have agreed to begin construction on a demonstration sized installation of the PyStR™ technology no later than February 14, 2008. We have met this obligation and we are in the process of constructing a portable PyStRTMHydrogen unit for demonstration. We plan to complete it at the end of 2008. We are also obligated to sell at least one commercial installation using the PyStR™ technology by the end of 2008.
Carbon dioxide sequestration technology
On June 7, 2007 we completed carbon dioxide sequestration technology, a component of the PyStR™ technology. Traditional gasification technology lets carbon dioxide escape into the air, but the PyStR™ technology captures carbon dioxide that is commonly accepted to be responsible for global warming. This captured carbon dioxide emission reduction creates an opportunity for us to pursue carbon credits by capturing produced carbon dioxide gases from our gasification process and injecting carbon dioxide into oil-bearing formations for geologic storage and enhanced oil recovery and is called carbon neutral.
The PyStR™ hydrogen production process is used in wells that have already passed through primary production, where natural pressure in the well pushes out the oil, and in wells that have passed secondary production using water or natural gas flooding. In primary and secondary production, well pressure eventually falls to levels where output is so thin it's not profitable. Use of carbon dioxide allows an opportunity to take a third run at the reservoir to tap a potentially large amount of remaining oil. The biggest problem has been a reliable supply of carbon dioxide. We,
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through our PyStR™ hydrogen production process, can capture carbon dioxide that is produced either as a primary or bi-product.
Butanol
We plan to use our PyStR™ and catalytic process to produce butanol from carbon based feedstocks. Butanol is a 4-carbon alcohol that is presently made through a fermentation process in the same manner as ethanol using mostly grains and corn.
Advantages of butanol are as follows:
M2 Fluidized Bed Gas Generator (Gasifier) (“M2”)
In Fiscal 2005 we acquired Syngas Energy along with all rights and title to its advanced gasification process. Subsequently, we completed a prototype of the gasification technology. The M2 is an air blown fluid bed gasifier, which converts waste solid fuel sources into a gaseous form. The M2 gas produced can be used in most boilers, kilns and furnaces to offset the use of natural gas.
The M2 fluidized bed gasification process offers substantial benefits compared to simple burning processes, and other forms of gasification. The gasifier has been successfully used to convert biomass wastes (i.e. wood wastes, bark, and agricultural wastes) into a clean fuel gas that can be used to fire various types of industrial equipment.
The overall thermal efficiency of fluid bed gasifiers is typically in the range of 75% to over 90%, depending on the ash and moisture content of the fuel. Unlike some burners (such as suspension burners) or old style fixed bed gasifiers, the fluid bed gasifiers can operate satisfactorily with highly variable feed materials ranging from coal, shredded wood and bark to sawdust fines, or lump wood with particle sizes of less than 1 1/2 - 2 inches. In contrast, other types of gasifiers or burners require either dry pellets, nuggets of clean wood, or uniformly dry sander dust. Thus the various types of fuels generally available around lumber mills can be used in fluid bed gasifiers with good results. The fluid bed gasifier does not have moving grates or other moving parts in the high temperature regions of the bed. Where there are moving parts, heavy duty industrial components proven in lumber and pulp mill operations are used. Reliability is thus high.
The size of energy conversion systems is generally dictated by their air flow. Because fluid bed gasifiers use comparatively small amounts of air, the equipment is comparatively small and compact. This permits systems to be completely shop fabricated and assembled on skids thereby reducing purchase price and installed costs. Because the process produces a fuel gas rather than just quantities of heat, it can be easily applied to a variety of industrial processes including boilers, dry kilns, veneer dryers, or several pieces of equipment at once. Operation with wood/bark fuels results in very low emissions, including low NOx, carbon monoxide, and particulate emissions. No "tail end" exhaust cleanup devices are required.
Modular Advanced Controlled Air Incinerator
We have developed a Modular, Controlled Air, Factory Built and Packaged incinerator. The unit is a Starved Ignition Chamber, Excess Air Combustion Chamber. These are not Pyrolytic Units since air is introduced into the ignition chamber. All units are designed and rated on a Burning Rate Basis, meaning they will burn waste as fast as it is charged.
The integrated design of the ignition chamber, flame port and combustion chamber allows proper and constant gas velocities to insure proper air/fuel (waste) ratios for optimum combustion efficiency. The units are ideally suited for medical waste and moderately prepared municipal waste disposal.
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Commercialization
We plan to focus on developing and marketing our current technologies while researching new methods of clean energy production. We intend to subcontract production to outside sources that have a proven track record of efficiency, reliability and competitive quality and pricing. Our distribution plan is to enter into technology licensing arrangements with energy producers and energy production technology distributors, to install our products and use them to create fuels produced with our technology, as well as to sell our technologies to other companies within exclusive geographic territories and to set up joint ventures with other companies.
We are focusing our efforts in getting the PyStR™ and M2 technologies to market. We completed prototypes of the PyStR™ hydrogen production process and the M2 fluidized bed gasification process. In April 2007 we began to commercialize the PyStR™ and M2 technologies.
Licensing Agreements with Re-Gen International, Beaufort Energy and Poly-Pacific International
We entered into a licensing agreement dated April 9, 2007, with Re-Gen International Corporation. Under the terms of the agreement, we agreed to grant licensing rights for our gasification technology in the United States of America. The term of the agreement is 10 years and is renewable at expiration for a further period of 10 years. Re-Gen International must pay us a royalty of 12% of defined profit, to be calculated each month, or a minimum of $30,000 every three months for the first year, whichever is greater. After the first year, the minimum will be adjusted to $60,000 every three months. We have not received any amounts and have not recognized any revenue under this agreement to date. On, October 31, 2008 this agreement was mutually canceled by both parties
We entered into a licensing agreement dated April 24, 2007, with Beaufort Energy Solutions, Inc. Under the terms of the agreement, we agreed to grant licensing rights for our gasification technology in the Province of British Columbia, Canada. The term of the agreement is 20 years and is renewable at expiration for a further period of 10 years. Beaufort Energy must pay us a royalty of 10% of defined net income, to be paid within 30 days after the end of each quarterly accounting period.
On October 24, 2007 we entered into a licensing agreement with Poly-Pacific International Inc. According to the agreement, we agreed to grant licensing rights for our gasification technology in the territory of Ontario, Canada. The term of the agreement is 10 years. Poly-Pacific International must pay us a royalty of 10% of defined profit, to be calculated each month, approximately $5,000 upon signing the agreement (paid) and a further approximately $5,000 upon the completion of a working commercial demo unit.
Manufacturing Agreement with I-Coda
On July 24, 2007 we entered into a manufacturing agreement with I-Coda Group, of Edmonton, Alberta, for the manufacture of units using our PyStR™ and M2 gasification technologies. Pursuant to the agreement, I-Coda has agreed to manufacture and package both the PyStR™ and M2 gasification units, for which we will pay the cost of manufacturing the units plus 15% and all taxes. The parties have agreed to jointly develop commercial units using the PyStR™ technology for use in emerging markets around the world. The agreement prohibits I-Coda from manufacturing products that will compete with the gasification units and allows us to retain all intellectual property relating to the design of the units. Any intellectual property developed jointly by the parties pursuant to the agreement will be our exclusive property. The term of the agreement is one year and will be renewed annually unless terminated by either party on two months notice.
Modular Bio-energy Units
On September 13, 2007 we completed the research and development of our small Modular Bio-energy units: Model FS324 and M2-3 Gasifier. By using our PyStR™ and M2 gasification technologies, these units can convert waste biomass or coal to electricity and heat.
Our small Modular Bio-energy units will be deployed in remote areas of Canada, United States, South Africa and India. Our small Modular Bio-energy units will give remote areas an alternative energy source. These units have state of the art controls and are user friendly.
Potential Deals
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In November 2007 we entered into a non binding letter of intent with Vimala Enterprise of Mumbai, India for the construction of two electrical power generation plants in India. One of the plants is a 500MW clean coal power project (Coal gasification) 1st phase and a second 700 MW 2nd phase for a total of 1200 MW for the two plants. We will be providing proven gasification technologies, procurement, commissioning and management of the project. Currently, we are still in negotiations with Vimala Enterprise of Mumbai, India for a definitive and binding agreement.
In December 2007 we entered into a non binding letter of intent with Willow Industries Inc. The letter sets forth the basic terms and conditions under which we expect to enter into a joint venture with Willow Industries for the construction of a 6 mega watt electrical power generation and gasification plant in the Edmonton, Alberta area. Currently, we are still in negotiations with Willow Industries for a definitive and binding agreement.
In March 2008 we entered into a non binding letter of intent with Etanol del Pacifico Sur S.A. (EPSSA). The letter sets forth the basic terms and conditions under which we expect to enter into a joint venture with EPSSA for the construction of an 82,000 liter per day waste biomass gasification synthetic diesel plant in Las Cabras, Chile. Currently, we are still in negotiations with EPSSA for a definitive and binding agreement.
The Gasification and Energy Production Industry
The energy production industry is comprised of major industrial players with large-scale production facilities, and low cost per energy unit. Gasification technology is a niche market within the larger energy production industry. Gasification is a mature, moderate growth business, with reasonable margins. We are concentrating our business focus on the production and distribution of low-cost ½ to 10 megawatt waste to electrical power units or liquid fuels. This is a niche market which is not presently being aggressively pursued by the major industrial players.
Marketing
We are a new company and we have little market presence at this time. So far, we have only three customers and partners, Poly-Pacific International, I-Coda, Northerrn Alberta Oil Ltd. and Beaufort Energy. We intend to supplement this with attendance at several trade shows in North America each year and with advertisements in magazines.
We plan to market our gasification unit by means of demonstrating a portable mobile gasification unit which will showcase the gasifier to generating power from a variety of feedstock such as wood waste, bio-mass, coal, petroleum coke, lignite and in addition a second trailer featuring the PyStR™ process combined with the gasifier generating hydrogen and oxygen from any available carbon source such as coal, wood waste, lignite and petroleum coke.
We plan on hiring consultants to contact companies with waste facilities, such as lumber waste and municipal waste. We believe that our PyStR™ technology is suitable for companies in the oil and gas business and in the ammonia business. We plan on targeting such companies through sales consultants that we will hire. Our marketing plan includes attending several oil and gas, and alternative energy trade shows during the next year. We have engaged several consultants to market our technologies. We also plan to attend several trade conferences in this year.
Competition
Over the last century, several different methods of gasification have been developed. The most prominent gasification systems used today are fluidized bed gasification systems similar to ours. There are competitors around the world who convert biomass to energy, primarily electricity or thermal, co-generating the energy to reduce waste costs, and lower fuel costs. The table below lists some of our major competitors and the advantage we see in our technology compared to the competition.
| Energy Products of Idaho, USA General Electric, - we are less expensive by half | ||
| USA | ||
| General Electric, USA | - General Electric holds very large complex systems only | |
| FERCO (Battelle), U.S.A | - | Unlike FERCO, we offer our incinerator units for sale or lease. |
| - | We also enter into joint venture agreements for the use of our technology | |
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| Lurgi, Germany | - | Unlike Lurgi’s, our units have a small footprint and can be skid |
| - | mounted and portable | |
| Foster-Wheeler (Outokumpu), Finland | - Our units are adaptable to downstream changing requirements | |
Our competition includes small and mid-size independent contractors as well as major energy services companies with international operations. We believe that the principal competitive factors in the market areas that we serve are price, product and service quality, efficiency and availability of equipment and technical proficiency.
We differentiate ourselves from our major competition by our unique equipment. Our target market is independent energy production companies. Based on the experience of our directors, these independents typically are relationship driven and make decisions at the local level. We believe this business model will enable us to grow our business. However, we are a minor participant in the industry and compete in the energy production industry with many other companies having far greater financial, technical and other resources.
Research and Development
On September 13, 2007 we completed the research and development of our small Modular Bio-energy units: Model FS324 and M2-3 Gasifier. Since our inception, we have spent approximately $300,000 on research and development.
We anticipate that we will spend $2,200,000 on research and development over the next twelve months to upgrade our PyStR™ and Fluid Bed gasification technology, including upgrading a prototype. If we are successful in acquiring other technologies, we may increase our research and development budget.
Intellectual Property
On December 24, 2004, we purchased an integrated gasification production system from Wilfred J. Ouellette, our President, CEO and director. The technology combines modern gasification with gas turbine technologies to produce synthetic gas or electricity. By December 31, 2007, we have completed an initial payment of $25,000 and issued the 10,000,000 (500,000 post reverse stock-split) common shares to 975110 Alberta Ltd. in consideration for the transfer of 100% of the interest in all of the enhanced gasification intellectual property and a small gasification unit.
We plan to file patents on several technologies, including the PyStR™ process and the M2 Fluidized Bed Gas Generator over next 12 months. We presently have patents on our diluent recovery and gas mixing technology properties.
Legislation and Government Regulation
Energy production and distribution is a highly regulated industry in North America and worldwide. Each of the provinces in Canada, and each US State, has regulatory provisions relating to the production of electricity and the distribution of electricity over the transmission grid. Electricity production and distribution is subject to control by differing regulatory agencies in each jurisdiction that may refuse to allow production and sale of electricity into the grid under their auspices, or periodically assign allowable rates of production. Changes in permits and allowable rates per energy unit may have a substantial effect on our operations and the operations of our customers, which in turn could affect the demand for our products and services and have a substantial effect on our operations. In addition to the forgoing, in the future our Canadian, US and global operations may be affected by political developments by Federal, provincial, state and local laws and regulations including but not limited to restrictions on emissions of greenhouse gases, price controls, tax increases, expropriation of property, modification or cancellation of contract rights, and environmental controls. Furthermore, operations may also be affected by energy trading regulations, import fees and restrictions.
As well, liquid fuels produced by our technologies are highly flammable and normally regulated under hazardous materials regulations in North America and worldwide. We are also subject to safety policies of jurisdictional-specific Workers Compensation Boards and like agencies regulating the health and safety of workers. Since our business strategy is to license our technology to energy producers, who will then face the legislative burden, we do not anticipate any significant compliance expense on our own behalf. However, the potential compliance expense for our customers may affect our operations.
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Environmental Law Compliance
Since our business plan involves offering energy production equipment for license and lease to energy producers or users, we do not expect that we will be governed by the comprehensive federal, provincial, state and local laws that regulate discharge of materials into the environment or otherwise relate to health and safety or the protection of the environment. However, since our customers and partners will be subject to these laws, the effect of the regulatory scheme in various jurisdictions may have a substantial affect on our operations.
Each jurisdiction where we sell our product has an Energy and Utilities Board, or similar independent, quasi-judicial agency of government which regulates the safe, responsible and efficient generation and distribution of electricity and energy products. Since we plan to license our technologies to energy producer partners, we do not anticipate that we will be directly subject to the authority of these regulatory bodies. However, since our customers and partners are subject to these laws, the effect of the regulatory bodies in various jurisdictions may have a substantial affect on our operations.
Employees
As of April 2, 2009, we have three full time employees. In addition to employing Wilfred Ouellette, our President, CEO, and Vasant K. Jain our CFO, we have engaged Ronald Foster as Secretary and Treasurer. We entered into an employment agreement with Mr. Ouellette dated April 17, 2007, for the position of Chief Executive Officer, for a period of 60 months at a base salary of $150,000 per year. On April 17, 2007 we entered into an employment agreement with Steve Eilers, for the position of Secretary and Treasurer, for a period of 60 months at a base salary of $130,000 per year. On June 30, 2008 Mr. Eilers resigned and on July 1, 2008 we engaged Mr. Ronald Foster as Secretary and Treasurer to replace Mr. Eilers for indefinitely period of time for services to be invoiced to the company. On January 3, 2008 we entered into an executive employment agreement with Vasant K. Jain for the position of Chief Financial Officer, for a period of sixty months at a base salary of $125,000 per year. The agreement expires January 20, 2013.
Item 1A. Risk Factors
Not Applicable.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive offices are located at Suite 169, 850 South Boulder Highway, Henderson, Nevada, 89015 -7564.
We also have offices at 6403 75th Street, Edmonton, Alberta T6E 0T3
Item 3. Legal Proceedings
As of April 2, 2009, 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 4. Submission of Matters to a Vote of Security Holders
None.
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
Our common stock is not traded on any exchange. Our common stock is quoted on the OTC Bulletin Board, under the trading symbol “EQST.OB”. The market for our stock is highly volatile. We cannot assure you that there will be a market in the future for our common stock. The OTC Bulletin Board securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC Bulletin Board securities transactions are conducted through a telephone and computer network connecting dealers in stocks. OTC Bulletin Board stocks are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
The following table shows the high and low prices of our common shares on the OTC Bulletin Board for each quarter within the two most recent fiscal years. On May 31, 2007 we effected a reverse stock split in a ratio of one new share for every twenty existing common shares of our outstanding stock. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
| Period | High | Low | ||||
| October 1, 2008 – December 31, 2008 | $ | 0.51 | $ | 0.08 | ||
| July 1, 2008 – September 30, 2008 | $ | 0.90 | $ | 0.70 | ||
| April 1, 2008 – June 30, 2008 | $ | 2.00 | $ | 0.65 | ||
| January 1, 2008 – March 31, 2008 | $ | 2.00 | $ | 0.75 | ||
| October 1, 2007 – December 31, 2007 | $ | 3.00 | $ | 1.04 | ||
| July 1, 2007 – September 30, 2007 | $ | 3.50 | $ | 1.25 | ||
| April 1, 2007 – June 30, 2007 | $ | 7.00 | $ | 2.75 | ||
| January 1, 2007 – March 31, 2007 | $ | 8.40 | $ | 3.00 |
Holders
As of April 2, 2009, there were 669 holders of record of our common stock.
Dividends
For the two most recent fiscal years we have not paid any cash dividends on our common shares and do not expect to declare or pay any cash dividends on our common shares in the foreseeable future. Payment of any dividends will depend upon future earnings, if any, our financial condition, and other factors as deemed relevant by our Board of Directors.
Equity Compensation Plans
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||||||
| Equity compensation plans approved by security holders | N/A | N/A | N/A | ||||||
| Equity compensation plans not approved by security holders | 2,000,000 | 2,000,000 | |||||||
| Total | 2,000,000 | N/A | 2,000,000 |
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According to the 2008 Stock Compensation Plan, we are authorized to issue up to 1,000,000 shares of our common stock to employees, executives and consultants. According to the 2008 Non-Qualified Stock Option Plan, we are authorized to issue up to 1,000,000 stock purchase options to employees, executives and consultants to purchase shares of our common stock. As of December 31, 2008, no securities were issued under two plans.
Recent Sales of Unregistered Securities
From September 30, 2008 to December 31, 2008, we made no sales of unregistered securities:
Item 6. Selected Financial Data
Not applicable.
Item 7. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-K. 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.
Results of Operations
Limited Revenues
Since our inception on December 14, 2004 to December 31, 2008, we had earned limited revenues of $5,164. During the fiscal year ended December 31, 2008 we did not generate any revenues. As of December 31, 2008, we had an accumulated deficit of $5,575,042. At this time, our ability to generate any significant revenues continues to be uncertain. There is 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 net loss of $5,498,106 since December 14, 2004 (date of inception) to December 31, 2008. Our net loss decreased significantly, from $1,709,078 for the fiscal year ended December 31, 2007 to $987,924 for the fiscal year ended December 31, 2008, a decrease of $721,154. For the fiscal year ended December 31, 2008, our net loss per share was $0.21, compared to net loss of $0.78 per share for the same period in 2007.
Expenses
Our total expenses from December 14, 2004 (date of inception) to December 31, 2008 were $5,385,523 and consisted of $4,454,897 in consulting and management fees, $328,535 in general and administrative fees, and $377,903 in professional fees. Total expenses decreased $735,589 or 43% to $979,995 for the fiscal year ended December 31, 2008 from $1,715,584 for the same period in 2007, mostly due to a substantial decrease in our expenses.
Our consulting and management fees decreased $808,798 or 58% to $594,425 for the fiscal year ended December 31, 2008 from $1,403,223 for the same period in 2007 mostly due to a substantial decrease in the amount we paid for consulting fees. During the fiscal year ended December 31, 2008, our consulting fees decreased as a result of using less external consultants. Our consulting and management fees consisted mainly of amounts paid to our senior officers and fees paid to our other consultants.
Our general and administrative expenses decreased by $121,203 or 71% from $170,515 for the fiscal year ended December 31, 2007 to $49,312 for the same period ended December 31, 2008. The decrease in general and administrative expenses was mainly due to the more efficient operation of our day to day operating activities. Our general and administrative expenses consist of office supplies, travel expenses, rent, communication expenses (cellular, internet, fax, telephone), office maintenance, courier and postage costs and office equipment.
Our professional fees decreased by $29,776, to $112,070 for the fiscal year ended December 31, 2008 from $141,846 for the same period in 2007. The 21% decrease in professional fees was mostly due to less legal and
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auditing services provided during the fiscal year just ended as opposed to the fiscal year ended in 2007. Our professional fees consisted primarily of legal, accounting and auditing fees.
Liquidity and Capital Resources
We expect that we only can generate limited revenues over the next twelve months. As of December 31, 2008, our current assets totaled $3,048,620 , which was comprised of $792 in cash and cash equivalents, $0 in prepaid expenses, and $2,927,078 in intangible assets, net of accumulated amortization. As of December 31, 2008 we had a working capital deficit of $615,439.
Our net loss of $5,575,042 from December 14, 2004 (date of inception) to December 31, 2008 was mostly funded by our equity financing. We expect to incur substantial losses over the next two years. During the fiscal year ended December 31, 2008 our cash position slightly decreased by $941, not including our restricted cash assets of $80,000.
During the fiscal year ended December 31, 2008, we received net cash of $168,099 from financing activities compared to $231,901 for the same period in 2007. We used net cash of $168,165 in operating activities compared to $155,854 for the same period in 2007. We used net cash of $nil in investing activities compared to $80,000 for the same period in 2007.
We are currently not in good short-term financial standing. We anticipate that we may only generate any limited 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.
Our corporate strategy for the next 12 months includes the following:
We believe that we need approximately an additional $26,585,000 to meet our capital requirements over the next 12 months (beginning April 2009) for the following estimated expenses:
| 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 | $ | 250,000 | |
| 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 |
12
| Heavy Oil Upgrader Plant (Northern Alberta Oil) | $ | 23,135,000 | |
| Total | $ | 26,585,000 |
We believe that we need approximately $26,585,000 to meet our capital requirements over the next 12 months (beginning April 2009). Of the $26,585,000, we had $792 in cash and cash equivalents as of December 31, 2008. We intend to meet the balance of our cash requirements for the next 12 months from external sources, through a combination of debt financing and equity financing through private placements.
On September 4, 2007, we entered into a 0% convertible debenture due September 4, 2012 with Vasant Jain whereby Mr. Jain agreed to loan us $120,000,000. At any time after September 4, 2012 and until September 4, 2017 Mr. Jain 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. As of April 2, 2009 the agreement had not closed. We anticipate closing the agreement shortly.
Once the agreement 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 successfully be closed on a timely basis. If the agreement fails to be closed, we intend to raise the balance of our cash requirements (approximately $3,449,000) 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.
We are seeking equity financing to provide for the capital required to market and develop our technologies and fully carry out our business plan. We cannot guarantee we will be successful in our business operations. A critical component of our operating plan impacting our continued existence is our ability to obtain additional capital through additional equity and/or debt financing. Obtaining additional financing will be subject to a number of factors including market conditions, investor acceptance of our business plan and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unattractive or unavailable to us. If financing is not available on satisfactory terms, we may be unable to continue, develop or expand our operations. If we are unable to raise additional financing, we will have to significantly reduce our spending, delay or cancel planned activities or substantially change our current corporate structure. In such an event, we intend to implement expense reduction plans in a timely manner. However, these actions would have material adverse effects on our business, revenues, operating results, and prospects, resulting in a possible failure of our business. If we raise funds through equity or convertible securities, our existing stockholders may experience dilution and our stock price may decline.
We have generated limited revenues and have incurred significant operating losses from operations. We may continue to experience net negative cash flows from operations and will be required to obtain additional financing to fund operations through equity securities’ offerings and bank borrowings to the extent necessary to provide working capital. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow from stockholders or other outside sources to sustain operations and meet our obligations on a timely basis and ultimately to attain profitability. We have limited capital with which to pursue our business plan. There can be no assurance that our future operations will be significant and profitable, or that we will have sufficient resources to meet our objectives.
These factors raise substantial doubt about our ability to continue as a going concern. Our auditors have issued a going concern opinion. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months. The financial statements do not include any adjustments that might result from the uncertainty about our ability to continue our business. If we are unable to obtain additional financing from outside sources and eventually produce enough revenues, we may be forced to sell our assets, curtail or cease our operations.
Known Material Trends and Uncertainties
On October 15, 2008, we entered into an agreement with CO.F.A.M.M. for the provision of assistance and advice to us on acquiring contracts in Italy, Romania, Greece, Morocco, the 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.
13
Pursuant to the agreement, we will pay the cost of marketing or any other costs incurred by COFAMM, with our prior approval.
On September 19, 2008, we entered into an agreement with Access Energy Technologies for the provision of assistance and advice to us 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, we will pay the cost of marketing or any other costs incurred by Access with our prior approval.
Off-Balance Sheet Arrangements
As of December 31, 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.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the US. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an on-going basis, including those related to customer programs and incentives, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, impairment or disposal of long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be both those important to the portrayal of our financial condition and that require the subjective judgment:
Intangible Asset
In May of 2008, we issued 2,000,000 shares of stock valued at $1.50 per share to a third party for the purchase of various technologies and patents with a total estimated fair market value of $3,000,000 based on the market price of the consideration given . The patents are to be used with the PyStR hydrogen generator to enhance the mixing of hydrogen with heavy oil for upgrading purposes and to recover diluent used in the same process. Amortization has been estimated on the economic useful life or expected legal life of the patent estimated to be 20 years.
On December 24, 2004, we purchased an integrated gasification production system from our CEO. The technology combines modern gasification with gas turbine technologies to produce synthetic gas, hydrogen or electricity. We intend to further develop the technology to make it commercially viable and intend to then sell or license the technology. We purchased the asset by issuing 10,000,000 (500,000 post reverse stock-split) shares of our common stock and a $25,000 payment. If by January 2006 the Company had not raised a minimum of $1,000,000 by way of equity private placements, it has the option, until June 30, 2007, of canceling the 10,000,000 shares issued to 975110 Alberta Ltd. and subject to escrow, in consideration for the transfer to 975110 Alberta Ltd. of 100% of the interest in all of the enhanced gasification intellectual property and a small gasification unit. By December 31, 2007, the 500,000 common shares were released from escrow.
Stock-Based Compensation
We record stock-based compensation in accordance with SFAS No. 123R “Share Based Payments”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the equity instrument issued. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.
On January 22, 2008 our Board of Directors approved the 2008 Stock Compensation Plan and the 2008 Non-Qualified Stock Option Plan. We plan to file a Form S-8 to register two plans. According to the 2008 Stock Compensation Plan, we are authorized to issue up to 1,000,000 shares of our common stock to employees, executives and consultants. According to the 2008 Non-Qualified Stock Option Plan, we are authorized to issue up
14
to 1,000,000 stock purchase options to employees, executives and consultants to purchase shares of our common stock. As of April 2, 2009, no securities were issued under the two plans.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data
Energy Quest Inc.
(A Development Stage Company)
December 31, 2008
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board Directors
Energy Quest, Inc.
(Formerly Syngas International Corp.)
(A Development Stage Company)
Henderson, Nevada
We have audited the accompanying consolidated balance sheets of Energy Quest, Inc. (“Energy Quest”) as of December 31, 2008 and 2007 and the related consolidated statements of operations and other comprehensive loss, cash flows, and changes in stockholders’ equity(deficit) for the years ended December 31, 2008 and 2007. These consolidated financial statements are the responsibility of Energy Quest's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Energy Quest 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 Energy Quest’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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Energy Quest as of December 31, 2008 and 2007 and the consolidated results of operations and cash flows for the for the year ended December 31, 2008 and 2007 , in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Energy Quest will continue as a going concern. As discussed in Note 1 to the financial statements, Energy Quest suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Malone & Bailey, P.C.
www.malone-bailey.com
Houston, TX
April 7, 2009
F-1
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Balance Sheets |
| December 31, | December 31, | |||||
| 2008 | 2007 | |||||
| $ | $ | |||||
| Assets | ||||||
| Current Assets | ||||||
| Cash and cash equivalents | 792 | 1,733 | ||||
| Restricted cash | – | 80,000 | ||||
| Prepaid expenses | – | 454 | ||||
| Other current assets | – | 2,064 | ||||
| Total Current Assets | 792 | 84,251 | ||||
| Intangible Assets, net (Note 3) | 2,927,078 | 31,336 | ||||
| Total Assets | 2,927,870 | 115,587 | ||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||
| Current Liabilities | ||||||
| Accounts payable and accrued liabilities | 54,829 | 61,603 | ||||
| Amounts due to related parties (Note 3) | 244,488 | 249,505 | ||||
| Stock payable | – | 161,583 | ||||
| Note payable (Note 4) | 29,212 | 21,197 | ||||
| Advances from former Shareholders (Note 5) | 287,702 | 289,934 | ||||
| Total Liabilities | 616,231 | 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: 9,555,270 shares (December 31, 2007 - 2,565,549 shares) | 9,555 | 2,566 | ||||
| Additional Paid-in Capital | 7,877,004 | 3,976,922 | ||||
| Accumulated Other Comprehensive Income (Loss) | 122 | (105 | ) | |||
| Stock Subscription Receivable | – | (60,500 | ) | |||
| Deficit Accumulated During the Development Stage | (5,575,042 | ) | (4,587,118 | ) | ||
| Total Stockholders’ Equity (Deficit) | 2,311,639 | (668,235 | ) | |||
| Total Liabilities and Stockholders’ Equity (Deficit) | 2,927,870 | 115,587 |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Statements of Operations and Other Comprehensive Loss |
| Period from | |||||||||
| For the Year | For the Year | December 14, 2004 | |||||||
| Ended | Ended | (Date of Inception) to | |||||||
| December 31, | December 31, | December 31, 2008 | |||||||
| 2008 | 2007 | (Unaudited) | |||||||
| $ | $ | $ | |||||||
| Revenue | – | 5,164 | 5,164 | ||||||
| Expenses | |||||||||
| Consulting and management fees | 594,425 | 1,403,223 | 4,454,897 | ||||||
| General and administrative | 49,312 | 170,515 | 328,535 | ||||||
| Professional fees | 112,070 | 141,846 | 377,903 | ||||||
| Research and development | 46,111 | – | 46,111 | ||||||
| Depreciation, depletion, and impairment | 98,077 | – | 98,077 | ||||||
| Other | 80,000 | – | 80,000 | ||||||
| 979,995 | 1,715,584 | 5,385,523 | |||||||
| Loss before the following: | (979,995 | ) | (1,710,420 | ) | (5,380,359 | ) | |||
| Interest income | – | 2,085 | 2,085 | ||||||
| Interest expense | (7,929 | ) | (743 | ) | (8,672 | ) | |||
| Gain on write-off of debt | – | – | 5,826 | ||||||
| Loss on write-off of loan receivable | – | – | (193,922 | ) | |||||
| Net loss | (987,924 | ) | (1,709,078 | ) | (5,575,042 | ) | |||
| Other comprehensive income | |||||||||
| Foreign currency translation adjustment | 227 | 992 | 122 | ||||||
| Total Comprehensive Loss | (987,697 | ) | (1,708,086 | ) | (5,574,920 | ) | |||
| Net Loss Per Share – Basic and Diluted | (0.21 | ) | (0.78 | ) | |||||
| Weighted Average Shares Outstanding – | |||||||||
| Basic and Diluted | 4,614,000 | 2,190,000 |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Statements of Cash Flows |
| Accumulated from | |||||||||
| For the Year | For the Year | December 14, 2004 | |||||||
| Ended | Ended | (Date of Inception) to | |||||||
| December 31, | December 31, | December 31, 2008 | |||||||
| 2008 | 2007 | (unaudited) | |||||||
| $ | $ | $ | |||||||
| Cash Flows Used In Operating Activities | |||||||||
| Net loss | (987,924 | ) | (1,709,078 | ) | (5,575,042 | ) | |||
| Adjustments to reconcile net loss to net cash used | |||||||||
| in operating activities: | |||||||||
| Stock-based compensation | 321,750 | 1,170,550 | 2,486,863 | ||||||
| Shares issued for expenses | 31,250 | 112,501 | 1,516,193 | ||||||
| Write-off on restricted cash | 80,000 | – | 80,000 | ||||||
| Loss on write-off of loan receivable | – | – | 193,922 | ||||||
| Amortization of intangible assets | 98,077 | – | 98,077 | ||||||
| Gain on write off of debt | – | – | (5,826 | ) | |||||
| Changes in operating assets and liabilities: | |||||||||
| Prepaid expenses and other current assets | 2,518 | 6,136 | – | ||||||
| Accounts payable and accrued liabilities | (6,774 | ) | 32,353 | 25,232 | |||||
| Due to related parties | 292,938 | 231,684 | (542,443 | ) | |||||
| Net Cash Used in Operating Activities | (168,165 | ) | (155,854 | ) | (638,138 | ) | |||
| Investing Activities | |||||||||
| Loan receivable | – | – | (193,922 | ) | |||||
| Net cash acquired on business acquisition | – | – | 565 | ||||||
| Change in restricted cash | – | (80,000 | ) | (80,000 | ) | ||||
| Purchase of intangible assets | – | – | (25,000 | ) | |||||
| Net Cash Used In Investing Activities | – | (80,000 | ) | (298,357 | ) | ||||
| Financing Activities | |||||||||
| Proceeds from issuance of common stock | 125,000 | 30,000 | 454,144 | ||||||
| Proceeds from notes payable | 64,296 | 201,901 | 505,320 | ||||||
| Re-payment of note payable | (21,197 | ) | - | (21,197 | ) | ||||
| Net Cash Provided By Financing Activities | 168,099 | 231,901 | 938,267 | ||||||
| Effect of Exchange Rate Changes on Cash | (875 | ) | 992 | (980 | ) | ||||
| Increase (decrease) in Cash and Cash Equivalents | (941 | ) | (2,961 | ) | 792 | ||||
| Cash and Cash Equivalents, beginning | 1,733 | 4,694 | |||||||
| Cash and Cash Equivalents, end | 792 | 1,733 | 792 | ||||||
| Supplemental Disclosures | |||||||||
| Cash paid for taxes | – | – | |||||||
| Cash paid for interest | – | – | |||||||
| Non-Cash Financing and Investing Activities | |||||||||
| Common stock issued for intangible assets | 3,000,000 | – | 3,000,204 | ||||||
| Common stock issued for stock payable | 161,550 | – | 161,550 | ||||||
| Common stock issued for amounts due to related | |||||||||
| parties | 328,022 | – | 328,022 | ||||||
| Common stock issued for subscription receivable | 120,750 | – | 120,750 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Statement of Changes in Stockholders’ Equity (Deficit) |
| Deficit | |||||||||||||||||||||
| Accumulated | Accumulated | ||||||||||||||||||||
| Additional | Other | Stock | During the | ||||||||||||||||||
| Common | Paid-In | Comprehensive | Subscriptions | Development | |||||||||||||||||
| Stock | Amount | Capital | Income | Receivable | Stage | Total | |||||||||||||||
| # | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance–December 14, 2004 (Date of Inception) | |||||||||||||||||||||
| (Unaudited) | – | – | – | – | – | – | – | ||||||||||||||
| Issue of common stock for cash | 1,000,000 | 407 | – | – | - | – | 407 | ||||||||||||||
| Issue of common stock for intangible asset | 500,000 | 204 | – | – | – | – | 204 | ||||||||||||||
| Net loss for the period | – | – | – | – | – | (10,015 | ) | (10,015 | ) | ||||||||||||
| Balance – December 31, 2004 (Unaudited) | 1,500,000 | 611 | – | – | – | (10,015 | ) | (9,404 | ) | ||||||||||||
| Issue of common stock for cash | 2,375 | 19,337 | – | – | – | – | 19,337 | ||||||||||||||
| 1,502,375 | 19,948 | – | – | – | (10,015 | ) | 9,933 | ||||||||||||||
| Adjustment to number of shares issued and outstanding as a | |||||||||||||||||||||
| result of the reverse takeover transaction: | |||||||||||||||||||||
| - Add issued and outstanding stock of Energy Quest Inc at | |||||||||||||||||||||
| time of reverse acquisition | 321,128 | 321 | 6,102 | – | – | (66,839 | ) | (60,416 | ) | ||||||||||||
| - Deduct issued and outstanding stock of Energy Quest Inc. | (1,502,375 | ) | (19,948 | ) | – | – | – | 19,948 | – | ||||||||||||
| Issue of common stock on acquisition of Energy Quest Inc. | 1,502,375 | 1,502 | 28,545 | – | – | (30,047 | ) | – | |||||||||||||
| Issue of common stock for cash on exercise of stock options | 13,000 | 13 | 77,987 | – | – | – | 78,000 | ||||||||||||||
| Stock-based compensation | – | – | 339,762 | – | – | – | 339,762 | ||||||||||||||
| Issue of common stock for services | 51,250 | 51 | 609,949 | – | – | – | 610,000 | ||||||||||||||
| Foreign currency translation adjustment | – | – | – | (1,019 | ) | – | – | (1,019 | ) | ||||||||||||
| Net loss for the year | – | – | – | – | – | (1,095,384 | ) | (1,095,384 | ) | ||||||||||||
| Balance – December 31, 2005 (Unaudited) | 1,887,753 | 1,887 | 1,062,345 | (1,019 | ) | – | (1,182,337 | ) | (119,124 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Statement of Stockholders’ Equity (Deficit) |
| Deficit | |||||||||||||||||||||
| Accumulated | Accumulated | ||||||||||||||||||||
| Additional | Other | Stock | During the | ||||||||||||||||||
| Common | Paid-In | Comprehensive | Subscriptions | Development | |||||||||||||||||
| Stock | Amount | Capital | Income | Receivable | Stage | Total | |||||||||||||||
| # | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance – December 31, 2005 (Unaudited) | 1,887,753 | 1,887 | 1,062,345 | (1,019 | ) | – | (1,182,337 | ) | (119,124 | ) | |||||||||||
| Issue of common stock for cash on exercise of stock options | 28,767 | 29 | 201,371 | – | – | – | 201,400 | ||||||||||||||
| Stock-based compensation | – | – | 654,801 | – | – | – | 654,801 | ||||||||||||||
| Issue of common stock for services | 75,998 | 76 | 685,428 | – | – | – | 685,504 | ||||||||||||||
| Foreign currency translation adjustment | – | – | – | (78 | ) | – | – | (78 | ) | ||||||||||||
| Net loss for the year | – | – | – | – | (1,695,703 | ) | (1,695,703 | ) | |||||||||||||
| Balance – December 31, 2006 (Unaudited) | 1,992,518 | 1,992 | 2,603,945 | (1,097 | ) | – | (2,878,040 | ) | (273,200 | ) | |||||||||||
| Issue of common stock for cash | 15,000 | 15 | 29,985 | – | – | – | 30,000 | ||||||||||||||
| Issue of common stock for subscription receivable | 57,500 | 58 | 60,442 | – | (60,500 | ) | – | – | |||||||||||||
| Issue of common stock for services | 500,500 | 501 | 1,282,550 | – | – | – | 1,283,051 | ||||||||||||||
| Issue of common stock to round-up fractional shares due to | |||||||||||||||||||||
| reverse stock-split | 31 | – | – | – | – | – | – | ||||||||||||||
| Foreign currency translation adjustment | – | – | – | 992 | – | – | 992 | ||||||||||||||
| Net loss for the year | – | – | – | – | – | (1,709,078 | ) | (1,709,078 | ) | ||||||||||||
| Balance – December 31, 2007 | 2,565,549 | 2,566 | 3,976,922 | (105 | ) | (60,500 | ) | (4,587,118 | ) | (668,235 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Statement of Changes in Stockholders’ Equity (Deficit) |
| Deficit | |||||||||||||||||||||
| Accumulated | Accumulated | ||||||||||||||||||||
| Additional | Other | Stock | During the | ||||||||||||||||||
| Common | Paid-In | Comprehensive | Subscription | Development | |||||||||||||||||
| Stock | Amount | Capital | Income | Receivable | Stage | Total | |||||||||||||||
| # | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance – December 31, 2007 | 2,565,549 | 2,566 | 3,976,922 | (105 | ) | (60,500 | ) | (4,587,118 | ) | (668,235 | ) | ||||||||||
| Issue of common stock for cash | 125,000 | 125 | 124,875 | – | – | – | 125,000 | ||||||||||||||
| Issue of common stock for stock payable | 107,700 | 108 | 161,442 | – | – | – | 161,550 | ||||||||||||||
| Issue of common stock for patents | 2,000,000 | 2,000 | 2,998,000 | – | – | – | 3,000,000 | ||||||||||||||
| Issue of share-based compensation | 1,750,000 | 1,807 | 319,943 | – | – | – | 321,750 | ||||||||||||||
| Issue of common stock for expenses | 25,000 | 25 | 31,225 | – | – | – | 31,250 | ||||||||||||||
| Fair value of consulting services (Note 8(e)) | – | (57 | ) | (60,443 | ) | – | 60,500 | – | - | ||||||||||||
| Issue of common stock for debt | 2,982,021 | 2,982 | 325,040 | – | – | – | 328,022 | ||||||||||||||
| Foreign currency translation adjustment | – | – | – | 227 | – | – | 227 | ||||||||||||||
| Net loss for the year | – | – | – | – | – | (987,924 | (987,924 | ) | |||||||||||||
| Balance – December 31, 2008 | 9,555,270 | 9,555 | 7,877,004 | 122 | – | (5,575,042 | ) | (2,311,640 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
| 1. | Nature of Operations and Going Concern Considerations | |
On January 28, 2005, Syngas International Corp. entered into two Share Exchange Agreements to acquire all of the shares of Syngas Energy Corp. Syngas Energy was incorporated in the Province of British Columbia, Canada, on December 14, 2004. Effective June 30, 2005, the acquisition of Syngas Energy by Syngas International was completed through the issuance of one share of Syngas International common stock for each share of Syngas Energy outstanding. Syngas International issued 30,047,500 (1,502,375 post reverse stock split) shares of common stock to the shareholders of Syngas Energy, and as a result, the former Syngas Energy shareholders owned approximately 82% of the outstanding common stock of Syngas International. The acquisition of Syngas Energy by Syngas International was considered a reverse acquisition and accounted for under the purchase method of accounting. Under reverse acquisition accounting, Syngas Energy was considered the acquirer for accounting and financial reporting purposes, and acquired the assets and assumed the liabilities of Syngas International. Assets acquired and liabilities assumed are reported at their historical amounts. On May 31, 2007, Syngas International changed its name to Energy Quest Inc. | ||
Energy Quest’s principal business involves an integrated gasification production system technology that combines modern gasification with turbine technologies to produce synthetic gas, hydrogen or electricity. Energy Quest intends to further develop the technology to make it commercially viable and intends to then sell or license the technology. Energy Quest is in the development stage as defined under Statement of Financial Accounting Standards (“SFAS”) No. 7“Accounting and Reporting by Development Stage Enterprises.” | ||
Going Concern | ||
As of December 31, 2008, the company had not reached a level of operations which would finance day-to-day activities. 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 raise 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 December 31, 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. | ||
| 2. | Summary of Significant Accounting Policies | |
| a) | Basis of Presentation | |
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in US dollars. These financial statements include accounts of the company and its wholly-owned subsidiary, Syngas Energy Corporation. All intercompany transactions and balances have been eliminated. The company’s fiscal year end is December 31. | ||
| b) | Use of Estimates | |
The preparation of financial statements in conformity with US generally accepted accounting principles 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. The company regularly evaluates estimates and assumptions related to valuation of long-lived assets, stock based compensation and deferred income tax asset valuation allowances. The company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the company may differ materially and adversely from the company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. | ||
| c) | Cash and Cash Equivalents | |
The company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. | ||
F-8
| 2. | Summary of Significant Accounting Policies (continued) | |
| d) | Intangible Assets | |
Intangible assets consist of an integrated gasification production system and patents. This technology combines modern gasification with gas turbine technologies to produce synthetic gas, hydrogen or electricity. The company intends to further develop the technology to make it commercially viable and intends to then sell or license the technology. The technology will be amortized on a systematic basis upon commencement of revenue from the sale or license of the technology. | ||
| e) | Long-lived Assets | |
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. At December 31, 2008, the Company did not recognize an impairment loss. | ||
| f) | Revenue recognition | |
The company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. | ||
| g) | Advertising Costs | |
The company’s policy regarding advertising is to expense advertising to general and administrative as incurred. Advertising expenses were approximately $5,000 and $122,000 for the years ended December 31, 2008 and 2007, respectively. | ||
| h) | Basic and Diluted Net Income (Loss) Per Share | |
The company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings per Share", which requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. | ||
| i) | Foreign Currency Translation | |
The company’s functional currency is the United States dollar. The financial statements of the company are translated to United States dollars in accordance with SFAS No. 52“Foreign Currency Translation”(“SFAS No. 52”). Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in Canadian dollars. The company has not, to the date of these financials statements, entered into derivative instruments to offset the impact of foreign currency fluctuations. | ||
The functional currency of the wholly-owned subsidiary is the Canadian dollar. The financial statements of the subsidiary are translated to United States dollars in accordance with SFAS No. 52 using period-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity. Foreign currency transaction gains and losses are included in current operations. | ||
| j) | Financial Instruments | |
The carrying value of cash and cash equivalents, prepaid expenses, accounts payable, accrued liabilities, loans payable and due to related parties approximate fair value due to the relatively short maturity of these financial instruments. | ||
F-9
| 2. | Summary of Significant Accounting Policies (continued) | |
| k) | Concentration of Risk | |
The company maintains its cash account in primarily three commercial financial institutions. The company's cash accounts are uninsured business checking accounts maintained in U.S. and Canadian dollars, which totalled $792 on December 31, 2008 (2007 - $1,733). At December 31, 2008, the company has not engaged in any transactions that would be considered derivative instruments on hedging activities. To date, the company has not incurred a loss relating to this concentration of credit risk. | ||
| l) | Comprehensive Loss | |
SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at December 31, 2008 and 2007, the company’s only component of comprehensive loss was foreign currency translation adjustments. | ||
| m) | Stock-Based Compensation | |
The company records stock-based compensation in accordance with SFAS No. 123R“Share Based Payments”, using the fair value method. | ||
All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued. | ||
| n) | Recent Accounting Pronouncements | |
In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position EITF 03-6-1,“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”.FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the computation of earnings per share under the two-class method as described in FASB Statement of Financial Accounting Standards No. 128,“Earnings per Share.”FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this statement is not expected to have a material effect on the company’s consolidated financial statements. | ||
| o) | Intangible Assets |
| a) | On December 24, 2004, the company purchased an integrated gasification production system from the CEO of the company. The technology combines modern gasification with gas turbine technologies to produce synthetic gas, hydrogen or electricity. The company intends to further develop the technology to make it commercially viable and intends to then sell or license the technology. The company purchased the asset by issuing 10,000,000 (500,000 post reverse stock split) common shares of the company and a $25,000 payment. If by January 2006 the company had not raised a minimum of $1,000,000 by way of equity private placements, it had the option, until June 30, 2007, of cancelling the 500,000 shares issued and subject to escrow, in consideration for the transfer to 975110 Alberta Ltd. of 100% of the interest in all of the enhanced gasification intellectual property and a small gasification unit. During the year ended December 31, 2007, the 500,000 common shares were released from escrow. At December 31, 2008, the total cost of $25,155 is recorded as an intangible asset. | |
| b) | On May 5, 2008, the company issued 2,000,000 shares of common stock with a fair value of $3,000,000 for a one time payment for the purchase of two patents acquired under a purchase/assignment agreement entered into in March 2008. The shares were valued on the closing date of the agreement. At December 31, 2008, the total cost of $3,000,000 is recorded as an intangible asset, net of accumulated amortization of $98,077. Amortization is calculated based on the expected legal useful life of 20 years. |
| 3. | Related Party Transactions | |
| a) | As at December 31, 2008, $16,994 (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 December 31, 2008, $5,213 (2007 - $50,705) is owed to a related party consultant for expenses paid on behalf of the company. | |
| c) | During the year ended December 31, 2008, the company recorded $150,000 (2007 - $113,351) for management services provided by the President of the company. At December 31, 2008, $222,281 (2007 - $87,341) is included in due to related parties. | |
| d) | During the year ended December 31, 2008, the company recorded $130,000 (2007 - $90,288) for management services provided by the former Treasurer of the company. On October 27, 2008, the company’s former Treasurer entered an agreement to assign the debt to related party consultant in the amount of $155,279. In addition, the company entered into an agreement to issue shares for the accrued management fees outstanding in the amount of $65,000. At December 31, 2008, $Nil (2007- $90,288) is included in due to related parties. (See notes 3(f), 7(a, and 7(c)). | |
| e) | During the year ended December 31, 2008, the company received $35,084 in proceeds from a related party consultant. This amount was later paid in shares as described in (g) and 7(c) below. | |
F-10
| f) | During the year ended December 31, 2008, the company recorded $85,832 (2007 - $Nil) for management services provided by the CFO of the company. On October 27, 2008, the company’s CFO entered an agreement to assign the debt to related party consultant in the amount of $85,832. At December 31, 2008, $Nil (2007 - $Nil) is included in due to related parties. (See note 3(f) and 7(c)). | |
| g) | On October 27, 2008, a related party consultant entered to a debt assignment agreement with the company’s CFO and former Treasurer. The company’s CFO and former treasurer assigned the company’s debt to the related party consultant in the amount of $85,832 and $155,279, respectively. Subsequently, on October 27, 2008, the company entered into agreement with the related party consultant to issue 2,982,021 shares in exchange for $241,120 debt owed by the company due to the debt assignment agreement and an aggregate of $86,903 that the company owed to related party consultant. The company had not issued the shares as of December 31, 2008. However, since the legal obligation existed, the company treated the shares as issued during the year of 2008. (See note 3(d), 3((e), and 7(c)). |
| 4. | Note Payable | |
| a) | On October 28, 2008, the company received $6,684 (CDN$ 8,000) in exchange for a promissory note payable. The note bears interest at 6% per annum, calculated annually, and is due on demand. As at December 31, 2008, accrued interest of $71 is recorded. | |
| 5. | On November 5, 2007, the company received $21,000 in exchange for a promissory note payable. The note bears interest at 6% per annum, calculated annually, and is due on demand. As at December 31, 2008, accrued interest of $1,457 (2007 - $197) is recorded. The company paid the amount in full during the year of 2008. | |
| 6. | Advances From Former Shareholders | |
As at December 31, 2008, $287,702 (2007 – $289,934) is owed to former shareholders. | ||
| 7. | Commitments | |
| a) | 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. | |
| b) | 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. | |
| c) | On July 1, 2008, the company signed an agreement with a consultant for consulting services for a period of one year. The company will pay the consultant $241,500, which is the fair value of the 57,500 shares issued (see Note 7(d)). The Company also agreed to issue 50,000 common shares of the company with a fair value of $2,500, which is included in accrued liabilities. During the year ended December 31, 2008, $123,250 was charged to consulting fees. The company issued the shares on July 1, 2008. However, per company’s understanding of the transaction, the company treated the shares as not issued until vested. At December 31, 2008 $120,750 is treated as vested and the other $120,750 is treated as unvested and not reflected in the financial statements because the shares are forfeitable. | |
| d) | 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. | |
| 8. | Common Stock | |
| a) | On December 31, 2008, the company signed an agreement with a consultant for consulting services for a period of six months ending December 31, 2008. The company will pay the consultant $65,000, which is the fair value of the 650,000 shares issuable to the consultant. During the year ended December 31, 2008, $65,000 was charged to consulting fees. The company had not issued the shares as of December 31, 2008. However, due to the fact that legal obligation exists as of December 31, 2008, the company treated the shares as issued for the year ending December 31, 2008. The shares were subsequently issued on February 16, 2009. | |
| b) | On December 31, 2008, the company signed an agreement with a consultant for consulting services for a period of six months ending December 31, 2008. The company will pay the consultant $100,000, which is the fair value of the 1,000,000 shares issuable to the consultant. During the year ended December 31, 2008, $100,000 was charged to consulting fees. The company had not issued the shares as of December 31, 2008. However, due to the fact that a legal obligation existed as of December 31, 2008, the company treated the shares as issued for the year ending December 31, 2008. The shares were subsequently issued on January 26, 2009. | |
| c) | On October 27, 2008, the company entered into agreement with the related party consultant to issue shares in exchange for $241,120 debt owed by the company due to the debt assignment agreement and an aggregate of $86,903 that the company owed to related party consultant. (See note 3(f)). The company had not issued the shares as of December 31, 2008. However, since the legal obligation existed, the company treated the shares as issued for 2,982,021 shares at fair value of $0.11/share on October 27, 2008. The company subsequently issued the shares on January 26, 2009. | |
F-11
| d) | 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 agreed to issue an additional 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. The consulting agreement covers services to be performed between July 1, 2008 until June 30, 2009. Upon the cancellation of the promissory note, the company adjusted its common stock, additional paid in capital and stock subscriptions receivable by $60,500. As of December 31, 2008, the company treated 28,750 shares as vested and issued and the other 28,750 shares as unvested and has not been issued. (See Note 6(c)). | |
| e) | 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 Company allocated $95,807 of the proceeds to the common stock and $65,743 to the warrants based on the relative fair market value of each. The relative fair market value of each component was determined by (i) using Black Scholes to estimate the fair market value of the warrants which 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.; and (ii) the closing price of the common stock was $1.28 on April 30, 2008. The Company evaluated the terms of the attached warrants and concluded that the terms did not result in derivative accounting | |
| f) | 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. | |
| g) | 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 December 31, 2008, the total cost of $3,000,000 is recorded as an intangible asset. | |
| h) | On June 3, 2008, the company issued 25,000 shares of common with a fair value of $31,250 for services received. | |
| i) | 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. | |
| j) | 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 8(f)). | |
| k) | During 2007, the company issued 500,500 shares of common stock with a fair value of $1,283,051 for the provision of consulting services and advertising expenses. | |
| l) | On April 26, 2007, the company completed a private placement and issued 15,000 post reverse stock split shares of common stock for proceeds of $30,000 and received a subscription receivable for $60,500 for 57,500 shares of common stock. | |
| m) | On May 31, 2007, the company effected a reverse stock split of its common stock in a ratio of one (1) new share for every twenty (20) existing shares of common stock. As a result, the issued and outstanding share capital decreased from 43,300,364 shares of common stock to 2,565,549 shares of common stock. The company also increased its authorized capital from 100,000,000 shares of common stock with a par value of $0.001 to 200,000,000 shares of common stock with a par value of $0.001. All share amounts were retroactively adjusted for all periods presented. | |
| n) | 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 the Stock Plan for the year ended December 31, 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 the Option Plan for the year ended December 31, 2008. |
| 9. | Warrants |
The company issued 107,700 warrants during the year ended December 31, 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 year ended December 31, 2008 was $0.88 (2007 - $Nil). The company recorded the fair value of $65,743 (2007 - $Nil) as additional paid-in capital. As at December 31, 2008 and 2007, the warrants have no intrinsic value. | |
The weighted average assumptions used are as follows: |
| December 31, 2008 | December 31, 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 |
F-12
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:
| December 31, 2008 | December 31, 2007 | ||||||||||||
| Weighted | Weighted | ||||||||||||
| Average | Average | ||||||||||||
| Number | Exercise Price | Number | Exercise Price | ||||||||||
| Balance, beginning of year | – | – | – | – | |||||||||
| Issued | 107,700 | $ | 2.00 | – | – | ||||||||
| Exercised | – | – | – | – | |||||||||
| Forfeited / Expired | – | – | – | – | |||||||||
| Balance, end of year | 107,700 | $ | 2.00 | – | – | ||||||||
The following share purchase warrants are outstanding:
| Exercise | December 31, | ||||||
| Expiry Date | Price | 2008 | |||||
| April 28, 2009 | $ | 2.00 | 107,700 | ||||
| 107,700 |
| 10. | Income Taxes |
The company follows the provisions of SFAS 109,“Accounting for Income Taxes”.Pursuant to SFAS 109 the company is required to compute tax asset benefits for net operating losses carried forward. The potential benefit of net operating losses has not been recognized in the financial statements because the company cannot be assured that it is more likely than not that it will utilize the net operating losses carried forward in future years. The company has approximately $5,467,000 of net operating loss carry-forwards available to offset taxable income in future years which expire through fiscal 2028. At December 31, 2008 and 2007, the valuation allowance established against the deferred tax assets was approximately $1,910,000 and $1,600,000 respectively. |
F-13
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Since inception, we have had no changes in or disagreements with our accountants. Our audited financial statements for the fiscal years ended December 31, 2008 and 2007 have been included in this annual report in reliance upon Malone & Bailey PC, Independent Registered Public Accounting Firm, as experts in accounting and auditing.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2008. Based on this evaluation, our management has concluded that our disclosure controls and procedures adequately do not ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms due to the material weaknesses in our internal control over financial reporting as reported below. The term "internal control over financial reporting" is defined as a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| (1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant; |
| (2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and |
| (3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements. |
Item 9A(T). Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework.
Management conducted a walkthrough of the procedures and controls documented in this memo or relied on personal knowledge where no walk through was possible in order to test the effectiveness of the Company’s internal control over financial reporting.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2008, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.
| 1. | There is lack of segregation of duties and therefore the Company is susceptible to fraud and misappropriation of assets. |
| 2. | There are no preventative and detective IT systems in place to prevent and/or detect fraud other than password protection. There no |
16
software based accounting controls in place to prevent double entries, monitor performance, etc. | |
| 3. | There is a lack of entity wide controls establishing a “tone at the top”, including no audit committee, no policy on fraud and no code of ethics. A whistleblower policy is not necessary given the small size of the organization. |
The Company is working on the following remediation efforts: :
| 1. | The Company has hired an external accountant to record transactions and prepare the financial statements. The information should be sent to the accountant by someone who is not in control of the bank account. |
| 2. | Obtain quotes for prevention and detection software in order to protect against fraud. |
| 3. | Once we obtain funding, we will purchase basic accounting software to record accounting transactions and print checks. |
| 4. | Adopt a corporate records and document retention policy to ensure that all significant records are kept for the appropriate amount of time as required by law. |
| 5. | Appoint a minimum of two independent directors to the board of directors and then implement an audit committee to review all financial statements and SEC filings and oversee the development of corporate policies. |
Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
As a result of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control—Integrated Framework issued by COSO.
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
We did not change our internal control over financial reporting during our last fiscal quarter of 2008 in connection with the results of Management’s report, nor have we made any changes to our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.
The following table sets forth the name, age, and position of our executive officers and directors as of April 2, 2009.
| Name and Age | Position(s) Held in | Tenure | Other Public |
| Energy Quest Inc. | Company | ||
| Directorships | |||
| Held by Director | |||
| Wilfred J. Ouellette, 66 | Director | From July 1, 2005 to present | n/a |
| President, and Chief Executive | |||
| Officer | From May 5, 2006 to present |
17
| Vasant K. Jain, 47 | Director, Chief Financial Officer | From January 2, 2008 to present | n/a |
| Director, Secretary, and | |||
| Ronald Foster, 67 | Treasurer | From July 1, 2008 to present | n/a |
| Jim Clark, 54 | Director | From June 8, 2007 to present | n/a |
| Peter J. Stephen, 41 | Director | From April 21, 2008 to present |
The directors shall be elected at an annual meeting of the stockholders and except as otherwise provided within our Bylaws, as pertaining to vacancies, shall hold office until a successor is elected and qualified. There any arrangements or understanding between any of our directors or officers or any other person pursuant to which any officer or director was or is to be selected as an officer or director.
Wilfred J. Ouellette, Director, President, and Chief Executive Officer
Mr. Ouellette has been a director since July 1, 2005 and our President, Chief Executive Officer since May 5, 2006. Mr. Ouellette has been a director and the Chief Executive Officer of Syngas Energy Corp., our wholly owned subsidiary, since February 2005. Mr. Ouellette has over 25 years experience in process combustion. From 2001 to the present he is worked as a consultant through his own company, Aclade Energy Corp., offering consulting services in the waste to energy industry, developing new projects in the energy sector and marketing the fluidized bed gasifier.
Mr. Ouellette has been principally active in the fields of heating, ventilating, air conditioning and process combustion systems since 1965. He also has extensive experience in the development and integration of alternate energy systems. Mr. Ouellette’s technical experience encompasses the following areas: instrumentation and control systems design and applications, heating and ventilation equipment systems applications, burner management and flame safe guard systems, combustion processes, burner design and applications, waste gasification processes and air pollution engineering. Previously Mr. Ouellette was a Fighter Control Operator and Pilot in the Royal Canadian Air Force.
Vasant K. Jain, Director and Chief Financial Officer
Mr. Jain has been our director and Chief Financial Officer since January 2, 2008. From 1972 to present, Mr. Jain has overseen the management of a 150 year old currency and bullion trading business, India Trading Company, owned by Mr. Jain’s family and based in Mumbai, India. That company also has branches in Dubai (U.A.E) and Mali (West Africa).
Concurrently, Mr. Jain oversaw several India based businesses owned by his family engaged in the manufacture and export of garments, yarn and textiles with annual revenues. From 1978 to present, Mr. Jain has overseen the management of several family owned generic and surgical pharmaceutical operations. Mr. Jain holds a Diploma in Civil Engineering and a Diploma in Business Management obtained in 1979 and 1980, respectively, from Mumbai University.
Ronald Foster, Director, Secretary and Treasurer
Ronald Foster serves as the company Secretary and Treasurer. His primary responsibilities include finance, compliance and business development. In his career, Mr. Foster has held a number of senior-level executive positions with several publicly traded companies, including, ValCom Inc., SBI Communications, Inc., EL-Phills Inc., Golden American Network and ROPA Communications Inc. He created and produced “Stock Outlook 86, 87, 88, 89”, a video presentation of public companies through Financial News Network, (FNN) a national cable network. Mr. Foster has a tremendous amount of experience with mergers & acquisitions, restructuring and the operations of publicly traded companies. Mr. Foster developed a strong operational focus through his past operations, management and consulting positions in the marketing, entertainment and financial business in the different companies that he has been affiliated with.
Jim Clark, Director
Jim Clark was appointed as a director on June 8, 2007. Mr. Clark is the founder of Luxcor Corporation, and has been the President and director of Luxcor Corporation since 2002. From 1997 to 2002, Mr. Clark was the president of Chancellor Industrial Construction Ltd. From 1993 through 1997, Mr. Clark was a partner with Canwest Group International Inc. Mr. Clark has significant depth of expertise in construction, project management tracking and cost controls. He will be invaluable to us in our diversification of our customer base and development of the company into a fully integrated energy services company.
Peter J. Stephen, Director
Mr. Stephen was appointed as director on April 21, 2008. Mr. Stephens has expertise assisting small businesses to become large and profitable corporations. He has experience in planning, implementing and managing service oriented companies and managing programs, policies and procedures in companies with interstate operations and offices. Mr. Stephens has developed a track record of utilizing available resources to improve operational efficiency which concurrently reducing costs. Mr. Stephens brings 18 years of business experience and creativity to the
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Company. He is currently the President of Alliance Overhead Door dba Garage Door Service Company, a position which he has held since 1996. During his tenure with Alliance Overhead Door, the company has grown to include 13 locations in 8 states with an average of $25 million in annual sales revenue. Prior to joining Alliance Overhead Door, Mr. Stephens was employed for two years as a salesman for Direct TV. His responsibilities included developing a detailed marketing plan for sales of Direct TV’s satellite product to consumers. Prior to that, Mr. Stephens worked for two years as a broker, preceded by two years spent as a realtor of residential and commercial property. Mr. Stephens completed his post-secondary education in sciences in 1990.
Director Nominees
We do not have a nominating committee. The Board of Directors, sitting as a Board, selects individuals to stand for election as members of the Board. Since the Board of Directors does not include a majority of independent directors, the decision of the Board as to director nominees is made by persons who have an interest in the outcome of the determination. The Board will consider candidates for directors proposed by security holders, although no formal procedures for submitting candidates have been adopted. Unless otherwise determined, not less than 90 days prior to the next annual Board of Directors' meeting at which the slate of Board nominees is adopted, the Board will accept written submissions of proposed nominees that include the name, address and telephone number of the proposed nominee; a brief statement of the nominee’s qualifications to serve as a director; and a statement as to why the shareholder submitting the proposed nominee believes that the nomination would be in the best interests of shareholders. If the proposed nominee is not the same person as the shareholder submitting the name of the nominee, a letter from the nominee agreeing to the submission of his or her name for consideration should be provided at the time of submission. The letter should be accompanied by a résumé supporting the nominee's qualifications to serve on the Board of Directors, as well as a list of references.
The Board identifies director nominees through a combination of referrals from different people, including management, existing Board members and security holders. Once a candidate has been identified, the Board reviews the individual's experience and background and may discuss the proposed nominee with the source of the recommendation. If the Board believes it to be appropriate, Board members may meet with the proposed nominee before making a final determination whether to include the proposed nominee as a member of management's slate of director nominees submitted to shareholders for election to the Board.
Among the factors that the Board considers when evaluating proposed nominees are their knowledge of, and experience in business matters, finance, capital markets and mergers and acquisitions. The Board may request additional information from the candidate prior to reaching a determination. The Board is under no obligation to formally respond to all recommendations, although as a matter of practice, it will endeavor to do so.
Audit Committee
The functions of the Audit Committee are currently carried out by our Board of Directors. Our Board of Directors has determined that we do not have an audit committee financial expert on our Board of Directors carrying out the duties of the Audit Committee. The Board of Directors has determined that the cost of hiring a financial expert to act as a director of us and to be a member of the Audit Committee or otherwise perform Audit Committee functions outweighs the benefits of having a financial expert on the Audit Committee.
Significant Employees
Other than the senior officers described above, we do not expect any other individuals to make a significant contribution to our business.
Family Relationships
There are no family relationships among our officers, directors or persons nominated for such positions.
No Legal Proceedings
None of our directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:
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Section 16(a) Beneficial Ownership Compliance Reporting
Section 16(a) of the Securities Exchange Act of 1934 requires a company’s directors and officers, and persons who own more than ten-percent (10%) of the company’s common stock, to file with the Securities and Exchange Commission reports of ownership on Form 3 and reports of change in ownership on Forms 4 and 5. Such officers, directors and ten-percent stockholders are also required to furnish the company with copies of all Section 16(a) reports they file. Based solely on our review of the copies of such forms received by us and on written representations from certain reporting persons, we believe that all Section 16(a) reports applicable to our officers, directors and ten-percent stockholders with respect to the fiscal year ended December 31, 2008 were filed.
Code of Ethics
On February 11, 2008, we adopted an ethics policy and a human rights policy statement that apply to our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions) and employees.. We have filed our ethics policy and human rights policy statement an exhibits to annual report on Form 10-K for the year ended December 31, 2007.
Item 11. Executive Compensation
The following table sets forth, as of December 31, 2008, compensation awarded to our Chief Executive Officer (CEO), and to other persons serving as executive officers whose salary and bonus for such year exceeded $100,000 (collectively, the “Named Executive Officers”) for the last two completed fiscal years.
| SUMMARY COMPENSATION TABLE | |||||||||||||||||||||||||||
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensa tion ($) | Total ($) | ||||||||||||||||||
| Wilfred J. | 2008 | 150,000 | 0 | 150,000 | |||||||||||||||||||||||
| Ouellette | 2007 | 113,351 | 0 | 113,351 | |||||||||||||||||||||||
| President, | |||||||||||||||||||||||||||
| CEO, and | |||||||||||||||||||||||||||
| Director (1) | |||||||||||||||||||||||||||
| (1) | Mr. Ouellette has been a director since July 1, 2005 and our President, Chief Executive Officer since May 5, 2006. He was our Chief Financial Officer from May 5, 2006 to January 2, 2008. Vasant K. Jain was appointed as Chief Financial Officer on January 2, 2008. |
Employment Agreements
On April 17, 2007 we entered into an executive employment agreement with Wilfred J. Ouellette for the position of Chief Executive Officer, for a period of sixty months at a base salary of $150,000 per year. The agreement expires March 31, 2012. We recognized $113,351 of management fees for the twelve-month period ended December 31, 2007 and recognized $ 150,000 for the twelve-months period ended December 31, 2008
On April 17, 2007 we entered into an executive employment agreement with Steve Eilers for the position of Secretary and Treasurer, for a period of sixty months at a base salary of $130,000 per year. The agreement expires April 20, 2012. We recognized $90,288 of management fees for the twelve-month period ended December 31, 2007 and recognized $ 65,000 for the twelve-months period ended December 31, 2008.
On January 3, 2008 we entered into an executive employment agreement with Vasant Jain whereby Mr. Jain will provide his services as Chief Financial Officer beginning January 20, 2008, for a period of 60 months ending on January 20, 2013, unless earlier terminated by either party. Mr. Jain may terminate the agreement at any time with or without cause by giving 60 days written notice. We may terminate the agreement
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without cause by giving 60 days written notice or with cause immediately upon suitable delivery of notice. Mr. Jain will receive a pro-rated annual base salary of $125,000 per year during the term of the agreement. Mr. Jain will also be eligible to receive performance based incentives at our discretion, and to participate in any performance based compensation incentive programs established by us from time to time for any members of our senior management.
Option Grants
We did not grant any options or stock appreciation rights to our named executive officers or directors in the fiscal 2008. As of April 2, 2009, none of our executive officers or directors owned any of our derivative securities.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.
Compensation Committee
We currently do not have a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.
Compensation of Directors
We reimburse our directors for expenses incurred in connection with attending Board meetings. We did not pay director's fees or other cash compensation for services rendered as a director for the year ended December 31, 2008.
No cash compensation was paid to any of our directors for the director's services as a director during the fiscal year ended December 31, 2008. We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors except for the granting from time to time of incentive stock options. The Board of Directors may award special remuneration to any director undertaking any special services on behalf of our Company other than services ordinarily required of a director. Other than indicated below, no director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.
Change of Control
As of April 2, 2009 we had no pension plans or compensatory plans or other arrangements which provide compensation on the event of termination of employment or change in control of us.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of April 2, 2009 by: (i) each of our directors; (ii) each of our named executive officers; and (iii) each person or group known by us to beneficially own more than 5% of our outstanding shares of common stock. Unless otherwise indicated, the shareholders listed below possess sole voting and investment power with respect to the shares they own.
As of April 2, 2009, there were 9,555,270 common shares issued and outstanding.
| Name and Address of | Title of Class | Amount and | Percent of |
| Beneficial Owner | Nature of | Class (2) | |
| Beneficial | (%) | ||
| Ownership (1) | |||
| (#) | |||
| Wilfred J. Ouellette (3) 78 Belleville Ave Spruce Grove, AB T7X 1H8 | Common Shares | 500,000 (4) | 5.2 |
| Vasant K. Jain (5) 102 Darshan Tower Seth Motisha Road, Mazagaon Mumbai 400 010 India | Common Shares | 0 (6) | 0 |
| Ronald Foster (7) 520, 52477 Hwy 21 Edmonton, AB T8A 6K2 | Common Shares | 350,350 | 3.7 |
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| Gilles H. Imbeault (8) Imbeault, Levesque & Associates C/O Casaluci Rodtmattstrasse 92 CH-3014 Bern, Switzerland | Common Shares | 0 | 0 |
| Jim Clark (9) 5215-126 Street Edmonton, Alberta Canada T6H 3W5 | Common Shares | 0 | 0 |
| Peter J. Stephen, 41 4525 South Dean Martin Dr. Las Vegas, NV 89103 | Common Shares | 0 | 0 |
| All Officers and Directors as a Group | Common Shares | 850,350 | 8.9 |
| Carolyn Foster (10) 103 Firetower Road Leesburg, Georgia 31763 | Common Shares | 1,878,286 | 19.7 |
| Energy Quest Ltd. (11) 15 Lillian Court Lucaya, Freeport Grand Bahama | Common Share | 2,000,000 | 20.9 |
(1) The number and percentage of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise of any stock option or other right. The persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table.
(2) Based on 9,555,270 issued and outstanding shares of common stock as of April 2, 2009.
(3) Wilfred J. Ouellette is our director, President and Chief Executive Officer.
(4) Includes 500,000 shares owned by 975110 Alberta Ltd., a company over which Wilfred J. Ouellette has the voting and investment control.
(5) Vasant K. Jain was appointed as our Chief Financial Officer and director on January 2, 2008.
(6) On September 4, 2007, we entered into a 0% Convertible Debenture due September 4, 2012 (the “Debenture”) with Vasant K. Jain whereby Mr. Jain agreed to loan $120,000,000 to us. We agreed to pay Mr. Jain the balance of the Principal on September 4, 2012. At any time after September 4, 2012 and until September 4, 2017, Mr. Jain has the right to convert all, or a portion of, the Principal amount of the Debenture into our common shares at a conversion price of $50 per share. As at April 2, 2009, the agreement had not closed. We expect to close the agreement shortly.
(7) Ronald Foster is our director, secretary and treasurer.
(8) Gilles H. Imbeault is our Vice President of Finance and director.
(9) Jim Clark is our director.
(10) Carolyn Foster is the wife of Ronald Foster, who is our director, secretary and treasurer.
(11) Tara Dorsette has voting and investment control over shares held by Energy Quest Ltd.
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Item 13. Certain Relationships, Related Transactions and Director Independence
As at December 31, 2008, $16,994 is owed to a company with a common director. This amount is unsecured, non-interest bearing and has no terms of repayment.
As at December 31, 2008, $192,116 is owed to a related party consultant for expenses paid on behalf of the company.
During the year ended December 31, 2008, the company recorded $150,000 for management services provided by the President of the company.
During the year ended December 31, 2008, the company recorded $130,000 for management services provided by the former Treasurer of the company.
During the year ended December 31, 2008, the company recorded $85,832 for management services provided by the CFO of the company
Other than as described above, we have not entered into any transactions with our officers, directors, persons nominated for these positions, beneficial owners of 5% or more of our common stock, or family members of these persons wherein the amount involved in the transaction or a series of similar transactions exceeded the lesser of $120,000 or 1% of the average of our total assets for the last three fiscal years.
Item 14. Principal Accountant Fees and Services.
Audit and Non-Audit Fees
The following table represents fees for the professional audit services and fees billed for other services rendered by our former auditors, Morgan & Company, and our current auditors, Malone & Bailey PC, for the audit of our annual financial statements respectively for the years ended December 31, 2007 and 2008 and any other fees billed for other services rendered by Morgan & Company and Malone & Bailey PC during these periods. All fees are paid by US dollars.
| Year Ended December 31, | Year Ended December 31, | |||||
| 2007 | 2008 | |||||
| Audit fees | $ | 26,700 | (1) | $ | 36,804 | |
| Audit-related fees | - | - | ||||
| Tax fees | - | - | ||||
| All other fees | - | - | ||||
| Total | $ | 26,700 | $ | 36,804 |
(1) Audit fees for 2007 were approximately $20,000 for services rendered by Malone & Bailey and approximately $6,700 for services rendered by Morgan & Company.
Since our inception, our Board of Directors, performing the duties of the Audit Committee, reviews all audit and non-audit related fees at least annually. The Board of Directors as the Audit Committee pre-approved all audit related services in the fiscal 2008.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
See “Index to Financial Statements” set forth on page F-1.
(a) (2) Financial Statement Schedules
None. The financial statement schedules are omitted because they are inapplicable or the requested information is shown in our financial statements or related notes thereto.
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| Exhibit | Exhibit Description |
| Number | |
| 3.1 | Articles of Incorporation (1) |
| 3.2 | Certificate of Amendment dated January 27, 2005 (2) |
| 3.3 | Certificate of Amendment dated December 29, 2005 |
| 3.4 | Certificate of Amendment dated May 10, 2007 (3) |
| 3.5 | Bylaws (1) |
| 10.1 | Executive employment agreement with Wilfred J. Ouellette dated April 17, 2007 (3) |
| 10.2 | Executive employment agreement with Steve Eilers dated April 17, 2007 (3) |
| 10.3 | Executive employment agreement with Vasant K. Jain dated January 3, 2008 (4) |
| 10.4 | Licensing agreement with Poly-Pacific International Inc. dated October 24, 2007 |
| 10.5 | 0% convertible debenture with Vasant Jain dated September 4, 2007 (5) |
| 10.6 | Manufacturing agreement with I-Coda Group dated July 24, 2007 (6) |
| 10.7 | Licensing agreement with Beaufort Energy Solutions, Inc. dated April 24, 2007 (3) |
| 10.8 | Licensing agreement with Re-Gen International Corporation dated April 19, 2007 (3) |
| 10.9 | Consulting agreement with Ronald Foster dated April 26, 2007 (3) |
| 10.10 | Ethics Policy (7) |
| 10.11 | Human Rights Policy Statement (7) |
| 21 | Subsidiaries |
| Syngas Energy Corp., which was incorporated under the laws of British Columbia on December 14, 2004. | |
| 31.1 | Certification of the Chief Executive Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of the Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| (1) | Included as exhibits to our Form 10-SB filed on November 30, 1999. |
| (2) | Included as an exhibit to our Form 8- K filed on February 24, 2005. |
| (3) | Included as exhibits to our Form SB-2 filed on July 17, 2007. |
| (4) | Included as an exhibit to our Form 8- K filed on January 8, 2008. |
| (5) | Included as an exhibit on our Form 10QSB filed November 19, 2007. |
| (6) | Included as an exhibit on our Form 10QSB filed August 15, 2007. |
| (7) | Included as an exhibit on our Form 10-K filed April 1, 2008. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| Energy Quest Inc. | |
| By:/s/ Wilfred J. Ouellette | |
| Date: April 13, 2009 | Wilfred J. Ouellette |
| President, Chief Executive Officer Director |
Pursuant to the requirements of the Exchange Act this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | D ate |
| / s/ Wilfred J. Ouellette | President, Chief Executive | April 13 2009 |
| Wilfred J. Ouellette | Officer, Director | |
| /s/ Vasant K. Jain | Chief Financial Officer | April 13, 2009 |
| Vasant K. Jain | Director | |
| /s/ Ronald Foster | Secretary, Treasurer | April 13, 2009 |
| Ronald Foster | Director |
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