UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2009
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number000-28305
Energy Quest Inc.
(Exact name of small business issuer as specified in its charter)
| Nevada | 91-1880015 |
| (State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
| organization) | |
| 850 South Boulder Hwy., Suite 169 | |
| Henderson, Nevada | 89015 - 7564 |
| (Address of principal executive offices) | (Zip Code) |
(702) 568 4131
(Issuer's telephone number)
_______________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was require to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X]No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company[ x ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 14, 2009, the registrant’s outstanding common stock consisted of 11,768,294 shares.
Table of Contents
1
PART I - FINANCIAL INFORMATION
Energy Quest Inc.
(A Development Stage Company)
June 30, 2009
2
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Balance Sheets |
| (Unaudited) |
| June 30, | December 31, | |||||
| 2009 | 2008 | |||||
| $ | $ | |||||
| Assets | ||||||
| Current Assets | ||||||
| Cash and cash equivalents | 76,406 | 792 | ||||
| Total Current Assets | 76,406 | 792 | ||||
| Intangible Assets, net | 2,853,528 | 2,927,078 | ||||
| Total Assets | 2,929,934 | 2,927,870 | ||||
| Liabilities and Stockholders' Equity | ||||||
| Current Liabilities | ||||||
| Accounts payable and accrued liabilities | 60,722 | 54,829 | ||||
| Amounts due to related parties | 273,003 | 244,488 | ||||
| Notes payable – related parties | 65,390 | 22,457 | ||||
| Note payable | – | 6,755 | ||||
| Advances from former Shareholders | 288,226 | 287,702 | ||||
| Total Liabilities | 687,341 | 616,231 | ||||
| Stockholders' Equity | ||||||
| Preferred Stock | ||||||
| Authorized: 1,000,000 shares, with a $0.01 par value; none issued | ||||||
| or outstanding | – | – | ||||
| Common Stock | ||||||
| Authorized: 200,000,000 shares, with a $0.001 par value; | ||||||
| Issued and outstanding: 11,668,294 shares (December 31, 2008 - | ||||||
| 9,555,270 shares) | 11,668 | 9,555 | ||||
| Additional Paid-in Capital | 8,245,746 | 7,877,004 | ||||
| Accumulated Other Comprehensive Income | 1,414 | 122 | ||||
| Deficit Accumulated During the Development Stage | (6,016,235 | ) | (5,575,042 | ) | ||
| Total Stockholders’ Equity | 2,242,593 | 2,311,639 | ||||
| Total Liabilities and Stockholders’ Equity | 2,929,934 | 2,927,870 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-1
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Statements of Operations and Other Comprehensive Loss |
| (Unaudited) |
| Period from | |||||||||||||||
| December 14, 2004 | |||||||||||||||
| For the Three | For the Three | For the Six | For the Six | (Date of Inception) | |||||||||||
| Months Ended | Months Ended | Months Ended | Months Ended | to | |||||||||||
| June 30, | June 30, | June 30, | June 30, | June 30, | |||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | |||||||||||
| $ | $ | $ | $ | $ | |||||||||||
| Revenue | – | – | – | – | 5,164 | ||||||||||
| Expenses | |||||||||||||||
| Consulting and management fees | 150,812 | 94,606 | 253,687 | 189,331 | 4,708,584 | ||||||||||
| General and administrative | 48,186 | 13,805 | 55,274 | 27,826 | 383,809 | ||||||||||
| Professional fees | 24,636 | 20,035 | 41,356 | 74,817 | 419,259 | ||||||||||
| Research and development | 14,338 | 4,922 | 14,338 | 9,922 | 60,449 | ||||||||||
| Depreciation, depletion, and impairment | 37,500 | – | 75,000 | – | 173,077 | ||||||||||
| Other | – | – | – | 80,000 | 80,000 | ||||||||||
| 275,472 | 133,368 | 439,655 | 381,896 | 5,825,178 | |||||||||||
| Loss from operations: | (275,472 | ) | (133,368 | ) | (439,655 | ) | (381,896 | ) | (5,820,014 | ) | |||||
| Interest income | – | 754 | – | 1,508 | 2,085 | ||||||||||
| Interest expense | (965 | ) | (1,240 | ) | (1,538 | ) | (6,759 | ) | (10,210 | ) | |||||
| Gain on write-off of debt | – | – | – | – | 5,826 | ||||||||||
| Loss on write-off of loan receivable | – | – | – | – | (193,922 | ) | |||||||||
| Net loss | (276,437 | ) | (133,854 | ) | (441,193 | ) | (387,147 | ) | (6,016,235 | ) | |||||
| Other comprehensive income (loss) | |||||||||||||||
| Foreign currency translation adjustment | 1,273 | (13 | ) | 1,293 | 33 | 1,415 | |||||||||
| Total Comprehensive Loss | (275,164 | ) | (133,867 | ) | (439,900 | ) | (387,114 | ) | (6,014,820 | ) | |||||
| Net Loss Per Share – Basic and Diluted | (0.03 | ) | (0.03 | ) | (0.04 | ) | (0.12 | ) | |||||||
| Weighted Average Shares Outstanding – | |||||||||||||||
| Basic and Diluted | 10,771,000 | 3,955,000 | 10,167,000 | 3,260,000 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-2
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Statements of Cash Flows |
| (Unaudited) |
| Accumulated from | |||||||||
| For the Six | For the Six | December 14, 2004 | |||||||
| Months Ended | Months Ended | (Date of Inception) to | |||||||
| June 30, | June 30, | June 30, | |||||||
| 2009 | 2008 | 2009 | |||||||
| $ | $ | $ | |||||||
| Cash Flows Used In Operating Activities | |||||||||
| Net loss | (441,193 | ) | (387,147 | ) | (6,016,235 | ) | |||
| Adjustments to reconcile net loss to net cash used in | |||||||||
| operating activities: | |||||||||
| Stock-based compensation | 120,750 | – | 2,607,613 | ||||||
| Shares issued for services | 37,500 | – | 1,553,693 | ||||||
| Loss on shares issued for amounts due to related parties | 15,976 | – | 15,976 | ||||||
| Write-off on restricted cash | – | 80,000 | 80,000 | ||||||
| Loss on write-off of loan receivable | – | – | 193,922 | ||||||
| Amortization of intangible assets | 75,000 | – | 173,077 | ||||||
| Gain on write-off of debt | – | – | (5,826 | ) | |||||
| Changes in operating assets and liabilities: | |||||||||
| Prepaid expenses and other current assets | – | (1,508 | ) | – | |||||
| Accounts payable and accrued liabilities | 5,946 | (8,307 | ) | 31,178 | |||||
| Due to related parties | 46,629 | 191,792 | 567,875 | ||||||
| Net Cash Used in Operating Activities | (139,392 | ) | (125,170 | ) | (798,727 | ) | |||
| Investing Activities | |||||||||
| Loan receivable | – | – | (193,922 | ) | |||||
| Net cash acquired on business acquisition | – | – | 565 | ||||||
| Change in restricted cash | – | – | (80,000 | ) | |||||
| Purchase of intangible assets | – | – | (25,000 | ) | |||||
| Net Cash Used In Investing Activities | – | – | (298,357 | ) | |||||
| Financing Activities | |||||||||
| Proceeds from issuance of common stock | 180,000 | 125,000 | 634,144 | ||||||
| Proceeds from notes payable | 41,448 | – | 546,768 | ||||||
| Re-payment of note payable | (6,808 | ) | – | (6,808 | ) | ||||
| Net Cash Provided By Financing Activities | 214,640 | 125,000 | 1,174,104 | ||||||
| Effect of Exchange Rate Changes on Cash | 366 | (4 | ) | (614 | ) | ||||
| (Decrease) increase in Cash and Cash Equivalents | 75,614 | (174 | ) | 76,406 | |||||
| Cash and Cash Equivalents, beginning | 792 | 1,733 | – | ||||||
| Cash and Cash Equivalents, end | 76,406 | 1,559 | 76,406 | ||||||
| Supplemental Disclosures | |||||||||
| Cash paid for taxes | – | – | – | ||||||
| Cash paid for interest | – | – | – | ||||||
| Non-Cash Activities | |||||||||
| Common stock issued for intangible assets | – | 3,000,000 | 3,000,204 | ||||||
| Common stock issued for stock payable | – | – | 161,550 | ||||||
| Common stock issued for amounts due to related parties | 16,629 | – | 344,651 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-3
| Energy Quest Inc. |
| (A Development Stage company) |
| Notes to the Unaudited Consolidated Financial Statements |
| 1. | Basis of Presentation |
The accompanying unaudited interim consolidated financial statements of Energy Quest, Inc. (“Energy Quest” or “the company”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Energy Quest’s Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2008 as reported in the Form 10-K have been omitted.
Reclassifications
Certain reclassifications have been made to the prior period’s financial statements to conform to the current period’s presentation.
| 2. | Going Concern |
These consolidated financial statements have been prepared on the assumption that the company is a going concern, meaning it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations. Different bases of measurement may be appropriate when a company is not expected to continue operations for the foreseeable future. The company’s continuation as a going concern is dependent upon its ability to attain profitable operations and generate funds there-from, and/or raises equity capital or borrowings sufficient to meet current and future obligations. Management plans to raise equity financings over the next twelve months to finance operations. There is no guarantee that the company will be able to complete any of these objectives. The company has incurred losses from operations since inception and at June 30, 2009, has a working capital deficiency and an accumulated deficit that creates substantial doubt about the company’s ability to continue as a going concern.
| 3. | Recently Adopted Pronouncements |
Energy Quest does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the company’s results of operations, financial position or cash flows.
| 4. | Intangible Assets |
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 June 30, 2009, the total cost of $3,000,000 is recorded as an intangible asset, net of accumulated amortization of $173,077. Amortization expense for the six months ended June 30, 2009 and 2008 was $75,000 and $0, respectively. Amortization is calculated based on the expected legal useful life of 20 years.
| 5. | Related Party Transactions | |
The following details Amounts due to related parties: | ||
| a. | As at June 30, 2009, $Nil (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. | |
| b. | As at June 30, 2009, $210 (December 31, 2008 - $5,213) is owed to a related party consultant for expenses paid on behalf of the company. | |
| c. | As at June 30, 2009, $16,171 (December 31, 2008 - $Nil) is owed by a related party consultant for advances received from the company. | |
| d. | During the six month period ended June 30, 2009, the company recorded $75,000 (2008 - $75,000) for management services provided by the President of the company. At June 30, 2009, $288,964 (December 31, 2008 - $222,281) is included in due to related parties. | |
On June 11, 2009, the company issued 163,024 shares of common stock, of which, $16,629 reduced Amounts due to related parties and a loss was recognized. See note 8 Equity for further details. | ||
F-4
| Energy Quest Inc. |
| (A Development Stage company) |
| Notes to the Unaudited Consolidated Financial Statements |
The following details Notes payable – related parties:
| e. | 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 June 30, 2009, accrued interest of $2,082 (December 31, 2008 - $1,457) is recorded. | |
| f. | During the six period ended June 30, 2009, the company received $41,448 in proceeds from a related consultant. At June 30, 2009, this amount is included in note payable – related party along with related accrued interest of $860. There were no such proceeds received during the six month period ended June 30, 2008. | |
| g. | During the six month period ended June 30, 2009, the company recorded $Nil (2008 - $65,000) for management services provided by the former Treasurer of the company. |
| 6. | Note Payable |
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 June 30, 2009, accrued interest of $0 (December 31, 2008 - $71) is recorded. The company paid the amount in full during the six-month period ended June 30, 2009. There were no similar payments made during the six month period ended June 30, 2008.
| 7. | Commitments |
On July 1, 2008, the company signed an agreement with a consultant for consulting services for a period of one year. The company paid the consultant $241,500, which is the fair value of the 57,500 shares issued. During the year ended December 31, 2008, $120,750 was charged to consulting fees. The company issued the shares on April 26, 2007. 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. During the six month period ended June 30, 2009, $120,750 was treated as vested and was recognized as stock-based compensation.
| 8. | Equity |
| a. | On May 4, 2009, the company issued 1,800,000 shares of common stock pursuant to a private placement. The company received $0.10 per share of common stock for total proceeds of $180,000. | |
| b. | On May 28, 2009, the company issued 150,000 shares of common stock with a fair value of $37,500 for services received. | |
| c. | On June 11, 2009, the company issued 163,024 shares of common stock with a fair value of $32,605 for settlement of amounts due to related party. Since the fair value of the shares issued was more than the amounts due to related party, the company recognized a loss on the shares issued for amounts due to related party for $15,976. | |
| d. | $120,750 of stock-based compensation was recognized for the six month period ended June 30, 2009. See note 7 Commitments for further details. | |
| e. | As of December 31, 2008, there were 107,700 warrants outstanding with an average weighted exercise price of $2.00. In April 2009, the warrants expired. There were no warrants granted during the six months period ended June 30, 2009, leaving zero warrants outstanding as of June 30, 2009. |
| 9. | Subsequent Event |
| a. | On July 10, 2009, the company issued 100,000 shares of common stock pursuant to a private placement. The company received $0.10 per share of common stock for total proceeds of $10,000. | |
| b. | In accordance with SFAS No. 165 “Subsequent Events”, we have evaluated subsequent events through August 14, 2009, the date of issuance of the unaudited consolidated financial statements. |
F-5
ITEM 2. Management Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor Statement
This report on Form 10-Q contains certain forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.
These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements. The following discusses our financial condition and results of operations based upon our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States. It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein.
The following discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q. The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.
Overview
We are engaged in the development and production of hydrogen-enriched alternative fuels. We plan to employ gasification technologies and catalytic conversion processes to produce clean fuels. We design, build, lease and in some cases operate the gasification technologies with broad potential application within the energy field. Our various technologies allow for the use of steam for reformation of coal and other carbonaceous feedstocks, conversion of waste solid fuel sources into gaseous form and allow for incineration of waste in an environmentally friendly manner.
We have one wholly-owned subsidiary, Syngas Energy Corp., and its principal business involves an integrated gasification production system technology that combines modern gasification with turbine technologies to produce synthetic gas, hydrogen or electricity.
Liquidity and Capital Resources
As of June 30, 2009, we had cash and cash equivalents of $76,406 and a working capital deficiency of $610,935. As of June 30, 2009 our accumulated deficit was $6,016,235. For the six months ended June 30, 2009 our net loss was $441,193 compared to $387,147 during the same period in 2008. This increase was due mostly to higher consulting and management fees.
3
Our loss was funded by proceeds from shareholder loans. During the six months ended June 30, 2009, we raised in net proceeds $214,640 through financing activities and our cash position increased by $75,614.
We used net cash of $139,392 in operating activities for the six months ended June 30, 2009 compared to net cash of $125,170 in operating activities for the same period in 2008. We did not use any money in investing activities for the six months ended June 30, 2009 nor did we use any money for investing activities during the same period in 2008. The effect of exchange rates on cash was an increase in cash of $366 for the six months ended June 30, 2009 compared to a decrease of $4 during six months ended June 30, 2008.
During the six months ended June 30, 2009 our monthly cash requirement was approximately $46,464, compared to approximately $41,723 for the same period in 2008. We expect to require a total of approximately $26,585,000 to fully carry out our business plan over the next twelve months beginning September 2009 as set out in this table:
| Description | Estimated Expense | ||
| Marketing our gasification technologies | $ | 200,000 | |
| Continued improvement of our PyStR™ and | |||
| other technologies | $ | 1,200,000 | |
| Further commercializing our gasification | |||
| technologies | $ | 400,000 | |
| Manufacturing of Modular Bio-energy units | $ | 400,000 | |
| Payment of accounts payable and accrued | |||
| liabilities | $ | 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 | |
| Heavy Oil Upgrader Plant (Northern Alberta Oil) | $ | 23,135,000 | |
| Total | $ | 26,585,000 |
We intend to meet our cash requirements for the next 12 months through external sources: a combination of debt financing and equity financing through private placements. We are currently not in good short-term financial standing. We anticipate that we may not generate any revenues in the near future and we will not have enough positive internal operating cash flow until we can generate substantial revenues, which may take the next few years to fully realize. There is no assurance we will achieve profitable operations. We have historically financed our operations primarily by cash flows generated from the sale of our equity securities and through cash infusions from officers and outside investors in exchange for debt and/or common stock.
4
These consolidated financial statements have been prepared on the assumption that we are a going concern, meaning we 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. Our continuation as a going concern is dependent upon our 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 we will be able to complete any of these objectives. We have incurred losses from operations since inception and at June 30, 2009, have a working capital deficiency and an accumulated deficit that creates substantial doubt about our ability to continue as a going concern.
On September 4, 2007, we entered into a 0% convertible debenture due September 4, 2012 with Jain Vasant whereby Mr. Vasant agreed to loan us $120,000,000. At any time after September 4, 2012 and until September 4, 2017 Mr. Vasant has the right to convert all, or a portion of, the principal amount of the convertible debenture into our common shares at a conversion price of $50.00 per share. Pursuant to the convertible debenture the funds will be transferred to us within 10 business days after the convertible debenture documents are successfully posted on Euroclear. As of August 11, 2009, the transaction has not yet closed and we have not yet received any funds. We anticipate that this agreement will close shortly.
Once the $120,000,000 debenture transaction is closed, we will have enough capital to meet our cash requirements over the next twelve months. However, we cannot guarantee that the agreement will be successfully closed on a timely basis. If the agreement fails to close, we intend to raise the balance of our cash requirements (approximately $26,585,000) 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.
On May 19, 2009 we entered into an Investment Agreement with First Nation Moosomin Band (“Moosomin”). The agreements specifies that Moosomin will make an investment of US $5,000,000 into us by way of a purchase of 2,500,000 Class A Preferred Shares at $2.00 per share which may be converted into common stock at the option of Moosomin. The investment will be finalized in a formal agreement which has not yet been executed.
Results of Operations for the three months ended June 30, 2009 compared to the three months ended June 30, 2008 and from inception to June 30, 2009.
Limited Revenues
Since our inception on December 14, 2004 to June 30, 2009, we have earned limited revenue of $5,164. As of June 30, 2009, we have an accumulated deficit of $6,016,235 and we did not earn any revenues during the three months ending on June 30, 2009. At this time, our ability to generate any significant revenues continues to be uncertain. Our financial statements contain an additional explanatory paragraph in Note 2, which identifies issues that raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustment that might result from the outcome of this uncertainty.
5
Net Loss
We incurred a net loss of $276,437 for the three months ended June 30, 2009, compared to a net loss of $133,854 for the same period in 2008. This increase in net loss is mostly due to higher consulting and management fees, general and administrative fees and research and development expenses. From inception on December 14, 2004 to June 30, 2009, we have incurred a net loss of $6,016,235. Our basic and diluted loss per share was $0.03 for the three months ended June 30, 2009, and $0.03 for the same period in 2008.
Expenses
Our total operating expenses increased from $133,368 to $275,472 for the three months ended June 30, 2009 compared to the same period in 2008. This increase in expenses is mostly due to higher consulting and management fees, general and administrative fees and research and development expenses. Since our inception on December 14, 2004 to June 30, 2009, we have incurred total operating expenses of $5,825,178.
Our consulting and management fees increased $56,206 from $94,606 to $150,812 for the three months ended June 30, 2009 compared to the same period in 2008. This increase was largely due to higher payments made to our consultants. Since our inception on December 14, 2004 until June 30, 2009 we have spent $4,708,584 on consulting and management fees.
Our general and administrative expenses consist of bank charges, travel, meals and entertainment, office maintenance, communication expenses (internet, fax, and telephone), courier, postage costs, office supplies. Our general and administrative expenses increased $34,381 from $13,805 to $48,186 for the three months ended June 30, 2009 compared to the same period in 2008. Since our inception on December 14, 2004 until June 30, 2009 we have spent $383,809 on general and administrative expenses.
We spent $14,338 on research and development expenses for the three months ended June 30, 2009 compared to $4,922 spent on research and development during the three months ended June 30, 2008. Since our inception on December 14, 2004 until June 30, 2009 we have spent $60,449 research and development. Going forward, we anticipate that we will spend approximately $1,600,000 on research and development during the next 12 months. Our professional fees, consisting primarily of legal, accounting and auditing fees, increased by $4,601 to $24,636 for the three months ended June 30, 2009 from $20,035 for the same period in 2008, mainly due to slightly increased legal and auditing services provided in the three month periods ended June 30, 2009.
Results of Operations for the six months ended June 30, 2009 compared to the six months ended June 30, 2008
Limited Revenues
We did not earn any revenues during the six months ending on June 30, 2009, nor did we earn any revenues in the same period in 2008. At this time, our ability to generate any significant revenues continues to be uncertain.
6
Net Loss
We incurred a net loss of $441,193 for the six months ended June 30, 2009, compared to a net loss of $387,147 for the same period in 2008. This increase in net loss is mostly due to higher consulting and management fees as well as general and administrative fees. Our basic and diluted loss per share was $0.04 for the six months ended June 30, 2009, and $0.12 for the same period in 2008.
Expenses
Our total operating expenses increased from $381,896 to $439,655 for the six months ended June 30, 2009 compared to the same period in 2008. This increase in expenses is mostly due to higher consulting and management fees as well as general and administrative fees.
Our consulting and management fees increased $64,356 from $189,331 to $253,687 for the six months ended June 30, 2009 compared to the same period in 2008. This increase was largely due to higher payments made to our consultants.
Our general and administrative expenses consist of bank charges, travel, meals and entertainment, office maintenance, communication expenses (internet, fax, and telephone), courier, postage costs, office supplies. Our general and administrative expenses increased $27,448 from $55,274 to $27,826 for the six months ended June 30, 2009 compared to the same period in 2008.
We spent $14,338 on research and development expenses for the six months ended June 30, 2009 compared to $9,922 spent on research and development during the six months ended June 30, 2008.
Our professional fees, consisting primarily of legal, accounting and auditing fees, decreased by $33,461 to $41,356 for the six months ended June 30, 2009 from $74,817 for the same period in 2008, mainly due to decreased legal and auditing services provided in the six month period ended June 30, 2009.
Inflation
The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.
Off-Balance Sheet Arrangements
As of June 30, 2009, we had no off-balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risks.
Not applicable.
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ITEM 4. Control and Procedures
Not applicable
ITEM 4T. Control and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is collected and communicated to management to allow timely decisions regarding required disclosures. The Chief Executive Officer and the Chief Financial Officer have concluded, based on their evaluation as of June 30, 2009 that, as a result of the following material weaknesses in internal control over financial reporting as described further in our Annual Report on Form 10-K filed with the SEC on April 14, 2009, disclosure controls and procedures were ineffective in providing reasonable assurance that material information is made known to them by others within the Company:
a) We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of generally accepted accounting principles commensurate with our complexity and our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting and disclosure controls and procedures. Also, we do not have an independent audit committee. As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the consolidated financial statements, including disclosures, will not be prevented or detected on a timely basis; and
b) Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Limitations On The Effectiveness Of Internal Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, and/or the degree of compliance with the policies or procedures may deteriorate.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings.
As of August 11, 2009 there are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we or any of our subsidiaries are a party or of which any of our properties is the subject. Also, our management is not aware of any legal proceedings contemplated by any governmental authority against us.
ITEM 2. Unregistered Sales of Equity Securities.
On May 4, 2009, we issued 1,800,000 shares of common stock pursuant to a private placement to two investors. The shares were issued at $0.10 per share total proceeds of $180,000.
On June 11, 2009, we issued 163,024 shares of common stock with a fair value of $32,605 for settlement of debt.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
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ITEM 6. Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
| ENERGY QUEST INC. | ||
| (REGISTRANT) | ||
| Date: August 14, 2009 | /s/Wilf Ouellette | |
| Wilf Ouellette | ||
| President, Chief Executive Officer, Director | ||
| (Authorized Officer for Registrant) | ||
| Date: August 14, 2009 | /s/Vasant K, Jain | |
| Vasant K, Jain | ||
| Chief Financial Officer, Director, Principal | ||
| Accounting Officer |
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