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 endedSeptember 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 November 11, 2009, the registrant’s outstanding common stock consisted of 12,768,294 shares.
Table of Contents
1
| PART I - FINANCIAL INFORMATION |
| |
| Energy Quest Inc. |
| (A Development Stage Company) |
| |
| September 30, 2009 |
2
| Energy Quest Inc. |
| (A Development Stage Company) |
| Consolidated Balance Sheets |
| (Unaudited) |
| | | September 30, | | | December 31, | |
| | | 2009 | | | 2008 | |
| Assets | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | $ | 27,719 | | $ | 792 | |
| Total Current Assets | | 27,719 | | | 792 | |
| Intangible Assets, net | | 2,817,738 | | | 2,927,078 | |
| Total Assets | | 2,845,457 | | | 2,927,870 | |
| | | | | | | |
| Liabilities and Stockholders' Equity | | | | | | |
| Current Liabilities | | | | | | |
| Accounts payable and accrued liabilities | | 61,676 | | | 54,829 | |
| Amounts due to related parties | | 323,785 | | | 244,488 | |
| Notes payable – related parties | | 37,667 | | | 22,457 | |
| Note payable | | – | | | 6,755 | |
| Advances from former Shareholders | | 288,843 | | | 287,702 | |
| Total Liabilities | | 711,971 | | | 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: 12,768,294 shares (December 31, 2008 - 9,555,270 shares) | | 12,768 | | | 9,555 | |
| Additional Paid-in Capital | | 8,454,646 | | | 7,877,004 | |
| Accumulated Other Comprehensive Income | | 2,507 | | | 122 | |
| Deficit Accumulated During the Development Stage | | (6,336,435 | ) | | (5,575,042 | ) |
| Total Stockholders’ Equity | | 2,133,486 | | | 2,311,639 | |
| Total Liabilities and Stockholders’ Equity | $ | 2,845,457 | | $ | 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 | |
| | | For the Three | | | For the Three | | | For the Nine | | | For the Nine | | | December 14, 2004 | |
| | | Months Ended | | | Months Ended | | | Months Ended | | | Months Ended | | | (Date of Inception) to | |
| | | September 30, | | | September 30, | | | September 30, | | | September 30, | | | September 30, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Revenue | $ | – | | $ | – | | $ | – | | $ | – | | $ | 5,164 | |
| | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | |
| Consulting and management fees | | 238,500 | | | 137,501 | | | 492,187 | | | 326,832 | | | 4,947,084 | |
| General and administrative | | 27,717 | | | 10,848 | | | 82,991 | | | 38,674 | | | 411,526 | |
| Professional fees | | 14,774 | | | 28,908 | | | 56,130 | | | 103,725 | | | 434,033 | |
| Research and development | | 1,045 | | | 36,189 | | | 15,383 | | | 46,111 | | | 61,494 | |
| Depreciation, depletion, and impairment | | 37,500 | | | – | | | 112,500 | | | – | | | 210,577 | |
| Other | | – | | | – | | | – | | | – | | | 80,000 | |
| | | 319,536 | | | 213,446 | | | 759,191 | | | 515,342 | | | 6,144,714 | |
| Loss from operations: | | (319,536 | ) | | (213,446 | ) | | (759,191 | ) | | (515,342 | ) | | (6,139,550 | ) |
| | | | | | | | | | | | | | | | |
| Interest income | | – | | | (1,508 | ) | | – | | | – | | | 2,085 | |
| Interest expense | | (664 | ) | | (782 | ) | | (2,202 | ) | | (7,541 | ) | | (10,874 | ) |
| Gain on write-off of debt | | – | | | – | | | – | | | – | | | 5,826 | |
| Loss on restricted cash | | – | | | – | | | – | | | (80,000 | ) | | – | |
| Loss on write-off of loan receivable | | – | | | – | | | – | | | – | | | (193,922 | ) |
| | | | | | | | | | | | | | | | |
| Net loss | | (320,200 | ) | | (215,736 | ) | | (761,393 | ) | | (602,883 | ) | | (6,336,435 | ) |
| Other comprehensive income | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | 1,092 | | | 29 | | | 2,385 | | | 62 | | | 2,507 | |
| Total Comprehensive Loss | $ | (319,108 | ) | $ | (215,707 | ) | $ | (759,008 | ) | $ | (602,821 | ) | $ | (6,333,928 | ) |
| Net Loss Per Share – Basic and Diluted | | (0.03 | ) | | (0.04 | ) | | (0.07 | ) | | (0.16 | ) | | | |
| Weighted Average Shares Outstanding – | | | | | | | | | | | | | | | |
| Basic and Diluted | | 12,268,000 | | | 4,858,000 | | | 10,875,000 | | | 3,797,000 | | | | |
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 Nine | | | For the Nine | | | December 14, 2004 | |
| | | Months Ended | | | Months Ended | | | (Date of Inception) to | |
| | | September 30, | | | September 30, | | | September 30, | |
| | | 2009 | | | 2008 | | | 2009 | |
| | | | | | | | | | |
| Cash Flows Used In Operating Activities | | | | | | | | | |
| Net loss | $ | (761,393 | ) | $ | (602,883 | ) | $ | (6,336,435 | ) |
| | | | | | | | | | |
| Adjustments to reconcile net loss to net cash used in | | | | | | | | | |
| operating activities: | | | | | | | | | |
| Stock-based compensation | | 120,750 | | | – | | | 2,607,613 | |
| Shares issued for services | | 237,500 | | | 127,625 | | | 1,753,693 | |
| Loss on shares issued for amounts due 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 | | 112,500 | | | – | | | 210,577 | |
| Gain on write-off of debt | | – | | | – | | | (5,826 | ) |
| | | | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | | |
| Prepaid expenses and other current assets | | – | | | 2,064 | | | – | |
| Accounts payable and accrued liabilities | | 6,900 | | | (16,706 | ) | | 32,132 | |
| Due to related parties | | 97,320 | | | 284,470 | | | 618,566 | |
| | | | | | | | | | |
| Net Cash Used in Operating Activities | | (170,447 | ) | | (125,430 | ) | | (829,782 | ) |
| | | | | | | | | | |
| 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 | | 190,000 | | | 125,000 | | | 644,144 | |
| Proceeds from notes payable | | 13,816 | | | – | | | 519,136 | |
| Re-payment of note payable | | (6,808 | ) | | – | | | (6,808 | ) |
| | | | | | | | | | |
| Net Cash Provided By Financing Activities | | 197,008 | | | 125,000 | | | 1,156,472 | |
| | | | | | | | | | |
| Effect of Exchange Rate Changes on Cash | | 366 | | | (3 | ) | | (614 | ) |
| | | | | | | | | | |
| Increase (decrease) in Cash and Cash Equivalents | | 26,927 | | | (433 | ) | | 27,719 | |
| | | | | | | | | | |
| Cash and Cash Equivalents, beginning | | 792 | | | 1,733 | | | – | |
| | | | | | | | | | |
| Cash and Cash Equivalents, end | $ | 27,719 | | $ | 1,300 | | $ | 27,719 | |
| | | | | | | | | | |
| | | | | | | | | | |
| 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 | | | 161,550 | |
| Common stock issued for amounts due to related parties | | 16,629 | | | – | | | 344,651 | |
| Common stock issued for subscription receivable | | – | | | (60,500 | ) | | – | |
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”), 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 September 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
In July 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance relating to the“FASB Accounting Standards Codification” at ASC 105, as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The codification is effective for interim periods ending after September 15, 2009. All existing accounting standards are superseded as described in ASC 105. All other accounting literature not included in the Codification is non-authoritative. The adoption of ASC 105 did not impact the Company’s results of operations, financial position or cash flows.
Effective for the quarter ended June 30, 2009, the Company implemented ASC 855, Subsequent Events. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of ASC 855 did not impact the Company’s financial position or results of operations. The Company evaluated all events or transactions that occurred after September 30, 2009 up through November 13, 2009, the date the Company issued these financial statements. During this period, the Company had no subsequent events.
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 September 30, 2009, the total cost of $3,000,000 is recorded as an intangible asset, net of accumulated amortization of $210,577. Amortization expense for the nine months ended September 30, 2009 and 2008 was $112,500 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 at September 30, 2009:
| | a. | $223 is owed to a related party consultant for expenses paid on behalf of the company. |
| | | |
| | b. | $2,902 is owed to a related party consultant for advances that the company received. |
| | | |
| | c. | During the nine month period ended September 30, 2009, the company recorded $112,500 for management services provided by the President of the company. At September 30, 2009, $326,464 is included in due to related parties. |
F-4
| Energy Quest Inc. |
| (A Development Stage company) |
| Notes to the Unaudited Consolidated Financial Statements |
| | d. | 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. |
| | | |
| | 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. At September 30, 2009, accrued interest of $2,399 is recorded. |
The following details Notes payable – related parties:
| | f. | During the nine months ended September 30, 2009, the company received an advance of $13,816 from a related party consultant. At September 30, 2009, this amount is included in note payable – related party along with related accrued interest of $452. There were no such proceeds received during the nine month period ended September 30, 2008. |
| | | |
| | g. | During the nine month period ended September 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 September 30, 2009, accrued interest of $0 (December 31, 2008 - $71) is recorded. The company paid the amount in full during the nine month period ended September 30, 2009. There were no similar payments made during the nine month period ended September 30, 2008.
7. Joint Venture
| | a. | On August 3, 2009, the company signed a Joint Venture Agreement (“Agreement”) with Crude Oil Petroleum Services Corporation to form a new company known as EnviroTec Services in the Province of Alberta, Canada. The new company will focus on the business of oil remediation consisting of sand, slop oil, sludge and tank cleaning. The Agreement will continue for a period of 20 years and capital contribution will be on a 50:50 basis. As of September 30, 2009, no transactions had taken place. |
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 a 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 a related party for $15,976. |
| | | |
| | d. | 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. |
| | | |
| | e. | On August 14, 2009, the company issued 1,000,000 shares of common stock with a fair value of $200,000 for services received. |
| | | |
| | f. | During the nine months ended September 30, 2009, stock-based compensation of $120,750 was recognized for previously granted common stock. |
| | | |
| | g. | 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 nine month period ended September 30, 2009, leaving zero warrants outstanding as of September 30, 2009. |
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 September 30, 2009, we had cash and cash equivalents of $27,719 and a working capital deficiency of $684,252. As of September 30, 2009 our accumulated deficit was $6,336,435. For the nine months ended September 30, 2009 our net loss was $761,393 compared to $602,883 during the same period in 2008. This increase was due mostly to higher consulting and management fees.
2
Our loss was funded by proceeds from shareholder loans. During the nine months ended September 30, 2009, we raised in net proceeds $197,008 through financing activities and our cash position increased by $26,927.
We used net cash of $170,447 in operating activities for the nine months ended September 30, 2009 compared to net cash of $125,430 in operating activities for the same period in 2008. We did not use any money in investing activities for the nine months ended September 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 nine months ended September 30, 2009 compared to a decrease of $3 during nine months ended September 30, 2008.
During the nine months ended September 30, 2009 our monthly cash requirement was approximately $18,939, compared to approximately $13,937 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 December 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.
3
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 September 30, 2009, have a working capital deficiency and an accumulated deficit that creates substantial doubt about our ability to continue as a going concern.
We intend to raise funds to meet 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 August 3, 2009, we signed a Joint Venture Agreement with Crude Oil Petroleum Services Corporation to form a new company known as EnviroTec Services in the Province of Alberta, Canada. The new company will focus on the business of oil remediation consisting of sand, slop oil, sludge and tank cleaning. The agreement will continue for a period of 20 years and each party will contribute services on a 50:50 basis and share revenues accordingly. As of September 30, 2009, no transactions had taken place.
Results of Operations for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 and from inception to September 30, 2009.
Limited Revenues
Since our inception on December 14, 2004 to September 30, 2009, we have earned limited revenue of $5,164. As of September 30, 2009, we have an accumulated deficit of $6,336,435 and we did not earn any revenues during the three months ending on September 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.
Net Loss
We incurred a net loss of $320,200 for the three months ended September 30, 2009, compared to a net loss of $215,736 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 depreciation, depletion and impairment expenses. From inception on December 14, 2004 to September 30, 2009, we have incurred a net loss of $6,336,435. Our basic and diluted loss per share was $0.03 for the three months ended September 30, 2009, and $0.04 for the same period in 2008.
4
Expenses
Our total operating expenses increased from $106,090 to $319,536 for the three months ended September 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 depreciation, depletion and impairment expenses. Since our inception on December 14, 2004 to September 30, 2009, we have incurred total operating expenses of $6,144,714.
Our consulting and management fees increased $100,999 from $137,501 to $238,500 for the three months ended September 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 September 30, 2009 we have spent $4,947,084 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 $16,869 from $10,848 to $27,717 for the three months ended September 30, 2009 compared to the same period in 2008. Since our inception on December 14, 2004 until September 30, 2009 we have spent $411,526 on general and administrative expenses.
We spent $1,045 on research and development expenses for the three months ended September 30, 2009 compared to $36,189 spent on research and development during the three months ended September 30, 2008. Since our inception on December 14, 2004 until September 30, 2009 we have spent $61,494 on research and development. Going forward, we anticipate that we will spend approximately $1,600,000 on research and development during the next 12 months.
Our professional fees, consisting primarily of legal, accounting and auditing fees, decreased by $14,134 to $14,774 for the three months ended September 30, 2009 from $28,908 for the same period in 2008, mainly due to slightly decreased legal and auditing services provided in the three month periods ended September 30, 2009.
Results of Operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008
Limited Revenues
We did not earn any revenues during the nine months ending on September 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.
Net Loss
We incurred a net loss of $761,393 for the nine months ended September 30, 2009, compared to a net loss of $602,883 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 $0.7 for the nine months ended September 30, 2009, and $0.16 for the same period in 2008.
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Expenses
Our total operating expenses increased from $515,342 to $759,191 for the nine months ended September 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. Since our inception on December 14, 2004 to September 30, 2009, we have incurred total operating expenses of $6,144,714.
Our consulting and management fees increased $165,355 from $326,832 to $492,187 for the nine months ended September 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 $44,317 from $38,674 to $82,991 for the nine months ended September 30, 2009 compared to the same period in 2008.
We spent $15,383 on research and development expenses for the nine months ended September 30, 2009 compared to $46,111 spent on research and development during the nine months ended September 30, 2008.
Our professional fees, consisting primarily of legal, accounting and auditing fees, decreased by $47,595 to $56,130 for the nine months ended September 30, 2009 from $103,725 for the same period in 2008, mainly due to decreased legal and auditing services provided in the nine month period ended September 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 September 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.
ITEM 4. Control and Procedures
Not applicable
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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 September 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 September 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 November 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 July 10, 2009, we issued 100,000 shares of common stock pursuant to a private placement. We received $0.10 per share of common stock for total proceeds of $10,000.
On August 14, 2009, we issued 1,000,000 shares of common stock with a fair value of $200,000 for services received.
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: November 13, 2009 | /s/Wilf Ouellette |
| | Wilf Ouellette |
| | President, Chief Executive Officer, Director |
| | (Authorized Officer for Registrant) |
| | |
| Date: November 13, 2009 | /s/Vasant K, Jain |
| | Vasant K, Jain |
| | Chief Financial Officer, Director, Principal |
| | Accounting Officer |
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