UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 000-28305
ENERGY QUEST, INC.
(Name of Small Business Issuer in its charter)
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Nevada | 91-1880015 |
(state or other jurisdiction of incorporation or organization) | (I.R.S. Employer I.D. No.) |
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850 South Boulder Hwy, Suite 169 Henderson, Nevada | 89015-7564 |
(Address of principal executive offices) | (Zip Code) |
(702) 568-4131
(Registrant’s telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of“ large accelerated filer” ,“ accelerated filer” and“ smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o &nbs p; Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 16, 2010 the registrant had 15,818,294 shares of common s tock outstanding.
EXPLANATORY NOTE
This Form 10-Q/A amends the Form 10-Q for the six months ended June 30, 2010 filed by Energy Quest Inc. (“we” , “us”, “our” or the “Company”) with the Securities and Exchange Commission on August 16, 2010, and restates its unaudited financial statements for the six months ended June 30, 2010, the notes thereto and related disclosure, to reflect an adjustment to the accounting and disclosure of the convertible note issued by us on January 29, 2010. As a result, the unaudited interim financial statements included in the originally filed Form 10-Q should not be relied upon.
On January 29, 2010, the Company completed a financing agreement for $50,000 with a private investor (the “Investor”) and issued a callable convertible note totaling $50,000 (the “Note”). The embedded conversion option contains a reset provision that can cause an adjustment to the conversion price if the Company sells or issues an equity instrument at a price lower than the initial conversion price. Due to this provision, the embedded conversion option qualifies for derivative accounting. The Company should have recorded the fair value of this derivative liability on the date of issuance of the Note as well as the change in fair value for each subsequent balance sheet date. The unaudited financial statements and the notes thereto included herein have been restated to reflect this adjustment, and disclosure of the adjustment has been made to the disc ussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Except as stated above, no other information has been changed from the originally filed Form 10-Q and this Form 10-Q/A does not reflect events occurring after the filing of the Form 10-Q.
The Company has included new certifications of its officers pursuant to Sections 302 and 906 of the Sarbanes Oxley Act with this Form 10-Q/A.
Table of Contents
2
PART I - FINANCIAL INFORMATION
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Energy Quest Inc. |
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(A Development Stage Company) |
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June 30, 2010 |
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| Index |
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Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited) | |
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3
(A Development Sta ge Company)
Consolidated Balance Sheets
(Unaudited)
| June 30, 2010 (Restated) | December 31, 2009 |
Assets |
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Current Assets |
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Cash | $65,409 | $816 |
Deferred financing cost | 1,200 | – |
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Total Current Assets | 66,609 | 816 |
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Intangible Assets, net | 2,706,255 | 2,781,224 |
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Total Assets | 2,772,864 | 2,782,040 |
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Liabilities and Stockholders' Equity |
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Current Liabilities |
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Accounts payable and accrued liabilities | 36,647 | 36,294 |
Amounts due to related parties | 600,403 | 516,881 |
Notes payable – related parties | 85,313 | 35,298 |
Convertible note, net | 27,778 | – |
Derivative liabilities | 55,935 | – |
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Total Liabilities | 806,076 | 588,473 |
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Stockhold ers' Equity |
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Preferred Stock |
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Authorized: 1,000,000 shares, with a $0.01 par value; none issued or outstanding | – | – |
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Common Stock |
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Authorized: 200,000,000 shares, with a $0.001 par value; Issued: 15,818,294 and 13,818, 294 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively | 15,818 | 13,818 |
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Additional Paid-in Capital | 8,761,596 | 8,663,596 |
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Accumulated Other Comprehensive Income | 3,981 | 3,946 |
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Deficit Accumulated During the Development Stage | (6,814,607) | (6,487,793) |
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Total Stockholders’ Equity | 1,966,788 | 2,193,567 |
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Total Liabilities and Stockholders’ Equity | $2,772,864 | $2,782,040 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-1
| &nb sp; |
(A Development Stage Company)
Consolidated Statements of Operations and Other Comprehensive Loss
(Unaudited)
| For the Three Months Ended June 30, 2010 (Restated) | For the Three Months Ended June 30, 200 9 | For the Six Months Ended June 30, 2010 (Restated) | For the Six Months Ended June 30, 2009 | Period from December 14, 2004 (Date of Inception) to June 30, 2010 (Restated) |
Revenue | $ &nbs p; – | $ – | $ – | $ &nb sp; – | $5,164 |
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Expenses |
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Consulting and management fees | 75,000 | 150,812 | 150,000 | 253,687 | 5,291,394 |
General and administrative | 20,513 | 48,186 | 26,776 | 55,274 | 451,063 |
Professional fees | 24,790 | 24,636 | 35,175 | 41,356 | 476,123 |
Research and development | – | 14,338 | 1,500 | 14,338 | 266,494 |
Depreciation, depletion, and impairment | 37,500 | 37,500 | 75,000 | 75,000 | 323,077 |
Loss on theft of cash | – | &nbs p; – | – | – | 80,000 |
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| 157,803 | 275,472 | 288,451 | 439,655 | 6,888,151 |
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Loss from operations: | (157,803) | (275,472) | (288,451) | (439,655) | (6,882,987) |
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Interest income | – | – | – | – | 2,089 |
Interest expense | (2,133) | (965) | (3,350) | (1,538) | (14,777) |
Gain on settlement of former shareholder advances | – | – | – | – | 310,003 |
Accretion of convertible debt d iscount | (16,667) | – | (27,778) | – | (27,778) |
Gain (Loss) on derivative financial instruments | 84,478 | – | (5,935) | &nbs p; – | (5,935) |
Financing Cost | (833) | – | (1,300) | – | (1,300) |
Loss on write-off of loan receivable | – | – | – | – | (193,922) |
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Net loss | (92,958) | (276,437) | (326,814) | (441,193) | (6,814,607) |
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Other comprehensive income (loss) |
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Foreign currency translation adjustment | (839) | 1,273 | 35 | 1,293 | 3,981 |
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Total Comprehensive Loss | $(93,797) | $(275,164) | $(326,779) | $(439,900) | $(6,810,626) |
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Net Loss Per Share & #150; Basic and Diluted | $(0.01) | $(0.03) | $(0.02) | $(0.04) |
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Weighted Average Shares Outstanding – Basic and Diluted | 14,368,000 | 10,771,000 | 14,095,000 | 10,167,000 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-2
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(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
| For the Six Months Ended June 30, 2010 (Restated) | For the Six Months Ended June 30, 2009 | Accumulated from December 14, 2004 (Date of Inception) to June 30, 2010 (Restated) |
Cash Flows Used In Operating Activities |
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Net loss | $ &nb sp; (326,814) | $ (441,193) | $ (6,814,607) |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Accretion of convertible debt discount | 27,778 | ; – | 27,778 |
Shares issued for services | – | 158,250 | 4,571,306 |
Loss on shares issued for amounts due related parties | – | 15,976 | 15,976 |
Loss on theft of cash | &nbs p; – | – | 80,000 |
Loss on write-off of loan receivable | – | – | 193,922 |
(Gain) Loss on derivative instruments | 5,935 | &nbs p; – | 5,935 |
Amortization of intangible assets | 75,000 | 75,000 | 323,077 |
Gain on settlement of former shareholder advances | – | – | (310,003) |
Amortizatio n of deferred financing cost | 1,300 | – | 1,300 |
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Changes in operating assets and liabilities: |
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Accounts payable and accrued liabilities | 353 | 5,946 | 22,838 |
Due to related parties | 83,522 | 46,629 | 914,823 |
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Net Cash Used in Operating Activities | (132,926) | (139,392) | (967,655) |
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Investing Activities |
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Loan receivable | – | – | (193,922) |
Net cash acquired on business acquisition | – | – | 565 |
Change in restricted cash | – | – | (80,000) |
Purchase of intangible assets | – | – | (25,000) |
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Net Cash Used In Investing Activities | – | – | (298,357) |
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Financing Activities |
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Proceeds from issuance of common stock | 100,000 | 180,000 | 744,307 |
Payment of deferred financing cost | (2,500) | – | (2,500) |
Proceeds from convertible note | 50,000 | – | 50,000 |
Proceeds from notes payable | 50,000 | 41,448 | 568,214 |
Re-payment of note payable | – | (6,808) | (28,005) |
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Net Cash Provided By Financing Activities | 197,500 | 214,640 | 1,332,016 |
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Effect of Exchange Rate Changes on Cash | 19 | 366 | (595) |
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Increase in Cash and Cash Equivalents | 64,593 | 75,614 | 65,409 |
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Cash and Cash Equivalents, beginning | 816 | 792 | – |
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Cash and Cash Equivalents, end | $65,409 | $76,406 | $5,409 |
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Supplemental Disclosures |
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Cash paid for taxes | $ – | $ – | $ &nbs p; – |
Cash paid for interest | – | – | – |
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Non-Cash Activities |
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Common stock issued for intangible assets | $ – | $ – | $ 3,000,204 |
Common stock issued for stock payable | – | – | 161,550 |
Common stock issued for amounts due to related parties | – | 16,629 | 360,954 |
Debt discount | 50,000 | – | 50,000 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-3
(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 future quarters or for the full year. Notes to the consolidated f inancial statements which substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2009 as reported in the Form 10-K have been omitted.
2.
Going Concern
The Company has incurred losses from operations since inception and at June 30, 2010, has a working capital deficiency and an accumulated deficit that creates substantial doubt about the Company’s ability to continue as a going co ncern. 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. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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.
3.
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
F-4
4. Restatement
The Company identified an error relating to the accounting for the convertible note described in Note 6 in its financial statements included in the Company’s Form 10-Qs filed with the SEC on May 24, 2010 and August 16, 2010. The Company had previously recognized a beneficial conversion feature as additional paid-in capital. After further review, the Company has determined that the conversion feature should have been classified as derivative liability pursuant to ASC 81 5-15, Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock. The Company intends to restate its financial results for the interim fiscal periods ending March 31, 2010 and June 30, 2010 to reflect the derivative liability.
The Company is restating the June 30, 2010 financial statements due to an error in the accounting for the conversion features embedded in the convertible note described in Note 6. The Company had previously recognized a beneficial conversion feature as additional paid-in capital. After further review, the Company has determined that the conversion feature should have been classified as derivative liability. The Company has corrected the accounting and recorded the fair value of the derivative liability on the date of issuance and the change in fair value for each subsequent balance sheet date.
The following tables reflect the adjustment and restated amounts:
| June 30, 2010 As Previously Reported $ | Adjustment $ |
| June 30, 2010 As Restated $ |
Consolidated Balance Sheets |
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Current Liabilities |
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Convertible note, net | 30,674 | (2,896) | (c) | 27,778 |
Derivative liabilities | – | 81,995 | (a) |
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| (26,060) | (b) | 55,935 |
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Stockholders’ Equity |
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Additional Paid-in Capital | 8,794,929 | (33,333) | (c) | 8,761,596 |
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Retained Earnings | (6,794,901) | (19,706) |
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| Period from December 14, 2004 (Date of Inception) to June 30, 2010 As Previousl y Reported $ | Adjustment $ |
| Period from December 14, 2004 (Date of Inception) to June 30, 2010 As Restated $ |
Consolidated Statements of Operations and Other Comprehensive Loss |
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Accretion of convertible debt discount | (14,007) | (13,771) | (c) | (27,778) |
Loss on derivative financial instruments | – | (31,995) | (a) |
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| 26,060 | (b) | (5,935) |
&nbs p; |
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Net Loss | (6,794,901) | (13,771) | (c) |
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| (31,995) | (a) |
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| 26,060 | (b) | (6,814,607) |
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Total Comprehensive Loss | (6,790,920) | (13,771) | (c) |
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| (31,995) | (a) |
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| 26,060 | (b) | (6,810,626) |
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x | For the Six Months Ended June 30, 2010 As Previously Reported $ | Adjustment $ |
| For the Six Months Ended June 30, 2010 As Restated $ |
Consolidated Statements of Operations and Other Comprehensive Loss |
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Accretion of convertible debt discount | (14,007) | (13,771) | (c) | (27,778) |
Loss on derivative financial instruments | – | (31,995) | (a) |
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| 26,060 | (b) | (5,935) |
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Net Loss | (307,108) | (13,771) | (c) |
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| (31,995) | (a) |
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| 26,060 | (b) | (326,814) |
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Total Comprehensive Loss | (307,073) | (13,771) | (c) |
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| (31,995) | (a) |
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| 26,060 | (b) | (326,779) |
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x | For the Three Months Ended June 30, 2010 As Previously Reported $ | Adjustment $ |
| For the Three Months Ended June 30, 2010 As Restated $ |
Consolidated Statements of Operations and Other Comprehensive Loss |
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Accretion of convertible debt discount | (9,584) | (7,083) | (c) | (16,667) |
Loss on derivative financial instruments | – | 84,478 | (b) | 84,478 |
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Net Loss | (170,353) | (7,083) | (c) |
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| 84,478 | (b) | (92,958) |
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Total Comprehensive Loss | (171,192) | (7,083) | (c) |
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| 84,478 | (b) | (93,797) |
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(a) To record fair value of derivative liabilities upon issuance of convertible notes.
(b) To record change in fair value of the derivative liabilities.
(c) To adjust the discount and accretion on the convertible note.
5.
Related Party Transactions
The following details amounts due to related parties at June 30, 2010:
a.
During the six months period ended June 30, 2010, the Company recorded $75,000 (2009 - $75,000) for management services provided by the President of the Company. At June 30, 2010, $415,964 (December 31, 2009 - $363,964) is included in due to related parties.
b.
During the six months period ended June 30, 2010, the Company recorded $75,000 (2009 - $Nil) for management services provided by the Secretary of the Company. At June 30, 2010, $184,439 (December 31, 2009 - $152,917) is included in due to related parties.
The following details Notes payable – related parties:
c.
During the six month period ended June 30, 2010, the Company received an advance of $Nil (2009 - $14, 313) from a related party consultant. At June 30, 2010, this amount is included in note payable – related party, and the related accrued interest of $426 (2009 - $252) is included in accrued liabilities.
d.
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 June 30, 2010, accrued interest of $625 (2009 - $625) is included in accrued liabilities.
e.
On April 14, 2010, the Company received $50,000 in exchange for a promissory note payable. The note bears interest at 6% per annum and is due on August 31, 2010. The Company has secured the note with 1,000,000 shares of common stock to be issued upon default. At June 30, 2010, accrued interest of $633 (2009 - $Nil) is included in accrued liabilities.
6.
Convertible Debt
On January 29, 2010, the Company completed a financing agreement for $50,000 with a private investor (the “Investor”) and issued a callable convertible note totaling $50,000 with 8% interest rate, 22% interest rate upon default and a maturity of nine months (the “Note”). The Company paid a finders’ fee of $2,500. The note is convertible into shares of common stock at 55% of the average of the lowest three closing prices for the Company’s shares of common stock during the ten trading day period ending one trading day prior to the date the conversion notice is sent by the investor to the borrower.
The embedded conversion option contains a reset provision that can cause an adjustment to the conversion price if the Company sells or issues an equity instrument at a price lower than the initial conversion price. Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15 (See Note 9 below). This fair value of the derivative liability at issuance of $81,995 resulted in a full discount to the note payable and a loss on the fair value of derivatives of $31,995.
The carrying value of the convertible note is to be accreted over the term of the convertible note up to their face value of $50,000. As at June 30, 2010, the carrying values of the convertible note and accrued convertible interest payable thereon were $27,778 and $1,666, respectively.
For the six months ended June 30, 2010, the Company recorded $27,778 as the accretion of interest expense on the convertible note and recorded the cost associated with obtaining the convertible note as deferred financing cost of $2,500 on February 8, 2010. As of June 30, 2010, the Company recorded $1,300 on amortization of deferred financing cost.
F-5
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7. Equity
On June 5, 2010, the Company issued 2,000,000 shares of common stock pursuant to a private placement at $0.05 per share for cash proceeds of $100,000.
8. Fair Value Measurements
ASC 825 defines fair value as the price that would be received from selling an asset or paid to trans fer a liability in an orderly transaction between market participants at the measurement date. In determining fair value for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
ASC 825 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based up on the lowest level of input that is significant to the fair value measurement. ASC 825 establishes three levels of inputs that may be used to measure fair value.
Level 1 applies to assets and liabilities for which there are quoted prices in active markets for identical assets or liabilities. Valuations are based on quoted prices that are readily and regularly available in an active market and do not entail a significant degree of judgment.
Level 2 applies to assets and liabilities for which there are other than Level 1 observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active m arkets), or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 2 instruments require more management judgment and subjectivity as compared to Level 1 instruments. For instance: determining which instruments are most similar to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced; and determining whether a market is considered active requires management judgment.
Level 3 applies to assets and liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of t he assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.
Pursuant to ASC 825, the fair values of the cash equivalents and investment securities are determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. Convertible notes payable are valued based on “Level 2” inputs, consisting of quoted prices in less active markets. Embedded derivatives are carried at fair value. The fair value amounts in current period earnings associated with the Company’s derivatives resulted from Level 2 fair value methodologies; that is, the Company is able to value the assets and liabilities based on observable market data for similar instruments. This observable data includes the quoted market prices and estimated volatility factors. The Company believes that the recorded values of all of the other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
F-6
9. Derivative Liability
ASC 815-15lays out a procedure to determine if an equity linked financial instrument (or embedded feature) is indexed to its own common stock.
Convertible Debt - The embedded conversion option in the Company’s $50,000 note described in Note 6contains a reset provision that can cause an adjustment to the conversion price if the Company sells or issues an equity instrument at a price lower than the initial conversion price. The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in our consolidated statement of operations as a gain or loss on derivative financial instruments.
The following table summarizes the change in derivative liabilities for the six months ended June 30, 2010:
Derivative Liabilities at December 31, 2009 | $ – |
Addition of new derivative liabilities | 81,995 |
Change in fair value of embedded conversion option | (26,060) |
Derivative Liabilities at June 30, 2010 | $ 55,935 |
The following table summarizes the loss on derivatives for the six months ended June 30, 2010:
Fair value of derivative liabilities in excess of note proceeds received | $ �� 31,995 |
Change in fair value of derivative liabilities at June 30, 2010 | (26,060) |
Loss on derivative liabilities | $ 5,935 |
The Company used the Black-Scholes option pricing model to value the embedded conversion feature using the following assumptions: number of options as set forth in the convertible note agreements; no expected dividend yield; expected volatility ranging from 212% - 534%; risk-free interest rates ranging from 0.15% - 0.24% and expected terms based on the contractual term.
F-7
ITEM 2. Management Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor Statement
This report o n 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 sig nificant 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 else where 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.
Restatement
The Company identified an error relating to the accounting for the convertible note described in Note 6 in its financial statements included in the Company’s Form 10-Qs filed with the SEC on May 24, 2010 and August 16, 2010. The Company had previously recognized a beneficial conversion feature as additional paid-in capital. After further review, the Company has determined that the conversion feature should have been classified as derivative liability pursuant to ASC 815-15, Determining Whether an Instrument (or Embedded Feature) is indexed to an En tity’s Own Stock. The Company intends to restate its financial results for the interim fiscal periods ending March 31, 2010 and June 30, 2010 to reflect the derivative liability.
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 friendl y 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.
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On May 31, 2010, we entered into a Joint Venture Agreement with ZAO Transmashholding, a company registered in Moscow, Russia. The business purpose of the Joint Venture is to use the knowledge, connections and efforts of both parties to enhance their financial capacities in order to achieve their common business goals. Transmashholding has set up a bank account with $102,368,000 (Rub 3,200,000,000) to act as collateral for the Joint Venture to acquire lines of credit for financing its business projects. We are solely responsible for acquiring the lines of credit against the provided collateral, and will assume the main responsibility of finding and arranging investment opportunities for the Joint Venture. All revenues generated by the Joint Venture will be divided equally between both parties. Each party will be resp onsible for their own costs and neither party shall be liable for mistakes made by the other.
Liquidity and Capital Resources
As of June 30, 2010, we had cash and cash equivalents of $65,409 and a working capital deficiency of $739,467. As of June 30, 2010 our accumulated deficit was $6,814,607. For the six months ended June 30, 2010 our net loss was $326,814 compared to $441,193 during the same period in 2009. This decrease was due mostly to lower consulting and management fees and general and administrative fees.
Our loss was funded by proceeds from shareholder loans and from the sale of our common stock. During the six months ended June 30, 2010, we raised in net proceeds $197,500 through financing activities and our cash position increased by $64,593.
We used net cash of $132,926 in operating activities for the six months ended June 30, 2010 compared to net cash of $139,392 in operating activities for the same period in 2009. We did not use any money in investing activities for the six months ended June 30, 2010 nor did we use any money for investing activities during the same period in 2009. The effect of exchange rates on cash was an increase in cash of $19 for the six months ended June 30, 2010 compared to an increase of $366 during six months ended June 30, 2009.
During the six months ended June 30, 2010 our monthly cash requirement was approximately $22,154, compared to approximately $23,232 for the same period in 2009. We expect to require a total of approximately $26,585,000 to fully carry out our busine ss plan over the next twelve months beginning September 2010 as set out in this table:
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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 |
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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 w e 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.
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 contin uation 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, 2010, have a working capital deficiency and an accumulated deficit that creates substantial doubt about our ability to continue as a going concern.
Results of Operations for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and from inception to June 30, 2010.
Limited Revenues
Since our inception on December 14, 2004 to June 30, 2010, we have earned limited revenue of $5,164. As of June 30, 2010, we have an accumulated deficit of $6,814,607 and we did not earn any revenues during the three months ending on June 30, 2010. 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 $92,958 for the three months ended June 30, 2010, compar ed to a net loss of $276,437for the same period in 2009. This decrease in net loss is mostly due to lower consulting and management fees, general and administrative fees, research and development expenses and a gain on the change in fair value of derivative liabilities of $84,478. From inception on December 14, 2004 to June 30, 2010, we have incurred a net loss of $6,814,607. Our basic and diluted loss per share was $0.01 for the three months ended June 30, 2010, and $0.03 for the same period in 2009.
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Expenses
Our total operating expenses decreased to $157,803 from $275,472 for the three months ended June 30, 2010 compared to the same period in 2009. This decrease in expenses is mostly due to lower consulting and management fees, general and administrative fees and research and development expenses. Since our inception on December 14, 2004 to June 30, 2010, we have incurred total operating expenses of $6,888,151.
Our consulting and management fees decreased $75,812 from $150,812 to $75,000 for the three months ended June 30, 2010 compared to the same period in 2009. This decrease was largely due to lower payments made to our consultants. Since our inception on December 14, 2004 until June 30, 2010 we have spent $5,291,394 on consulting and management fees.
Our general and administrative expenses consist of bank charges, travel, meals and entertainment, office maintenance, communication expenses (internet, fax, and telephone), courier, postage costs, office supplies. Our general and administrative expenses decreased $27,673 from $48,186 to $20,513 for the three months ended June 30, 2010 compared to the same period in 2009. Since our inception on December 14, 2004 until June 30, 2010 we have spent $451,063 on general and administrative expenses.
We spent $0 on research and developmen t expenses for the three months ended June 30, 2010 compared to $14,338 spent on research and development during the three months ended June 30, 2009. Since our inception on December 14, 2004 until June 30, 2010 we have spent $266,494 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, increased by $154 to $24,790 for the three months ended June 30, 2010 from $24,636 for the same period in 2009, mainly due to slightly increased legal and auditing services provided in the three month periods ended June 30, 2010.
We incurred $16,667 of interest expense relating to the convertible note during the three month period ended June 30, 2010 compared to $nil during the three months ended June 30, 2009. We also incurred a gain of $84,478 on the change in the fair value of derivative liabilities during the three month period ended June 30, 2010 compared to $nil during the three months ended June 30, 2009.
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Results of Operations for the six months ended June 30, 2010 compared to the six months ended June 30, 2009
Limited Revenues
We did not earn any revenues during the six months ending on June 30, 2010, nor did we earn any revenues in the same period in 2009. At this time, our ability to generate any significant revenues continues to be uncertain.
Net Loss
We incurred a net loss of $326,814 for the six months ended June 30, 2010, compared to a net loss of $441,193 for the same period in 2009. This decrease in net loss is mostly due to lower co nsulting and management fees as well as general and administrative fees. Our basic and diluted loss per share was $0.02 for the six months ended June 30, 2010, and $0.04 for the same period in 2009.
Expenses
Our total operating expenses decreased from $439,655 to $288,451 for the six months ended June 30, 2010 compared to the same period in 2009. This decrease in expenses is mostly due to lower consulting and management fees as well as general and administrative fees.
Our consulting and management fees decreased $103,687 from $253,687 to $150,000 for the six months ended June 30, 2010 compared to the same period in 2009. This increase was largely due to lower 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 decreased $28,498 from $55,274 to $26,776 for the six months ended June 30, 2010 compared to the same period in 2009.
We spent $1,500 on research and development expenses for the six months ended June 30, 2010 compared to $14,338 spent on research and development during the six months ended June 30, 2009.
Our professional fees, consisting primarily of legal, accounting and auditing fees, decreased by $6,181 to $35,175 for the six months ended June 30, 2010 from $41,356 for the same period in 2 009, mainly due to decreased legal and auditing services provided in the six month period ended June 30, 2010.
We incurred $27,778 of interest expense relating to the convertible note during the six month period ended June 30, 2010 compared to $nil during the six months ended June 30, 2009. We also incurred a loss of $5,935 on the change in the fair value of derivative liabilities during the six month period ended June 30, 2010 compared to $nil during the six months 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 ref lected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.
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Off-Balance Sheet Arrangements
As of June 30, 2010, we had no off-balance sheet transaction s that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risks.
Not applicable.
ITEM 4. Control and Procedures.
Not applicable
ITEM 4T. Control and Procedures.
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, 2010 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/A filed with the SEC on July 16, 2010, disclosure controls and procedures were not effective 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 c ommensurate 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 reasona ble 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, 2010 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. &n bsp;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.
As of August 16, 2010 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 June 5, 2010, we issued 2,000,000 shares of common stock pursuant to a private placement at $0.05 per share for cash proceeds of $100,000 to us.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
None.
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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. | ||
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| (REGISTRANT) | |
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Date: September 30, 2010 | /s/ Wilf Ouellette | ||
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| Wilf Ouellette | |
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| President, Chief Executive Officer, Director | |
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| (Autho rized Officer for Registrant) | |
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Date: September 30, 2010 | /s/ Ronald Foster | ||
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| Ronald Foster | |
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| Chief Financial Officer, Director, Principal Accounting Officer | |
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