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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

☐ 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)

 

   
Nevada 91-1880015
(state or other jurisdiction of incorporation or organization) (I.R.S. Employer I.D. No.)
   

103 Firetower Road

Leesburg, Georgia

31763-3755
(Address of principal executive offices) (Zip Code)

 

(229) 759-9176

(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 ☐

 

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 ☐      Accelerated filer ☐     Non-accelerated filer ☐     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   ☐     No   þ

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of November 9, 2012 the registrant had 42,581,641 shares of common stock outstanding.

 

1

 

 
 

 

 

 

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 2. Management Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 3. Quantitative and Qualitative Disclosure About Market Risks.

ITEM 4. Control and Procedures

ITEM 4T. Control and Procedures.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings.

ITEM 2. Unregistered Sales of Equity Securities.

ITEM 3. Defaults Upon Senior Securities.

ITEM 4. Submission of Matters to a Vote of Security Holders.

ITEM 5. Other Information.

ITEM 6. Exhibits.

 

 

2

 
 

 

PART I - FINANCIAL INFORMATION

 

 

Energy Quest Inc.

 
(A Development Stage Company)  
   
September 30, 2012  
  Index
Consolidated Balance Sheets (Unaudited) F-1
Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited) F-2
Consolidated Statements of Cash Flows (Unaudited) F-3
Notes to the Unaudited Consolidated Financial Statements F-4 to F-8

 

 

 

 

 
 

Energy Quest Inc.

(A Development Stage Company)

Consolidated Balance Sheets

(Unaudited)

 

   September 30,
2012
  December 31,
2011
Assets          
Current Assets          
Cash  $1,354   $257 
Deferred financing cost   1,752    530 
Total Assets   3,106    787 
Liabilities and Stockholders' Deficit          
Current Liabilities          
Accounts payable and accrued liabilities   51,820    50,534 
Amounts due to related parties   31,484    7,706 
Notes payable   30,000    30,000 
Notes payable – related parties   69,754    35,710 
Convertible notes, net of discount of $Nil and $7,428, respectively   109,500    51,572 
Derivative liabilities   175,594    94,612 
Total Liabilities   468,152    270,134 
Stockholders' Deficit          
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: 42,581,641 and 40,611,944 shares issued
and outstanding as of September 30, 2012 and December 31, 2011,
respectively
   42,582    40,612 
Additional Paid-in Capital   10,029,089    10,010,927 
Deficit Accumulated During the Development Stage   (10,536,717)   (10,320,886)
Total Stockholders’ Deficit   (465,046)   (269,347)
Total Liabilities and Stockholders’ Deficit  $3,106   $787 

 

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)

 

   For the
Three Months
Ended
September 30,
2012
  For the
Three Months
Ended
September 30,
2011
  For the
Nine Months
Ended
September 30,
2012
  For the
Nine Months
Ended
September 30,
2011
  Period from
December 14, 2004
(Date of Inception) to
September 30,
2012
Revenue  $—     $—     $—     $—     $5,164 
Expenses                         
Consulting and management fees   10,000    25,000    10,000    175,000    5,626,394 
General and administrative   15,216    7,638    36,473    33,181    644,241 
Professional fees   8,400    5,000    28,600    30,760    556,071 
Research and development   —      —      —      —      266,494 
Depreciation and depletion   —      —      —      —      398,077 
Impairment of intangible assets   —      —      —      —      2,632,666 
Loss on theft of cash   —      —      —      —      80,000 
    33,616    37,638    75,073    238,941    10,203,943 
Loss from operations:   (33,616)   (37,638)   (75,073)   (238,941)   (10,198,779)
Interest expense   (4,293)   (25,957)   (46,144)   (71,530)   (208,875)
Gain on settlement of former related party debt   —      —      —      —      310,003 
Loss on derivative financial instruments   (129)   (90,555)   (94,614)   (142,319)   (232,368)
Loss on shares issued for interest   —      (5,998)   —      (5,998)   (5,998)
Loss on write-off of loan receivable   —      —      —      (6,778)   (200,700)
Net loss  $(38,038)  $(160,148)  $(215,831)  $(465,566)  $(10,536,717)
Net Loss Per Share – Basic and Diluted  $(0.00)  $(0.01)  $(0.01)  $(0.03)     
Weighted Average Shares Outstanding –
Basic and Diluted
   42,603,000    18,967,000    41,280,000    17,964,000      

 

 

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)

   For the
Nine Months
Ended
September 30,
2012
  For the
Nine Months
Ended
September 30,
2011
  Accumulated from
December 14, 2004
(Date of Inception) to
September 30,
2012
Cash Flows Used In Operating Activities               
Net loss  $(215,831)  $(465,566)  $(10,536,717)
Adjustments to reconcile net loss to net cash used in operating activities:               
Accretion of convertible debt discount   7,428    59,212    135,000 
Shares issued for services   —      —      4,617,793 
Loss on shares issued for interest   —      5,998    5,998 
Loss on shares issued for amounts due related parties   —      —      54,321 
Loss on theft of cash   —      —      80,000 
Loss on write-off of loan receivable   —      6,778    200,700 
Loss on derivative instruments   94,614    142,319    232,368 
Penalties on convertible debt   29,500    —      29,500 
Impairment of intangible assets   —      —      2,632,666 
Amortization of intangible assets   —      —      398,077 
Gain on settlement of former related party debt   —      —      (310,003)
Amortization of deferred financing cost   1,278    3,735    8,748 
Changes in operating assets and liabilities:               
Accounts payable and accrued liabilities   1,286    12,973    43,146 
Due to related parties   23,778    161,103    1,219,644 
Net Cash Used in Operating Activities   (57,947)   (73,448)   (1,188,759)
Investing Activities               
Loan receivable   —      2,000    (201,922)
Net cash acquired on business acquisition   —      —      565 
Change in restricted cash   —      —      (80,000)
Purchase of intangible assets   —      —      (25,000)
Net Cash Provided by (Used In) Investing Activities   —      2,000    (306,357)
Financing Activities               
Proceeds from issuance of common stock   —      —      744,307 
Payment of deferred financing cost   (2,500)   (2,500)   (10,500)
Proceeds from convertible note   27,500    35,000    162,500 
Proceeds from notes payable   —      31,500    30,000 
Proceeds from notes payable – related party   33,500    —      603,214 
Re-payment of note payable   —      —      (28,005)
Net Cash Provided By Financing Activities   58,500    64,000    1,501,516 
Effect of Exchange Rate Changes on Cash   544    (476)   (5,046)
Increase (Decrease) in Cash and Cash Equivalents   1,097    (7,924)   1,354 
Cash and Cash Equivalents, Beginning   257    8,246    —   
Cash and Cash Equivalents, Ending  $1,354   $322   $1,354 
Supplemental Disclosures               
Cash paid for taxes  $—     $—     $—   
Cash paid for interest   —      —      —   
Non-Cash Activities               
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   —      —      722,608 
Discount on convertible notes payable from derivative   —      —      135,000 
Conversion of derivative liability   13,632    63,517    191,774 
Conversion of interest   —      2,400    2,400 
Related party debt settlement   —      563,586    563,586 
Conversion of convertible notes to common stock   6,500    32,000    84,500 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

F-3

 

 
 
1.Nature of Operations

Energy Quest’s principal business is in oil refining and waste energy. On July 12, 2012, the Company acquired a 100% interest in Quest Communications Inc. (“Quest”), a private Nevada company, as a wholly-owned subsidiary. Energy Quest is in the development stage as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915, Development Stage Entities.

The Company entered into an Agreement dated December 15, 2011, with a Consultant to provide services to the Company and to identify potential business opportunities or potential business acquisitions in the broadcasting, production and music media business. The agreement was cancelled on July 31, 2012. Refer to Note 10 (a).

2.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 financial statements and notes thereto contained in Energy Quest’s Annual Report filed with the SEC on Form 10-K. These financial statements include accounts of the Company and its wholly-owned subsidiary, Quest Communication Inc. All intercompany transactions and balances have been eliminated. 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 financial statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2011 as reported in the Form 10-K have been omitted.

3.Going Concern

The Company has incurred losses from operations since December 14, 2004 (inception) to September 30, 2012, has a working capital deficiency and an accumulated deficit that creates substantial doubt about the Company’s ability to continue as a 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. 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.

4.Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

5.Related Party Transactions

The following details amounts due to related parties at September 30, 2012:

a.During the nine month period ended September 30, 2012, the Company recorded $Nil (2011 – $87,500) for management services provided by the President of the Company. At September 30, 2012, $21,264 (December 31, 2011 – $Nil) is owed to the President for expenses paid on behalf of the Company.

The following details Notes payable – related parties:

b.On March 15, 2009, the Company received $15,254 (CDN$15,000) from a related party consultant in exchange for a promissory note payable. The note bears interest at 6% per annum and is due on demand. At September 30, 2012, this amount is included in notes payable – related party, and the related accrued interest of $3,248 (December 31, 2011 – $2,469) is included in amounts due to related parties.
c.On November 5, 2007, the Company received $21,000 from a director 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, 2012, accrued interest of $6,183 (December 31, 2011 – $5,237) is included in amounts due to related parties.

 

d.On March 10, 2012, the Company received $26,000 from the President of the Company in exchange for a promissory note payable. The note bears interest at 5% per annum and is due on October 10, 2012 or upon demand. At September 30, 2012, accrued interest of $726 is included in amounts due to related parties.
e.On July 30, 2012, the Company received $5,000 from the President of the Company in exchange for a promissory note payable. The note bears interest at 5% per annum and is due on October 10, 2012 or upon demand. At September 30, 2012, accrued interest of $43 is included in amounts due to related parties.
f.On August 3, 2012, the Company received $2,500 from the President of the Company in exchange for a promissory note payable. The note bears interest at 5% per annum and is due on October 10, 2012 or upon demand. At September 30, 2012, accrued interest of $20 is included in amounts due to related parties.
6.Convertible Debt
a.On November 24, 2010, the Company borrowed $50,000 from a private investor and issued a callable convertible note with an 8% interest rate, 150% of outstanding principal and unpaid interest upon default and a maturity of nine months. The Company paid a finders’ fee of $3,000. The note is convertible into common shares at 55% of the average of the lowest three closing prices for the Company’s common shares 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. This fair value of the derivative liability at issuance of $71,911 resulted in a full discount to the note payable and a loss on the fair value of derivatives of $21,911. The carrying value of the convertible note is to be accreted over the term of the convertible note up to their value of $50,000. See Note 8.

During the nine month period ended September 30, 2012 and the year ended December 31, 2011, $6,500 and $26,000 were converted into 1,969,697 and 1,994,491 shares of common stock, respectively. As at September 30, 2012, the carrying values of the convertible note, and accrued convertible interest payable thereon, were $29,500 (December 31, 2011 – $24,000), and $5,208 (December 31, 2011 – $3,417), respectively.

The following table summarize the change in convertible debt as of September 30, 2012:

 

September 30,

2012

December 31,

2011

Carrying value (B/F) $         24,000  $                  –
Converted into 1,969,697 and 1,994,491 shares of common stock, respectively (6,500) (26,000)
Accretion of debt discount 50,000 
Penalty due to default 12,000 
Carrying value $         29,500  $         24,000 

 

During the nine month period ended September 30, 2012, the Company recorded $Nil (2011 – $35,165) 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 $3,000 on November 24, 2010. During the nine month period ended September 30, 2012, the Company recorded $Nil, (2011 – $1,989) on amortization of deferred financing cost. During the nine month period ended September 30, 2012, the Company record $12,000, (2011 - $Nil) as penalty upon default. Per default terms, the principal of the note increased by 150% during the year.

b.On May 26, 2011, the Company borrowed $35,000 from a private investor and issued a callable convertible note with an 8% interest rate, 150% of outstanding principal and unpaid interest upon default and a maturity of nine months. The Company paid a finders’ fee of $2,500. The note is convertible into common shares at 50% of the average of the lowest three closing prices for the Company’s common shares 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. This fair value of the derivative liability at issuance of $52,570 resulted in a full discount to the note payable and a loss on the fair value of derivatives of $17,570. The carrying value of the convertible note is to be accreted over the term of the convertible note up to their value of $35,000. See Note 8.

 

As at September 30, 2012, the carrying values of the convertible note, and accrued convertible interest payable thereon, were $52,500, (December 31, 2011 – $27,572), and $4,484, (December 31, 2011 – $1,680), respectively.

The following table summarize the change in convertible debt as of September 30, 2012:

 

September 30,

2012

December 31,

2011

Carrying value (B/F) $          27,572 $                 –
Proceeds from convertible debt 35,000 
Discount (35,000)
Accretion of debt discount 7,428 27,572 
Penalty due to default 17,500
Carrying value $          52,500 $        27,572 

During the nine month period ended September 30, 2012, the Company recorded $7,428 (2011 – $4,407) 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 May 26, 2011. During the nine month period ended September 30, 2012, the Company recorded $530 (2011 – $315) on amortization of deferred financing cost. During the nine month period ended September 30, 2012, the Company record $17,500, (2011 - $Nil) as penalty upon default. Per default terms, the principal of the note increased by 150% during the year. 

c.On July 6, 2012, the Company entered into a Securities Purchase Agreement with Asher for the sale of a Convertible Promissory Note (the “Note”) in the principal amount of $27,500. The Company received net proceeds from the issuance of the Note in the amount of $25,000 and incurred debt financing costs of $2,500, which will be amortized over the term of the Note. The Note, which is due on April 10, 2013, bears interest at the rate of 8% per annum. Any amount of principal or interest on this note which is not paid when due shall bear interest at the rate of 22% per annum from the due date thereof until the same is paid. All principal and accrued interest on the Note is convertible into shares of the Company’s common stock at the election of Asher at any time after 180 days from July 10, 2012 at a conversion price equal to a 50% discount to the average of the 3 closing bid prices of the common stock during the 10 trading day period prior to conversion. The derivative treatment would not become applicable until the Note becomes convertible on January 6, 2013.

The Conversion Price is reduced when the Company issues or grants i) any shares of its common stock, or ii) any warrants, rights or options (not including employee stock option plans), whether or not immediately exercisable, or iii) other securities convertible into or exchangeable for common stock, in each case for consideration (or with a conversion price) per common share less than the conversion price in effect immediately prior to the issuance or sale of such securities or instruments, or without consideration. Upon the issuance or sale of such equity securities, the conversion price shall (until another such issuance or sale) be reduced to the price equal to the price (or conversion price) of any such securities or instruments.

At any time during the period beginning on July 10, 2012 (issue date) and ending on the 90th day following the issue date, the Company has the option to redeem this note and pay the note holder 150% of the unpaid principal and accrued interest. At any time during the period beginning on the 91st day from the issue date and ending on the 180th day following the issue date, the Company has the option to redeem this note and pay the note holder 175% of the unpaid principal and accrued interest. There is no right to repay after the 181th day of issuance.

7.Fair Value Measurements

ASC 825 defines fair value as the price that would be received from selling an asset or paid to transfer 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 upon 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 markets), 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 the 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 value of the cash equivalent is determined based on “Level 1” inputs, which consists 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. 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.

Assets and liabilities measured at fair value on a recurring basis were presented on the Company’s balance sheet as at September 30, 2012 as follows:

  Fair Value Measurements Using    
 

Quoted prices in

active markets

for identical

instruments

(Level 1)

$

Significant other

observable Inputs

(Level 2)

$

Significant

Unobservable

inputs

(Level 3)

$

Balance

September 30,

2012

$

Balance

December 31,

2011

$

Derivative liabilities (175,594) (175,594) (94,612)
  (175,594) (175,594) (94,612)

The fair values of other financial instruments, which include accounts payable and accrued liabilities, amounts due to related parties, notes payable, notes payable – related parties, convertible notes and derivative liabilities, approximate their carrying values due to the relatively short-term maturity of these instruments.

 

8.Derivative Liability

ASC 815-15 lays 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 notes described in Note 6 contain 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 statement of operations as a gain or loss on derivative financial instruments.

The following table summarizes the change in derivative liabilities as of September 30, 2012:

Derivative Liabilities at December 31, 2011 $             94,612
Addition of new derivative liabilities
Conversion of derivative liability 13,632
Change in fair value of embedded conversion option 67,350
Derivative Liabilities at September 30, 2012 $           175,594

The following table summarizes the loss on derivatives as of September 30, 2012:

Fair value of derivative liabilities in excess of note proceeds received $ –
Change in fair value of derivative liabilities at September 30, 2012 94,614
Loss on derivative liabilities – September 30, 2012 $         94,614

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 notes agreements; no expected dividend yield; expected volatility ranging from 230% 450%; risk-free interest rates ranging from 0.01% 0.28% and expected terms based on the contractual term.

9.Notes Payable

On August 10, 2011, the Company received $30,000 from two lenders in exchange for two promissory notes payable. The notes bear interest at 8% per annum and are due on demand. On August 10, 2011, the Company issued 239,914 shares of common stock at a fair value of $8,397 for the $2,399 interest on the notes. This resulted in a loss of $5,998. As at September 30, 2012, accrued interest of $335 is included in accrued liabilities, and both notes are in default.

10.Commitments

In the normal course of business, the Company may become subject to lawsuits and other claims and proceedings. Such matters are subject to uncertainty and outcomes are not predictable with assurance. Management is not aware of any pending or threatened lawsuits or proceedings which would have a material effect on the Company’s financial position, liquidity, or results of operations.

a.On December 15, 2011, the Company entered into an Agreement with a Consultant to provide services to the Company and to identify potential business opportunities or potential business acquisitions in the broadcasting, production and music media business. The term is for a period of one year. On December 20, 2011, the Consultant was issued 1,000,000 shares of common stock with a fair value of $10,000. The Agreement was cancelled on July 31, 2012.
b.On June 11, 2012, the Company entered into an Agreement with a Consultant to provide general investor relation services to the Company. The term is on a month to month basis and will be renewed at the Company’s requests. The Consultant will be paid $3,000 per month in common stock. The Consultant has not provided any services to September 30, 2012.
11.Acquisition

On July 12, 2012, the Company acquired a 100% interest in Quest Communications Inc. (“Quest”), a private Nevada company, in consideration for $15. Quest was incorporated on June 11, 2012 and has not yet commenced operations.

 

 

 
 

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 were incorporated as a Nevada company on June 20, 1997. We changed our corporate name to Energy Quest Inc. on May 31, 2007. We are a development stage company in the development and production of hydrogen-enriched alternative fuels in an environmentally responsible manner. Our principal business involves an integrated gasification production system technology that combines modern gasification with turbine technologies to produce synthetic gas, hydrogen or electricity.

 

We plan to employ gasification technologies and catalytic conversion processes to produce clean fuels. In addition we have recently acquired technology for a High-Tech Portable Frac & Brine Water Emulsion Breaker System and a Water Purification System.

 

Our principal offices are located at 103 Firetower Road, Leesburg, Georgia 31763 and recently opened offices at the Frost Bank Tower, 402 Congress Avenue, Suite 1540, Austin, Texas 78701. Our fiscal year end is December 31.

 

Development

 

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, 2012, no transactions have taken place.

On May 31, 2011, 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 responsible for their own costs and neither party shall be liable for mistakes made by the other.

 

Liquidity and Capital Resources

 

As of September 30, 2012, we had cash of $1,354 and a working capital deficiency of $505,620.  As of September 30, 2012 our accumulated deficit was $10,536,717.  For the nine months ended September 30, 2012 our net loss was $215,831 compared to $465,566 during the same period in 2011.  This decrease was due mostly to lower consulting and management fees.

 

Our loss was funded by proceeds from shareholder loans.  During the nine months ended September 30, 2012, we raised in net proceeds $58,500 through financing activities and our cash position increased by $1,097.  

 

We used net cash of $57,947 in operating activities for the nine months ended September 30, 2012 compared to net cash of $73,448 in operating activities for the same period in 2011.  We used net cash of $nil in investing activities for the nine months ended September 30, 2012 compared to a net gain of cash of $2,000 for the same period of 2010.  The effect of exchange rates on cash was an increase in cash of $544 for the nine months ended September 30, 2012 compared to a decrease of $476 during nine months ended September 30, 2011.

 

During the nine months ended September 30, 2012 our monthly cash requirement was approximately $6,439, compared to approximately $8,161 for the same period in 2011.  We expect to require a total of approximately $13,750,000 to fully carry out our business plan over the next twelve months beginning December 2012 as set out in this table:

   
   
Description   Estimated Expense  
Marketing our gasification technologies  $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 $6,500,000
Water Recycling Equipment $5,000,000
Total   $13,750,000

 

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.

 

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, 2012, 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 September 30, 2012 compared to the three months ended September 30, 2011 and from inception to September 30, 2012.

 

Limited Revenues

 

Since our inception on December 14, 2004 to September 30, 2012, we have earned limited revenue of $5,164.  As of September 30, 2012, we have an accumulated deficit of $10,536,717 and we did not earn any revenues during the three months ending on September 30, 2012.  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 $38,038for the three months ended September 30, 2012, compared to a net loss of $160,148 for the same period in 2011.  This decrease in net loss is mostly due to lower consulting and management fees.  From inception on December 14, 2004 to September 30, 2012, we have incurred a net loss of $10,536,717.  Our basic and diluted loss per share was $0.00 for the three months ended September 30, 2012, $0.01 for the same period in 2011.  

 

Expenses

 

Our total operating expenses decreased from $37,638 to $33,616 for the three months ended September 30, 2012 compared to the same period in 2011.  This decrease in expenses is mostly due to lower consulting and management fees.  Since our inception on December 14, 2004 to September 30, 2012, we have incurred total operating expenses of $10,203,943.

 

Our consulting and management fees decreased $15,000 from $25,000 to $10,000 for the three months ended September 30, 2012 compared to the same period in 2011.  This decrease was largely due to lower payments made to our consultants.  Since our inception on December 14, 2004 until September 30, 2012 we have spent $5,626,394 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 increased $7,578 from $7,638 to $15,216 for the three months ended September 30, 2012 compared to the same period in 2011.  Since our inception on December 14, 2004 until September 30, 2012 we have spent $644,241 on general and administrative expenses.

 

We did not incur any research and development expenses for the three months ended September 30, 2012 nor during the three months ended September 30, 2011.  Since our inception on December 14, 2004 until September 30, 2012 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 $3,400 to $8,400 for the three months ended September 30, 2012 from $5,000 for the same period in 2011, mainly due to slightly increased legal and auditing services provided in the three month periods ended September 30, 2012.

 

Results of Operations for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2012

 

Limited Revenues

 

We did not earn any revenues during the six months ending on September 30, 2012, nor did we earn any revenues in the same period in 2011. At this time, our ability to generate any significant revenues continues to be uncertain.

 

Net Loss

 

We incurred a net loss of $215,831for the nine months ended September 30, 2012, compared to a net loss of $465,566 for the same period in 2011.  This decrease in net loss is mostly due to lower consulting and management fees.  Our basic and diluted loss per share was $0.01 for the nine months ended September 30, 2012, and $0.03 for the same period in 2011.  

 

Expenses

 

Our total operating expenses decreased from $238,941 to $75,073 for the nine months ended September 30, 2012 compared to the same period in 2011.  This decrease in expenses is mostly due to lower consulting and management fees.

 

Our consulting and management fees decreased $165,000 from $175,000 to $10,000 for the nine months ended September 30, 2012 compared to the same period in 2011.  This decrease 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 increased $3,292 from $33,181 to $36,473 for the nine months ended September 30, 2012 compared to the same period in 2011.

 

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, 2012, we had no off-balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

ITEM 3. Quantitative and Qualitative Disclosure About Market Risks.

 

Not applicable.

 

ITEM 4. Control and Procedures

 

Not applicable

 

ITEM 4T. Control and Procedures.

 

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, 2012 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 March 30, 2012, 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 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, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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 1, 2012 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 31, 2012 we issued 606,061 shares of common stock upon partial conversion of a convertible note.

 

ITEM 3. Defaults Upon Senior Securities.

 

None.

 

ITEM 4. Submission of Matters to a Vote of Security Holders.

 

None.

 

ITEM 5. Other Information.

 

None.

 
 

ITEM 6. Exhibits.

 

Exhibit

Number

Exhibit

Description

31.1 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-101.INS XBRL Instance Document
EX-101.SCH XBRL Taxonomy Extension Schema
EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase
EX-101.LAB XBRL Taxonomy Extension Label Linkbase
EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase
EX-101.DEF XBRL Taxonomy Extension Definition Linkbase

 

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 9, 2012 /s/  Ronald Foster
    Ronald Foster
    President, Chief Executive Officer, Secretary, Treasurer, Chief Financial Officer and Director
    (Authorized Officer for Registrant)