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 March 31, 2012
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)
| 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 [x] 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 [x]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 15, 2012 the registrant had 40,611,944 shares of common stock outstanding.
Table of Contents
| PART I - FINANCIAL INFORMATION | 3 |
| ITEM 1. FINANCIAL STATEMENTS. | 3 |
| ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION / PLAN OF OPERATIONS. | 4 |
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS. | 8 |
| ITEM 4. CONTROL AND PROCEDURES. | 8 |
| ITEM 4T. CONTROL AND PROCEDURES. | 8 |
| PART II – OTHER INFORMATION | 9 |
| ITEM 1. LEGAL PROCEEDINGS. | 9 |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES. | 9 |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES. | 9 |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. | 9 |
| ITEM 5. OTHER INFORMATION. | 9 |
| ITEM 6. EXHIBITS. | 10 |
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Our unaudited interim consolidated financial statements are stated in US dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. All dollar amounts in this report refer to US dollars unless otherwise indicated. When we refer to Energy Quest, we, our or us, we are referring to Energy Quest Inc.
|
Energy Quest Inc. |
|
| (A Development Stage Company) | |
| March 31, 2012 | |
| Index | |
| Balance Sheets (Unaudited) | F-1 |
| Statements of Operations and Other Comprehensive Loss (Unaudited) | F-2 |
| Statements of Cash Flows (Unaudited) | F-3 |
| Notes to the Unaudited Financial Statements | F-4 to F-7 |
Energy Quest Inc.
(A Development Stage Company)
Balance Sheets
(Unaudited)
|
March 31, 2012 |
December 31, 2011 | |
| Assets | ||
| Current Assets | ||
| Cash | $ 488 | $ 257 |
| Deferred financing cost | – | 530 |
| Total Assets | 488 | 787 |
| Liabilities and Stockholders' Deficit | ||
| Current Liabilities | ||
| Accounts payable and accrued liabilities | 46,887 | 50,534 |
| Amounts due to related parties | 13,509 | 7,706 |
| Notes payable | 30,000 | 30,000 |
| Notes payable – related parties | 62,045 | 35,710 |
| Convertible notes, net of discount of $0.00 and $7,428, respectively | 59,000 | 51,572 |
| Derivative liabilities | 111,859 | 94,612 |
| Total Liabilities | 323,300 | 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: 40,611,944 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively |
40,612 | 40,612 |
| Additional Paid-in Capital | 10,010,927 | 10,010,927 |
| Deficit Accumulated During the Development Stage | (10,374,351) | (10,320,886) |
| Total Stockholders’ Deficit | (322,812) | (269,347) |
| Total Liabilities and Stockholders’ Deficit | $ 488 | $ 787 |
| F-1 |
Energy Quest Inc.
(A Development Stage Company)
Statements of Operations and Other Comprehensive Loss
(Unaudited)
|
For the Three Months Ended March 31, 2012 |
For the Three Months Ended March 31, 2011 |
Period from December 14, 2004 (Date of Inception) to March 31, 2012 | |||
| Revenue | $ – | $ – | $ 5,164 | ||
| Expenses | |||||
| Consulting and management fees | – | 75,000 | 5,616,394 | ||
| General and administrative | 12,693 | 15,230 | 620,461 | ||
| Professional fees | 13,720 | 5,000 | 541,191 | ||
| Research and development | – | – | 266,494 | ||
| Depreciation and depletion | – | – | 398,077 | ||
| Impairment of intangible assets | – | – | 2,632,666 | ||
| Loss on theft of cash | – | – | 80,000 | ||
| 26,413 | 95,230 | 10,155,283 | |||
| Loss from operations: | (26,413) | (95,230) | (10,150,119) | ||
| Interest expense | (9,805) | (18,660) | (172,536) | ||
| Gain on settlement of former related party debt | – | – | 310,003 | ||
| (Loss) gain on derivative financial instruments | (17,247) | 9,525 | (155,001) | ||
| Loss on shares issued for interest | – | – | (5,998) | ||
| Loss on write-off of loan receivable | – | (6,778) | (200,700) | ||
| Net loss | $ (53,465) | $ (111,143) | $ (10,374,351) | ||
| Net Loss Per Share – Basic and Diluted | $ (0.00) | $ (0.01) | |||
|
Weighted Average Shares Outstanding – Basic and Diluted |
40,612,000 | 17,329,000 | |||
| F-2 |
Energy Quest Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
|
For the Three Months Ended March 31, 2012 |
For the Three Months Ended March 31, 2011 |
Accumulated from December 14, 2004 (Date of Inception) to March 31, 2012 | |||
| Cash Flows Used In Operating Activities | |||||
| Net loss | $ (53,465) | $ (111,143) | $ (10,374,351) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||
| Accretion of convertible debt discount | 7,428 | 16,483 | 135,000 | ||
| Shares issued for services | – | – | 4,617,793 | ||
| Loss on shares issued for interest | – | – | 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 (gain) on derivative instruments | 17,247 | (9,525) | 155,001 | ||
| 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 | 530 | 989 | 8,000 | ||
| Changes in operating assets and liabilities: | |||||
| Accounts payable and accrued liabilities | (3,647) | 7,058 | 38,213 | ||
| Due to related parties | 5,803 | 79,902 | 1,201,669 | ||
| Net Cash Used in Operating Activities | (26,104) | (9,458) | (1,156,916) | ||
| 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 | – | – | (8,000) | ||
| Proceeds from convertible note | – | – | 135,000 | ||
| Proceeds from notes payable | – | – | 30,000 | ||
| Proceeds from notes payable – related party | 26,000 | – | 595,714 | ||
| Re-payment of note payable | – | – | (28,005) | ||
| Net Cash Provided By Financing Activities | 26,000 | – | 1,469,016 | ||
| Effect of Exchange Rate Changes on Cash | 335 | 423 | (5,255) | ||
| (Decrease) Increase in Cash and Cash Equivalents | 231 | (7,035) | 488 | ||
| Cash and Cash Equivalents, Beginning | 257 | 8,246 | – | ||
| Cash and Cash Equivalents, Ending | $ 488 | $ 1,211 | $ 488 | ||
| 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 | – | 12,157 | 178,142 | ||
| Conversion of interest | – | – | 2,400 | ||
| Related party debt settlement | – | – | 563,586 | ||
| Conversion of convertible notes to common stock | – | 6,000 | 78,000 | ||
| F-3 |
Energy Quest Inc.
(A Development Stage Company)
Notes to the Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited interim 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. 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 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.
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. Refer to Note 9.
2. Going Concern
The Company has incurred losses from operations since December 14, 2004 (inception) to March 31, 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 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 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.
4. Related Party Transactions
The following details amounts due to related parties at March 31, 2012:
a) During the three month period ended March 31, 2012, the Company recorded $Nil (2011 - $37,500) for management services provided by the President of the Company. At March 31, 2012, $5,133 (December 31, 2011 - $Nil) is included in due to related parties.
The following details Notes payable – related parties:
b) On March 15, 2009, the Company received $15,045 (CDN$ 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 March 31, 2012, this amount is included in notes payable – related party, and the related accrued interest of $2,750 (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 March 31, 2012, accrued interest of $5,551 (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 March 31, 2012, accrued interest of $75 is included in amounts due to related parties.
| F-4 |
Energy Quest Inc.
(A Development Stage Company)
Notes to the Financial Statements
(Unaudited)
5. 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, 22% interest rate 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. As of March 31, 2012, the discount has been fully accreted.
During the year ended December 31, 2011, $26,000 was converted into 1,994,491 shares of common stock. As at March 31, 2012, the carrying values of the convertible note, and accrued convertible interest payable thereon, were $24,000, (December 31, 2011 - $24,000), and $3,896, (December 31, 2011 - $3,417), respectively.
The following table summarizes the change in convertible debt as of March 31, 2012:
| March 31, 2012 | December 31, 2011 | |
| Carrying value (B/F) | $ 24,000 | $ - |
| Converted into 1,994,491 shares of common stock | – | (26,000) |
| Accretion of debt discount | – | 50,000 |
| Carrying value | $ 24,000 | $ 24,000 |
During the three month period ended March 31, 2012, the Company recorded $Nil (December 31, 2011 - $43,223) 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 three month period ended March 31, 2012, the Company recorded $Nil, (December 31, 2010 - $2,407) on amortization of deferred financing cost.
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, 22% interest rate 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 7.
As at March 31, 2012, the carrying values of the convertible note, and accrued convertible interest payable thereon, were $35,000, (December 31, 2011 - $27,572), and $2,378, (December 31, 2011 - $1,680), respectively.
The following table summarizes the change in convertible debt as of March 31, 2012:
| March 31, 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 |
| Carrying value | $ 35,000 | $ 27,572 |
During the three month period ended March 31, 2012, the Company recorded $7,428 (December 31, 2011 - $27,572) 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 three month period ended March 31, 2012, the Company recorded $530 (December 31, 2011 - $1,970) on amortization of deferred financing cost.
| F-5 |
Energy Quest Inc.
(A Development Stage Company)
Notes to the Financial Statements
(Unaudited)
6. 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 March 31, 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, March 31, 2012 $ |
Balance, December 31, 2011 $ | |
| Derivative liabilities | – | – | (111,859) | (111,859) | (94,612) |
| – | – | (111,859) | (111,859) | (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.
| F-6 |
Energy Quest Inc.
(A Development Stage Company)
Notes to the Financial Statements
(Unaudited)
7. 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 5 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 March 31, 2012:
| Derivative Liabilities at December 31, 2011 | $ 94,612 |
| Addition of new derivative liabilities | – |
| Conversion of derivative liability | – |
| Change in fair value of embedded conversion option | 17,247 |
| Derivative Liabilities at March 31, 2012 | $ 111,859 |
The following table summarizes the loss on derivatives as of March 31, 2012:
| Fair value of derivative liabilities in excess of note proceeds received | $ – |
| Change in fair value of derivative liabilities at March 31, 2012 | 17,247 |
| Loss on derivative liabilities – March 31, 2012 | $ 17,247 |
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% - 430%; risk-free interest rates ranging from 0.01% - 0.28% and expected terms based on the contractual term.
8. 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 of March 31, 2011, both notes are in default.
9. Commitments
In the normal course of business, we 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.
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.
| F-7 |
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 March 30, 2012, no transactions have taken place.
| 4 |
Liquidity and Capital Resources
As of March 31, 2012, we had cash of $488 and a working capital deficiency of $322,812. As of March 31, 2012 our accumulated deficit was $10,374,351. For the three months ended March 31, 2012 our net loss was $53,465 compared to $111,143 during the same period in 2011.
Our loss was funded by proceeds from shareholder loans. During the three months ended March 31, 2012, we raised in net proceeds $26,000 through financing activities and our cash position increased by $231.
We used net cash of $26,104 in operating activities for the three months ended March 31, 2012 compared to net cash of $9,458 in operating activities for the same period in 2011. We did not use any money in investing activities for the three months ended March 31, 2012 compared to net cash of $2,000 for investing activities during the same period in 2011. The effect of exchange rates on cash was an increase in cash of $335 for the three months ended March 31, 2012 compared to $423 during three months ended March 31, 2011.
During the three months ended March 31, 2012 our monthly cash requirement was approximately $8,701, compared to approximately $3,153 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 June 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.
| 5 |
These consolidated financial statements have been prepared on the assumption that the company is a going concern, meaning it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations. Different bases of measurement may be appropriate when a company is not expected to continue operations for the foreseeable future. The company’s continuation as a going concern is dependent upon its ability to attain profitable operations and generate funds there-from, and/or raises equity capital or borrowings sufficient to meet current and future obligations. Management plans to raise equity financings over the next twelve months to finance operations. There is no guarantee that the company will be able to complete any of these objectives. The company has incurred losses from operations since inception and at March 31, 2012, have a working capital deficiency and an accumulated deficit that creates substantial doubt about the company’s ability to continue as a going concern.
We intend to raise the funds to meet our cash requirements (approximately $13,750,000) from private placements, loans, or possibly a registered public offering (either self-underwritten or through a broker-dealer) within the next few months. At this time we do not have any commitments from any broker-dealer to provide us with financing. There is no guarantee that we will be successful in raising any capital. There is no assurance that we will be able to obtain such additional funds on favorable terms, if at all. If we fail in raising capital, our business may fail and we may curtail or cease our operations.
Results of Operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 and from inception to March 31, 2012.
Limited Revenues
Since our inception on December 14, 2004 to March 31, 2012, we have earned limited revenue of $5,164. As of March 31, 2012, we have an accumulated deficit of $10,374,351 and we did not earn any revenues during the three months ending on March 31, 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 $53,465 for the three months ended March 31, 2012, compared to a net loss of $111,143 for the same period in 2011. From inception on December 14, 2004 to March 31, 2012, we have incurred a net loss of $10,374,351. Our basic and diluted loss per share was $0.00 for the three months ended March 31, 2012, and $0.01 for the same period in 2011.
Expenses
Our total operating expenses decreased from $95,230 to $26,413 for the three months ended March 31, 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 March 31, 2012, we have incurred total operating expenses of $10,155,283.
Our consulting and management fees decreased from $75,000 to $nil for the three months ended March 31, 2012 compared to the same period in 2011. Since our inception on December 14, 2004 until March 31, 2012 we have spent $5,616,394 on consulting and management fees.
| 6 |
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 from $15,230 to $12,693 for the three months ended March 31, 2012 compared to the same period in 2011. Since our inception on December 14, 2004 until March 31, 2011 we have spent $620,461 on general and administrative expenses.
We spent $nil on research and development expenses for the three months ended March 31, 2012 and during the three months ended March 31, 2011. Since our inception on December 14, 2004 until March 31, 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 from $5,000 to $13,720 for the three months ended March 31, 2012 compared to the same period in 2011. Since our inception on December 14, 2004 until March 31, 2012 we have spent $541,191 on professional fees.
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 March 31, 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.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). This update provides amendments to Subtopic 820-10 and requires new disclosures for 1) significant transfers in and out of Level 1 and Level 2 and the reasons for such transfers and 2) activity in Level 3 fair value measurements to show separate information about purchases, sales, issuances and settlements. In addition, this update amends Subtopic 820-10 to clarify existing disclosures around the disaggregation level of fair value measurements and disclosures for the valuation techniques and inputs utilized (for Level 2 and Level 3 fair value measurements). The provisions in ASU 2010-06 are applicable to interim and annual reporting periods beginning subsequent to December 15, 2009, with the exception of Level 3 disclosures of purchases, sales, issuances and settlements, which will be required in reporting periods beginning after December 15, 2010. The adoption of ASU 2010-06 did not impact the Company’s operating results, financial position or cash flows, but did impact the Company’s disclosures on fair value measurements. See Note 6, “Fair Value Measurements.”
In February 2010, FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). This update amends Subtopic 855-10 and gives a definition to SEC filer, and requires SEC filers to assess for subsequent events through the issuance date of the financial statements. This amendment states that an SEC filer is not required to disclose the date through which subsequent events have been evaluated for a reporting period. ASU 2010-09 becomes effective upon issuance of the final update. The Company adopted the provisions of ASU 2010-09 for the period ended March 31, 2010.
| 7 |
In April 2010, the FASB issued ASU No. 2010-12, Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts (ASU 2010-12). This update clarifies questions surrounding the accounting implications of the different signing dates of the Health Care and Education Reconciliation Act (signed March 30, 2010) and the Patient Protection and Affordable Care Act (signed March 23, 2010). ASU 2010-12 states that the FASB and the Office of the Chief Accountant at the SEC would not be opposed to view the two Acts together for accounting purposes. The Company is currently assessing the impact, if any, the adoption of ASU 2010-12 will have on the Company’s disclosures, operating results, financial position and cash flows.
Related Party Transactions
The following details are related to note receivable and payable from related parties at March 31, 2012:
During the three month period ended March 31, 2012, we recorded $nil (2011 - $37,500) for management services provided by our President. At March 31, 2012, $5,133 (December 31, 2011 - $Nil) is included in due to related parties.
On March 15, 2009, we received $15,045 (CDN$ 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 March 31, 2012, this amount is included in notes payable – related party, and the related accrued interest of $2,750 (December 31, 2011 - $2,469) is included in amounts due to related parties.
On November 5, 2007, we 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 March 31, 2012, accrued interest of $5,551 (December 31, 2011 - $5,237) is included in amounts due to related parties.
On March 10, 2012, we received $26,000 from our President 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 March 31, 2012, accrued interest of $75 is included in amounts due to related parties.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risks.
Not applicable.
ITEM 4. Control and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is collected and communicated to management to allow timely decisions regarding required disclosures. The Chief Executive Officer and the Chief Financial Officer have concluded, based on their evaluation as of September 30, 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
| 8 |
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 March 31, 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.
| 9 |
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings.
As of March 31, 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.
None.
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 |
| 10 |
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: May 17, 2012 | /s/ Ron Foster | |||
| Ron Foster | ||||
| President, Chief Executive Officer, Chief Financial Officer, Director | ||||
| 11 |
Exhibit 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ron Foster, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Energy Quest Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; | |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Registrant and have: | |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the period covered by the quarterly report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and | |
| 5. | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): | |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. | |
| Date: May 17, 2012 | |
| /s/ Ron Foster | |
| Ron Foster, | |
|
Director, President, Chief Executive Officer, Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Energy Quest Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ron Foster, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that:
| 1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 , and |
| 2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: May 17, 2012 | |
| /s/ Ron Foster | |
| Ron Foster, | |
| Director, President, Chief Executive Officer |
Chief Financial Officer
|
Related Party Transactions
|
3 Months Ended |
|---|---|
|
Mar. 31, 2012
|
|
| Notes to Financial Statements | |
| Related Party Transactions |
Related Party Transactions The following details amounts due to related parties at March 31, 2012: a) During the three month period ended March 31, 2012, the Company recorded $Nil (2011 - $37,500) for management services provided by the President of the Company. At March 31, 2012, $5,133 (December 31, 2011 - $Nil) is included in due to related parties. The following details Notes payable – related parties: b) On March 15, 2009, the Company received $15,045 (CDN$ 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 March 31, 2012, this amount is included in notes payable – related party, and the related accrued interest of $2,750 (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 March 31, 2012, accrued interest of $5,551 (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 March 31, 2012, accrued interest of $75 is included in amounts due to related parties. |