10-Q/A 1 quest_1q08a1.txt FORM 10-Q/A ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 AMENDMENT NO. 1 TO FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2008 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File No.: 000-30291 QUEST MINERALS & MINING CORP. (Exact name of registrant as specified in its charter) Utah 87-0429950 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 18B East 5th Street Paterson, NJ 07524 (Address of principal executive offices) Issuer's telephone number: (973) 684-0075 ___________________ Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required 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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filter [ ] Accelerated filter [ ] Non-accelerated filter [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) 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, 2008, 363,128,219 shares of our common stock were outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] ================================================================================ EXPLANATORY NOTE This Amendment No. 1 to quarterly report on Form 10-Q is being filed to provide the financial statements required by Item 310 of Regulation S-K, management's discussion and analysis required by Item 303 of Regulation S-K, disclosure controls and procedures required by Item 307 of Regulation S-K, internal control over financial reporting required by Item 308 of Regulation S-K, and certifications required under Rule 13a-14 of the Securities Exchange Act of 1934, as amended, and Section 1350 of the Sarbanes-Oxley Act of 2002, which items were not available for filing with the quarterly report on Form 10-Q filed by us on May 20, 2008. 1 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements of Quest Minerals & Mining Corp. and subsidiaries (collectively, the "Company"), included herein were prepared, without audit, pursuant to rules and regulations of the Securities and Exchange Commission. Because certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America were condensed or omitted pursuant to such rules and regulations, these financial statements should be read in conjunction with the financial statements and notes thereto included in the audited financial statements of the Company as included in the Company's Amendment No. 1 to Form 10-KSB for the year ended December 31, 2007. 2
QUEST MINERALS & MINING CORP. CONSOLIDATED BALANCE SHEETS March 31, December 31, 2008 2007 ------------ ------------ (Unaudited) ASSETS Current Assets Cash $ 8,918 $ 4,464 Receivables -- -- ------------ ------------ Total current assets 8,918 4,464 Leased Mineral Reserves, net (Note 2 & 5) 5,208,524 5,208,524 Equipment, net (Note 6) 144,178 166,273 Deposits 41,223 40,643 Prepaid consulting expense 9,425 27,000 Other receivables, net (Note 7) -- -- DIP Cash, Restricted (Note 15) 600 1,166 DIP Receivables, Restricted (Note 15) -- -- ------------ ------------ TOTAL ASSETS $ 5,412,868 $ 5,448,070 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable and accrued expenses (Note 8) $ 2,830,554 $ 2,735,718 Loans payable (Note 9) 3,062,035 2,937,716 Bank loans (Note 9) 1,017,525 1,017,525 Related party loans (Note 9) 666,486 672,289 ------------ ------------ TOTAL CURRENT LIABILITIES 7,576,600 7,363,248 Other Liabilities Derivative Liability (Note 8) 1,960,749 2,841,203 Unearned revenues (Note 8) -- -- DIP Financing (Note 9) 370,733 335,764 ------------ ------------ TOTAL LIABILITIES 9,908,082 10,540,215 Commitments and Contingencies (Note 16) Stockholders' equity Preferred stock, par value $0.001, 10,000,000 shares authorized; SERIES A - issued and outstanding 398,288 shares 398 448 SERIES B - issued and outstanding 48,284 shares 48 48 SERIES C - issued and outstanding 260,000 shares 260 260 Common stock, par value $0.001, 975,000,000 shares authorized; issued and outstanding 194,867,219 shares 194,871 46,796 Equity held in escrow (Note 12) (587,500) (587,500) Equity allowance (Note 12) (29,326) Paid-in capital 52,359,997 51,981,253 Accumulated Deficit (56,463,288) (56,504,124) ------------ ------------ Total Stockholders' Equity (4,495,214) (5,092,145) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,412,868 $ 5,448,070 ============ ============
See Notes to Financial Statements. 3
QUEST MINERALS & MINING CORP. CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended March 31, 2008 and 2007 (Unaudited) 2008 2007 ------------ ------------ Revenue: Coal revenues $ -- $ -- ------------ ------------ Total Revenues -- -- ------------ ------------ Expenses: Production costs -- -- Selling, general and administrative 502,880 1,461,993 Depreciation and Amortization 25,707 21,345 ------------ ------------ Total Operating Expenses 528,587 1,483,338 ------------ ------------ Loss from Operations (528,587) (1,483,338) Other Income (Expense): Interest (87,976) (84,839) Gain (Loss) on Derivatives 880,454 (116,497) Beneficial conversion expense (223,054) (292,500) ------------ ------------ Income loss before income taxes 40,837 (1,977,174) ------------ ------------ Provision for Income taxes -- -- ------------ ------------ Net lncome (loss) $ 40,837 $ (1,977,174) ============ ============ Basic income (loss) per common share $ 0.00 $ (0.28) ============ ============ Diluted income (loss) per common share $ 0.00 $ (0.28) ============ ============ Weighted average common shares outstanding 88,362,237 7,080,473 ============ ============ Weighted average diluted shares outstanding 824,657,317 7,080,473 ============ ============
See Notes to Financial Statements. 4
QUEST MINERALS & MINING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 2008 and 2007 (Unaudited) 2008 2007 ------------ ------------ Operating Activities -------------------- Net lncome (loss) $ 40,837 $ (1,977,174) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 25,707 21,345 Deferred Consulting amortization -- 34,050 Stock issued for interest -- 82,504 Stock issued for services 202,900 227,171 Preferred C Stock Issued -- 292,500 Warrants issuances and conversions 351,090 1,002,193 Changes in operating assets and liabilities: Loss (gain) on derivatives (880,454) 116,497 (Increase) decrease in prepaid expenses 17,576 (17,400) Increase (decrease) in DIP payables 34,969 -- Increase (decrease) in accounts payable and accrued expenses 94,836 21,005 ------------ ------------ Net cash used by operating activities (112,539) (197,309) Investing Activities -------------------- Equipment purchased 3,613 -- Security deposits 580 -- ------------ ------------ Net cash used by investing activities 4,193 -- Financing Activities -------------------- Repayments (11,700) (20,583) Borrowings 124,500 244,300 ------------ ------------ Net cash provided by financing activities 112,800 223,717 ------------ ------------ Increase (decrease) in cash 4,454 26,408 Cash at beginning of period 4,464 52 ------------ ------------ Cash at end of period $ 8,918 $ 26,460 ============ ============ Supplemental Disclosures of Cash Flow Information: Cash paid during year for: Interest $ 1,689 $ -- ============ ============ Stock issued during year for: Services $ 202,900 $ 227,171 ============ ============ Stock Compensation 82,504 ============ ============ Series C Preferred Stock for officer indemnification -- 260,000 ============ ============
See Notes to Financial Statements. 5 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 1 - ORGANIZATION & OPERATIONS Quest Minerals & Mining Corp. (the "Registrant" or the "Company") was incorporated in Utah on November 21, 1985. The Company has leasehold interests in certain properties in Eastern Kentucky, is seeking to re-commence full coal mining operations on these properties, and is looking to acquire additional coal properties. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Quest Mineral & Mining, Ltd., Quest Energy, Ltd., and Gwenco, Inc. (collectively, the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Mineral Interests The purchase acquisition costs of mineral properties are deferred until the properties are placed into production, sold or abandoned. These deferred costs will be amortized on the unit-of-production basis over the estimated useful life of the properties following the commencement of production or written-off if the properties are sold, allowed to lapse or abandoned. Mineral property acquisition costs include any cash consideration and the fair market value of common shares and preferred shares, based on the trading price of the shares, or, if no trading price exists, on other indicia of fair market value, issued for mineral property interests, pursuant to the terms of the agreement or based upon an independent appraisal. Administrative expenditures are expensed in the year incurred. Coal Acquisition Costs The costs to obtain coal lease rights are capitalized and amortized primarily by the units-of-production method over the estimated recoverable reserves. Amortization occurs either as the Company mines on the property or as others mine on the property through subleasing transactions. Rights to leased coal lands are often acquired through royalty payments. As mining occurs on these leases, the accrued royalty is charged to cost of coal sales. Mining Acquisition Costs The costs to obtain any interest in third-party mining operations are expensed unless significantly proven reserves can be established for the entity. At that point, capitalization would occur. 6 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 2 - SIGNICANT ACCOUNTING POLICIES (Continued) Mining Equipment Mining equipment is recorded at cost. Expenditures that extend the useful lives of existing plant and equipment or increase the productivity of the asset are capitalized. Mining equipment is depreciated principally on the straight-line method over the estimated useful lives of the assets, which range from three to 15 years. Deferred Mine Expense Costs of developing new mines or significantly expanding the capacity of existing mines are capitalized and amortized using the units-of-production method over the estimated recoverable reserves that are associated with the property being benefited. Asset Impairment If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed under the guidance of SFAS 144, pursuant to SEC Industry Guide 7. If the review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value. Revenue Recognition Coal sales revenues are sales to customers of coal produced at the Company's operations. The Company recognizes revenue from coal sales at the time title passes to the customer. Stock-Based Compensation Effective January 1, 2006, the Company began recording compensation expense associated with stock options and other forms of equity compensation in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment, as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to January 1, 2006, the Company had accounted for stock options according to the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and therefore no related compensation expense was recorded for awards granted with no intrinsic value. The Company adopted the modified prospective transition method provided for under SFAS No. 123R, and, consequently, has not retroactively adjusted results from prior periods. There were 250,000 options issued to employees and non-employee directors during the year ending December 31, 2006, and there were no options issued to employees or non-employee directors during the year ended December 31, 2005. As of March 31, 2008, 75,000 options remain outstanding. See Note 13 for details. 7 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 2 - SIGNICANT ACCOUNTING POLICIES (Continued) Income Taxes The Company provides for the tax effects of transactions reported in the financial statements. The provision, if any, consists of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities, if any, represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. As of March 31, 2008, the Company had no material current tax liability, deferred tax assets, or liabilities to impact on the Company's financial position because the deferred tax asset related to the Company's net operating loss carry forward was fully offset by a valuation allowance. Fair Value The Company's financial instruments, as defined by SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," include cash, advances to affiliate, trade accounts receivable, investment in securities available-for-sale, restricted cash, accounts payable and accrued expenses and short-term borrowings. All instruments other than the investment in securities available-for-sale are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at December 31, 2007. The Company had no securities available-for-sale at March 31, 2008. Earnings loss per share The Company adopted SFAS No. 128, which provides for the calculation of "basic" and "diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average common shares outstanding for the period; after provisions for cumulative dividends on Series A preferred stock. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings similar to fully diluted earnings per share. Stock Split All references to common stock and per share data have been retroactively restated to account for the 1 for 4 reverse stock split effectuated on August 17, 2007. See Note 12 for details. All references to common stock and per share data have been retroactively restated once more to account for the 1 for 10 reverse stock split effectuated on December 14, 2007. See Note 12 for details. Other Recent Accounting Pronouncements The Company does not expect that the adoption of other recent accounting pronouncements to have any impact on its financial condition or results of operations. 8 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 3 - GOING CONCERN The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net operating losses of $5,169,899 and $5,530,115 for the years ended December 31, 2007 and 2006 and had a working capital deficit of $7,358,784 at December 31, 2007. For the three months ended March 31, 2008, the Company had a net operating loss of $839,617. The working capital deficit as of March 31, 2008 was $7,567,682. These factors indicate that the Company's continuation as a going concern is dependent upon its ability to obtain adequate financing. The Company will require substantial additional funds to finance its business activities on an ongoing basis and will have a continuing long-term need to obtain additional financing. The Company's future capital requirements will depend on numerous factors including, but not limited to, continued progress developing additional mines and increasing mine production. Currently, the Company is in the process of seeking additional funding to achieve its operational goals. NOTE 4 - LEASEHOLD INTERESTS The Company maintains a number of coal leases with minimum lease or royalty payments that vary by lease as defined in the separate agreements. Several of the landowners have contended that the Company is in default under certain of these leases and that said leases are terminated. The Company disputes these contentions. Certain former owners of the Company's indirect, wholly-owned subsidiary, Gwenco, Inc. ("Gwenco") commenced an action in the Circuit Court of Pike County against Gwenco for damages resulting from an alleged failure to pay past royalties and other amounts allegedly due. On May 19, 2006, the former owners obtained a default judgment in this action in the amount of $687,391, from which Gwenco has taken appeal. The plaintiffs then amended their complaint, seeking to be adjudged a lien on certain real and personal property of Gwenco pursuant to the aforementioned judgment and that said real and personal property be sold to satisfy the aforesaid lien, and that the liens of the plaintiffs attach to the proceeds of the sale. Gwenco believes that it has several meritorious defenses and counterclaims to this action and intends to defend it vigorously. This foreclosure action was stayed against Gwenco as a result of Gwenco's filing of a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. (See Note 16.) On June 20, 2007, Gwenco entered into a settlement agreement with one of the former owners, pursuant to which the former owner agreed to accept payment of $150,000 in exchange for a release of the judgment amount of $458,260. The Bankruptcy Court approved the settlement agreement on July 17, 2007. On August 3, 2007, the Court approved Gwenco's debtor-in-possession financing and the settlement agreement became effective. The escrowed funds were released on August 10, 2007 to complete the settlement. As of March 31, 2008, Gwenco owed approximately $242,925 in lease payments in addition to the reduced judgment amount of $229,130. 9 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 5 - LEASED MINERAL RESERVES All of the Company's existing reserves remain in Gwenco, Inc., a wholly owned subsidiary. The total reserves are a combination of several coal seams throughout the spectrum of leased properties. At March 31, 2008 and December 31, 2007, the leased mineral reserves, valued at $5,208,524, consisted of the following: Proven Reserves Seams Tons ----- ------------ Winifrede 214,650 Taylor 1,783,500 Cedar Grove 3,702,600 Pond Creek 4,092,572 ------------ Total Reserves 9,793,322 ============ The Company maintains a number of coal leases with minimum lease or royalty payments that vary by lease as defined in the separate agreements. Several of the landowners have contended that the Company is in default under certain of these leases and that said leases are terminated. The Company disputes these contentions. Pursuant to SFAS 144, management has reviewed the recoverable value of the Company's mineral reserves and has determined that no impairment loss has occurred. As long as the recoverable amount continues to exceed its carrying value, amortization will occur based on a proportionate ratio of depleted reserves as a result of future coal mining activity. NOTE 6 - EQUIPMENT Equipment consisted of the following: March 31, December 31, 2008 2007 ------------ ------------ Mining equipment (a) $ 869,965 866,353 ---------------------------- Less accumulated depreciation (369,967) (344,260) Less allowance for Impairment (b) (355,820) (355,820) ---------------------------- Equipment - net $ 144,178 166,273 ============================ All of the equipment currently in use by the Company is owned by the Company's wholly-owned subsidiary, Gwenco, Inc., which is currently in Chapter 11 bankruptcy proceedings. (a) The Company depreciates its mining equipment over a 5 year period, while the office equipment is depreciated over a 7 year period. In both cases, the straight-line method is used. Depending on the type of equipment needed at any given point in production, the Company will sell existing equipment and replace it with new or used machinery, which can reflect a fluctuation in the asset valuation. 10 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 6 - EQUIPMENT (Continued) (b) On July 10, 2006, the Company entered into a settlement arrangement with an existing equipment lessor for the bill of sale on two pieces of equipment, of which the Company had retained possession while in default of prior lease payments. On October 10, 2006, the Pike County Circuit court entered an order enforcing this settlement agreement, and on December 19, 2006, the lessor was awarded summary judgment in the amount of $35,000 plus 8% accrued interest from August 9, 2006. As of March 31, 2008, the Company has accrued allowances against the equipment, as some of it has been repossessed with the understanding that it will be returned upon satisfaction of existing lease contracts, while the remaining equipment is unusable until required restoration and repairs can be made. 11 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 7 - OTHER RECEIVABLES Other Receivables consisted of the following: March 31, December 31, 2008 2007 ------------ ------------ D&D Contracting, Inc.(a) $ 678,349 678,349 Braxton Coal (b) 57,109 57,109 Less allowance (735,458) (735,458) ---------------------------- Other Receivables - net $ -- ============================ (a) The receivable with D&D Contracting, Inc. exists as a result of the rescission agreement dated November 1, 2004. The Company holds an equipment lease and a limited royalty agreement totaling $668,000. Unearned revenues have been recorded as an allowance. The remaining balance is the cash and account deposits that have not yet been reimbursed. The Company has booked an allowance against this amount. As of March 31, 2008, D&D was in default of their obligations to the Company. The Company is currently negotiating with the existing leaseholders to receive subsidized payments from the coal mined by D&D to secure their lease payments. As a result, the Company has accrued an additional allowance on the entire receivable until a settlement can be determined. (b) During the twelve months ended December 31, 2006, the Company hired a contract miner to mine the coal from the Gwenco properties. The receivables represent initial startup and maintenance expenses, which were to be paid back through a royalty arrangement once coal production began. As of March 31, 2008, the agreement with this contract miner has expired. The Company has since retained a new contract miner. As a result, the Company has accrued an allowance against the receivable until a settlement can be negotiated to recoup these initial expenses. 12 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 8 - ACCOUNTS PAYABLE & ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: March 31, December 31, 2008 2007 ------------ ------------ Accounts payable $ 301,654 294,604 Accrued royalties payable-operating (a) 242,925 235,925 Accrued bank claim (b) 650,000 650,000 Accrued taxes 87,315 87,315 Accrued interest 690,075 609,289 Accrued expenses (c) 858,585 858,585 ---------------------------- 2,830,554 2,735,718 Derivative Liability (d) 1,960,749 2,841,203 Unearned Revenues (e) -- $ 4,791,303 5,576,921 ============================ (a) The Company maintains a number of coal leases with minimum lease or royalty payments that vary by lease as defined in the separate agreements. Several of the landowners have contended that the Company is in default under certain of these leases and that said leases are terminated. The Company disputes these contentions. Certain former owners of Gwenco commenced an action in the Circuit Court of Pike County against Gwenco for damages resulting from an alleged failure to pay past royalties and other amounts allegedly due. On May 19, 2006, the former owners obtained a default judgment in this action in the amount of $687,391, from which Gwenco has taken appeal. Gwenco believes that it has several meritorious defenses and counterclaims to this action and intends to defend it vigorously. Since the judgment was approximately $500,000 above what the Company believes to have owed, the Company reclassified the difference and recorded additional expense to account for the liability. On June 20, 2007, Gwenco entered into a settlement agreement with one of the former owners, pursuant to which the former owner agreed to accept payment of $150,000 in exchange for a release of the judgment amount of $458,260. The Bankruptcy Court approved the settlement agreement on July 17, 2007. On August 3, 2007, the Court approved Gwenco's debtor-in-possession financing and the settlement agreement became effective. The escrowed funds were later released on August 10, 2007 to complete the settlement. As of March 31, 2008, Gwenco recorded approximately $242,925 in lease and/or royalty payments as accounts payable and accrued expenses in addition to the reduced judgment of $229,130 against Gwenco as notes payable. (b) During the period ended December 31, 2004, the Company's bank initiated a claim for an overdraft recovery. Since it was later determined that there was a much larger malice perpetrated against the Company by existing bank employees, estimates for the resolution of a claim against a defunct subsidiary have been accrued until a resolution can be determined. The Company has filed suit against the bank and all parties involving several counts of fraudulent misconduct. As of March 31, 2008, no resolution has been determined. 13 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 8 - ACCOUNTS PAYABLE & ACCRUED EXPENSES (Continued) (c) The Company recorded an accrued liability for indemnification obligations of $390,000 to its officers, which represents the fair value of shares of the Company's common stock, which the officers pledged as collateral for personal guarantees of a loan to the Company. In January 2007, the Company satisfied $260,000 of this accrued liability by issuing 260,000 shares of Series C Preferred Stock. See Note 11. Upon default by the Company, the lender foreclosed on the officer's pledged shares. In addition, during the period ended December 31, 2004, the Company had recorded accrued expenses of $468,585 from its subsidiaries, E-Z Mining Co. and Gwenco, Inc. as acquisition for mining expenses recorded on their books and records. The Company continues to carry these balances until further validity can be determined. (d) The Company has issued convertible notes at a discounted rate relative to the market price of the underlying common stock, as well as warrants. The Company has accrued additional derivative liability allowances based on the market price volatility of the common stock using the Black-Scholes method under the accounting guidance of FASB 133. The valuations are adjusted each quarter to present a fair representation of the liability until the underlying note or warrant has matured, expired, or has been exercised, cancelled, or satisfied. The Company's operating losses are increased or decreased relative to the derivative liability allowance. These adjusted valuations also remain relative to the future capitalization costs that would incur from exercise of the warrant issuances or settlement of existing debt through conversion. (e) As part of the rescission agreement with D&D on November 1, 2004, the Company posted receivables based on a two-year lease agreement for equipment still owned as well as a limited 2,000,000 ton royalty payout of $0.25 per ton. Management has initiated a liability allowance until the receivables are recognized. As of the three months ended March 31, 2008, D&D was in default of this agreement. The Company is currently negotiating with the existing leaseholders to receive subsidized payments from the coal mined by D&D to secure D&D's obligations to the Company. As a result, the Company has reclassified the allowance under Other Receivables until a settlement can be determined. 14 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE
Notes payable consist of the following: March 31, December 31, 2008 2007 ------------ ------------ QUEST MINERALS & MINING CORP. 0% Notes payable (a). $ 202,864 202,864 12% Notes payable to Gross Foundation (b). 5,899 32,399 15% Notes payable to Gross Foundation (c). 70,822 -- 7% Notes payable to GP, PTF, FM (d). -- -- 7% Notes payable to Investors (e). 50,000 50,000 7% Notes payable to Greenwood Partners (f). -- -- 7% Notes payable to First Mirage (f). 35,950 50,000 7% Notes payable to Professional Traders Fund (g). 73,248 100,000 8% Notes payable to Cornway Co (h). -- -- 8% Notes payable to Interstellar Holdings. (h). 535,000 535,000 5% Advances from Interstellar Holdings (i). 1,031,849 1,010,049 0% Notes payable (j). 316,684 217,684 6% Notes payable to Westor Capital Group (k). 100,000 100,000 8% Notes payable to Kaila (l). 300,000 300,000 10% Notes payable to IMR (m). 10,000 10,000 QUEST ENERGY, LTD. 8% Summary Judgment payable to BH&P (n). 35,000 35,000 GWENCO, INC.: (Bank Loans) 12% Judgment to Duke Energy Merchants (o). 726,964 726,964 9% Assigned Judgment to Interstellar Holdings (p). -- -- 12.75% Assigned Judgment to Interstellar Holdings (p). 65,589 65,589 9.5% Note payable to First Sentry Bank (q) 262,402 262,402 6% Note payable to United National Bank (q) 28,159 28,159 0% Default Judgment to Third-Party (r) 229,130 229,130 17% DIP Financing - Interstellar Holdings (s) 370,733 335,764 GWENCO, INC.: (Related-Party Loans) 5.26% Notes payable to Scott Whitson (t). 666,486 672,289 ---------------------------- 5,116,779 4,963,294 Less current portion 5,116,779 4,963,294 ---------------------------- Long-Term Debt: $ -- ============================
15 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE (Continued) (a) On December 31, 2005, the Company closed E-Z Mining Co., Inc. During the period ended December 31, 2004, the Company's bank initiated a claim for an overdraft recovery. Since it was later determined that there was a much larger malice perpetrated against the Company by existing bank employees, allowances have been accrued until a resolution can be determined. These current notes consist of various third parties related to the former CFO of the Company. All notes are due on demand except $110,000, which is due from future royalties. All notes are non-interest bearing. (b) On December 17, 2004, the Company signed a 15% per annum promissory note with Gross Foundation for $300,000 due on June 17, 2005. The note was secured by certain of the Company's equipment. In the event of default, the note became convertible into shares of the Company's common stock at the option of the holder at a conversion price of $4.00 per share. As additional compensation to the lender, the Company issued 7,500 common stock warrants at $60.00. The warrants have anti-dilution privileges and piggyback registration rights. On December 20, 2005, the Company issued 50,000 shares of common stock at $4.00 per share to Gross Foundation as a partial conversion pursuant to their promissory note, which matured on June 17, 2005. The lender continues to make periodic partial conversion requests to pay down the principal and accrued interest. On July 26, 2006, the note was amended and restated at 12%, due on April 18, 2007, with a new balance of $258,091, which included the remaining principal and interest from the original note. The note is convertible at the option of the holder at a conversion price of $3.00 per share; provided, that if the market price of the Company's common stock was less than $4.00 per share for ten consecutive trading days, the conversion price would reduced to $2.00 per share; provided, further, that if the market price of the Company's common stock was less than $2.00 per share for ten consecutive trading days, the conversion price would become the lesser of (i) $2.00 per share or (ii) 70% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date. The lender makes periodic partial conversions of the principal and accruing interest. Since the convertible notes were issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. As of March 31, 2008, the amended note was in default. (c) On March 11, 2008, the Company signed a 15% per annum promissory note with a third party lender for $75,000 due on March 10, 2009. The note is convertible at the option of the holder at a conversion price of 50% of the average of the three lowest per share market values during the ten (10) trading days immediately preceding a conversion date. The holder may not convert any outstanding principal amount of this note or accrued and unpaid interest thereon to the extent such conversion would result in the holder beneficially owning in excess of 4.999% of the then issued and outstanding common shares of the Company. Since the convertible note was issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. 16 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE (Continued) (d) On February 22, 2005, the Company signed a series of unit purchase agreements with three individual third-party lenders for a total sale amount of $650,000. Each unit was sold at $25,000 and consisted of a 7% senior secured convertible note due March 6, 2006 and 3,750 Series A Warrants. The notes are secured by certain of the Company's assets and were initially convertible into shares of the Company's common stock at the rate of $20.00 per share, which conversion price was subject to adjustment. Each Series A Warrant was exercisable into one (1) share of common stock at an exercise price of $20.00 and one (1) Series B Warrant. Each Series B Warrant was exercisable into one (1) share of common stock at an exercise price of $40.00. The Company categorized the convertible notes as a liability in the amount of $650,000. A 10% commission was paid to the agent who arranged the transaction. On February 14, 2006, the Company amended and restated a 7% convertible note in the principal amount of $350,000, which is now due February 22, 2007, to one of the third party lenders. On June 5, 2006, the Company amended and restated the remaining 7% convertible notes in the principal amounts of $100,000 and $200,000, respectively, which are also now due February 22, 2007. The notes are convertible at the option of the holder at a conversion price of $3.00 per share; provided, that if the market price of the Company's common stock was less than $4.00 per share for ten consecutive trading days, the conversion price would reduced to $2.00 per share; provided, further, that if the market price of the Company's common stock was less than $2.00 per share for ten consecutive trading days, the conversion price would become the lesser of (i) $2.00 per share or (ii) 70% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date. The lenders make periodic partial conversions to pay down the remaining principal on the notes. As of the three months ended March 31, 2008, only a partial amount of accrued interest remains. Since the convertible notes were issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. 17 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE (Continued) (e) On March 4, 2005, the Company signed a series of unit purchase agreements with thirteen individual third-party lenders for a total sale amount of $375,000. Each unit was sold at $25,000 and consisted of a 7% senior secured convertible note due March 6, 2006 and 3,750 Series A Warrants. The notes are secured by certain of the Company's assets and were initially convertible into shares of the Company's common stock at the rate of $20.00 per share, which conversion price is subject to adjustment. Each Series A Warrant was exercisable into one (1) share of common stock at an exercise price of $20.00 and one (1) Series B Warrant. Each Series B Warrant was exercisable into one (1) share of common stock at an exercise price of $40.00. The Company categorized the convertible notes as a liability in the amount of $375,000. A 10% commission was paid to the agent who arranged in the transaction. During the twelve months ended December 31, 2006, the Company amended and restated 7% convertible notes in the aggregate principal amount of $325,000, which are now due February 22, 2007. The notes are convertible at the option of the holder at a conversion price of $3.00 per share; provided, that if the market price of the Company's common stock was less than $4.00 per share for ten consecutive trading days, the conversion price would reduced to $2.00 per share; provided, further, that if the market price of the Company's common stock was less than $2.00 per share for ten consecutive trading days, the conversion price would become the lesser of (i) $2.00 per share or (ii) 70% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date. During the three months ended March 31, 2008, several of the lenders made periodic partial conversions of the principal and accruing interest. Since the convertible notes were issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. As of March 31, 2008, the remaining notes are in default. 18 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE (Continued) (f) On April 18, 2005, the Company signed a series of unit purchase agreements with two third-party lenders for a total sale amount of $400,000. Each unit was sold at $25,000 and consisted of a 7% senior secured convertible note due March 6, 2006 and 3,750 Series A Warrants. The notes are secured by certain of the Company's assets and were initially convertible into shares of the Company's common stock at the rate of $20.00 per share, which conversion price is subject to adjustment. Each Series A Warrant was exercisable into one (1) share of common stock at an exercise price of $20.00 and one (1) Series B Warrant. Each Series B Warrant was exercisable into one (1) share of common stock at an exercise price of $40.00. The Company categorized the convertible notes as a liability in the amount of $400,000. A $14,000 commission was paid to the agent who arranged in the transaction. On June 5, 2006, the Company amended and restated the 7% convertible notes in the principal amounts of $100,000, $125,000, and $50,000, respectively, which are now due April 18, 2007. As part of the amendment and restatement, one of the noteholders forgave a 7% senior secured convertible note in the principal amount of $125,000. The notes are convertible at the option of the holder at a conversion price of $3.00 per share; provided, that if the market price of the Company's common stock was less than $4.00 per share for ten consecutive trading days, the conversion price would reduced to $2.00 per share; provided, further, that if the market price of the Company's common stock was less than $2.00 per share for ten consecutive trading days, the conversion price would become the lesser of (i) $2.00 per share or (ii) 70% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date. The lenders make periodic partial conversions of the principal and accruing interest. Since the convertible notes were issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. 19 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE (Continued) (g) On May 16, 2005, the Company entered into a credit agreement with a third party lender in which $245,000 was issued as a 10% note due August 19, 2005. According to the credit agreement, the lender may, in its sole and absolute discretion, make additional loans to the Company of $255,000 for an aggregate total of $500,000. Additionally, the lender was issued 256,501 warrants. The loans subject to the credit agreement are secured by certain assets of the Company. The warrants have an exercise price of $4.00 per share, subject to adjustment, and expire on May 31, 2007. As of December 31, 2005, the Company had made a payment of $5,500. On February 14, 2006, in connection with a settlement agreement with the lender, the Company made a payment of $264,000 and issued an amended and restated 10% note in the amount of $100,000. The note covered accrued interest and additional legal fees. The amended and restated note is convertible into the Company's common stock at a rate of $4.00 per share and was due February 22, 2007. Since the convertible note was issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. On June 6, 2007, the Company entered into an exchange agreement with the lender, under which the holder exchanged the $100,000 note and all remaining warrants held by such lender for a new convertible promissory note in the aggregate principal amount of $100,000. The new note is due on June 6, 2008, with an annual interest rate of seven percent (7%), and is convertible into Quest's common shares at a conversion price of 70% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date. Since the convertible note was issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. (h) On December 8, 2005, the Company issued a convertible secured promissory note in the principal amount of $335,000. The note was due on December 8, 2006, with an annual interest rate of eight percent (8%), and is convertible into the Company's common shares at an initial conversion price of $2.00 per share, subject to adjustment. As of December 31, 2006, the Company was in default. In January, 2007, the Company entered into an exchange agreement with the note holder and holders of 150,000 shares of the Company's common stock, under which the holders exchanged the note and the 150,000 shares of the Company's common stock for a series of new convertible promissory notes in the aggregate principal amount of $635,000. The new notes were due on March 31, 2007, with an annual interest rate of eight percent (8%), and are convertible into the Company's common shares at an initial conversion price of the greater of (i) $0.20 per share or (ii) 50% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date. During the first quarter of 2007, the note holders made partial conversions of the principal and accruing interest. Since the convertible notes were issued at a discount to the market price of the collaterzied common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. As of March 31, 2008, the obligation was in default. 20 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE (Continued) (i) During January of 2006, the Company entered into a loan agreement to receive up to $300,000 in funds for operations in return for a 12% percent note due in May of 2006. As additional collateral, the officers of the Company guaranteed the loan and pledged their own shares of common stock. As of the three months ended March 31, 2006, the lender has made advances totaling $132,000. On April 3, 2006, the lender declared a default under the terms of the loan agreement. The Company failed to repay the lender as required under the loan agreement. The lender then enforced guarantees made by the officers of the Company and foreclosed on shares of the officer's common stock pledged to the lender to secure the guarantee. Along with accrued interest, the Company recorded a capital contribution from its officers of $390,000. The Company has indemnified one officer and is currently negotiating the terms of indemnification of the other officer as a result of this foreclosure. During the three months ended March 31, 2008, the lender continued to advance operational funding into the Company. Since there has been no formal agreement regarding the balance owed, the Company accrues a 5% annual interest on the principal with the intent that a mutual arrangement will be resolved between both parties. (j) Periodically, the Company receives cash advances from unrelated third party investors. Since these advances are open accounts and have no fixed or determined dates for repayment, the amounts carry a 0% interest rate. (k) On April 5, 2006, the Company issued an aggregate of 1.25 units at a price of $100,000 per unit. The aggregate gross proceeds from the sale of the units were $125,000. Each unit consists of a convertible promissory note in the principal amount of $100,000 and warrants to purchase shares of the Company's common stock at an exercise price of $8.40 per share. The unit notes are due on July 5, 2007. The notes bear interest at a rate of six percent (6%) and are convertible into Quest common shares at an initial conversion price of $4.20 per share, subject to adjustment, including a "weighted-average" reduction of the conversion price in the event that the Company issued additional stock or stock equivalents at a price lower than the conversion price. Commencing on the fifth month of the notes, the Company must make amortizing payments of the outstanding principal amount and interest on each note until the principal amount and interest have been paid in full, either in cash of 102% of the monthly amount due or by conversion of such amount into our common shares at a conversion rate of seventy-five percent of the volume weighted average price of our common shares for the five trading days prior to a conversion date, subject to certain limitations. Since the convertible notes were issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. On June 27, 2007, the Company entered into an agreement with one of the note holders to exchange a note in the principal amount of $25,000 for 83,693 shares of common stock. Since the exchange transaction valued the stock at greater than market, the Company incurred no additional expense at the time of issuance. As of March 31, 2008, the remaining note was in default, and the Company is in the process of re-negotiating the note with the holder. 21 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE (Continued) (l) On April 1, 2006, the Company entered into a settlement and release agreement with a third party individual pursuant to which the Company issued a convertible secured promissory note in the principal amount of $300,000. The note is due on April 1, 2008, with an annual interest rate of eight percent (8%). The note is convertible into the Company's common shares at an initial conversion price equal to the greater of (a) $0.20 per share, and (b) 50% of the average market price during the three trading days immediately preceding any conversion date. The holder may not convert any outstanding principal amount of this note or accrued and unpaid interest thereon to the extent such conversion would result in the holder beneficially owning in excess of 4.999% of the then issued and outstanding common shares of the Company. Since the convertible note was issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. (m) On May 1, 2007, the Company entered into a settlement and release agreement with a third party pursuant to which the Company issued a convertible secured promissory note in the principal amount of $10,000. The note is due on May 1, 2008, with an annual interest rate of ten percent (10%). The note is convertible into the Company's common shares at a fixed rate of $0.16 per share. The holder may not convert any outstanding principal amount of this note or accrued and unpaid interest thereon to the extent such conversion would result in the holder beneficially owning in excess of 4.999% of the then issued and outstanding common shares of the Company. Since the convertible note was issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. (n) On July 10, 2006, the Company entered into a settlement arrangement with an existing equipment lessor for the bill of sale on two pieces of equipment, of which the Company had retained possession while in default of prior lease payments. On October 10, 2006, the Pike County Circuit Court entered an order enforcing this settlement agreement, and on December 19, 2006, the lessor was awarded summary judgment in the amount of $35,000 plus 8% accrued interest from August 9, 2006. As of March 31, 2008, the Company remains in default. (o) On April 28, 2004, in connection with the Company's acquisition of Gwenco, Inc., the Company assumed a promissory note which was in default. The note was secured by certain assets of Gwenco. The former stockholder of Gwenco has personally guaranteed most of the above loans. On May 20, 2005, the lender, Duke Energy, was awarded a judgment of $670,964 plus legal fees of $56,000, which accrues interest at the rate of twelve percent. As of March 31, 2008, the balance remains outstanding. Duke Energy has obtained a judgment lien against the Company and its assets. (See Note 16.) 22 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE (Continued) (p) On April 28, 2004, in connection with the Company's acquisition of Gwenco, Inc., the Company assumed a commercial installment note and a commercial time note, both of which were in default. The notes were secured by certain assets of Gwenco. The former stockholder of Gwenco has personally guaranteed most of the above loans. In 2005, the Company entered into an agreed judgment in with the lender, National City Bank of Kentucky, with respect to the defaulted notes. National City Bank obtained a judgment lien against the Company and its assets. On July 19, 2006, National City Bank sold its right, title, and interest in and to the various judgments, judgment liens, security interests, and lines of credit, all of which are based on the notes issued to National City Bank of Kentucky, also referenced in Note 16, to a third party investor. The third party investor has agreed to forbear on further collection, enforcement, and foreclosure with respect to this indebtedness until further notice. In connection therewith, the Company granted the investor a royalty on fifty percent of the Company's gross profits generated from coal mining at the Company's leased mine. Also in connection therewith, the Company entered into a judgment conversion agreement where the investor shall have the right, but not the obligation, to convert all or any portion of the then aggregate outstanding amounts due under the judgments into the Company's common shares at the rate of $0.001 per share. The investor shall not be entitled to convert any portion of the judgment if such conversion would result in beneficial ownership by the investor of more than 4.99% of the outstanding common shares of the Company. Since the convertible note was issued at a discount to the market price of the underlying common stock, the Company has taken into consideration the cost of issuing the common stock to settle the debt at the time of issuance and has accrued additional allowances based on a valuation of market price volatility. (q) On July 27, 2006, the Company assumed two promissory notes in connection with a settlement agreement with the former owner of Gwenco. The notes are in default. (r) Certain former owners of Gwenco commenced an action in the Circuit Court of Pike County against Gwenco for damages resulting from an alleged failure to pay past royalties and other amounts allegedly due. On May 19, 2006, the former owners obtained a default judgment in this action in the amount of $687,391, from which Gwenco has taken appeal. The plaintiffs then amended their complaint, seeking to be adjudged a lien on certain real and personal property of Gwenco pursuant to the aforementioned judgment and that said real and personal property be sold to satisfy the aforesaid lien, and that the liens of the plaintiffs attach to the proceeds of the sale. Gwenco believes that it has several meritorious defenses and counterclaims to this action and intends to defend it vigorously. This foreclosure action was stayed against Gwenco as a result of Gwenco's filing of a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. (See Notes 16 & 17.) On June 20, 2007, Gwenco entered into a settlement agreement with one of the former owners, pursuant to which the former owner agreed to accept payment of $150,000 in exchange for a release of the judgment amount of $458,260. On July 17, 2007, the Bankruptcy Court approved the settlement agreement. On August 3, 2007, the Court approved Gwenco's debtor-in-possession financing and the settlement agreement became effective. On August 10, 2007, the escrowed funds were transferred to complete the settlement. As of the three months ended March 31, 2008, the Company continues to negotiate the remaining balance of the judgment with its former owners. 23 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 9 - NOTES PAYABLE (Continued) (s) On August 15, 2007, the U.S. Bankruptcy Court approved a DIP Financing Motion authorizing the Company's wholly owned subsidiary, Gwenco, Inc., which is currently in Chapter 11 reorganization proceedings, to borrow up to $2,000,000 ("Total Facility") in post-petition debt from a pre-petition creditor pursuant to a Debtor-In-Possession loan agreement and promissory note between Gwenco and the lender dated June 29, 2007. Additionally, the Court approved prior budgeted advances from July of up to $350,000, which, in turn, adjusted the Total Facility to $1,700,000. The loan advances will carry a 17% interest rate per annum and mature on July 31, 2008. (t) The Company has guaranteed payment on a note in the amount of $300,000 made to a former stockholder of Gwenco by another former stockholder of Gwenco. This note is secured by 50% of the outstanding capital stock of Gwenco. The debt required 4 annual payments of approximately $75,000 plus interest. As of December 31, 2005, the Company was in default. Additionally, a 3.7% annual rate note in the amount of $495,000 due in December 2007 was agreed upon in consideration for royalties to be paid out on a schedule based on the level of production from the mine. Since the initial agreement was made effective in March of 2004, the Company has accrued two years of interest expense and has adjusted its paid in capital to reflect the future correction on the issuance of preferred stock associated with the original acquisition of Gwenco, Inc. On August 24, 2006, the Company amended the original note of $300,000 to $180,884, which included the remaining principal and interest, which has an interest rate of 5.21% and is due on September 24, 2009. The Company also amended the $495,000 note due on December 10, 2007 to $545,473, which also included the accrued interest; having an interest rate of 5.26% to be paid through monthly payments equal to the sum of $.50 per clean sellable ton of coal removed the property. On March 31, 2008, the Company had 975,000,000 common shares authorized, of which 194,867,219 shares were issued and outstanding. As of March 31, 2008, the number of common shares of the Company that could be issued upon conversion of all outstanding convertible notes exceeded 780,132,781 common shares, leaving the Company with insufficient authorized common stock to honor all possible conversion requests. 24 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 10 - INCOME TAXES The Company recognized no income tax benefit for the loss generated for the periods through March 31, 2008. SFAS No. 109 requires that a valuation allowance be provided if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company's ability to realize the benefit of its deferred tax asset will depend on the generation of future taxable income. Because the Company has yet to recognize significant revenue from the sale of its products, it believes that the full valuation allowance should be provided. The Company has not filed corporate federal, state, or local income tax returns since 2002, and believes that, due to its operating losses, it does not have a material tax liability. NOTE 11 - PREFERRED STOCK Series A Each share of Quest Series A Preferred Stock is convertible into a maximum of five (5) shares of the Company's common stock, or such lesser shares as determined by dividing $3.00 by the average closing bid price of one share of the Company's common stock during the ten trading days preceding actual receipt of a notice of conversion, subject to proportional adjustment for stock-splits, stock dividends, recapitalizations, and subsequent dilutive issuances of common stock. The Series A Preferred Stock is convertible at the option of the holder. The holders of the Series A Preferred Stock shall be entitled to receive cumulative dividends at the rate of $0.0001 per share per annum in preference to the holders of common stock. The holders of the Series A Preferred Stock shall also be entitled to receive, upon liquidation, an amount equal to $3.00 per share for the Series A Preferred Stock plus all declared and unpaid dividends, in preference to the holders of the common stock. After March 31, 2004, the Company has the option of redeeming the Series A Preferred Stock at a price equal to $3.00 per share for the Series A Preferred Stock plus all declared and unpaid dividends. The Series A Preferred Stock has no voting rights. On December 19, 2007, the Company amended the terms of the Series A Preferred Stock to provide for a reduced conversion price set forth as such that (1) Each share of Series A Preferred Stock shall be convertible at any time into a shares of common stock, par value, $.001 per share of the Company as determined by multiplying each share of Series A Preferred Stock by a fraction, the numerator of which is $3.00 and the denominator of which is equal to the greater of (i) $0.001 or (ii) 40% of closing price per share of common stock. A holder of Series A Preferred Stock may not convert shares of the Series A Preferred Stock to the extent that such conversion would result in the Holder, together with any affiliate thereof, beneficially owning, pursuant to Section 13(d) of the Securities Exchange of 1934, in excess of 4.999% of the then issued and outstanding common stock of the Company. The provisions of this section may be waived by a holder upon not less than 61 days prior notice to the Corporation. 25 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 11 - PREFERRED STOCK (Continued) Series A Since the Series A Preferred shares are now convertible at a discount to the market price of the Company's common stock, the Company has taken into consideration the beneficial cost liabilities associated with future conversions and has accrued additional liability allowances relative to the future capitalization costs that would incur from these conversions. Allowances are based on a valuation of market price volatility using the Black-Scholes method. As of March 31, 2008, 55,045 shares have been converted. On March 31, 2008, the Company had 975,000,000 common shares authorized, of which 194,867,219 shares were issued and outstanding. As of March 31, 2008, the number of common shares of the Company that could be issued upon conversion of all outstanding convertible notes and Series A Preferred Stock exceeded 780,132,781 common shares, leaving the Company with insufficient authorized common stock to honor all possible conversion requests. Series B Effective July 2006, each share of the Company's Series B Preferred Stock is convertible into 10.355 shares of the Company's common stock, subject to proportional adjustment for stock-splits, stock dividends, and recapitalizations. The Series B Preferred Stock is convertible at the option of the holder, but shall be automatically converted into the Company's common stock, at the then applicable conversion price, in the event that, during any period of fifteen (15) consecutive trading days, the average closing price per share of Quest's common stock as reported on a national securities exchange, the NASDAQ NMS or Small Cap Market, or the OTC Bulletin Board, equals or exceeds $4.00 (subject to anti-dilution, recapitalization, and reorganization adjustments). The holders of the Series B Preferred Stock shall be entitled to receive dividends on a pro-rata, as-if converted basis with the Series A Preferred Stock. The holders of the Series B Preferred Stock shall also be entitled to receive, upon liquidation, an amount equal to $2.50 per share for the Series B Preferred Stock plus all declared and unpaid dividends, in preference to the holders of the common stock. On July 27, 2006, the Company settled a third party complaint by the former owner of Gwenco. As part of the settlement, the Company issued 87,500 shares of common stock for the conversion of 337,991 shares of Series B Preferred Stock issued pursuant to the purchase agreement with Gwenco, Inc. On August 17, 2007, the company effectuated a 4 to 1 reverse stock split. As a result of the reverse split, the conversion price was adjusted from $0.241422 to $0.965688. On December 14, 2007, the company effectuated a 10 to 1 reverse stock split. As a result of the reverse split, the conversion price was adjusted from $0.965688 to $9.65688. 26 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 11 - PREFERRED STOCK (Continued) Series C On January 17, 2007, the Company created a series of preferred stock known as Series C Preferred Stock, par value $0.001 per share. The conversion price at which shares of common stock shall be deliverable upon conversion of Series C Preferred Stock without the payment of any additional consideration by the holder thereof is the lesser of (i) $0.008 per share or (ii) 100% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date. Holders of the Series C Preferred Stock shall be entitled to receive dividends or other distributions with the holders of our common stock on an as converted basis when, as, and if declared by our board of directors. The holders of the Series C Preferred Stock shall also be entitled to receive, upon liquidation, an amount equal to $1.00 per share of the Series C Preferred Stock plus all declared but unpaid dividends with respect to such shares. The shares of Series C Preferred Stock are not redeemable. On all matters submitted to a vote of the holders of the common stock, including, without limitation, the election of directors, a holder of shares of the Series C Preferred Stock shall be entitled to the number of votes on such matters equal to the product of (a) the number of shares of the Series C Preferred Stock held by such holder, (b) the number of issued and outstanding shares of our common stock, as of the record date for the vote, or, if no such record date is established, as of the date such vote is taken or any written consent of stockholders is solicited, and (c) 0.000008. On January 12, 2007, the Company entered into an indemnity agreement with the Company's President, who is also the Company's Secretary and sole director. Under the indemnity agreement, the Company issued 260,000 shares of its Series C Preferred Stock to the President to indemnify him for a loss he incurred when he delivered a personal guarantee in connection with a loan agreement. Under the loan agreement, the President personally guaranteed repayment of the loan and pledged 2,000,000 shares of common stock held by him as collateral for the amounts loaned under the loan agreement. The Company eventually defaulted under the loan agreement, and the lender foreclosed on the shares which the President had pledged. On the date of foreclosure, the President's shares had a market value of approximately $260,000. The board of directors has determined that the President delivered the guarantee and pledged the shares in the course and scope of his employment, as an officer and director, and for benefit of the Company. The board of directors has further determined that the President's conduct was in good faith and that he reasonably believed that his conduct was in, or not opposed to, the best interests of the Company. The Company recorded a beneficial conversion expense of $292,500 as a result of the issuance of the Series C Preferred Stock. The issuance of the Series C Preferred Stock to the President effectively transferred control of the Company to the President. On August 17, 2007, the Company effectuated a 4 to 1 reverse common stock split. As a result of the reverse split, the conversion price was adjusted from the lower of $0.008 or 100% of the 5-day average to the lower of $0.032 or 100% of the 5-day average. On December 14, 2007, the Company effectuated a 10 to 1 reverse common stock split. As a result of the reverse split, the conversion price was adjusted from the lower of $0.032 or 100% of the 5-day average to the lower of $0.32 or 100% of the 5-day average. 27 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 12 - COMMON STOCK On February 9, 2007, the Company amended its articles of incorporation to increase the number of shares of common stock that were authorized to issue form 250,000,000 to 975,000,000. On August 17, 2007, the Company effectuated a 1 to 4 reverse stock split resulting in a 644,867,576 reduction of shares from 859,823,718 common shares outstanding to 214,956,142 common shares outstanding. The reverse stock split did not affect the amount of authorized shares of the Company. Additionally, the board approved the issuance of up to 500 shares of the Company's common stock for rounding up of fractional shares in connection with the reverse stock split, of which, 213 shares were issued. In conjunction with the reverse stock split, the Company's stock symbol on the OTC Bulletin Board Symbol was changed to QMMC. On December 14, 2007, the Company effectuated a 1 to 10 reverse stock split resulting in a 331,309,124 reduction of shares from 368,121,581 common shares outstanding to 36,812,457 common shares outstanding. The reverse stock split did not affect the amount of authorized shares of the Company. Additionally, the board approved the issuance of up to 500 shares of the Company's common stock for rounding up of fractional shares in connection with the reverse stock split. In conjunction with the reverse stock split, the Company's stock symbol on the OTC Bulletin Board Symbol was changed to QMNM. During the year ended December 31, 2007, holders of Amended and Restated 7% Senior Secured Promissory Notes effectuated a series of partial conversions and were issued an aggregate of 5,186,698 shares of common stock at a conversion price averaging approximately $0.17 per share. In the aggregate, these issuances reduced the debt by $671,598 in principal and $65,849 in accrued interest, and the Company expensed an additional $350,423 due to the difference in market value at the time of the respective issuances. During the year ended December 31, 2007, the Holder of an Amended and Restated 12% Promissory Note effectuated a series of partial conversions and were issued an aggregate of 2,158,728 shares of common stock at a conversion price averaging approximately $0.128 per share. In the aggregate, these issuances reduced the debt by $180,692 in principal and $15,858 in accrued interest, and the Company expensed an additional $167,113 due to the difference in market value at the time of the respective issuances. During the year ended December 31, 2007, the Holder of various judgments, judgment liens, security interests, and lines of credit, based on notes issued to National City Bank of Kentucky, effectuated a series of partial conversions and were issued an aggregate of 17,125,000 shares of common stock at a conversion price averaging approximately $0.031 per share. In the aggregate, these issuances reduced the debt by $389,745 in principal and $34,255 in accrued interest, and the Company expensed an additional $1,821,100 due to the difference in market value at the time of the respective issuances. During the year ended December 31, 2007, holders of the Company's Series A Preferred Stock converted an aggregate of 5,467 shares into 3,400,000 shares of common stock, at a conversion price averaging $0.0048 per share. The Company expensed an additional $41,195 due to the difference in market value at the time of issuance. In the year ended December 31, 2007, the Company issued an aggregate of 9,820,000 shares of common stock to various consultants. Expense of $609,355 was recorded related to these shares, which was the market value of such shares issued at prices varying from $0.011 to $0.48 per share. 28 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 12 - COMMON STOCK (Continued) During the year ended December 31, 2007, the Company issued 1,250,000 shares of common stock as compensation towards back salaries owed to the Company's President. Expense of $110,000 was recorded related to these shares, which was the market value of such shares issued, at prices varying from $0.06 to $0.17 per share. In January, 2007, the Company entered into an exchange agreement with a noteholder and holders of 150,000 shares of the Company's common stock, under which the holders exchanged the note and the 150,000 shares of the Company's common stock for a series of new 8% Secured Convertible Promissory Notes in the aggregate principal amount of $635,000. See Note 9. The Company credited $33,600 to stockholder's equity based on the market value of the 150,000 shares received as of the date of the exchange. The shares were returned to treasury. On February 20, 2007, holders of these notes effectuated a series of conversions and were issued 500,000 shares of common stock at a conversion price of $0.20 per share. These issuances reduced the debt by $100,000 in principal, and the Company expensed $140,000 due to the difference in market value at the time of issuance. On March 5, 2007, the Company issued 1,667 shares of common stock at $0.04 per share upon cashless exercise of 3,750 Series A and Series B Warrants. The Company expensed $460 due to the difference in market value at the time of issuance. On June 27, 2007, the Company issued 83,693 shares of common stock in exchange for an outstanding convertible promissory note in the principal amount of $25,000 pursuant to an exchange agreement. On December 14, 2007, the Company issued 2,094,707 shares of common stock at $0.001 per share in error to Gross Foundation due to a communication oversight to the transfer agent relating to the time in which the 1 to 10 reverse split was effectuated. The Company valued the issuance at market price and has posted a capital allowance of $29,326 until the issuance can be reconciled. During the three months ended March 31, 2007, holders of Amended and Restated 7% Senior Secured Promissory Notes effectuated a series of partial conversions and were issued an aggregate of 14,300,000 shares of common stock at a conversion price averaging approximately $0.0028 per share. In the aggregate, these issuances reduced the debt by $40,802 in principal, and the Company expensed an additional $20,698 due to the difference in market value at the time of the respective issuances. During the three months ended March 31, 2008, the Holder of an Amended and Restated 12% Promissory Note effectuated a series of partial conversions and were issued an aggregate of 9,373,515 shares of common stock at a conversion price averaging approximately $0.0035 per share. In the aggregate, these issuances reduced the debt by $26,500 in principal and $4,981 in accrued interest, and the Company expensed an additional $28,569 due to the difference in market value at the time of the respective issuances. During the three months ended March 31, 2008, the Holder of a 12% Promissory Note effectuated a partial conversion of 2,094,707 shares of common stock at a conversion price of $0.002 per share. In the aggregate, the issuance reduced the debt by $4,177 in principal and $12 in accrued interest, and the Company expensed an additional $4,399 due to the difference in market value at the time of the respective issuances. 29 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 12 - COMMON STOCK (Continued) During the three months ended March 31, 2008, holders of the Company's Series A Preferred Stock converted an aggregate of 49,579 shares into 81,300,000 shares of common stock, at a conversion price averaging $0.00195 per share. The Company expensed an additional $223,054 due to the difference in market value at the time of issuance. In the three months ended March 31, 2008, the Company issued an aggregate of 43,100,000 shares of common stock to various consultants. Expense of $202,900 was recorded related to these shares, which was the market value of such shares issued at prices varying from $0.004 to $0.006 per share. On March 20, 2008, Gross Foundation returned 2,094,707 shares of common stock that were issued to them in error on December 14, 2007. The Company had issued 2,094,707 shares of common stock in error to due to a communication oversight to the transfer agent relating to a conversion notice during the time in which the Company's 1 to 10 reverse split was effectuated. The issuance was valued at market price and a capital allowance of $29,326 was posted until it could be reconciled. The shares were subsequently cancelled and the allowance was credited. On March 31, 2008, the Company had 975,000,000 common shares authorized, of which 194,867,219 shares were issued and outstanding. As of March 31, 2008, the number of common shares of the Company that could be issued upon conversion of all outstanding convertible notes and preferred series A stock exceeded 780,132,781 common shares, leaving the Company with insufficient authorized common stock to honor all possible conversion requests. 30 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 13 - STOCK OPTION / WARRANTS
Stock Option / Warrant Issuances Outstanding consist of the following: March 31, 2008 Exercise ------------ Warrants Price Valuation ------------ ------------ ------------ December 17, 2004 issuance of 15,000 warrants; expiration 2009 (a). 15,000 60.00 0 December 21, 2004 issuance of 5,000 warrants; expiration 2009 (b). 5,000 60.00 0 March 4, 2005 issuance of 18,750 series A warrants; expiration 2010 (c). 18,750 20.00 0 March 4, 2005 issuance of 18,750 series B warrants; expiration 2010 (c). 18,750 40.00 0 April 5, 2006 issuance of 29,677 warrants; expiration 2009 (d). 29,677 8.40 0 May 18, 2006 issuance of 75,000 options; expiration 2011 (e). 75,000 2.00 143,054 ------------ ------------ TOTALS: 162,177 $ 143,054 ============ ============ Avg. Warrants Ex. Price ($) Valuation ------------ ------------ ------------ Total Options / Warrants outstanding as of December 31, 2007 162,177 $ 16.80 143,055 --------------------------------------------------------------------------------------------------------------------------- Options / Warrants Issued 0 0 0 Options / Warrants Expired / Cancelled (0) (0) (0) Options / Warrants Exercised (0) (0) (0) Derivative Valuation Adjustment (1) --------------------------------------------------------------------------------------------------------------------------- Total Options / Warrants outstanding as of March 31, 2008 162,177 $ 16.80 143,054 ============================================
31 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 13 - STOCK OPTION / WARRANTS (Continued) (a) On December 17, 2004, the Company signed a 15% per annum promissory note with two third parties, each for $300,000 due on June 17, 2005. The notes are secured by certain of the Company's equipment. In the event of default, the notes become convertible into shares of the Company's common stock at the option of the holder at a conversion price of $4.00 per share. As additional compensation to these lenders, the Company agreed to issue them 15,000 common stock warrants at $60.00. The warrants have anti-dilution privileges and piggyback registration rights. Based on the market price volatility of the common stock, the warrants are valued using the Black-Scholes method. The Company accrues additional liability allowances relative to the future capitalization costs that would incur from exercise. (b) On December 21, 2004, the Company issued 5,000 common stock warrants at $60.00 as finder's fee. The warrants have anti-dilution privileges and piggyback registration rights. Based on the market price volatility of the common stock, the warrants are valued using the Black-Scholes method. The Company accrues additional liability allowances relative to the future capitalization costs that would incur from exercise. (c) On March 4, 2005, the Company signed a series of unit purchase agreements with thirteen individual third-party lenders for a total sale amount of $375,000. Each unit was sold at $25,000 and consisted of a 7% senior secured convertible note due March 6, 2006 and 3,750 Series A Warrants. The notes are secured by certain of the Company's assets and were initially convertible into shares of the Company's common stock at the rate of $20.00 per share, which conversion price is subject to adjustment. Each Series A Warrant is exercisable into one (1) share of common stock at an exercise price of $20.00 and one (1) Series B Warrant. Each Series B Warrant is exercisable into one (1) share of common stock at an exercise price of $40.00. Based on the market price volatility of the common stock, the warrants are valued using the Black-Scholes method. The Company accrues additional liability allowances relative to the future capitalization costs that would incur from exercise. During the three months ended March 31, 2007, 37,500 Series A and Series B warrants were exercised on a cashless basis pursuant to the agreements. (d) On April 5, 2006, the Company issued an aggregate of 1.25 units at a price of $100,000 per unit. The aggregate gross proceeds from the sale of the units were $125,000. Each unit consists of a convertible promissory note in the principal amount of $100,000 and warrants to purchase shares of the Company's common stock at an exercise price of $8.40 per share. The unit notes are due on July 5, 2007. The notes bear interest at a rate of six percent (6%) and are convertible into Quest common shares at an initial conversion price of $4.20 per share, subject to adjustment, including a "weighted-average" reduction of the conversion price in the event that the Company issued additional stock or stock equivalents at a price lower than the conversion price. Commencing on the fifth month of the notes, the Company must make amortizing payments of the outstanding principal amount and interest on each note until the principal amount and interest have been paid in full, either in cash of 102% of the monthly amount due or by conversion of such amount into our common shares at a conversion rate of seventy-five percent of the volume weighted average price of our common shares for the five trading days prior to a conversion date, subject to certain limitations. Based on the calculation terms of the agreement, a total of 29,677 warrants were issued. Based on the market price volatility of the common stock, the warrants are valued using the Black-Scholes method. The Company accrues additional liability allowances relative to the future capitalization costs that would incur from exercise. As of the three months ended March 31, 2008, the notes were in default. 32 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 13 - STOCK OPTION / WARRANTS (Continued) (e) On May 18, 2006, the Company granted non-qualified options to honor employment agreements previously entered into with each of its President and Vice President. Each agreement called for the President and Vice President to receive options to purchase up to 125,000 shares of the Company's common stock pursuant to a new stock compensation plan adopted by the Company. The options would be exercisable at $2.00 per share, the fair market value at the time of grant, and would vest as follows: (i) options to purchase up to 50,000 shares vesting immediately, (ii) options to purchase up to 50,000 shares vesting upon the Company's receipt of an aggregate of $25,000 in cash or cash equivalents in its accounts, and (iii) options to purchase up to 25,000 shares vesting six months after the date of the option agreements. The 250,000 options were valued at $476,846 using the Black Scholes method, of which $286,108 was deferred against Paid-in capital. Since 50,000 of these options would vest six months from issuance and 100,000 would vest upon a stipulated performance, the Company has accrued a deferred stock compensation allowance against the issued capitalization. On May 31, 2006, the Company's then-President resigned. The Company and the former President then entered into a consulting agreement, under which it was agreed that 50,000 options initially awarded to him would remain vested and 25,000 options would be allowed to vest in six months. 50,000 options that vested upon the Company's raising one million dollars were mutually voided. The Company credited both the deferred stock compensation and the accrued paid-in capital by $95,369, which reversed the valued portion of the issuance. On November 18, 2006, the 50,000 options vested pursuant to the agreements. The Company adjusted the deferred stock compensation and expensed $95,369 for compensation. On January 2, 2007, the current President (former Vice President) and the Company mutually agreed to cancel his stock option agreement. On March 31, 2008, the Company had 975,000,000 common shares authorized, of which 194,867,219 shares were issued and outstanding. As of March 31, 2008, the number of common shares of the Company that could be issued upon conversion of all outstanding convertible notes and Series A Preferred Stock exceeded 780,132,781 common shares, leaving the Company with insufficient authorized common stock to honor all possible conversion requests. 33 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 14 - STOCK COMPENSATION PLAN Since January 1, 2004, the board of directors of the Company has adopted a total of seven (7) Stock Incentive Plans, which have ultimately allowed for the issuance of up to 247,000,000 shares of the Company's Common Stock to officers, employees, directors, consultants, and advisors. In each instance, the board of directors also authorized the filing of a Form S-8 Registration Statement with the Securities and Exchange Commission for the issuance of the stipulated shares under each Plan. Additionally, under the guidelines stated in each plan, the number of shares available for issuance or reservation does not adjust in the event of a forward or reverse stock split. On August 17, 2007, the Company effectuated a 1 to 4 reverse stock. On December 14, 2007, the Company effectuated a 1 to 10 reverse stock split. Please note that, pursuant to the terms of each plan, the board of directors has full authority to interpret the plan, and that interpretation is final, conclusive, and binding upon all parties. As an example, if you look at the 2004 plan, it originally authorized 17,500,000 shares. Then, in 2004, it granted stock awards for 17,500,000 pre-split shares. In 2007, there were the 4-1 and 10-1 reverse splits. When the 4-1 split occurred, the number of stock award shares reversed from 17,500,000 to 4,375,000 shares (i.e. 1 new share for every 4 shares originally granted). However, the plan specifically provides that the number of shares authorized does not adjust in the event of a reverse split, so the authorized stayed at 17,500,000. The same occurred when the 10-1 split occurred, so that the number of stock award shares reversed from 4,375,000 to 437,500 shares. Again, the plan stayed at 17,500,000 shares. All references to available common stock issued or reserved per plan have been retroactively adjusted to account for the reverse stock splits effectuated in 2007. As of March 31, 2008, the following schedule shows the remaining shares available for issuance under each plan:
------------------------------------------ ------------------- ------------------ ------------------ Plan Authorized Granted / Balance Reserved Available ------------------------------------------ ------------------- ------------------ ------------------ 2004 Stock Compensation Plan 17,500,000 437,500 17,062,500 ------------------------------------------ ------------------- ------------------ ------------------ 2005 Stock Incentive Plan 7,000,000 174,375 6,825,625 ------------------------------------------ ------------------- ------------------ ------------------ 2005 Stock Incentive Plan No. 2 2,000,000 50,000 1,950,000 ------------------------------------------ ------------------- ------------------ ------------------ 2006 Stock Incentive Plan 23,000,000 541,095 22,458,905 ------------------------------------------ ------------------- ------------------ ------------------ 2006 Stock Incentive Plan No. 2 30,000,000 734,000 29,266,000 ------------------------------------------ ------------------- ------------------ ------------------ 2007 Stock Incentive Plan 70,000,000 6,867,500 63,132,500 ------------------------------------------ ------------------- ------------------ ------------------ 2007 Stock Incentive Plan No. 2 97,500,000 86,045,000 11,455,000 ------------------------------------------ ------------------- ------------------ ------------------
34 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 15 - RELATED PARTY TRANSACTIONS The Company has guaranteed payment on a note in the amount of $300,000 made to a former stockholder of Gwenco by another former stockholder of Gwenco. This note is secured by 50% of the outstanding capital stock of Gwenco. The debt required 4 annual payments of approximately $75,000 plus interest. As of December 31, 2005, the Company was in default. Additionally, a 3.7% annual rate note in the amount of $495,000 due in December 2007 was agreed upon in consideration for royalties to be paid out on a schedule based on the level of production from the mine. Since the initial agreement was made effective in March of 2004, the Company has accrued two years of interest expense and has adjusted its paid in capital to reflect the future correction on the issuance of preferred stock associated with the original acquisition of Gwenco. On August 24, 2006, the Company amended the original note of $300,000 to $180,884, which included the remaining principal and interest, which has an interest rate of 5.21% and is due on September 24, 2009. The Company also amended the $495,000 note due on December 10, 2007 to $545,473, which also included the accrued interest; having an interest rate of 5.26% to be paid through monthly payments equal to the sum of $.50 per clean sellable ton of coal removed the property. During January of 2006, the Company entered into a loan agreement to receive up to $300,000 in funds for operations in return for a 12% percent note due in May of 2006. As additional collateral, the officers of the Company guaranteed the loan and pledged their own shares of common stock. As of the three months ended March 31, 2006, the lender had made advances totaling $132,000. On April 3, 2006, the lender declared a default under the terms of the loan agreement. The Company failed to repay the lender as required under the loan agreement. The lender then enforced guarantees made by the officers of the Company and foreclosed on shares of the officer's common stock pledged to the lender to secure the guarantee. Along with accrued interest, the Company recorded an accrued liability for indemnification obligations to the officers of $390,000, the fair value of the pledged shares lost in the foreclosure. On January 12, 2007, the Company entered into an indemnity agreement with the Company's President, who is also the Company's Secretary and sole director. Under the indemnity agreement, the Company issued 260,000 shares of its Series C Preferred Stock to the President to indemnify him for the loss he incurred as a result of the foreclosure by the lender on the shares, which the President had pledged. On the date of foreclosure, the President's shares had a market value of approximately $260,000. The board of directors has determined that the President delivered the guarantee and pledged the shares in the course and scope of his employment, as an officer and director, and for benefit of the Company. The board of directors has further determined that the President's conduct was in good faith and that he reasonably believed that his conduct was in, or not opposed to, the best interests of the Company. The Company recorded a beneficial conversion expense of $292,500 as a result of the issuance of the Series C Preferred Stock. The issuance of the Series C Preferred Stock to the President effectively transferred control of the company to the President. The Company is currently negotiating the terms of indemnification of with the other former officer as a result of this foreclosure. On January 6, 2008, the Company amended a two-year agreement acquiring administrative services from a third party consulting company owned by the son of its president originally dated June 6, 2006. The agreement consisted of 1,000,000 shares of common stock as an initial grant under a Stock Incentive Plan, along with a monthly payment of $6,500. The initial shares were valued at $35,000 and are being amortized over the term of the agreement. The amendment consisted of an increase of the monthly payment to $9,900 due to providing additional services with regards to the reorganization of the Company's wholly owned subsidiary, Gwenco, Inc., which is currently under Chapter 11. 35 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 16 - COMMITMENTS AND CONTINGENCIES The Company is subject to certain asserted and unasserted claims encountered in a fraud action committed by former employees of the Company against a local bank. It is the Company's belief that the resolution of these matters will not have a material adverse effect on the financial position or results of operations, however, the Company cannot provide assurance that damages that result in a material adverse effect on its financial position or results of operations will not be imposed in these matters. On or about December 21, 2004, the Company terminated its Chief Financial Officer for cause, as it had reason to believe he had participated in a bank fraud scheme. The Chief Financial Officer's replacement has not been appointed at this time. During the period ended December 31, 2004, the Company's bank initiated a claim for an overdraft recovery. Since it was later determined that there was a much larger malice perpetrated against the Company by existing bank employees, allowances have been accrued until a resolution can be determined. The bank's insurer commenced an action in Pike County Court, Kentucky against Quest Energy, the Company's subsidiary, for subrogation of monies it has paid to the bank and repayment of deductibles by the bank as a part of an alleged criminal scheme and conspiracy by former employees of the bank and other individuals. The insurer alleged that former employees or associates of Quest Energy, including the Company's former CEO and CFO, were primarily involved in the alleged scheme, that Quest Energy is accordingly responsible for the actions of these former employees and associates, and that Quest Energy obtained a substantial material benefit as a result of this alleged scheme. Quest Energy has denied these allegations, that it had any involvement with or responsibility for any of the actions alleged by the insurer, and it further denies that it has benefited from any such alleged scheme. Further, Quest Energy filed a counterclaim against the bank and the insurer contending that the negligent actions and inactions by the bank caused severe damage and loss to Quest Energy and the Company. Since management has determined that the existing liabilities and debt from the Company were all related to the issues involving these claims, the assets have been written down in consideration for the allowance already accrued by the Company. The Company has accrued the existing liabilities until validity can be determined. As of March 31, 2008, no outcome has been determined. [In light of these occurrences and due in part to the apparent participation of its former Chief Financial Officer in this scheme, the Company determined that the design and operation of its disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(f) have not been effective to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to them to allow timely decisions regarding required disclosure. The Company is currently reviewing and revising its controls and procedures to increase the effectiveness of its disclosure controls and procedures.] In or about May 2004, National City Bank of Kentucky commenced an action in Boyd County Court, Kentucky against the Company's indirect wholly owned subsidiary, Gwenco, Inc., and a former director of the Company for breach of various promissory notes issued by Gwenco. Duke Energy Merchants and First Sentry Bank were joined in the action. National City Bank and Duke Energy are collectively seeking approximately $1,100,000 in principal as well as interests, fees, and costs. National City Bank has obtained judgment in that action in the amount of approximately $340,000, and Duke Energy has obtained judgment as well. 36 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued) In March, 2006, National City Bank commenced an action commenced an action in Pike County Court, Kentucky against the Company, Gwenco, Inc., and Quest Energy, Ltd. seeking to be adjudged a lien on certain real and personal property of Gwenco pursuant to the aforementioned judgment and that said real and personal property be sold to satisfy the aforesaid lien, and that the liens of National City Bank attach to the proceeds of the sale. The Company intends to defend this action while continuing negotiations with National City Bank. On July 19, 2006, National City Bank of Kentucky sold its right, title, and interest in and to various judgments, judgment liens, security interests, and lines of credit, all of which are based on the Gwenco notes issued to National City Bank of Kentucky, to a third party investor. The third party investor has agreed to forbear on further collection, enforcement, and foreclosure with respect to this indebtedness until further notice. On May 11, 2005, the former director of the Company, who is also the former stockholder of Gwenco, filed a third party complaint in this action against the Company and its subsidiary, Taylor Mining, seeking control of the mines leased by Gwenco and/or damages for fraud in the inducement of the Gwenco purchase agreement. On July 27, 2006, the Company settled the third party complaint by the former owner of Gwenco. As part of the settlement, Gwenco received mining permit renewal and transfer documentation, which Gwenco is required to obtain in order to recommence mining operations at its Pond Creek mine at Slater's Branch, Kentucky. Further, the former Gwenco owner agreed to provide all reasonable cooperation in recommencing mining operations at the Slater's Branch mine. The parties also agreed to terminate all remaining rights, duties, and obligations under the original stock purchase agreement entered into in connection with the acquisition of Gwenco by the Company. The Company made a one-time cash payment of $75,000 and issued 350,000 shares of the Company's common stock, subject to a lock-up/leak out agreement, to the former owner of Gwenco, upon conversion of his Series B Preferred Stock, the terms of which were amended under the settlement agreement. The Company also granted the former owner of Gwenco a sliding scale royalty on coal sales. The Company also assumed two promissory notes made by the former owner of Gwenco in the aggregate principal amount of $290,561. The notes are in default. The parties mutually dismissed their respective counter-claims against each other in the civil action pending in Boyd County Court, Kentucky. The Company has not filed corporate federal, and state and local income tax returns since 2002, and believes that, due to its operating losses, it does not have a material tax liability and the penalties owed are minimal. On July 10, 2006, the Company entered into a settlement arrangement with an existing equipment lessor for the bill of sale on two pieces of equipment, of which the Company had retained possession while in default of prior lease payments. On October 10, 2006, the Pike County Circuit court entered an order enforcing this settlement agreement, and on December 19, 2006, the lessor was awarded summary judgment in the amount of $35,000 plus 8% accrued interest from August 9, 2006. As of March 31, 2008, the Company remains in default. 37 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued) Certain former owners of Gwenco commenced an action in the Circuit Court of Pike County against Gwenco for damages resulting from an alleged failure to pay past royalties and other amounts allegedly due. On May 19, 2006, the former owners obtained a default judgment in this action in the amount of $687,391, from which Gwenco has taken appeal. The plaintiffs then amended their complaint, seeking to be adjudged a lien on certain real and personal property of Gwenco pursuant to the aforementioned judgment and that said real and personal property be sold to satisfy the aforesaid lien, and that the liens of the plaintiffs attach to the proceeds of the sale. Gwenco believes that it has several meritorious defenses and counterclaims to this action and intends to defend it vigorously. This foreclosure action was stayed against Gwenco as a result of Gwenco's filing of a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On February 28, 2007, one of the Company's wholly-owned subsidiaries, Gwenco, Inc., filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Company nor any of its other subsidiaries were included in the filing. As a result, all pending legal actions against Gwenco, including the pending foreclosure actions, were automatically stayed. On June 20, 2007, Gwenco entered into a settlement agreement with one of the former owners, pursuant to which the former owner agreed to accept payment of $150,000 in exchange for a release of the judgment amount of $458,260. The settlement agreement is subject to approval by the Bankruptcy Court. On July 17, 2007, the Bankruptcy Court approved the settlement agreement, subject to Gwenco's receipt of debtor-in-possession financing. On August 3, 2007, the Court approved Gwenco's debtor-in-possession financing and the settlement agreement became effective. On August 10, 2007, escrowed funds were transferred to complete the settlement. On August 15, 2007, the U.S. Bankruptcy Court approved a DIP Financing Motion authorizing the Company's wholly owned subsidiary, Gwenco, Inc., which is currently in Chapter 11 reorganization proceedings, to borrow up to $2,000,000 ("Total Facility") in post-petition debt from a pre-petition creditor pursuant to a Debtor-In -Possession loan agreement and promissory note between Gwenco and the lender dated June 29, 2007. Additionally, the Court approved prior budgeted advances from July of up to $350,000, which, in turn, adjusted the Total Facility to $1,700,000. The loan advances will carry a 17% interest rate per annum and mature on July 31, 2008. As of December 31, 2007, the legal counsel managing the bankruptcy proceedings has accrued an additional $35,000 in fees from their initial $20,000 retainer; and is waiting on approval from the court to be paid. Although, continuing legal costs are accruing, the counsel has yet to invoice the company for its services as of the three months ending March 31, 2008. 38 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued) As of March 31, 2008, Gwenco had assets of $5,412,868, which included all of the mineral rights of the Company valued at $5,208,524 and liabilities (other than liabilities that have been guaranteed by the Company or another of its wholly-owned subsidiaries) of $5,301,322. Of these liabilities, $2,840,606 was owed to Quest Minerals & Mining and Quest Energy, Ltd. These receivables are unsecured and Quest Minerals & Mining and Quest Energy, Ltd have reserved 100% of the receivable as doubtful at March 31, 2008. Gwenco also currently holds all of the company's current receivables, which are restricted to specific limitations, since the company now acts as a Debtor in possession (DIP) as per the Chapter 11 requirements. The following is the combined balance sheet of the Company at March 31, 2008, which includes Gwenco, Inc. and the Company and its other subsidiaries: 39 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited)
QUEST MINERALS & MINING CORP. COMBINED BALANCE SHEET MARCH 31, 2008 QUEST &SUB GWENCO ADJUSTMENTS COMBINED ------------ ------------ ------------ ------------ ASSETS Current Assets Cash 8,918 -- $ $ 8,918 ------------ ------------ ------------ ------------ Total current assets 8,918 -- 8,918 Leased Mineral Reserves, net (Note 2 & 5) -- 5,208,524 5,208,524 Equipment, net (Note 6) -- 144,178 144,178 Deposits -- 41,223 41,223 Prepaid consulting Expense 9,425 -- 9,425 Intercompany,net -- Other receivables, net (Note 7) DIP Cash, restricted 600 600 DIP Receivable, restricted -- -- -- -- ------------ ------------ ------------ ------------ TOTAL ASSETS $ 18,343 $ 5,394,525 $ -- $ 5,412,868 ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable and accrued expenses (Note 8) $ 1,987,225 $ 843,329 $ $ 2,830,554 Loans payable (Note 9) 2,832,905 229,130 3,062,035 Bank loans (Note 9) -- 1,017,524 1,017,524 Related party loans (Note 9) 666,486 -- -- 666,486 ------------ ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 5,486,616 2,089,983 7,576,599 Other Liabilities Intercompany -- 2,840,606 (2,840,606) -- Derivative Liability (Note 8) 1,960,749 1,960,749 Unearned revenues (Note 8) -- -- DIP Financeing (Note 9) -- 370,733 -- 370,733 ------------ ------------ ------------ ------------ TOTAL LIABILITIES 7,447,365 5,301,322 (2,840,606) 9,908,081 Commitments and Contingencies Stockholders' equity Preferred stock, par value $0.001, 10,000,000 shares authorized; SERIES A - issued and outstanding 398,288 shares 398 -- 398 SERIES B - issued and outstanding 48,284 shares (0) 48 48 SERIES C - issued and outstanding 260,000 shares 260 -- 260 Common stock, par value $0.001, 975,000,000 shares authorized; issued and outstanding 732,704,185 shares 194,871 4,500 (4,500) 194,871 Equity held in escrow (Note 12) (587,500) -- (587,500) Paid-in capital (Note 14) 49,802,948 2,557,049 52,359,997 Accumulated Deficit (56,839,999) (2,468,395) 2,845,106 (56,463,288) ------------ ------------ ------------ ------------ Total Stockholders' Equity (7,429,022) 93,203 2,840,606 (4,495,214) ------------ ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,343 $ 5,394,525 $ -- $ 5,412,868 ============ ============ ============ ============
See Notes to Financial Statements. 40 QUEST MINERALS AND MINING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts and disclosures at and for the Three Months Ended March 31, 2008 and 2007 are Unaudited) NOTE 17 - SUBSEQUENT EVENTS On April 1, 2008, the Company defaulted on a $300,000 convertible promissory note. The defaulted note was issued on April 1, 2006, where the Company entered into a settlement and release agreement with a third party individual pursuant to which the Company issued a convertible secured promissory note in the principal amount of $300,000. The note was due on April 1, 2008, with an annual interest rate of eight percent (8%). The note is convertible into the Company's common shares at an initial conversion price equal to the greater of (a) $0.20 per share, and (b) 50% of the average market price during the three trading days immediately preceding any conversion date. The holder may not convert any outstanding principal amount of this note or accrued and unpaid interest thereon to the extent such conversion would result in the holder beneficially owning in excess of 4.999% of the then issued and outstanding common shares of the Company. 41 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with Quest's financial statements and related notes included in this report. This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this report that are not historic in nature, particularly those that utilize terminology such as "may," "will," "should," "expects," "anticipates," "estimates," "believes," or "plans" or comparable terminology are forward-looking statements based on current expectations and assumptions. Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements. Please refer to the Risk Factors section of Quest's Annual Report on Form 10-KSB, as amended, for a description of these risks and uncertainties. All forward-looking statements in this document are based on information currently available to Quest as of the date of this report, and Quest assumes no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. General Quest Minerals & Mining Corp. acquires and operates energy and mineral related properties in the southeastern part of the United States. Quest focuses its efforts on properties that produce quality compliance blend coal. Quest is a holding company for Quest Minerals & Mining, Ltd., a Nevada corporation, or Quest (Nevada), which in turn is a holding company for Quest Energy, Ltd., a Kentucky corporation, or Quest Energy, and of Gwenco, Inc., a Kentucky corporation, or Gwenco. Quest Energy is the parent corporation of E-Z Mining Co., Inc, a Kentucky corporation, or E-Z Mining, and of Quest Marine Terminal, Ltd., a Kentucky corporation, or Quest Marine. Gwenco leases over 700 acres of coal mines, with approximately 12,999,000 tons of coal in place in six seams. In 2004, Gwenco had reopened Gwenco's two former drift mines at Pond Creek and Lower Cedar Grove, and had begun production at the Pond Creek seam. This seam of high quality compliance coal is located at Slater's Branch, South Williamson, Kentucky. Fiscal 2007 and First Quarter 2008 Developments Logan & Kanawha Purchase Order. In April 2008, our wholly owned subsidiary, Gwenco, Inc., received a purchase order for up to $8 million on coal through December 2008 from Logan & Kanawha Co., LLC, a West Virginia company. Rehabilitation and Reopening of Pond Creek Mine. In January 2007, Gwenco received a permit from the Kentucky Department of Natural Resources to conduct coal mining at its Pond Creed mine. In February 2007, Gwenco's engineering firm, Alchemy Engineering of Prestonburg, Kentucky, completed a one and five year mine plan and maps required by the Kentucky Department of Mines and Minerals in connection with the permit to conduct coal mining at Pond Creek. Gwenco has retained General Mining, LLC of Wallins, Kentucky to rehabilitate the Pond Creek mine in February 2007 and further retained General Mining to conduct mining operations at Pond Creek in March 2007. The company completed its initial rehabilitation of the Pond Creek mine, recommenced mining operations, and began shipping commercial coal for sale in May 2007. The company completed all rehabilitation the week of July 30, 2007. In January 2008, Quest retained White Star Mining to conduct all mining operations at Pond Creek. White Star retained all necessary permits to being mining operations in February 2008, and Quest expects to resume mining operations in the second or third fiscal quarter of 2008. March 2008 Financing. On March 11, 2008, the Company signed a 15% per annum promissory note with a third party lender for $75,000 due on March 10, 2009. The note is convertible at the option of the holder at a conversion price of 50% of the average of the three lowest per share market values during the ten (10) trading days immediately preceding a conversion date. The holder may not convert any outstanding principal amount of this note or accrued and unpaid interest thereon to the extent such conversion would result in the holder beneficially owning in excess of 4.999% of the then issued and outstanding common shares of the Company. 42 Letter of Intent with McCoy Heirs. In January 2008, we entered into a letter of intent on a joint venture with the McCoy Heirs, owners of coal property in southern Kentucky. The project was intended to encompass 1,000,000 tons of recoverable coal reserves from the Elkhorn # 3 coal seam structured through a lease agreement to mine property held by the McCoy Heirs. This letter of intent has since been abandoned. Gwenco, Inc. Chapter 11 Reorganization. On March 2, 2007, Quest's wholly owned subsidiary, Gwenco, Inc., filed a voluntary petition for reorganization under Chapter 11 of .the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Kentucky. Management felt this was a necessary step to further the company's financial restructuring initiative and to protect Gwenco's assets from claims, debts, judgments, foreclosures, and forfeitures of those creditors and stakeholders with whom both Quest and Gwenco were unable to negotiate restructured agreements. The company is currently overseeing Gwenco's operations as a debtor in possession, subject to court approval of matters outside the ordinary course of business. Gwenco is currently seeking court approval for debtor in possession financing from holders of Gwenco's existing debt obligations in order to fund operating expenses. The company intends to continue its mining operations at Pond Creek mine at Slater's Branch while this matter is completed. Under Chapter 11, claims against Gwenco in existence prior to the filing of the petitions for reorganization relief under the federal bankruptcy laws are stayed while Gwenco is in bankruptcy. On August 3, 2007, the Bankruptcy Court approved Gwenco's request for debtor-in-possession financing in an amount of up to $2,000,000. In February 2008, Gwenco submitted a preliminary plan of reorganization to the court for approval. Letter of Intent with Parsons Branch. On July 21, 2006, Quest signed a non-binding letter of intent with Parsons Branch Development to acquire a permit to mine the Elkhorn #2 seam on Parsons Branch located in Mud Creek, Kentucky. Parsons Branch Development has approximately 450,000 tons of clean coal under lease at this location. Upon completion of the transfer of the permit to Quest, it will retain all revenues from coal sales after payment of a royalty to Parsons Branch of $1.50 per clean ton mined and expenses of mine operations, which are expected to be carried out by a contract miner. Management determined not to pursue this transaction during fiscal 2007. Business Development of Quest Quest Minerals (Nevada), was organized on November 19, 2003 to acquire and operate privately held coal mining companies in the southeast United States. On January 1, 2004, Quest Minerals (Nevada) acquired E-Z Mining Co., Inc. On February 9, 2004, Quest Minerals (Nevada) completed a "reverse merger" with Tillman International, Inc., or Tillman, a publicly-traded shell corporation and a fully reporting company registered under the Securities Exchange Act of 1934. On April 8, 2004, Tillman changed its name to "Quest Minerals & Mining Corp." E-Z Mining Acquisition. On January 1, 2004, Quest Minerals (Nevada) acquired E-Z Mining pursuant to a stock purchase agreement whereby Quest Energy acquired 100% of the outstanding shares of capital stock of E-Z Mining. Under the stock purchase agreement, Quest Minerals (Nevada) issued 2,000,000 shares of its Series A convertible preferred stock and 23,000 shares of its common stock to the stockholders of E-Z Mining in exchange for all of the outstanding shares of capital stock of E-Z Mining. Each share of Quest Minerals (Nevada) Series A preferred stock is now convertible into a maximum of five (5) shares of Quest common stock, or such lesser shares as determined by dividing $3.00 by the average closing bid price of one share of Quest common stock during the ten trading days preceding actual receipt of a notice of conversion, subject to proportional adjustment for stock-splits, stock dividends, recapitalizations, and subsequent dilutive issuances of common stock. The Series A preferred stock is convertible at the option of the holder. The holders of the Series A preferred stock shall be entitled to receive cumulative dividends at the rate of $0.0001 per share per annum in preference to the holders of common stock. The holders of the Series A preferred stock shall also be entitled to receive, upon liquidation, an amount equal to $3.00 per share for the Series A preferred stock plus all declared and unpaid dividends, in preference to the holders of the common stock. After March 31, 2004, Quest has the option of redeeming the Series A preferred stock at a price equal to $3.00 per share for the Series A preferred stock plus all declared and unpaid dividends. The Series A Preferred Stock has no voting rights. As of June 9, 2005, 1,546,667 shares of the Series A preferred stock had been converted into an aggregate of 2,004,689 shares of Quest common stock. On December 19, 2007, the Company amended the terms of the Series A Preferred Stock to provide for a reduced conversion price set forth as such that (1) each share of Series A Preferred Stock shall be convertible at any time into a shares of common stock, par value, $.001 per share of the Company as determined by multiplying each share of Series A Preferred Stock by a fraction, the numerator of which is $3.00 and the denominator of which is equal to the 43 greater of (i) $0.001 or (ii) 40% of closing price per share of common stock. A holder of Series A Preferred Stock may not convert shares of the Series A Preferred Stock to the extent that such conversion would result in the Holder, together with any affiliate thereof, beneficially owning, pursuant to Section 13(d) of the Securities Exchange of 1934, in excess of 4.999% of the then issued and outstanding common stock of the Company. The provisions of this section may be waived by a holder upon not less than 61 days prior notice to the Company. Reverse Merger. Quest was incorporated on November 21, 1985 in the State of Utah under the name "Sabre, Inc." It subsequently changed its name to Tillman International, Inc., or Tillman. On February 9, 2004, Tillman acquired 100% of the outstanding common stock of Quest Minerals (Nevada) pursuant to a securities purchase agreement and plan of reorganization. Under the plan of reorganization, Tillman issued 20,700,000 shares of its common stock to the stockholders of Quest Minerals (Nevada) in exchange for all of the outstanding shares of common stock of Quest Minerals (Nevada). In addition, Tillman agreed to issue to the stockholders of Quest Minerals (Nevada) an additional 1,800,000 shares of its common stock upon completion of an amendment to its articles of incorporation to increase the authorized common stock of Tillman to 250,000,000 shares. Pursuant to the plan of reorganization, 22,464,358 shares of Tillman common stock held by Silvestre Hutchinson, the former President of Tillman and one of its former directors, were cancelled. Upon the completion of the reorganization, William R. Wheeler and Eugene Chiaramonte, Jr., the former directors of Quest Minerals (Nevada), were appointed as directors of Tillman. On April 8, 2004, Tillman amended its articles of incorporation to change its name to "Quest Minerals & Mining Corp." The additional 1,800,000 shares of Quest common stock were issued in May 2004. Gwenco Acquisition. Effective April 28, 2004, Quest Minerals (Nevada) acquired 100% of the outstanding capital stock of Gwenco in exchange for 1,600,000 shares of Series B preferred stock of Quest Minerals (Nevada) and the assumption of up to $1,700,000 in debt. Each share of Series B preferred stock carries a liquidation preference of $2.50 per share. In addition, each share of Series B Preferred Stock is convertible into one share of Quest common stock. After the acquisition, the parties agreed to a post-closing adjustment to the purchase price to adjust for the liabilities of Gwenco exceeding $1,700,000. As a result of this adjustment, the number of shares of Series B preferred stock issued to the former stockholders of Gwenco was reduced to 1,386,275. On November 1, 2004, 1,000,000 shares of the Series B preferred stock were converted into 1,000,000 shares of Quest common stock. In connection with this acquisition, Quest appointed Albert Anderson, the former principal stockholder of Gwenco, to Quest's board of directors. On March 24, 2005, the board of directors asked Albert Anderson to resign as a director of Quest, and on April 4, 2005, Mr. Anderson submitted his resignation. In connection with his resignation, Mr. Anderson alleged that Quest has defaulted under the stock purchase agreement by and between Quest, Gwenco, Inc., and the former stockholders of Gwenco, which includes Mr. Anderson. Quest has denied Mr. Anderson's allegations, believes that the allegations are baseless and without merit, and further believes that it has several claims against Mr. Anderson which it could assert. In or about May, 2004, National City Bank of Kentucky commenced an action in Boyd County Court, Kentucky against Gwenco, Inc. and Albert Anderson for breach of various promissory notes issued by Gwenco. Duke Energy Merchants and First Sentry Bank were joined in the action. National City Bank and Duke Energy are collectively seeking approximately $1,100,000 in principal as well as interests, fees, and costs. National City Bank and Duke Energy have been granted summary judgment in this action. National City Bank has obtained judgment in that action in the amount of approximately $340,000. In that action, Anderson has filed a third-party complaint against Quest (Nevada) and Taylor Mining, two of Quest's subsidiaries, for breach of contract, fraud in the inducement, breach of the covenant of good faith and fair dealing, unjust enrichment, conversion, and breach of fiduciary duties. On July 27, 2006, Quest settled the third party complaint with Anderson. As part of the settlement, Gwenco received mining permit renewal and transfer documentation which Gwenco is required to obtain in order to recommence mining operations at its Pond Creek mine at Slater's Branch, Kentucky. Further, Anderson agreed to provide all reasonable cooperation in recommencing mining operations at the Slater's Branch mine. The parties also agreed to terminate all remaining rights, duties, and obligations under the original stock purchase agreement entered into in connection with the acquisition of Gwenco by Quest. Quest made a one-time cash payment of $75,000 and issued 3,500,000 shares of common stock, subject to a lock-up/leak out agreement, to Anderson, upon conversion of his Series B Preferred Stock, the terms of which were amended under the settlement agreement. Quest also granted Anderson a sliding scale royalty on coal sales. The parties mutually dismissed their respective counter-claims against each other in the civil action pending in Boyd County Court, Kentucky. 44 Critical Accounting Policies The discussion and analysis of Quest's financial conditions and results of operations is based upon Quest's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires managers to make estimates and disclosures on the date of the financial statements. On an on-going basis, Quest evaluates its estimates, including, but not limited to, those related to revenue recognition. It uses authoritative pronouncements, historical experience, and other assumptions as the basis for making judgments. Actual results could differ from those estimates. Quest believes the following critical accounting policies affect its more significant judgments and estimates in the preparation of our consolidated financial statements. Mineral Interests The purchase acquisition costs of mineral properties are deferred until the properties are placed into production, sold or abandoned. These deferred costs will be amortized on the unit-of-production basis over the estimated useful life of the properties following the commencement of production or written-off if the properties are sold, allowed to lapse or abandoned. Mineral property acquisition costs include any cash consideration and the fair market value of common shares and preferred shares, based on the trading price of the shares, or, if no trading price exists, on other indicia of fair market value, issued for mineral property interests, pursuant to the terms of the agreement or based upon an independent appraisal. Administrative expenditures are expensed in the year incurred. Coal Acquisition Costs The costs to obtain coal lease rights are capitalized and amortized primarily by the units-of-production method over the estimated recoverable reserves. Amortization occurs either as Quest mines on the property or as others mine on the property through subleasing transactions. Rights to leased coal lands are often acquired through royalty payments. As mining occurs on these leases, the accrued royalty is charged to cost of coal sales. Mining Acquisition Costs The costs to obtain any interest in third-party mining operations are expensed unless significantly proven reserves can be established for the entity. At that point, capitalization would occur. Mining Equipment Mining equipment is recorded at cost. Expenditures that extend the useful lives of existing plant and equipment or increase the productivity of the asset are capitalized. Mining equipment is depreciated principally on the straight-line method over the estimated useful lives of the assets, which range from three to 15 years. Deferred Mine Equipment Costs of developing new mines or significantly expanding the capacity of existing mines are capitalized and amortized using the units-of-production method over the estimated recoverable reserves that are associated with the property being benefited. Asset Impairment If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If the review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value. 45 Revenue Recognition Coal sales revenues are sales to customers of coal produced at Quest's operations. Quest recognizes revenue from coal sales at the time title passes to the customer. Income Taxes Quest provides for the tax effects of transactions reported in the financial statements. The provision, if any, consists of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities, if any, represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. As of the year ended December 31, 2007, Quest had no material current tax liability, deferred tax assets, or liabilities to impact on its financial position because the deferred tax asset related to Quest's net operating loss carry forward was fully offset by a valuation allowance. However, Quest has not filed its corporate income tax returns since 2002. Fair Value Quest's financial instruments, as defined by SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", include cash, advances to affiliate, trade accounts receivable, investment in securities available-for-sale, restricted cash, accounts payable and accrued expenses and short-term borrowings. All instruments other than the investment in securities available-for-sale are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value as at March 31, 2008. Earnings loss per share Quest adopted SFAS No. 128, which provides for the calculation of "basic" and "diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings similar to fully diluted earnings per share. Stock Split All references to common stock and per share data have been retroactively restated to account for the 1 for 4 reverse stock split effectuated on August 17, 2007. All references to common stock and per share data have been retroactively restated once more to account for the 1 for 10 reverse stock split effectuated on December 14, 2007. Other Recent Accounting Pronouncements Quest does not expect that the adoption of other recent pronouncements from the Public Company Oversight Board to have any impact on its financial statements. 46 Results of Operations Basis of Presentation The following table sets forth, for the periods indicated, certain unaudited selected financial data: Three Months Ended March 31, ---------------------------- 2008 2007 ------------ ------------ Revenues $ -- $ -- Production costs -- -- Selling, general and administrative 502,880 1,461,993 Stock Compensation -- 286,108 Depreciation and amortization 25,707 21,345 ------------ ------------ Operating (loss) (528,587) (1,483,338) ------------ ------------ Comparison of the three months ended March 31, 2008 and 2007 Net sales. Quest had no revenues during the three months ended March 31, 2008, as compared to $0 for the three months ended March 31, 2007. In January 2008, we retained White Star Mining to conduct all mining operations at Pond Creek. As a result of this change in mine operators, we had to cease mining operations to obtain new permitting and to conduct further rehabilitation of the mine. White Star retained all necessary permits to being mining operations in February 2008, and we expect to resume mining operations in the second fiscal quarter of 2008. Production costs. Quest incurred no production costs during the three months ended March 31, 2008, as compared to $0 for the three months ended March 31, 2007. Quest had no production costs due to its lack of mining operations during the period. Selling, general, and administrative. Selling, general and administrative expenses decreased to $502,880 for the period ended March 31, 2008, from $1,461,993 for the three months ended March 31, 2007. The selling, general, and administrative expenses result primarily from the issuance of shares of common stock upon conversion of debt at a discount to the market price for common stock and from the issuance of shares of common stock upon conversion of debt at a discount to the market price for common stock, resulting in approximate $351,090 associated with debt conversions. The Company also issued shares of common stock for services, resulting in an additional non-cash expense of approximately $202,900. Interest. Interest expense slightly increased to $87,976 for the three months ended March 31, 2008, from $84,839 for the three months ended March 31, 2007. Quest's interest expense results from various outstanding debt obligations, including obligations that Quest assumed in connection with the acquisition of Gwenco and various notes issued in various financings since October 2004. The slight increase in interest expense results from additional borrowings, which was offset by the reduction of our outstanding indebtedness by means of conversions of such indebtedness into common stock and reduced interest rates on refinanced debts. Depreciation and amortization. Depreciation expense increased to $25,707 for the three months ended March 31, 2008, from $21,345 for the three months ended March 31, 2007. Quest's depreciation expense increased primarily as a result of putting additional equipment into service in the 2007 fiscal year. Beneficial conversion expense. Quest incurred beneficial conversion expense of $223,054 for the three months ended March 31, 2008, as opposed to $292,500 for the three months ended March 31, 2007. The expense in the first quarter of 2008 results from the issuance of convertible debt, whereas the expense in the first quarter of 2007 resulted from the issuance of shares of Series C Preferred Stock. 47 Operating loss. Quest incurred an operating loss of $528,587 for the three months ended March 31, 2008, compared to an operating loss of $1,483,338 for the three months ended March 31, 2007. It had lower operating losses in the first quarter of 2008 as compared to the first quarter of 2007 primarily from significantly decreased selling, general, and administrative expenses. Liquidity and Capital Resources Quest has financed its operations, acquisitions, debt service, and capital requirements through cash flows generated from operations until June 30, 2005, and through issuance of debt and equity securities. Its working capital deficit at March 31, 2008 was $7,567,682. It had cash of $8,918 as of March 31, 2008. Quest used $112,539 of net cash in operating activities for the three months ended March 31, 2008, compared to using $197,309 in the three months ended March 31, 2007. Cash used in operating activities for the three months ended March 31, 2008 was mainly due to a gain on derivatives of $880,454, which offset our operating losses. This was offset by non-cash expenses of $25,707 in depreciation and amortization, $202,900 of stock issued for services, $351,090 for warrant issuances and conversions expenses, $17,576 of decrease in prepaid expenses, $34,969 for increase in DIP payables, and an increase of accounts payable and accrued expenses of $94,836. Net cash flows used by investing activities was $4,193 for the three months ended March 31, 2008, resulting from the purchase of equipment and providing a security deposit and offset by mine development, as compared to $0 of net cash flows used by investing activities for the comparable period in 2007. Net cash flows provided by financing activities were $112,800 for the three months ended March 31, 2008, compared to net cash flows provided by financing activities of $223,717 for the three months ended March 31, 2007. This increase in net cash provided by financing activities is due to Quest's borrowings of $124,500, offset by repayment of $11,700 of debt. Financings and Debt Restructurings From December 2005 through January 2006, Quest issued 1,500,000 shares of its common stock in an offshore private placement at $0.20 per share. In addition, Quest also issued a convertible secured promissory note in the principal amount of $335,000. The note was due on December 8, 2006, bore interest at a rate of eight percent (8%), and was convertible into Quest common shares at an initial conversion price of $0.20 per share, subject to adjustment. In January, 2007, Quest and these investors entered into an exchange agreement, pursuant to which the shares and the note were exchanged for new notes in the aggregate principal amount of $635,000. The notes are due on April 1, 2008, with an annual interest rate of eight percent (8%). The notes are convertible into the Company's common shares at an initial conversion price equal to the greater of (a) $0.02 per share, and (b) 50% of the average market price during the three trading days immediately preceding any conversion date. On April 5, 2006, Quest issued an aggregate of 1.25 units at a price of $100,000 per unit. Each unit consists of a convertible promissory note in the principal amount of $100,000 and warrants to purchase shares of Quest common stock at an exercise price of $0.84 per share. The unit notes are due on July 5, 2007. The notes bear interest at a rate of six percent (6%) and are convertible into Quest common shares at an initial conversion price of $0.42 per share. On July 27, 2007, an investor holding a unit note in the amount of $25,000 exchanged the note for 836,925 shares of our common stock. On May 16, 2005, Quest entered into a credit agreement with a third party lender in which $245,000 was issued as a 10% note due August 19, 2005. Additionally, the lender was issued 2,565,007 warrants. The loans subject to the credit agreement are secured by certain assets of Quest. The warrants have an exercise price of $0.10 per share, subject to adjustment, and expire on May 31, 2007. On February 14, 2006, in connection with a settlement agreement with the lender, Quest made a payment of $264,000 and issued an amended and restated 10% note in the amount of $100,000. The note covered accrued interest and additional legal fees. The amended and restated note is convertible into Quest's common stock at a rate of $0.40 per share and was due February 22, 2007. Quest amended and restated the warrant issuance to reflect a $0.20 per share exercise price. Quest also issued 1,250,000 new warrants exercisable at $0.40 per share as part of a settlement agreement with one of its lenders. They are due to expire in 2009. In June, 2007, Quest entered into an exchange agreement with the third party lender, under which the holder exchanged the $100,000 note and the remaining warrants held by such lender for a new convertible promissory note in the aggregate principal amount of $100,000. The new note is due on June 6, 2008, with an annual interest rate of seven percent (7%), and is convertible intoQuest's common shares at a conversion price of 70% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date. 48 A third-party lender advances operational funding to Quest. Since there has been no formal agreement regarding the balance owed, Quest accrues a 5% annual interest on the principal with the intent that a mutual arrangement will be resolved between both parties. On August 15, 2007, the U.S. Bankruptcy Court approved a DIP Financing Motion authorizing the Company's wholly owned subsidiary, Gwenco, Inc., which is currently in Chapter 11 reorganization proceedings, to borrow up to $2,000,000 in post-petition debt from a pre-petition creditor pursuant to a Debtor-In -Possession loan agreement and promissory note between Gwenco and the lender dated June 29, 2007. Additionally, the Court approved prior budgeted advances from July of up to $350,000, which, in turn, adjusted the total facility to $1,700,000. The loan advances will carry a 17% interest rate per annum and mature on July 31, 2008. Capital Requirements The report of Quest's independent accountants for the fiscal year ended December 31, 2007 states that Quest has incurred operating losses since inception and requires additional capital to continue operations, and that these conditions raise substantial doubt about its ability to continue as a going concern. Quest believes that, as of the date of this report, in order to fund its plan of operations over the next 12 months, it will need to fund its operations out of cash flows generated from operations, to the extent such operations are resumed, and from the sale of additional securities. Quest is continuing to seek to fund its capital requirements over the next 12 months from the additional sale of its debt and equity securities. It is possible that Quest will be unable to obtain sufficient additional capital through the sale of its securities as needed. Quest has also obtained debtor-in-possession financing through the Gwenco bankruptcy proceedings to fund the capital requirements of Gwenco, Inc. Part of Quest's growth strategy is to acquire additional coal mining operations. Where appropriate, Quest will seek to acquire operations located in markets where it currently operates to increase utilization at existing facilities, thereby improving operating efficiencies and more effectively using capital without a proportionate increase in administrative costs. Quest does not currently have binding agreements or understandings to acquire any other companies. Quest intends to retain any future earnings to pay its debts, finance the expansion of its business and any necessary capital expenditures, and for general corporate purposes. 49 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this item. ITEM 4 - CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports that we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective to ensure that all material information required to be disclosed in this Quarterly Report on Form 10-Q has been made known to them in a timely fashion. In addition, our Chief Executive Officer and Chief Financial Officer have identified significant deficiencies that existed in the design or operation of our internal control over financial reporting that they consider to be "material weaknesses." The Public Company Accounting Oversight Board has defined a material weakness as a "significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected." In light of the material weaknesses described below, we performed additional procedures to ensure that the consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Annual Report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented. We did not design and maintain effective entity-level controls as defined in the Internal Control--Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Specifically: 1. We lacked the technical expertise and did not maintain adequate procedures to ensure that the accounting for derivative financial instruments under SFAS No. 133, Accounting for Derivative Instruments, and under Emerging Issues Task Force 00-19, was appropriate. Procedures relating to convertible debt and warrant financing transactions did not operate effectively to (a) properly evaluate embedded derivative liability and warrant liability accounting treatment, (b) meet the documentation requirements of SFAS No. 133 and EITF 00-19, and (c) adequately assess and measure derivative liability values on a quarterly basis. This material weakness resulted in a restatement of prior financial statements, as described in Note 18 to the Consolidated Financial Statements and, if not remediated, has the potential to cause a material misstatement in the future. 2. We did not maintain a sufficient complement of personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of generally accepted accounting principles commensurate with our financial accounting and reporting requirements and low materiality thresholds. This material weakness contributed to the restatement of prior financial statements, as described in Note 18 to the Consolidated Financial Statements and, if not remediated, has the potential to cause a material misstatement in the future. 3. Due to the previously reported material weaknesses, as evidenced by the restatements related to derivative liabilities, management has concluded that the controls over the period-end financial reporting process were not operating effectively. Specifically, controls were not effective to ensure that significant non-routine transactions, accounting estimates, and other adjustments were appropriately reviewed, analyzed, and monitored on a timely basis. A material weakness in the period-end financial reporting process could result in our not being able to meet our regulatory filing deadlines and, if not remediated, has the potential to cause a material misstatement or to miss a filing deadline in the future. 50 These conditions constitute deficiencies in both the design and operation of entity-level controls. As a result of these deficiencies, our original Quarterly Report on Form 10-Q did not contain all material information which is required to be disclosed. In addition, we have restated our financial statements for the fiscal years ended December 31, 2005 and 2004 and the interim financial statements for the periods ending March 31, 2005, June 30, 2005, September 30, 2005, March 31, 2006, June 30, 2006, and September 30, 2006. These significant deficiencies in the design and operation of our internal controls include the needs to hire additional staffing and to provide training to existing and new personnel in SEC reporting requirements and generally accepted accounting principles. Furthermore, the deficiencies include the need for formal control systems for journal entries and closing procedures, the need to form an independent audit committee as a form of internal checks and balances and oversight of our management, to implement budget and reporting procedures, and the need to provide internal review procedures for schedules, SEC reports, and filings prior to submission to the auditors and/or filing with the SEC. These deficiencies have been disclosed to our Board of Directors. Additional effort is needed to fully remedy these deficiencies and we are seeking to improve and strengthen our control processes and procedures. We are in the process of improving our internal control over financial reporting in an effort to remediate these deficiencies by adding additional accounting personnel, improving supervision and increasing training of our accounting staff with respect to generally accepted accounting principles, providing additional training to our management regarding use of estimates in accordance with generally accepted accounting principles, increasing the use of contract accounting assistance, and increasing the frequency of internal financial statement review. We will continue to take additional steps necessary to remediate the material weaknesses described above. Our Chief Executive Officer and Chief Financial Officer have also evaluated whether any change in our internal controls occurred during the last fiscal quarter and have concluded that there were no changes in our internal controls or in other factors that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, these controls. 51 PART II: OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Litigation Gwenco, Inc. Chapter 11 Reorganization. On March 2, 2007, our wholly owned subsidiary, Gwenco, Inc., filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Kentucky. Management felt this was a necessary step to further our financial restructuring initiative and to protect Gwenco's assets from claims, debts, judgments, foreclosures, and forfeitures of those creditors and stakeholders with whom both Quest and Gwenco were unable to negotiate restructured agreements. We are currently overseeing Gwenco's operations as a debtor in possession, subject to court approval of matters outside the ordinary course of business. We are currently seeking court approval for debtor in possession financing from holders of Gwenco's existing debt obligations in order to fund operating expenses. We intend to continue our mining operations at Pond Creek Mine at Slater's Branch while this matter is completed. Under Chapter 11, claims against Gwenco in existence prior to the filing of the petitions for reorganization relief under the federal bankruptcy laws are stayed while Gwenco is in bankruptcy. On August 3, 2007, the Bankruptcy Court approved Gwenco's request for debtor-in-possession financing in an amount of up to $2,000,000. In February 2008, Gwenco submitted a preliminary plan of reorganization to the court for approval. In or about May, 2004, National City Bank of Kentucky commenced an action in Boyd County Court, Kentucky against Quest's indirect wholly-owned subsidiary, Gwenco, Inc., and Albert Anderson for breach of various promissory notes issued by Gwenco. Duke Energy Merchants and First Sentry Bank were joined in the action. National City Bank and Duke Energy are collectively seeking approximately $1,100,000 in principal as well as interests, fees, and costs. National City Bank and Duke Energy have been granted summary judgment in this action and both obtained judgment. In March, 2006, National City Bank commenced an action commenced an action in Pike County Court, Kentucky against Quest, Gwenco, and Quest Energy, seeking to be adjudged a lien on certain real and personal property of Gwenco pursuant to the aforementioned judgment and that said real and personal property be sold to satisfy the aforesaid lien, and that the liens of National City Bank attach to the proceeds of the sale. In July, 2006, National City Bank of Kentucky sold its right, title, and interest in and to the various judgments, judgment liens, security interests, and lines of credit to a third party investor. The third party investor has agreed to forbear on further collection, enforcement, and foreclosure with respect to this indebtedness, in exchange for which Gwenco agreed to grant the investor a royalty on gross profits of Gwenco. This foreclosure action was stayed against Gwenco as a result of Gwenco's Chapter 11 filing. On or about August 25, 2004, Valley Personnel Services, Inc. commenced an action in the Circuit Court of Mingo County, West Virginia against Quest's indirect wholly-owned subsidiaries, D&D Contracting, Inc. and Quest Energy, Ltd. for damages in the amount of approximately $150,000, plus pre and post judgment interest as provided by law, costs, and fees. This action was stayed against Gwenco as a result of Gwenco's Chapter 11 filing. The Federal Insurance Company, the insurer for Community Trust Bank, commenced an action in Pike County Court, Kentucky against Quest Energy for subrogation of monies it has paid to the bank and repayment of deductibles by Community Trust as a part of an alleged criminal scheme and conspiracy by Mr. Runyon, Ms. Holbrook, Mr. Stollings, and Mr. Wheeler. The insurer alleged that former employees or associates of Quest Energy, including Mr. Runyon and Mr. Wheeler, were primarily involved in the alleged scheme, that Quest Energy is accordingly responsible for the actions of these former employees and associates, and that Quest Energy obtained a substantial material benefit as a result of this alleged scheme. Quest Energy has denied these allegations, that it had any involvement with or responsibility for any of the actions alleged by the insurer, and it further denies that it has benefited from any such alleged scheme. Further, Quest Energy filed a counterclaim against the Federal Insurance Company and Community Trust contending that the negligent actions and inactions by Community Trust caused severe damage and loss to Quest Energy and Quest. The court granted Community Trust's motion to dismiss the counterclaim. Mountain Edge Personnel has commenced an action in the Circuit Court of Mingo County, West Virginia against Quest's now-dissolved indirect wholly-owned subsidiary, J. Taylor Mining, for damages in the amount of approximately $115,000, plus pre and post judgment interest as provided by law, costs, and fees. 52 An action has been commenced in the Circuit Court of Pike County, Kentucky against Quest and its indirect, wholly-owned subsidiaries, Gwenco, Inc., Quest Energy, Ltd., and J. Taylor Mining, for unspecified damages resulting from personal injuries suffered while working for Mountain Edge Personnel, an employee leasing agency who leased employees to Quest's subsidiaries. Quest Energy is actively defending the action. This action was originally stayed against Gwenco as a result of Gwenco's Chapter 11 filing. However, in March, 2008, the plaintiff obtained relief from stay and as a result the lawsuit has reopened against Gwenco. BHP, Inc. commenced an action in the Circuit Court of Pike County, Kentucky against Quest's indirect, wholly-owned subsidiary, Quest Energy, Ltd., for damages resulting an alleged failure to pay for certain equipment leases in the amount of approximately $225,000, plus pre and post judgment interest as provided by law, costs, and fees. July 10, 2006, Quest Energy entered into a settlement arrangement with BHP for the bill of sale on two pieces of equipment, of which Quest Energy had retained possession while in default of prior lease payments. On October 10, 2006, the Pike County Circuit Court entered an order enforcing this settlement agreement, and on December 19, 2006, BHP was awarded summary judgment in the amount of $35,000 plus 8% accrued interest from August 9, 2006. BHP, Inc. has since repossessed the equipment. Christopher Younger and Sharon Preece commenced an action in the Circuit Court of Pike County against Quest's indirect, wholly-owned subsidiary, Gwenco, Inc., for damages resulting from an alleged failure to pay past royalties and other amounts allegedly due. The plaintiffs have obtained a default judgment in this action in the amount of approximately $600,000, from which Gwenco has taken appeal. The plaintiffs then amended their complaint, seeking to be adjudged a lien on certain real and personal property of Gwenco pursuant to the aforementioned judgment and that said real and personal property be sold to satisfy the aforesaid lien, and that the liens of the plaintiffs attach to the proceeds of the sale. This foreclosure action was stayed against Gwenco as a result of Gwenco's Chapter 11 filing. In 2007, Gwenco settled the claim Sharon Preece for $150,000. The settlement was approved by the bankruptcy court. ITEM 1A - RISK FACTORS As a "small reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item. ITEM 2 - CHANGES IN SECURITIES (a) During the quarter ended March 31, 2008, Quest issued an aggregate of 25,768,229 shares of common stock upon conversions of various convertible notes. The aggregate principal and interest amount of these notes that were converted was $76,562. The issuances were exempt pursuant to Section 3(a)(9) of the Securities Act as well as Section 4(2) of the Securities Act. During the quarter ended March 31, 2008, Quest issued an aggregate of 81,300,000 shares of common stock upon conversion of 49,580 shares of its series A preferred stock. The issuances were exempt pursuant to Section 3(a)(9) of the Securities Act as well as Section 4(2) of the Securities Act. (b) None. (c) None. ITEM 3 - DEFAULT UPON SENIOR SECURITIES (a) None. (b) None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5 - OTHER INFORMATION None. 53 ITEM 6 - EXHIBITS Item Method of No. Description Filing ---- ---------------------------------------------------- --------------- 31.1 Certification of Eugene Chiaramonte, Jr. pursuant to Filed herewith. Rule 13a-14(a) 32.1 Chief Executive Officer and Chief Financial Officer Filed herewith. Certification pursuant to 18 U.S.C. ss. 1350 adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUEST MINERALS & MINING CORP. June 23, 2008 /s/ EUGENE CHIARAMONTE, JR. ----------------------------------------- Eugene Chiaramonte, Jr. President (Principal Executive Officer and Principal Accounting Officer) 54