10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

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 June 30, 2010

¨ 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

KENTUCKY ENERGY, INC.

 (Exact name of registrant as specified in its charter)

Utah	87-0429950
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨  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   ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes  ¨  No  x

APPLICABLE ONLY TO CORPORATE ISSUERS

As of August 18, 2010, 209,076,048 shares of our common stock were outstanding.

Transitional Small Business Disclosure Format:    Yes  ¨ No   x

 

PART 1:                   FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Current assets
Cash	$	7,587		$	7,254
Receivables		91,412			112,282
Prepaid expenses		3,025			8,227
Total current assets		102,024			127,763
Other assets:
Leased Mineral Reserves, net		5,173,892			5,187,317
Mine development, net		56,607			113,207
Equipment, net		115,140			133,184
Deposits		49,479			48,986
Total assets	$	5,497,142		$	5,610,457
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note 3)	$	3,435,668		$	3,060,061
Loans payable-current portion, net (Note 4)		1,793,170			996,995
Total current liabilities		5,228,838			4,057,056
Long-term liabilities:
Loans payable-long term portion, net (Note 4)		1,101,906			2,075,927
Restructured debt - long term portion, net  (Note 4)		1,500,345			558,833
Related party loans, net (Note 4)		681,940			300,468
Total long-term liabilities		3,284,191			2,935,228
Total liabilities		8,513,029			6,992,284
Commitments and contingencies (Note 7)		-			-
Deficiency in stockholders' equity
Preferred stock, par value $0.001, 25,000,000 shares authorized
SERIES A - issued and outstanding 20,726 shares		21			21
SERIES B - issued and outstanding 48,284 shares		48			48
SERIES C - issued and outstanding 260,000 shares		260			260
Common stock, par value $0.0001, 2,500,000,000 shares authorized (Note 6) issued and outstanding 117,823,963 and 17,457,239 shares as of June 30, 2010 and December 31, 2009, respectively		11,783			1,746
Common stock to be issued		5,648			5,648
Equity allowance		(587,500	)		(587,500	)
Paid-in capital		70,351,234			69,846,336
Accumulated deficit		(72,797,381	)		(70,648,386	)
Total deficiency in stockholders' equity		(3,015,887	)		(1,381,827	)
Total liabilities and deficiency in stockholders' equity	$	5,497,142		$	5,610,457

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

F-1

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the three months ended June 30,						For the six months ended June 30,
	2010			2009			2010			2009
Coal revenues	$	774,846		$	-		$	1,458,351		$	330,314
Production costs		(854,879	)		(56,038	)		(1,829,179	)		(688,768	)
Gross profit (loss)		(80,033	)		(56,038	)		(370,828	)		(358,454	)
Operating expenses:
Selling, general and administrative		474,702			381,662			708,203			720,021
Depreciation and amortization		44,154			37,321			88,069			77,940
Total operating expenses		518,856			418,983			796,272			797,961
Net loss from operations		(598,889	)		(475,021	)		(1,167,100	)		(1,156,415	)
Other income (expense):
Gain (loss) on debt settlements		5,841			(35,282	)		16,026			(921	)
Interest, net		(417,752	)		(152,655	)		(997,921	)		(293,549	)
Net loss before income taxes		(1,010,800	)		(662,958	)		(2,148,995	)		(1,450,885	)
Provision for income taxes		-			-			-			-
Net loss	$	(1,010,800	)	$	(662,958	)	$	(2,148,995	)	$	(1,450,885	)
Basic and diluted (loss) per common share	$	(0.01	)	$	(1.49	)	$	(0.03	)	$	(4.28	)
Weighted average common shares outstanding		89,634,837			443,732			61,925,471			339,378

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

F-2

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Unaudited)

	2010			2009
Operating Activities
Net loss	$	(2,148,995	)	$	(1,450,885	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		88,069			77,940
Stock issued for interest		10,968			-
Stock issued for services		215,310			308,465
Stock compensation		100,000			-
Gain (loss) on debt settlements		-			921
Amortization of discount on convertible notes - interest expense		659,142			62,276
Amortization of deferred issuance costs		-			226
Amortization of royalty costs		2,606			6,615
Changes in operating assets and liabilities:
Decrease in receivables		20,870			1,230
Decrease in prepaid expenses		5,202			1,993
Increase in accounts payable and accrued expenses		626,268			474,580
Net cash used in operating activities		(420,560	)		(516,639	)
Investing Activities
Mine development		-			-
Equipment purchased		-			(12,000	)
Restricted cash		-			11,455
Security deposits		(493	)		(5,916	)
Net cash used in investing activities		(493	)		(6,461	)
Financing  Activities
Repayment of borrowings		(1,131,397	)		(21,500	)
Proceeds from DIP Financing		-			375,500
Proceeds from borrowings, net		1,552,783			155,698
Net cash provided by financing activities		421,386			509,698
Increase (decrease) in cash		333			(13,402	)
Cash at beginning of period		7,254			13,439
Cash at end of period	$	7,587		$	37
Supplemental Disclosures of Cash Flow Information
Cash paid during the year:
Interest	$	-		$	1,881
Services	$	22,974		$	2,300
Income taxes	$	-		$	-
Non-cash financing activites:
Conversions of note principal and interest	$	557,500		$	480,000

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

F-3

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements as of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009 are unaudited.

These financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all the information necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2010. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2009 financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

On June 10, 2010, the Company filed an amendment to its Articles of Incorporation to change its corporate name from Quest Minerals & Mining Corp. to Kentucky Energy, Inc.  The change in corporate name took effect on June 16, 2010.

The unaudited condensed consolidated financial statements include our accounts and the accounts for our wholly owned subsidiaries, Quest Minerals & Mining, Ltd. (“Quest Ltd.”), Quest Energy, Ltd. (“Quest Energy”), E-Z Mining Co., Inc. (“E-Z Mining”), and Gwenco, Inc. (“Gwenco”).  Significant intercompany transactions and accounts are eliminated in consolidation.

Fair Value of Financial Instruments

In the first quarter of fiscal year 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”).  ASC 820-10 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. ASC 820-10 delays, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of ASC 820-10 did not have a material impact on the Company’s financial position or operations.

Effective October 1, 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on the Company’s unaudited condensed consolidated financial position, results of operations nor cash flows. The carrying value of current and non-current loans payable, restructured debt and related party loans, as reflected in the balance sheets, approximate its fair values.

F-4

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Going Concern

The accompanying unaudited condensed consolidated 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 and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company incurred net losses from operations of $1,167,100 and $1,156,415 for the periods ended June 30, 2010 and 2009 and had a working capital deficit (current assets less current liabilities) of $5,126,814 and $3,929,293 at June 30, 2010 and December 31, 2009, respectively.  These factors indicate that the Company’s continuation as a going concern is dependent upon its ability to increase its cash flows from operations or to obtain adequate financing.

The Company will likely 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 if it cannot improve its cash flows from operations.  The Company may also seek to dispose of some or all of its assets or operations.  The Company’s future capital requirements will depend on numerous factors including, but not limited to, increasing mine production and continued progress developing additional mines.

On March 2, 2007, Gwenco 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. Prior to October 12, 2009, Gwenco oversaw its operations as a debtor in possession, subject to court approval of matters outside the ordinary course of business. In 2007, the Bankruptcy Court approved Gwenco’s request for debtor-in-possession financing in an amount of up to $2,000,000 from holders of Gwenco’s existing debt obligations in order to fund operating expenses. Under Chapter 11, all claims against Gwenco in existence prior to the filing of the petitions for reorganization relief under the federal bankruptcy laws were stayed while Gwenco was in bankruptcy.

On September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan of Reorganization (the “Plan”). Secured and non-priority unsecured classes of creditors voted to approve the Plan, with over 80% of the unsecured claims in dollar amount voting for the plan, and over 90% of responding lessors supporting it. The Plan became effective on October 12, 2009.

Even though the Bankruptcy Court has confirmed the Plan, it is still possible that the Bankruptcy Court could convert Gwenco’s case to Chapter 7 and liquidate all of Gwenco’s assets if the Court determines that Gwenco is unable to perform under the Plan. In the case of a Chapter 7 conversion, the Company would be materially impacted and could lose all of its working assets and have only unpaid liabilities. In addition, the Company might be forced to file for protection under Chapter 11 as it is the primary guarantor on a number of Gwenco’s contracts.

F-5

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Recent Accounting Pronouncements

In January 2010, the FASB issued an accounting standard update, amending disclosure requirements related to Fair Value Measurements and Disclosures, as follows:

1. Significant transfers between Level 1 and 2 shall be disclosed separately, including the reasons for the transfers; and

2. Information about purchases, sales, issuances and settlements shall be disclosed separately in the reconciliation of activity in Level 3 fair value measurements.

This accounting standard update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation of activity in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010.  The adoption of this accounting standard update did not have a material impact on our financial position or results of operations.

Effective January 1, 2010, the Company applied ASU No. 2009-17, which requires consolidation of certain special purpose entities that were previously exempted from consolidation.  The revised criteria define a controlling financial interest for requiring consolidation as: the power to direct the activities that most significantly affect the entity’s performance, and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity.  The initial adoption had no effect on the Company’s financial statements.

In January and April 2010, respectively, the FASB issued ASU 2010-03, Extractive Activities-Oil and Gas (Topic 932) and 2010-14, Accounting for Extractive Activities-Oil & Gas.  The objective of these updates is to align the oil and gas accounting and reserve estimation and disclosure requirements of Extractive Activities-Oil & Gas (Topic 932) with the requirements of the Securities and Exchange Commission’s (SEC) Release 33-8895, Modernization of Oil and Gas Reporting, which became effective for registration statements filed beginning January 1, 2010 and for annual reports for years ending on or after December 31, 2009.  SEC Release 33-8895 was issued to provide investors with more meaningful information on which to base their evaluations of oil and gas companies, taking into account the significant technological advances that have occurred since the original SEC rules were issued some three decades ago.  The Company is applying the requirements of Release 33-8895, though it has not yet reported information regarding reserves in its annual reports.

In January 2010, the FASB issued Update No. 2010-05 “Compensation—Stock Compensation—Escrowed Share Arrangements and Presumption of Compensation” (“2010-05”).  2010-05 re-asserts that the Staff of the SEC has stated the presumption that for certain shareholders escrowed shares represent a compensatory arrangement.  2010-05 further clarifies the criteria required to be met to establish a position different from the SEC Staff’s position.  The Company does not believe this pronouncement will have any material impact on its financial position, results of operations, or cash flows.

In January 2010, the FASB issued Update No. 2010-04 “Accounting for Various Topics—Technical Corrections to SEC Paragraphs” (“2010-04”).  2010-04 represents technical corrections to SEC paragraphs within various sections of the Codification.  Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.

F-6

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

In January 2010, the FASB issued Update No. 2010-02 “Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification” (“2010-02”) an update of ASC 810 “Consolidation.”  2010-02 clarifies the scope of ASC 810 with respect to decreases in ownership in a subsidiary to those of a subsidiary or group of assets that are a business or nonprofit, a subsidiary that is transferred to an equity method investee or joint venture, and an exchange of a group of assets that constitutes a business or nonprofit activity to a non-controlling interest including an equity method investee or a joint venture.  Management does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows.  Management does not intend to decrease its ownership in any of its wholly-owned subsidiaries.

In January 2010, the FASB issued Update No. 2010-01 “Accounting for Distributions to Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging Issues Task Force” (“2010-03”) an update of ASC 505 “Equity.”  2010-03 clarifies the treatment of stock distributions as dividends to shareholders and their affect on the computation of earnings per shares.  Management does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows.

In April 2010, the FASB issued an accounting standard update, amending disclosure requirements related to income taxes, as a result of the Patient Protection and Affordable Care Act (“PPACA”), which became law on March 23, 2010, and was subsequently amended on March 30, 2010.  The adoption of this accounting standard update did not have a material impact on our financial position or results of operations.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future consolidated financial statements.

NOTE 2 - PLAN OF REORGANIZATION

In 2009, the United States Bankruptcy Court for the Eastern District of Kentucky confirmed Gwenco’s Plan of Reorganization (the “Plan”) pursuant to Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Kentucky.  The Plan became effective on October 12, 2009.  See Note 16 to our consolidated financial statements as of December 31, 2009 and 2008 and for each of the years then ended, as set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, for a description of the Plan and its effect on our financial statements.

F-7

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

NOTE 3 - ACCOUNTS PAYABLE & ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

	June 30,		December 31,
	2010 (Unaudited)		2009
Accounts payable	$	1,324,636		1,074,035
Accrued royalties payable-operating (a)		229,587		125,894
Accrued bank claim (b)		650,000		650,000
Accrued taxes		87,316		87,315
Accrued interest (c)		291,407		220,095
Accrued expenses (d)		852,722		902,722
	$	3,435,668	$	3,060,061

(a) The Company maintains a number of coal leases with minimum lease or royalty payments that vary by lease as defined in each lease agreement.  As a result of the confirmation of Gwenco’s Plan, Gwenco has assumed all coal leases and is obligated to pay cure claims due under each lease.  In addition, the Company has granted overriding royalties to third parties.  Unless otherwise provided in the Plan, all accrued amounts due under the leases and overriding royalty obligations are due on or before October 12, 2012.   As a result, most of the existing royalties, which accrued up until the effective date, were re-categorized as Cure Claims totaling $199,213.  As of June 30, 2010, the Company owed approximately $229,587 in current lease and/or royalty payments.

Certain accrued overriding royalties owed to former owners totaling $319,062 have been reclassified as allowed unsecured claims under Gwenco’s Plan, to be paid along with the other allowed unsecured claims under Gwenco’s Plan.  (See Note 4.)

In addition, the Company accrued $25,544 as an estimated royalty payable in connection with an August 2008 financing.  This amount is currently being amortized over the life of the underlying note involved in the financing.  (See Note 4.)

(b) Community Trust Bank and its insurer, the Federal Insurance Company, commenced an action in Pike County Court, Kentucky against Quest Energy alleging that former employees or associates of Quest Energy engaged in a criminal scheme and conspiracy to defraud Community Trust Bank, 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.  As of June 30, 2010, the matter is closed and off the Court’s docket, and no outcome has been determined.  While we believe that this matter will be resolved without a material adverse impact on our cash flows, results of operation, or financial condition, it is reasonably possible that our judgments regarding this matter could change in the future.

F-8

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

(c) As a result of the confirmation of Gwenco’s Plan, most of the existing debts, which included the accrued interest up until the effective date, were prioritized under various long-term debt classifications and no longer accrue interest.  The Company made an $864,175 adjustment to re-categorize the existing interest as long-term debt.  Most of these claim amounts are now due on or before October 12, 2014.

(d) 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.  The Company defaulted on the loan and the lender foreclosed on the officer’s pledged shares.  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. The Company has accrued the remaining $130,000 due to its former officer.   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.

F-9

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

NOTE 4 - NOTES PAYABLE

Notes payable consist of the following:

	June 30,			December 31,
	2010 (Unaudited)			2009
Kentucky Energy, Inc.
0% Notes Due on Demand (a).	$	202,864		$	$202,864
7% Senior Secured Convertible Notes Due 2007 (b).		25,000			25,000
5% Unsecured Advances Due on Demand (c).		130,857			130,857
6% Convertible Notes Due 2011 (c).		865,418			1,044,580
6% Convertible Notes Due 2011 (d).		1,000,000			1,000,000
6% Convertible Notes Due 2011 (e).		174,000			200,000
0% Notes Due on Demand (f).		483,171			480,434
10% Convertible Notes due 2008 (g).		10,000			10,000
6% Convertible Notes due 2010 (h).		2,300			27,304
8% Convertible Notes due 2010 (i).		3,330			117,010
8% Convertible Notes due 2011 (j).		25,000			25,000
5% Convertible Notes due 2014 (k).		51,000			90,500
4% Convertible Notes due 2011 (l).		-			30,000
8% Convertible Notes due 2011 (m).		50,000			50,000
12% Notes Due on Demand (n).		12,500			12,500
6% Notes Due on Demand (o).		10,000			10,000
5% Convertible Notes due 2012 (p).		95,000			-
8% Convertible Notes due 2012 (q).		55,000			-
8% Convertible Notes due 2011 (r).		50,000			-
QUEST ENERGY, LTD.
8% Summary Judgment (s).		35,000			35,000
GWENCO, INC.: (Restructured Debt)
CLASS 1 – Secured Claim with conversion option (t).		1,191,290			1,753,377
CLASS 1 – Secured claim with conversion option (u)		2,491,480			3,207,376
CLASS 3 – Unsecured Claims (v)		385,900			413,741
CLASS 3 - Unsecured Claims with conversion option (w)		319,062			319,062
CLASS 5 – Cured Claims (x)		199,213			199,213
GWENCO, INC.: (Related-Party Loans)
CLASS 3 - Unsecured Claim with conversion option (y).		576,967			651,967
Total Debt		8,444,351			10,035,785
Current Portion		1,830,439			1,050,969
Less: Unamortized debt discount on Current Portion		(37,269	)		(53,974	)
Total Notes Payable – Current Portion, net	$	1,793,170		$	996,995
Long-Term Debt:	$	6,613,912		$	8,984,816
Less: Unamortized present value and debt discount on Long-Term Debt		(3,329,721	)		(6,049,588	)
Total Long-Term Debt, net	$	3,284,191		$	2,935,228

F-10

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

(a) On December 31, 2005, the Company closed E-Z Mining Co., Inc.  These current notes consist of various third parties related to the former CFO of the Company.  All notes are unsecured and due on demand except $110,000, which is due from future royalties.  All notes are non-interest bearing.

(b) From February 22, 2005 through April 18, 2005, the Company entered into unit purchase agreements with sixteen third-party investors for a total sale amount of $1,425,000.  Each unit was sold at $25,000 and consisted of a 7% senior secured convertible note due March 6, 2006 and 3.75 Series A Warrants.  The notes were secured by certain of the Company’s assets and were initially convertible into shares of the Company’s common stock at the rate of $20,000.00 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 $200.00 and one (1) Series B Warrant.  Each Series B Warrant was exercisable into one (1) share of common stock at an exercise price of $40,000.00.  As of June 30, 2010, $25,000 in principal amount of the original $1,425,000 in notes remains outstanding and in default.  This default should not have any material impact on the Company.

(c) Since 2006 through June 30, 2010, a third party investor, and its successor in interest, has advanced operational funding into the Company.  Since there had 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.

On June 26, 2009, the Company entered into an exchange agreement with the third party investor, pursuant to which the investor exchanged approximately $1,082,411 of the evidences of indebtedness, along with $124,195 of accrued interest thereon, for a new convertible promissory note in the aggregate principal amount of $1,200,000.  The new note is due June 26, 2011, is unsecured, and bears interest at an annual rate of six percent (6%).  The new note was initially convertible into shares of the Company’s common stock at a conversion price of $0.001 per share.  The conversion price has since adjusted to $0.0001 pursuant to rate adjustment terms set forth in the note.  During the year ended December 31, 2009, the holders have made various conversions to the principal and interest outstanding.

As of June 30, 2010, there continues to be no formal agreement regarding the remaining evidences of indebtedness of $130,857, and the Company continues to accrue 5% annual interest on the principal with the intent that a mutual arrangement will be resolved between both parties.

(d) On July 11, 2009, the Company and Gwenco entered into a settlement and release agreement with the Company’s largest lender to resolve various disputes that had arisen between the Company and the lender.  Pursuant to the settlement agreement, the lender waived certain defaults under various debt obligations.  In addition, Gwenco and the lender under the Debtor-in-Possession Total Facility extended the maturity date on the Total Facility to the earliest of (i) December 31, 2010, (ii) the date of confirmation of a plan of reorganization or liquidation in the Bankruptcy Case; (iii) the date of closing of a sale of all or substantially all of Gwenco’s assets pursuant to the Bankruptcy Code; or (iv) the approval of a disclosure statement in respect of a plan of reorganization or liquidation not supported by the lender.  In exchange for this consideration, Quest issued the lender a new convertible promissory note in the aggregate principal amount of $1,000,000.  The note is due July 11, 2011, is unsecured, and bears interest at an annual interest rate of six percent (6%).  The new note was initially convertible into shares of the Company’s common stock at a conversion price of $0.001 per share.  The conversion price has since adjusted to $0.0001 pursuant to rate adjustment terms set forth in the note.

F-11

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

(e) On July 13, 2009, the Company issued a consulting bonus in the form of a convertible promissory note in the aggregate principal amount of $200,000 to a third party consulting company owned by a stockholder of the Company.  The note is due July 13, 2011, is unsecured, and bears interest at an annual interest rate of six percent (6%).  The new note was initially convertible into shares of the Company’s common stock at a conversion price of $0.001 per share.  The conversion price has since adjusted to $0.0001 pursuant to rate adjustment terms set forth in the note.  The Company recorded consulting expense for $200,000 and continues to accrue interest in relation to the convertible promissory note.

(f) Periodically, the Company receives cash advances from unrelated third party investors.  Since these advances are open accounts, are unsecured, and have no fixed or determined dates for repayment, the amounts carry a 0% interest rate.

(g) 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 was due on May 1, 2008, is unsecured, and bears interest at the annual rate of ten percent (10%).  The note is convertible into the Company’s common shares at a fixed rate of $160 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.

As of June 30, 2010, the Company was in default of this obligation.  This default should not have any material impact on the Company.

(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 $20.00 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) $2.00 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.

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 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) $2.00 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.

F-12

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

On June 6, 2008, the Company entered into an exchange agreement with the subsequent holder of these notes, in the aggregate principal amount of $835,000, under which the subsequent holder exchanged the notes held by such holder for a new convertible promissory note in the aggregate principal amount of $835,000.  The new note is due June 6, 2010, is unsecured, and bears interest at an annual interest rate of six percent (6%).  The new note is convertible into shares of the Company’s common stock at a conversion price of $0.001 per share. As of June 30, 2010, the Company was in default of this obligation.  This default should not have any material impact on the Company.

(i) On August 14, 2008, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $400,000 convertible promissory note and granted a three (3) year royalty on future coal sales.  The note is due July 23, 2010, is unsecured, and bears interest at an annual interest rate of eight percent (8%).  The note is convertible into shares of the Company’s common stock at a conversion price of sixty percent (60%) of the average of the five (5) lowest per share market value during the ten (10) trading days immediately preceding a conversion date.  The royalty is based on sliding scale ranging from $0.00 to $0.75 per ton, depending on actual sale prices of coal received by the Company.  On August 28, 2009, the Company amended the conversion price to be forty five percent (45%) of the average of the five (5) lowest per share market value during the ten (10) trading days immediately preceding a conversion date.

In accordance with ASC 470-20, the Company also recognized an imbedded beneficial conversion feature present in this note.  The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital.  The Company recognized and measured $225,000 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the note.  The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.  On August 28, 2009, pursuant to the amended conversion feature agreement, the Company deemed the existing debt extinguished and reissued it according to the new terms.   The discounted amortization was revised to $219,218.  As of June 30, 2010, unamortized discount of $843 remains.

In addition, the Company recognized and measured $25,544 of the proceeds, which is equal to the Company’s estimate of the royalty payable under this agreement, to accrued royalties and a discount against the note.  The debt discount attributed to the accrued royalty is amortized over the note’s maturity period as interest expense.

(j) On September 16, 2009, the Company issued a convertible promissory note to a third party investor for facilitation of Gwenco’s Debtor-In-Possession financing.  The note is due September 16, 2011, is unsecured, and bears interest at an annual interest rate of eight percent (8%).  The note is convertible into shares of the Company’s common stock at a conversion price of forty five percent (45%) of the average of the five (5) lowest per share market value during the ten (10) trading days immediately preceding a conversion date.

In accordance with ASC 470-20, the Company also recognized an imbedded beneficial conversion feature present in this note.  The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital.  The Company recognized and measured $25,000 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the note.  The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.  As of June 30, 2010, unamortized discount of $16,318 remains.

F-13

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

(k) On October 14, 2009, the Company entered into an exchange agreement with a third party investor, pursuant to which the investor exchanged approximately $125,000 of evidences of indebtedness, for a new convertible promissory note in the aggregate principal amount of $125,000.  The new note is due October 14, 2014, is unsecured, and bears interest at an annual rate of six percent (6%).  The new note was initially convertible into shares of the Company’s common stock at a conversion price of $0.001 per share.  The conversion price has since adjusted to $0.0001 pursuant to rate adjustment terms set forth in the note.  During the year ended December 31, 2009, the holders have made various conversions to the principal and interest outstanding.  Subsequent to December 31, 2009, the note was amended to reduce the interest rate to 5% and to amend certain adjustment terms in the conversion price.

In accordance with ASC 470-20, the Company recognized an imbedded beneficial conversion feature present in this note.  The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital.  The Company recognized and measured $125,000 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the note.  The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.  As of June 30, 2010, unamortized discount of $44,033 still remains.

(l) On December 14, 2009, the Company entered into an exchange agreement with a third party investor, pursuant to which the investor exchanged approximately $30,000 of the evidences of indebtedness through unsecured cash advances, for a new convertible promissory note in the aggregate principal amount of $30,000.  The new note is due December 14, 2011, is unsecured, and bears interest at an annual rate of four percent (4%).  The new note is convertible into shares of the Company’s common stock at a conversion price of 50% of the average of the per share market values during the three (3) trading days immediately preceding a conversion date, subject to adjustments.

In accordance with ASC 470-20, the Company recognized an imbedded beneficial conversion feature present in this note.  The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital.  The Company recognized and measured $28,554 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the note.  The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.  As of June 30, 2010, the debt principal has been fully satisfied through conversions with only $240 remaining in unpaid interest.

(m) On October 23, 2009, the Company issued a convertible note to a third party investor in the amount of 50,000.  The note is due October 23, 2011, is unsecured, and bears interest at an annual rate of six percent (8%).  The note is convertible into shares of the Company’s common stock at a conversion price of 45% of the average of the five (5) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.

F-14

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

In accordance with ASC 470-20, the Company recognized an imbedded beneficial conversion feature present in this note.  The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital.  The Company recognized and measured $31,064 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the note.  The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.  As of June 30, 2010, unamortized discount of $21,501 still remains.

(n) On August 28, 2009, the Company borrowed $12,500 from an unrelated third party, and in connection therewith, issued a promissory note that is due on demand, is unsecured, and bears interest at an annual interest rate of twelve percent (12%).

(o) On January 16, 2009, the Company borrowed $10,000 from an unrelated third party, and in connection therewith, issued a promissory note that is due on demand, is unsecured, and bears interest at an annual interest rate of six percent (6%).

(p) On February 4, 2010, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $95,000 convertible promissory note.  The note is due February 4, 2012 and bears interest at an annual interest rate of five percent (5%).  The note is convertible into shares of the Company’s common stock at a conversion price of $0.0001 per share due to variable rate adjustments.  The Company recorded a note discount of $20,000, which is being amortized over the term of the note.

(q) On February 26, 2010, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $55,000 convertible promissory note.  The note is due February 26, 2012 and bears interest at an annual interest rate of eight percent (8%).  The note is convertible into shares of the Company’s common stock at a conversion price of forty five percent (45%) of the average of the five (5) lowest per share market value during the five (5) trading days immediately preceding a conversion date.  The Company recorded a note discount of $5,000, which is being amortized over the term of the note.

(r) On March 22, 2010, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $50,000 convertible promissory note.  The note is due March 22, 2011 and bears interest at an annual interest rate of eight percent (8%).  The note is convertible into shares of the Company’s common stock at a conversion price of forty five percent (40%) of the average of the three (3) lowest per share market value during the ten (10) trading days immediately preceding a conversion date.  The Company recorded a note discount of $50,000, which is being amortized over the term of the note.

(s) 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 June 30, 2010, the Company remains in default.  The lessor has since repossessed the equipment.

F-15

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

(t) Under Gwenco’s Plan of Reorganization, a judgment in favor of Interstellar Holdings, LLC was classified as a Class 1 Claim and was satisfied by the issuance to Interstellar Holdings of a 5 year secured convertible promissory note, which note is convertible into common stock of the Company at a rate of the lower of (i) $0.001 per share and (ii) 40% of the average of the three lowest per shares market values of the Company’s common stock during the 10 trading days before a conversion; provided that the holder is prohibited from converting if such conversion would result in it holding more than 4.99% of the Company’s outstanding common stock. In accordance with ASC 470-20, the Company recognized an imbedded beneficial conversion feature present in this note.  The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital.  The Company recognized and measured $1,093,771 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the note.  The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.  As of June 30, 2010, unamortized discount of $938,820 still remains.

(u) Under Gwenco’s Plan of Reorganization, the Court approved an exit facility under which Interstellar Holdings, LLC will provide up to $2 million in financing to Gwenco, which Gwenco used to pay off its Debtor In Possession Total Facility.  The exit facility consists of a 5 year secured convertible line of credit note, which note is convertible into common stock of the Company at a rate of the lower of (i) $0.001 per share and (ii) 40% of the average of the three lowest per shares market values of the Company’s common stock during the 10 trading days before a conversion; provided that the holder is prohibited from converting if such conversion would result in it holding more than 4.99% of the Company’s outstanding common stock. In accordance with ASC 470-20, the Company recognized an imbedded beneficial conversion feature present in this note.  The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital.  The Company recognized and measured $1,968,281 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the note.  The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.  As of June 30, 2010, unamortized discount of $1,689,441 still remains.

(v) Certain unsecured promissory notes which Gwenco assumed in connection with a settlement agreement with a former owner were classified as unsecured Class 3 Claims in Gwenco’s Plan of Reorganization.  These claims will be satisfied by cash payments equal to the value of their claim on the earlier of (i) October 12, 2014 or (ii) the date on which, in Gwenco’s sole discretion, proceeds from the exit facility are sufficient to satisfy the claims.  Further, these claimholders shall receive their pro-rata share of royalty payments to reduce their claims.

(w) Certain accrued overriding royalties owed to former owners totaling $319,062 have been reclassified as allowed unsecured claims under Gwenco’s Plan, to be paid along with the other allowed unsecured claims under Gwenco’s Plan.  Each former owner has the right to convert up to $40,000 of his or her claim into the Company’s common stock at a conversion price of eighty five percent (85%) of the average of the five (5) per share market values immediately preceding a conversion date, with a minimum conversion price of the par value of the Company’s common stock. In accordance with ASC 470-20, the Company recognized an imbedded beneficial conversion feature present in this note.  The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital.  The Company recognized and measured $1,634 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the note.  The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.  As of June 30, 2010, unamortized discount of $1,307 still remains.

F-16

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

(x) Pursuant to the Plan, most of the existing royalties, which accrued up until the effective date, were re-categorized as unsecured Cure Claims totaling $199,213.  These claim amounts are now due on or before October 12, 2012.

(y) Certain promissory notes issued to a former stockholder of Gwenco were classified as unsecured Class 3 Claims in Gwenco’s Plan of Reorganization.  The claims are also guaranteed by the Company and Quest Ltd. and are secured by 50% of Quest Ltd.’s ownership of Gwenco.  The former stockholder also has the has the right to convert up to $15,000 of the claim each month into the Company’s common stock at a conversion price of eighty five percent (85%) of the average of the five (5) per share market values immediately preceding a conversion date, with a minimum conversion price of the par value of the Company’s common stock.

Reclassification

During the six months ended June 30, 2010, the Company revised its methodology of estimating the fair value of obligations modified as a result of the confirmation of Gwenco’s Plan of Reorganization.  This resulted in a reclassification of approximately $480,000 from additional paid in capital to restructured debt.

NOTE 5 - INCOME TAXES

The Company recognized no income tax benefit for the loss generated for the periods through June 30, 2010.

ASC 740-10 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 6 - COMMON STOCK

On June 16, 2010, the Company effectuated a 1 to 20 reverse stock split resulting in a 1,858,642,772 reduction of shares from 1,956,466,735 common shares outstanding to 97,823,963 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.

All references in the condensed consolidated financial statements and notes to condensed consolidated financial statements, numbers of shares, and share amounts have been retroactively restated to reflect the reverse splits, unless explicitly stated otherwise.

During the six months ended June 30, 2010, the Company issued an aggregate of 13,715,000 shares of common stock for consulting and legal services.  Expense of $215,310 was recorded related to these shares, which was the market value of such shares issued at prices ranging from $0.00040 to $0.00181 per share.

F-17

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

During the six months ended June 30, 2010, the holders of 7% convertible promissory notes effectuated a final conversion of 332,917 shares of common stock at a conversion price of $0.0168 per share to satisfy the remaining $5,593 of accrued interest.

During the six months ended June 30, 2010, the holders of 8% convertible promissory notes due August 14, 2010, effectuated a series of partial conversions and were issued an aggregate of 10,000,000 shares of common stock at conversion prices ranging from $0.006 to $0.02 per share.  In the aggregate, these issuances reduced the debt by $113,680 in principal.

During the six months ended June 30, 2010, the holders of 4% convertible promissory notes due December 14, 2011, effectuated a series of partial conversions and were issued an aggregate of 2,556,762 shares of common stock at conversion prices ranging from $0.006 to $0.022 per share.  In the aggregate, these issuances reduced the debt by $30,000 in principal.

During the six months ended June 30, 2010, the holders of 6% convertible promissory notes due July 13, 2011, effectuated a series of partial conversions and were issued an aggregate of 5,400,000 shares of common stock at conversion prices ranging from $0.002 to $0.01 per share.  In the aggregate, these issuances reduced the debt by $26,000 in principal.

During the six months ended June 30, 2010, the holders of 6% convertible promissory notes due October 14, 2014, effectuated a series of partial conversions and were issued an aggregate of 11,600,000 shares of common stock at conversion prices ranging from $0.002 to $0.02 per share.  In the aggregate, these issuances reduced the debt by $39,500 in principal.

During the six months ended June 30, 2010, the holders of 6% convertible promissory notes due June 26, 2011, effectuated a series of partial conversions and were issued an aggregate of 38,750,000 shares of common stock at conversion prices ranging from $0.002 to $0.02 per share.  In the aggregate, these issuances reduced the debt by $179,163 in principal and $3,338 in accrued interest.

During the six months ended June 30, 2010, the holders of 6% convertible promissory notes due June 6, 2010, effectuated a series of partial conversions and were issued an aggregate of 1,352,036 shares of common stock at a conversion price of $0.02 per share.  In the aggregate, these issuances reduced the debt by $25,004 in principal and $2,037 in accrued interest.

During the six months ended June 30, 2010, the holders of a Class 3 Claim under the Gwenco Plan of Reorganization, due October 12, 2014, exercised its conversion option pursuant to the Plan to effectuate a series of partial conversions and were issued an aggregate of 5,159,383 shares of common stock at conversion prices ranging from $0.0076 to $0.0274 per share.  In the aggregate, these issuances reduced the debt by $75,000 in principal.

During the six months ended June 30, 2010, the holders of a Class 1 Claim under the Gwenco Plan of Reorganization, due October 12, 2014, exercised its conversion option within the Exit Facility terms pursuant to the Plan to effectuate a series of partial conversions and were issued an aggregate of 11,500,000 shares of common stock at conversion prices ranging from $0.004 to $0.01 per share.  In the aggregate, these issuances reduced the debt by $58,187 in principal.

F-18

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

NOTE 7 - COMMITMENTS AND CONTINGENCIES

Valley Personnel Services.  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.

Community Trust Bank.  Community Trust Bank and its insurer, the Federal Insurance Company, commenced an action in Pike County Court, Kentucky against Quest Energy alleging that former employees or associates of Quest Energy engaged in a criminal scheme and conspiracy to defraud Community Trust Bank, 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.  As of June 30, 2010, the matter is closed and off the Court’s docket, and no outcome has been determined.  We have previously recorded an accrual of $650,000 for our best estimate of probable loss related to this matter.  While we believe that this matter will be resolved without a material adverse impact on our cash flows, results of operation, or financial condition, it is reasonably possible that our judgments regarding this matter could change in the future.

Personal Injury.An action has been commenced in the Circuit Court of Pike County, Kentucky against the Company and its subsidiaries for unspecified damages resulting from personal injuries suffered while working for Mountain Edge Personnel, an employee leasing agency who leased employees to the subsidiaries.  The action has since been dismissed without prejudice.

Fidler.  In the fourth quarter of 2008, a former attorney for the Company commenced an action alleging breach of contract for unpaid legal fees.  The Company has denied the allegations and is actively defending the matter.  Furthermore, the Company has filed a counterclaim against the attorney alleging legal malpractice in connection with the attorney’s representation of the Company in several matters.  The parties have agreed in principle to settle the matter, subject to completion of definitive settlement documents.

Potential SEC Action.  In October 2008, the Company received a Wells notice (the “Notice”) from the staff of the Salt Lake Regional Office of the Securities and Exchange Commission (the “Commission”) stating that they are recommending an enforcement action be filed against the Company based on the Company’s financial statements and other information contained in reports filed with the Commission for the period 2004 and thereafter.  The Notice states that the Commission anticipates alleging that we have violated Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934, as amended and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.  The Company contends that the Company did not commit any wrongdoings or the violations referred to in the Notice.  The Company cannot predict whether the Commission will follow the recommendations of the staff and file suit against the Company.  If any enforcement proceeding is instituted by the Commission, and intends to vigorously defend itself against the Commission’s claims.

The Company believes that it may incur significant costs and expenses in connection with this investigation.  There can be no assurance that litigation asserting such claims will not be initiated, or that the Company would prevail in any such litigation.

F-19

KENTUCKY ENERGY, INC.

(formerly Quest Minerals and Mining Corp.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

The Company is unable to predict the extent of its ultimate liability with respect to any and all future securities, bankruptcy, or other litigation matters.  The costs and other effects of any future litigation, bankruptcy proceedings, government investigations, legal and administrative cases and proceedings, settlements, judgments and investigations, claims and changes in these matters could have a material adverse effect on the Company’s financial condition and operating results.

The Company is subject to other legal proceedings and claims, which arise in the ordinary course of its business.  Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations, or liquidity.

NOTE 8 - SUBSEQUENT EVENTS

On July 16, 2010, the Company entered into an exchange agreement with an unrelated third party where the Company issued a $13,862 convertible promissory note in exchange for an existing demand note of $12,500 plus accrued interest.  The note is due July 16, 2012 and bears interest at an annual interest rate of eight percent (8%).  The note is convertible into shares of the Company’s common stock at a conversion price of forty percent (40%) of the average of the three (3) lowest per share market value during the ten (10) trading days immediately preceding a conversion date.

On July 21, 2010, the Company entered into an agreement with an unrelated third party to obtain up to 100 drill sites and a 100% working interest of the oil and gas rights on approximately 3,000 acres of property located in Rockcastle County, Kentucky for $50,000. In addition, the unrelated third party is to drill a well for additional consideration of $125,000 if paid by November 5, 2010. This well will be used to test thoroughly the main oil and gas horizons.

From July 1, 2010 through August 19, 2010, the Company issued an aggregate of 88,622,085 shares of common stock as conversion pursuant to convertible notes and under the exit facility and 8,000,000 shares of common stock for services rendered.

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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 our consolidated financial statements and related notes included in this report.

This report and the documents to which we refer you and incorporate into this report by reference contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  In addition, from time to time, we or our representatives may make such forward-looking statements orally or in writing.  These are statements that relate to future periods and include statements regarding our future strategic, operational, and financial plans, anticipated capital expenditures, projected cash flows, borrowings and other sources of funding, anticipated or projected revenues, expenses, and operational growth, the adequacy of our current equipment and supplies as well as our ability to obtain additional equipment and supplies, and our ability to expand our operations.

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,” “plans,” “target,” “goal,” “objective,” 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.

All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume 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, including, but not limited to, the following:

(i) our cash flows, results of operations, or financial condition;

(ii) our ability to continue as a going concern;

(iii) the possibility that the assets of our wholly owned subsidiary, Gwenco, Inc., could be liquidated in the future if its bankruptcy case is converted to a Chapter 7 liquidation;

(iv) our need to continue to finance our operations through additional borrowings or other capital financings, which may not be available as needed;

(v) our substantial indebtedness outstanding and significantly leveraged operations;

(vi) our ability to timely obtain necessary supplies and equipment;

(vii) the impact of the recent mine explosion at the Upper Big Branch mine in West Virginia;

(viii) governmental policies, laws, regulatory actions and court decisions affecting the coal industry or our customers’ coal usage;

(ix) legal and administrative proceedings, settlements, investigations and claims and the availability of insurance coverage related thereto, including, but not limited to, any SEC enforcement action that may be brought in the future;

(x) our interpretation and application of accounting literature related to mining specific issues;

(xi) our assumptions and projections concerning economically recoverable coal reserve estimates;

(xii) inherent risks of coal mining beyond our control, including weather and geologic conditions or catastrophic weather-related damage;

(xiii) inherent complexities which make it more difficult and costly to mine in Central Appalachia than in other parts of the United States;

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(xiv) our production capabilities to meet market expectations and customer requirements;

(xv) the cost and availability of transportation for our produced coal;

(xvi) our ability to obtain and renew permits necessary for our existing and any future operations in a timely manner;

(xvii) our ability to expand our mining capacity;

(xviii) our ability to manage production costs, including labor costs;

(xix) adjustments made in price, volume, or terms to existing coal supply arrangements;

(xx) the worldwide market demand for coal, electricity, and steel;

(xxi) environmental concerns related to coal mining and combustion and the cost and perceived benefits of alternative sources of energy such as natural gas and nuclear energy;

(xxii) our reliance upon and relationships with our customers and suppliers;

(xxiii) the creditworthiness of our customers and suppliers;

(xxiv) the lack of insurance against all potential operating risks;

(xxv) competition among coal and other energy producers, in the United States and internationally;

(xxvi) our ability to attract, train and retain a skilled workforce to meet replacement or expansion needs;

(xxvii) future economic or capital market conditions;

(xxviii) the availability and costs of credit, surety bonds and letters of credit that we require;

(xxix) foreign currency fluctuations;

(xxx) the successful completion of acquisition, disposition, or financing transactions and the effect thereof on our business; and

(xxxi) the successful implementation of our strategic plans and objectives for future operations and expansion or consolidation.

We include these cautionary statements in this report to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as well as the “bespeaks caution” doctrine.  Any forward-looking statements should be considered in context with the various disclosures made by us about our company in our public filings with the SEC, including, without limitation, the Risk Factors more specifically described on our annual report on Form 10-K for the year ended December 31, 2009, as amended.  The forward-looking statements speak only as of the date hereof, and we expressly disclaim any obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing unless required by securities law, and we caution the reader not to rely on them unduly.
 

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General

Kentucky Energy Inc. (f/k/a Quest Minerals & Mining Corp.)  acquires and operates energy and mineral related properties in the southeastern part of the United States.  We focus our efforts on operating properties that produce quality compliance blend coal, generating revenues and cash flow through the mining, processing, and selling of the coal located on these properties.

We are 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.

In 2009, the United States Bankruptcy Court for the Eastern District of Kentucky confirmed Gwenco’s Plan of Reorganization (the “Plan”) pursuant to Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Kentucky.  The Plan became effective on October 12, 2009.  A description of the Plan and a copy of the Plan are set forth in our Current Report on Form 8-K dated October 2, 2009.

Fiscal 2010 Developments

Operations Overview.  In the first half of 2010, we continued to conduct mining operations.  We generated coal revenues of $1.45 million for the first half of 2010, compared to $0.33 million for the first half  of 2009.  Other than with respect to the West Virginia explosion discussed below, we did not have to shut down our operations during the first half of 2010.  However, we did encounter temporary delays and stoppages, due to either breakdowns in equipment, a lack of necessary supplies, weather-related production issues, or regulatory inspections.  We continue to encounter thicker coal seams as we advance further into the mine.

While certain general business conditions continue to improve, the continued effects of the recent recession, credit crisis, and related turmoil in the global financial system has had and may continue to have a negative impact on our business, financial condition, and liquidity.  We may face significant future challenges if conditions in the financial markets do not continue to improve.  Worldwide demand for coal has been adversely impacted by the global recession, but the steel industry and the global metallurgical coal markets have shown signs of improvement.   If this trend continues, coal demand should increase and improve our opportunities to sell our coal products at higher prices.  

West Virginia Explosion.  On April 5, 2010, an explosion occurred at the Upper Big Branch mine in Montcoal, West Virginia, operated by Performance Coal Company, a subsidiary of Massey Energy.  According to news reports, the explosion resulted in 29 fatalities.  We are deeply saddened by the loss of these members of the industry.  In response to this tragedy, the Federal Mine Safety and Health Administration (“MSHA”) conducted inspections of most mines in the region, including Pond Creek.  As a result of these inspections, MSHA issued an order to Gwenco to take certain precautionary measures, including upgrades to its ventilation system, CO system, and airlock system.  In addition, MSHA conducted simulated evacuations and conducted underground training seminars.  Gwenco ceased mining operations during this period in order to allow the inspections, implement the precautionary measures, and conduct the simulations and training.  Gwenco reopened the mining operations approximately two weeks after the inspections commenced.   We are unable to ascertain or estimate at this time what additional effect the explosion will have on our current or future operations, or whether our operations will become subject to additional regulation.

Name Change.  On June 10, 2010, we filed an amendment to our Articles of Incorporation to change corporate name from Quest Minerals & Mining Corp. to “Kentucky Energy, Inc.  The change in corporate name took effect on June 16, 2010.

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Drilling Contract.   On July 21, 2010, we entered into an agreement with an unrelated third party to obtain up to 100 drill sites and a 100% working interest of the oil and gas rights on approximately 3,000 acres of property located in Rockcastle County, Kentucky for $50,000. In addition, the unrelated third party is to drill a well for additional consideration of $125,000 if paid by November 5, 2010. This well will be used to test thoroughly the main oil and gas horizons.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our 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, we evaluate our estimates, including, but not limited to, those related to revenue recognition.  We use authoritative pronouncements, historical experience, and other assumptions as the basis for making judgments.  Actual results could differ from those estimates.  We believe 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 we mine 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.

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Revenue Recognition

Coal sales revenues are sales to customers of coal produced at our operations.  We recognize revenue from coal sales at the time title passes to the customer.  Under the typical terms of sale, title and risk of loss transfer to the customer at the mine (or dock, or port) where coal is loaded to the truck (or rail, barge, ocean-going vessel, or other transportation source) that serves our mines.

Income Taxes

We provide 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 June 30, 2010, we had no material current tax liability, deferred tax assets, or liabilities to impact on its financial position because the deferred tax asset related to our net operating loss carry forward was fully offset by a valuation allowance.  However, we have not filed our corporate income tax returns since 2002.

Fair Value

Our financial instruments, as defined by FASB ASC Topic 825-10-50, “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 June 30, 2010.

Earnings loss per share

We adopted FASB ASC Topic 260, “Earnings per Share”, 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; however, the potential dilution becomes anti-dilutive in the case of a loss and, therefore, basic and fully diluted loss per share are the same.

Stock Split

All references to common stock and per share date have been retroactively restated to account for the 1 for 100 reverse stock split effectuated on August 4, 2009.

All references to common stock and per share date have been retroactively restated to account for the 1 for 20 reverse stock split effectuated on June 16, 2010.

Other Recent Accounting Pronouncements

We do not expect that the adoption of other recent pronouncements from the Public Company Oversight Board to have any impact on its financial statements.

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Results of Operations

Basis of Presentation

The following table sets forth, for the periods indicated, certain unaudited selected financial data:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Net sales	$	774,846		$	—		$	1,458,351		$	330,314
Production costs		(854,879	)		(56,038	)		(1,829,179	)		(688,768	)
Selling, general and administrative		474,702			381,662			708,203			720,021
Depreciation and amortization		44,154			37,321			88,069			77,940
Operating income (loss)	$	(598,889	)	$	(475,021	)	$	(1,167,100	)	$	(1,156,415	)

Comparison of the three months ended June 30, 2010 and 2009

Coal Revenues.  Our coal revenues were $774,846 for the three months ended June 30, 2010, as compared to $0 for the three months ended June 30, 2009.  Our increase in revenues was due to our increased level of mining operations in the second quarter of 2010 versus 2009.  This increase resulted from our ability to mine on a more consistent basis as compared to the prior period.  We added and upgraded equipment which allowed us to be in production more consistently.  In addition, as we advanced further into the mine, the coal seam thickened, which resulted in improved rates of recovery and a higher percentage of coal per gross ton extracted.  Finally, the completion of the Gwenco bankruptcy allowed us to access additional working capital that allowed us to obtain necessary labor and supplies for production.

Production costs.  Production costs were $854,879 for the three months ended June 30, 2010 as compared to $56,038 for the three months ended June 30, 2009, an increase over 1425%.  As a percentage of sales, our productions cost were approximately 110% for the three months ended June 30, 2010.  In order to increase our mining production, we needed to contract for additional labor, purchase additional supplies, and conduct additional repairs, all of which led to an increase in production costs.  Furthermore, we incurred increased shipping charges, as the shipping distance to our new customers was further than our prior customers.  In addition, we incurred increased royalty expense as we increased mining production and sales.  As a percentage of net sales, our production costs decreased, as our additional cost expenditures resulted in more efficient and productive mining operations.

Selling, general, and administrative.  Selling, general, and administrative expenses increased to $474,702 for the three months ended June 30, 2010, from $381,662 for the three months ended June 30, 2009, an increase of approximately 33%.   The increase resulted from increases in compensation costs, equipment lease payments  and professional fees.

Depreciation and amortization.  Depreciation expense increased to $44,154 for the three months ended June 30, 2010, from $37,321 for the three months ended June 30, 2009.  The increase results from our putting additional equipment into service in 2009.

Operating loss.  We incurred an operating loss of $598,889 for the three months ended June 30, 2010, compared to an operating loss of $475,021 for the three months ended June 30, 2009.   We had higher operating losses in the three months ended June 30, 2010 as compared to the comparable period of 2009 primarily from the production costs associated with producing our coal revenues as well as an increase in selling, general, and administrative expenses.

Loss on debt settlements.  We recorded $5,841 in gain on debt settlements in the three months ended June 30, 2010, as opposed to a loss of $35,282 on loan settlements from the prior comparable period.  The gain on debt settlement in the three months ended June 30, 2010 resulted from the payment of accrued royalties and corresponding reduction of a note payable.

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Interest.  Interest expense increased to $417,752 for the three months ended June 30, 2010 from $152,655 for the three months ended June 30, 2009.  Our interest expense results from various outstanding debt obligations, including obligations that we assumed in connection with the acquisition of Gwenco and various notes issued in various financings since October 2004.  In addition, it includes expense associated with the issuance of securities with beneficial conversion features.  The increase results primarily from interest computed in accruing present values of the principal amounts and future interest requirements of our restructured debt obligations pursuant to Gwenco’s plan of reorganization.  It also results from additional borrowings which occurred in 2009.

Comparison of the six months ended June 30, 2010 and 2009

Coal Revenues.  Our coal revenues were $1,458,351 for the six months ended June 30, 2010, as compared to $330,314 for the six months ended June 30, 2009, an increase of approximately 341%.  Our increase in revenues was due to our increased level of mining operations in the first six months of 2010 versus 2009.  This increase resulted from our ability to mine on a more consistent basis as compared to the prior period.  We added and upgraded equipment which allowed us to be in production more consistently.  In addition, as we advanced further into the mine, the coal seam thickened, which resulted in improved rates of recovery and a higher percentage of coal per gross ton extracted.  Finally, the completion of the Gwenco bankruptcy allowed us to access additional working capital that allowed us to obtain necessary labor and supplies for production.

Production costs.  Production costs were $1,829,179 for the six months ended June 30, 2010 as compared to $688,768 for the six months ended June 30, 2009, an increase of approximately 165%.  As a percentage of sales, our productions cost decreased to 125% in the six months ended June 30, 2010 from 208% for the comparable period in 2009.  In order to increase our mining production, we needed to contract for additional labor, purchase additional supplies, and conduct additional repairs, all of which led to an increase in production costs.  Furthermore, we incurred increased shipping charges, as the shipping distance to our new customers was further than our prior customers.  In addition, we incurred increased royalty expense as we increased mining production and sales.  As a percentage of net sales, our production costs decreased, as our additional cost expenditures resulted in more efficient and productive mining operations.

Selling, general, and administrative.  Selling, general, and administrative expenses decreased to $708,203 for the six months ended June 30, 2010, from $720,021 for the six months ended June 30, 2009.

Depreciation and amortization.  Depreciation expense increased to $88,069 for the six months ended June 30, 2010, from $77,940 for the six months ended June 30, 2009.  The increase results from our putting additional equipment into service in 2009.

Operating loss.  We incurred an operating loss of $1,167,100 for the six months ended June 30, 2010, compared to an operating loss of $1,156,415 for the six months ended June 30, 2009.   We had lower operating losses in the first quarter of 2010 as compared to the comparable period of 2009 primarily from increase in coal revenues as well as a decrease in selling, general, and administrative expenses which was offset by increased production costs related to our coal production.

Loss on debt settlements.  We recorded $16,026 in gain on debt settlements in the six months ended June 30, 2010, as opposed to a loss of $921 on loan settlements from the prior comparable period.  The gain on debt settlement in the first six months of 2010 resulted from the payment of accrued royalties and corresponding reduction of a note payable.

Interest.  Interest expense increased to $997,921 for the six months ended June 30, 2010 from $293,549 for the six months ended June 30, 2009.  Our interest expense results from various outstanding debt obligations, including obligations that we assumed in connection with the acquisition of Gwenco and various notes issued in various financings since October 2004.  In addition, it includes expense associated with the issuance of securities with beneficial conversion features.  The increase results primarily from interest computed in accruing present values of the principal amounts and future interest requirements of our restructured debt obligations pursuant to Gwenco’s plan of reorganization.  It also results from additional borrowings which occurred in 2009.

Liquidity and Capital Resources

We have financed its operations, acquisitions, debt service, and capital requirements through cash flows generated from operations and through issuance of debt and equity securities.  Our working capital deficit at June 30, 2010 was $5,126,814.  We had cash of $7,587 as of June 30, 2010.

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We used $420,560 of net cash in operating activities for the six months ended June 30, 2010, compared to using $516,639 in the six months ended June 30, 2009.  Cash used in operating activities for the six months ended June 30, 2010 was due to our net loss of $2,148,995.  This was offset by non-cash expenses of $88,069 in depreciation and amortization, $10,968 of stock issued for interest, $215,310 of stock issued for services, $100,000 of stock option compensation, $659,142 of amortized discount on convertible notes, $2,606 of amortized royalty costs, a decrease of $20,870 in receivables, a decrease of $5,202 in prepaid expenses and an increase of accounts payable and accrued expenses of $626,268.

Net cash flows used in investing activities was $493 for the six months ended June 30, 2010, as compared to $6,461 of net cash flows used in investing activities for the comparable period in 2009.  The net cash flows used in investing activities in the six months ended June 30, 2010 resulted from $493 in security deposits.

Net cash flows provided by financing activities were $421,386 for the six months ended June 30, 2010, compared to net cash flows provided by financing activities of $509,698 for the six months ended June 30, 2009.  This decrease in net cash provided by financing activities is due to our borrowings of $1,552,783 under our Exit Facility in the Gwenco reorganization and other borrowings, offset by repayment of $1,131,397 under our Exit Facility.

Exit Facility

Under Gwenco’s Plan of Reorganization, the Court approved an exit facility under which Interstellar Holdings, LLC will provide up to $2 million in financing to Gwenco.  The exit facility consists of a 12% secured convertible line of credit note due March 2015.  The note is convertible into our common stock at a rate of the lower of (i) $0.001 per share and (ii) 40% of the average of the three lowest per shares market values of our common stock during the 10 trading days before a conversion; provided that the holder is prohibited from converting if such conversion would result in it holding more than 4.99% of our outstanding common stock.  The obligations under the exit facility are secured and guaranteed by us and our subsidiaries.  As of June 30, 2010, the outstanding balance on the exit facility was approximately $2.49 million.    On June 14, 2010, Interstellar sent us notice of an alleged default under the exit facility.  We denied that any such default occurred or is continuing.  See Part II, Item 5 of this report for additional details.

Pursuant to the exit facility, Interstellar required Gwenco to assign all of its accounts receivable to Interstellar and have all payments on the receivables paid into an escrow account.  Interstellar had been making advances under the facility to Gwenco against the accounts receivable, and the advances were being repaid as payments are made to the escrow account.  In connection therewith, the Company issued a convertible promissory note to a third party investor for facilitation of the escrow arrangement.  The note is due September 16, 2011 and bears interest at an annual interest rate of eight percent (8%).  The note is convertible into shares of the Company’s common stock at a conversion price of forty five percent (45%) of the average of the five (5) lowest per share market value during the ten (10) trading days immediately preceding a conversion date.  In addition, the third-party investors who facilitated the escrow arrangement received a commission of 2.5% of each advance made.  Gwenco, Interstellar, and the third-party investors terminated this escrow arrangement in March 2010.

Capital Requirements

The report of our independent accountants for the fiscal year ended December 31, 2009 states that we have incurred operating losses since inception and require additional capital to continue operations, and that these conditions raise substantial doubt about our ability to continue as a going concern.  We believe that, as of the date of this report, in order to fund our plan of operations over the next 12 months, we will need to fund our operations and capital requirements out of cash flows generated from operations and from borrowings and/or the sale of additional debt, equity, or convertible securities.  We have obtained exit facility financing through the Gwenco bankruptcy proceedings to fund the capital requirements of Gwenco; however, the borrowings under this financing may not be sufficient to address all of our capital requirements for the next 12 months, as we have exceeded the maximum capacity under the line.  We may also seek to dispose of some or all of our assets or operations.  It is possible that we will be unable to obtain sufficient additional capital through the sale of our securities as needed.

Part of our growth strategy is to acquire additional coal mining operations.  Where appropriate, we will seek to acquire operations located in markets where we currently operate to increase utilization at existing facilities, thereby improving operating efficiencies and more effectively using capital without a proportionate increase in administrative costs. We do not currently have binding agreements or understandings to acquire any other companies.

 

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We intend to retain any future earnings to pay our debts, finance the expansion of our business and any necessary capital expenditures, and for general corporate purposes.

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 Quarterly 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 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 in the past and, if not remediated, has the potential to cause a material misstatement in the future.

2.            Due to the previously reported material weaknesses, as evidenced by previous restatements, as well as lack of formal documentation of systems and procedures, and lack of consistent application of record keeping procedures, 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.  These conditions constitute deficiencies in both the design and operation of entity-level controls.  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.

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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, recording of transactions, closing procedures, the preparation of financial statements, 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. We have appointed an independent director as a form of internal checks and balances and to provide oversight over management. In addition, we are also seeking to improve our internal control over financial reporting 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.

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PART II:  OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Material developments in legal proceedings affecting us are described in Part I, Item 3 – Legal Proceedings, of our Annual Report on Form 10-K for the year ended December 31, 2009, as they relate to the fiscal quarter ended June 30, 2010, are set forth in Note 7, “Commitments and Contingencies,” of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q and are incorporated herein by reference.

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)

(1)           During the quarter ended June 30, 2010, we issued an aggregate of 35,653,846 shares of common stock upon conversions of various convertible notes. The aggregate principal and interest amount of these notes that were converted was $58,500.  The issuances were exempt pursuant to Section 3(a)(9) of the Securities Act as well as Section 4(2) of the Securities Act.  

(2)           During the quarter ended June 30, 2010, we issued an aggregate of 10,912,958 shares of common stock pursuant to Gwenco’s Plan of Reorganization in partial satisfaction of certain claims against Gwenco in the Gwenco Bankruptcy proceedings.  The aggregate amount of claims satisfied pursuant to these issuances was $56,600.  The issuances were exempt pursuant to Section 1145 of the Bankruptcy Code.

(3)           On July 16, 2010, we entered into an exchange agreement with a third party investor, pursuant to which the investor exchanged a $12,500 demand note (plus accrued interest) for a $13,862 8% convertible promissory note due July 16, 2012.  The note is convertible into shares of our common stock at a conversion price of 40% of the average of the three lowest per shares market values during the ten 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 our then issued and outstanding common shares of Quest.  The issuance was 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 – (REMOVED AND RESERVED)

None.

ITEM 5 – OTHER INFORMATION

1.           On June 14, 2010, Interstellar Holdings, LLC, our secured lender under the exit facility, delivered a notice of default relating to that certain Loan and Security Agreement dated March 8, 2010 by and among Gwenco, Inc., Interstellar Holdings, Inc., Kentucky Energy, Inc. (f/k/a Quest Minerals & Mining Corp). and Quest Minerals & Mining Ltd.  Under the notice, Interstellar alleged an Event of Default under the Loan Agreement occurred and was continuing pursuant to Section 8.21 thereunder as Interstellar allegedly deemed itself “insecure” under the Loan Agreement.  We denied Interstellar’s allegation of an Event of Default under the Loan Agreement and contend that no such Event of Default under the Loan Agreement has occurred or is continuing.   On June 17, 2010, Gwenco and Interstellar entered into an agreement pursuant to which, among other things, Interstellar agreed to forbear under the Loan Agreement for a period of 90 days.  We continue to contend that no default under the exit facility has occurred.

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2.           On July 21, 2010, we entered into an agreement with an unrelated third party to obtain up to 100 drill sites and a 100% working interest of the oil and gas rights on approximately 3,000 acres of property located in Rockcastle County, Kentucky for $50,000. In addition, the unrelated third party is to drill a well for additional consideration of $125,000 if paid by November 5, 2010. This well will be used to test thoroughly the main oil and gas horizons.

ITEM 6 - EXHIBITS

Item No.	Description	Method of Filing
4.1	Articles of Amendment	Incorporated by reference to our Current Report on Form 8-K filed on June 16, 2010.
4.2	8% Convertible Note	Filed herewith.
31.1	Certification of Eugene Chiaramonte, Jr. pursuant to Rule 13a-14(a)	Filed herewith.
32.1	Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002	Filed herewith.

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.

	KENTUCKY ENERGY, INC.
August 23, 2010	/s/ Eugene Chiaramonte, Jr.
	Eugene Chiaramonte, Jr.
	President
	(Principal Executive Officer and Principal Accounting Officer)

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EX-4.2

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, REGISTRATION UNDER SAID ACT.

CONVERTIBLE PROMISSORY NOTE

U.S. $13,862.50	July 16, 2010
Original Investment Date (determined pursuant to Rule 144(d)(3)(ii))	August 28, 2009

FOR VALUE RECEIVED, Kentucky Energy, Inc., a Utah corporation (the “Maker”), hereby promises to pay to Metacomet Company, LLC, or its successors and assigns (the “Payee”), at its address at 8515 Costa Verde Blvd., Suite 907, San Diego, California 92112, or to such other address as Payee shall provide in writing to the Maker for such purpose, a principal sum of Thirteen Thousand Eight Hundred Sixty Two and 50/100 Dollars (U.S. $13,862.50).  The aggregate principal amount outstanding under this Note will be conclusively evidenced by the schedule annexed as Exhibit B hereto (the “Loan Schedule”), up to a maximum principal document of U.S $13,812.52.  The entire principal amount hereunder shall be due and payable in full on July 16, 2012 (the “Maturity Date”), or on such earlier date as such principal amount may earlier become due and payable pursuant to the terms hereof.

1.           Interest Rate.  Interest shall accrue on the unpaid principal amount of this Convertible Promissory Note (the “Note”) at the rate of eight percent (8%) per annum from the date of the first making of the loan for such principal amount until such unpaid principal amount is paid in full or earlier converted into shares (the “Shares”) of the Maker’s common stock, $0.0001 par value (the “Common Stock”) in accordance with the terms hereof.  Interest hereunder shall be paid on the Maturity Date or on such earlier date as the principal amount under this Note becomes due and payable or is converted in accordance with the terms hereof and shall be computed on the basis of a 360-day year for the actual number of days elapsed.

2.           Conversion of Principal and Interest.  Subject to the terms and conditions hereof, the Payee, at its sole option, may deliver to the Maker a notice in the form attached hereto as Exhibit A (a “Conversion Notice”) and an updated Loan Schedule, at any time and from time to time after the date hereof and prior to the payment of the principal amount and all accrued interest thereon (the date of the delivery of a Conversion Notice (except as otherwise set forth in the last sentence of this paragraph, a “Conversion Date”), to convert all or any portion of the outstanding principal amount of this Note plus accrued and unpaid interest thereon, for a number of Shares equal to the quotient obtained by dividing the dollar amount of such outstanding principal amount of this Note plus the accrued and unpaid interest thereon being converted by the Conversion Price (as defined in Section 15).  Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note plus all accrued and unpaid interest thereunder in an amount equal to the applicable conversion, which shall be evidenced by entries set forth in the Conversion Notice and the Loan Schedule.

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3.           Certain Conversion Limitations.

(a)           The Payee may not convert an outstanding principal amount of this Note or accrued and unpaid interest thereon to the extent such conversion would result in the Payee, together with any affiliate thereof, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act (as defined in Section 15) and the rules promulgated thereunder) in excess of 4.999% of the then issued and outstanding shares of Common Stock.  Since the Payee will not be obligated to report to the Maker the number of shares of Common Stock it may hold at the time of a conversion hereunder, unless the conversion at issue would result in the issuance of Shares in excess of 4.999% of the then outstanding shares of Common Stock without regard to any other shares which may be beneficially owned by the Payee or an affiliate thereof, the Payee shall have the authority and obligation to determine whether and the extent to which the restriction contained in this Section will limit any particular conversion hereunder.  The provisions of this Section may be waived by Payee upon not less than 61 days’ prior notice to the Maker.

(b)           The Payee may not convert an outstanding principal amount of this Note or accrued and unpaid interest thereon to the extent such conversion would result in the Payee, together with any affiliate thereof, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock.  Since the Payee will not be obligated to report to the Maker the number of shares of Common Stock it may hold at the time of a conversion hereunder, unless the conversion at issue would result in the issuance of Shares in excess of 9.999% of the then outstanding shares of Common Stock without regard to any other shares which may be beneficially owned by the Payee or an affiliate thereof, the Payee shall have the authority and obligation to determine whether and the extent to which the restriction contained in this Section will limit any particular conversion hereunder.  The provisions of this Section may be waived by Payee upon not less than 61 days’ prior notice to the Maker.

(c)           The Payee may not convert an outstanding principal amount of this Note or accrued and unpaid interest thereon to the extent such conversion would require the Maker to issue shares of Common Stock in excess of the Maker’s then sufficient authorized and unissued shares of Common Stock.

4.           Deliveries.

(a)           Not later than three (3) Trading Days (as defined in Section 15) after any Conversion Date (the “Delivery Date”), the Maker will deliver to the Payee (i) a certificate or certificates representing the number of Shares being acquired upon the conversion of the principal amount of this Note and any interest accrued thereunder being converted pursuant to the Conversion Notice (subject to the limitations set forth in Section 3 hereof), and (ii) an endorsement by the Maker of the Loan Schedule acknowledging the remaining outstanding principal amount of this Note plus all accrued and unpaid interest thereon not converted (an “Endorsement”).  The Maker’s delivery to the Payee of stocks certificates in accordance clause (i) above shall be Maker’s conclusive endorsement of the remaining outstanding principal amount of this Note plus all accrued and unpaid interest thereon not converted as set forth in the Loan Schedule.

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(b)           If the Maker fails to deliver to the Payee such certificate or certificates pursuant to Section 4(a) by the third (3rd) Trading Day after the Conversion Date, the Maker shall pay to the Payee, in cash, as liquidated damages and not as a penalty, $500 for each Trading Day after such third (3rd) Trading Day until such certificates are delivered.  Nothing herein shall limit a Payee’s right to pursue actual damages or declare a Triggering Event (as defined in Section 7) pursuant to Section 7 herein for the Maker’s failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Payee shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree specific performance and/or injunctive relief.  The exercise of any such rights shall not prohibit the Payee from seeking to enforce damages pursuant to any other Section hereof or under applicable law.  Further, if the Maker shall not have delivered any cash due in respect of conversions of the principal amount of this Note and any interest accrued thereunder by the third (3rd) Trading Day after the Conversion Date, then in lieu of the receipt of such cash payment, the Payee may, by notice to the Maker, require the Maker to issue shares of Common Stock pursuant to Section 2, except that for such purpose the Conversion Price applicable thereto shall be the lesser of the Conversion Price on the Conversion Date and the Conversion Price on the date of the Payee demand.

(c)           If, by the relevant Delivery Date Maker fails for any reason to deliver the Shares to be issued upon conversion of this Note and after such Delivery Date, Payee  (a “Converting Payee”) purchases, in an arm’s-length open market transaction or otherwise, shares of Common Stock (the “Covering Shares”) in order to make delivery in satisfaction of a sale of Common Stock by the Converting Payee (the “Sold Shares”), which delivery such Converting Payee anticipated to make using the Shares to be issued upon such conversion (a “Buy-In”), the Converting Payee shall have the right, to require Maker to pay to the Converting Payee, in addition to and not in lieu of the amounts due under Section 4(b) hereof (but in addition to all other amounts contemplated in other provisions of the Transaction Agreements, and not in lieu of any such other amounts), the Buy-In Adjustment Amount (as defined below).  The “Buy-In Adjustment Amount” is the amount equal to the excess, if any, of (x) the Converting Payee’s total purchase price (including brokerage commissions, if any) for the Covering Shares over (y) the net proceeds  (after brokerage commissions, if any) received by the Converting Payee from the sale of the  Sold Shares.  The Company shall pay the Buy-In Adjustment Amount to the Company in immediately available funds immediately upon demand by the Converting Payee.  By way of illustration and not in limitation of the foregoing, if the Converting Payee purchases shares of Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount which Company will be required to pay to the Converting Payee will be $1,000.

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5.           Optional Redemption of Principal Amount.  Provided a Triggering Event or an event which with the passage of time or the giving of notice could become Triggering Event has not occurred, whether or not such Triggering Event has been cured, the Maker will have the option of prepaying the outstanding principal amount of this Note (“Optional Redemption”), in whole or in part, by paying to the Payee a sum of money equal to one hundred and fifty percent (150%) of the principal amount to be redeemed, together with accrued but unpaid interest thereon and any and all other sums due, accrued or payable to Payee arising under this Note through the Redemption Payment Date as defined below (the “Redemption Amount”).  Maker’s election to exercise its right to prepay must be by notice in writing (“Notice of Redemption”).  The Notice of Redemption shall specify the date for such Optional Redemption (the “Redemption Payment Date”), which date shall be twenty (20) days after the date of the Notice of Redemption (the “Redemption Period”).  A Notice of Redemption shall not be effective with respect to any portion of the principal amount for which the Payee has a pending election to convert; provided, however, that Payee may not initiate any additional conversions during the Redemption Period.  On the Redemption Payment Date, the Redemption Amount, less any portion of the Redemption Amount against which Payee has exercised its conversion rights prior to the Notice of Redemption, shall be paid in good funds to Payee. In the event Maker fails to pay the Redemption Amount on the Redemption Payment Date as set forth herein, then such Notice of Redemption will be null and void.

6.           Certain Adjustments.

(a)           In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Payee shall have the right thereafter to, at its option, (A) convert the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing under this Note only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of the Common Stock following such reclassification or share exchange, and the Payee shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock into which the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Note could have been converted immediately prior to such reclassification or share exchange would have been entitled or (B) require the Maker to prepay the aggregate of its outstanding principal amount under this Note, plus all interest accrued and other amounts due and payable thereon, at a price determined and payable in accordance with Section 7.  The entire prepayment price shall be paid in cash.  This provision shall similarly apply to successive reclassifications or share exchanges.

(b)           No adjustments in the Conversion Price shall be required if such adjustment is less than $0.0001, provided that any adjustments which by reason of this Section are not required to be made shall be carried forward and taken into account in any subsequent adjustment.  All calculations under this Section 7 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be.

(c)           Whenever the Conversion Price is adjusted pursuant to any of Section 6, the Maker shall promptly mail to the Payee a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiting such adjustment.

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(d)           If (A) the Maker shall declare a dividend (or any other distribution) on the Common Stock; (B) the Maker shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Maker shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Maker shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Maker is a party, any sale or transfer of all or substantially all of the assets of the Maker, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; (E) the Maker shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Maker; then, in each case, the Maker shall cause to be filed at each office or agency maintained for the purpose of conversion of the any portion of the principal amount and interest outstanding under this Note, and shall cause to be mailed to the Payee at its last address as it shall appear upon the stock books of the Maker, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice.

(e)           In case of any (1) merger or consolidation of the Maker with or into another Person that would constitute a Change of Control Transaction (as defined in Section 15), or (2) sale, directly or indirectly, by the Maker of more than one-half of the assets of the Maker (on an as valued basis) in one or a series of related transactions, or (3) tender or other offer or exchange (whether by the Maker or another Person) pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, stock, cash or property of the Maker or another Person: then the Payee shall have the right to (A) convert the then aggregate amount of principal and interest outstanding under this Note into the shares of stock and other securities, cash, and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and the Payee shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate amount of principal and interest outstanding under this Note could have been converted immediately prior to such merger, consolidation or sale would have been entitled, (B) in the case of a merger or consolidation, (x) require the surviving entity to issue shares of convertible convertible debt with aggregate principal amount equal to the then aggregate amount of principal outstanding under this Note, plus all accrued and unpaid interest and other amounts owing thereon, which convertible debt shall have terms identical (including with respect to conversion) to the terms of this Note and shall be entitled to all of the rights and privileges of the Payee as set forth herein and the agreements pursuant to which this Note was issued (including, without limitation, as such rights relate to the acquisition, transferability, registration and listing of such shares of stock other securities issuable upon conversion thereof), and (y) simultaneously with the issuance of such convertible debt, shall have the right to convert such debt only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation, or (C) in the event of an exchange or tender offer or other transaction contemplated by clause (3) of this Section, tender or exchange the then outstanding aggregate amount of principal and interest under this Note for such securities, stock, cash and other property receivable upon or deemed to be held by holders of Common Stock that have tendered or exchanged their shares of Common Stock following such tender or exchange, and the Payee shall be entitled upon such exchange or tender to receive such amount of securities, cash and property as the shares of Common Stock into which the then outstanding aggregate amount of principal and interest under this Note could have been converted (taking into account all then accrued and unpaid dividends) immediately prior to such tender or exchange.  The terms of any such merger, sale, consolidation, tender or exchange shall include such terms so as to continue to give the Payee the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event.  This provision shall similarly apply to successive such events.

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(f)           The Maker covenants that it will reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of the outstanding aggregate amount of principal and interest under this Note as herein provided, upon the conversion of the outstanding amount of principal and interest under this Note.  The Maker covenants that all shares of Common Stock that shall be issuable pursuant to the terms thereof shall be, upon issuance, duly authorized, validly issued and fully paid, and nonassessable.

(g)           Upon a conversion hereunder the Maker shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time.  If the Maker elects not, or is unable, to make such a cash payment, the Payee shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

(h)           The issuance of certificates for shares of the Common Stock on conversion of the principal amount and interest outstanding under this Note shall be made without charge to the Payee for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate.

7.           Mandatory Prepayment Upon Triggering Events. Upon the occurrence of a Triggering Event (as defined below), the Payee shall have the right (in addition to all other rights it may have hereunder under this Note or under applicable law), exercisable at the sole option of the Payee, to require the Maker to prepay all or a portion of the Redemption Amount.  Such prepayment shall be due and payable within thirty (30) Trading Days of the date on which the notice for the payment therefor is provided by the Payee.

A “Triggering Event” means any one or more of the following events (whatever the reason and whether it shall be voluntary or involuntary, or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule, or regulation of any administrative or governmental body):

(i)           any default in the payment of the principal of interest on or other payments owing in respect of this Note, free of any claim of subordination, as and when the same shall become due and payable (whether on a Conversion Date, the Maturity Date, by acceleration or otherwise);

(ii)           the Maker shall fail for any reason to deliver certificates or an Endorsement to the Payee prior to the tenth (10th) day after a Conversion Date pursuant to and in accordance with Section 4(a);

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(iii)           an SEC or judicial stop trade order or trading suspension by the OTC Bulletin Board, the Pink Sheets OTC Electronic Market, or a Subsequent Market with respect to the Common Stock that lasts for five or more consecutive Trading Days;

(iv)           if the registration of the Common Stock with the SEC under the Exchange Act is revoked; 

(v)           the Maker or any of its subsidiaries shall commence or there shall be commenced against the Maker or any such subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Maker commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Maker or any subsidiary thereof or there is commenced against the Maker or any subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Maker or any subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Maker or any subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Maker or any subsidiary thereof shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Maker or any subsidiary thereof for the purpose of effecting any of the foregoing; or

(vi)           the Maker shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of (ii) this Note or (ii) the Exchange Agreement, and such failure or breach shall not, if subject to the possibility of a cure by the Maker, have been remedied within thirty (30) days after the date on which notice of such failure or breach shall have been given.

8.           No Waiver of Payee’s Rights, etc.  All payments of principal and interest shall be made without setoff, deduction or counterclaim.  No delay or failure on the part of the Payee in exercising any of its options, powers or rights, nor any partial or single exercise of its options, powers or rights shall constitute a waiver thereof or of any other option, power or right, and no waiver on the part of the Payee of any of its options, powers or rights shall constitute a waiver of any other option, power or right.  The Maker hereby waives presentment of payment, protest, and notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note.  Acceptance by the Payee of less than the full amount due and payable hereunder shall in no way limit the right of the Payee to require full payment of all sums due and payable hereunder in accordance with the terms hereof.

9.           Modifications.  No term or provision contained herein may be modified, amended or waived except by written agreement or consent signed by the party to be bound thereby.

10.           Cumulative Rights and Remedies; Usury.  The rights and remedies of the Payee expressed herein are cumulative and not exclusive of any rights and remedies otherwise available. If it shall be found that any interest outstanding hereunder shall violate applicable laws governing usury, the applicable rate of interest outstanding hereunder shall be reduced to the maximum permitted rate of interest under such law.

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11.           Collection Expenses. If this obligation is placed in the hands of an attorney for collection after default, and provided the Payee prevails on the merits in respect to its claim of default, the Maker shall pay (and shall indemnify and hold harmless the Payee from and against), all reasonable attorneys’ fees and expenses incurred by the Payee in pursuing collection of this Note.

12.           Successors and Assigns. This Note shall be binding upon the Maker and its successors and shall inure to the benefit of the Payee and its successors and assigns.  The term “Payee” as used herein, shall also include any endorsee, assignee or other holder of this Note.

13.           Lost or Stolen Promissory Note.  If this Note is lost, stolen, mutilated or otherwise destroyed, the Maker shall execute and deliver to the Payee a new promissory note containing the same terms, and in the same form, as this Note.  In such event, the Maker may require the Payee to deliver to the Maker an affidavit of lost instrument and customary indemnity in respect thereof as a condition to the delivery of any such new promissory note.

14.           Governing Law.  This Note shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the State of New York, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.

15.           Definitions.  For the purposes hereof, the following terms shall have the following meanings:

“Business Day” means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York or State of Utah are authorized or required by law or other government action to close.

“Change of Control Transaction” means the occurrence of any of (i) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in excess of 33% of the voting securities of the Maker, (ii) a replacement of more than one-half of the members of the Maker’s board of directors which is not approved by those individuals who are members of the board of directors on the date hereof in one or a series of related transactions, (iii) the merger of the Maker with or into another entity, the direct or indirect consolidation or sale of all or substantially all of the assets of the Maker in one or a series of related transactions, unless following such transaction, the holders of the Maker’s securities continue to hold at least 66% of such securities following such transaction or (iv) the execution by the Maker of an agreement to which the Maker is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii).

“Conversion Price” shall be 40% of the average of the three (3) lowest Per Share Market Values during the ten (10) Trading Days immediately preceding a Conversion Date.

 

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“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Exchange Agreement” means that certain Exchange Agreement dated as of July 16, 2010 by and between Maker and Payee.

“Per Share Market Value” means on any particular date (a) the closing bid price per share of Common Stock on such date on the OTC Bulletin Board or on such Subsequent Market on which the shares of Common Stock are then listed or quoted, or if there is no such price on such date, then the closing bid price on the OTC Bulletin Board or on such Subsequent Market on the date nearest preceding such date, or (b) if the shares of Common Stock are not then listed or quoted on the OTC Bulletin Board or a Subsequent Market, the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the shares of Common Stock are not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the relevant conversion period, as determined in good faith by the Payee.

“Person” means a corporation, an association, a partnership, limited liability company, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency.

“Securities Act” means the Securities Act of 1933, as amended.

“Subsequent Market” means the New York Stock Exchange, American Stock Exchange, Nasdaq SmallCap Market or Nasdaq National Market.

“Trading Day” means (a) a day on which the shares of Common Stock are traded on such Subsequent Market on which the shares of Common Stock are then listed or quoted, or (b) if the shares of Common Stock are not listed on a Subsequent Market, a day on which the shares of Common Stock are traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the shares of Common Stock are not quoted on the OTC Bulletin Board, a day on which the shares of Common Stock are quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the shares of Common Stock are not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of California or State of Utah are authorized or required by law or other government action to close.

IN WITNESS WHEREOF, the Maker has caused this Convertible Promissory Note to be duly executed and delivered as of the date first set forth above.

-9-

KENTUCKY ENERGY, INC.

By:

Name:  Eugene Chiaramonte, Jr.

Title:  President

-10-

 

EXHIBIT A

NOTICE OF CONVERSION

Dated:

The undersigned hereby elects to convert the principal amount and interest indicated below of the attached Convertible Promissory Note into shares of common stock, $0.0001 par value (the “Common Stock”), of Kentucky Energy, Inc., according to the conditions hereof, as of the date written below.  No fee will be charged to the holder for any conversion.

Exchange calculations: ______________________________________________

Date to Effect Conversion: ___________________________________________

Principal Amount and Interest of

Convertible Note to be Converted: ____________________________________

Number of shares of Common Stock to be Issued: ________________________

Applicable Conversion Price:

Signature: __________________________________________

Name:_____________________________________________

Address: ___________________________________________

-Exhibit A-

EXHIBIT B

LOAN SCHEDULE

Convertible Promissory Note Issued by Kentucky Energy, Inc.

Dated: July 16, 2010

SCHEDULE

OF

CONVERSIONS AND PAYMENTS OF PRINCIPAL

Date of Conversion Amount of Conversion Total Amount Due Subsequent To Conversion

-Exhibit B-

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Eugene Chiaramonte, Jr., certify the following:

1.           I have reviewed this quarterly report on Form 10-Q of Kentucky Energy, Inc. (f/k/a Quest Minerals & Mining Corp.);

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this report;

4.           I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for registrant and I have done the following:

a.           designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.           designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.           evaluated the effectiveness of registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.           disclosed in this report any change in registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, registrant’s internal control over financial reporting; and

5.           I have disclosed, based on my most recent evaluation of internal control over financial reporting, to registrant’s auditors and the audit committee of registrant’s board of directors:

a.           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect registrant’s ability to record, process, summarize and report financial information; and

b.           Any fraud, whether or not material, that involves management or other employees who have a significant role in registrant’s internal control over financial reporting.

August 23, 2010	/s/ Eugene Chiaramonte, Jr.
	Eugene Chiaramonte, Jr.
	President
	(Principal Executive, Financial and
	Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Kentucky Energy, Inc. (f/k/a Quest Minerals & Mining Corp.), a Utah corporation, (the “Company”) on Form 10-Q for the period ending June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eugene Chiaramonte, Jr., Chief Executive Officer and Chief Financial Officer of the Company, certify the following pursuant to Section 18, U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:

1.           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.           The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Eugene Chiaramonte, Jr.

Eugene Chiaramonte, Jr.,

President

(Chief Executive Officer and

Chief Financial Officer)

August 23, 2010