10-K 1 v181178_10k.htm
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to _____________
 
Commission File Number 000-32131
 
QUEST MINERALS & MINING CORP.
(Name of small business issuer 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, including zip code)
 
Registrant’s telephone number, including area code:  (973) 684-0075
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.0001 par value
___________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: ¨ Yes No x
 
Indicate by check mark whether the registrant(1) has filed all reports required by Section 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 day. x Yes ¨ No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy ir information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
 
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 if 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
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Solely for purposes of the foregoing calculation, all of the registrant’s directors and officers are deemed to be affiliates:  $804,331.
 
As of April 6, 2010, 1,280,130,661 shares of our common stock were issued and outstanding.

Documents Incorporated by Reference:      None.

 

 

PART I
 
Quest Minerals & Mining Corp., including all its subsidiaries, are collectively referred to herein as “Quest Minerals,” “Quest,” “the Company,” “us,” or “we.”

Item 1.   DESCRIPTION OF BUSINESS
 
General

Quest Minerals & Mining Corp. acquires and operates energy and mineral related properties in the southeastern part of the United States.  Quest focuses its efforts on properties that produce quality compliance blend coal.

Quest is a holding company for Quest Minerals & Mining, Ltd., a Nevada corporation, or Quest (Nevada), which in turn is a holding company for Quest Energy, Ltd., a Kentucky corporation, or Quest Energy, and of Gwenco, Inc., a Kentucky corporation, or Gwenco.

Gwenco leases over 700 acres of coal mines, with approximately 12,999,000 tons of coal in place in six seams.  In 2004, Gwenco had reopened Gwenco’s two former drift mines at Pond Creek and Lower Cedar Grove, and had begun production at the Pond Creek seam.  This seam of high quality compliance coal is located at Slater’s Branch, South Williamson, Kentucky.

Fiscal 2009 and First Quarter 2010 Developments

Coal Production.  Due to economic conditions in the first quarter of 2009, domestic steel production dropped significantly, thereby reducing demand for Quest’s coal.  In order to conserve costs, Quest temporarily suspended operations in the second quarter of 2009.  Quest procured a new contract for the sale of coal to a new customer in the second quarter of 2009.  In addition, it received new coal orders from another coal distribution company and we re-started coal production in July 2009.  In July and August 2009, Quest encountered temporary delays and stoppages that are normally associated with resuming dormant mine operations.  In September, Quest was able to operate without any significant delays or stoppages, which allowed it to increase coal production.  As a result, from September 2009 through the end of the year, Quest generated approximately $1.17 million of its $1.61 million 2009 annual revenues.  Furthermore, as Quest has advanced further in the mine, it has been encountering thicker coal seams, which resulted in improved rates of recovery.

Gwenco, Inc. Chapter 11 Reorganization.  On March 2, 2007, Quest’s wholly owned subsidiary, Gwenco, Inc., filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Kentucky.  Management felt this was a necessary step to further the Company’s financial restructuring initiative and to protect Gwenco’s assets from claims, debts, judgments, foreclosures, and forfeitures of those creditors and stakeholders with whom both Quest and Gwenco were unable to negotiate restructured agreements.  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. 

There were 5 classes of Claims under the Plan:  (i)  Class 1—The Interstellar Duke claim, in the aggregate amount of $1,093,771; (ii) Class 2—Priority Claims, in aggregate amount of $391,558; (iii) Class 3—General Unsecured Claims, in the aggregate amount of $1,417,786; (iv) Class 4-Subordinated Claims, consisting of claims of affiliates of the debtor totaling $3,453,996; and (v) Class 5—Equity Holder Interest in the amount of $199,213.

 

 

The Class 1 Claim was satisfied by the issuance to Interstellar Holdings, LLC 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.  The company and Interstellar formally closed this transaction on March 8, 2010.

The Class 2 Claims were due and payable as of the effective date of the Plan.

The Class 3 Claims will be satisfied by cash payments equal to the value of their claim on the earlier of (i) the 60th month after the effective date of the Plan or (ii) the date on which, in Gwenco’s sole discretion, proceeds from the exit facility are sufficient to satisfy the claims.  Further, Class 3 Claimholders shall receive their pro-rata share of royalty payments to reduce their claims beginning in the month following the Effective Date.  Notwithstanding the foregoing, certain creditors in this Class negotiated settlements as more specifically set forth in the Plan.

The Class 4 Claims will be paid after holders of all allowed claims in other classes have been paid in full.  The Class 5 Claims were deemed unimpaired.

Gwenco, as a reorganized debtor, operates its coal mining business and will use current and future income from operations to meet current and future expenses and to make payments called for under the Plan.  In addition, 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 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.  On March 8, 2010, Gwenco and Interstellar formally closed this transaction by, among other things, entering into a Loan and Security Agreement and related transaction documents.  The obligations under the exit facility are secured and guaranteed by the Company and Quest (Nevada).

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.

This description of the Plan does not purport to be complete and is qualified in its entirety by reference to such Plan, a copy of which was filed as an exhibit to Quest’s Current Report on Form 8-K dated October 2, 2009.
 
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 25 fatalities as of the date of this report.  Quest is deeply saddened by the loss of these members of the industry.  Following an event of this nature there is always a period of uncertainty.  Quest is unable to ascertain or estimate at this time what effect the explosion will have on its current or future operations, or whether its operations will become subject to additional regulation.

Industry Overview
 
Coal accounted for 24% of the energy consumed (excluding certain alternative fuels including wind, geothermal and solar power generators) by the United States and 29% of energy consumed globally in 2007, according to the BP Statistical Review of World Energy (“BP”).  In 2007, coal was the fuel source of 49% of the electricity generated nationwide, as reported by the Energy Information Administration (“EIA”), a statistical agency of the United States Department of Energy.

 
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According to BP, in 2007, the United States was the second largest coal producer in the world, exceeded only by China. Other leading coal producers include Australia, India, South Africa, the Russian Federation and Indonesia. According to BP, the United States has the largest coal reserves in the world, with proved reserves totaling 243 billion tons. The Russian Federation ranks second in proved coal reserves with 157 billion tons, followed by China with 115 billion tons, according to BP.
 
United States coal reserves are more plentiful than oil or natural gas with 234 years of supply at current production rates.  Proved United States reserves of oil amount to 12 years of supply at current production rates and proved United States reserves of natural gas amount to 11 years of supply at current levels of consumption, as reported by BP.

United States coal production has more than doubled over the last 40 years.  In 2008, total United States coal production, as estimated by the EIA, was 1.2 billion tons.

Coal is used in the United States by utilities to generate electricity, by steel companies to make steel products, and by a variety of industrial users to produce heat and to power foundries, cement plants, paper mills, chemical plants and other manufacturing and processing facilities.  Significant quantities of coal are also exported from both East and Gulf Coast terminals.  The breakdown of United States coal consumption for the first ten months of 2008 as estimated by the EIA, is as follows:

End Use
 
% of Total
 
Electric Power
    93 %
Other Industrial
    5 %
Coke
    2 %
Residential and Commercial
 
<1
         
Total
    100 %
 
Coal has long been favored as an electricity generating fuel because of its basic economic advantage.  The largest cost component in electricity generation is fuel.  This fuel cost is typically lower for coal than competing fuels such as oil and natural gas on a Btu-comparable basis.  The EIA estimates the average cost of various fossil fuels for generating electricity in the first 11 months of 2008 was as follows:

Electricity Generation Source
 
Average Cost per
million BTU
 
Petroleum Liquids
  $ 16.56  
Natural Gas
  $ 9.34  
Coal
  $ 2.06  
Petroleum Coke 
  $ 1.85  

There are factors other than fuel cost that influence each utility’s choice of electricity generation mode, including facility construction cost, access to fuel transportation infrastructure, environmental restrictions, and other factors.  The breakdown of United States electricity generation by fuel source in 2007, as estimated by EIA, is as follows:

Electricity Generation Source
 
% of Total
Electricity Generation
 
Coal
    49 %
Natural Gas
    21 %
Nuclear
    19 %
Hydroelectric
    6 %
Oil and other (solar, wind, etc.)
    5 %
         
Total
    100 %
 
 
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Demand for electricity has historically been driven by United States economic growth but it can fluctuate from year to year depending on weather patterns.  In 2008, electricity consumption in the United States decreased 0.4% from 2007, but the average growth rate in the past decade was approximately 1.3% per year according to EIA estimates.  Because coal-fired generation is used in most cases to meet base load requirements, coal consumption has generally grown at the pace of electricity demand growth.
 
According to the World Coal Institute (“WCI”), in 2007 the United States ranked seventh among worldwide exporters of coal.  Australia was the largest exporter, with other major exporters including Indonesia, the Russian Federation, Columbia, South Africa and China.  According to EVA, United States exports increased by 37% from 2007 to 2008.  The usage breakdown for 2008 United States coal exports of 80 million tons was 47% for electricity generation and 53% for steel production.  In 2008, United States coal exports were shipped to more than 30 countries.  The largest purchaser of United States exported utility coal in 2008 continued to be Canada, which took 19.1 million tons or 50% of total utility coal exports.  This was up 31% compared to the 14.6 million tons exported to Canada in 2007.  Overall steam coal exports increased 43% in 2008 compared to 2007.  The largest purchasers of United States exported metallurgical coal were Brazil, which imported approximately 5.9 million tons, or 14%, and Canada, which imported 3.7 million tons, or 9%.  In total, metallurgical coal exports increased 31% in 2008 compared to 2007.

Depending on the relative strength of the United States dollar versus currencies in other coal producing regions of the world, United States producers may export more or less coal into foreign countries as they compete on price with other foreign coal producing sources.  Likewise, the domestic coal market may be impacted due to the relative strength of the United States dollar to other currencies, as foreign sources could be cost-advantaged based on a coal producing region’s relative currency position.
 
Since 2003, the global marketplace for coal has experienced swings in the demand/supply balance.  In periods of supply shortfall, as occurred from 2003 to early 2006 and again in late 2007 through late 2008, the prices for coal reached record highs in the United States.  The increased worldwide demand was primarily driven by higher prices for oil and natural gas and economic expansion, particularly in China, India, and elsewhere in Asia.  At the same time, infrastructure and regulatory limitations in China contributed to a tightening of worldwide coal supply, affecting global prices of coal.  The growth in China and India caused an increase in worldwide demand for raw materials and a disruption of expected coal exports from China to Japan, Korea and other countries.  Since mid-2008, the United States and world economies have been in an economic recession and financial credit crisis, significantly reducing the demand for coal.
 
Metallurgical grade coal is distinguished by special quality characteristics that include high carbon content, volatile matter, low expansion pressure, low sulfur content, and various other chemical attributes.  High vol met coal is also high in heat content (as measured in Btus), and therefore is desirable to utilities as fuel for electricity generation.  Consequently, high vol met coal producers have the ongoing opportunity to select the market that provides maximum revenue and profitability.  The premium price offered by steel makers for the metallurgical quality attributes is typically higher than the price offered by utility coal buyers that value only the heat content.  The primary concentration of United States metallurgical coal reserves is located in the Central Appalachian region.  EVA estimates that the Central Appalachian region supplied 89% of domestic metallurgical coal and 76% of United States exported metallurgical coal during 2007.

For utility coal buyers, the primary goal is to maximize heat content, with other specifications like ash content, sulfur content, and size varying considerably among different customers.  Low sulfur coals, such as those produced in the western United States and in Central Appalachia, generally demand a higher price due to restrictions on sulfur emissions imposed by the Federal Clean Air Act, as amended, and implementing regulations (“Clean Air Act”) and the volatility in sulfur dioxide (“SO2”) allowance prices that occurred in recent years when the demand for all specifications of coal increased.  SO2 allowances permit utilities to emit a higher level of SO2 than otherwise required under the Clean Air Act regulations.  The demand and premium price for low sulfur coal is expected to diminish as more utilities install scrubbers at their coal-fired plants.

Coal shipped for North American consumption is typically sold at the mine loading facility with transportation costs being borne by the purchaser.  Offshore export shipments are normally sold at the ship-loading terminal, with the purchaser paying the ocean freight.  According to the National Mining Association (“NMA”), approximately two-thirds of United States coal shipments in recent years were transported via railroads.  Final delivery to consumers often involves more than one transportation mode.  A significant portion of United States production is delivered to customers via barges on the inland waterway system and ships loaded at Great Lakes ports.

 
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Gwenco Mines

Gwenco holds approximately 30 coal leases, covering an estimated 700 acres, with a projected 12,999,000 tons of coal in place in six seams with possible additional reserves on adjacent leases.  The primary reserves are in the Pond Creek, Lower Cedar Grove, and Taylor seams. Both the Pond Creek and Lower Cedars Grove seams are permitted and bonded and have been mined to a limited extent.  The coal in the Pond Creek seam is low-sulfur, compliance coal, running at an average of 12,000 to 12,500 BTUs when mined clean.  The coal in the Lower Cedar Grove seam has a shale parting and must be washed to be commercial.  When cleaned it is a high BTU coal with certain metallurgical coal qualities.

Mining Techniques

There are several basis techniques for mining drift or adit mines.  Quest has used, and intends to use, a continuous miner on the Pond Creek seam at its Gwenco facility.  Quest has used, and intends to use, a Joy 14-9 continuous miner at the Gwenco mines.  In this technique, the miner has a cutting head that tears the coal from it natural deposit and transfers the coal to a gather head and then to shuttle cars that can carry from 3 to 10 tons depending on the size.  This method can create higher volume mining than the conventional method, but may mine the coal with a higher content of ash.

Expansion Strategy

Quest seeks to acquire new mines and contracting to produce and market additional coal in its geographic focus area.  Quest intends to acquire and operate high quality coal properties with established field personnel, primarily in the eastern Kentucky coalfields, with additional properties in southwestern West Virginia and western Virginia.  This region has an excellent infrastructure of workers, truckers, rail sidings on the CSX and N&W rail lines and low cost access to the Big Sandy barge docks near Ashland, KY, for effective coal distribution.  Quest intends to use its local knowledge to pursue high returns on investment from re-opening profitable properties in this region.  It intends to grow by additional accretive acquisitions, contract mining, and internal development of owned properties.

Quest is also seeking to diversify its operations into other sectors of the energy industry, including the oil and gas sector.  Quest’s coal miners collectively have over 50 years of mining experience.  Quest may also engage key industry experts to assist in the analysis and funding of these properties.  Quest management believes that a successful diversification into the oil and gas field would provide Quest with an opportunity to improve its results of operations while hedging on coal production and prices.

Customers

Quest currently has two primary customers, which routinely purchase all the coal Quest can produce at spot market rates.  To the extent that Quest is able to produce coal beyond the demands of these two customers, it intends to sell its remaining coal to other purchasers or on the spot market to coal brokers.  Quest may seek to enter into long-term contracts (exceeding one year in duration) with customers if economic circumstances indicate that such arrangements would maximize profitability.  These arrangements would allow customers to secure a supply for their future needs and provide Quest with greater predictability of sales volume and sales prices.

Competition

The coal industry in the United States is highly competitive.  Quest competes with many large producers and other small coal producers.  Quest also competes with other producers primarily on the basis of price, coal quality, transportation cost and reliability of supply.  Many of Quest’s competitors are more viable, are better capitalized, and have greater financial resources than Quest.  Continued demand for coal is also dependent on factors outside of Quest’s control, including demand for electricity, environmental and governmental regulations, weather, technological developments, and the availability and cost of alternative fuel sources.

 
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The price at which Quest’s production can be sold is dependent upon a variety of factors, many of which are beyond Quest’s control.  Quest sells coal on the spot-market and seeks to sell coal under long-term contracts.  Generally, the relative competitiveness of coal vis-a-vis other fuels or other coals is evaluated on a delivered cost per heating value unit basis.  In addition to competition from other fuels, coal quality, the marginal cost of producing coal in various regions of the country and transportation costs are major determinants of the price for which Quest’s production can be sold.  Factors that directly influence production cost include geological characteristics (including seam thickness), overburden ratios, depth of underground reserves, transportation costs and labor availability and cost.  Underground mining has higher labor (including reserves for future costs associated with labor benefits and health care) and capital (including modern mining equipment and construction of extensive ventilation systems) costs than those of surface mining.  In recent years, increased development of large surface mining operations, particularly in the western United States, and more efficient mining equipment and techniques, have contributed to excess coal production capacity in the United States.  Competition resulting from excess capacity has encouraged producers to reduce prices and to pass productivity gains through to customers.  Demand for Quest’s low sulfur coal and the prices that Quest will be able to obtain for it will also be affected by the price and availability of high sulfur coal, which can be marketed in tandem with emissions allowances.

Transportation costs are another fundamental factor affecting coal industry competition.  Coordination of the many eastern loadouts, the large number of small shipments, terrain and labor issues all combine to make shipments originating in the eastern United States inherently more expensive on a per-mile basis than shipments originating in the western United States.  Historically, coal transportation rates from the western coal producing areas into Central Appalachian markets limited the use of western coal in those markets.  More recently, however, lower rail rates from the western coal producing areas to markets served by eastern producers have created major competitive challenges for eastern producers.  Barge transportation is the lowest cost method of transporting coal long distances in the eastern United States, and the large numbers of eastern producers with river access keep coal prices competitive.  Quest believes that many utilities with plants located on the Ohio River system are well positioned for deregulation as competition for river shipments should remain high for Central Appalachian coal.  Quest also believes that with close proximity to competitively-priced Central Appalachian coal, utilities with plants located on the Ohio River system will become price setters in a deregulated environment.

Although undergoing significant consolidation, the coal industry in the United States remains highly fragmented.  It is possible that Quest’s costs will not permit it to compete effectively with other producers seeking to provide coal to a customer; however, it is Quest’s goal to maintain low production costs, offer a variety of products and have develop access to multiple transportation systems that will enable it to compete effectively with other producers.

Environmental, Safety and Health Laws and Regulations
 
The coal mining industry is subject to regulation by federal, state and local authorities on matters such as the discharge of materials into the environment, employee health and safety, permitting and other licensing requirements, reclamation and restoration of mining properties after mining is completed, management of materials generated by mining operations, surface subsidence from underground mining, water pollution, water appropriation, and legislatively mandated benefits for current and retired coal miners, air quality standards, protection of wetlands, endangered plant and wildlife protection, limitations on land use, and storage of petroleum products and substances that are regarded as hazardous under applicable laws.  The possibility exists that new legislation or regulations may be adopted that could have a significant impact on our mining operations or on our customers’ ability to use coal.

Numerous governmental permits and approvals are required for mining operations.  Regulations provide that a mining permit or modification can be delayed, refused or revoked if an officer, director or a stockholder with a 10% or greater interest in the entity is affiliated with or is in a position to control another entity that has outstanding permit violations.  Thus, past or ongoing violations of federal and state mining laws by individuals or companies no longer affiliated with us could provide a basis to revoke existing permits and to deny the issuance of addition permits.  We are required to prepare and present to federal, state, or local authorities data and/or analysis pertaining to the effect or impact that any proposed exploration for or production of coal may have upon the environment, public and employee health and safety.  All requirements imposed by such authorities may be costly and time-consuming and may delay commencement or continuation of exploration or production operations.  Accordingly, the permits we need for our mining and gas operations may not be issued, or, if issued, may not be issued in a timely fashion.  Permits we need may involve requirements that may be changed or interpreted in a manner that restricts our ability to conduct our mining operations or to do so profitably.  Future legislation and administrative regulations may increasingly emphasize the protection of the environment, health and safety and, as a consequence, our activities may be more closely regulated.  Such legislation and regulations, as well as future interpretations of existing laws, may require substantial increases in equipment and operating costs, delays, interruptions or a termination of operations, the extent of which cannot be predicted.

 
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While it is not possible to quantify the expenditures we incur to maintain compliance with all applicable federal and state laws, those costs have been and are expected to continue to be significant.  We post surety performance bonds or letters of credit pursuant to federal and state mining laws and regulations for the estimated costs of reclamation and mine closing, often including the cost of treating mine water discharge when necessary.  Compliance with these laws has substantially increased the cost of coal mining for all domestic coal producers.  We endeavor to conduct our mining operations in compliance with all applicable federal, state, and local laws and regulations.  However, even with our substantial efforts to comply with extensive and comprehensive regulatory requirements, violations during mining operations occur from time to time.

Mine Safety and Health
 
Stringent health and safety standards have been in effect since Congress enacted the Federal Coal Mine Health and Safety Act of 1969.  The Federal Coal Mine Safety and Health Act of 1977 significantly expanded the enforcement of safety and health standards and imposed safety and health standards on all aspects of mining operations.  A further expansion occurred in June 2006 with the enactment of the Mine Improvement and New Emergency Response Act of 2006 (“MINER Act”).

The MINER Act and related Mine Safety and Health Administration (“MSHA”) regulatory action require, among other things, improved emergency response capability, increased availability of emergency breathable air, enhanced communication and tracking systems, more available mine rescue teams, increased mine seal strength and monitoring of sealed areas in underground mines, as well as larger penalties by MSHA for noncompliance by mine operators.  Coal producing states, including West Virginia and Kentucky, passed similar legislation.  The bituminous coal mining industry was actively engaged throughout 2008 and 2009 in activities to achieve compliance with these new requirements.  These compliance efforts will continue into 2010.

In 2008, MSHA published final rules implementing Section 4 of the MINER Act that addressed mine rescue, sealing of abandoned areas, refuge alternatives, fire prevention and detection, use of air from the belt entry and civil penalty assessments.  MSHA also provided guidance on wireless communication and electronic tracking systems and new requirements for the plugging of coal bed methane wells with horizontal branches in coal seams.  Two additional regulations were also published related to measures to achieve alcohol and drug free mines and the use of coal mine dust personal monitors.  In February 2009, the United States Court of Appeals for the District of Columbia Circuit held that the 2008 rules were not sufficient to satisfy the requirements of the Miner Act in certain respects, and remanded those portions of the rules to MSHA for reconsideration.  New rules issued by the MSHA will likely contain more stringent provisions regarding training of rescue teams.

Kentucky, the state in which we operate, has state programs for mine safety and health regulation and enforcement.  Collectively, federal and state safety and health regulation in the coal mining industry is perhaps the most comprehensive and pervasive system for protection of employee health and safety affecting any segment of industry in the United States.  While regulation has a significant effect on our operating costs, our United States competitors are subject to the same regulation.

We measure our success in this area primarily through the use of occupational injury and illness frequency rates.  We believe that a superior safety and health regime is inherently tied to achieving productivity and financial goals, with overarching benefits for our shareholders, the community, and the environment.
 
Black Lung.  Under federal black lung benefits legislation, each coal mine operator is required to make payments of black lung benefits or contributions to: (i) current and former coal miners totally disabled from black lung disease; and (ii) certain survivors of a miner who dies from black lung disease.  The Black Lung Disability Trust Fund, to which we must make certain tax payments based on tonnage sold, provides for the payment of medical expenses to claimants whose last mine employment was before January 1, 1970 and to claimants employed after such date, where no responsible coal mine operator has been identified for claims or where the responsible coal mine operator has defaulted on the payment of such benefits.  In addition to federal acts, we are also liable under various state statutes for black lung claims.  Federal benefits are offset by any state benefits paid.

 
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Coal Industry Retiree Health Benefit Act of 1992 and Tax Relief and Retiree Health Care Act of 2006.  The Coal Industry Retiree Health Benefit Act of 1992 (“Coal Act”) provides for the funding of health benefits for certain UMWA retirees.  The Coal Act established the Combined Benefit Fund (“CBF”) into which “signatory operators” and “related persons” are obligated to pay annual premiums for covered beneficiaries.  The Coal Act also created a second benefit fund, the 1992 Benefit Plan, for miners who retired between July 21, 1992 and September 30, 1994 and whose former employers are no longer in business.  On December 20, 2006, President Bush signed the Tax Relief and Retiree Health Care Act of 2006.  This legislation includes important changes to the Coal Act that impacts all companies required to contribute to the CBF.  Effective October 1, 2007, the SSA revoked all beneficiary assignments made to companies that did not sign a 1988 UMWA contract (“reachback companies”), but phased-in their premium relief.  Effective October 1, 2007, reachback companies will pay only 55% of their plan year 2008 assessed premiums, 40% of their plan year 2009 assessed premiums, and 15% of their plan year 2010 assessed premiums.  General United States Treasury money will be transferred to the CBF to make up the difference.  After 2010, reachback companies will have no further obligations to the CBF, and transfers from the United States Treasury will cover all of the health care costs for retirees and dependents previously assigned to reachback companies.

Environmental Laws

Surface Mining Control and Reclamation Act.  The Surface Mining Control and Reclamation Act, (“SMCRA”), which is administered by the Office of Surface Mining Reclamation and Enforcement (“OSM”), establishes mining, environmental protection, and reclamation standards for all aspects of surface mining as well as many aspects of deep mining.  The SMCRA and similar state statutes require, among other things, the restoration of mined property in accordance with specified standards and an approved reclamation plan.  In addition, the Abandoned Mine Land Fund, which is part of the SMCRA, imposes a fee on all current mining operations, the proceeds of which are used to restore mines closed before 1977.  The maximum tax is $0.315 per ton on surface-mined coal and $0.135 per ton on deep-mined coal.  A mine operator must submit a bond or otherwise secure the performance of its reclamation obligations.  Mine operators must receive permits and permit renewals for surface mining operations from the OSM or, where state regulatory agencies have adopted federally approved state programs under the act, the appropriate state regulatory authority.  We accrue for reclamation and mine-closing liabilities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 410-20, “Asset Retirement and Environmental Obligations” (“ASC 410-20”).
 
Clean Water Act.  Section 301 of the Clean Water Act prohibits the discharge of a pollutant from a point source into navigable waters of the United States except in accordance with a permit issued under either Section 402 or Section 404 of the Clean Water Act.  Navigable waters are broadly defined to include streams, even those that are not navigable in fact, and may include wetlands.  All mining operations in Appalachia generate excess material, which are typically placed in fills in adjacent valleys and hollows.  Likewise, coal refuse disposal areas and coal processing slurry impoundments are located in valleys and hollows.  These areas frequently contain intermittent or perennial streams, which are considered navigable waters under the Clean Water Act.  An operator must secure a Clean Water Act permit before filling such streams.  For approximately the past twenty-five years, operators have secured Section 404 fill permits that authorize the filling of navigable waters with material from various forms of coal mining.  Operators have also obtained permits under Section 404 for the construction of slurry impoundments.  Discharges from these structures require permits under Section 402 of the Clean Water Act. Section 402 discharge permits are generally not suitable for authorizing the construction of fills in navigable waters.
 
Clean Air Act.  Coal contains impurities, including sulfur, mercury, chlorine, nitrogen oxide and other elements or compounds, many of which are released into the air when coal is burned.  The Clean Air Act and corresponding state laws extensively regulate emissions into the air of particulate matter and other substances, including sulfur dioxide, nitrogen oxide and mercury.  Although these regulations apply directly to impose certain requirements for the permitting and operation of our mining facilities, by far their greatest impact on us and the coal industry generally is the effect of emission limitations on utilities and other customers.  Owners of coal-fired power plants and industrial boilers have been required to expend considerable resources to comply with these air pollution standards.  The United States Environmental Protection Agency (“EPA”) has imposed or attempted to impose tighter emission restrictions in a number of areas, some of which are currently subject to litigation.  The general effect of such tighter restrictions could be to reduce demand for coal.  This in turn may result in decreased production and a corresponding decrease in revenue and profits.  

 
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National Ambient Air Quality Standards.  Ozone is produced by a combination of two precursor pollutants: volatile organic compounds and nitrogen oxide, a by-product of coal combustion.  Particulate matter is emitted by sources burning coal as fuel, including coal fired power plants.  States are required to submit to EPA revisions to their State Implementation Plans (“SIPs”) that demonstrate the manner in which the states will attain National Ambient Air Quality Standards (“NAAQS”) every time a NAAQS is revised by EPA.  In 2006, EPA adopted a new NAAQS for fine particulate matter, which a number of states and environmental advocacy groups challenged as not sufficiently stringent to satisfy Clean Air Act requirements.  In February 2009, the United States Court of Appeals for the District of Columbia Circuit agreed that EPA had inadequately explained its decision regarding several aspects of the NAAQS and remanded those to EPA for reconsideration, a process that could lead to more stringent NAAQS for fine particulate matter.  EPA also adopted a more stringent ozone NAAQS on March 27, 2008.  Revised SIPs for both ozone and fine particulates could require electric power generators to further reduce particulate, nitrogen oxide, and sulfur dioxide emissions.  In addition to the SIP process, the Clean Air Act permits states to assert claims against sources in other “upwind” states alleging that emission sources including coal fired power plants in the upwind states are preventing the “downwind” states from attaining a NAAQS.  The new NAAQS for ozone and fine particulates, as well as claims by affected states, could result in additional controls being required of coal fired power plants and we are unable to predict the effect on markets for our coal. 

Acid Rain Control Provisions.  The acid rain control provisions promulgated as part of the Clean Air Act Amendments of 1990 in Title IV of the Clean Air Act (“Acid Rain program”) required reductions of sulfur dioxide emissions from power plants.  The Acid Rain program is now a mature program and we believe that any market impacts of the required controls have likely been factored into the price of coal in the national coal market.
 
Regional Haze Program.  EPA promulgated a regional haze program designed to protect and to improve visibility at and around so-called Class I Areas, which are generally National Parks, National Wilderness Areas and International Parks.  This program may restrict the construction of new coal-fired power plants whose operation may impair visibility at and around the Class I Areas.  Moreover, the program requires certain existing coal-fired power plants to install additional control measures designed to limit haze-causing emissions, such as sulfur dioxide, nitrogen oxide and particulate matter.  States were required to submit Regional Haze SIPs to EPA by December 17, 2007.  Many states did not meet the December 17, 2007, deadline and we are unable to predict the impact on the coal market of the failure to submit Regional Haze SIPs by the deadline or of any subsequent submissions deadlines.
 
New Source Review Program.  Under the Clean Air Act, new and modified sources of air pollution must meet certain new source standards (“New Source Review Program”).  In the late 1990s, EPA filed lawsuits against many coal-fired plants in the eastern United States alleging that the owners performed non-routine maintenance, causing increased emissions that should have triggered the application of these new source standards.  Some of these lawsuits have been settled, with the owners agreeing to install additional pollution control devices in their coal-fired plants.  The remaining litigation and the uncertainty around the New Source Review Program rules could adversely impact utilities’ demand for coal in general or coal with certain specifications, including the coal we produce.
 
Multi-Pollutant Strategies.  In March 2005, EPA issued two closely related rules designed to significantly reduce levels of sulfur dioxide, nitrogen oxide and mercury: the Clean Air Interstate Rule (“CAIR”) and the Clean Air Mercury Rule (“CAMR”).  CAIR sets a “cap-and-trade” program in 28 states and the District of Columbia to establish emissions limits for sulfur dioxide and nitrogen oxide, by allowing utilities to buy and sell credits to assist in achieving compliance with the NAAQS for 8-hour ozone and fine particulates.  CAMR as promulgated will cut mercury emissions nearly 70% by 2018 through a “cap-and-trade” program.  Both rules were challenged in numerous lawsuits and the United States Court of Appeals for the District of Columbia Circuit vacated CAMR and remanded it to EPA for reconsideration on February 8, 2008.  In February 2009, EPA announced its intention to develop a technology-based standard under Section 112 of the Clean Air Act to address mercury emissions rather than pursue the “cap-and-trade” approach of CAMR.  The same court vacated the CAIR on July 11, 2008, but subsequently revised its remedy to a remand to EPA for reconsideration on December 23, 2008.  EPA is preparing its response to the remand, but the court did not impose a response date.  Regardless of the outcome of litigation on either rule, stricter controls on emissions of SO2, NOX and mercury are likely in some form.  Any such controls may have an impact on the demand for our coal.

 
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Global Climate Change
 
The United States has not implemented the 1992 Framework Convention on Global Climate Change (“Kyoto Protocol”), which became effective for many countries on February 16, 2005.  The Kyoto Protocol was intended to limit or reduce emissions of greenhouse gases, such as carbon dioxide.  The United States has not ratified the emission targets of the Kyoto Protocol or any other greenhouse gas agreement among parties.

Nevertheless, global climate change continues to attract considerable public and scientific attention and a considerable amount of legislative attention in the United States is being paid to global climate change and the reduction of greenhouse gas emissions, particularly from coal combustion by power plants.  Enactment of laws and passage of regulations regarding greenhouse gas emissions by the United States or some of its states, or other actions to limit carbon dioxide emissions, could result in electric generators switching from coal to other fuel sources.
 
Comprehensive Environmental Response, Compensation and Liability Act

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and similar state laws affect coal mining operations by, among other things, imposing cleanup requirements for threatened or actual releases of hazardous substances that may endanger public health or welfare or the environment.  Under CERCLA and similar state laws, joint and several liability may be imposed on waste generators, site owners and lessees and others regardless of fault or the legality of the original disposal activity.  Although EPA excludes most wastes generated by coal mining and processing operations from the hazardous waste laws, such wastes can, in certain circumstances, constitute hazardous substances for the purposes of CERCLA.  In addition, the disposal, release, or spilling of some products used by coal companies in operations, such as chemicals, could implicate the liability provisions of the statute.  Under EPA’s Toxic Release Inventory process, companies are required annually to report the use, manufacture, or processing of listed toxic materials that exceed defined thresholds, including chemicals used in equipment maintenance, reclamation, water treatment and ash received for mine placement from power generation customers.  Our current and former coal mining operations incur, and will continue to incur, expenditures associated with the investigation and remediation of facilities and environmental conditions under CERCLA.

Endangered Species Act
 
The federal Endangered Species Act and counterpart state legislation protect species threatened with possible extinction.  Protection of endangered species may have the effect of prohibiting or delaying us from obtaining mining permits and may include restrictions on timber harvesting, road building, and other mining or agricultural activities in areas containing the affected species.  Based on the species that have been identified on our properties to date and the current application of applicable laws and regulations, we do not believe there are any species protected under the Endangered Species Act that would materially and adversely affect our ability to mine coal from our properties in accordance with current mining plans.

Operations - Permitting; Compliance.  Quest has obtained all the permits required for its current operations under the SMCRA, the Clean Water Act, the Clean Air Act, and corresponding state laws.  Quest currently is, and intends to remain in compliance in all material respects with such permits and intends to routinely correct in a timely fashion violations of which it receives notice in the normal course of operations.  The expiration dates of the permits are largely immaterial as the law provides for a right of successive renewal.  The cost of obtaining surface mining, clean water, and air permits can vary widely depending on the scientific and technical demonstrations that must be made to obtain the permits.  However, the cost of obtaining a permit is rarely more than $500,000 and of obtaining a renewal is rarely more than $5,000.  It is impossible to predict the full impact of future judicial, legislative, or regulatory developments on Quest’s operations because the standards to be met, as well as the technology and length of time available to meet those standards, continue to develop and change.

The imposition of more stringent requirements under environmental laws or regulations, new developments or changes regarding site cleanup costs or the allocation of such costs among potentially responsible parties, or a determination that Quest is potentially responsible for the release of hazardous substances at sites other than those currently identified, could result in additional expenditures or the provision of additional accruals in expectation of such expenditures.

 
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Coal Reserves

Quest estimates that, as of December 31, 2009, it has total reserves of approximately 11.2 million tons, of which approximately 8.5 million tons constitute proven/probable reserves.  “Reserves” are defined by Securities and Exchange Commission Industry Guide 7 as that part of a mineral deposit, which could be economically and legally extracted or produced at the time of the reserve determination.  “Recoverable” reserves mean coal that is economically recoverable using existing equipment and methods under federal and state laws currently in effect.  “Proven (Measured) Reserves” are defined by Securities and Exchange Commission Industry Guide 7 as reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.  “Probable reserves” are defined by Securities and Exchange Commission Industry Guide 7 as reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced.  The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.

Information about Quest’s reserves consists of estimates based on engineering, economic, and geological data assembled and analyzed by its contracted engineers, geologists, and finance associates.  Reserve estimates are updated as deemed necessary by management using geologic data taken from drill holes, adjacent mine workings, outcrop prospect openings and other sources.  Coal tonnages are categorized according to coal quality, seam thickness, mineability, and location relative to existing mines and infrastructure.  In accordance with applicable industry standards, proven reserves are those for which reliable data points are spaced no more than 2,700 feet apart.  Probable reserves are those for which reliable data points are spaced 2,700 feet to 7,900 feet apart.  Further scrutiny is applied using geological criteria and other factors related to profitable extraction of the coal.  These criteria include seam height, roof and floor conditions, yield, and marketability.

As with most coal-producing companies in Central Appalachia, all of Quest’s coal reserves are controlled pursuant to leases from third party landowners.  These leases convey mining rights to the coal producer in exchange for a royalty payment to the lessor based on either a fixed amount per ton of coal mined or a percentage of gross sales price of coal mined.  The royalties for coal reserves to landowners from Quest’s producing properties was approximately $110,000 for the year ended December 31, 2009 and $90,000 for the year ended December 31, 2008.

Employees

Quest currently employs one person, our President, Eugene Chiaramonte, Jr.  All other personnel who provide services for Quest, whether in administration or in mining operations, either work on an independent contractor basis or work for White Star Mining under a contract mining arrangement.  None of Quest’s employees are represented by a labor union, and Quest has not entered into a collective bargaining agreement with any union.  Quest has not experienced any work stoppages and believes that it has good relations with its employees.

Business Development of Quest

Quest Minerals (Nevada), was organized on November 19, 2003 to acquire and operate privately held coal mining companies in the southeast United States.

Reverse Merger. Quest was incorporated on November 21, 1985 in the State of Utah under the name “Sabre, Inc.”  It subsequently changed its name to Tillman International, Inc., or Tillman.  On February 9, 2004, Quest Minerals (Nevada) completed a “reverse merger” with Tillman.  On April 8, 2004, Tillman changed its name to “Quest Minerals & Mining Corp.”

Gwenco Acquisition.  Effective April 28, 2004, Quest Minerals (Nevada) acquired 100% of the outstanding capital stock of Gwenco in exchange for 1,386,275 shares of Series B preferred stock of Quest Minerals (Nevada) and the assumption of up to $1,700,000 in debt.  Each share of Series B preferred stock carries a liquidation preference of $2.50 per share and is convertible into shares of Quest’s common stock.

 
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Item 1A.  RISK FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

An investment in Quest common stock involves a high degree of risk.  You should carefully consider the following risk factors and the other information in this report before investing in Quest common stock.  Quest’s business and results of operations could be seriously harmed by any of the following risks.  The trading price of Quest’s common stock could decline due to any of these risks, and you may lose part or all of your investment.

We may become subject to an SEC enforcement action.  On October 31, 2008, we 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 us based on our financial statements and other information contained in reports filed by us with the Commission by us for our 2004 year 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.  We contend that we have not committed any wrongdoing or the violations referred to in the Notice.  We cannot predict whether the Commission will follow the recommendations of the staff and file suit against us.  If any enforcement proceeding is instituted by the Commission, we will defend the action.  We cannot predict the outcome or timing of this matter.

Our wholly owned subsidiary, Gwenco, Inc., is emerging from bankruptcy protection; however, it is still possible that its assets may be liquidated in the future.   On March 2, 2007, Quest’s wholly owned subsidiary, Gwenco, Inc., filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Kentucky.  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.  The Court could make such a determination upon motion of any creditor, other party to the action, or on its own motion.  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.

Equipment breakdowns and a shortage of supplies have caused significant work stoppages.  Unless we receive significant additional working capital, it is likely that these breakdowns and shortages will continue.  During the past two fiscal years, Quest has been forced to suspend its mining operations for approximately two out of five days, on average, due to either breakdowns in equipment or a lack of necessary supplies.  Quest requires significant additional working capital to maintain, repair, or replace its equipment and to maintain adequate inventories of supplies in order to significantly reduce these work stoppages.  It is possible that Quest may not be able to obtain such additional working capital in the amounts necessary to reduce these work stoppages.  If Quest is unable to obtain such working capital, significant work stoppages are to likely to continue.

We have issued a substantial number of securities convertible into shares of our common stock which will result in substantial dilution to the ownership interests of our existing stockholders. As of December 31, 2009, approximately 8,860,000,000 shares of our common stock were required for issuance upon exercise or conversion of the following securities (without regard to any limitations on conversion): (i) 8,800,000,000 shares representing shares of common stock issuable upon conversion in full of our outstanding convertible promissory notes (without regard to any limitations on conversion); (ii) 60,000,000 shares of common stock issuable upon conversion of our Series A Preferred (without regard to any limitations on conversion).  The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and substantially dilute the ownership interests of our existing shareholders.  In addition, any decrease in our stock price will result in additional shares of common stock required for issuance upon exercise or conversion of the securities set forth above.  Furthermore, the conversion prices set in many of Quest’s convertible securities do not adjust in the event of a stock split or reverse stock split.

 
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The issuance of shares upon conversion of our convertible securities may cause immediate and substantial dilution to our existing stockholders. The issuance of shares upon conversion of our outstanding convertible notes or Series A Preferred Stock may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion.  Although the selling stockholders may not convert their convertible notes if such conversion would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholders from converting some of their holdings and then converting the rest of their holdings. In this way, the selling stockholders could sell more than this limit while never holding more than this limit. There only upper limit on the number of shares that may be issued is the number of shares of common stock authorized for issuance under our articles of incorporation. The issuance of shares upon conversion of the convertible notes will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock.  Furthermore, the conversion prices set in many of Quest’s convertible securities do not adjust in the event of a stock split or reverse stock split.

The issuance of shares of common stock to consultants may cause immediate and substantial dilution to our existing stockholders.  We have established, and my establish in the future additional, stock incentive plans under which we may issue various types of awards, including common stock awards.  We currently pay certain consultants and are likely to continue to pay consultants in the future with stock awards under these plans.  The issuance of stock awards to consultants will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock.

Quest may need to continue to finance its operations through additional borrowings or other capital financings, and if it is unable to obtain additional capital, it may not be able to continue as a going concern.  Quest had a working capital deficit as of December 31, 2009.  While Quest and Gwenco submitted financial projections to the Bankruptcy Court that forecast that Gwenco will generate positive cash flow, to date, Gwenco has unable to meet those projections and has not generated negative cash flow.  While management believes that it will be able to perform according to the projections, it cannot currently estimate when that may occur, if at all.  As such, Quest is unable to forecast whether it will be able to fund its operations, working capital requirements, and debt service requirements over the fiscal year 2010 through cash flows generated from operations.  So long as Gwenco is not generating positive cash flow, Quest will need to continue to finance its operations through additional borrowings or other capital financings.  Quest’s collateral may not be sufficient to borrow additional amounts at such time.  Quest may also seek equity financing in the form of a private placement or a public offering.  Such additional financing may not be available to Quest, when and if needed, on acceptable terms or at all.  If Quest is unable to obtain additional financing in sufficient amounts or on acceptable terms, its operating results and prospects could be further adversely affected.

Quest has substantial indebtedness outstanding, and its operations are significantly leveraged.   In order to finance its operations, Quest has incurred substantial indebtedness.  Quest’s subsidiary, Gwenco, Inc., has already filed for protection under Chapter 11 of the U.S. Bankruptcy Code.  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.  Gwenco is not currently generating positive cash flows from operations, and as such, it relies on additional financing in order to supplement its current cash flows from operations in order service its debt and other obligations 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.

 
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Quest may be unable to continue as a going concern, in which case its securities will have little or no value.  Quest’s independent auditor has noted in its report concerning Quest’s financial statements as of December 31, 2009 that it has incurred recurring losses from operations and has a working capital deficiency, which raises substantial doubt about its ability to continue as a going concern.  As shown in the consolidated financial statements included in this report, Quest has incurred recurring losses from operations in 2009 and 2008, and has an accumulated deficit and a working capital deficit as of December 31, 2009.  These conditions raise substantial doubt as to Quest’s ability to continue as a going concern.  It is possible that Quest will not achieve operating profits in the future.

The level of Quest’s indebtedness could adversely affect its ability to grow and compete and prevent it from fulfilling its obligations under its contracts and agreements.  Quest has significant debt, lease, and royalty obligations.  Its ability to satisfy debt service, lease, and royalty obligations and to effect any refinancing of its indebtedness will depend upon future operating performance, which will be affected by prevailing economic conditions in the markets that it serves as well as financial, business and other factors, many of which are beyond its control.  Quest may be unable to generate sufficient cash flow from operations and future borrowings, or other financings may be unavailable in an amount sufficient to enable it to fund its debt service, lease, and royalty payment obligations or its other liquidity needs.   Quest’s relative amount of debt could have material consequences to its business, including, but not limited to, the following: (i) making it more difficult to satisfy debt covenants and debt service, lease payment, and other obligations; (ii) increasing its vulnerability to general adverse economic and industry conditions; (iii) limiting its ability to obtain additional financing to fund future acquisitions, working capital, capital expenditures, or other general corporate requirements; (iv) reducing the availability of cash flows from operations to fund acquisitions, working capital, capital expenditures, or other general corporate purposes; (v) limiting its flexibility in planning for, or reacting to, changes in its business and the industry in which it competes; or (vi) placing it at a competitive disadvantage when compared to competitors with less relative amounts of debt.

If transportation for Quest’s coal becomes unavailable or uneconomic for its customers, Quest’s ability to sell coal could suffer.  Transportation costs represent a significant portion of the total cost of coal and, as a result, the cost of transportation is a critical factor in a customer’s purchasing decision.  Increases in transportation costs could make coal a less competitive source of energy or could make some of Quest’s operations less competitive than other sources of coal.  Coal producers depend upon rail, barge, trucking, overland conveyor, and other systems to deliver coal to markets.  While U.S. coal customers typically arrange and pay for transportation of coal from the mine to the point of use, disruption of these transportation services because of weather-related problems, strikes, lock-outs or other events could temporarily impair Quest’s ability to supply coal to its customers and thus could adversely affect Quest’s results of operations.  For example, the high volume of coal shipped from one region of mines could create temporary congestion on the rail systems servicing that region.

Risks inherent to mining could increase the cost of operating Quest’s business.  Quest’s mining operations are subject to conditions beyond its control that can delay coal deliveries or increase the cost of mining at particular mines for varying lengths of time.  These conditions include weather and natural disasters, unexpected maintenance problems, key equipment failures, variations in coal seam thickness, variations in the amount of rock and soil overlying the coal deposit, variations in rock, and other natural materials and variations in geologic conditions.  In addition, the United States and over 160 other nations are signatories to the 1992 Framework Convention on Climate Change, which is intended to limit emissions of greenhouse gases, such as carbon dioxide.  In December 1997, in Kyoto, Japan, the signatories to the convention established a binding set of emission targets for developed nations.  Although the specific emission targets vary from country to country, the United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012.  Although the United States has not ratified the emission targets and no comprehensive regulations focusing on U.S. greenhouse gas emissions are in place, these restrictions, whether through ratification of the emission targets or other efforts to stabilize or reduce greenhouse gas emissions, could adversely impact the price of and demand for coal.  According to the Energy Information Administration’s Emissions of Greenhouse Gases in the United States 2002, coal accounts for 30% of greenhouse gas emissions in the United States, and efforts to control greenhouse gas emissions could result in reduced use of coal if electricity generators switch to sources of fuel with lower carbon dioxide emissions.  Further developments in connection with regulations or other limits on carbon dioxide emissions could have a material adverse effect on Quest’s financial condition or results of operations.

 
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Quest’s future success depends upon its ability to continue acquiring and developing coal reserves that are economically recoverable.  Quest’s recoverable reserves decline as it produces coal.  Quest has not yet applied for the permits required or developed the mines necessary to use all of its reserves.  Furthermore, Quest may not be able to mine all of its reserves as profitably as it does at its current operations.  Quest’s future success depends upon its conducting successful exploration and development activities or acquiring properties containing economically recoverable reserves.  Quest’s planned mine development projects and acquisition activities may not result in significant additional reserves, and it may not have continuing success developing additional mines.  Most of Quest’s mining operations are conducted on properties owned or leased by Quest.  Because title to most of its leased properties and mineral rights are not thoroughly verified until a permit to mine the property is obtained, Quest’s right to mine some of its reserves may be materially adversely affected if defects in title or boundaries exist.  In addition, in order to develop its reserves, Quest must receive various governmental permits.  Quest cannot predict whether it will continue to receive the permits necessary for it to operate profitably in the future.  Quest may not be able to negotiate new leases from the government or from private parties or obtain mining contracts for properties containing additional reserves or maintain its leasehold interest in properties on which mining operations are not commenced during the term of the lease.  From time to time, Quest has experienced litigation with lessors of our coal properties and with royalty holders.

If the coal industry experiences overcapacity in the future, Quest’s profitability could be impaired.  During the mid-1970s and early 1980s, a growing coal market and increased demand for coal attracted new investors to the coal industry, spurred the development of new mines, and resulted in added production capacity throughout the industry, all of which led to increased competition and lower coal prices.  Similarly, an increase in future coal prices could encourage the development of expanded capacity by new or existing coal producers.  Any overcapacity could reduce coal prices in the future.

Quest’s ability to operate effectively could be impaired if it loses key personnel.  Quest manages its business with a number of key personnel, the loss of a number of whom could have a material adverse effect on Quest.  In addition, as its business develops and expands, Quest believes that its future success will depend greatly on its continued ability to attract and retain highly skilled and qualified personnel.  It is possible that key personnel will not continue to be employed by Quest and that we will be not able to attract and retain qualified personnel in the future. Quest does not have “key person” life insurance to cover its executive officers. Failure to retain or attract key personnel could have a material adverse effect on Quest.

Coal markets are highly competitive and affected by factors beyond Quest’s control. Quest competes with coal producers in various regions of the U.S. for domestic sales and with both domestic and overseas producers for sales to international markets. Continued domestic demand for Quest’s coal and the prices that it will be able to obtain primarily will depend upon coal consumption patterns of the domestic electric utility industry and the domestic steel industry. Consumption by the domestic utility industry is affected by the demand for electricity, environmental and other governmental regulations, technological developments and the price of competing coal and alternative fuel supplies including nuclear, natural gas, oil and renewable energy sources, including hydroelectric power. Consumption by the domestic steel industry is primarily affected by the demand for U.S. steel. Quest’s sales of metallurgical coal are dependent on the continued financial viability of domestic steel companies and their ability to compete with steel producers abroad. The cost of ocean transportation and the valuation of the U.S. dollar in relation to foreign currencies significantly impact the relative attractiveness of Quest’s coal as it competes on price with other foreign coal producing sources.
 
Quest is subject to being adversely affected by the potential inability to renew or obtain surety bonds.    Federal and state laws require bonds to secure our obligations to reclaim lands used for mining, to pay federal and state workers’ compensation and to satisfy other miscellaneous obligations. These bonds are typically renewable annually. Surety bond issuers and holders may not continue to renew the bonds or may demand additional collateral upon those renewals. We are also subject to increases in the amount of surety bonds required by federal and state laws as these laws change or the interpretation of these laws changes. Our failure to maintain, or inability to acquire, surety bonds that are required by state and federal law would have a material adverse impact on us, possibly by prohibiting us from developing properties that we desire to develop. That failure could result from a variety of factors including the following: (i) lack of availability, higher expense or unfavorable market terms of new bonds; (ii) restrictions on availability of collateral for current and future third-party surety bond issuers under the terms of our senior notes or revolving credit facilities; (iii) our inability to meet certain financial tests with respect to a portion of the post-mining reclamation bonds; and (iv) the exercise by third-party surety bond issuers of their right to refuse to renew or issue new bonds.

 
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Defects in title or loss of any leasehold interests in Quest’s properties could limit its ability to mine its properties or result in significant unanticipated costs.  Substantially all of our mining operations occur on properties that we lease.  Title defects or the loss of leases could adversely affect our ability to mine the reserves covered by those leases.  Our right to mine some of our reserves may be adversely affected if defects in title or boundaries exist.  In order to obtain leases to conduct our mining operations on property where these defects exist, we may have to incur unanticipated costs.  In addition, we may not be able to successfully negotiate new leases for properties containing additional reserves, or maintain our leasehold interests in properties where we have not commenced mining operations during the term of the lease.

Concerns about the environmental impacts of coal combustion, including perceived impacts on global climate change, are resulting in increased regulation of coal combustion in many jurisdictions, and interest in further regulation, which could significantly affect demand for our products.  The Clean Air Act and similar state and local laws extensively regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides and other compounds emitted into the air from electric power plants, which are the largest end-users of our coal. Such regulation may require significant emissions control expenditures for many coal-fired power plants. As a result, the generators may switch to other fuels that generate less of these emissions or install more effective pollution control equipment, possibly reducing future demand for coal and the construction of coal-fired power plants. The majority of our coal supply agreements contain provisions that allow a purchaser to terminate its contract if legislation is passed that either restricts the use or type of coal permissible at the purchaser’s plant or results in specified increases in the cost of coal or its use.

Global climate change continues to attract considerable public and scientific attention. Widely publicized scientific reports, such as the Fourth Assessment Report of the Intergovernmental Panel on Climate Change released in 2007, have also engendered widespread concern about the impacts of human activity, especially fossil fuel combustion, on global climate change. A considerable and increasing amount of attention in the United States is being paid to global climate change and to reducing greenhouse gas emissions, particularly from coal combustion by power plants. According to the EIA report, “Emissions of Greenhouse Gases in the United States 2007,” coal combustion accounts for 30% of man-made greenhouse gas emissions in the United States. Legislation was introduced in Congress in the past several years to reduce greenhouse gas emissions in the United States and, although no bills to reduce such emissions have yet passed either house of Congress, bills to reduce such emissions remain pending and others are likely to be introduced. President Obama campaigned in favor of a “cap-and-trade” program to require mandatory greenhouse gas emissions reductions and since his election has continued to express support for such legislation, contrary to the previous administration. The United States Supreme Court’s 2007 decision in Massachusetts v. Environmental Protection Agency ruled that EPA improperly declined to address carbon dioxide impacts on climate change in a rulemaking related to new motor vehicles. The reasoning of the court decision could affect other federal regulatory programs, including those that directly relate to coal use. In July 2008, EPA published an Advanced Notice of Proposed Rulemaking (ANPR) seeking comments regarding the regulation of greenhouse gas emissions; and, in February 2009, the newly appointed administrator of EPA granted a petition by environmental advocacy groups to reconsider an interpretive memorandum by her predecessor in December 2008 that concluded the Clean Air Act’s Prevention of Significant Deterioration program does not extend to carbon dioxide emissions, a decision that could lead to carbon dioxide emissions from coal-fired power plants being a consideration in permitting decisions. In addition, a growing number of states in the United States are taking steps to require greenhouse gas emissions reductions from coal-fired power plants. Enactment of laws and promulgation of regulations regarding greenhouse gas emissions by the United States or some of its states, or other actions to limit carbon dioxide emissions, could result in electric generators switching from coal to other fuel sources.

As part of the United Nations Framework Convention on Climate Change, representatives from 187 nations met in Bali, Indonesia in December 2007 to discuss a program to limit greenhouse gas emissions after 2012. The United States participated in the conference. The convention adopted what is called the “Bali Action Plan.” The Bali Action Plan contains no binding commitments, but concludes that “deep cuts in global emissions will be required” and provides a timetable for two years of talks to shape the first formal addendum to the 1992 United Nations Framework Convention on Climate Change treaty since the Kyoto Protocol. The ultimate outcome of the Bali Action Plan, and any treaty or other arrangement ultimately adopted by the United States may have a material adverse impact on the global supply and demand for coal. This is particularly true if cost effective technology for the capture and sequestration of carbon dioxide is not sufficiently developed. Technologies that may significantly reduce emissions into the atmosphere of greenhouse gases from coal combustion, such as carbon capture and sequestration (which captures carbon dioxide at major sources such as power plants and subsequently stores it in nonatmospheric reservoirs such as depleted oil and gas reservoirs, unmineable coal seams, deep saline formations, or the deep ocean) have attracted and continue to attract the attention of policy makers, industry participants, and the public. For example, in July 2008 EPA proposed rules that would establish, for the first time, requirements specifically for wells used to inject carbon dioxide into geologic formations. Considerable uncertainty remains, not only regarding rules that may become applicable to carbon dioxide injection wells but also concerning liability for potential impacts of injection, such as groundwater contamination or seismic activity. In addition, technical, environmental, economic, or other factors may delay, limit, or preclude large-scale commercial deployment of such technologies, which could ultimately provide little or no significant reduction of greenhouse gas emissions from coal combustion.

 
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Further developments in connection with legislation, regulations or other limits on greenhouse gas emissions and other environmental impacts from coal combustion, both in the United States could have a material adverse effect on our cash flows, results of operations or financial condition.

Coal prices are affected by a number of factors and may vary dramatically by region.  The two principal components of the price of coal are the price of coal at the mine, which is influenced by mine operating costs and coal quality, and the cost of transporting coal from the mine to the point of use.  The cost of mining the coal is influenced by geologic characteristics such as seam thickness, overburden ratios and depth of underground reserves. Underground mining is generally more expensive than surface mining as a result of high capital costs, including costs for modern mining equipment and construction of extensive ventilation systems and higher labor costs due to lower productivity.  Quest currently engages in three principal coal mining techniques: underground room and pillar mining, underground longwall mining and highwall mining.  Because underground longwall mining, surface mining, and highwall mining are high-productivity, low-cost mining methods, Quest seeks to increase production from its use of these methods to the extent permissible and cost effective.

Quest depends on continued demand from its customers.  Reduced demand from Quest’s largest customers could have an adverse impact on its ability to achieve its projected revenue.  It is possible that Quest’s customers will not continue to purchase the same amount of coal as they have in the past or on terms, including pricing terms, as favorable as under existing purchase terms.  If Quest enters into long-term contracts with future customers, when those contracts reach expiration, it is possible that that the customers will not extend or enter into new long-term contracts.
 
Quest faces numerous uncertainties in estimating its economically recoverable coal reserves, and inaccuracies in its estimates could result in lower than expected revenues, higher than expected costs and decreased profitability.  There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves, including many factors beyond Quest’s control.  As a result, estimates of economically recoverable coal reserves are by their nature uncertain.  Information about Quest’s reserves consists of estimates based on engineering, economic, and geological data assembled and analyzed by Quest’s staff.  Some of the factors and assumptions that impact economically recoverable reserve estimates include the following:

·         geological conditions;

·         historical production from the area compared with production from other producing areas;

·         the assumed effects on regulations and taxes by governmental agencies;

·         assumptions governing future prices; and

·         future operating costs.

Each of these factors may in fact vary considerably from the assumptions used in estimating reserves.  For these reasons, estimates of the economically recoverable quantities of coal attributable to a particular group of properties may vary substantially.  As a result, Quest’s estimates may not accurately reflect its actual reserves. Actual production, revenues, and expenditures with respect to its reserves will likely vary from estimates, and these variances may be material.

 
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Union represented labor creates an increased risk of work stoppages and higher labor costs.  As of December 31, 2009, none of Quest’s workforce was represented by a union.  However, in the event that Quest is required to hire union labor, there may be an increased risk of strikes and other related work actions, in addition to higher labor costs associated with union labor.  Quest has experienced some union organizing campaigns at some of its open shop facilities within the past five years.  If some or all of Quest’s current open shop operations were to become union represented, Quest could be subject to additional risk of work stoppages and higher labor costs.  Increased labor costs or work stoppages could adversely affect the stability of production and reduce its net income.
 
Severe weather may affect Quest’s ability to mine and deliver coal. Severe weather, including flooding and excessive ice or snowfall, when it occurs, can adversely affect Quest’s ability to produce, load, and transport coal, and can also result in power outages that create an inability to operate the mines.  Quest has suffered work stoppages as a result of severe weather conditions, particularly during winter months.
 
Shortages of skilled labor in the Central Appalachian coal industry may pose a risk to achieving high labor productivity and competitive costs.  Coal mining continues to be a labor intensive industry.  In 2001, the coal industry experienced a shortage of trained coal miners in the Central Appalachian region causing many companies to hire mine workers with less experience. While Quest did not experience a comparable labor shortage in 2003, if another such shortage of skilled labor were to arise, Quest’s productivity could decrease and our costs could increase.  Such a lack of skilled miners could have an adverse impact on Quest’s labor productivity and costs and its ability to expand production in the event there is an increase in the demand for coal.
 
If the coal industry experiences overcapacity in the future, Quest’s profitability could be impaired. Historically, a growing coal market and increased demand for coal attract new investors to the coal industry, spur the development of new mines and result in added production capacity throughout the industry, all of which can lead to increased competition and lower coal prices. Similarly, an increase in future coal prices could encourage the development of expanded capacity by new or existing coal producers. Any overcapacity could reduce coal prices and therefore reduce Quest’s revenues.
 
Terrorist attacks and threats, escalation of military activity in response to such attacks, or acts of war may negatively affect Quest’s cash flows, results of operations, or financial condition. Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect Quest’s cash flows, results of operations, or financial condition.  Quest’s business is affected by general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, which can decline as a result of numerous factors outside of its control, such as terrorist attacks and acts of war.  Future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the U.S. or its allies, or military or trade disruptions affecting Quest’s customers may materially adversely affect its operations.  As a result, there could be delays or losses in transportation and deliveries of coal to Quest’s customers, decreased sales of its coal, and extension of time for payment of accounts receivable from its customers.  Strategic targets such as energy-related assets may be at greater risk of future terrorist attacks than other targets in the U.S.  In addition, disruption or significant increases in energy prices could result in government-imposed price controls.  It is possible that any, or a combination, of these occurrences could have a material impact on Quest’s cash flows, results of operations, or financial condition.
 
Quest may not be able to identify quality strategic acquisition candidates, and if it does make strategic acquisitions, it may not be able to successfully integrate their operations.  Quest intends to acquire companies in the coal mining industry that offer complementary products and services to its current business operations.  For each acquisition, Quest will be required to assimilate the operations, products, and personnel of the acquired business and train, retain, and motivate its key personnel.  Quest may be unable to maintain uniform standards, controls, procedures, and policies if it fails in these efforts.  Similarly, acquisitions may subject Quest to liabilities and risks that are not known or identifiable at the time of the acquisition or may cause disruptions in its operations and divert management’s attention from day-to-day operations, which could impair Quest’s relationships with its current employees, customers, and strategic partners.  Quest may have to incur debt or issue equity securities to pay for any future acquisitions.  The issuance of equity securities could be substantially dilutive to Quest’s stockholders.  In addition, Quest’s profitability may suffer because of acquisition related costs.  Quest currently has no agreements or commitments concerning any such additional acquisitions, and it may not be able to identify any companies that satisfy its acquisition criteria.

 
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The government extensively regulates Quest’s mining operations, which imposes significant costs on Quest, and future regulations could increase those costs or limit Quest’s ability to produce coal.  Federal, state, and local authorities regulate the coal mining industry with respect to matters such as employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface subsidence from underground mining, and the effects that mining has on groundwater quality and availability.  In addition, significant legislation mandating specified benefits for retired coal miners affects Quest’s industry.  Numerous governmental permits and approvals are required for mining operations.  Quest is required to prepare and present to federal, state, or local authorities data pertaining to the effect or impact that any proposed exploration for or production of coal may have upon the environment.  The costs, liabilities, and requirements associated with these regulations may be costly and time-consuming and may delay commencement or continuation of exploration or production.  The possibility exists that new legislation and/or regulations and orders may be adopted that may materially adversely affect Quest’s mining operations, its cost structure, and/or its customers’ ability to use coal.  New legislation or administrative regulations (or judicial interpretations of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require Quest or its customers to change operations significantly or incur increased costs.  The majority of Quest’s coal supply agreements contain provisions that allow a purchaser to terminate its contract if legislation is passed that either restricts the use or type of coal permissible at the purchaser’s plant or results in specified increases in the cost of coal or its use.  Further, in light of the recent mine explosion in West Virginia, it is also possible that new legislation and/or regulations and orders may be adopted relating to miners’ health and safety that may material adversely affect Quest’s mining operations, its cost structure, and/or its customers’ ability to use coal.  New legislation or administrative regulations (or judicial interpretations of existing laws and regulations), including proposals related to the protection of mine workers’ safety that would further regulate and tax the coal industry may also require Quest or its customers to change operations significantly or incur increased costs.  These factors and legislation, if enacted, could have a material adverse effect on Quest’s financial condition and results of operations.

There is a limited active trading market for Quest shares.  Quest common stock is traded on the “Pink Sheets” under the symbol “QMIN.PK.”  Trading activity in Quest common stock has fluctuated widely and at times has been limited.  Quest considers its common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the common stock.  A consistently active trading market for Quest’s stock may not develop at any time in the future.  Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid market and limited public float for Quest stock.

Quest’s common stock is considered to be a “penny stock” and, as such, the market for Quest common stock may be further limited by certain SEC rules applicable to penny stocks.   As long as the price of Quest’s common stock remains below $5.00 per share or Quest has net tangible assets of $2,000,000 or less, Quest’s common shares are likely to be subject to certain “penny stock” rules promulgated by the SEC.  Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000).  For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale.  Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm.  These rules and regulations make it more difficult for brokers to sell Quest common shares and limit the liquidity of Quest’s securities.

Quest has no immediate plans to pay dividends.  Quest has not paid any cash dividends to date and does not expect to pay dividends for the foreseeable future.

Our sole officer controls our voting rights, and as long as he does, he will be able to control the outcome of stockholder voting.  Quest’s sole officer, who is also one of two directors, is the owner of all of the outstanding shares of Quest’s Series C Preferred Stock, pursuant to which he holds approximately 67% of the outstanding voting rights for Quest’s capital stock.  As long as he controls our voting rights, our other stockholders will generally be unable to affect or change the management or the direction of our company without the support of our officers and directors.  As a result, some investors may be unwilling to purchase our common stock.  If the demand for our common stock is reduced because our officers and directors have significant influence over our company, the price of our common stock could be materially depressed.  Our sole officer will be able to exert significant influence over the outcome of all corporate actions requiring stockholder approval, including the election of directors, amendments to our certificate of incorporation, and approval of significant corporate transactions.

 
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Quest’s articles of incorporation authorize Quest’s board of directors to effectuate forward and reverse stock splits without stockholder approval.  Quest’s board of directors has the authority to effectuate both forward and reverse stock splits of Quest’s common stock without any further vote or action by Quest’s stockholders.  Although a forward or reverse stock split does not, in and of itself, result in dilution to existing stockholders, forward or reverse stock split may be negatively perceived and may have a negative effect on the market capitalization and relative price per share of Quest’s common stock.  Furthermore, the conversion prices set in many of Quest’s convertible securities do not adjust in the event of a stock split or reverse stock split.  As a result, some investors may be unwilling to purchase our common stock.

Quest’s articles of incorporation authorize Quest’s board of directors to designate and issue preferred stock with rights, preferences and privileges that may be adverse to the rights of the holders of Quest’s common stock.  Quest’s board of directors has the authority to issue up to an additional 21,140,000 shares of preferred stock and to determine the price, rights, preferences, and privileges of those shares without any further vote or action by Quest’s stockholders.  To date, Quest has issued 2,000,000 shares of Series A preferred stock, 1,600,000 shares of Series B preferred stock and 260,000 shares of Series C preferred stock.  Any preferred stock issued by Quest’s board of directors may, and in certain cases, do contain rights and preferences adverse to the voting power and other rights of the holders of common stock.  As a result, some investors may be unwilling to purchase our common stock.

Cautionary Statement Concerning
Forward-Looking Information

This annual report and the documents to which Quest refers you and incorporate into this annual report by reference contain forward-looking statements.  In addition, from time to time, Quest, or its representatives, may make forward-looking statements orally or in writing.  These are statements that relate to future periods and include statements regarding Quest’s future strategic, operational and financial plans, potential acquisitions, anticipated or projected revenues, expenses and operational growth, markets and potential customers for Quest’s products and services, plans related to sales strategies and efforts, the anticipated benefits of Quest’s relationships with strategic partners, growth of its competition, its ability to compete, the adequacy of its current facilities and its ability to obtain additional space, use of future earnings, and the feature, benefits and performance of its current and future products and services.

You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” “seek” or “continue” or the negative of these or similar terms.  In evaluating these forward-looking statements, you should consider various factors.  These factors may cause Quest’s actual results to differ materially from any forward-looking statement.  Quest cautions you not to place undue reliance on these forward-looking statements.

Quest bases these forward-looking statements on its expectations and projections about future events, which it derives from the information currently available to it.  Such forward-looking statements relate to future events or future performance.  Forward-looking statements are only predictions.  The forward-looking events discussed in this annual report, the documents to which Quest refers you and other statements made from time to time by Quest or its representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about Quest.  For these statements, Quest claims the protection of the “bespeaks caution” doctrine.  The forward-looking statements speak only as of the date hereof, and Quest expressly disclaims 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.

 
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We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 2.   PROPERTIES                                                      
 
PROPERTIES                                
 
Quest’s executive offices are located in Paterson, New Jersey and consist of approximately 1,000 square feet of leased space.  Quest leases this space at the rate of $1,500 per month from a related party corporation.

Gwenco leases over 700 acres of coal mines in Pike County, Kentucky, with approximately 12,999,000 tons of coal in place in six seams.  Gwenco is required to make annual minimum lease payments of approximately $55,000 per year.

All of Quest’s current facilities are adequate for its current operations.  Quest anticipates that additional facilities will be leased or purchased as needed and that sufficient facilities for its needs are readily available.

Item 3.   LEGAL PROCEEDINGS

Litigation

Potential SEC Action.  On October 31, 2008, we 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 us based on our financial statements and other information contained in reports filed by us with the Commission by us for our 2004 year 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.  We contend that we have not committed any wrongdoing or the violations referred to in the Notice.  We cannot predict whether the Commission will follow the recommendations of the staff and file suit against us.  If any enforcement proceeding is instituted by the Commission, we will defend the action.  We cannot predict the outcome or timing of this matter.

Gwenco, Inc. Chapter 11 Reorganization.  On March 2, 2007, Quest’s wholly owned subsidiary, Gwenco, Inc., filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Kentucky.  Management felt this was a necessary step to further the company’s financial restructuring initiative and to protect Gwenco’s assets from claims, debts, judgments, foreclosures, and forfeitures of those creditors and stakeholders with whom both Quest and Gwenco were unable to negotiate restructured agreements.  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. 

There were 5 classes of Claims under the Plan:  (i)  Class 1—The Interstellar Duke claim, in the aggregate amount of $1,093,771; (ii) Class 2—Priority Claims, in aggregate amount of $391,558; (iii) Class 3—General Unsecured Claims, in the aggregate amount of $1,417,786; (iv) Class 4-Subordinated Claims, consisting of claims of affiliates of the debtor totaling $3,453,996; and (v) Class 5—Equity Holder Interest in the amount of $199,213.

 
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The Class 1 Claim was satisfied by the issuance to Interstellar Holdings, LLC 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.  The company and Interstellar formally closed this transaction on March 8, 2010.

The Class 2 Claims were due and payable as of the effective date of the Plan.

The Class 3 Claims will be satisfied by cash payments equal to the value of their claim on the earlier of (i) the 60th month after the effective date of the Plan or (ii) the date on which, in Gwenco’s sole discretion, proceeds from the exit facility are sufficient to satisfy the claims.  Further, Class 3 Claimholders shall receive their pro-rata share of royalty payments to reduce their claims beginning in the month following the Effective Date.  Notwithstanding the foregoing, certain creditors in this Class negotiated settlements as more specifically set forth in the Plan.

The Class 4 Claims will be paid after holders of all allowed claims in other classes have been paid in full.  The Class 5 Claims were deemed unimpaired.

Gwenco, as a reorganized debtor, operates its coal mining business and will use current and future income from operations to meet current and future expenses and to make payments called for under the Plan.  In addition, 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 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.  On March 8, 2010, Gwenco and Interstellar formally closed this transaction by, among other things, entering into a Loan and Security Agreement and related transaction documents.  The obligations under the exit facility are secured and guaranteed by the company and Quest (Nevada).

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.

This description of the Plan does not purport to be complete and is qualified in its entirety by reference to such Plan, a copy of which was filed as an exhibit to Quest’s Current Report on Form 8-K dated October 2, 2009.

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.

Federal Insurance Company.  The Federal Insurance Company, the insurer for Community Trust Bank, commenced an action in Pike County Court, Kentucky against Quest Energy for subrogation of monies it has paid to the bank and repayment of deductibles by Community Trust as a part of an alleged criminal scheme and conspiracy by Mr. Runyon, Ms. Holbrook, Mr. Stollings, and Mr. Wheeler.  The insurer alleged that former employees or associates of Quest Energy, including Mr. Runyon and Mr. Wheeler, were primarily involved in the alleged scheme, that Quest Energy is accordingly responsible for the actions of these former employees and associates, and that Quest Energy obtained a substantial material benefit as a result of this alleged scheme.  Quest Energy has denied these allegations, that it had any involvement with or responsibility for any of the actions alleged by the insurer, and it further denies that it has benefited from any such alleged scheme.  Further, Quest Energy filed a counterclaim against the Federal Insurance Company and Community Trust contending that the negligent actions and inactions by Community Trust caused severe damage and loss to Quest Energy and Quest.  The court granted Community Trust’s motion to dismiss the counterclaim.

 
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Mountain Edge Personnel.  Mountain Edge Personnel commenced an action in the Circuit Court of Mingo County, West Virginia against Quest’s now-dissolved indirect wholly-owned subsidiary, J. Taylor Mining, for damages in the amount of approximately $115,000, plus pre and post judgment interest as provided by law, costs, and fees.   This matter was settled in January 2009 for payment of approximately $25,000.

Personal Injury.  An action has been commenced in the Circuit Court of Pike County, Kentucky against Quest and its indirect, wholly-owned subsidiaries, Gwenco, Inc., Quest Energy, Ltd., and J. Taylor Mining, for unspecified damages resulting from personal injuries suffered while working for Mountain Edge Personnel, an employee leasing agency who leased employees to Quest’s subsidiaries.  Quest Energy is actively defending the action.  This action was originally stayed against Gwenco as a result of Gwenco’s Chapter 11 filing. However, in March, 2008, the plaintiff obtained relief from stay and as a result the lawsuit has reopened against Gwenco.

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 matter is currently pending.
  
Item 4.   (REMOVED AND RESERVED).

 
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PART II
 
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
Quest’s common stock is traded on the Pink Sheets OTC Electronic Market under the symbol “QMIN.”  The following table shows the high and low bid prices for Quest’s common stock for each quarter since January 1, 2008 as reported by the either the OTC Bulletin Board or the Pink Sheets OTC Electronic Market.  All share prices have been adjusted to provide for 1 for 10 reverse stock split effected on November 4, 2008 and the 1 for 100 reverse stock split effected on August 5, 2009.  Quest considers its stock to be “thinly traded” and any reported sale prices may not be a true market-based valuation of its stock.  Some of the bid quotations from the OTC Bulletin Board set forth below may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

2008 (OTC Bulletin Board)
 
High Bid
   
Low Bid
 
First quarter
  $ 11.00     $ 3.90  
Second quarter
    75.00       0.80  
Third quarter
    48.00       1.50  
Fourth quarter
    5.70       0.80  
                 
2009 (OTC Bulletin Board)
 
High Bid
   
Low Bid
 
First quarter
  $ 0.280     $ 0.040  
Second quarter
    0.180       0.040  
Third quarter
    0.080       0.040  
Fourth quarter
    0.031       0.001  

As of April 6, 2010, there were approximately 522 record holders of Quest’s common stock.

Quest has not paid any cash dividends since its inception and does not contemplate paying dividends in the foreseeable future.  It is anticipated that earnings, if any, will be retained for the operation of its business.

Shares eligible for future sale could depress the price of Quest’s common stock, thus lowering the value of your investment.  Sales of substantial amounts of Quest’s common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for shares of Quest’s common stock.

Quest’s revenues and operating results may fluctuate significantly from quarter to quarter, which can lead to significant volatility in the price and volume of its stock.  In addition, stock markets have experienced extreme price and volume volatility in recent years.  This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons unrelated or disproportionate to the operating performance of the specific companies.  These broad market fluctuations may adversely affect the market price of Quest’s common stock.

Recent Sales of Unregistered Securities

During the quarter ended December 31, 2009, Quest issued an aggregate of 195,677,720 shares of common stock upon conversions of various convertible notes. The aggregate principal and interest amount of these notes that were converted was $295,222.  The issuances were exempt pursuant to Section 3(a)(9) of the Securities Act as well as Section 4(2) of the Securities Act.

During the quarter ended December 31, 2009, Quest issued an aggregate of 8,337,702 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 $30,000.  The issuances were exempt pursuant to Section 1145 of the Bankruptcy Code.

During the quarter ended December 31, 2009, Quest issued 12,000,000 shares of common stock upon conversion of 4,800 shares of its series A preferred stock.  The issuance was exempt pursuant to Section 3(a)(9) of the Securities Act as well as Section 4(2) of the Securities Act.

 
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On October 14, 2009, Quest 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 $125,000 5% convertible promissory note due October 14, 2014.  The evidences of indebtedness were comprised of investments made into Quest in 2008 which Quest agreed to repay upon demand.    The note is convertible into shares of Quest’s common stock at a conversion price of $0.001 per share, subject to adjustment.  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 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.

On October 23, 2009, Quest borrowed $50,000 from an investor, and in connection therewith, issued a $50,000 8% convertible promissory note due October 23, 2011.  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 values during the ten (10) trading days immediately preceding a conversion date.  The issuance was exempt pursuant to Section 4(2) of the Securities Act.

On December 14, 2009, Quest entered into an exchange agreement with a third party investor, pursuant to which the investor exchanged approximately $30,000 of evidence of indebtedness for a $30,000 4% convertible promissory note due December 14, 2011.  The evidence of indebtedness was comprised of an investment made into Quest in 2008 which Quest agreed to repay upon demand.    The note is convertible into shares of Quest’s common stock at a conversion price of fifty percent (50%) of the average of the three (3) per share market values immediately preceding a conversion date.  The holder may not convert any outstanding principal amount of this note or accrued and unpaid interest thereon to the extent such conversion would result in the holder beneficially owning in excess of 4.999% of the then issued and outstanding common shares of 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.
 
Item 6.     SELECTED FINANCIAL DATA
 
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

The following discussion and analysis should be read in conjunction with Quest’s financial statements and related notes included in this report.  This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The statements contained in this report that are not historic in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements based on current expectations and assumptions.  Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements.  Please refer to the Risk Factors section of this report on page 4 for a description of these risks and uncertainties.

All forward-looking statements in this document are based on information currently available to Quest as of the date of this report, and Quest assumes no obligation to update any forward-looking statements.  Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

General

Quest Minerals & Mining Corp. acquires and operates energy and mineral related properties in the southeastern part of the United States.  Quest focuses its efforts on properties that produce quality compliance blend coal.

Quest is a holding company for Quest Minerals & Mining, Ltd., a Nevada corporation, or Quest (Nevada), which in turn is a holding company for Quest Energy, Ltd., a Kentucky corporation, or Quest Energy, and of Gwenco, Inc., a Kentucky corporation, or Gwenco.  Quest Energy is the parent corporation of E-Z Mining Co., Inc, a Kentucky corporation, or E-Z Mining, and of Quest Marine Terminal, Ltd., a Kentucky corporation, or Quest Marine.

Gwenco leases over 700 acres of coal mines, with approximately 12,999,000 tons of coal in place in six seams.  In 2004, Gwenco had reopened Gwenco’s two former drift mines at Pond Creek and Lower Cedar Grove, and had begun production at the Pond Creek seam.  This seam of high quality compliance coal is located at Slater’s Branch, South Williamson, Kentucky.

Fiscal 2009 and First Quarter 2010 Developments

Coal Production.  Due to economic conditions in the first quarter of 2009, domestic steel production dropped significantly, thereby reducing demand for Quest’s coal.  In order to conserve costs, Quest temporarily suspended operations in the second quarter of 2009.  Quest procured a new contract for the sale of coal to a new customer in the second quarter of 2009.  In addition, it received new coal orders from another coal distribution company and we re-started coal production in July 2009.  In July and August 2009, Quest encountered temporary delays and stoppages that are normally associated with resuming dormant mine operations.  In September, Quest was able to operate without any significant delays or stoppages, which allowed it to increase coal production.  As a result, from September 2009 through the end of the year, Quest generated approximately $1.17 million of its $1.61 million 2009 annual revenues.  Furthermore, as Quest has advanced further in the mine, it has been encountering thicker coal seams, which resulted in improved rates of recovery.

Gwenco, Inc. Chapter 11 Reorganization.  On March 2, 2007, Quest’s wholly owned subsidiary, Gwenco, Inc., filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Kentucky.  Management felt this was a necessary step to further the company’s financial restructuring initiative and to protect Gwenco’s assets from claims, debts, judgments, foreclosures, and forfeitures of those creditors and stakeholders with whom both Quest and Gwenco were unable to negotiate restructured agreements.  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.

 
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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. 

There were 5 classes of Claims under the Plan:  (i)  Class 1—The Interstellar Duke claim, in the aggregate amount of $1,093,771; (ii) Class 2—Priority Claims, in aggregate amount of $391,558; (iii) Class 3—General Unsecured Claims, in the aggregate amount of $1,417,786; (iv) Class 4-Subordinated Claims, consisting of claims of affiliates of the debtor totaling $3,453,996; and (v) Class 5—Equity Holder Interest in the amount of $199,213.

The Class 1 Claim was satisfied by the issuance to Interstellar Holdings, LLC 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.  The company and Interstellar formally closed this transaction on March 8, 2010.

The Class 2 Claims were due and payable as of the effective date of the Plan.

The Class 3 Claims will be satisfied by cash payments equal to the value of their claim on the earlier of (i) the 60th month after the effective date of the Plan or (ii) the date on which, in Gwenco’s sole discretion, proceeds from the exit facility are sufficient to satisfy the claims.  Further, Class 3 Claimholders shall receive their pro-rata share of royalty payments to reduce their claims beginning in the month following the Effective Date.  Notwithstanding the foregoing, certain creditors in this Class negotiated settlements as more specifically set forth in the Plan.

The Class 4 Claims will be paid after holders of all allowed claims in other classes have been paid in full.  The Class 5 Claims were deemed unimpaired.

Gwenco, as a reorganized debtor, operates its coal mining business and will use current and future income from operations to meet current and future expenses and to make payments called for under the Plan.  In addition, 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 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.  On March 8, 2010, Gwenco and Interstellar formally closed this transaction by, among other things, entering into a Loan and Security Agreement and related transaction documents.  The obligations under the exit facility are secured and guaranteed by the company and Quest (Nevada).

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.

This description of the Plan does not purport to be complete and is qualified in its entirety by reference to such Plan, a copy of which was filed as an exhibit to Quest’s Current Report on Form 8-K dated October 2, 2009.

Critical Accounting Policies

The discussion and analysis of Quest’s financial conditions and results of operations is based upon Quest’s consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.  The preparation of financial statements requires managers to make estimates and disclosures on the date of the financial statements.  On an on-going basis, Quest evaluates its estimates, including, but not limited to, those related to revenue recognition.  It uses authoritative pronouncements, historical experience, and other assumptions as the basis for making judgments.  Actual results could differ from those estimates.  Quest believes the following critical accounting policies affect its more significant judgments and estimates in the preparation of our consolidated financial statements.

 
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Mineral Interests

The purchase acquisition costs of mineral properties are deferred until the properties are placed into production, sold or abandoned.  These deferred costs will be amortized on the unit-of-production basis over the estimated useful life of the properties following the commencement of production or written-off if the properties are sold, allowed to lapse or abandoned.

Mineral property acquisition costs include any cash consideration and the fair market value of common shares and preferred shares, based on the trading price of the shares, or, if no trading price exists, on other indicia of fair market value, issued for mineral property interests, pursuant to the terms of the agreement or based upon an independent appraisal.

Administrative expenditures are expensed in the year incurred.

Coal Acquisition Costs

The costs to obtain coal lease rights are capitalized and amortized primarily by the units-of-production method over the estimated recoverable reserves.  Amortization occurs either as Quest mines on the property or as others mine on the property through subleasing transactions.

Rights to leased coal lands are often acquired through royalty payments.  As mining occurs on these leases, the accrued royalty is charged to cost of coal sales.

Mining Acquisition Costs

The costs to obtain any interest in third-party mining operations are expensed unless significantly proven reserves can be established for the entity.  At that point, capitalization would occur.

Mining Equipment

Mining equipment is recorded at cost.  Expenditures that extend the useful lives of existing plant and equipment or increase the productivity of the asset are capitalized.  Mining equipment is depreciated principally on the straight-line method over the estimated useful lives of the assets, which range from three to 15 years.

Deferred Mine Equipment

Costs of developing new mines or significantly expanding the capacity of existing mines are capitalized and amortized using the units-of-production method over the estimated recoverable reserves that are associated with the property being benefited.

Asset Impairment

If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed.  If the review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value.

Revenue Recognition

Coal sales revenues are sales to customers of coal produced at Quest’s operations.  Quest recognizes revenue from coal sales at the time title passes to the customer.  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 Quest’s mines.

 
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Income Taxes

Quest provides for the tax effects of transactions reported in the financial statements.  The provision, if any, consists of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting.  The deferred tax assets and liabilities, if any, represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.  As of the years ended December 31, 2009 and 2008, Quest had no material current tax liability, deferred tax assets, or liabilities to impact on its financial position because the deferred tax asset related to Quest’s net operating loss carry forward was fully offset by a valuation allowance.  However, Quest has not filed its corporate income tax returns since 2002.

Fair Value

Quest’s financial instruments, as defined by 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 December 31, 2009.

Earnings loss per share

Quest 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 diluged 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 10 reverse stock split effectuated on November 4, 2008.

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.

Other Recent Accounting Pronouncements

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

 
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Results of Operations

Basis of Presentation

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

   
Year Ended
 
   
December 31,
 
   
2009
   
2008
 
             
Coal Revenues
  $ 1,612,357     $ 746,767  
Production costs
    (2,441,756 )     (1,333,778 )
Selling, general and administrative
    (1,717,373 )     (2,567,082 )
Depreciation and Amortization
    (165,384 )     (229,744 )
                 
Operating (loss)
    (2,712,156 )     (3,383,837 )

Comparison of the year ended December 31, 2009 and 2008

Coal Revenues.  Revenues for Quest were $1,612,357 for the year ended December 31, 2009, as compared to $746,767 for the year ended December 31, 2008, an increase of approximately 116%.  Our increase in revenues was due to our increased level of mining operations in 2009 versus 2008.  This increase resulted from our ability to mine on a more consistent basis, particularly during the latter half of the year.  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 $2,441,756 for the year ended December 31, 2009 as compared to $1,333,778 for the year ended December 31, 2008, an increase of approximately 83%.  As a percentage of sales, our production costs decreased from 178% to 151%.  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 $1,717,373 for the year ended December 31, 2009, from $2,567,082 for the year ended December 31, 2008.   The primary reason for the decrease was the absence in the year ended December 31, 2009 of the selling, general, and administrative expenses result primarily the issuance of stock options valued at $582,500 pursuant to FASB ASC Topic 718, “Compensation – Stock Compensation” which occurred during the year ended December 31, 2008.  In addition, the decrease in selling, general, and administrative expenses resulted from a decrease of compensation expense from the issuance of shares of common stock for services of $913,089 for the year ended December 31, 2009 from $1,093,253 for the year ended December 31, 2008.

Depreciation and amortization.  Depreciation expense decreased to $165,384 for the year ended December 31, 2009, from $229,744 for the year ended December 31, 2008.  Quest fully depreciated a large asset portion of its equipment in 2008, and there was no comparable depreciation expense in 2009, resulting in higher depreciation in 2008.   This difference was partially offset by increased depreciation in 2009 on other equipment that resulted from Quest putting additional equipment into service in 2009.

 
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Operating loss.  Quest incurred an operating loss of $2,712,156 for the year ended December 31, 2009, compared to an operating loss of $3,383,837 for the year ended December 31, 2008.   It had lower operating losses in 2009 as compared to 2008 primarily from increase in coal revenues as well as a decrease in selling, general, and administrative expenses.

Interest.  Interest expense increased to $2,710,455 for the year ended December 31, 2009 from $637,320 for the year ended December 31, 2008.  Quest’s interest expense results from various outstanding debt obligations, including obligations that Quest assumed in connection with the acquisition of Gwenco and various notes issued in various financings since October 2004.  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 Quest’s restructured debt obligations pursuant to Gwenco’s plan of reorganization.  It also results from additional borrowings which occurred in 2009.

Loss on sale of assets.  In 2008, Quest incurred a loss of $73,205 from the sale of certain assets.

Gain on loan settlements pursuant to plan of reorganization.  As a result of the confirmation of Gwenco’s Plan of Reorganization, Quest recorded a gain of $2,450,059 on loan settlements pursuant to the plan of reorganization in the year ended December 31, 2009.  Although the plan of reorganization is a 100% pay out plan, the revised terms of repayment result in a reduction of the present value of certain debt obligations, which in turn resulted in our recognition of a gain on loan settlements.

Loss on restructuring prior to plan of reorganization.  Quest recognized a loss of $1,201,226 on restructurings prior to the confirmation of Gwenco’s plan of reorganization.  This loss primarily results from negotiated resolution of outstanding contested matter with Quest’s largest creditor.

Liquidity and Capital Resources

Quest has financed its operations, acquisitions, debt service, and capital requirements through cash flows generated from operations and through issuance of debt and equity securities.  Its working capital deficit at December 31, 2009 was $3,929,293.  It had cash of $7,254 as of December 31, 2009.

Quest used $1,019,781 of net cash in operating activities for the year ended December 31, 2009, compared to using $1,051,475 in the year ended December 31, 2008.  Cash used in operating activities for the year ended December 31, 2009 was due to Quest’s net loss of $4,173,778, a gain on debt extinguishments of $1,248,833, an increase in accounts receivable of $111,052, an increase in prepaid expenses of $6,234, and a decrease in accounts payable and accrued expenses of $418,374.  This was offset by non-cash expenses of $165,384 in depreciation and amortization, $36,226 of stock issued for interest, $913,089 of stock issued for services, $292,532 of amortized discount on convertible notes, $16,702 of amortized royalty costs, $226 of amortized deferred issuance costs, a $12,395 decrease in restricted cash, and an increase of debt transfers and credits from accrued interest of $3,501,936.

Net cash flows used in investing activities was $18,544 for the year ended December 31, 2009, as compared to $528,272 of net cash flows used in investing activities for the comparable period in 2008.  The net cash flows used in investing activities in 2009 resulted from $12,000 in equipment purchases and $6,544 in security deposits.

Net cash flows provided by financing activities were $1,032,140 for the year ended December 31, 2009, compared to net cash flows provided by financing activities of $1,588,722 for the year ended December 31, 2008.  This decrease in net cash provided by financing activities is due to Quest’s borrowings of $1,901,188 under its DIP and Exit Facilities in the Gwenco reorganization and $231,827 in other borrowings, offset by repayment of $1,100,875 of debt.

Financings and Debt Restructurings

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.

 
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Upon Gwenco’s recommencement of mining operations in the third quarter of 2009, the debtor-in-possession lender required Gwenco to assign all of its accounts receivable to the lender and have all payments on the receivables paid into an escrow account.  The lender had been making advances under the facility to Gwenco against the accounts receivable, and the advances are 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.

On September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan of Reorganization (the “Plan”).  The Plan became effective on October 12, 2009.  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.  Gwenco paid off the debtor-in-possession financing with borrowings from the exit 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.

A third-party lender advances operational funding to Quest.  Since there has been no formal agreement regarding the balance owed, Quest accrues a 5% annual interest on the principal with the intent that a mutual arrangement will be resolved between both parties.  On June 26, 2009, Quest 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 and bears interest at an annual rate of five percent (5%).  The new note is convertible into shares of Quest’s common stock at a conversion price of $0.001 per share, subject to adjustment.  As of December 31, 2009, there continues to be no formal agreement regarding the remaining evidences of indebtedness of $130,857, and Quest continues to accrue 5% annual interest on the principal with the intent that a mutual arrangement will be resolved between both parties.

On August 14, 2008, Quest issued an 8% $400,000 convertible promissory note to a single accredited investor. The note is due on July 23, 2010 and is convertible into shares of our 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 proceeds will be used for working capital and general corporate purposes. 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 Quest.  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 connection with the Company’s common stock being removed from quotation from the OTC Bulletin Board.

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

On October 23, 2009, Quest borrowed $50,000 from an investor, and in connection therewith, issued a $50,000 8% convertible promissory note due October 23, 2011.  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 values during the ten (10) trading days immediately preceding a conversion date.

 
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Capital Requirements

The report of Quest’s independent accountants for the fiscal year ended December 31, 2009 states that Quest has incurred operating losses since inception and requires additional capital to continue operations, and that these conditions raise substantial doubt about its ability to continue as a going concern. Quest believes that, as of the date of this report, in order to fund its plan of operations over the next 12 months, it will need to fund its operations out of cash flows generated from operations, to the extent such operations are resumed, and from the sale of additional securities.

Quest is continuing to seek to fund its capital requirements over the next 12 months from the additional sale of its debt and equity securities. It is possible that Quest will be unable to obtain sufficient additional capital through the sale of its securities as needed.  Quest has also obtained exit facility financing through the Gwenco bankruptcy proceedings to fund the capital requirements of Gwenco, Inc.

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

Quest intends to retain any future earnings to pay its debts, finance the expansion of its business and any necessary capital expenditures, and for general corporate purposes.

 
34

 
 
Item 8.  FINANCIAL STATEMENTS
 
RBSM LLP
Accountants and Advisors
5 West 37th Street
9th Floor
New York, NY 10018
212.868.3669
212.868.3498/Fax

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Quest Minerals & Mining Corp.
Paterson, New Jersey

We have audited the consolidated balance sheet of Quest Minerals & Mining Corp. (the “Company”) and subsidiaries, as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in deficiency in stockholders' equity and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Quest Minerals & Mining Corp. and subsidiaries as of December 31, 2009 and 2008 and the results of its consolidated operations and its cash flows for the year ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company’s only operating subsidiary, Gwenco, Inc. (“Gwenco”) filed on March 2, 2007, 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 the Company and Gwenco were unable to negotiate restructured agreements. On September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan of Reorganization (the “Plan”) and the plan became effective on October 12, 2009. Gwenco is currently overseeing its operations as a debtor in possession, subject to court approval of matters outside the ordinary course of business. 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.
 
Washington, D.C.    New York, NY   Mumbai, India
www.rbsmllp.com
Member of Russell Bedford International with affiliated offices worldwide
 
35


Additionally, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and the company’s primary operating subsidiary has filed for reorganization under Chapter 11 of U.S. Bankruptcy Code, this raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Notes 1 and 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
/s/ RBSM, LLP

New York, New York
April 14, 2010
 
Washington, D.C.    New York, NY   Mumbai, India
www.rbsmllp.com
Member of Russell Bedford International with affiliated offices worldwide
 
36

 
QUEST MINERALS & MINING CORP.

CONSOLIDATED BALANCE SHEETS

   
December 31,
   
December 31,
 
 
 
2009
   
2008
 
ASSETS
           
             
Current Assets
           
Cash
  $ 7,254     $ 13,439  
Receivables
    112,282       -  
Prepaid expenses
    8,227       1,993  
Total current assets
    127,763       15,432  
                 
Other Assets:
               
Leased Mineral Reserves, net (Notes 2 & 5)
    5,187,317       5,203,414  
Mine development, net
    113,207       226,407  
Equipment, net (Note 6)
    133,184       157,271  
Deposits
    48,986       42,442  
Deferred debt issue cost, net
    -       226  
DIP Cash, Restricted (Note 14)
    -       12,395  
DIP Receivables, Restricted (Note 14)
    -       1,230  
                 
TOTAL ASSETS
  $ 5,610,457     $ 5,658,816  
                 
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
               
                 
Current Liabilities
               
Accounts payable and accrued expenses (Note 7)
  $ 3,060,061     $ 3,478,435  
Loans payable-current portion, net (Note 8)
    996,995       2,197,958  
Bank loans (Note 8)
    -       1,017,525  
Related party loans (Note 8)
    -       624,581  
DIP Financing (Note 8)
    -       923,043  
                 
TOTAL CURRENT LIABILITIES
    4,057,056       8,241,542  
                 
Long-Term Liabilities:
               
Loans payable-long term portion, net (Note 8)
    2,075,927       751,342  
Restructured debt - long term portion, net  (Note 8)
    558,833       -  
Related party loans, net (Note 8)
    300,468       -  
                 
TOTAL LONG-TERM LIABILITIES
    2,935,228       751,342  
                 
TOTAL LIABILITIES
    6,992,284       8,992,884  
                 
Commitments and Contingencies (Note 15)
    -       -  
                 
Deficiency in Stockholders' Equity
               
Preferred stock, par value $0.001, 25,000,000 shares authorized (Note 10)
               
SERIES A - issued and outstanding 20,726 shares
    21       26  
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 11) issued and outstanding 349,144,782 and 2,531,885 shares as of December 31, 2009 and December 31, 2008, respectively
    34,914       253  
                 
Common stock to be issued
    5,648       5,648  
                 
Equity allowance (Note 11)
    (587,500 )     (587,500 )
                 
Paid-in capital (Note 11)
    69,813,168       63,721,804  
Accumulated Deficit
    (70,648,386 )     (66,474,607 )
                 
Total Deficiency in Stockholders' Equity
    (1,381,827 )     (3,334,068 )
                 
TOTAL LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
  $ 5,610,457     $ 5,658,816  

The accompanying notes are an integral part of these financial statements

 
37

 

CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2009 and 2008

   
2009
   
2008
 
             
Coal revenues
  $ 1,612,357     $ 746,767  
Production costs
    (2,441,756 )     (1,333,778 )
                 
Gross profit (loss)
  $ (829,399 )     (587,011 )
                 
Operating expenses:
               
Selling, general and administrative
    1,717,373       2,567,082  
Depreciation and amortization
    165,384       229,744  
                 
Total Operating Expenses
    1,882,757       2,796,826  
                 
Net Loss from Operations
    (2,712,156 )     (3,383,837 )
                 
Other income (expense):
               
Loss on sale of assets
    -       (73,205 )
Gain on loan settlements pursuant to plan of reorganization
    2,450,059       -  
Loss on restructuring prior to plan of reorganization
    (1,201,226 )     49,743  
 Interest, net
    (2,710,455 )     (637,320 )
                 
Net loss before income taxes
    (4,173,778 )     (4,044,619 )
                 
Provision for Income taxes
    -       -  
                 
Net Loss
  $ (4,173,778 )   $ (4,044,619 )
                 
Basic diluted (loss) per common share
  $ (0.0657 )   $ (5.5651 )
                 
Weighted average common shares outstanding
    63,550,123       726,781  

The accompanying notes are an integral part of these financial statements

 
38

 

QUEST MINERALS & MINING CORP.

CONSOLIDATED STATEMENT OF CHANGES OF DEFICIENCY IN STOCKHOLDER'S EQUITY
For the years ended December 31, 2009 and 2008

   
Common Stock
   
Preferred Stock
   
Additional
   
Escrow /
             
                           
Paid-in
   
Adjustments
             
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Common Stock
   
Deficit
   
Totals
 
                                                 
Balances at January 1, 2008
    46,799     $ 5       756,150     $ 756       60,833,302     $ (611,178 )   $ (62,429,988 )   $ (2,207,105 )
                                                                 
Common Stock issued:
                                                               
For consulting services
    3,000       -                       6,600                       6,600  
For notes payable and interest expense
    1,234,724       123                       743,052                       743,175  
                                                                 
Common Stock issued as compensation:
                                                               
For consulting services
    387,691       39                       797,013                       797,052  
For other services
    162,800       16                       289,583                       289,599  
                                                                 
Employee Stock Options
    -       -                       582,500                       582,500  
                                                                 
Series A Preferred Conversion
    698,967       70       (422,341 )     (422 )     352                       -  
                                                                 
Returned Stock from Issuance Error - December 14, 2007
    (2,095 )     -                       (29,326 )     29,326               -  
                                                                 
Convertible Note Discount Accruals
    -       -                       370,026                       370,026  
                                                                 
Exchange conversion adjustments
    -       -                       128,704                       128,704  
                                                                 
Net Loss for the year ended December 31, 2008
                                                    (4,044,619 )     (4,044,619 )
                                                                 
Balances at January 1, 2009
    2,531,886     $ 253       333,809     $ 334       63,721,806     $ (581,852 )   $ (66,474,608 )   $ (3,334,068 )
                                                                 
Common Stock issued:
                                                               
For notes payable and interest expense
    246,829,966       24,683                       1,022,265                       1,046,948  
                                                                 
Common Stock issued as compensation:
                                                               
For consulting services
    25,535,000       2,554                       320,147                       322,701  
For legal and accounting services
    62,247,930       6,225                       584,164                       590,389  
                                                                 
Series A Preferred Conversion
    12,000,000       1,200       (4,800 )     (5 )     (1,195 )                     -  
                                                                 
Debt discount - Beneficial conversion feature on convertible notes
    -       -                       4,165,981                       4,165,981  
                                                                 
Net Loss for the year ended December 31, 2009
                                                    (4,173,778 )     (4,173,778 )
                                                                 
Balances at December 31, 2009
    349,144,782     $ 34,915       329,009     $ 329       69,813,168     $ (581,852 )   $ (70,648,386 )   $ (1,381,827 )
  
The accompanying notes are an integral part of these financial statements.

 
39

 

QUEST MINERALS & MINING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
   

   
2009
   
2008
 
             
Operating Activities
           
Net loss
  $ (4,173,778 )   $ (4,044,619 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    165,384       229,744  
Loss on sale of assets
    -       73,205  
Stock issued for interest
    36,226       66,212  
Stock issued for services
    913,089       1,093,253  
Fair value of vested Options issued to employees
    -       582,500  
Gain on debt extinguishments
    (1,248,833 )     (49,743 )
Amortization of discount on convertible notes
    292,532       244,850  
Amortization of royalty costs
    16,702       -  
Amortization of deferred issuance costs
    226       (226 )
Changes in operating assets and liabilities:
               
(Increase) decrease in receivables
    (111,052 )     (1,230 )
(Increase) decrease in prepaid expenses
    (6,234 )     35,578  
(Increase) decrease in restricted cash
    12,395       -  
Increase (decrease) in accounts payable and accrued expenses
    (418,374 )     781,828  
Increase (decrease) in debt transfers and credits from accrued interest
    3,501,936       -  
Increase (decrease) in liquidated damages payable
    -       (62,827 )
Net cash used in operating activities
    (1,019,781 )     (1,051,475 )
                 
Investing Activities
               
Mine development
    -       (339,611 )
Equipment purchased
    (12,000 )     (175,633 )
Restricted cash
    -       (11,229 )
Security deposits
    (6,544 )     (1,799 )
Net cash used in investing activities
    (18,544 )     (528,272 )
                 
Financing  Activities
               
Repayment of borrowings
    (1,100,875 )     (47,708 )
Proceeds from DIP/Exit Financing
    1,901,188       587,280  
Borrowings
    231,827       1,049,150  
Net cash provided by financing activities
    1,032,140       1,588,722  
                 
Increase (decrease) in cash
    (6,185 )     8,975  
Cash at beginning of year
    13,439       4,464  
Cash at end of year
  $ 7,254     $ 13,439  
                 
Supplemental Disclosures of Cash Flow Information
               
Cash paid during the year:
               
Interest
  $ 22,477     $ 6,517  
                 
Income taxes
  $ -     $ -  
                 
Non-cash financing activities:
               
Conversions of note principal and interest
  $ 1,046,948     $ 743,175  

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

 
40

 
  

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

NOTE 1 – 
ORGANIZATION & OPERATIONS

Quest Minerals & Mining Corp. (“Quest,” the “Registrant,” or the “Company”) was incorporated in Utah on November 21, 1985. The Company has leasehold interests in certain properties in Eastern Kentucky, is seeking to re-commence full coal mining operations on these properties, and is looking to acquire additional coal properties.

Quest’s subsidiary, Gwenco, Inc. (“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.

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.

NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The audited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Quest Mineral & Mining, Ltd., Quest Energy, Ltd., and Gwenco, Inc. (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Critical estimates include amortization of intangible assets, depreciation, and the fair value of options and warrants included in the determination of debt discounts and share-based compensation.

 
41

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

Major Customers and Suppliers

The Company had three customers who accounted for 53%, 20%, and 27%, respectively of total revenues in 2009 and one customer who accounted for 100% of revenues in 2008.

Costs of the Company’s one major vendor, who provided contract mining services, accounted for 71% of the Company’s production costs for the year ended December 31, 2009 and costs of the Company’s two major vendors, who provided contract mining and trucking services, accounted for 73% and 14%, respectively, of the Company’s production costs for the year ended December 31, 2008.

Dependency on Key Management

The future success or failure of the Company is dependent primarily upon the efforts of the Company’s President, sole director, and controlling stockholder. The Company does not have insurance covering such officer’s liability and term life insurance. The Company entered into a five-year employment contract with the President in 2005.

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.

Since the Company’s continuation as a going concern is dependent upon its ability to obtain adequate financing (see Note 3), the carrying value of the mineral rights does not necessarily represent liquidation value if the Company were force to sell the mineral rights in liquidation in a liquidation proceeding under Chapter 7 of the Bankruptcy Code.

Coal Acquisition Costs

The costs to obtain coal lease rights are capitalized and amortized primarily by the units-of-production method over the estimated recoverable reserves. Amortization occurs either as the Company mines on the property or as others mine on the property through subleasing transactions.

Rights to leased coal lands are often acquired through royalty payments. As mining occurs on these leases, the accrued royalty is charged to cost of coal sales.

 
42

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

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 3 to 15 years.

Deferred Mine Expense

Costs of developing new mines or significantly expanding the capacity of existing mines are capitalized and amortized using the units-of-production method over the estimated recoverable reserves that are associated with the property being benefited.

Asset Impairment

If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed under the guidance of ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If the review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value.

Revenue Recognition

Coal sales revenues are sales to customers of coal produced at the Company’s operations. The Company recognizes revenue from coal sales at the time title passes to the customer. 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 the Company’s mines.

Stock-Based Compensation

Effective January 1, 2006, the Company began recording compensation expense associated with stock options and other forms of equity compensation in accordance with FASB ASC 718 “Stock Compensation”. Prior to January 1, 2006, the Company had accounted for stock options according to the provisions of ASC 718, and related interpretations, and therefore no related compensation expense was recorded for awards granted with no intrinsic value. The Company adopted the modified prospective transition method provided for ASC 718-10, and, consequently, has not retroactively adjusted results from prior periods.

There were 50,000 options issued to the Company’s President during the year ended December 31, 2008. In 2009, the 50,000 options were exchanged and cancelled for a new option grant of equal value, which grant shall be consummated upon the Company’s adoption of a new stock incentive plan. As of December 31, 2009, the exchange had not been completed. See Note 12 for details.

 
43

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

Income Taxes

The Company provides for the tax effects of transactions reported in the consolidated 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 December 31, 2009 and 2008, the Company had no material current tax liability, deferred tax assets, or liabilities to impact on the Company’s financial position because the deferred tax asset related to the Company’s net operating loss carry forward was fully offset by a valuation allowance.

Fair Value

The FASB issued ASC 820-10, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820-10 applies to other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. ASC 820-10 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with the exception of all non-financial assets and liabilities, which will be effective for years beginning after November 15, 2008. The Company adopted the required provisions of ASC 820-10 that became effective in its first quarter of 2008. The adoption of these provisions did not have a material impact on the Company’s consolidated financial statements. In February 2008, the FASB issued ASC 820-10-15, “Effective Date of FASB ASC 820-10.” ASC 820-10-15 delays the effective date of ASC 820-10 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In October 2008, the FASB issued ASC 820-10-35, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” ASC 820-10-35 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with ASC 820-10. This ASC clarifies the application of ASC 820-10 in determining the fair values of assets or liabilities in a market that is not active. In April 2009, the FASB issued ASC 820-10-65, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” ASC 820-10-65 does not change the definition of fair value as detailed in ASC 820-10, but provides additional guidance for estimating fair value in accordance with ASC 820-10 when the volume and level of activity for the asset or liability have significantly decreased. The provisions of ASC 820-10-65 are effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. If early adoption is elected for either ASC 320-10 or ASC 825-10 and ASC 270-10, ASC 820-10-65 must also be adopted early.

ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820-10 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.

There are three general valuation techniques that may be used to measure fair value, as described below:

 
44

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 
·
Market approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources;

 
·
Cost approach – Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and

 
·
Income approach – Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.

Financial assets and liabilities are valued using either level 1 inputs based on unadjusted quoted market prices within active markets or using level 2 inputs based primarily on quoted prices for similar assets or liabilities in active or inactive markets. For certain debt, fair value is based on present value techniques using inputs derived principally or corroborated from market data. Using level 3 inputs using management’s assumptions about the assumptions market participants would utilize in pricing the asset or liability. In the Company’s case, this entailed assumptions used in pricing models for note discounts. Valuation techniques utilized to determine fair value are consistently applied.

As of December 31, 2009, the Company does not carry on a recurring basis any assets or liabilities at fair value.

Earnings (loss) per share

The Company adopted ASC 260, which provides for the calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average common shares outstanding for the period; after provisions for cumulative dividends on Series A preferred stock. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings similar to fully diluted earnings per share. The assumed exercise of outstanding stock options and warrants and the conversion of convertible securities were not included in the computation of diluted loss per share because the assumed exercises and conversions would be anti-dilutive for the periods presented.

Stock Split

All references to common stock and per share data have been retroactively restated to the earliest period presented to account for the 1 for 10 reverse stock split effectuated on November 4, 2008. See Note 11 for details.

All references to common stock and per share data have been retroactively restated once more to the earliest period presented to account for the 1 for 100 reverse stock split effectuated on August 4, 2009. See Note 11 for details.

Articles of Incorporation Amendment

All references to common stock and per share par value data have been retroactively restated to the earliest period presented to account for the amended par value from $.001 to $.0001 effectuated on November 23, 2009. See Note 11 for details.

 
45

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

Recently Adopted Accounting Principles

In August 2009, FASB Accounting Standards Update 2009-05 included amendments to Subtopic 820-10, Fair Value Measurements and Disclosures—Overall, for the fair value measurement of liabilities and provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. This update also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability and that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
 
In July 2009, the FASB issued ASC 105-10, “Generally Accepted Accounting Principles.” ASC 105-10 established the FASB Accounting Standards Codification as the single source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities. ASC 105-10 will supersede all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in ASC 105-10 will become nonauthoritative. Following ASC 105-10, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification.  ASC 105-10 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of ASC 105-10 did not have a material impact on the Company’s consolidated financial statements.
 
The FASB has issued ASC 855-10, “Subsequent Events.”  ASC 855-10 established general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Specifically, ASC 855-10 provides (a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  ASC 855-10 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively.  The adoption of this ASC did not have a material impact on the Company’s consolidated financial statements.
 
The FASB has issued ASC 825-10-65, “Interim Disclosures about Fair Value of Financial Instruments.” ASC 825-10-65 amends ASC 825-10-50, Disclosures About Fair Value of Financial Instrument, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. ASC 825-10-65 also amends ASC 270-10, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. ASC 825-10-65 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. ASC 825-10-65 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, ASC 825-10-65 requires comparative disclosures only for periods ending after initial adoption. The adoption of this ASC did not have a material impact on the Company’s consolidated financial statements.

 
46

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
 
The FASB has issued ASC 805-10, “Accounting for Assets Acquired and Liabilities assumed in a Business Combination That Arise from Contingencies —an amendment of FASB Statement No. 141 (Revised December 2007), Business Combinations.” ASC 805-10 addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. ASC 805-10 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. ASC 805-10 will have an impact on the Company’s accounting for any future acquisitions and its consolidated financial statements.

The FASB has issued ASC 350-10, “Determination of the Useful Life of Intangible Assets.” ASC 350-10 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350-10, “Goodwill and Other Intangible Assets.” ASC No. 350-10 is effective for fiscal years beginning after December 15, 2008. The adoption of this ASC did not have a material impact on the Company’s consolidated financial statements.

 The FASB has issued ASC 815-10, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” ASC 815-10 requires enhanced disclosures regarding derivatives and hedging activities, including: (a) the manner in which an entity uses derivative instruments; (b) the manner in which derivative instruments and related hedged items are accounted for under Accounting Standards Codification 815-10, “Accounting for Derivative Instruments and Hedging Activities;” and (c) the effect of derivative instruments and related hedged items on an entity’s financial position, financial performance, and cash flows. ASC 815-10 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted ASC 815-10 effective January 1, 2009 and the adoption had no material impact on the Company’s consolidated financial statements and disclosures.

The FASB has issued ASC 810-10-65-1, “Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). In ASC 810-10-65-1, the FASB established accounting and reporting standards that require non-controlling interests to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any retained non-controlling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. ASC 810-10-65-1 is effective for annual periods beginning on or after December 15, 2008. Retroactive application of ASC810-10-65-1 is prohibited. The Company adopted ASC 810-10-65-1 effective January 1, 2009 and the adoption had no material impact on the Company’s consolidated financial statements and disclosures.

The FASB has issued ASC 808-10, “Accounting for Collaborative Arrangements.” ASC 808-10 prescribes the accounting for parties of a collaborative arrangement to present the results of activities for the party acting as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. Further, ASC 808-10 clarified the determination of whether transactions within a collaborative arrangement are part of a vendor-customer (or analogous) relationship subject to Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer.” ASC 808-10 is effective for collaborative arrangements that exist on January 1, 2009 and application is retrospective. The Company adopted ASC 808-10 effective January 1, 2009 and the adoption had no material effect on the Company’s financial position or results of operations.

 
47

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

The FASB issued ASC 815-40-15, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.” ASC 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815-40-15 is effective for fiscal years beginning after December 15, 2008. The Company adopted ASC 815-40-15 effective January 1, 2009, and the adoption had no material effect on the Company’s financial position or results of operations.

NOTE 3 -
GOING CONCERN

The accompanying 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 $2,712,156 and $3,383,837 for the years ended December 31, 2009 and 2008 and had a working capital deficit (current assets less current liabilities) of $3,929,293 and $8,226,110 at December 31, 2009 and December 31, 2008, respectively. These factors indicate that the Company’s continuation as a going concern is dependent upon its ability to obtain adequate financing.

The Company will require substantial additional funds to finance its business activities on an ongoing basis and will have a continuing long-term need to obtain additional financing. The Company’s future capital requirements will depend on numerous factors including, but not limited to, continued progress developing additional mines and increasing mine production. Currently, the Company is in the process of seeking additional funding to achieve its operational goals.

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.

 
48

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

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.

NOTE 4 -
LEASEHOLD INTERESTS

The Company maintains a number of coal leases with minimum lease or royalty payments that vary by lease as defined in the separate agreements. Several of the landowners contended that the Company was in default under certain of these leases and that said leases were terminated. The Company disputed these contentions.

On September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan, which became effective on October 12, 2009. 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. Pursuant to the Plan, most of the existing royalties, which accrued up until the effective date, were re-categorized as Cure Claims totaling $199,213. These claim amounts are now due on or before October 12, 2012. See Note 16 for the terms and effects of the Plan.

As of December 31, 2009, Gwenco owed approximately $102,996 in current lease and/or royalty payments.

NOTE 5 -
LEASED MINERAL RESERVES

All of the Company’s existing reserves remain in Gwenco, Inc., a wholly owned subsidiary. The total reserves are a combination of several coal seams throughout the spectrum of leased properties.

At December 31, 2009, the leased mineral reserves, valued at $5,187,317, net consisted of the following:
 
Proven Reserves
 
Seams
 
Tons
 
Winifrede
    214,650  
Taylor
    1,512,900  
Cedar Grove
    3,564,560  
Pond Creek
    4,665,000  
         
Total Reserves
    9,957,110  

The Company maintains a number of coal leases with minimum lease or royalty payments that vary by lease as defined in the separate agreements.    Several of the landowners contended that the Company was in default under certain of these leases and that said leases were terminated.  The Company disputed these contentions.     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.  Unless otherwise provided in the Plan, the cure claims are due on or before October 12, 2012.

Pursuant to ASC 360-10, management has reviewed the recoverable value of the Company’s mineral reserves and has determined that no impairment loss has occurred as of December 31, 2009 and 2008.  As long as the recoverable amount continues to exceed its carrying value, amortization will occur based on a proportionate ratio of depleted reserves as a result of future coal mining activity.

 
49

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

NOTE 6 - 
EQUIPMENT

Equipment consisted of the following:
 
December 31,
   
December 31,
 
   
2009
   
2008
 
             
Mining equipment
  $ 344,435       332,435  
Less accumulated depreciation
    (211,251 )     (175,164 )
                 
Equipment - net
  $ 133,184       157,271  

All of the equipment currently in use by the Company is owned or leased by the Company’s wholly-owned subsidiary, Gwenco, Inc.

The Company depreciates its mining equipment over a 5 year period, while the office equipment is depreciated over a 7 year period.  In both cases, the straight-line method is used.  Depending on the type of equipment needed at any given point in production, the Company will sell existing equipment and replace it with new or used machinery, which can reflect a fluctuation in the asset valuation.  Depreciation charged for the years ended December 31, 2009 and 2008 were $36,087 and $85,800 respectively.

NOTE 7 - 
ACCOUNTS PAYABLE & ACCRUED EXPENSES
 
Accounts payable and accrued expenses consist of the following:
 
December 31,
   
December 31,
 
   
2009
   
2008
 
Accounts payable
  $ 1,074,035       710,027  
Accrued royalties payable-operating (a)
    125,894       354,126  
Accrued bank claim (b)
    650,000       650,000  
Accrued taxes
    87,315       87,315  
Accrued interest (c)
    220,095       816,944  
Accrued expenses (d)
    902,722       860,023  
    $ 3,060,061     $ 3,478,435  
                 
 
(a)
The Company maintains a number of coal leases with minimum lease or royalty payments that vary by lease as defined in the separate agreements.   Several of the landowners have contended that the Company is in default under certain of these leases and that said leases are terminated.  The Company disputes these contentions.  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.  Unless otherwise provided in the Plan, these accrued amounts 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 December 31, 2009, the Company owed approximately $125,894 in current lease and/or royalty payments.

 
50

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

On May 19, 2006, the former owners obtained a default judgment in this action in the amount of $687,391.  Since the judgment was approximately $500,000 above what the Company believes to have owed, the Company reclassified the difference and recorded additional expense to account for the liability.

On June 20, 2007, Gwenco entered into a settlement agreement with one of the former owners (and the holder of the $458,260 judgment), pursuant to which the former owner agreed to accept payment of $150,000 in exchange for a release of the judgment amount of $458,260.  (See Notes 15 and 16.)

On July 1, 2009, Gwenco entered into a settlement agreement with another former owner (and the holder of the $229,130 judgment), pursuant to which the parties agreed that the former owner would have an allowed unsecured claim of $92,238, plus interest in the amount of $25,000, for a total of $117,238, to be paid along with the other allowed unsecured claims under Gwenco’s Plan.  The former owner has the right to convert up to $40,000 of the 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.  On July 21, 2009, the Bankruptcy Court approved the settlement agreement.  (See Notes 8, 15, and 16.)

On June 30, 2009, Gwenco entered into a settlement agreement with last former owner of Gwenco, pursuant to which the parties agreed that the former owner would have an allowed unsecured claim of $161,824, plus interest in the amount of $40,000, for a total of $201,824, to be paid along with the other allowed unsecured claims under Gwenco’s Plan.  The former owner has the right to convert up to $40,000 of the 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.  On July 21, 2009, the Bankruptcy Court approved the settlement agreement.  As a result, the Company reclassified $166,542 of its accrued royalties to Notes Payable and expensed the additional $40,000 of interest pursuant to the agreement.  (See Notes 8, 15, and 16).

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 Notes 8, 15, and 16).

 
(b)
During the period ended December 31, 2004, the Company’s bank initiated a claim for an overdraft recovery.  Since it was later determined that there was a much larger malice perpetrated against the Company by existing bank employees, estimates for the resolution of a claim against a defunct subsidiary have been accrued until a resolution can be determined.

 
(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.  See Note 16 for the terms and effects of the Plan.
 
 
51

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 
(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.

 
52

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

NOTE 8 -
NOTES PAYABLE
 
Notes payable consist of the following:
 
December 31,
   
December 31,
 
   
2009
   
2008
 
QUEST MINERALS & MINING CORP.
           
0% Notes Due on Demand (a).
  $ 202,864       202,864  
7% Senior Secured Convertible Notes Due 2007 (b).
    25,000       25,000  
7% Convertible Notes Due 2008 (c).
    -       1,616  
5% Unsecured Advances Due on Demand (d).
    130,857       1,082,411  
6% Convertible Notes Due 2011 (d).
    1,044,580       -  
6% Convertible Notes Due 2011 (e).
    1,000,000       -  
6% Convertible Notes Due 2011 (f).
    200,000       -  
0% Notes Due on Demand (g).
    480,434       611,937  
10% Convertible Notes due 2008 (h).
    10,000       10,000  
6% Convertible Notes due 2010 (i).
    27,304       533,500  
8% Convertible Notes due 2010 (j).
    117,010       400,000  
8% Convertible Notes due 2011 (k).
    25,000       -  
6% Convertible Notes due 2014 (l).
    90,500       -  
4% Convertible Notes due 2011 (m).
    30,000       -  
8% Convertible Notes due 2011 (n).
    50,000       -  
12% Notes Due on Demand (o).
    12,500       -  
6% Notes Due on Demand (p).
    10,000       -  
QUEST ENERGY, LTD.
               
8% Summary Judgment (q).
    35,000       35,000  
GWENCO, INC.: (Restructured Debt)
               
CLASS 1 – Secured Claim with conversion option (r).
    1,753,377       726,964  
CLASS 1 – Secured claim with conversion option (s)
    3,207,376       923,043  
CLASS 3 – Unsecured Claims (t)
    413,741       290,561  
CLASS 3 - Unsecured Claims with conversion option (u)
    319,062       229,130  
CLASS 5 – Cured Claims (v)
    199,213       -  
GWENCO, INC.: (Related-Party Loans)
               
CLASS 3 - Unsecured Claim with conversion option (w).
    651,967       624,581  
Total Debt
    10,035,785       5,696,607  
  Current Portion
    1,050,969       4,763,107  
Less: Unamortized debt discount on Current Portion
    (53,974 )     -  
Total Notes Payable – Current Portion, net
    996,995       4,763,107  
                 
Long-Term Debt:
  $ 8,984,816       933,500  
Less: Unamortized present value and debt discount on
   Long-Term Debt
    (6,049,588 )     (182,158 )
Total Long-Term Debt, net
  $ 2,935,228     $ 751,342  
 
 
53

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 
(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.  The Company categorized the convertible notes as a liability in the amount of $1,425,000.  During the year ended December 31, 2006, the Company amended and restated the 7% convertible notes in the aggregate principal amount of $1,250,000, which became due on dates ranging from February 22, 2007 to April 18, 2007.  As part of the amendments and restatements, one of the note holders forgave a 7% senior secured convertible note in the principal amount of $125,000.  The amended and restated notes are convertible at the option of the holder at a conversion price of $3,000.00 per share; provided, that if the market price of the Company’s common stock was less than $4,000.00 per share for ten consecutive trading days, the conversion price would reduced to $2,000.00 per share; provided, further, that if the market price of the Company’s common stock was less than $2,000.00 per share for ten consecutive trading days, the conversion price would become the lesser of (i) $2,000.00 per share or  (ii) 70% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date.  The lenders have made periodic partial conversions to pay down the remaining principal on the notes.

Quest had recognized derivative liability of $1,580,575 upon restatement of these notes in accordance with ASC 815-10 and ASC 815-40.  In particular, Quest compared (a) the number of then authorized but unissued shares, less the maximum number of shares that could be required to be delivered during the contract period under existing commitments (i.e. the other convertible notes and warrants) with (b) the maximum number of shares that could be required to be delivered under share settlement (either net-share or physical) of these notes.  Since the amount in (b) exceeded the amount in (a), and because Quest was required to obtain shareholder approval to increase its authorized common shares or otherwise effect a recapitalization in order to net-share or physically settle all contracts, Quest determined that share settlement was not within its control, and accordingly, derivative liability classification was required.

On February 9, 2007, Quest amended its articles of incorporation to increase its authorized common stock to 975,000,000 shares, and to authorize its board of directors to effectuate a stock split or reverse stock split without stockholder approval.  As a result of this amendment, Quest no was no longer required to obtain shareholder approval to effect a recapitalization in order to net-share or physically settle any of its convertible notes or warrants, and accordingly, obtained full control of share settlement of these notes.  As a result, Quest reclassified the conversion options on these notes, then valued at $322,963, as permanent equity.

In accordance with ASC 470-20, Debt with Conversions and Other Options, the Company also recognized an imbedded beneficial conversion feature present in these notes.  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 $1,183,139 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 notes.  The debt discount attributed to the beneficial conversion feature was amortized over the notes’ maturity period as interest expense.

 
54

 

QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

On September 3, 2008, Quest issued 5,000 shares of common stock to a noteholder that did not participate in the 2006 exchange in exchange of an original note of $25,000 and warrants for 3.75 shares of common stock.  Quest credited the principal amount of $25,000 and accrued interest of $6,217 to paid-in capital and also incurred $2,611 as an induced conversion expense in connection with this exchange.

As of December 31, 2009, $25,000 in principal amount of the original $1,425,000 in notes remains outstanding and in default.

 
(c)
On May 16, 2005, the Company entered into a credit agreement with a third party lender in which $245,000 was issued as a 10% note due August 19, 2005.  According to the credit agreement, the lender may, in its sole and absolute discretion, make additional loans to the Company of $255,000 for an aggregate total of $500,000.  Additionally, the lender was issued 257 warrants.  The loans subject to the credit agreement are secured by certain assets of the Company.  The warrants had an exercise price of $4,000.00 per share, subject to adjustment, and expired on May 31, 2007.   As of December 31, 2005, the Company had made a payment of $5,500.  On February 14, 2006, in connection with a settlement agreement with the lender, the Company made a payment of $264,000 and issued an amended and restated 10% note in the amount of $100,000.  The note covered accrued interest and additional legal fees.  The amended and restated note is convertible into the Company’s common stock at a rate of $40.00 per share and was due February 22, 2007.  On June 6, 2007, the Company entered into an exchange agreement with the lender, under which the holder exchanged the $100,000 note and all remaining warrants held by such lender for a new convertible promissory note in the aggregate principal amount of $100,000.  The new note became due on June 6, 2008, with an annual interest rate of seven percent (7%), and is convertible into Quest’s common shares at a conversion price of 70% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date.  During the year ended December 31, 2009, the holder made a final conversion to satisfy the remaining principal and interest on the note.

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 $43,944 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.  The balance of the discount was fully amortized during the year ended December 31, 2008.

 
(d)
During January of 2006, the Company entered into a loan agreement to receive up to $300,000 in funds for operations in return for a 12% percent note due in May of 2006.  As collateral, the officers of the Company guaranteed the loan and pledged their own shares of common stock.  As of the three months ended March 31, 2006, the lender has made advances totaling $132,000.  On April 3