x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File No.: 000-30291
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Utah
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87-0429950
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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18B East 5th Street
Paterson, NJ 07524
(Address of principal executive offices)
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Large accelerated filter o | Accelerated filter o |
Non-accelerated filter o (Do not check if a smaller reporting company) | Smaller reporting company x |
March, 31
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December 31,
|
|||||||
2011
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2010
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|||||||
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(Unaudited)
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|||||||
ASSETS
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||||||||
Current assets:
|
||||||||
Cash
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$ | 1,908 | $ | 200 | ||||
Other assets:
|
||||||||
Unproved property (Note 3)
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44,500 | 44,500 | ||||||
Assets of discontinued operation held for sale (Note 2)
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5,295,916 | 5,320,972 | ||||||
Total assets
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$ | 5,342,324 | $ | 5,365,672 | ||||
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
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||||||||
Current Liabilities:
|
||||||||
Accounts payable and accrued expenses (Note 4)
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$ | 3,467,276 | $ | 3,278,293 | ||||
Loans payable-current portion, net (Note 5)
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2,936,756 | 2,807,045 | ||||||
Related party loans, net (Note 5)
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165,200 | - | ||||||
Total current liabilities
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6,569,232 | 6,085,338 | ||||||
Long-Term Liabilities:
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||||||||
Loans payable-long term portion, net (Notes 5)
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33,465 | 106,922 | ||||||
Related party loans, net (Note 5)
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- | 165,700 | ||||||
Total long-term liabilities
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33,465 | 272,622 | ||||||
Liabilities of discontinued operation held for sale (Notes 2 and 5)
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6,408,283 | 3,378,509 | ||||||
Total liabilities
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13,010,980 | 9,736,469 | ||||||
Commitments and contingencies (Note 8)
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- | - | ||||||
Deficiency in stockholders' equity:
|
||||||||
Preferred stock, par value $0.001, 25,000,000 shares authorized
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||||||||
SERIES A - issued and outstanding 20,726 shares
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21 | 21 | ||||||
SERIES B - issued and outstanding 48,284 shares
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48 | 48 | ||||||
SERIES C - issued and outstanding 260,000 shares
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260 | 260 | ||||||
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||||||||
Common stock, par value $0.0001, 2,500,000,000 shares authorized (Note 7) issued and outstanding 162,020,489 and 64,880,004 shares as of March 31, 2011 and December 31, 2010, respectively
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16,204 | 6,488 | ||||||
Common stock to be issued
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- | - | ||||||
Equity allowance
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(587,500 | ) | (587,500 | ) | ||||
Paid-in capital
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71,233,332 | 71,017,335 | ||||||
Accumulated deficit
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(78,331,021 | ) | (74,807,449 | ) | ||||
Total deficiency in stockholders' equity
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(7,668,656 | ) | (4,370,797 | ) | ||||
Total liabilities and deficiency in stockholders' equity
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$ | 5,342,324 | $ | 5,365,672 |
For the three months ended March 31,
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||||||||
2011
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2010
|
|||||||
Coal revenues
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$ | - | $ | - | ||||
Production costs
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- | - | ||||||
Gross loss
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- | - | ||||||
Operating expenses:
|
||||||||
Selling, general and administrative
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302,037 | 203,558 | ||||||
Depreciation and amortization
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- | - | ||||||
Total operating expenses
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302,037 | 203,558 | ||||||
Net loss from operations
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(302,037 | ) | (203,558 | ) | ||||
Other income (expense):
|
||||||||
Gain (loss) on debt settlements
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400 | - | ||||||
Interest, net
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(126,537 | ) | (158,626 | ) | ||||
Net loss from continuing operations before income taxes
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(428,174 | ) | (362,184 | ) | ||||
Provision for income taxes
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- | - | ||||||
Net loss from continuing operations
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(428,174 | ) | (362,184 | ) | ||||
Net loss from discontinued operations, net of income taxes (Note 2)
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(3,095,398 | ) | (776,011 | ) | ||||
Net loss
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$ | (3,523,572 | ) | $ | (1,138,195 | ) | ||
Loss per common share, basic and diluted:
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||||||||
Net loss from continuing operations
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(0.0042 | ) | (0.2667 | ) | ||||
Net loss from discontinued operations
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(0.0304 | ) | (0.5715 | ) | ||||
Net loss
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$ | (0.0346 | ) | $ | (0.8382 | ) | ||
Weighted average common shares outstanding
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101,693,956 | 1,357,819 |
2011
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2010
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|||||||
Operating Activities
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||||||||
Net loss from continuing operations
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$ | (428,174 | ) | $ | (362,184 | ) | ||
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
|
||||||||
Stock issued for interest
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1,713 | 10,467 | ||||||
Stock issued for services
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79,570 | 165,310 | ||||||
Loss (gain) on debt settlements
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(400 | ) | - | |||||
Amortization of discount on convertible notes
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88,085 | 113,758 | ||||||
Amortization of royalty costs
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- | 2,122 | ||||||
Changes in operating assets and liabilities:
|
||||||||
Increase (Decrease) in accounts payable and accrued expenses
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(675,758 | ) | 828,317 | |||||
Net cash provided by (used in) operating activities - continuing operations
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(934,964 | ) | 757,790 | |||||
Net cash provided by (used in) operating activities - discontinued operations
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915,155 | (1,225,358 | ) | |||||
Net cash used in operating activities
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(19,809 | ) | (467,568 | ) | ||||
Investing Activities
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||||||||
Unproved property acquisition
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(44,500 | ) | - | |||||
Net cash (used in) investing activities - continuing operations
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(44,500 | ) | - | |||||
Net cash (used in) investing activities - discontinued operations
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(31,477 | ) | (88 | ) | ||||
Net cash (used in) investing activities
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(75,977 | ) | (88 | ) | ||||
Financing Activities
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||||||||
Proceeds from borrowings
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97,500 | 1,220,746 | ||||||
Net cash provided by financing activities - continuing operations
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97,500 | 1,220,746 | ||||||
Net cash used in financing activities - discontinued operations
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- | (668,626 | ) | |||||
Net cash provided by financing activities
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97,500 | 552,120 | ||||||
Increase (decrease) in cash
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1,714 | 84,464 | ||||||
Cash at beginning of period
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238 | 7,254 | ||||||
Cash at end of period
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1,952 | 91,718 | ||||||
Less cash of discontinued operations at end of period
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44 | 77,155 | ||||||
Cash of continuing operations at end of period
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$ | 1,908 | $ | 14,563 | ||||
Supplemental Disclosures of Cash Flow Information
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||||||||
Cash paid during the period:
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||||||||
Interest
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$ | - | $ | 22,477 | ||||
Income taxes
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$ | - | $ | - | ||||
Non-cash financing activites:
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||||||||
Conversions of note principal
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$ | 51,931 | $ | 431,933 |
2011
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2010
|
|||||||
Coal revenues
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$ | - | $ | 683,505 | ||||
Production costs
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(36,655 | ) | (974,300 | |||||
Gross loss
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(36,655 | ) | (290,795 | ) | ||||
Operating expenses:
|
||||||||
Selling, general and administrative
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42,340 | 19,758 | ||||||
Depreciation and amortization
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9,022 | 43,915 | ||||||
Total operating expenses
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51,362 | 63,673 | ||||||
Net loss from operations
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(88,017 | ) | (354,468 | ) | ||||
Other income (expense):
|
||||||||
Loss on Chapter 7 debt restructuring (Note 5)
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(2,697,035 | ) | - | |||||
Interest, net
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(310,346 | ) | (421,543 | ) | ||||
Net loss before income taxes
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(3,095,398 | ) | (776,011 | ) | ||||
Provision for income taxes
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- | - | ||||||
Net loss from discontinued operation, net of income taxes
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$ | (3,095,398 | ) | $ | (776,011 | ) |
March, 31
2011
|
December 31,
2010
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|||||||
ASSETS
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||||||||
Current assets
|
||||||||
Cash
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$ | 44 | $ | 38 | ||||
Prepaid expenses
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5,028 | 8,045 | ||||||
Total current assets
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5,072 | 8,083 | ||||||
Other assets
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||||||||
Leased Mineral Reserves, net
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5,165,469 | 5,165,469 | ||||||
Equipment, net
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88,075 | 97,097 | ||||||
Deposits
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37,300 | 50,323 | ||||||
Total assets
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$ | 5,295,916 | $ | 5,320,972 | ||||
Current liabilities:
|
||||||||
Accounts payable and accrued expenses
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$ | 1,023,019 | $ | 985,626 | ||||
Discontinued debt held for sale (Note 5)
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5,385,264 | 2,392,883 | * | |||||
Total current liabilities
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6,408,283 | 3,378,509 | ||||||
Net Assets
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$ | (1,112,367 | ) | $ | 1,942,463 |
*
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The total discontinued debt held for sale as of December 31, 2010 amounted to $5,297,743 less present value and BCF discount of $2,904,860.
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March 31, 2011
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December 31,
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||||||
(unaudited)
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2010
|
|||||||
Accounts payable
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$ | 1,504,600 | 1,338,825 | |||||
Accrued royalties payable-operating (a)
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25,545 | 25,545 | ||||||
Accrued bank claim (b)
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650,000 | 650,000 | ||||||
Accrued taxes
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69,186 | 69,186 | ||||||
Accrued interest (c)
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411,712 | 375,054 | ||||||
Accrued expenses (d)
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806,233 | 819,683 | ||||||
$ | 3,467,276 | $ | 3, 278,293 |
(a)
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The Company accrued $25,545 as an estimated royalty payable in connection with an August 2008 financing. The debt discount related to the accrued royalty was amortized over the life of the underlying note involved in the financing.
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(b)
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Community Trust Bank and its insurer, the Federal Insurance Company, commenced an action in Pike County Court, Kentucky against Quest Energy alleging that former employees or associates of Quest Energy engaged in a criminal scheme and conspiracy to defraud Community Trust Bank, that Quest Energy is accordingly responsible for the actions of these former employees and associates, and that Quest Energy obtained a substantial material benefit as a result of this alleged scheme. Quest Energy has denied these allegations. As of March 31, 2011, the matter is closed and off the Court’s docket, and no outcome has been determined. While we believe that this matter will be resolved without a material adverse impact on our cash flows, results of operation, or financial condition, it is reasonably possible that our judgments regarding this matter could change in the future.
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(c)
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Since all of the company’s issued debt transactions do not offer a compounded interest rate, interest charges continue to accrue on principal only.
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(d)
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The Company recorded an accrued liability for indemnification obligations of $390,000 to its current and former 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. 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 $468,585 from its subsidiaries, E-Z Mining Co. and Gwenco, Inc. as acquisition for mining expenses recorded on their books and records. The Company continues to carry these balances until further validity can be determined. The Company also accrues consulting fees based on contractual agreements with outside consultants.
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March 31, 2011
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December 31,
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|||||||
|
(unaudited)
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2010
|
||||||
CONTINUING DEBT:
|
||||||||
0% Notes Due on Demand (a).
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$ | 202,864 | $ | 202,864 | ||||
7% Senior Secured Convertible Notes Due 2007 (b).
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25,000 | 25,000 | ||||||
5% Unsecured Advances Due on Demand (c).
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130,857 | 130,857 | ||||||
6% Convertible Notes Due 2011 (c).
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838,515 | 838,515 | ||||||
6% Convertible Notes Due 2011 (d).
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1,000,000 | 1,000,000 | ||||||
6% Convertible Notes Due 2011 (e).
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165,200 | 165,700 | ||||||
0% Notes Due on Demand (f).
|
503,371 | 498,370 | ||||||
10% Convertible Notes due 2008 (g).
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10,000 | 10,000 | ||||||
6% Convertible Notes due 2010 (h).
|
2,300 | 2,300 | ||||||
8% Convertible Notes due 2010 (i).
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3,330 | 3,330 | ||||||
8% Convertible Notes due 2011 (j).
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25,000 | 25,000 | ||||||
5% Convertible Notes due 2014 (k).
|
50,400 | 50,400 | ||||||
4% Convertible Notes due 2011 (l).
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50,000 | - | ||||||
8% Convertible Notes due 2012 (m).
|
- | 1,481 | ||||||
8% Convertible Notes due 2012 (n).
|
42,500 | - | ||||||
8% Convertible Notes due 2012 (o).
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11,115 | 11,115 | ||||||
5% Convertible Notes due 2012 (p).
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95,000 | 95,000 | ||||||
8% Convertible Notes due 2012 (q).
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55,000 | 55,000 | ||||||
8% Convertible Notes due 2011 (r).
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- | 24,500 | ||||||
8% Convertible Notes due 2011 (s).
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164,650 | 169,500 | ||||||
8% Convertible Notes due 2012 (t).
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50,000 | 50,000 | ||||||
8% Convertible Notes due 2012 (u).
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4,700 | 10,700 | ||||||
8% Summary Judgment (w).
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35,000 | 35,000 | ||||||
Total Continuing Debt
|
$ | 3,464,802 | $ | 3,404,632 | ||||
Current Portion
|
3,298,587 | 2,940,737 | ||||||
Less: Unamortized debt discount on Current Portion
|
(196,631 | ) | (133,692 | ) | ||||
Total Continuing Debt – Current Portion, net
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$ | 3,101,956 | $ | 2,807,045 | ||||
Long-Term Continuing Debt:
|
166,215 | 463,896 | ||||||
Less: Unamortized present value and debt discount on | ||||||||
Long-Term Debt
|
(132,750 | ) | (191,274 | ) | ||||
Total Long-Term Continuing Debt, net
|
$ | 33,465 | $ | 272,622 | ||||
DISCONTINUED DEBT HELD FOR SALE: (Note 2)
|
||||||||
CLASS 1 – Secured Claim with conversion option (x).
|
$ | 1,292,408 | $ | 1,258,942 | ||||
CLASS 1 – Secured claim with conversion option (y).
|
2,701,714 | 2,632,659 | ||||||
CLASS 3 – Unsecured Claims (z).
|
385,900 | 385,900 | ||||||
CLASS 3 - Unsecured Claims with conversion option (ai).
|
319,062 | 319,062 | ||||||
CLASS 5 – Cured Claims (aii).
|
199,213 | 199,213 | ||||||
CLASS 3 - Unsecured Claim with conversion option (aiii).
|
486,967 | 501,967 | ||||||
Total Discontinued Debt
|
$ | 5,385,264 | $ | 5,297,743 |
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(a)
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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.
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(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 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 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. As of March 31, 2011, $25,000 in principal amount of the original $1,425,000 in notes remains outstanding and in default.
|
(c)
|
Since 2006 through March 31, 2011, a third party investor, and its successor in interest, has advanced operational funding into the Company. Since there had been no formal agreement regarding the balance owed, the Company accrues a 5% annual interest on the principal with the intent that a mutual arrangement will be resolved between both parties.
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(d)
|
On July 11, 2009, the Company and Gwenco entered into a settlement and release agreement with the Company’s largest lender to resolve various disputes that had arisen between the Company and the lender. Pursuant to the settlement agreement, the lender waived certain defaults under various debt obligations. In addition, Gwenco and the lender under the Debtor-in-Possession Total Facility extended the maturity date on the Total Facility to the earliest of (i) December 31, 2010, (ii) the date of confirmation of a plan of reorganization or liquidation in the Bankruptcy Case; (iii) the date of closing of a sale of all or substantially all of Gwenco’s assets pursuant to the Bankruptcy Code; or (iv) the approval of a disclosure statement in respect of a plan of reorganization or liquidation not supported by the lender. In exchange for this consideration, the Company issued the lender a new convertible promissory note in the aggregate principal amount of $1,000,000. The note is due July 11, 2011, is unsecured, and bears interest at an annual interest rate of six percent (6%). The new note was initially convertible into shares of the Company’s common stock at a conversion price of $0.001 per share. The conversion price has since adjusted to $0.0001 pursuant to rate adjustment terms set forth in the note.
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(e)
|
On July 13, 2009, the Company issued a consulting bonus in the form of a convertible promissory note in the aggregate principal amount of $200,000 to a third party consulting company owned by a stockholder of the Company. The note is due July 13, 2011, is unsecured, and bears interest at an annual interest rate of six percent (6%). The new note was initially convertible into shares of the Company’s common stock at a conversion price of $0.001 per share. The conversion price has since adjusted to $0.0001 pursuant to rate adjustment terms set forth in the note. As of March 31, 2011, $165,200 remains outstanding and the Company continues to accrue interest in relation to the convertible promissory note.
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(f)
|
Periodically, the Company receives cash advances from unrelated third party investors. Since these advances are open accounts, are unsecured, and have no fixed or determined dates for repayment, the amounts carry a 0% interest rate.
|
(g)
|
On May 1, 2007, the Company entered into a settlement and release agreement with a third party pursuant to which the Company issued a convertible secured promissory note in the principal amount of $10,000. The note was due on May 1, 2008, is unsecured, and bears interest at the annual rate of ten percent (10%). The note is convertible into the Company’s common shares at a fixed rate of $160 per share. The holder may not convert any outstanding principal amount of this note or accrued and unpaid interest thereon to the extent such conversion would result in the holder beneficially owning in excess of 4.999% of the then issued and outstanding common shares of the Company.
|
(h)
|
On December 8, 2005, the Company issued a convertible secured promissory note in the principal amount of $335,000. The note was due on December 8, 2006, with an annual interest rate of eight percent (8%), and is convertible into the Company’s common shares at an initial conversion price of $20.00 per share, subject to adjustment. As of December 31, 2006, the Company was in default. In January, 2007, the Company entered into an exchange agreement with the note holder and holders of 150,000 shares of the Company’s common stock, under which the holders exchanged the note and the 150,000 shares of the Company’s common stock for a series of new convertible promissory notes in the aggregate principal amount of $635,000. The new notes were due on March 31, 2007, with an annual interest rate of eight percent (8%), and are convertible into the Company’s common shares at an initial conversion price of the greater of (i) $2.00 per share or (ii) 50% of the average of the 5 closing bid prices of the common stock immediately preceding such conversion date. During the first quarter of 2007, the note holders made partial conversions of the principal and accruing interest.
|
(i)
|
On August 14, 2008, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $400,000 convertible promissory note and granted a three (3) year royalty on future coal sales. The note is due July 23, 2010, is unsecured, and bears interest at an annual interest rate of eight percent (8%). The note is convertible into shares of the Company’s common stock at a conversion price of sixty percent (60%) of the average of the five (5) lowest per share market value during the ten (10) trading days immediately preceding a conversion date. The royalty is based on sliding scale ranging from $0.00 to $0.75 per ton, depending on actual sale prices of coal received by the Company. On August 28, 2009, the Company amended the conversion price to be forty five percent (45%) of the average of the five (5) lowest per share market value during the ten (10) trading days immediately preceding a conversion date. As of March 31, 2011, $3,330 remains outstanding and in default.
|
(j)
|
On September 16, 2009, the Company issued a convertible promissory note to a third party investor for facilitation of Gwenco’s Debtor-In-Possession financing. The note is due September 16, 2011, is unsecured, and bears interest at an annual interest rate of eight percent (8%). The note is convertible into shares of the Company’s common stock at a conversion price of forty five percent (45%) of the average of the five (5) lowest per share market value during the ten (10) trading days immediately preceding a conversion date.
|
(k)
|
On October 14, 2009, the Company entered into an exchange agreement with a third party investor, pursuant to which the investor exchanged approximately $125,000 of evidences of indebtedness, for a new convertible promissory note in the aggregate principal amount of $125,000. The new note is due October 14, 2014, is unsecured, and bears interest at an annual rate of six percent (6%). The new note was initially convertible into shares of the Company’s common stock at a conversion price of $0.001 per share. The conversion price has since adjusted to $0.0001 pursuant to rate adjustment terms set forth in the note. Subsequent to December 31, 2009, the note was amended to reduce the interest rate to 5% and to amend certain adjustment terms in the conversion price. As of March 31, 2011, $50,400 remains outstanding and the Company continues to accrue interest in relation to the convertible promissory note.
|
(l)
|
On February 10, 2011, the Company issued a convertible note to a third party investor in the amount of $50,000. The note is due February 10, 2013, is unsecured, and bears interest at an annual rate of eight percent (8%). The note is convertible into shares of the Company’s common stock at a conversion price of thirty percent (30%) of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.
|
(m)
|
On October 23, 2009, the Company issued a convertible note to a third party investor in the amount of $50,000. The note is due October 23, 2011, is unsecured, and bear interest at an annual 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 values during the ten (10) trading days immediately preceding a conversion date.
|
(n)
|
On February 15, 2011, the Company issued a convertible note to a third party investor in the amount of $42,500. The note is due November 17, 2011, is unsecured, and bears interest at an annual 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 three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.
|
(o)
|
On January 16, 2009, the Company borrowed $10,000 from an unrelated third party, and in connection therewith, issued a promissory note that is due on demand, is unsecured, and bears interest at an annual interest rate of six percent (6%). On November 16, 2010, the Company and the investor entered into an agreement where the existing principal and accrued interest of $1,115 were exchanged for a new convertible note with an aggregate principal amount of $11,115. The note is due November 16, 2012, is unsecured, and bears interest at an annual rate of eight percent (8%). The note is convertible into shares of the Company’s common stock at a conversion price of forty percent (40%) of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.
|
(p)
|
On February 4, 2010, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $95,000 convertible promissory note for a purchase price of $75,000. The note is due February 4, 2012 and bears interest at an annual interest rate of five percent (5%). The note is convertible into shares of the Company’s common stock at a conversion price of $0.0001 per share due to variable rate adjustments.
|
(q)
|
On February 26, 2010, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $55,000 convertible promissory note for a purchase price of $50,000. The note is due February 26, 2012 and bears interest at an annual interest rate of eight percent (8%). The note is convertible into shares of the Company’s common stock at a conversion price of forty five percent (45%) of the average of the five (5) lowest per share market value during the five (5) trading days immediately preceding a conversion date.
|
(r)
|
On March 22, 2010, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $50,000 convertible promissory note. The note is due March 22, 2011 and bear interest at an annual interest rate of eight percent (8%). The note is convertible into shares of the Company’s common stock at a conversion price of forty percent (40%) of the average of the three (3) lowest per share market value during the ten (10) trading days immediately preceding a conversion date.
|
(s)
|
From July 20, 2010 to September 24, 2010, the Company entered into a series of purchase agreements with unrelated third party investors pursuant to which the Company issued a series of convertible promissory notes. The notes are due on dates ranging from July 20, 2011 to December 3, 2011 and bear interest at an annual interest rate of eight percent (8%). The note is convertible into shares of the Company’s common stock at a conversion price of forty percent (40%) of the average of the three (3) lowest per share market value during the ten (10) trading days immediately preceding a conversion date.
|
(t)
|
On October 22, 2010, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $50,000 convertible promissory note. The note is due October 22, 2012 and bear 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 thirty percent (30%) of the average of the three (3) lowest per share market value during the five (5) trading days immediately preceding a conversion date.
|
(u)
|
On October 13, 2010, the Company entered into a purchase agreement with an unrelated third party where the Company issued a $20,000 convertible promissory note. The note is due October 13, 2012 and bear 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 fifty percent (50%) of the average of the five (5) trading days immediately preceding a conversion date.
|
(w)
|
On July 10, 2006, the Company entered into a settlement arrangement with an existing equipment lessor for the bill of sale on two pieces of equipment, of which the Company had retained possession while in default of prior lease payments. On October 10, 2006, the Pike County Circuit Court entered an order enforcing this settlement agreement, and on December 19, 2006, the lessor was awarded summary judgment in the amount of $35,000 plus 8% accrued interest from August 9, 2006. As of March 31, 2011, the Company remains in default. The lessor has since repossessed the equipment.
|
(x)
|
Under Gwenco’s Plan of Reorganization, a judgment in favor of Interstellar Holdings, LLC was classified as a Class 1 Claim and was satisfied by the issuance to Interstellar Holdings of a 5 year secured convertible promissory note, which note is convertible into common stock of the Company at a rate of the lower of (i) $0.001 per share and (ii) 40% of the average of the three lowest per shares market values of the Company’s common stock during the 10 trading days before a conversion; provided that the holder is prohibited from converting if such conversion would result in it holding more than 4.99% of the Company’s outstanding common stock.
|
(y)
|
Under Gwenco’s Plan of Reorganization, the Court approved an exit facility under which Interstellar Holdings, LLC will provide up to $2 million in financing to Gwenco, which Gwenco used to pay off its Debtor In Possession Total Facility. The exit facility consists of a 5 year secured convertible line of credit note, which note is convertible into common stock of the Company at a rate of the lower of (i) $0.001 per share and (ii) 40% of the average of the three lowest per shares market values of the Company’s common stock during the 10 trading days before a conversion; provided that the holder is prohibited from converting if such conversion would result in it holding more than 4.99% of the Company’s outstanding common stock.
|
(z)
|
Certain unsecured promissory notes which Gwenco assumed in connection with a settlement agreement with a former owner were classified as unsecured Class 3 Claims in Gwenco’s Plan of Reorganization. These claims will be satisfied by cash payments equal to the value of their claim on the earlier of (i) October 12, 2014 or (ii) the date on which, in Gwenco’s sole discretion, proceeds from the exit facility are sufficient to satisfy the claims. Further, these claimholders shall receive their pro-rata share of royalty payments to reduce their claims.
|
(ai)
|
Certain accrued overriding royalties owed to former owners totaling $319,062 have been reclassified as allowed unsecured claims under Gwenco’s Plan, to be paid along with the other allowed unsecured claims under Gwenco’s Plan. Each former owner has the right to convert up to $40,000 of his or her claim into the Company’s common stock at a conversion price of eighty five percent (85%) of the average of the five (5) per share market values immediately preceding a conversion date, with a minimum conversion price of the par value of the Company’s common stock. In accordance with ASC 470-20, the Company recognized an imbedded beneficial conversion feature present in this note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital. The Company recognized and measured $1,634 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense. As of March 31, 2011, the unamortized discount of $1,062 was recorded as a loss on Chapter 7 debt restructuring as a result of Gwenco’s bankruptcy case conversion to Chapter 7. Payment terms have been accelerated to face value pursuant to the extent of liquidation valuation See Note 2.
|
|
(aii)
|
Pursuant to the Plan, most of the existing royalties, which accrued up until the effective date, were re-categorized as unsecured Cure Claims totaling $199,213. These claim amounts are now due on or before October 12, 2012.
|
(aiii)
|
Certain promissory notes issued to a former stockholder of Gwenco were classified as unsecured Class 3 Claims in Gwenco’s Plan of Reorganization. The claims are also guaranteed by the Company and Quest Ltd. and are secured by 50% of Quest Ltd.’s ownership of Gwenco. The former stockholder also has the has the right to convert up to $15,000 of the claim each month into the Company’s common stock at a conversion price of eighty five percent (85%) of the average of the five (5) per share market values immediately preceding a conversion date, with a minimum conversion price of the par value of the Company’s common stock.
|
(i)
|
the involuntary conversion of the bankruptcy case of our primary operating subsidiary to a Chapter 7 case of the U.S. Bankruptcy Code;
|
(ii)
|
our cash flows, results of operations, or financial condition;
|
(iii)
|
our ability to continue as a going concern;
|
(iv)
|
our need to continue to finance our operations through additional borrowings or other capital financings, which may not be available as needed;
|
(v)
|
our substantial indebtedness outstanding and significantly leveraged operations;
|
(vi)
|
our ability to timely obtain necessary supplies and equipment;
|
(vii)
|
the impact of the 2010 mine explosion at the Upper Big Branch mine in West Virginia;
|
(viii)
|
governmental policies, laws, regulatory actions and court decisions affecting the coal industry or our customers’ coal usage;
|
(ix)
|
legal and administrative proceedings, settlements, investigations and claims and the availability of insurance coverage related thereto, including, but not limited to, any SEC enforcement action that may be brought in the future;
|
(x)
|
our interpretation and application of accounting literature related to mining specific issues;
|
(xi)
|
our assumptions and projections concerning economically recoverable coal reserve estimates;
|
(xii)
|
inherent risks of coal mining beyond our control, including weather and geologic conditions or catastrophic weather-related damage;
|
(xiii)
|
inherent complexities which make it more difficult and costly to mine in Central Appalachia than in other parts of the United States;
|
(xiv)
|
our production capabilities to meet market expectations and customer requirements;
|
(xv)
|
the cost and availability of transportation for our produced coal;
|
(xvi)
|
our ability to obtain and renew permits necessary for our existing and any future operations in a timely manner;
|
(xvii)
|
our ability to expand our mining capacity;
|
(xviii)
|
our ability to manage production costs, including labor costs;
|
(xix)
|
adjustments made in price, volume, or terms to existing coal supply arrangements;
|
(xx)
|
the worldwide market demand for coal, electricity, and steel;
|
(xxi)
|
environmental concerns related to coal mining and combustion and the cost and perceived benefits of alternative sources of energy such as natural gas and nuclear energy;
|
(xxii)
|
our reliance upon and relationships with our customers and suppliers;
|
(xxiii)
|
the creditworthiness of our customers and suppliers;
|
(xxiv)
|
the lack of insurance against all potential operating risks;
|
(xxv)
|
competition among coal and other energy producers, in the United States and internationally;
|
(xxvi)
|
our ability to attract, train and retain a skilled workforce to meet replacement or expansion needs;
|
(xxvii)
|
future economic or capital market conditions;
|
(xxviii)
|
the availability and costs of credit, surety bonds and letters of credit that we require;
|
(xxix)
|
foreign currency fluctuations;
|
(xxx)
|
the successful completion of acquisition, disposition, or financing transactions and the effect thereof on our business; and
|
(xxxi)
|
the successful implementation of our strategic plans and objectives for future operations and expansion or consolidation.
|
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Revenues
|
$ | - | $ | - | ||||
Production costs
|
- | - | ||||||
Selling, general and administrative
|
302,037 | 203,558 | ||||||
Depreciation and Amortization
|
- | - | ||||||
Operating (loss)
|
$ | (302,037 | ) | $ | (203,558 | ) |
(b)
|
None.
|
(c)
|
None.
|
(a)
|
None.
|
(b)
|
None.
|
None.
|
|
Item No.
|
Description
|
Method of Filing
|
||
31.1
|
Certification of Eugene Chiaramonte, Jr. pursuant to Rule 13a-14(a)
|
Filed herewith.
|
||
32.1
|
Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
Filed herewith.
|
KENTUCKY ENERGY, INC.
|
|||
May 23, 2011
|
|
/s/ Eugene Chiaramonte, Jr.
|
|
Eugene Chiaramonte, Jr.
|
|||
President
|
|||
(Principal Executive Officer and Principal Accounting Officer)
|
1.
|
I have reviewed this report on Form 10-Q of Kentucky Energy, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterlyl report;
|
4.
|
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have done the following:
|
a.
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to me by others within the Company, particularly during the period in which this report is being prepared;
|
b.
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
|
c.
|
presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;
|
5.
|
I have disclosed, based on my most recent evaluation, the registrant’s auditors and the audit committee of the registrant’s board of directors:
|
a.
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for Kentucky Energy, Inc.’s auditors any material weaknesses in internal controls; and
|
b.
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
6.
|
I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
May 23, 2011
|
|
/s/ Eugene Chiaramonte, Jr.
|
|
Eugene Chiaramonte, Jr.
|
|||
President
|
|||
(Principal Executive Officer and Principal Accounting Officer)
|
1.
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
2.
|
The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
/s/ Eugene Chiaramonte, Jr.
|
|
|||
Eugene Chiaramonte, Jr.,
|
|
|||
President
|
|
|||
(Principal Executive Officer and Principal Accounting Officer)
|
||||
May 23, 2011
|