UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No.: 000-30291
QUEST MINERALS & MINING CORP.
(Exact name of registrant as specified in its charter)
Utah 87-0429950
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
|
18B East 5th Street
Paterson, NJ 07524
(Address of principal executive offices)
Issuer's telephone number: (973) 684-0075
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 13, 2008, 142,449,309 shares of our common stock were
outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Quest Minerals & Mining Corp. and
subsidiaries (collectively, the "Company"), included herein were prepared,
without audit, pursuant to rules and regulations of the Securities and Exchange
Commission. Because certain information and notes normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America were condensed or omitted pursuant to such rules
and regulations, these financial statements should be read in conjunction with
the financial statements and notes thereto included in the audited financial
statements of the Company as included in the Company's Amendment No. 1 to Form
10-KSB for the year ended December 31, 2007.
2
QUEST MINERALS & MINING CORP.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
2008 2007
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash $ 31,231 $ 4,464
Receivables -- --
------------ ------------
Total current assets 31,231 4,464
Leased Mineral Reserves, net (Note 2 & 5) 5,206,588 5,208,524
Equipment, net (Note 6) 254,085 166,273
Deposits 41,846 40,643
Prepaid consulting expense -- 27,000
Other receivables, net (Note 7) -- --
DIP Cash, Restricted (Note 15) 3,526 1,166
DIP Receivables, Restricted (Note 15) 9,520 --
------------ ------------
TOTAL ASSETS $ 5,546,796 $ 5,448,070
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Commitments and Contingencies (Note 15)
Current Liabilities
Accounts payable and accrued expenses (Note 8) $ 3,277,173 $ 2,735,718
Loans payable, net of discount (Note 9) 2,961,693 2,937,716
Bank loans (Note 9) 1,017,525 1,017,525
Related party loans (Note 9) 641,418 672,289
------------ ------------
TOTAL CURRENT LIABILITIES 7,897,809 7,363,248
Other Liabilities
Derivative Liability (Note 8) 484,313 2,841,203
Unearned revenues (Note 8) -- --
DIP Financing (Note 9) 694,043 335,764
------------ ------------
TOTAL LIABILITIES 9,076,165 10,540,215
Commitments and Contingencies
Stockholders' equity
Preferred stock, par value $0.001, 10,000,000 shares authorized;
SERIES A - issued and outstanding 35,752 shares 36 448
SERIES B - issued and outstanding 48,284 shares 48 48
SERIES C - issued and outstanding 260,000 shares 260 260
Common stock, par value $0.001, 2,500,000,000 shares authorized;
issued and outstanding 106,841,837 shares 106,844 46,796
Equity held in escrow (Note 12) (587,500) (587,500)
Equity allowance (Note 12) (29,326)
Paid-in capital 63,352,664 51,981,253
Accumulated Deficit (66,401,721) (56,504,124)
------------ ------------
Total Stockholders' Equity (3,529,369) (5,092,145)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,546,796 $ 5,448,070
============ ============
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See Notes to Financial Statements.
3
QUEST MINERALS & MINING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue:
Coal revenues $ 223,305 $ 43,543 $ 282,392 $ 99,420
Interest and Other 87 -- 87 --
------------ ------------ ------------ ------------
Total Revenues 223,392 43,543 282,479 99,420
------------ ------------ ------------ ------------
Expenses:
Production costs 97,147 114,179 407,318 520,982
Selling, general and administrative 1,463,375 766,368 2,203,719 3,469,526
Interest 85,420 84,423 238,297 301,622
Stock compensation expense 582,500 -- 582,500 --
Depreciation and Amortization 35,512 25,936 87,736 69,421
Beneficial conversion expense 887,753 -- 4,411,008 292,500
------------ ------------ ------------ ------------
Total Operating Expenses 3,151,707 990,906 7,930,578 4,654,051
------------ ------------ ------------ ------------
Loss from Operations (2,928,315) (947,363) (7,648,099) (4,554,631)
Other Income (Expense):
Gain (Loss) on settlement costs (2,269,598) 178,261 (4,606,387) 178,261
Gain (Loss) on Derivatives 389,374 76,859 2,356,890 229,293
------------ ------------ ------------ ------------
Income loss before income taxes (4,808,539) (692,243) (9,897,596) (4,147,077)
------------ ------------ ------------ ------------
Provision for Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net lncome (loss) $ (4,808,539) $ (692,243) $ (9,897,596) $ (4,147,077)
============ ============ ============ ============
Basic income (loss) per common share $ (0.0531) $ (0.0325) $ (0.2135) $ (0.2855)
============ ============ ============ ============
Weighted average common shares outstanding 90,540,235 21,316,798 46,363,284 14,523,388
============ ============ ============ ============
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See Notes to Financial Statements.
4
QUEST MINERALS & MINING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2008 and 2007
(Unaudited)
2008 2007
------------ ------------
Operating Activities
--------------------
Net lncome (loss) $ (9,897,596) $ (4,147,077)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 87,736 69,421
Deferred consulting amortization -- 84,325
Stock issued for interest -- 89,998
Stock issued for services 763,400 468,271
Preferred C stock Issued -- 292,500
Warrants issuances and preferred A conversions 4,026,484 2,560,937
Loss on debt conversion settlements 4,647,553 --
Beneficial loss on convertible debt issuance 384,524 --
Amortized discount on convertible debt 282,785 --
Stock compensation 582,500 --
Changes in operating assets and liabilities:
Loss (gain) on derivatives (2,356,890) (229,293)
(Increase) decrease in prepaid expenses 27,000 (84,900)
Increase (decrease) in DIP payables 358,279 (1,707)
Increase (decrease) in accounts payable and accrued expenses 541,930 63,474
------------ ------------
Net cash used by operating activities (552,295) (834,051)
Investing Activities
--------------------
Equipment purchased 173,612 (83,632)
Security deposits 1,203 (739)
------------ ------------
Net cash used by investing activities 174,815 (84,371)
Financing Activities
--------------------
Repayments (672,549) (38,354)
Borrowings 1,076,796 971,403
------------ ------------
Net cash provided by financing activities 404,247 933,049
------------ ------------
Increase (decrease) in cash 26,767 14,627
Cash at beginning of period 4,464 52
------------ ------------
Cash at end of period $ 31,231 $ 14,679
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during year for:
Interest $ 5,128 $ 5,238
============ ============
Stock issued during year for:
Services $ 763,400 $ 468,271
============ ============
Stock compensation 582,500 --
============ ============
Interest -- 89,998
============ ============
Series C preferred stock fo officer indemnification -- 260,000
============ ============
Beneficial conversion feature 384,524 --
============ ============
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See Notes to Financial Statements.
5
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 1 - ORGANIZATION & OPERATIONS
Quest Minerals & Mining Corp. (the "Registrant" or the "Company") was
incorporated in Utah on November 21, 1985. The Company has leasehold
interests in certain properties in Eastern Kentucky, is seeking to
re-commence full coal mining operations on these properties, and is
looking to acquire additional coal properties.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Quest Mineral & Mining,
Ltd., Quest Energy, Ltd., and Gwenco, Inc. (collectively, the
"Company"). All significant intercompany transactions and balances have
been eliminated in consolidation.
Management Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Mineral Interests
The purchase acquisition costs of mineral properties are deferred until
the properties are placed into production, sold or abandoned. These
deferred costs will be amortized on the unit-of-production basis over
the estimated useful life of the properties following the commencement
of production or written-off if the properties are sold, allowed to
lapse or abandoned.
Mineral property acquisition costs include any cash consideration and
the fair market value of common shares and preferred shares, based on
the trading price of the shares, or, if no trading price exists, on
other indicia of fair market value, issued for mineral property
interests, pursuant to the terms of the agreement or based upon an
independent appraisal.
Administrative expenditures are expensed in the year incurred.
Coal Acquisition Costs
The costs to obtain coal lease rights are capitalized and amortized
primarily by the units-of-production method over the estimated
recoverable reserves. Amortization occurs either as the Company mines
on the property or as others mine on the property through subleasing
transactions.
Rights to leased coal lands are often acquired through royalty
payments. As mining occurs on these leases, the accrued royalty is
charged to cost of coal sales.
Mining Acquisition Costs
The costs to obtain any interest in third-party mining operations are
expensed unless significantly proven reserves can be established for
the entity. At that point, capitalization would occur.
6
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 2 - SIGNICANT ACCOUNTING POLICIES (Continued)
Mining Equipment
Mining equipment is recorded at cost. Expenditures that extend the
useful lives of existing plant and equipment or increase the
productivity of the asset are capitalized. Mining equipment is
depreciated principally on the straight-line method over the estimated
useful lives of the assets, which range from three to 15 years.
Deferred Mine Expense
Costs of developing new mines or significantly expanding the capacity
of existing mines are capitalized and amortized using the
units-of-production method over the estimated recoverable reserves that
are associated with the property being benefited.
Asset Impairment
If facts and circumstances suggest that a long-lived asset may be
impaired, the carrying value is reviewed under the guidance of SFAS
144, pursuant to SEC Industry Guide 7. If the review indicates that the
value of the asset will not be recoverable, as determined based on
projected undiscounted cash flows related to the asset over its
remaining life, then the carrying value of the asset is reduced to its
estimated fair value.
Revenue Recognition
Coal sales revenues are sales to customers of coal produced at the
Company's operations. The Company recognizes revenue from coal sales at
the time title passes to the customer.
Stock-Based Compensation
Effective January 1, 2006, the Company began recording compensation
expense associated with stock options and other forms of equity
compensation in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123R, Share-Based Payment, as interpreted by SEC
Staff Accounting Bulletin No. 107. Prior to January 1, 2006, the
Company had accounted for stock options according to the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, and therefore no related
compensation expense was recorded for awards granted with no intrinsic
value. The Company adopted the modified prospective transition method
provided for under SFAS No. 123R, and, consequently, has not
retroactively adjusted results from prior periods.
There were 25,000 options issued to employees and non-employee
directors during the year ending December 31, 2006, and there were no
options issued to employees or non-employee directors during the year
ended December 31, 2005. As of September 30, 2008, there were 5,007,500
options issued and outstanding. See Note 13 for details.
7
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 2 - SIGNICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company provides for the tax effects of transactions reported in
the financial statements. The provision, if any, consists of taxes
currently due plus deferred taxes related primarily to differences
between the basis of assets and liabilities for financial and income
tax reporting. The deferred tax assets and liabilities, if any,
represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of September 30, 2008, the
Company had no material current tax liability, deferred tax assets, or
liabilities to impact on the Company's financial position because the
deferred tax asset related to the Company's net operating loss carry
forward was fully offset by a valuation allowance.
Fair Value
The Company's financial instruments, as defined by SFAS No. 107,
"Disclosure about Fair Value of Financial Instruments," include cash,
advances to affiliate, trade accounts receivable, investment in
securities available-for-sale, restricted cash, accounts payable and
accrued expenses and short-term borrowings. All instruments other than
the investment in securities available-for-sale are accounted for on a
historical cost basis, which, due to the short maturity of these
financial instruments, approximates fair value at December 31, 2007.
The Company had no securities available-for-sale at September 30, 2008.
Earnings loss per share
The Company adopted SFAS No. 128, which provides for the calculation of
"basic" and "diluted" earnings per share. Basic earnings per share
includes no dilution and is computed by dividing net income available
to common stockholders by the weighted average common shares
outstanding for the period; after provisions for cumulative dividends
on Series A preferred stock. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings
similar to fully diluted earnings per share.
Stock Split
All references to common stock and per share data have been
retroactively restated to account for the 1 for 4 reverse stock split
effectuated on August 17, 2007. See Note 12 for details.
All references to common stock and per share data have been
retroactively restated once more to account for the 1 for 10 reverse
stock split effectuated on December 14, 2007. See Note 12 for details.
All references to common stock and per share data have been
retroactively restated once more to account for the subsequent 1 for 10
reverse stock split effectuated on November 4, 2008. See Note 12 for
details.
8
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 2 - SIGNICANT ACCOUNTING POLICIES (Continued)
Recently Adopted Accounting Principles
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 defines fair value, establishes a framework
and gives guidance regarding the methods used for measuring fair value,
and expands disclosures about fair value measurements. In February
2008, the FASB issued FASB Staff Position 157-1, "Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13" ("FSP 157-1")
and FASB Staff Position 157-2, "Effective Date of FASB Statement No.
157" ("FSP 157-2"). FSP 157-1 amends SFAS No. 157 to remove certain
leasing transactions from its scope. FSP 157-2 delays the effective
date of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least
annually), until fiscal years beginning after November 15, 2008. SFAS
No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those
fiscal years. The Company adopted SFAS No. 157 effective January 1,
2008 for all financial assets and liabilities as required. The adoption
of SFAS No. 157 was not material to the Company's financial statements
or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities -- Including an
Amendment of FASB Statement No. 115", which is effective for fiscal
years beginning after November 15, 2007. SFAS No. 159 is an elective
standard which permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified election
dates. Subsequent unrealized gains and losses on items for which the
fair value option has been elected will be reported in earnings. The
Company has not elected the fair value option for any assets or
liabilities under SFAS No. 159.
The Company does not expect that the adoption of other recent
accounting pronouncements to have any impact on its financial condition
or results of operations.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net operating losses of $5,169,899 and $5,530,115 for
the years ended December 31, 2007 and 2006 and had a working capital
deficit of $7,358,784 at December 31, 2007. For the nine months ended
September 30, 2008, the Company had a net operating loss of $7,648,099.
The working capital deficit as of September 30, 2008 was $7,866,578.
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.
9
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 4 - LEASEHOLD INTERESTS
The Company maintains a number of coal leases with minimum lease or
royalty payments that vary by lease as defined in the separate
agreements. Several of the landowners have contended that the Company
is in default under certain of these leases and that said leases are
terminated. The Company disputes these contentions.
Certain former owners of the Company's indirect, wholly-owned
subsidiary, Gwenco, Inc. ("Gwenco") commenced an action in the Circuit
Court of Pike County against Gwenco for damages resulting from an
alleged failure to pay past royalties and other amounts allegedly due.
On May 19, 2006, the former owners obtained a default judgment in this
action in the amount of $687,391, from which Gwenco has taken appeal.
The plaintiffs then amended their complaint, seeking to be adjudged a
lien on certain real and personal property of Gwenco pursuant to the
aforementioned judgment and that said real and personal property be
sold to satisfy the aforesaid lien, and that the liens of the
plaintiffs attach to the proceeds of the sale. Gwenco believes that it
has several meritorious defenses and counterclaims to this action and
intends to defend it vigorously. This foreclosure action was stayed
against Gwenco as a result of Gwenco's filing of a voluntary petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. (See
Note 16.) On June 20, 2007, Gwenco entered into a settlement agreement
with one of the former owners, pursuant to which the former owner
agreed to accept payment of $150,000 in exchange for a release of the
judgment amount of $458,260. The Bankruptcy Court approved the
settlement agreement on July 17, 2007. On August 3, 2007, the Court
approved Gwenco's debtor-in-possession financing and the settlement
agreement became effective. The escrowed funds were released on August
10, 2007 to complete the settlement.
As of September 30, 2008, Gwenco owed approximately $318,254 in lease
payments in addition to the reduced judgment amount of $229,130.
10
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 5 - LEASED MINERAL RESERVES
All of the Company's existing reserves remain in Gwenco, Inc., a wholly
owned subsidiary. The total reserves are a combination of several coal
seams throughout the spectrum of leased properties.
At September 30, 2008 the leased mineral reserves, valued at
$5,206,588, consisted of the following:
Proven Reserves
Seams Tons
----- --------------
Winifrede 214,650
Taylor 1,783,500
Cedar Grove 3,702,600
Pond Creek 4,089,660
--------------
Total Reserves 9,790,410
==============
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The Company maintains a number of coal leases with minimum lease or
royalty payments that vary by lease as defined in the separate
agreements. Several of the landowners have contended that the Company
is in default under certain of these leases and that said leases are
terminated. The Company disputes these contentions. Pursuant to SFAS
144, management has reviewed the recoverable value of the Company's
mineral reserves and has determined that no impairment loss has
occurred. As long as the recoverable amount continues to exceed its
carrying value, amortization will occur based on a proportionate ratio
of depleted reserves as a result of future coal mining activity.
NOTE 6 - EQUIPMENT
Equipment consisted of the following:
September 30, December 31,
2008 2007
-------------- --------------
Mining equipment (a) $ 1,039,965 866,353
--------------------------------
Less accumulated depreciation (430,060) (344,260)
Less allowance for Impairment (b) (355,820) (355,820)
--------------------------------
Equipment - net $ 254,085 166,273
================================
|
All of the equipment currently in use by the Company is owned by the
Company's wholly-owned subsidiary, Gwenco, Inc., which is currently in
Chapter 11 bankruptcy proceedings.
(a) The Company depreciates its mining equipment over a 5 year period,
while the office equipment is depreciated over a 7 year period. In both
cases, the straight-line method is used. Depending on the type of
equipment needed at any given point in production, the Company will
sell existing equipment and replace it with new or used machinery,
which can reflect a fluctuation in the asset valuation.
11
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 6 - EQUIPMENT (Continued)
(b) On July 10, 2006, the Company entered into a settlement arrangement
with an existing equipment lessor for the bill of sale on two pieces of
equipment, of which the Company had retained possession while in
default of prior lease payments. On October 10, 2006, the Pike County
Circuit court entered an order enforcing this settlement agreement, and
on December 19, 2006, the lessor was awarded summary judgment in the
amount of $35,000 plus 8% accrued interest from August 9, 2006. As of
September 30, 2008, the Company has accrued allowances against the
equipment, as some of it has been repossessed with the understanding
that it will be returned upon satisfaction of existing lease contracts,
while the remaining equipment is unusable until required restoration
and repairs can be made.
12
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 7 - OTHER RECEIVABLES
Other Receivables consisted of the following:
September 30, December 31,
2008 2007
-------------- --------------
D&D Contracting, Inc.(a) $ 678,349 678,349
Braxton Coal (b) 57,109 57,109
Less allowance (735,458) (735,458)
--------------------------------
Other Receivables - net $ --
================================
|
(a) The receivable with D&D Contracting, Inc. exists as a result
of the rescission agreement dated November 1, 2004. The
Company holds an equipment lease and a limited royalty
agreement totaling $668,000. Unearned revenues have been
recorded as an allowance. The remaining balance is the cash
and account deposits that have not yet been reimbursed. The
Company has booked an allowance against this amount. As of
September 30, 2008, D&D was in default of their obligations to
the Company. The Company is currently negotiating with the
existing leaseholders to receive subsidized payments from the
coal mined by D&D to secure their lease payments. As a result,
the Company has accrued an additional allowance on the entire
receivable until a settlement can be determined.
(b) During the twelve months ended December 31, 2006, the Company
hired a contract miner to mine the coal from the Gwenco
properties. The receivables represent initial startup and
maintenance expenses, which were to be paid back through a
royalty arrangement once coal production began. As of
September 30, 2008, the agreement with this contract miner has
expired. The Company has since retained a new contract miner.
As a result, the Company has accrued an allowance against the
receivable until a settlement can be negotiated to recoup
these initial expenses.
13
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 8 - ACCOUNTS PAYABLE & ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
September 30, December 31,
2008 2007
-------------- --------------
Accounts payable $ 580,140 294,604
Accrued royalties payable-operating (a) 318,254 235,925
Accrued bank claim (b) 650,000 650,000
Accrued taxes 93,066 87,315
Accrued interest 694,186 609,289
Accrued equipment lease (c) 170,000 --
Accrued expenses (d) 771,527 858,585
-------------- --------------
3,277,173 2,735,718
Derivative Liability (e) 484,313 2,841,203
Unearned Revenues (f) --
$ 3,761,486 5,576,921
================================
|
(a) The Company maintains a number of coal leases with minimum
lease or royalty payments that vary by lease as defined in the
separate agreements. Several of the landowners have contended
that the Company is in default under certain of these leases
and that said leases are terminated. The Company disputes
these contentions. Certain former owners of Gwenco commenced
an action in the Circuit Court of Pike County against Gwenco
for damages resulting from an alleged failure to pay past
royalties and other amounts allegedly due. On May 19, 2006,
the former owners obtained a default judgment in this action
in the amount of $687,391, from which Gwenco has taken appeal.
Gwenco believes that it has several meritorious defenses and
counterclaims to this action and intends to defend it
vigorously. Since the judgment was approximately $500,000
above what the Company believes to have owed, the Company
reclassified the difference and recorded additional expense to
account for the liability. On June 20, 2007, Gwenco entered
into a settlement agreement with one of the former owners,
pursuant to which the former owner agreed to accept payment of
$150,000 in exchange for a release of the judgment amount of
$458,260. The Bankruptcy Court approved the settlement
agreement on July 17, 2007. On August 3, 2007, the Court
approved Gwenco's debtor-in-possession financing and the
settlement agreement became effective. The escrowed funds were
later released on August 10, 2007 to complete the settlement.
As a result of the settlement, the remaining judgment balance
is $229,130 and is posted in the Notes Payable section of the
company's financial statements (See NOTE 9). As of September
30, 2008, Gwenco recorded approximately $318,254 in lease
and/or royalty payments as accounts payable and accrued
expenses in addition to the reduced judgment of $229,130
against Gwenco, which is accrued as a notes payable.
(b) During the period ended December 31, 2004, the Company's bank
initiated a claim for an overdraft recovery. Since it was
later determined that there was a much larger malice
perpetrated against the Company by existing bank employees,
estimates for the resolution of a claim against a defunct
subsidiary have been accrued until a resolution can be
determined. The Company has filed suit against the bank and
all parties involving several counts of fraudulent misconduct.
As of September 30, 2008, no resolution has been determined.
14
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 8 - ACCOUNTS PAYABLE & ACCRUED EXPENSES (Continued)
(c) On March 12, 2008, the company entered into a lease purchase
agreement with a third party vendor to acquire certain mining
equipment needed for their operations. Payments of $7,500 were
to be paid on a monthly basis until the obligation was
satisfied. As of September 30, 2008, the company is
renegotiating said terms due to extensive repairs arising
shortly after the initial transaction took place.
(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. In January 2007, the Company satisfied
$260,000 of this accrued liability by issuing 260,000 shares
of Series C Preferred Stock. See Note 11. Upon default by the
Company, the lender foreclosed on the officer's pledged
shares. In addition, during the period ended December 31,
2004, the Company had recorded accrued expenses of $468,585
from its subsidiaries, E-Z Mining Co. and Gwenco, Inc. as
acquisition for mining expenses recorded on their books and
records. The Company continues to carry these balances until
further validity can be determined.
(e) The Company has issued convertible notes at a discounted rate
relative to the market price of the underlying common stock,
as well as warrants. The Company has accrued additional
derivative liability allowances based on the market price
volatility of the common stock using the Black-Scholes method
under the accounting guidance of FASB 133. The valuations are
adjusted each quarter to present a fair representation of the
liability until the underlying note or warrant has matured,
expired, or has been exercised, cancelled, or satisfied. The
Company's operating losses are increased or decreased relative
to the derivative liability allowance. These adjusted
valuations also remain relative to the future capitalization
costs that would incur from exercise of the warrant issuances
or settlement of existing debt through conversion.
(f) As part of the rescission agreement with D&D on November 1,
2004, the Company posted receivables based on a two-year lease
agreement for equipment still owned as well as a limited
2,000,000 ton royalty payout of $0.25 per ton. Management has
initiated a liability allowance until the receivables are
recognized. As of the nine months ended September 30, 2008,
D&D was in default of this agreement. The Company is currently
negotiating with the existing leaseholders to receive
subsidized payments from the coal mined by D&D to secure D&D's
obligations to the Company. As a result, the Company has
reclassified the allowance under Other Receivables until a
settlement can be determined.
15
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE
Notes payable consist of the following:
September 30, December 31,
2008 2007
-------------- --------------
QUEST MINERALS & MINING CORP.
0% Notes payable (a). $ 202,864 202,864
12% Notes payable to Gross Foundation (b). -- 32,399
15% Notes payable to Gross Foundation (c). 42,223 --
7% Notes payable to GP, PTF, FM (d). -- --
7% Notes payable to Investors (e). -- 50,000
7% Notes payable to Greenwood Partners (f). -- --
7% Notes payable to First Mirage (f). -- 50,000
7% Notes payable to Professional Traders Fund (g). 1,616 100,000
8% Notes payable to Interstellar Holdings. (h). -- 535,000
5% Advances from Interstellar Holdings (i). 1,105,711 1,010,049
0% Notes payable (j). 502,934 217,684
7% Notes payable to Westor Capital Group (k). -- 100,000
8% Notes payable to Kaila (l). -- 300,000
10% Notes payable to IMR (m). 10,000 10,000
6% Notes payable to Interstellar Holdings. (n). 715,000 --
8% Notes payable to Prof. Offshore Opportunity Fund, Ltd. (o). 400,000 --
QUEST ENERGY, LTD.
8% Summary Judgment payable to BH&P (p). 35,000 35,000
GWENCO, INC.: (Bank Loans)
12% Judgment to Duke Energy Merchants (q). 726,964 726,964
9% Assigned Judgment to Interstellar Holdings (r). -- --
12.75% Assigned Judgment to Interstellar Holdings (r). -- 65,589
9.5% Note payable to First Sentry Bank (s) 262,402 262,402
6% Note payable to United National Bank (s) 28,159 28,159
0% Default Judgment to Third-Party (t) 229,130 229,130
17% DIP Financing - Interstellar Holdings (u) 694,043 335,764
GWENCO, INC.: (Related-Party Loans)
5.26% Notes payable to Scott Whitson (v). 641,418 672,289
--------------------------------
5,597,464 4,963,294
Less Accumulated Discount (282,785)
Less current portion (4,199,679) (4,963,294)
--------------------------------
Long-Term Debt: $ 1,115,000 --
================================
|
16
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(a) On December 31, 2005, the Company closed E-Z Mining Co., Inc.
During the period ended December 31, 2004, the Company's bank
initiated a claim for an overdraft recovery. Since it was
later determined that there was a much larger malice
perpetrated against the Company by existing bank employees,
allowances have been accrued until a resolution can be
determined. These current notes consist of various third
parties related to the former CFO of the Company. All notes
are due on demand except $110,000, which is due from future
royalties. All notes are non-interest bearing.
(b) On December 17, 2004, the Company signed a 15% per annum
promissory note with Gross Foundation for $300,000 due on June
17, 2005. The note was secured by certain of the Company's
equipment. In the event of default, the note became
convertible into shares of the Company's common stock at the
option of the holder at a conversion price of $4.00 per share.
As additional compensation to the lender, the Company issued
750 common stock warrants at $600.00. The warrants have
anti-dilution privileges and piggyback registration rights. On
December 20, 2005, the Company issued 5,000 shares of common
stock at $40.00 per share to Gross Foundation as a partial
conversion pursuant to their promissory note, which matured on
June 17, 2005. The lender continues to make periodic partial
conversion requests to pay down the principal and accrued
interest. On July 26, 2006, the note was amended and restated
at 12%, due on April 18, 2007, with a new balance of $258,091,
which included the remaining principal and interest from the
original note. The note is convertible at the option of the
holder at a conversion price of $30.00 per share; provided,
that if the market price of the Company's common stock was
less than $40.00 per share for ten consecutive trading days,
the conversion price would reduced to $20.00 per share;
provided, further, that if the market price of the Company's
common stock was less than $20.00 per share for ten
consecutive trading days, the conversion price would become
the lesser of (i) $20.00 per share or (ii) 70% of the average
of the 5 closing bid prices of the common stock immediately
preceding such conversion date. The lender makes periodic
partial conversions of the principal and accruing interest.
Since the convertible notes were issued at a discount to the
market price of the underlying common stock, the Company has
taken into consideration the cost of issuing the common stock
to settle the debt at the time of issuance and has accrued
additional allowances based on a valuation of market price
volatility. On June 19, 2008, the lender submitted a final
conversion notice to satisfy the remaining principal and
interest on the note.
(c) On March 11, 2008, the Company signed a 15% per annum
promissory note with a third party lender for $75,000 due on
March 10, 2009. The note is convertible at the option of the
holder at a conversion price of 50% of the average of the
three lowest per share market values during the ten (10)
trading days immediately preceding a conversion date. The
holder may not convert any outstanding principal amount of
this note or accrued and unpaid interest thereon to the extent
such conversion would result in the holder beneficially owning
in excess of 4.999% of the then issued and outstanding common
shares of the Company. Since the convertible note was issued
at a discount to the market price of the underlying common
stock, the Company has taken into consideration the cost of
issuing the common stock to settle the debt at the time of
issuance and has accrued additional allowances based on a
valuation of market price volatility.
17
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(d) On February 22, 2005, the Company signed a series of unit
purchase agreements with three individual third-party lenders
for a total sale amount of $650,000. Each unit was sold at
$25,000 and consisted of a 7% senior secured convertible note
due March 6, 2006 and 375 Series A Warrants. The notes are
secured by certain of the Company's assets and were initially
convertible into shares of the Company's common stock at the
rate of $200.00 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 $400.00. The Company categorized the convertible
notes as a liability in the amount of $650,000. A 10%
commission was paid to the agent who arranged the transaction.
On February 14, 2006, the Company amended and restated a 7%
convertible note in the principal amount of $350,000, which is
now due February 22, 2007, to one of the third party lenders.
On June 5, 2006, the Company amended and restated the
remaining 7% convertible notes in the principal amounts of
$100,000 and $200,000, respectively, which are also now due
February 22, 2007. The notes are convertible at the option of
the holder at a conversion price of $30.00 per share;
provided, that if the market price of the Company's common
stock was less than $40.00 per share for ten consecutive
trading days, the conversion price would reduced to $20.00 per
share; provided, further, that if the market price of the
Company's common stock was less than $20.00 per share for ten
consecutive trading days, the conversion price would become
the lesser of (i) $20.00 per share or (ii) 70% of the average
of the 5 closing bid prices of the common stock immediately
preceding such conversion date. The lenders make periodic
partial conversions to pay down the remaining principal on the
notes. As of the nine months ended September 30, 2008, only a
partial amount of accrued interest remains. Since the
convertible notes were issued at a discount to the market
price of the underlying common stock, the Company has taken
into consideration the cost of issuing the common stock to
settle the debt at the time of issuance and has accrued
additional allowances based on a valuation of market price
volatility.
18
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(e) On March 4, 2005, the Company signed a series of unit purchase
agreements with thirteen individual third-party lenders for a
total sale amount of $375,000. Each unit was sold at $25,000
and consisted of a 7% senior secured convertible note due
March 6, 2006 and 375 Series A Warrants. The notes are secured
by certain of the Company's assets and were initially
convertible into shares of the Company's common stock at the
rate of $200.00 per share, which conversion price is subject
to adjustment. Each Series A Warrant was exercisable into one
(1) share of common stock at an exercise price of $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 $400.00. The Company categorized the convertible
notes as a liability in the amount of $375,000. A 10%
commission was paid to the agent who arranged in the
transaction. During the twelve months ended December 31, 2006,
the Company amended and restated 7% convertible notes in the
aggregate principal amount of $325,000, which are now due
February 22, 2007. The notes are convertible at the option of
the holder at a conversion price of $30.00 per share;
provided, that if the market price of the Company's common
stock was less than $40.00 per share for ten consecutive
trading days, the conversion price would reduced to $20.00 per
share; provided, further, that if the market price of the
Company's common stock was less than $20.00 per share for ten
consecutive trading days, the conversion price would become
the lesser of (i) $20.00 per share or (ii) 70% of the average
of the 5 closing bid prices of the common stock immediately
preceding such conversion date. During the three months ended
March 31, 2008, several of the lenders made periodic partial
conversions of the principal and accruing interest. Since the
convertible notes were issued at a discount to the market
price of the underlying common stock, the Company has taken
into consideration the cost of issuing the common stock to
settle the debt at the time of issuance and has accrued
additional allowances based on a valuation of market price
volatility. On September 3, 2008, the remaining lender
submitted a final conversion notice to satisfy the remaining
principal of the debt.
19
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(f) On April 18, 2005, the Company signed a series of unit
purchase agreements with two third-party lenders for a total
sale amount of $400,000. Each unit was sold at $25,000 and
consisted of a 7% senior secured convertible note due March 6,
2006 and 375 Series A Warrants. The notes are secured by
certain of the Company's assets and were initially convertible
into shares of the Company's common stock at the rate of
$200.00 per share, which conversion price is subject to
adjustment. Each Series A Warrant was exercisable into one (1)
share of common stock at an exercise price of $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
$400.00. The Company categorized the convertible notes as a
liability in the amount of $400,000. A $14,000 commission was
paid to the agent who arranged in the transaction. On June 5,
2006, the Company amended and restated the 7% convertible
notes in the principal amounts of $100,000, $125,000, and
$50,000, respectively, which are now due April 18, 2007. As
part of the amendment and restatement, one of the noteholders
forgave a 7% senior secured convertible note in the principal
amount of $125,000. The notes are convertible at the option of
the holder at a conversion price of $30.00 per share;
provided, that if the market price of the Company's common
stock was less than $40.00 per share for ten consecutive
trading days, the conversion price would reduced to $20.00 per
share; provided, further, that if the market price of the
Company's common stock was less than $20.00 per share for ten
consecutive trading days, the conversion price would become
the lesser of (i) $20.00 per share or (ii) 70% of the average
of the 5 closing bid prices of the common stock immediately
preceding such conversion date. The lenders make periodic
partial conversions of the principal and accruing interest.
Since the convertible notes were issued at a discount to the
market price of the underlying common stock, the Company has
taken into consideration the cost of issuing the common stock
to settle the debt at the time of issuance and has accrued
additional allowances based on a valuation of market price
volatility. On June 24, 2008, on of the remaining lenders
submitted a final conversion notice to satisfy their remaining
principal and interest. As of the nine months ended September
30, 2008, only a partial amount of accrued interest remains
from the remaining lender.
20
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(g) On May 16, 2005, the Company entered into a credit agreement
with a third party lender in which $245,000 was issued as a
10% note due August 19, 2005. According to the credit
agreement, the lender may, in its sole and absolute
discretion, make additional loans to the Company of $255,000
for an aggregate total of $500,000. Additionally, the lender
was issued 25,650 warrants. The loans subject to the credit
agreement are secured by certain assets of the Company. The
warrants have an exercise price of $40.00 per share, subject
to adjustment, and expire on May 31, 2007. As of December 31,
2005, the Company had made a payment of $5,500. On February
14, 2006, in connection with a settlement agreement with the
lender, the Company made a payment of $264,000 and issued an
amended and restated 10% note in the amount of $100,000. The
note covered accrued interest and additional legal fees. The
amended and restated note is convertible into the Company's
common stock at a rate of $40.00 per share and was due
February 22, 2007. Since the convertible note was issued at a
discount to the market price of the underlying common stock,
the Company has taken into consideration the cost of issuing
the common stock to settle the debt at the time of issuance
and has accrued additional allowances based on a valuation of
market price volatility. On June 6, 2007, the Company entered
into an exchange agreement with the lender, under which the
holder exchanged the $100,000 note and all remaining warrants
held by such lender for a new convertible promissory note in
the aggregate principal amount of $100,000. The new note is
due on June 6, 2008, with an annual interest rate of seven
percent (7%), and is convertible into Quest's common shares at
a conversion price of 70% of the average of the 5 closing bid
prices of the common stock immediately preceding such
conversion date. Since the convertible note was issued at a
discount to the market price of the underlying common stock,
the Company has taken into consideration the cost of issuing
the common stock to settle the debt at the time of issuance
and has accrued additional allowances based on a valuation of
market price volatility. As of the nine months ended September
30, 2008, the company was in default on the remaining balance
of this obligation.
(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. Since the
convertible notes were issued at a discount to the market
price of the collaterzied common stock, the Company has taken
into consideration the cost of issuing the common stock to
settle the debt at the time of issuance and has accrued
additional allowances based on a valuation of market price
volatility. On June 6, 2008, the debt was satisfied through an
exchange agreement between the Company and another third party
lender to whom the note had been assigned.
21
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(i) During January of 2006, the Company entered into a loan
agreement to receive up to $300,000 in funds for operations in
return for a 12% percent note due in May of 2006. As
additional collateral, the officers of the Company guaranteed
the loan and pledged their own shares of common stock. As of
the three months ended March 31, 2006, the lender has made
advances totaling $132,000. On April 3, 2006, the lender
declared a default under the terms of the loan agreement. The
Company failed to repay the lender as required under the loan
agreement. The lender then enforced guarantees made by the
officers of the Company and foreclosed on shares of the
officer's common stock pledged to the lender to secure the
guarantee. Along with accrued interest, the Company recorded a
capital contribution from its officers of $390,000. The
Company has indemnified one officer and is currently
negotiating the terms of indemnification of the other officer
as a result of this foreclosure. During the nine months ended
September 30, 2008, the lender continued to advance
operational funding into the Company. Since there has been no
formal agreement regarding the balance owed, the Company
accrues a 5% annual interest on the principal with the intent
that a mutual arrangement will be resolved between both
parties.
(j) Periodically, the Company receives cash advances from
unrelated third party investors. Since these advances are open
accounts and have no fixed or determined dates for repayment,
the amounts carry a 0% interest rate.
(k) On April 5, 2006, the Company issued an aggregate of 1.25
units at a price of $100,000 per unit. The aggregate gross
proceeds from the sale of the units were $125,000. Each unit
consists of a convertible promissory note in the principal
amount of $100,000 and warrants to purchase shares of the
Company's common stock at an exercise price of $84.00 per
share. The unit notes are due on July 5, 2007. The notes bear
interest at a rate of six percent (6%) and are convertible
into Quest common shares at an initial conversion price of
$42.00 per share, subject to adjustment, including a
"weighted-average" reduction of the conversion price in the
event that the Company issued additional stock or stock
equivalents at a price lower than the conversion price.
Commencing on the fifth month of the notes, the Company must
make amortizing payments of the outstanding principal amount
and interest on each note until the principal amount and
interest have been paid in full, either in cash of 102% of the
monthly amount due or by conversion of such amount into our
common shares at a conversion rate of seventy-five percent of
the volume weighted average price of our common shares for the
five trading days prior to a conversion date, subject to
certain limitations. Since the convertible notes were issued
at a discount to the market price of the underlying common
stock, the Company has taken into consideration the cost of
issuing the common stock to settle the debt at the time of
issuance and has accrued additional allowances based on a
valuation of market price volatility. On June 27, 2007, the
Company entered into an agreement with one of the note holders
to exchange a note in the principal amount of $25,000 for
83,693 shares of common stock. Since the exchange transaction
valued the stock at greater than market, the Company incurred
no additional expense at the time of issuance. On April 1,
2008, the Company entered into an agreement with the remaining
note holder to exchange their expired note of $100,000; along
with their existing warrants for a newly issued convertible
note in the amount of $100,000. The new note carries an
interest rate of seven percent (7%) and expires on March 31,
2009. The note is convertible into Quest common shares at a
conversion price of seventy percent (70%) of the average per
share market value during the three (3) trading days
immediately preceding a conversion date. On August 13, 2008,
the lender converted 2,100,000 shares of common stock to
satisfy the note pursuant to another exchange agreement
between the two parties.
22
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(l) On April 1, 2006, the Company entered into a settlement and
release agreement with a third party individual pursuant to
which the Company issued a convertible secured promissory note
in the principal amount of $300,000. The note is due on April
1, 2008, with an annual interest rate of eight percent (8%).
The note is convertible into the Company's common shares at an
initial conversion price equal to the greater of (a) $2.00 per
share, and (b) 50% of the average market price during the
three trading days immediately preceding any conversion date.
The holder may not convert any outstanding principal amount of
this note or accrued and unpaid interest thereon to the extent
such conversion would result in the holder beneficially owning
in excess of 4.999% of the then issued and outstanding common
shares of the Company. Since the convertible note was issued
at a discount to the market price of the underlying common
stock, the Company has taken into consideration the cost of
issuing the common stock to settle the debt at the time of
issuance and has accrued additional allowances based on a
valuation of market price volatility. On June 6, 2008, the
debt was satisfied through an exchange agreement between the
Company and another third party lender to whom the note had
been assigned.
(m) On May 1, 2007, the Company entered into a settlement and
release agreement with a third party pursuant to which the
Company issued a convertible secured promissory note in the
principal amount of $10,000. The note is due on May 1, 2008,
with an annual interest rate of ten percent (10%). The note is
convertible into the Company's common shares at a fixed rate
of $1.60 per share. The holder may not convert any outstanding
principal amount of this note or accrued and unpaid interest
thereon to the extent such conversion would result in the
holder beneficially owning in excess of 4.999% of the then
issued and outstanding common shares of the Company. Since the
convertible note was issued at a discount to the market price
of the underlying common stock, the Company has taken into
consideration the cost of issuing the common stock to settle
the debt at the time of issuance and has accrued additional
allowances based on a valuation of market price volatility. As
of the nine months ended September 30, 2008, the company was
in default of this obligation.
(n) On June 6, 2008, the Company issued a convertible secured
promissory note in the principal amount of $835,000 as part of
a consolidated exchange agreement to settle two prior debts
already in default, which had been reassigned to another third
party. The note is due on June 6, 2010, with an annual
interest rate of six percent (6%), and is convertible into the
Company's common shares at a conversion price of $.001 per
share. Since the convertible notes were issued at a discount
to the market price of the collaterzied common stock, the
Company has taken into consideration the cost of issuing the
common stock to settle the debt at the time of issuance and
has accrued additional allowances based on a valuation of
market price volatility.
(o) 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 at 8%; as well
as a three (3) year royalty on future coal sales. The note is
due on July 23, 2010 and is convertible into Quest common
shares 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 $.75 per ton, depending on actual sale prices of coal
received by the company. The Company expensed $266,667 against
paid-in capital based on the Black Scholes method as a
beneficial conversion feature relative to the market valuation
at the time of issuance. Since the convertible note was issued
at a discount to the market price of the collaterzied common
stock, the Company has taken into consideration the cost of
issuing the common stock to settle the debt at the time of
issuance and has accrued additional allowances based on a
valuation of market price volatility.
23
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(p) 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
September 30, 2008, the Company remains in default.
(q) On April 28, 2004, in connection with the Company's
acquisition of Gwenco, Inc., the Company assumed a promissory
note, which was in default. The note was secured by certain
assets of Gwenco. The former stockholder of Gwenco has
personally guaranteed most of the above loans. On May 20,
2005, the lender, Duke Energy, was awarded a judgment of
$670,964 plus legal fees of $56,000, which accrues interest at
the rate of twelve percent. Duke Energy has obtained a
judgment lien against the Company and its assets. (See Note
16.) As of June 30, 2008, the balance remains outstanding. On
or about August 20, 2008, Duke Energy sold its right, title,
and interest in and to the various judgments, judgment liens,
adnd security interests, all of which are based on the note
issued to Duke Energy of Kentucky, also referenced in Note 16,
to a third party investor. As of the nine months ended
September 30, 2008, the company is currently negotiating a
convertible note settlement with the current note holder.
24
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(r) On April 28, 2004, in connection with the Company's
acquisition of Gwenco, Inc., the Company assumed a commercial
installment note and a commercial time note, both of which
were in default. The notes were secured by certain assets of
Gwenco. The former stockholder of Gwenco has personally
guaranteed most of the above loans. In 2005, the Company
entered into an agreed judgment in with the lender, National
City Bank of Kentucky, with respect to the defaulted notes.
National City Bank obtained a judgment lien against the
Company and its assets. On July 19, 2006, National City Bank
sold its right, title, and interest in and to the various
judgments, judgment liens, security interests, and lines of
credit, all of which are based on the notes issued to National
City Bank of Kentucky, also referenced in Note 16, to a third
party investor. The third party investor has agreed to forbear
on further collection, enforcement, and foreclosure with
respect to this indebtedness until further notice. In
connection therewith, the Company granted the investor a
royalty on fifty percent of the Company's gross profits
generated from coal mining at the Company's leased mine. Also
in connection therewith, the Company entered into a judgment
conversion agreement where the investor shall have the right,
but not the obligation, to convert all or any portion of the
then aggregate outstanding amounts due under the judgments
into the Company's common shares at the rate of $0.001 per
share. The investor shall not be entitled to convert any
portion of the judgment if such conversion would result in
beneficial ownership by the investor of more than 4.99% of the
outstanding common shares of the Company. Since the
convertible note was issued at a discount to the market price
of the underlying common stock, the Company has taken into
consideration the cost of issuing the common stock to settle
the debt at the time of issuance and has accrued additional
allowances based on a valuation of market price volatility. On
July 21, 2008, the lender submitted a final conversion notice
to satisfy the obligation.
(s) On July 27, 2006, the Company assumed two promissory notes in
connection with a settlement agreement with the former owner
of Gwenco. The notes are in default.
(t) Certain former owners of Gwenco commenced an action in the
Circuit Court of Pike County against Gwenco for damages
resulting from an alleged failure to pay past royalties and
other amounts allegedly due. On May 19, 2006, the former
owners obtained a default judgment in this action in the
amount of $687,391, from which Gwenco has taken appeal. The
plaintiffs then amended their complaint, seeking to be
adjudged a lien on certain real and personal property of
Gwenco pursuant to the aforementioned judgment and that said
real and personal property be sold to satisfy the aforesaid
lien, and that the liens of the plaintiffs attach to the
proceeds of the sale. Gwenco believes that it has several
meritorious defenses and counterclaims to this action and
intends to defend it vigorously. This foreclosure action was
stayed against Gwenco as a result of Gwenco's filing of a
voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. (See Notes 16 & 17.) On June 20, 2007,
Gwenco entered into a settlement agreement with one of the
former owners, pursuant to which the former owner agreed to
accept payment of $150,000 in exchange for a release of the
judgment amount of $458,260. On July 17, 2007, the Bankruptcy
Court approved the settlement agreement. On August 3, 2007,
the Court approved Gwenco's debtor-in-possession financing and
the settlement agreement became effective. On August 10, 2007,
the escrowed funds were transferred to complete the
settlement. As of the nine months ended September 30, 2008,
the Company continues to negotiate the remaining balance of
the judgment with its former owners.
25
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 9 - NOTES PAYABLE (Continued)
(u) On August 15, 2007, the U.S. Bankruptcy Court approved a DIP
Financing Motion authorizing the Company's wholly owned
subsidiary, Gwenco, Inc., which is currently in Chapter 11
reorganization proceedings, to borrow up to $2,000,000 ("Total
Facility") in post-petition debt from a pre-petition creditor
pursuant to a Debtor-In-Possession loan agreement and
promissory note between Gwenco and the lender dated June 29,
2007. Additionally, the Court approved prior budgeted advances
from July of up to $350,000, which, in turn, adjusted the
Total Facility to $1,700,000. The loan advances will carry a
17% interest rate per annum and mature on July 31, 2008. As of
the nine months ended September 30, 2008, advances at maturity
date totaled $694,043 and continue to accrue interest.
(v) The Company has guaranteed payment on a note in the amount of
$300,000 made to a former stockholder of Gwenco by another
former stockholder of Gwenco. This note is secured by 50% of
the outstanding capital stock of Gwenco. The debt required 4
annual payments of approximately $75,000 plus interest. As of
December 31, 2005, the Company was in default. Additionally, a
3.7% annual rate note in the amount of $495,000 due in
December 2007 was agreed upon in consideration for royalties
to be paid out on a schedule based on the level of production
from the mine. Since the initial agreement was made effective
in March of 2004, the Company has accrued two years of
interest expense and has adjusted its paid in capital to
reflect the future correction on the issuance of preferred
stock associated with the original acquisition of Gwenco, Inc.
On August 24, 2006, the Company amended the original note of
$300,000 to $180,884, which included the remaining principal
and interest, which has an interest rate of 5.21% and is due
on September 24, 2009. The Company also amended the $495,000
note due on December 10, 2007 to $545,473, which also included
the accrued interest; having an interest rate of 5.26% to be
paid through monthly payments equal to the sum of $.50 per
clean sellable ton of coal removed the property.
26
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 10 - INCOME TAXES
The Company recognized no income tax benefit for the loss generated for
the periods through September 30, 2008.
SFAS No. 109 requires that a valuation allowance be provided if it is
more likely than not that some portion or all of a deferred tax asset
will not be realized. The Company's ability to realize the benefit of
its deferred tax asset will depend on the generation of future taxable
income. Because the Company has yet to recognize significant revenue
from the sale of its products, it believes that the full valuation
allowance should be provided.
The Company has not filed corporate federal, state, or local income tax
returns since 2002, and believes that, due to its operating losses, it
does not have a material tax liability.
NOTE 11 - PREFERRED STOCK
Series A
Each share of Quest Series A Preferred Stock is convertible into a
maximum of five (5) shares of the Company's common stock, or such
lesser shares as determined by dividing $3.00 by the average closing
bid price of one share of the Company's common stock during the ten
trading days preceding actual receipt of a notice of conversion,
subject to proportional adjustment for stock-splits, stock dividends,
recapitalizations, and subsequent dilutive issuances of common stock.
The Series A Preferred Stock is convertible at the option of the
holder. The holders of the Series A Preferred Stock shall be entitled
to receive cumulative dividends at the rate of $0.0001 per share per
annum in preference to the holders of common stock. The holders of the
Series A Preferred Stock shall also be entitled to receive, upon
liquidation, an amount equal to $3.00 per share for the Series A
Preferred Stock plus all declared and unpaid dividends, in preference
to the holders of the common stock. After March 31, 2004, the Company
has the option of redeeming the Series A Preferred Stock at a price
equal to $3.00 per share for the Series A Preferred Stock plus all
declared and unpaid dividends. The Series A Preferred Stock has no
voting rights.
On December 19, 2007, the Company amended the terms of the Series A
Preferred Stock to provide for a reduced conversion price set forth as
such that (1) Each share of Series A Preferred Stock shall be
convertible at any time into a shares of common stock, par value, $.001
per share of the Company as determined by multiplying each share of
Series A Preferred Stock by a fraction, the numerator of which is $3.00
and the denominator of which is equal to the greater of (i) $0.001 or
(ii) 40% of closing price per share of common stock. A holder of Series
A Preferred Stock may not convert shares of the Series A Preferred
Stock to the extent that such conversion would result in the Holder,
together with any affiliate thereof, beneficially owning, pursuant to
Section 13(d) of the Securities Exchange of 1934, in excess of 4.999%
of the then issued and outstanding common stock of the Company. The
provisions of this section may be waived by a holder upon not less than
61 days prior notice to the Corporation.
27
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 11 - PREFERRED STOCK (Continued)
Series A
Since the Series A Preferred shares are now convertible at a discount
to the market price of the Company's common stock, the Company has
taken into consideration the beneficial cost liabilities associated
with future conversions and has accrued additional liability allowances
relative to the future capitalization costs that would incur from these
conversions. Allowances are based on a valuation of market price
volatility using the Black-Scholes method.
As of September 30, 2008, 417,581 shares have been converted.
Series B
Effective July 2006, each share of the Company's Series B Preferred
Stock is convertible into 10.355 shares of the Company's common stock,
subject to proportional adjustment for stock-splits, stock dividends,
and recapitalizations. The Series B Preferred Stock is convertible at
the option of the holder, but shall be automatically converted into the
Company's common stock, at the then applicable conversion price, in the
event that, during any period of fifteen (15) consecutive trading days,
the average closing price per share of Quest's common stock as reported
on a national securities exchange, the NASDAQ NMS or Small Cap Market,
or the OTC Bulletin Board, equals or exceeds $4.00 (subject to
anti-dilution, recapitalization, and reorganization adjustments). The
holders of the Series B Preferred Stock shall be entitled to receive
dividends on a pro-rata, as-if converted basis with the Series A
Preferred Stock. The holders of the Series B Preferred Stock shall also
be entitled to receive, upon liquidation, an amount equal to $2.50 per
share for the Series B Preferred Stock plus all declared and unpaid
dividends, in preference to the holders of the common stock.
On July 27, 2006, the Company settled a third party complaint by the
former owner of Gwenco. As part of the settlement, the Company issued
87,500 shares of common stock for the conversion of 337,991 shares of
Series B Preferred Stock issued pursuant to the purchase agreement with
Gwenco, Inc.
On August 17, 2007, the company effectuated a 4 to 1 reverse stock
split. As a result of the reverse split, the conversion price was
adjusted from $0.241422 to $0.965688.
On December 14, 2007, the company effectuated a 10 to 1 reverse stock
split. As a result of the reverse split, the conversion price was
adjusted from $0.965688 to $9.65688.
On November 4, 2008, the company will effectuate a 10 to 1 reverse
stock split. As a result of the reverse split, the conversion price
will adjust from $9.65688 to $96.5688.
28
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 11 - PREFERRED STOCK (Continued)
Series C
On January 17, 2007, the Company created a series of preferred stock
known as Series C Preferred Stock, par value $0.001 per share. The
conversion price at which shares of common stock shall be deliverable
upon conversion of Series C Preferred Stock without the payment of any
additional consideration by the holder thereof is the lesser of (i)
$0.008 per share or (ii) 100% of the average of the 5 closing bid
prices of the common stock immediately preceding such conversion date.
Holders of the Series C Preferred Stock shall be entitled to receive
dividends or other distributions with the holders of our common stock
on an as converted basis when, as, and if declared by our board of
directors. The holders of the Series C Preferred Stock shall also be
entitled to receive, upon liquidation, an amount equal to $1.00 per
share of the Series C Preferred Stock plus all declared but unpaid
dividends with respect to such shares. The shares of Series C Preferred
Stock are not redeemable.
On all matters submitted to a vote of the holders of the common stock,
including, without limitation, the election of directors, a holder of
shares of the Series C Preferred Stock shall be entitled to the number
of votes on such matters equal to the product of (a) the number of
shares of the Series C Preferred Stock held by such holder, (b) the
number of issued and outstanding shares of our common stock, as of the
record date for the vote, or, if no such record date is established, as
of the date such vote is taken or any written consent of stockholders
is solicited, and (c) 0.000008.
On January 12, 2007, the Company entered into an indemnity agreement
with the Company's President, who is also the Company's Secretary and
sole director. Under the indemnity agreement, the Company issued
260,000 shares of its Series C Preferred Stock to the President to
indemnify him for a loss he incurred when he delivered a personal
guarantee in connection with a loan agreement. Under the loan
agreement, the President personally guaranteed repayment of the loan
and pledged 2,000,000 shares of common stock held by him as collateral
for the amounts loaned under the loan agreement. The Company eventually
defaulted under the loan agreement, and the lender foreclosed on the
shares which the President had pledged. On the date of foreclosure, the
President's shares had a market value of approximately $260,000. The
board of directors has determined that the President delivered the
guarantee and pledged the shares in the course and scope of his
employment, as an officer and director, and for benefit of the Company.
The board of directors has further determined that the President's
conduct was in good faith and that he reasonably believed that his
conduct was in, or not opposed to, the best interests of the Company.
The Company recorded a beneficial conversion expense of $292,500 as a
result of the issuance of the Series C Preferred Stock.
The issuance of the Series C Preferred Stock to the President
effectively transferred control of the Company to the President.
On August 17, 2007, the Company effectuated a 4 to 1 reverse common
stock split. As a result of the reverse split, the conversion price was
adjusted from the lower of $0.008 or 100% of the 5-day average to the
lower of $0.032 or 100% of the 5-day average.
On December 14, 2007, the Company effectuated a 10 to 1 reverse common
stock split. As a result of the reverse split, the conversion price was
adjusted from the lower of $0.032 or 100% of the 5-day average to the
lower of $0.32 or 100% of the 5-day average.
On November 4, 2008, the Company will effectuate a 10 to 1 reverse
common stock split. As a result of the reverse split, the conversion
price will adjust from the lower of $0.32 or 100% of the 5-day average
to the lower of $3.20 or 100% of the 5-day average.
29
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 12 - COMMON STOCK
On February 9, 2007, the Company amended its articles of incorporation
to increase the number of shares of common stock that were authorized
to issue form 250,000,000 to 975,000,000.
On August 17, 2007, the Company effectuated a 1 to 4 reverse stock
split resulting in a 644,867,576 reduction of shares from 859,823,718
common shares outstanding to 214,956,142 common shares outstanding. The
reverse stock split did not affect the amount of authorized shares of
the Company. Additionally, the board approved the issuance of up to 500
shares of the Company's common stock for rounding up of fractional
shares in connection with the reverse stock split, of which, 213 shares
were issued. In conjunction with the reverse stock split, the Company's
stock symbol on the OTC Bulletin Board Symbol was changed to QMMC.
On December 14, 2007, the Company effectuated a 1 to 10 reverse stock
split resulting in a 331,309,124 reduction of shares from 368,121,581
common shares outstanding to 36,812,457 common shares outstanding. The
reverse stock split did not affect the amount of authorized shares of
the Company. Additionally, the board approved the issuance of up to 500
shares of the Company's common stock for rounding up of fractional
shares in connection with the reverse stock split. In conjunction with
the reverse stock split, the Company's stock symbol on the OTC Bulletin
Board Symbol was changed to QMNM.
On November 4, 2008, the Company will effectuate a 1 to 10 reverse
stock split resulting in a 961,576,530 reduction of shares from
1,068,418,367 common shares outstanding to 106,841,367 common shares
outstanding. The reverse stock split will not affect the amount of
authorized shares of the Company. Additionally, the board approved the
issuance of up to 500 shares of the Company's common stock for rounding
up of fractional shares in connection with the reverse stock split. In
conjunction with the reverse stock split, the Company's stock symbol on
the OTC Bulletin Board Symbol will change to QMLM. All references to
the issuance of common stock have been retroactively adjusted to
account for this subsequent event.
During the year ended December 31, 2007, holders of Amended and
Restated 7% Senior Secured Promissory Notes effectuated a series of
partial conversions and were issued an aggregate of 518,670 shares of
common stock at a conversion price averaging approximately $1.70 per
share. In the aggregate, these issuances reduced the debt by $671,598
in principal and $65,849 in accrued interest, and the Company expensed
an additional $350,423 due to the difference in market value at the
time of the respective issuances.
During the year ended December 31, 2007, the Holder of an Amended and
Restated 12% Promissory Note effectuated a series of partial
conversions and were issued an aggregate of 215,873 shares of common
stock at a conversion price averaging approximately $1.28 per share. In
the aggregate, these issuances reduced the debt by $180,692 in
principal and $15,858 in accrued interest, and the Company expensed an
additional $167,113 due to the difference in market value at the time
of the respective issuances.
During the year ended December 31, 2007, the Holder of various
judgments, judgment liens, security interests, and lines of credit,
based on notes issued to National City Bank of Kentucky, effectuated a
series of partial conversions and were issued an aggregate of 1,712,500
shares of common stock at a conversion price averaging approximately
$0.31 per share. In the aggregate, these issuances reduced the debt by
$389,745 in principal and $34,255 in accrued interest, and the Company
expensed an additional $1,821,100 due to the difference in market value
at the time of the respective issuances.
30
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 12 - COMMON STOCK (Continued)
During the year ended December 31, 2007, holders of the Company's
Series A Preferred Stock converted an aggregate of 5,467 shares into
340,000 shares of common stock, at a conversion price averaging $0.048
per share. The Company expensed an additional $41,195 due to the
difference in market value at the time of issuance.
In the year ended December 31, 2007, the Company issued an aggregate of
982,000 shares of common stock to various consultants. Expense of
$609,355 was recorded related to these shares, which was the market
value of such shares issued at prices varying from $0.11 to $4.80 per
share.
During the year ended December 31, 2007, the Company issued 125,000
shares of common stock as compensation towards back salaries owed to
the Company's President. Expense of $110,000 was recorded related to
these shares, which was the market value of such shares issued, at
prices varying from $0.60 to $1.70 per share.
In January, 2007, the Company entered into an exchange agreement with a
noteholder and holders of 15,000 shares of the Company's common stock,
under which the holders exchanged the note and the 15,000 shares of the
Company's common stock for a series of new 8% Secured Convertible
Promissory Notes in the aggregate principal amount of $635,000. See
Note 9. The Company credited $33,600 to stockholder's equity based on
the market value of the 15,000 shares received as of the date of the
exchange. The shares were returned to treasury.
On February 20, 2007, holders of these notes effectuated a series of
conversions and were issued 50,000 shares of common stock at a
conversion price of $2.00 per share. These issuances reduced the debt
by $100,000 in principal, and the Company expensed $140,000 due to the
difference in market value at the time of issuance.
On March 5, 2007, the Company issued 167 shares of common stock at
$0.40 per share upon cashless exercise of 375 Series A and Series B
Warrants. The Company expensed $460 due to the difference in market
value at the time of issuance.
On June 27, 2007, the Company issued 8,369 shares of common stock in
exchange for an outstanding convertible promissory note in the
principal amount of $25,000 pursuant to an exchange agreement.
On December 14, 2007, the Company issued 209,471 shares of common stock
at $0.01 per share in error to Gross Foundation due to a communication
oversight to the transfer agent relating to the time in which the 1 to
10 reverse split was effectuated. The Company valued the issuance at
market price and has posted a capital allowance of $29,326 until the
issuance can be reconciled.
During the nine months ended September 30, 2008, holders of Amended and
Restated 7% Senior Secured Promissory Notes effectuated a series of
partial conversions and were issued an aggregate of 4,714,259 shares of
common stock at a conversion price averaging approximately $0.368 per
share. In the aggregate, these issuances reduced the debt by $195,452
in principal and $30,295 in accrued interest, and the Company expensed
an additional $1,316,630 due to the difference in market value at the
time of the respective issuances.
31
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 12 - COMMON STOCK (Continued)
During the nine months ended September 30, 2008, the Holder of an
Amended and Restated 12% Promissory Note effectuated a series of
partial conversions and were issued an aggregate of 1,785,587 shares of
common stock at a conversion price averaging approximately $0.035 per
share. In the aggregate, these issuances reduced the debt by $32,399 in
principal and $8,042 in accrued interest, and the Company expensed an
additional $57,920 due to the difference in market value at the time of
the respective issuances.
During the nine months ended September 30, 2008, the Holder of a 15%
Promissory Note effectuated a series of partial conversions and were
issued an aggregate of 3,197,713 shares of common stock at a conversion
price averaging approximately $0.013 per share. In the aggregate, the
issuances reduced the debt by $32,777 in principal and $1,294 in
accrued interest, and the Company expensed an additional $721,577 due
to the difference in market value at the time of the respective
issuances.
During the nine months ended September 30, 2008, holders of the
Company's Series A Preferred Stock converted an aggregate of 412,114
shares into 59,796,654 shares of common stock, at a conversion price
averaging $0.022 per share. The Company expensed an additional
$4,026,484 due to the difference in market value at the time of
issuance.
In the nine months ended September 30, 2008, the Company issued an
aggregate of 11,810,000 shares of common stock to various consultants.
Expense of $881,500 was recorded related to these shares, which was the
market value of such shares issued at prices varying from $0.014 to
$0.34 per share.
In the nine months ended September 30, 2008, the Holder of various
judgments, judgment liens, security interests, and lines of credit,
based on notes issued to National City Bank of Kentucky, effectuated a
series of partial conversions and were issued an aggregate of 6,967,725
shares of common stock at a conversion price of $0.01 per share. In the
aggregate, these issuances reduced the debt by $65,589 in principal and
$4,088 in accrued interest, and the Company expensed an additional
$1,739,513 due to the difference in market value at the time of the
respective issuances.
In the nine months ended September 30, 2008, the Holder of various
judgments, judgment liens, and security interests based on notes issued
to DUKE Energy of Kentucky, effectuated a series of partial conversions
and were issued an aggregate of 12,000,000 shares of common stock at a
conversion price of $0.01 per share. In the aggregate, these issuances
reduced the debt by $120,000 in, and the Company expensed an additional
$704,000 due to the difference in market value at the time of the
respective issuances.
On March 20, 2008, Gross Foundation returned 209,471 shares of common
stock that were issued to them in error on December 14, 2007. The
Company had issued 209,471 shares of common stock in error to due to a
communication oversight to the transfer agent relating to a conversion
notice during the time in which the Company's 1 to 10 reverse split was
effectuated. The issuance was valued at market price and a capital
allowance of $29,326 was posted until it could be reconciled. The
shares were subsequently cancelled and the allowance was credited.
32
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 12 - COMMON STOCK (Continued)
On August 13, 2008, the Company issued 2,100,000 shares of common stock
a third party lender at $.048 per share pursuant to an exchange
agreement, which satisfied an 8% convertible note previously signed on
April 1, 2008. The principle amount of $100,000 was reduced, while the
company expensed an additional $173,000 due to the difference in market
value at the time of the discounted settlement.
On July 18, 2008 the company filed a 14C Information Statement
regarding the approval to increase the authorized common stock by
1,525,000,000 shares. Since the actions were approved by the holders of
the required majority of the outstanding shares of the voting stock, no
proxies were or are being solicited.
33
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 13 - STOCK OPTION / WARRANTS
Stock Option / Warrant Issuances Outstanding consist of the following:
September 30,
2008
Exercise ------------
Warrants Price Valuation
------------ ------------ ------------
December 17, 2004 issuance of 1,500 warrants; expiration 2009 (a). 1,500 600.00 18
December 21, 2004 issuance of 500 warrants; expiration 2009 (b). 500 600.00 6
March 4, 2005 issuance of 1,125 series A warrants; expiration 2010 (c). 1,125 200.00 18
March 4, 2005 issuance of 1,125 series B warrants; expiration 2010 (c). 1,125 400.00 17
April 5, 2006 issuance of 2,968 warrants; expiration 2009 (d). 0 84.00 0
May 18, 2006 issuance of 7,500 options; expiration 2011 (e). 7,500 20.00 143,054
July 3, 2008 issuance of 2,500,000 options; expiration 2018 (f). 2,500,000 .24 500,000
September 23, 2008 issuance of 2,500,000 options; expiration 20181(g). 2,500,000 .044 82,500
------------ ------------
TOTALS: 5,011,750 $ 725,613
============ ============
Avg.
Warrants Ex. Price ($) Valuation
------------ ------------ ------------
Total Options / Warrants outstanding as of December 31, 2007 16,218 $ 168.00 143,055
----------------------------------------------------------------------------------------------------------------------
Options / Warrants Issued 5,000,000 0 582,500
Options / Warrants Expired / Cancelled (4,468) (0) (306)
Options / Warrants Exercised (0) (0) (0)
Derivative Valuation Adjustment 364
----------------------------------------------------------------------------------------------------------------------
Total Options / Warrants outstanding as of September 30, 2008 5,011,750 $ 0.55 725,613
============================================
|
34
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 13 - STOCK OPTION / WARRANTS (Continued)
On November 4, 2008, the Company will effectuate a 1 to 10 reverse
stock split resulting in a 961,576,530 reduction of shares from
1,068,418,367 common shares outstanding to 106,841,367 common shares
outstanding. The reverse stock split will not affect the amount of
authorized shares of the Company. Additionally, the board approved the
issuance of up to 500 shares of the Company's common stock for rounding
up of fractional shares in connection with the reverse stock split. In
conjunction with the reverse stock split, the Company's stock symbol on
the OTC Bulletin Board Symbol will change to QMLM. All references to
the issuance of warrants have been retroactively adjusted to account
for this subsequent event.
(a) On December 17, 2004, the Company signed a 15% per annum
promissory note with two third parties, each for $300,000 due
on June 17, 2005. The notes are secured by certain of the
Company's equipment. In the event of default, the notes become
convertible into shares of the Company's common stock at the
option of the holder at a conversion price of $40.00 per
share. As additional compensation to these lenders, the
Company agreed to issue them 1,500 common stock warrants at
$600.00. The warrants have anti-dilution privileges and
piggyback registration rights. Based on the market price
volatility of the common stock, the warrants are valued using
the Black-Scholes method. The Company accrues additional
liability allowances relative to the future capitalization
costs that would incur from exercise.
(b) On December 21, 2004, the Company issued 500 common stock
warrants at $600.00 as finder's fee. The warrants have
anti-dilution privileges and piggyback registration rights.
Based on the market price volatility of the common stock, the
warrants are valued using the Black-Scholes method. The
Company accrues additional liability allowances relative to
the future capitalization costs that would incur from
exercise.
(c) On March 4, 2005, the Company signed a series of unit purchase
agreements with thirteen individual third-party lenders for a
total sale amount of $375,000. Each unit was sold at $25,000
and consisted of a 7% senior secured convertible note due
March 6, 2006 and 375 Series A Warrants. The notes are secured
by certain of the Company's assets and were initially
convertible into shares of the Company's common stock at the
rate of $200.00 per share, which conversion price is subject
to adjustment. Each Series A Warrant is exercisable into one
(1) share of common stock at an exercise price of $200.00 and
one (1) Series B Warrant. Each Series B Warrant is exercisable
into one (1) share of common stock at an exercise price of
$400.00. Based on the market price volatility of the common
stock, the warrants are valued using the Black-Scholes method.
The Company accrues additional liability allowances relative
to the future capitalization costs that would incur from
exercise. During the three months ended March 31, 2007, 375
Series A and Series B warrants were exercised on a cashless
basis pursuant to the agreements. On September 3, 2008, in
connection with an exchange agreement involving related
convertible debt, 750 Series A and Series B warrants were
cancelled.
35
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 13 - STOCK OPTION / WARRANTS (Continued)
(c) On April 5, 2006, the Company issued an aggregate of 1.25
units at a price of $100,000 per unit. The aggregate gross
proceeds from the sale of the units were $125,000. Each unit
consists of a convertible promissory note in the principal
amount of $100,000 and warrants to purchase shares of the
Company's common stock at an exercise price of $84.00 per
share. The unit notes are due on July 5, 2007. The notes bear
interest at a rate of six percent (6%) and are convertible
into Quest common shares at an initial conversion price of
$42.00 per share, subject to adjustment, including a
"weighted-average" reduction of the conversion price in the
event that the Company issued additional stock or stock
equivalents at a price lower than the conversion price.
Commencing on the fifth month of the notes, the Company must
make amortizing payments of the outstanding principal amount
and interest on each note until the principal amount and
interest have been paid in full, either in cash of 102% of the
monthly amount due or by conversion of such amount into our
common shares at a conversion rate of seventy-five percent of
the volume weighted average price of our common shares for the
five trading days prior to a conversion date, subject to
certain limitations. Based on the calculation terms of the
agreement, a total of 2,968 warrants were issued. Based on the
market price volatility of the common stock, the warrants are
valued using the Black-Scholes method. The Company accrues
additional liability allowances relative to the future
capitalization costs that would incur from exercise. On April
1, 2008, the company entered into an agreement with one of the
remaining lenders where one unit consisting of a $100,000
promissory note and 2,374 warrants was exchanged for a 7%
convertible note due March 31, 2009. The existing warrants
were subsequently cancelled upon issuance of this agreement.
36
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 13 - STOCK OPTION / WARRANTS (Continued)
(e) On May 18, 2006, the Company granted non-qualified options to
honor employment agreements previously entered into with each
of its President and Vice President. Each agreement called for
the President and Vice President to receive options to
purchase up to 12,500 shares of the Company's common stock
pursuant to a new stock compensation plan adopted by the
Company. The options would be exercisable at $20.00 per share,
the fair market value at the time of grant, and would vest as
follows: (i) options to purchase up to 5,000 shares vesting
immediately, (ii) options to purchase up to 5,000 shares
vesting upon the Company's receipt of an aggregate of $25,000
in cash or cash equivalents in its accounts, and (iii) options
to purchase up to 2,500 shares vesting six months after the
date of the option agreements. The 12,500 options were valued
at $476,846 using the Black Scholes method, of which $286,108
was deferred against Paid-in capital. Since 5,000 of these
options would vest six months from issuance and 7,500 would
vest upon a stipulated performance, the Company has accrued a
deferred stock compensation allowance against the issued
capitalization. On May 31, 2006, the Company's then-President
resigned. The Company and the former President then entered
into a consulting agreement, under which it was agreed that
5,000 options initially awarded to him would remain vested and
2,500 options would be allowed to vest in six months. 5,000
options that vested upon the Company's raising one million
dollars were mutually voided. The Company credited both the
deferred stock compensation and the accrued paid-in capital by
$95,369, which reversed the valued portion of the issuance. On
November 18, 2006, the 5,000 options vested pursuant to the
agreements. The Company adjusted the deferred stock
compensation and expensed $95,369 for compensation. On January
2, 2007, the current President (former Vice President) and the
Company mutually agreed to cancel his stock option agreement.
(f) On July 3, 2008, the Company entered into an Incentive Stock
Option Agreement, pursuant to the corporation's 2006 Stock
Incentive Plan, in which 2,500,000 stock options were granted
to the President of the corporation. It was noted that it was
in the best interests of the corporation to compensate the
President for his responsibilities regarding all of the
day-to-day operations with these options as an incentive for
his continued services as President. The options have an
exercise price of $.24 and carry a ten (10) year expiration
period. The Company expensed $500,000 against paid-in capital
based on the Black Scholes method to accrue capitalization
costs on future exercise of the options relative to the market
valuation of the common stock at the time of the agreement.
(g) On September 23, 2008, the Company entered into an Incentive
Stock Option Agreement, pursuant to the corporation's 2007
Stock Incentive Plan, in which 2,500,000 stock options were
granted to the President of the corporation. It was noted that
it was in the best interests of the corporation to compensate
the President for his responsibilities regarding all of the
day-to-day operations with these options as an incentive for
his continued services as President. The options have an
exercise price of $.044 and carry a ten (10) year expiration
period. The Company expensed $82,500 against paid-in capital
based on the Black Scholes method to accrue capitalization
costs on future exercise of the options relative to the market
valuation of the common stock at the time of the agreement.
37
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 14 - STOCK COMPENSATION PLAN
Since January 1, 2004, the board of directors of the Company has
adopted a total of seven (7) Stock Incentive Plans, which have
ultimately allowed for the issuance of up to 247,000,000 shares of the
Company's Common Stock to officers, employees, directors, consultants,
and advisors. In each instance, the board of directors also authorized
the filing of a Form S-8 Registration Statement with the Securities and
Exchange Commission for the issuance of the stipulated shares under
each Plan. Additionally, under the guidelines stated in each plan, the
number of shares available for issuance or reservation does not adjust
in the event of a forward or reverse stock split.
On August 17, 2007, the Company effectuated a 1 to 4 reverse stock.
On December 14, 2007, the Company effectuated a 1 to 10 reverse stock
split.
On November 4, 2008, the Company will effectuate a 1 to 10 reverse
stock split
Please note that, pursuant to the terms of each plan, the board of
directors has full authority to interpret the plan, and that
interpretation is final, conclusive, and binding upon all parties.
As an example, if you look at the 2004 plan, it originally authorized
17,500,000 shares. Then, in 2004, it granted stock awards for
17,500,000 pre-split shares. In 2007, there were the 4-1 and 10-1
reverse splits. When the 4-1 split occurred, the number of stock award
shares reversed from 17,500,000 to 4,375,000 shares (i.e. 1 new share
for every 4 shares originally granted). However, the plan specifically
provides that the number of shares authorized does not adjust in the
event of a reverse split, so the authorized stayed at 17,500,000. The
same occurred when the 10-1 split occurred, so that the number of stock
award shares reversed from 4,375,000 to 437,500 shares. Again, the plan
stayed at 17,500,000 shares. Once again, on November 4, 2008, the stock
award shares will reverse from 437,500 to 43,750 shares after another
10-1 split is effectuated.
All references to available common stock issued or reserved per plan
have been retroactively adjusted to account for the reverse stock
splits effectuated in 2007. As of September 30, 2008, the following
schedule shows the remaining shares available for issuance under each
plan:
NOTE: All references to available common stock issued or reserved per
plan have been retroactively adjusted to account for a subsequent 1 to
10 reverse stock split effectuated on November 4, 2008:
Granted / Balance
Plan Authorized Reserved Available
------------------------------------------ ------------------- ------------------ ------------------
2004 Stock Compensation Plan 17,500,000 43,750 17,456,250
2005 Stock Incentive Plan 7,000,000 17,438 6,982,563
2005 Stock Incentive Plan No. 2 2,000,000 5,000 1,995,000
2006 Stock Incentive Plan 23,000,000 54,110 22,945,891
2006 Stock Incentive Plan No. 2 30,000,000 2,573,400 27,426,600
2007 Stock Incentive Plan 70,000,000 5,636,750 64,363,250
2007 Stock Incentive Plan No. 2 97,500,000 9,354,500 88,145,500
|
38
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 15 - RELATED PARTY TRANSACTIONS
The Company has guaranteed payment on a note in the amount of $300,000
made to a former stockholder of Gwenco by another former stockholder of
Gwenco. This note is secured by 50% of the outstanding capital stock of
Gwenco. The debt required 4 annual payments of approximately $75,000
plus interest. As of December 31, 2005, the Company was in default.
Additionally, a 3.7% annual rate note in the amount of $495,000 due in
December 2007 was agreed upon in consideration for royalties to be paid
out on a schedule based on the level of production from the mine. Since
the initial agreement was made effective in March of 2004, the Company
has accrued two years of interest expense and has adjusted its paid in
capital to reflect the future correction on the issuance of preferred
stock associated with the original acquisition of Gwenco. On August 24,
2006, the Company amended the original note of $300,000 to $180,884,
which included the remaining principal and interest, which has an
interest rate of 5.21% and is due on September 24, 2009. The Company
also amended the $495,000 note due on December 10, 2007 to $545,473,
which also included the accrued interest; having an interest rate of
5.26% to be paid through monthly payments equal to the sum of $.50 per
clean sellable ton of coal removed the property.
During January of 2006, the Company entered into a loan agreement to
receive up to $300,000 in funds for operations in return for a 12%
percent note due in May of 2006. As additional collateral, the officers
of the Company guaranteed the loan and pledged their own shares of
common stock. As of the three months ended March 31, 2006, the lender
had made advances totaling $132,000. On April 3, 2006, the lender
declared a default under the terms of the loan agreement. The Company
failed to repay the lender as required under the loan agreement. The
lender then enforced guarantees made by the officers of the Company and
foreclosed on shares of the officer's common stock pledged to the
lender to secure the guarantee. Along with accrued interest, the
Company recorded an accrued liability for indemnification obligations
to the officers of $390,000, the fair value of the pledged shares lost
in the foreclosure.
On January 12, 2007, the Company entered into an indemnity agreement
with the Company's President, who is also the Company's Secretary and
sole director. Under the indemnity agreement, the Company issued
260,000 shares of its Series C Preferred Stock to the President to
indemnify him for the loss he incurred as a result of the foreclosure
by the lender on the shares, which the President had pledged. On the
date of foreclosure, the President's shares had a market value of
approximately $260,000. The board of directors has determined that the
President delivered the guarantee and pledged the shares in the course
and scope of his employment, as an officer and director, and for
benefit of the Company. The board of directors has further determined
that the President's conduct was in good faith and that he reasonably
believed that his conduct was in, or not opposed to, the best interests
of the Company. The Company recorded a beneficial conversion expense of
$292,500 as a result of the issuance of the Series C Preferred Stock.
The issuance of the Series C Preferred Stock to the President
effectively transferred control of the company to the President. The
Company is currently negotiating the terms of indemnification of with
the other former officer as a result of this foreclosure.
On January 6, 2008, the Company amended a two-year agreement acquiring
administrative services from a third party consulting company owned by
the son of its president originally dated June 6, 2006. The agreement
consisted of 2,500 shares of common stock as an initial grant under a
Stock Incentive Plan, along with a monthly payment of $6,500. The
initial shares were valued at $35,000 and are being amortized over the
term of the agreement. The amendment consisted of an additional
issuance of 200,000 shares of common stock, and an increase of the
monthly payment to $9,900 due to providing additional services with
regards to the reorganization of the Company's wholly owned subsidiary,
Gwenco, Inc., which is currently under Chapter 11.
39
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 16 - COMMITMENTS AND CONTINGENCIES
The Company is subject to certain asserted and unasserted claims
encountered in a fraud action committed by former employees of the
Company against a local bank. It is the Company's belief that the
resolution of these matters will not have a material adverse effect on
the financial position or results of operations, however, the Company
cannot provide assurance that damages that result in a material adverse
effect on its financial position or results of operations will not be
imposed in these matters.
On or about December 21, 2004, the Company terminated its Chief
Financial Officer for cause, as it had reason to believe he had
participated in a bank fraud scheme. The Chief Financial Officer's
replacement has not been appointed at this time.
During the period ended December 31, 2004, the Company's bank initiated
a claim for an overdraft recovery. Since it was later determined that
there was a much larger malice perpetrated against the Company by
existing bank employees, allowances have been accrued until a
resolution can be determined. The bank's insurer commenced an action in
Pike County Court, Kentucky against Quest Energy, the Company's
subsidiary, for subrogation of monies it has paid to the bank and
repayment of deductibles by the bank as a part of an alleged criminal
scheme and conspiracy by former employees of the bank and other
individuals. The insurer alleged that former employees or associates of
Quest Energy, including the Company's former CEO and CFO, were
primarily involved in the alleged scheme, that Quest Energy is
accordingly responsible for the actions of these former employees and
associates, and that Quest Energy obtained a substantial material
benefit as a result of this alleged scheme. Quest Energy has denied
these allegations, that it had any involvement with or responsibility
for any of the actions alleged by the insurer, and it further denies
that it has benefited from any such alleged scheme. Further, Quest
Energy filed a counterclaim against the bank and the insurer contending
that the negligent actions and inactions by the bank caused severe
damage and loss to Quest Energy and the Company.
Since management has determined that the existing liabilities and debt
from the Company were all related to the issues involving these claims,
the assets have been written down in consideration for the allowance
already accrued by the Company. The Company has accrued the existing
liabilities until validity can be determined. As of September 30, 2008,
no outcome has been determined.
[In light of these occurrences and due in part to the apparent
participation of its former Chief Financial Officer in this scheme, the
Company determined that the design and operation of its disclosure
controls and procedures, as defined in Exchange Act Rule 13a-15(f) have
not been effective to ensure that information required to be disclosed
in its Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is
accumulated and communicated to them to allow timely decisions
regarding required disclosure. The Company is currently reviewing and
revising its controls and procedures to increase the effectiveness of
its disclosure controls and procedures.]
In or about May 2004, National City Bank of Kentucky commenced an
action in Boyd County Court, Kentucky against the Company's indirect
wholly owned subsidiary, Gwenco, Inc., and a former director of the
Company for breach of various promissory notes issued by Gwenco. Duke
Energy Merchants and First Sentry Bank were joined in the action.
National City Bank and Duke Energy are collectively seeking
approximately $1,100,000 in principal as well as interests, fees, and
costs. National City Bank has obtained judgment in that action in the
amount of approximately $340,000, and Duke Energy has obtained judgment
as well.
40
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
In March, 2006, National City Bank commenced an action commenced an
action in Pike County Court, Kentucky against the Company, Gwenco,
Inc., and Quest Energy, Ltd. seeking to be adjudged a lien on certain
real and personal property of Gwenco pursuant to the aforementioned
judgment and that said real and personal property be sold to satisfy
the aforesaid lien, and that the liens of National City Bank attach to
the proceeds of the sale. The Company intends to defend this action
while continuing negotiations with National City Bank. On July 19,
2006, National City Bank of Kentucky sold its right, title, and
interest in and to various judgments, judgment liens, security
interests, and lines of credit, all of which are based on the Gwenco
notes issued to National City Bank of Kentucky, to a third party
investor. The third party investor has agreed to forbear on further
collection, enforcement, and foreclosure with respect to this
indebtedness until further notice.
On May 11, 2005, the former director of the Company, who is also the
former stockholder of Gwenco, filed a third party complaint in this
action against the Company and its subsidiary, Taylor Mining, seeking
control of the mines leased by Gwenco and/or damages for fraud in the
inducement of the Gwenco purchase agreement. On July 27, 2006, the
Company settled the third party complaint by the former owner of
Gwenco. As part of the settlement, Gwenco received mining permit
renewal and transfer documentation, which Gwenco is required to obtain
in order to recommence mining operations at its Pond Creek mine at
Slater's Branch, Kentucky. Further, the former Gwenco owner agreed to
provide all reasonable cooperation in recommencing mining operations at
the Slater's Branch mine. The parties also agreed to terminate all
remaining rights, duties, and obligations under the original stock
purchase agreement entered into in connection with the acquisition of
Gwenco by the Company. The Company made a one-time cash payment of
$75,000 and issued 875 shares of the Company's common stock, subject to
a lock-up/leak out agreement, to the former owner of Gwenco, upon
conversion of his Series B Preferred Stock, the terms of which were
amended under the settlement agreement. The Company also granted the
former owner of Gwenco a sliding scale royalty on coal sales. The
Company also assumed two promissory notes made by the former owner of
Gwenco in the aggregate principal amount of $290,561. The notes are in
default. The parties mutually dismissed their respective counter-claims
against each other in the civil action pending in Boyd County Court,
Kentucky.
The Company has not filed corporate federal, and state and local income
tax returns since 2002, and believes that, due to its operating losses,
it does not have a material tax liability and the penalties owed are
minimal. The failure to file income tax returns may invoke penalties
for failure to file from the taxing authorities but these penalties are
small in amounts and the company had large losses in every one of the
filing periods.
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
September 30, 2008, the Company remains in default.
41
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
Certain former owners of Gwenco commenced an action in the Circuit
Court of Pike County against Gwenco for damages resulting from an
alleged failure to pay past royalties and other amounts allegedly due.
On May 19, 2006, the former owners obtained a default judgment in this
action in the amount of $687,391, from which Gwenco has taken appeal.
The plaintiffs then amended their complaint, seeking to be adjudged a
lien on certain real and personal property of Gwenco pursuant to the
aforementioned judgment and that said real and personal property be
sold to satisfy the aforesaid lien, and that the liens of the
plaintiffs attach to the proceeds of the sale. Gwenco believes that it
has several meritorious defenses and counterclaims to this action and
intends to defend it vigorously. This foreclosure action was stayed
against Gwenco as a result of Gwenco's filing of a voluntary petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
On February 28, 2007, one of the Company's wholly-owned subsidiaries,
Gwenco, Inc., filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Neither the Company nor any of
its other subsidiaries were included in the filing. As a result, all
pending legal actions against Gwenco, including the pending foreclosure
actions, were automatically stayed.
On June 20, 2007, Gwenco entered into a settlement agreement with one
of the former owners, pursuant to which the former owner agreed to
accept payment of $150,000 in exchange for a release of the judgment
amount of $458,260. The settlement agreement is subject to approval by
the Bankruptcy Court. On July 17, 2007, the Bankruptcy Court approved
the settlement agreement, subject to Gwenco's receipt of
debtor-in-possession financing. On August 3, 2007, the Court approved
Gwenco's debtor-in-possession financing and the settlement agreement
became effective. On August 10, 2007, escrowed funds were transferred
to complete the settlement.
On August 15, 2007, the U.S. Bankruptcy Court approved a DIP Financing
Motion authorizing the Company's wholly owned subsidiary, Gwenco, Inc.,
which is currently in Chapter 11 reorganization proceedings, to borrow
up to $2,000,000 ("Total Facility") in post-petition debt from a
pre-petition creditor pursuant to a Debtor-In -Possession loan
agreement and promissory note between Gwenco and the lender dated June
29, 2007. Additionally, the Court approved prior budgeted advances from
July of up to $350,000, which, in turn, adjusted the Total Facility to
$1,700,000. The loan advances will carry a 17% interest rate per annum
and mature on July 31, 2008.
As of December 31, 2007, the legal counsel managing the bankruptcy
proceedings has accrued an additional $12,292 in fees from their
initial $20,000 retainer; and is waiting on approval from the court to
be paid. Although, continuing legal costs are accruing, the Company has
made an advance payment of $2,500 towards the pending fees as of the
nine months ending September 30, 2008.
42
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
As of September 30, 2008, Gwenco had assets of $5,515,565, which
included all of the mineral rights of the Company valued at $5,206,588
and liabilities (other than liabilities that have been guaranteed by
the Company or another of its wholly-owned subsidiaries) of $6,536,443.
Of these liabilities, $3,369,633 was owed to Quest Minerals & Mining
and Quest Energy, Ltd. These receivables are unsecured and Quest
Minerals & Mining and Quest Energy, Ltd have reserved 100% of the
receivable as doubtful at September 30, 2008. Gwenco also currently
holds all of the company's current receivables, which are restricted to
specific limitations, since the company now acts as a Debtor in
possession (DIP) as per the Chapter 11 requirements.
The following is the combined balance sheet of the Company at September
30, 2008, which includes Gwenco, Inc. and the Company and its other
subsidiaries:
43
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
QUEST MINERALS & MINING CORP.
COMBINED BALANCE SHEET
SEPTEMBER 30, 2008
QUEST & SUB GWENCO ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
ASSETS
Current Assets
Cash 31,231 -- $ $ 31,231
------------ ------------ ------------ ------------
Total current assets 31,231 -- 31,231
Leased Mineral Reserves, net (Note 2 & 5) -- 5,206,588 5,206,588
Equipment, net (Note 6) -- 254,085 254,085
Deposits -- 41,846 41,846
Prepaid consulting Expense -- -- --
Intercompany,net --
Other receivables, net (Note 7)
DIP Cash, restricted 3,526 3,526
DIP Receivable, restricted -- 9,520 -- 9,520
------------ ------------ ------------ ------------
TOTAL ASSETS $ 31,231 $ 5,515,565 $ -- $ 5,546,796
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses (Note 8) $ 2,051,091 $ 1,226,082 $ $ 3,277,173
Loans payable, net (Note 9) 2,732,563 229,130 2,961,693
Bank loans (Note 9) -- 1,017,525 1,017,525
Related party loans (Note 9) 641,418 -- -- 641,418
------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 5,425,072 2,472,737 7,897,809
Other Liabilities
Intercompany -- 3,369,663 (3,369,663) --
Derivative Liability (Note 8) 484,313 484,313
Unearned revenues (Note 8) -- --
DIP Financeing (Note 9) -- 694,043 -- 694,043
------------ ------------ ------------ ------------
TOTAL LIABILITIES 5,909,385 6,536,443 (3,369,663) 9,076,165
Commitments and Contingencies
Stockholders' equity
Preferred stock, par value $0.001, 10,000,000 shares authorized;
SERIES A - issued and outstanding 35,752 shares 36 -- 36
SERIES B - issued and outstanding 48,284 shares -- 48 48
SERIES C - issued and outstanding 260,000 shares 260 -- 260
Common stock, par value $0.001, 2,500,000 shares authorized;
issued and outstanding 106,841,837 shares 106,844 4,500 (4,500) 106,844
Equity held in escrow (Note 12) (587,500) -- (587,500)
Paid-in capital (Note 14) 60,795,615 2,557,049 63,352,664
Accumulated Deficit (66,193,409) (3,582,475) 3,374,163 (66,401,721)
------------ ------------ ------------ ------------
Total Stockholders' Equity (5,878,154) (1,020,878) 3,369,663 (3,529,369)
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,231 $ 5,515,565 $ -- $ 5,546,796
============ ============ ============ ============
|
See Notes to Financial Statements.
44
QUEST MINERALS AND MINING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures at and for the Nine Months Ended September 30, 2008
and 2007 are Unaudited)
NOTE 17 - SUBSEQUENT EVENTS
On October 21, 2008, the Company approved a 1 for 10 reverse stock
split of the corporation's outstanding common stock. Due to the market
price and the number of shares of common stock outstanding, management
felt it was in the best interests of the Corporation and its
stockholders to effect the Reverse Stock Split. The Corporation's
Articles of Incorporation, as amended, provide that the corporation
may, by resolutions of the board of directors and without approval or
consent of the stockholders of the Corporation, adopt any
recapitalization affecting the outstanding shares of capital stock of
the corporation by effecting a forward or reverse split of all of the
outstanding shares of any class of capital stock of the corporation,
without correspondingly increasing or decreasing the number of
authorized shares of shares of such class or series, provided that the
recapitalization does not require any amendment to the Articles of
Incorporation of the corporation. The Reverse Stock Split has a record
date of November 3, 2008 and an effective date of November 4, 2008.
Additionally, the Board of Directors authorized the Company to issue up
to 500 shares of common stock for rounding up of any fractions shares
resulting from the Reverse Stock Split. In conjunction with the reverse
stock split, the Company's stock symbol on the OTC Bulletin Board
Symbol will change to QMLM. All references to the issuance of common
stock and warrants have been retroactively adjusted to account for this
subsequent event.
45
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with Quest's financial statements and related notes included in this report.
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The statements contained in
this report that are not historic in nature, particularly those that utilize
terminology such as "may," "will," "should," "expects," "anticipates,"
"estimates," "believes," or "plans" or comparable terminology are
forward-looking statements based on current expectations and assumptions.
Various risks and uncertainties could cause actual results to differ materially
from those expressed in forward-looking statements. Please refer to the Risk
Factors section of Quest's Annual Report on Form 10-KSB, as amended, for a
description of these risks and uncertainties.
All forward-looking statements in this document are based on
information currently available to Quest as of the date of this report, and
Quest assumes no obligation to update any forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
General
Quest Minerals & Mining Corp. acquires and operates energy and mineral
related properties in the southeastern part of the United States. Quest focuses
its efforts on properties that produce quality compliance blend coal.
Quest is a holding company for Quest Minerals & Mining, Ltd., a Nevada
corporation, or Quest (Nevada), which in turn is a holding company for Quest
Energy, Ltd., a Kentucky corporation, or Quest Energy, and of Gwenco, Inc., a
Kentucky corporation, or Gwenco. Quest Energy is the parent corporation of E-Z
Mining Co., Inc, a Kentucky corporation, or E-Z Mining, and of Quest Marine
Terminal, Ltd., a Kentucky corporation, or Quest Marine.
Gwenco leases over 700 acres of coal mines, with approximately
12,999,000 tons of coal in place in six seams. In 2004, Gwenco had reopened
Gwenco's two former drift mines at Pond Creek and Lower Cedar Grove, and had
begun production at the Pond Creek seam. This seam of high quality compliance
coal is located at Slater's Branch, South Williamson, Kentucky.
Fiscal 2007 and 2008 Developments
Logan & Kanawha Purchase Order. In April 2008, our wholly owned
subsidiary, Gwenco, Inc., received a purchase order for up to $8 million on coal
through December 2008 from Logan & Kanawha Co., LLC, a West Virginia company.
Rehabilitation and Reopening of Pond Creek Mine. In January 2007,
Gwenco received a permit from the Kentucky Department of Natural Resources to
conduct coal mining at its Pond Creed mine. In February 2007, Gwenco's
engineering firm, Alchemy Engineering of Prestonburg, Kentucky, completed a one
and five year mine plan and maps required by the Kentucky Department of Mines
and Minerals in connection with the permit to conduct coal mining at Pond Creek.
Gwenco has retained General Mining, LLC of Wallins, Kentucky to rehabilitate the
Pond Creek mine in February 2007 and further retained General Mining to conduct
mining operations at Pond Creek in March 2007. The company completed its initial
rehabilitation of the Pond Creek mine, recommenced mining operations, and began
shipping commercial coal for sale in May 2007. The company completed all
rehabilitation the week of July 30, 2007. In January 2008, Quest retained White
Star Mining to conduct all mining operations at Pond Creek. White Star retained
all necessary permits to being mining operations in February 2008. We resumed
mining operations in July 2008.
March 2008 Financing. On March 11, 2008, the Company signed a 15% per
annum promissory note with a third party lender for $75,000 due on March 10,
2009. The note is convertible at the option of the holder at a conversion price
of 50% of the average of the three lowest per share market values during the ten
(10) trading days immediately preceding a conversion date. The holder may not
convert any outstanding principal amount of this note or accrued and unpaid
interest thereon to the extent such conversion would result in the holder
beneficially owning in excess of 4.999% of the then issued and outstanding
common shares of the Company.
46
Gwenco, Inc. Chapter 11 Reorganization. On March 2, 2007, Quest's
wholly owned subsidiary, Gwenco, Inc., filed a voluntary petition for
reorganization under Chapter 11 of .the U.S. Bankruptcy Code with the United
States Bankruptcy Court for the Eastern District of Kentucky. Management felt
this was a necessary step to further the company's financial restructuring
initiative and to protect Gwenco's assets from claims, debts, judgments,
foreclosures, and forfeitures of those creditors and stakeholders with whom both
Quest and Gwenco were unable to negotiate restructured agreements. The company
is currently overseeing Gwenco's operations as a debtor in possession, subject
to court approval of matters outside the ordinary course of business. Gwenco is
currently seeking court approval for debtor in possession financing from holders
of Gwenco's existing debt obligations in order to fund operating expenses. The
company intends to continue its mining operations at Pond Creek mine at Slater's
Branch while this matter is completed. Under Chapter 11, claims against Gwenco
in existence prior to the filing of the petitions for reorganization relief
under the federal bankruptcy laws are stayed while Gwenco is in bankruptcy. On
August 3, 2007, the Bankruptcy Court approved Gwenco's request for
debtor-in-possession financing in an amount of up to $2,000,000. Gwenco has
submitted a preliminary plan of reorganization to the court and the creditors
for approval, and the court had set August 19, 2008 for the hearing on
confirmation of the plan of reorganization. At the company's request, the court
has continued the confirmation hearing to December 15, 2008 to allow the company
to continue negotiating the terms of the plan of reorganization with the
creditors. Although there can be no assurance that an amended plan of
reorganization will be confirmed, the company believes it will successfully
negotiate a plan of reorganization with its creditors and that the plan of
reorganization will be confirmed at the December hearing. If the bankruptcy
court rejects Gwenco's petition for bankruptcy under Chapter 11, we would be
have a material impact as would lose all of its working assets and have only
unpaid liabilities. Accordingly, the court could convert Gwenco's petition to
Chapter 7 and liquidate all of Gwenco's assets. In addition, we might be forced
to file for protection under Chapter 11 as we are the primary guarantor on a
number of Gwenco's contracts.
August 2008 Financing. On August 14, 2008, the Company entered into a
Securities Purchase and Royalty Agreement with an unrelated third party pursuant
to which the Company issued an 8% $400,000 convertible promissory note and a
three year royalty on future coal sales. 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 the Company. The royalty is based on sliding scale
coal sale prices received by the Company, not to exceed $0.75 per ton.
Business Development of Quest
Quest Minerals (Nevada), was organized on November 19, 2003 to acquire
and operate privately held coal mining companies in the southeast United States.
On January 1, 2004, Quest Minerals (Nevada) acquired E-Z Mining Co., Inc. On
February 9, 2004, Quest Minerals (Nevada) completed a "reverse merger" with
Tillman International, Inc., or Tillman, a publicly-traded shell corporation and
a fully reporting company registered under the Securities Exchange Act of 1934.
On April 8, 2004, Tillman changed its name to "Quest Minerals & Mining Corp."
E-Z Mining Acquisition. On January 1, 2004, Quest Minerals (Nevada)
acquired E-Z Mining pursuant to a stock purchase agreement whereby Quest Energy
acquired 100% of the outstanding shares of capital stock of E-Z Mining. Under
the stock purchase agreement, Quest Minerals (Nevada) issued 2,000,000 shares of
its Series A convertible preferred stock and 23,000 shares of its common stock
to the stockholders of E-Z Mining in exchange for all of the outstanding shares
of capital stock of E-Z Mining.
Each share of Quest Minerals (Nevada) Series A preferred stock is now
convertible into a maximum of five (5) shares of Quest common stock, or such
lesser shares as determined by dividing $3.00 by the average closing bid price
of one share of Quest common stock during the ten trading days preceding actual
receipt of a notice of conversion, subject to proportional adjustment for
stock-splits, stock dividends, recapitalizations, and subsequent dilutive
issuances of common stock. The Series A preferred stock is convertible at the
option of the holder. The holders of the Series A preferred stock shall be
entitled to receive cumulative dividends at the rate of $0.0001 per share per
annum in preference to the holders of common stock. The holders of the Series A
preferred stock shall also be entitled to receive, upon liquidation, an amount
equal to $3.00 per share for the Series A preferred stock plus all declared and
unpaid dividends, in preference to the holders of the common stock. After March
31, 2004, Quest has the option of redeeming the Series A preferred stock at a
price equal to $3.00 per share for the Series A preferred stock plus all
47
declared and unpaid dividends. The Series A Preferred Stock has no voting
rights. As of June 9, 2005, 1,546,667 shares of the Series A preferred stock had
been converted into an aggregate of 2,004,689 shares of Quest common stock.
On December 19, 2007, the Company amended the terms of the Series A
Preferred Stock to provide for a reduced conversion price set forth as such that
(1) each share of Series A Preferred Stock shall be convertible at any time into
a shares of common stock, par value, $.001 per share of the Company as
determined by multiplying each share of Series A Preferred Stock by a fraction,
the numerator of which is $3.00 and the denominator of which is equal to the
greater of (i) $0.001 or (ii) 40% of closing price per share of common stock. A
holder of Series A Preferred Stock may not convert shares of the Series A
Preferred Stock to the extent that such conversion would result in the Holder,
together with any affiliate thereof, beneficially owning, pursuant to Section
13(d) of the Securities Exchange of 1934, in excess of 4.999% of the then issued
and outstanding common stock of the Company. The provisions of this section may
be waived by a holder upon not less than 61 days prior notice to the Company.
Reverse Merger. Quest was incorporated on November 21, 1985 in the
State of Utah under the name "Sabre, Inc." It subsequently changed its name to
Tillman International, Inc., or Tillman. On February 9, 2004, Tillman acquired
100% of the outstanding common stock of Quest Minerals (Nevada) pursuant to a
securities purchase agreement and plan of reorganization. Under the plan of
reorganization, Tillman issued 20,700,000 shares of its common stock to the
stockholders of Quest Minerals (Nevada) in exchange for all of the outstanding
shares of common stock of Quest Minerals (Nevada). In addition, Tillman agreed
to issue to the stockholders of Quest Minerals (Nevada) an additional 1,800,000
shares of its common stock upon completion of an amendment to its articles of
incorporation to increase the authorized common stock of Tillman to 250,000,000
shares. Pursuant to the plan of reorganization, 22,464,358 shares of Tillman
common stock held by Silvestre Hutchinson, the former President of Tillman and
one of its former directors, were cancelled. Upon the completion of the
reorganization, William R. Wheeler and Eugene Chiaramonte, Jr., the former
directors of Quest Minerals (Nevada), were appointed as directors of Tillman. On
April 8, 2004, Tillman amended its articles of incorporation to change its name
to "Quest Minerals & Mining Corp." The additional 1,800,000 shares of Quest
common stock were issued in May 2004.
Gwenco Acquisition. Effective April 28, 2004, Quest Minerals (Nevada)
acquired 100% of the outstanding capital stock of Gwenco in exchange for
1,600,000 shares of Series B preferred stock of Quest Minerals (Nevada) and the
assumption of up to $1,700,000 in debt. Each share of Series B preferred stock
carries a liquidation preference of $2.50 per share. In addition, each share of
Series B Preferred Stock is convertible into one share of Quest common stock.
After the acquisition, the parties agreed to a post-closing adjustment to the
purchase price to adjust for the liabilities of Gwenco exceeding $1,700,000. As
a result of this adjustment, the number of shares of Series B preferred stock
issued to the former stockholders of Gwenco was reduced to 1,386,275. On
November 1, 2004, 1,000,000 shares of the Series B preferred stock were
converted into 1,000,000 shares of Quest common stock. In connection with this
acquisition, Quest appointed Albert Anderson, the former principal stockholder
of Gwenco, to Quest's board of directors.
On March 24, 2005, the board of directors asked Albert Anderson to
resign as a director of Quest, and on April 4, 2005, Mr. Anderson submitted his
resignation. In connection with his resignation, Mr. Anderson alleged that Quest
has defaulted under the stock purchase agreement by and between Quest, Gwenco,
Inc., and the former stockholders of Gwenco, which includes Mr. Anderson. Quest
has denied Mr. Anderson's allegations, believes that the allegations are
baseless and without merit, and further believes that it has several claims
against Mr. Anderson which it could assert.
In or about May, 2004, National City Bank of Kentucky commenced an
action in Boyd County Court, Kentucky against Gwenco, Inc. and Albert Anderson
for breach of various promissory notes issued by Gwenco. Duke Energy Merchants
and First Sentry Bank were joined in the action. National City Bank and Duke
Energy are collectively seeking approximately $1,100,000 in principal as well as
interests, fees, and costs. National City Bank and Duke Energy have been granted
summary judgment in this action. National City Bank has obtained judgment in
that action in the amount of approximately $340,000.
In that action, Anderson has filed a third-party complaint against
Quest (Nevada) and Taylor Mining, two of Quest's subsidiaries, for breach of
contract, fraud in the inducement, breach of the covenant of good faith and fair
dealing, unjust enrichment, conversion, and breach of fiduciary duties. On July
27, 2006, Quest settled the third party complaint with Anderson. As part of the
settlement, Gwenco received mining permit renewal and transfer documentation
48
which Gwenco is required to obtain in order to recommence mining operations at
its Pond Creek mine at Slater's Branch, Kentucky. Further, Anderson agreed to
provide all reasonable cooperation in recommencing mining operations at the
Slater's Branch mine. The parties also agreed to terminate all remaining rights,
duties, and obligations under the original stock purchase agreement entered into
in connection with the acquisition of Gwenco by Quest. Quest made a one-time
cash payment of $75,000 and issued 3,500,000 shares of common stock, subject to
a lock-up/leak out agreement, to Anderson, upon conversion of his Series B
Preferred Stock, the terms of which were amended under the settlement agreement.
Quest also granted Anderson a sliding scale royalty on coal sales. The parties
mutually dismissed their respective counter-claims against each other in the
civil action pending in Boyd County Court, Kentucky.
Critical Accounting Policies
The discussion and analysis of Quest's financial conditions and results
of operations is based upon Quest's consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
in the United States. The preparation of financial statements requires managers
to make estimates and disclosures on the date of the financial statements. On an
on-going basis, Quest evaluates its estimates, including, but not limited to,
those related to revenue recognition. It uses authoritative pronouncements,
historical experience, and other assumptions as the basis for making judgments.
Actual results could differ from those estimates. Quest believes the following
critical accounting policies affect its more significant judgments and estimates
in the preparation of our consolidated financial statements.
Mineral Interests
The purchase acquisition costs of mineral properties are deferred until
the properties are placed into production, sold or abandoned. These deferred
costs will be amortized on the unit-of-production basis over the estimated
useful life of the properties following the commencement of production or
written-off if the properties are sold, allowed to lapse or abandoned.
Mineral property acquisition costs include any cash consideration and
the fair market value of common shares and preferred shares, based on the
trading price of the shares, or, if no trading price exists, on other indicia of
fair market value, issued for mineral property interests, pursuant to the terms
of the agreement or based upon an independent appraisal.
Administrative expenditures are expensed in the year incurred.
Coal Acquisition Costs
The costs to obtain coal lease rights are capitalized and amortized
primarily by the units-of-production method over the estimated recoverable
reserves. Amortization occurs either as Quest mines on the property or as others
mine on the property through subleasing transactions.
Rights to leased coal lands are often acquired through royalty
payments. As mining occurs on these leases, the accrued royalty is charged to
cost of coal sales.
Mining Acquisition Costs
The costs to obtain any interest in third-party mining operations are
expensed unless significantly proven reserves can be established for the entity.
At that point, capitalization would occur.
Mining Equipment
Mining equipment is recorded at cost. Expenditures that extend the
useful lives of existing plant and equipment or increase the productivity of the
asset are capitalized. Mining equipment is depreciated principally on the
straight-line method over the estimated useful lives of the assets, which range
from three to 15 years.
Deferred Mine Equipment
Costs of developing new mines or significantly expanding the capacity
of existing mines are capitalized and amortized using the units-of-production
method over the estimated recoverable reserves that are associated with the
property being benefited.
49
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.
Income Taxes
Quest provides for the tax effects of transactions reported in the
financial statements. The provision, if any, consists of taxes currently due
plus deferred taxes related primarily to differences between the basis of assets
and liabilities for financial and income tax reporting. The deferred tax assets
and liabilities, if any, represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of the year ended December 31, 2007,
Quest had no material current tax liability, deferred tax assets, or liabilities
to impact on its financial position because the deferred tax asset related to
Quest's net operating loss carry forward was fully offset by a valuation
allowance. However, Quest has not filed its corporate income tax returns since
2002.
Fair Value
Quest's financial instruments, as defined by SFAS No. 107, "Disclosure
about Fair Value of Financial Instruments", include cash, advances to affiliate,
trade accounts receivable, investment in securities available-for-sale,
restricted cash, accounts payable and accrued expenses and short-term
borrowings. All instruments other than the investment in securities
available-for-sale are accounted for on a historical cost basis, which, due to
the short maturity of these financial instruments, approximates fair value as at
September 30, 2008.
Earnings loss per share
Quest adopted SFAS No. 128, which provides for the calculation of
"basic" and "diluted" earnings per share. Basic earnings per share includes no
dilution and is computed by dividing net income available to common stockholders
by the weighted average common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution of securities that could share
in the earnings similar to fully diluted earnings per share.
Stock Split
All references to common stock and per share data have been
retroactively restated to account for the 1 for 4 reverse stock split
effectuated on August 17, 2007.
All references to common stock and per share data have been
retroactively restated once more to account for the 1 for 10 reverse stock split
effectuated on December 14, 2007.
Other Recent Accounting Pronouncements
Quest does not expect that the adoption of other recent pronouncements
from the Public Company Oversight Board to have any impact on its financial
statements.
50
Results of Operations
Basis of Presentation
The following table sets forth, for the periods indicated, certain unaudited
selected financial data:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net sales $ 223,392 $ 43,543 $ 282,479 $ 99,420
Production costs 97,147 114,479 407,318 520,982
Selling, general and administrative 1,463,375 766,368 2,203,719 3,649,526
Interest 85,420 84,423 238,297 301,622
Stock Compensation Expense 582,500 -- 582,500 --
Depreciation and amortization 35,512 25,936 87,736 69,421
Beneficial Conversion Feature 887,753 -- 4,411,008 292,500
--------------------------------------------------------
Operating income (loss) $(2,928,315) $ (947,363) $(7,648,099) $(4,554,631)
--------------------------------------------------------
|
Comparison of the three months ended September 30, 2008 and 2007
Net sales. We had $223,392 in revenues during the three months ended
September 30, 2008, as compared to $43,353 for the three months ended September
30, 2007. In January 2008, we retained White Star Mining to conduct all mining
operations at Pond Creek. As a result of this change in mine operators, we had
to cease mining operations to obtain new permitting and to conduct further
rehabilitation of the mine. White Star retained all necessary permits to being
mining operations in February 2008, and we resumed mining operations in July
2008. We generated revenues of $223,392 after reopening the mine in July 2008.
In the second quarter of 2007, we resumed mining operations at our Pond Creek
Mine at Slater's Branch and generated revenues of $43,543 during the three
months ended September 30, 2007.
Production costs. Production costs decreased to $97,147 for the three
months ended September 30, 2008 as compared to $114,479 for the three months
ended September 30, 2007. Our production costs in the third quarter of 2008 were
related to shipping costs, royalties and taxes associated with the coal sold
during the period. In the third quarter 2007, we had recently resumed mining
operations at its Pond Creek Mine at Slater's Branch. However, during the
quarter ended September 30, 2007, we were required to conduct extensive
rehabilitation of the mine, which resulted in production costs well in excess of
the revenue generated. The difference in production costs for 2008 versus the
comparable period in 2007 can be attributed to reclassification of production
costs as expenses under selling, general and administrative expenses.
Selling, general, and administrative. Selling, general and
administrative expenses increased to $1,463,375 for the three months ended
September 30, 2008 from $766,368 for the three months ended September 30, 2007.
The selling, general, and administrative expenses result primarily from the
issuance of shares of common stock upon conversion of preferred stock at a
discount to the market price for common stock, resulting in approximate
$4,026,484 associated with equity conversions. The Company also issued shares of
common stock for services, resulting in an additional non-cash expense of
approximately $763,400 during the three months ended September 30, 2008. The
selling, general, and administrative expenses for the three months ended
September 30, 2007 result primarily from the issuance of shares of common stock
upon conversion of debt at a discount to the market price for common stock and
from the issuance of shares of common stock upon exercise of warrants at a
discount to the market price for common stock, resulting in approximate $665,000
in non-cash expenses.
Interest. Interest expense decreased to $85,420 for the three months
ended September 30, 2008, from $84,423 for the three months ended September 30,
2007. Quest's interest expense results from various outstanding debt
obligations, including obligations that Quest assumed in connection with the
acquisition of Gwenco and various notes issued in various financings since
October 2004. The decrease in interest expense results from additional
borrowings, which was offset by the reduction of our outstanding indebtedness by
means of conversions of such indebtedness into common stock and reduced interest
rates on refinanced debts.
51
Stock compensation expense. We incurred stock compensation expenses of
$582,500 for the three months ended September 30, 2008, as opposed to $0 for the
three months ended September 30, 2007. The expense in the third quarter of 2008
results from the issuance of stock in the third quarter of 2008.
Depreciation and amortization. Depreciation expense increased to
$35,512 for the three months ended September 30, 2008, from $25,936 for the
three months ended September 30, 2007. Our depreciation expense increased
primarily as a result of putting additional equipment into service in the 2008
fiscal year.
Beneficial conversion expense. We incurred beneficial conversion
expense of $887,753 for the three months ended September 30, 2008, as opposed to
$0 for the three months ended September 30, 2007. The expense in the third
quarter of 2008 results from the issuance of convertible debt.
Operating loss. We incurred an operating loss of $2,928,315 for the
three months ended September 30, 2008, compared to an operating loss of $947,336
for the three months ended September 30, 2007. We had higher operating losses in
the second quarter of 2008 as compared to the second quarter of 2007 primarily
from significantly increased beneficial conversion and stock compensation
expenses.
Comparison of the nine months ended September 30, 2008 and 2007
Net sales. We had $282,479 in revenues during the nine months ended
September 30, 2008, as compared to $99,420 for the nine months ended September
30, 2007. In January 2008, we retained White Star Mining to conduct all mining
operations at Pond Creek. As a result of this change in mine operators, we had
to cease mining operations to obtain new permitting and to conduct further
rehabilitation of the mine. White Star retained all necessary permits to being
mining operations in February 2008, and we resumed mining operations in the July
2008. We generated revenues of $282,479 as a result of coal produced in
connection with remediation of the mine prior to opening and subsequent to
opening in July 2008. In the second quarter of 2007, we resumed mining
operations at our Pond Creek Mine at Slater's Branch and generated initial
revenues of $99,420. Before that time, we had not been generating revenues from
any of its mines since June 2005, when, due to equipment breakdowns and a lack
of working capital, we had to shut down the mines.
Production costs. Production costs decreased to $407,318 for the nine
months ended September 30, 2008 as compared to $520,982 for the nine months
ended September 30, 2007. Our production costs in the first three quarters of
2008 were related to shipping costs, royalties and taxes associated with the
coal sold during the period. In the second quarter 2007, we had resumed mining
operations at its Pond Creek Mine at Slater's Branch. However, during the
quarter ended September 30, 2007, we were required to conduct extensive
rehabilitation of the mine, which resulted in production costs well in excess of
the revenue generated. The difference in production costs for 2008 versus the
comparable period in 2007 can be attributed to reclassification of production
costs as expenses under selling, general and administrative expenses.
Selling, general, and administrative. Selling, general and
administrative expenses decreased to $2,203,719 for the nine months ended
September 30, 2008 from $3,649,526 for the nine months ended September 30, 2007.
The selling, general, and administrative expenses result primarily from the
issuance of shares of common stock upon conversion of preferred stock at a
discount to the market price for common stock, resulting in approximate
$4,026,484 associated with equity conversions. The Company also issued shares of
common stock for services, resulting in an additional non-cash expense of
approximately $763,400 during the three months ended September 30, 2008. The
selling, general, and administrative expenses for the three months ended
September 30, 2007 result primarily from the issuance of shares of common stock
upon conversion of debt at a discount to the market price for common stock and
from the issuance of shares of common stock upon exercise of warrants at a
discount to the market price for common stock, resulting in approximate $665,000
in non-cash expenses.
Interest. Interest expense decreased to $238,927 for the nine months
ended September 30, 2008, from $301,622 for the nine months ended September 30,
2007. Our interest expense results from various outstanding debt obligations,
including obligations that we assumed in connection with the acquisition of
Gwenco and various notes issued in various financings since October 2004. The
decrease in interest expense results from additional borrowings, which was
offset by the reduction of our outstanding indebtedness by means of conversions
of such indebtedness into common stock and reduced interest rates on refinanced
debts.
52
Stock compensation expense. We incurred stock compensation expenses of
$582,500 for the nine months ended September 30, 2008, as opposed to $0 for the
nine months ended September 30, 2007. The expense in the first three quarters of
2008 results from the issuance of stock in the first three quarters of 2008.
Depreciation and amortization. Depreciation expense increased to
$87,736 for the nine months ended September 30, 2008, from $69,421 for the nine
months ended September 30, 2007. Our depreciation expense increased primarily as
a result of putting additional equipment into service in the 2008 fiscal year.
Beneficial conversion expense. We incurred beneficial conversion
expense of $4,411,008 for the nine months ended September 30, 2008, as opposed
to $292,500 for the nine months ended September 30, 2007. The expense in the
fist six months of 2008 results from the issuance of convertible debt.
Operating loss. Quest incurred an operating loss of $7,648,099 for the
nine months ended September 30, 2008, compared to an operating loss of
$4,554,631 for the nine months ended September 30, 2007. We had higher operating
losses in the second quarter of 2008 as compared to the second quarter of 2007
primarily from significantly increased beneficial conversion expenses.
Liquidity and Capital Resources
We have financed our operations, acquisitions, debt service, and
capital requirements through cash flows generated from operations until June 30,
2005, and through issuance of debt and equity securities. Our working capital
deficit at September 30, 2008 was $7,866,578. We had cash of $31,231 as of
September 30, 2008.
We used $552,295 of net cash in operating activities for the nine
months ended September 30, 2008, compared to using $834,051 in the nine months
ended September 30, 2007. Cash used in operating activities for the nine months
ended September 30, 2008 was mainly due to a gain on derivatives of $2,356,890,
which offset our operating losses. This was offset by non-cash expenses of
$87,736 in depreciation and amortization, $736,400 of stock issued for services,
$4,026,484 for warrant issuances and conversions expenses, $4,647,553 for loss
on debt conversion settlements, $27,000 of decrease in prepaid expenses,
$358,279 for increase in DIP payables, and an increase of accounts payable and
accrued expenses of $541,930.
Net cash flows provided by investing activities was $174,815 for the
nine months ended September 30, 2008, resulting from the purchase of equipment
through a capital lease as compared to $84,371 of net cash flows used by
investing activities for the comparable period in 2007.
Net cash flows provided by financing activities were $404,247 for the
nine months ended September 30, 2008, compared to net cash flows provided by
financing activities of $933,049 for the nine months ended September 30, 2007.
This decrease in net cash provided by financing activities is due to Quest's
borrowings of $1,076,796, offset by repayment of $672,549 of debt.
Financings and Debt Restructurings
From December 2005 through January 2006, Quest issued 1,500,000 shares
of its common stock in an offshore private placement at $0.20 per share. In
addition, Quest also issued a convertible secured promissory note in the
principal amount of $335,000. The note was due on December 8, 2006, bore
interest at a rate of eight percent (8%), and was convertible into Quest common
shares at an initial conversion price of $0.20 per share, subject to adjustment.
In January, 2007, Quest and these investors entered into an exchange agreement,
pursuant to which the shares and the note were exchanged for new notes in the
aggregate principal amount of $635,000. The notes are due on April 1, 2008, with
an annual interest rate of eight percent (8%). The notes are convertible into
the Company's common shares at an initial conversion price equal to the greater
of (a) $0.02 per share, and (b) 50% of the average market price during the three
trading days immediately preceding any conversion date.
On April 5, 2006, Quest issued an aggregate of 1.25 units at a price of
$100,000 per unit. Each unit consists of a convertible promissory note in the
principal amount of $100,000 and warrants to purchase shares of Quest common
stock at an exercise price of $0.84 per share. The unit notes are due on July 5,
2007. The notes bear interest at a rate of six percent (6%) and are convertible
into Quest common shares at an initial conversion price of $0.42 per share. On
July 27, 2007, an investor holding a unit note in the amount of $25,000
exchanged the note for 836,925 shares of our common stock.
53
On May 16, 2005, Quest entered into a credit agreement with a third
party lender in which $245,000 was issued as a 10% note due August 19, 2005.
Additionally, the lender was issued 2,565,007 warrants. The loans subject to the
credit agreement are secured by certain assets of Quest. The warrants have an
exercise price of $0.10 per share, subject to adjustment, and expire on May 31,
2007. On February 14, 2006, in connection with a settlement agreement with the
lender, Quest made a payment of $264,000 and issued an amended and restated 10%
note in the amount of $100,000. The note covered accrued interest and additional
legal fees. The amended and restated note is convertible into Quest's common
stock at a rate of $0.40 per share and was due February 22, 2007. Quest amended
and restated the warrant issuance to reflect a $0.20 per share exercise price.
Quest also issued 1,250,000 new warrants exercisable at $0.40 per share as part
of a settlement agreement with one of its lenders. They are due to expire in
2009. In June, 2007, Quest entered into an exchange agreement with the third
party lender, under which the holder exchanged the $100,000 note and the
remaining warrants held by such lender for a new convertible promissory note in
the aggregate principal amount of $100,000. The new note is due on June 6, 2008,
with an annual interest rate of seven percent (7%), and is convertible 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.
A third-party lender advances operational funding to Quest. Since there
has been no formal agreement regarding the balance owed, Quest accrues a 5%
annual interest on the principal with the intent that a mutual arrangement will
be resolved between both parties.
On August 15, 2007, the U.S. Bankruptcy Court approved a DIP Financing
Motion authorizing the Company's wholly owned subsidiary, Gwenco, Inc., which is
currently in Chapter 11 reorganization proceedings, to borrow up to $2,000,000
in post-petition debt from a pre-petition creditor pursuant to a Debtor-In
-Possession loan agreement and promissory note between Gwenco and the lender
dated June 29, 2007. Additionally, the Court approved prior budgeted advances
from July of up to $350,000, which, in turn, adjusted the total facility to
$1,700,000. The loan advances will carry a 17% interest rate per annum and
mature on July 31, 2008. As of the date of this report, the creditor has not
requested payment. It is anticipated that these loans will be repaid at
confirmation of the confirmation hearing for the Chapter 11 proceeding with an
exit financing facility.
On March 11, 2008, the Company signed a 15% per annum promissory note
with a third party lender for $75,000 due on March 10, 2009. The note is
convertible at the option of the holder at a conversion price of 50% of the
average of the three lowest per share market values during the ten (10) trading
days immediately preceding a conversion date. The holder may not convert any
outstanding principal amount of this note or accrued and unpaid interest thereon
to the extent such conversion would result in the holder beneficially owning in
excess of 4.999% of the then issued and outstanding common shares of the
Company.
On August 14, 2008, the Company 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 the Company.
Capital Requirements
The report of Quest's independent accountants for the fiscal year ended
December 31, 2007 states that Quest has incurred operating losses since
inception and requires additional capital to continue operations, and that these
conditions raise substantial doubt about its ability to continue as a going
concern. Quest believes that, as of the date of this report, in order to fund
its plan of operations over the next 12 months, it will need to fund its
operations out of cash flows generated from operations, to the extent such
operations are resumed, and from the sale of additional securities.
Quest is continuing to seek to fund its capital requirements over the
next 12 months from the additional sale of its debt and equity securities. It is
possible that Quest will be unable to obtain sufficient additional capital
through the sale of its securities as needed. Quest has also obtained
debtor-in-possession financing through the Gwenco bankruptcy proceedings to fund
the capital requirements of Gwenco, Inc.
54
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a "smaller reporting company" as defined by Item 10 of Regulation
S-K, we are not required to provide the information required by this item.
ITEM 4 - CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports that we file
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized, and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure based on the definition of "disclosure controls and
procedures" in Rule 13a-15(e). In designing and evaluating the disclosure
controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
At the end of the period covered by this Quarterly Report on Form 10-Q,
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief Executive Officer and
our Chief Financial Officer concluded that our disclosure controls and
procedures were not effective to ensure that all material information required
to be disclosed in this Quarterly Report on Form 10-Q has been made known to
them in a timely fashion. In addition, our Chief Executive Officer and Chief
Financial Officer have identified significant deficiencies that existed in the
design or operation of our internal control over financial reporting that they
consider to be "material weaknesses." The Public Company Accounting Oversight
Board has defined a material weakness as a "significant deficiency or
combination of significant deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected." In light of the material
weaknesses described below, we performed additional procedures to ensure that
the consolidated financial statements are prepared in accordance with generally
accepted accounting principles. Accordingly, management believes that the
financial statements included in this Annual Report fairly present in all
material respects our financial condition, results of operations and cash flows
for the periods presented.
We did not design and maintain effective entity-level controls as
defined in the Internal Control--Integrated Framework published by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO"). Specifically:
1. We lacked the technical expertise and did not maintain
adequate procedures to ensure that the accounting for derivative financial
instruments under SFAS No. 133, Accounting for Derivative Instruments, and under
Emerging Issues Task Force 00-19, was appropriate. Procedures relating to
convertible debt and warrant financing transactions did not operate effectively
to (a) properly evaluate embedded derivative liability and warrant liability
accounting treatment, (b) meet the documentation requirements of SFAS No. 133
and EITF 00-19, and (c) adequately assess and measure derivative liability
values on a quarterly basis. This material weakness resulted in a restatement of
prior financial statements, as described in Note 18 to the Consolidated
Financial Statements and, if not remediated, has the potential to cause a
material misstatement in the future.
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2. We did not maintain a sufficient complement of personnel with
an appropriate level of technical accounting knowledge, experience, and training
in the application of generally accepted accounting principles commensurate with
our financial accounting and reporting requirements and low materiality
thresholds. This material weakness contributed to the restatement of prior
financial statements, as described in Note 18 to the Consolidated Financial
Statements and, if not remediated, has the potential to cause a material
misstatement in the future.
3. Due to the previously reported material weaknesses, as
evidenced by the restatements related to derivative liabilities, management has
concluded that the controls over the period-end financial reporting process were
not operating effectively. Specifically, controls were not effective to ensure
that significant non-routine transactions, accounting estimates, and other
adjustments were appropriately reviewed, analyzed, and monitored on a timely
basis. A material weakness in the period-end financial reporting process could
result in our not being able to meet our regulatory filing deadlines and, if not
remediated, has the potential to cause a material misstatement or to miss a
filing deadline in the future.
These conditions constitute deficiencies in both the design and
operation of entity-level controls. As a result of these deficiencies, our
original Quarterly Report on Form 10-Q did not contain all material information
which is required to be disclosed. In addition, we have restated our financial
statements for the fiscal years ended December 31, 2005 and 2004 and the interim
financial statements for the periods ending March 31, 2005, June 30, 2005,
September 30, 2005, March 31, 2006, June 30, 2006, and September 30, 2006.
These significant deficiencies in the design and operation of our
internal controls include the needs to hire additional staffing and to provide
training to existing and new personnel in SEC reporting requirements and
generally accepted accounting principles. Furthermore, the deficiencies include
the need for formal control systems for journal entries and closing procedures,
the need to form an independent audit committee as a form of internal checks and
balances and oversight of our management, to implement budget and reporting
procedures, and the need to provide internal review procedures for schedules,
SEC reports, and filings prior to submission to the auditors and/or filing with
the SEC.
These deficiencies have been disclosed to our Board of Directors.
Additional effort is needed to fully remedy these deficiencies and we are
seeking to improve and strengthen our control processes and procedures. We are
in the process of improving our internal control over financial reporting in an
effort to remediate these deficiencies by adding additional accounting
personnel, improving supervision and increasing training of our accounting staff
with respect to generally accepted accounting principles, providing additional
training to our management regarding use of estimates in accordance with
generally accepted accounting principles, increasing the use of contract
accounting assistance, and increasing the frequency of internal financial
statement review. We will continue to take additional steps necessary to
remediate the material weaknesses described above.
Our Chief Executive Officer and Chief Financial Officer have also
evaluated whether any change in our internal controls occurred during the last
fiscal quarter and have concluded that there were no changes in our internal
controls or in other factors that occurred during the last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, these
controls.
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PART II: OTHER INFORMATION
ITEM 1 - 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, our wholly owned
subsidiary, Gwenco, Inc., filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court
for the Eastern District of Kentucky. Management felt this was a necessary step
to further our financial restructuring initiative and to protect Gwenco's assets
from claims, debts, judgments, foreclosures, and forfeitures of those creditors
and stakeholders with whom both Quest and Gwenco were unable to negotiate
restructured agreements. We are currently overseeing Gwenco's operations as a
debtor in possession, subject to court approval of matters outside the ordinary
course of business. We are currently seeking court approval for debtor in
possession financing from holders of Gwenco's existing debt obligations in order
to fund operating expenses. We intend to continue our mining operations at Pond
Creek Mine at Slater's Branch while this matter is completed. Under Chapter 11,
claims against Gwenco in existence prior to the filing of the petitions for
reorganization relief under the federal bankruptcy laws are stayed while Gwenco
is in bankruptcy. On August 3, 2007, the Bankruptcy Court approved Gwenco's
request for debtor-in-possession financing in an amount of up to $2,000,000.
Gwenco has submitted a preliminary plan of reorganization to the court and the
creditors for approval, and the court had set August 19, 2008 for the hearing on
confirmation of the plan of reorganization. At the company's request, the court
has continued the confirmation hearing to December 15, 2008 to allow the company
to continue negotiating the terms of the plan of reorganization with the
creditors. Although there can be no assurance that an amended plan of
reorganization will be confirmed, the company believes it will successfully
negotiate a plan of reorganization with its creditors and that the plan of
reorganization will be confirmed at the December hearing. If the bankruptcy
court rejects Gwenco's petition for bankruptcy under Chapter 11, we would be
have a material impact as would lose all of its working assets and have only
unpaid liabilities. Accordingly, the court could convert Gwenco's petition to
Chapter 7 and liquidate all of Gwenco's assets. In addition, we might be forced
to file for protection under Chapter 11 as we are the primary guarantor on a
number of Gwenco's contracts.
In or about May, 2004, National City Bank of Kentucky commenced an
action in Boyd County Court, Kentucky against Quest's indirect wholly-owned
subsidiary, Gwenco, Inc., and Albert Anderson for breach of various promissory
notes issued by Gwenco. Duke Energy Merchants and First Sentry Bank were joined
in the action. National City Bank and Duke Energy are collectively seeking
approximately $1,100,000 in principal as well as interests, fees, and costs.
National City Bank and Duke Energy have been granted summary judgment in this
action and both obtained judgment.
In March, 2006, National City Bank commenced an action commenced an
action in Pike County Court, Kentucky against Quest, Gwenco, and Quest Energy,
seeking to be adjudged a lien on certain real and personal property of Gwenco
pursuant to the aforementioned judgment and that said real and personal property
be sold to satisfy the aforesaid lien, and that the liens of National City Bank
attach to the proceeds of the sale. In July, 2006, National City Bank of
Kentucky sold its right, title, and interest in and to the various judgments,
judgment liens, security interests, and lines of credit to a third party
investor. The third party investor has agreed to forbear on further collection,
enforcement, and foreclosure with respect to this indebtedness, in exchange for
which Gwenco agreed to grant the investor a royalty on gross profits of Gwenco.
This foreclosure action was stayed against Gwenco as a result of Gwenco's
Chapter 11 filing.
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On or about August 25, 2004, Valley Personnel Services, Inc. commenced
an action in the Circuit Court of Mingo County, West Virginia against Quest's
indirect wholly-owned subsidiaries, D&D Contracting, Inc. and Quest Energy, Ltd.
for damages in the amount of approximately $150,000, plus pre and post judgment
interest as provided by law, costs, and fees. This action was stayed against
Gwenco as a result of Gwenco's Chapter 11 filing.
The Federal Insurance Company, the insurer for Community Trust Bank,
commenced an action in Pike County Court, Kentucky against Quest Energy for
subrogation of monies it has paid to the bank and repayment of deductibles by
Community Trust as a part of an alleged criminal scheme and conspiracy by Mr.
Runyon, Ms. Holbrook, Mr. Stollings, and Mr. Wheeler. The insurer alleged that
former employees or associates of Quest Energy, including Mr. Runyon and Mr.
Wheeler, were primarily involved in the alleged scheme, that Quest Energy is
accordingly responsible for the actions of these former employees and
associates, and that Quest Energy obtained a substantial material benefit as a
result of this alleged scheme. Quest Energy has denied these allegations, that
it had any involvement with or responsibility for any of the actions alleged by
the insurer, and it further denies that it has benefited from any such alleged
scheme. Further, Quest Energy filed a counterclaim against the Federal Insurance
Company and Community Trust contending that the negligent actions and inactions
by Community Trust caused severe damage and loss to Quest Energy and Quest. The
court granted Community Trust's motion to dismiss the counterclaim.
Mountain Edge Personnel has commenced an action in the Circuit Court of
Mingo County, West Virginia against Quest's now-dissolved indirect wholly-owned
subsidiary, J. Taylor Mining, for damages in the amount of approximately
$115,000, plus pre and post judgment interest as provided by law, costs, and
fees.
An action has been commenced in the Circuit Court of Pike County,
Kentucky against Quest and its indirect, wholly-owned subsidiaries, Gwenco,
Inc., Quest Energy, Ltd., and J. Taylor Mining, for unspecified damages
resulting from personal injuries suffered while working for Mountain Edge
Personnel, an employee leasing agency who leased employees to Quest's
subsidiaries. Quest Energy is actively defending the action. This action was
originally stayed against Gwenco as a result of Gwenco's Chapter 11 filing.
However, in March, 2008, the plaintiff obtained relief from stay and as a result
the lawsuit has reopened against Gwenco.
BHP, Inc. commenced an action in the Circuit Court of Pike County,
Kentucky against Quest's indirect, wholly-owned subsidiary, Quest Energy, Ltd.,
for damages resulting an alleged failure to pay for certain equipment leases in
the amount of approximately $225,000, plus pre and post judgment interest as
provided by law, costs, and fees. July 10, 2006, Quest Energy entered into a
settlement arrangement with BHP for the bill of sale on two pieces of equipment,
of which Quest Energy had retained possession while in default of prior lease
payments. On October 10, 2006, the Pike County Circuit Court entered an order
enforcing this settlement agreement, and on December 19, 2006, BHP was awarded
summary judgment in the amount of $35,000 plus 8% accrued interest from August
9, 2006. BHP, Inc. has since repossessed the equipment.
Christopher Younger and Sharon Preece commenced an action in the
Circuit Court of Pike County against Quest's indirect, wholly-owned subsidiary,
Gwenco, Inc., for damages resulting from an alleged failure to pay past
royalties and other amounts allegedly due. The plaintiffs have obtained a
default judgment in this action in the amount of approximately $600,000, from
which Gwenco has taken appeal. The plaintiffs then amended their complaint,
seeking to be adjudged a lien on certain real and personal property of Gwenco
pursuant to the aforementioned judgment and that said real and personal property
be sold to satisfy the aforesaid lien, and that the liens of the plaintiffs
attach to the proceeds of the sale. This foreclosure action was stayed against
Gwenco as a result of Gwenco's Chapter 11 filing. In 2007, Gwenco settled the
claim Sharon Preece for $150,000. The settlement was approved by the bankruptcy
court.
ITEM 1A - RISK FACTORS
As a "small reporting company" as defined by Item 10 of Regulation S-K,
we are not required to provide information required by this item.
ITEM 2 - CHANGES IN SECURITIES
(a) During the quarter ended September 30, 2008, Quest issued an aggregate
of 13,367,725 shares of common stock (which number reflects the 1 for 10 reverse
split effected on November 4, 2008) upon conversions of various convertible
notes and a judgment. The aggregate principal and interest amount of these
notes/judgment that were converted was $133,677.25. The issuances were 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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During the quarter ended September 30, 2008, Quest issued an aggregate
of 9,268,112 shares of common stock (which number reflects the 1 for 10 reverse
split effected on November 4, 2008) upon conversion of 157,883 shares of its
series A preferred stock. The issuances were exempt pursuant to Section 3(a)(9)
of the Securities Act as well as Section 4(2) of the Securities Act.
On August 13, 2008, we entered into an exchange agreement with an
existing debt holder. We had entered into an agreement on April 1, 2008, with an
existing note holder to exchange their expired note of $100,000; along with
their existing warrants for a newly issued convertible note in the amount of
$100,000. The new note carries an interest rate of seven percent (7%) and
expires on March 31, 2009. The note is convertible into our common shares at a
conversion price of seventy percent (70%) of the average per share market value
during the three (3) trading days immediately preceding a conversion date. 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 August 14, 2008, we 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
issuance was exempt pursuant to Section 4(2) of the Securities Act.
(b) None.
(c) None.
ITEM 3 - DEFAULT UPON SENIOR SECURITIES
(a) None.
(b) None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Please see our Definitive Information Statement in Form 14C filed with the SEC
on August 15, 2008, which is incorporated herein by reference.
ITEM 5 - OTHER INFORMATION
Please see our Current Report in Form 8-K filed with the SEC on September 9,
2008, which is incorporated herein by reference.
ITEM 6 - EXHIBITS
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. ss. 1350 adopted
pursuant to Section 906 of the Sarbanes Oxley Act of
2002 Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUEST MINERALS & MINING CORP.
November 19, 2008 /s/ Eugene Chiaramonte, Jr.
-----------------------------------------
Eugene Chiaramonte, Jr.
President
(Principal Executive Officer and
Principal Accounting Officer)
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