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NOTE
1 –
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ORGANIZATION
& OPERATIONS
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Quest
Minerals & Mining Corp. (“Quest,” the “Registrant,” or the “Company”) was
incorporated in Utah on November 21, 1985. The Company has leasehold
interests in certain properties in Eastern Kentucky, is seeking to re-commence
full coal mining operations on these properties, and is looking to acquire
additional coal properties.
Quest’s
subsidiary, Gwenco, Inc. (“Gwenco”), leases over 700 acres of coal mines, with
approximately 12,999,000 tons of coal in place in six seams. In 2004,
Gwenco had reopened Gwenco’s two former drift mines at Pond Creek and Lower
Cedar Grove, and had begun production at the Pond Creek seam. This
seam of high quality compliance coal is located at Slater’s Branch, South
Williamson, Kentucky.
On March
2, 2007, Gwenco filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the
Eastern District of Kentucky. Management felt this was a necessary
step to further the Company’s financial restructuring initiative and to protect
Gwenco’s assets from claims, debts, judgments, foreclosures, and forfeitures of
those creditors and stakeholders with whom both Quest and Gwenco were unable to
negotiate restructured agreements. Gwenco is currently overseeing its
operations as a debtor in possession, subject to court approval of matters
outside the ordinary course of business. 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 from holders of Gwenco’s existing debt obligations
in order to fund operating expenses. Gwenco 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. Gwenco has
submitted a preliminary plan of reorganization to the court and the creditors
for approval, and the court has set September 2009 for the hearing on
confirmation of the plan of reorganization. If the bankruptcy court
rejects Gwenco’s petition for bankruptcy under Chapter 11, the Company would be
material impacted and could 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, the Company might
be forced to file for protection under Chapter 11 as it is the primary guarantor
on a number of Gwenco’s contracts.
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NOTE
2 -
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SIGNIFICANT
ACCOUNTING POLICIES
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General
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instruction to Form
10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Accordingly,
the results from operations for the six month period ended June 30, 2009 and
2008 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated December 31, 2008
financial statements and footnotes thereto included in the Company’s Form
10-K.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
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. Critical estimates include amortization of intangible
assets, depreciation, and the fair value of options and warrants included in the
determination of debt discounts and share-based compensation.
Major
Customers and Suppliers
The
Company had one customer who accounted for 100% of revenues in
2009.
Costs of
the Company’s two major vendors, who provided contract mining and trucking
services, accounted for 70% and 11%, respectively, of the Company’s production
costs for the period ended June 30, 2009.
Dependency
on key management
The
future success or failure of the Company is dependent primarily upon the efforts
of the Company’s President, sole director, and controlling
stockholder. The Company does not have insurance covering such
officer’s liability and term life insurance. The Company entered into
a five-year employment contract with the President in 2005.
Mineral
Interests
The
purchase acquisition costs of mineral properties are deferred until the
properties are placed into production, sold or abandoned. These
deferred costs will be amortized on the unit-of-production basis over the
estimated useful life of the properties following the commencement of production
or written-off if the properties are sold, allowed to lapse, or
abandoned.
Mineral
property acquisition costs include any cash consideration and the fair market
value of common shares and preferred shares, based on the trading price of the
shares, or, if no trading price exists, on other indicia of fair market value,
issued for mineral property interests, pursuant to the terms of the agreement or
based upon an independent appraisal.
Administrative
expenditures are expensed in the year incurred.
Since the
Company’s continuation as a going concern is dependent upon its ability to
obtain adequate financing (see
Note 3
),
the carrying value of the mineral rights does not necessarily represent
liquidation value if the Company were force to sell the mineral rights in
liquidation in a liquidation proceeding under Chapter 7 of the Bankruptcy
Code.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
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.
Mining
Equipment
Mining
equipment is recorded at cost. Expenditures that extend the useful
lives of existing plant and equipment or increase the productivity of the asset
are capitalized. Mining equipment is depreciated principally on the
straight-line method over the estimated useful lives of the assets, which range
from 3 to 15 years.
Deferred
Mine Expense
Costs of
developing new mines or significantly expanding the capacity of existing mines
are capitalized and amortized using the units-of-production method over the
estimated recoverable reserves that are associated with the property being
benefited.
Asset
Impairment
If facts
and circumstances suggest that a long-lived asset may be impaired, the carrying
value is reviewed under the guidance of SFAS 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” and 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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
There
were 50,000 options issued to the Company’s President during the year ended
December 31, 2008. During the three months ended March 31, 2009, the 50,000
options were exchanged and cancelled for a new option grant of equal value,
which grant shall be consummated upon the Company’s adoption of a new stock
incentive plan. As of June 30, 2009, there were 75 options
issued and outstanding. See Note 12 for details.
Income
Taxes
The
Company provides for the tax effects of transactions reported in the
consolidated financial statements. The provision, if any, consists of
taxes currently due plus deferred taxes related primarily to differences between
the basis of assets and liabilities for financial and income tax
reporting. The deferred tax assets and liabilities, if any, represent
the future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled. As of June 30, 2009, 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
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.
SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 requires that valuation
techniques maximize the use of observable inputs and minimize the use of
unobservable inputs. SFAS 157 also establishes a fair value hierarchy, which
prioritizes the valuation inputs into three broad levels.
There are
three general valuation techniques that may be used to measure fair value, as
described below:
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·
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Market
approach – Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities. Prices may be indicated by pricing guides, sale
transactions, market trades, or other
sources;
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QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
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·
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Cost
approach – Based on the amount that currently would be required to replace
the service capacity of an asset (replacement cost);
and
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·
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Income
approach – Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about the future
amounts (includes present value techniques and option-pricing models). Net
present value is an income approach where a stream of expected cash flows
is discounted at an appropriate market interest
rate.
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Financial
assets and liabilities are valued using either level 1 inputs based on
unadjusted quoted market prices within active markets or using level 2 inputs
based primarily on quoted prices for similar assets or liabilities in active or
inactive markets. For certain debt, fair value is based on present
value techniques using inputs derived principally or corroborated from market
data. Using level 3 inputs using management’s assumptions about the
assumptions market participants would utilize in pricing the asset or
liability. In the Company’s case, this entailed assumptions used in
pricing models for note discounts. Valuation techniques utilized to
determine fair value are consistently applied.
The
Company’s notes payable are the only items that are subject to SFAS 157 as of
June 30, 2009 as follows:
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Notes
Payable (level 1)
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$
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4,327,482
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Convertible
Notes Payable (level 1)
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1,358,500
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Convertible
Notes Payable (level 3)
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260,118
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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. The assumed exercise of outstanding stock options and
warrants and the conversion of convertible securities were not included in the
computation of diluted loss per share because the assumed exercises and
conversions would be anti-dilutive for the periods presented.
Stock Split
All
references to common stock and per share data have been retroactively restated
to the earliest period presented to account for the 1 for 4 reverse stock split
effectuated on August 17, 2007. See Note 11 for details.
All
references to common stock and per share data have been retroactively restated
once more to the earliest period presented to account for the 1 for 10 reverse
stock split effectuated on December 14, 2007. See Note 11 for
details.
All
references to common stock and per share data have been retroactively restated
once more to the earliest period presented to account for the 1 for 10 reverse
stock split effectuated on November 4, 2008. See Note 11 for
details.
All
references to common stock and per share data have been retroactively restated
once more to the earliest period presented to account for the 1 for 100 reverse
stock split effectuated on August 4, 2009. See Note 11 for
details.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
Recently
Adopted Accounting Principles
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.
In March
2008, the FASB issued SFAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 13
3” (“SFAS No. 161”). The new standard is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, results of
operations and cash flows. The new standard also improves
transparency about how and why a company uses derivative instruments and how
derivative instruments and related hedged items are accounted for under
Statement No. 133. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. The Company adopted SFAS No.
161 effective January 1, 2009 and the adoption had no material impact on
the Company’s consolidated financial statements and disclosures.
In
December 2007, the FASB issued SFAS No. 160, “
Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51
” (“SFAS
No. 160”). In SFAS No. 160, the FASB established accounting and
reporting standards that require non-controlling interests to be reported as a
component of equity, changes in a parent’s ownership interest while the parent
retains its controlling interest to be accounted for as equity transactions, and
any retained non-controlling equity investment upon the deconsolidation of a
subsidiary to be initially measured at fair value. SFAS No. 160 is
effective for annual periods beginning on or after December 15,
2008. Retroactive application of SFAS No. 160 is
prohibited. The Company adopted SFAS No. 160 effective
January 1, 2009 and the adoption had no material impact on the Company’s
consolidated financial statements and disclosures.
In
December 2007, the FASB issued EITF No. 07-1, “
Accounting for Collaborative
Arrangements
” (“EITF No. 07-1”). EITF No. 07-1 prescribes the
accounting for parties of a collaborative arrangement to present the results of
activities for the party acting as the principal on a gross basis and report any
payments received from (made to) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to
authoritative accounting literature or a reasonable, rational, and consistently
applied accounting policy election. Further, EITF No. 07-1
clarified the determination of whether transactions within a collaborative
arrangement are part of a vendor-customer (or analogous) relationship subject to
Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a
Customer.” EITF No. 07-1 is effective for collaborative arrangements
that exist on January 1, 2009 and application is
retrospective. The Company adopted EITF No. 07-1 effective
January 1, 2009 and the adoption had no material effect on the Company’s
financial position or results of operations.
In June
2008, the FASB ratified EITF No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF No.
07-5”). EITF No. 07-5 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument’s
contingent exercise and settlement provisions. It also clarifies the
impact of foreign currency denominated strike prices and market-based employee
stock option valuation instruments on the evaluation. EITF No. 07-5
is effective for fiscal years beginning after December 15,
2008. The Company adopted EITF No. 07-5 effective January 1,
2009, and the adoption had no material effect on the Company’s financial
position or results of operations.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
In April
2009, the Financial Accounting Standards Board (“FASB”) issued the following new
accounting standards:
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·
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FASB
Staff Position FAS No. 157-4,
Determining Whether a Market
Is Not Active and a Transaction Is Not Distressed,
(“FSP FAS No.
157-4”) provides guidelines for making fair value measurements more
consistent with the principles presented in SFAS No. 157. FSP
FAS No. 157-4 provides additional authoritative guidance in determining
whether a market is active or inactive and whether a transaction is
distressed. It is applicable to all assets and liabilities
(i.e., financial and non-financial) and will require enhanced
disclosures.
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·
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FASB
Staff Positions FAS No. 115-2, FAS 124-2, and EITF No. 99-20-2,
Recognition and Presentation
of Other-Than-Temporary Impairments
, (“FSP FAS No. 115-2, FAS No.
124-2, and EITF No. 99-20-2”) provides additional guidance to provide
greater clarity about the credit and noncredit component of an
other-than-temporary impairment event and to more effectively communicate
when an other-than-temporary impairment event has
occurred. This FSP applies to debt
securities.
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·
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FASB
Staff Position FAS No. 107-1 and APB No. 28-1,
Interim Disclosures about Fair
Value of Financial Instruments
, (“FSP FAS No. 107-1 and APB No.
28-1”) amends FASB Statement No. 107,
Disclosures about Fair Value
of Financial Instruments
, to require disclosures about fair value
of financial instruments in interim as well as in annual financial
statements. This FSP also amends APB Opinion No. 28,
Interim Financial
Reporting
, to require those disclosures in all interim financial
statements.
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These
standards are effective for periods ending after June 15, 2009. The
Company is evaluating the impact that these standards will have on its
consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
consolidated financial statements.
The
accompanying unaudited consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net operating losses of $1,156,415 and $759,461 for the periods
ended June 30, 2009 and 2008 and had a working capital deficit (current assets
less current liabilities) of $7,904,996 and $8,226,110 at June 30, 2009 and
December 31, 2008, respectively. These factors indicate that the
Company’s continuation as a going concern is dependent upon its ability to
obtain adequate financing.
The
Company will require substantial additional funds to finance its business
activities on an ongoing basis and will have a continuing long-term need to
obtain additional financing. The Company’s future capital
requirements will depend on numerous factors including, but not limited to,
continued progress developing additional mines and increasing mine
production. Currently, the Company is in the process of seeking
additional funding to achieve its operational goals.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
On March
2, 2007, Gwenco filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the
Eastern District of Kentucky. Management felt this was a necessary
step to further the Company’s financial restructuring initiative and to protect
Gwenco’s assets from claims, debts, judgments, foreclosures, and forfeitures of
those creditors and stakeholders with whom both Quest and Gwenco were unable to
negotiate restructured agreements. Gwenco is currently overseeing its
operations as a debtor in possession, subject to court approval of matters
outside the ordinary course of business. 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 from holders of Gwenco’s existing debt obligations
in order to fund operating expenses. Gwenco 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. Gwenco has
submitted a preliminary plan of reorganization to the court and the creditors
for approval, and the court has set September 2009 for the hearing on
confirmation of the plan of reorganization.
If the
bankruptcy court rejects Gwenco’s petition for bankruptcy under Chapter 11, the
Company would be material impacted and could 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
particular, the carrying value of the mineral rights (see
Note 5
)
does not necessarily represent liquidation value if the Company were force to
sell the mineral rights in liquidation in a liquidation proceeding under Chapter
7 of the Bankruptcy Code. In addition, the Company might be forced to
file for protection under Chapter 11 as it is the primary guarantor on a number
of Gwenco’s contracts.
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NOTE
4 -
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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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
On June
30, 2009, Gwenco entered into a settlement agreement with another former owner
of Gwenco, pursuant to which the parties agreed that the former owner would have
an allowed unsecured claim of $161,824, plus interest in the amount of $40,000,
for a total of $201,824, to be paid along with the other allowed unsecured
claims under Gwenco’s Chapter 11 plan of reorganization. The former
owner has the right to convert up to $40,000 of the claim into the Company’s
common stock at a conversion price of eighty five percent (85%) of the average
of the five (5) per share market values immediately preceding a conversion date,
with a minimum conversion price of the par value of the Company’s common
stock. On July 21, 2009, the Court approved the settlement
agreement.
As of
June 30, 2009, Gwenco owed approximately $227,283 in lease and/or royalty
payments in addition to the reduced judgment amount of $229,130.
On July
1, 2009, Gwenco entered into a settlement agreement with the last former owner
of Gwenco (and the holder of the $229,130 judgment), pursuant to which the
parties agreed that the former owner would have an allowed unsecured claim of
$92,238, plus interest in the amount of $25,000, for a total of $117,238, to be
paid along with the other allowed unsecured claims under Gwenco’s Chapter 11
plan of reorganization. The former owner has the right to convert up
to $40,000 of the claim into the Company’s common stock at a conversion price of
eighty five percent (85%) of the average of the five (5) per share market values
immediately preceding a conversion date, with a minimum conversion price of the
par value of the Company’s common stock. On July 21, 2009, the Court
approved the settlement agreement. (See
Note
16
.)
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NOTE
5 -
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LEASED
MINERAL RESERVES
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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.
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At
June 30, 2009, the leased mineral reserves, valued at $5,200,117, net
consisted of the following:
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Proven
Reserves
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Seams
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Tons
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Winifrede
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214,650
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Taylor
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1,783,500
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Cedar
Grove
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3,702,600
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Pond
Creek
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4,079,925
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Total
Reserves
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9,780,675
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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 of June 30, 2009. 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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
Equipment
consisted of the following:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Mining
equipment
|
|
$
|
344,435
|
|
|
|
332,435
|
|
|
Less
accumulated depreciation
|
|
|
(193,208
|
)
|
|
|
(175,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
- net
|
|
$
|
151,227
|
|
|
|
157,271
|
|
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.
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.
|
NOTE
7 -
|
ACCOUNTS
PAYABLE & ACCRUED EXPENSES
|
|
Accounts
payable and accrued expenses consist of the following:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2009
(Unaudited)
|
|
|
2008
|
|
|
Accounts
payable
|
|
$
|
923,755
|
|
|
|
710,027
|
|
|
Accrued
royalties payable-operating (a)
|
|
|
240,094
|
|
|
|
354,126
|
|
|
Accrued
bank claim (b)
|
|
|
650,000
|
|
|
|
650,000
|
|
|
Accrued
taxes
|
|
|
87,315
|
|
|
|
87,315
|
|
|
Accrued
interest
|
|
|
910,486
|
|
|
|
816,944
|
|
|
Accrued
expenses (c)
|
|
|
809,223
|
|
|
|
860,023
|
|
|
|
|
$
|
3,620,873
|
|
|
$
|
3,478,435
|
|
|
|
(a)
|
The
Company maintains a number of coal leases with minimum lease or royalty
payments that vary by lease as defined in the separate
agreements. Several of the landowners have contended that
the Company is in default under certain of these leases and that said
leases are terminated. The Company disputes these
contentions. 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.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
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 consolidated financial
statements
(See
NOTE
8
)
.
On June
30, 2009, Gwenco entered into a settlement agreement with another former owner
of Gwenco, pursuant to which the parties agreed that the former owner would have
an allowed unsecured claim of $161,824, plus interest in the amount of $40,000,
for a total of $201,824, to be paid along with the other allowed unsecured
claims under Gwenco’s Chapter 11 plan of reorganization. The former
owner has the right to convert up to $40,000 of the claim into the Company’s
common stock at a conversion price of eighty five percent (85%) of the average
of the five (5) per share market values immediately preceding a conversion date,
with a minimum conversion price of the par value of the Company’s common
stock. On July 21, 2009, the Court approved the settlement
agreement. As a result, the Company reclassified $166,542 of its
accrued royalties to Notes Payable and expensed the additional $40,000 of
interest pursuant to the agreement.
As of
June 30, 2009, Gwenco recorded approximately $227,283 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.
In
addition, the Company accrued $25,544 as an estimated royalty payable in
connection with an August 2008 financing. This amount is currently
being amortized over the life of the underlying note involved in the
financing.
(See
NOTE
8
)
.
On July
1, 2009, Gwenco entered into a settlement agreement with the last former owner
of Gwenco (and the holder of the $229,130 judgment), pursuant to which the
parties agreed that the former owner would have an allowed unsecured claim of
$92,238, plus interest in the amount of $25,000, for a total of $117,238, to be
paid along with the other allowed unsecured claims under Gwenco’s Chapter 11
plan of reorganization. The former owner has the right to convert up
to $40,000 of the claim into the Company’s common stock at a conversion price of
eighty five percent (85%) of the average of the five (5) per share market values
immediately preceding a conversion date, with a minimum conversion price of the
par value of the Company’s common stock. On July 21, 2009, the Court
approved the settlement agreement. (See
Note
16
.)
|
|
(b)
|
During
the period ended December 31, 2004, the Company’s bank initiated a
claim for an overdraft recovery. Since
it was later determined that there was a much larger malice perpetrated
against the Company by existing bank employees, estimates for the
resolution of a claim against a defunct subsidiary have been accrued until
a resolution can be determined.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
|
(c)
|
The
Company recorded an accrued liability for indemnification obligations of
$390,000 to its officers, which represents the fair value of shares of the
Company’s common stock, which the officers pledged as collateral for
personal guarantees of a loan to the Company. The Company
defaulted on the loan and the lender foreclosed on the officer’s pledged
shares. In January 2007, the Company satisfied $260,000 of this
accrued liability by issuing 260,000 shares of Series C Preferred
Stock. See Note 11. The Company has accrued the remaining
$130,000 due to its former officer. In addition, during
the period ended December 31, 2004, the Company had recorded accrued
expenses of $468,585 from its subsidiaries, E-Z Mining Co. and Gwenco,
Inc. as acquisition for mining expenses recorded on their books and
records. The Company continues to carry these balances until
further validity can be determined.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
Notes
payable consist of the following:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2009
(Unaudited)
|
|
|
2008
|
|
|
QUEST
MINERALS & MINING CORP.
|
|
|
|
|
|
|
|
0%
Notes Due on Demand (a).
|
|
$
|
202,864
|
|
|
|
202,864
|
|
|
7%
Senior Secured Convertible Notes Due 2007 (b).
|
|
|
25,000
|
|
|
|
25,000
|
|
|
7%
Convertible Notes Due 2008 (c).
|
|
|
-
|
|
|
|
1,616
|
|
|
5%
Unsecured Advances Due on Demand (d).
|
|
|
137,198
|
|
|
|
1,082,411
|
|
|
6%
Convertible Notes Due 2011 (d).
|
|
|
1,200,000
|
|
|
|
-
|
|
|
0%
Notes Due on Demand (e).
|
|
|
630,436
|
|
|
|
611,937
|
|
|
10%
Convertible Notes due 2008 (f).
|
|
|
10,000
|
|
|
|
10,000
|
|
|
6%
Convertible Notes due 2010 (g).
|
|
|
83,500
|
|
|
|
533,500
|
|
|
8%
Convertible Notes due 2010 (h).
|
|
|
380,000
|
|
|
|
400,000
|
|
|
6%
Notes Due on Demand (i).
|
|
|
10,000
|
|
|
|
-
|
|
|
QUEST
ENERGY, LTD.
|
|
|
|
|
|
|
|
|
|
8%
Summary Judgment (j).
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
GWENCO,
INC.: (Bank Loans)
|
|
|
|
|
|
|
|
|
|
12%
Assigned Judgment (k).
|
|
|
726,964
|
|
|
|
726,964
|
|
|
9.5%
Note due 2004 (l)
|
|
|
262,402
|
|
|
|
262,402
|
|
|
6%
Note due 2004 (l)
|
|
|
28,159
|
|
|
|
28,159
|
|
|
0%
Default Judgment (m)
|
|
|
229,130
|
|
|
|
229,130
|
|
|
0%
Unsecured Claim (n)
|
|
|
201,824
|
|
|
|
-
|
|
|
17%
Debtor in Possession Financing due 2008 (o)
|
|
|
1,298,543
|
|
|
|
923,043
|
|
|
|
|
|
|
|
|
|
|
|
|
GWENCO,
INC.: (Related-Party Loans)
|
|
|
|
|
|
|
|
|
|
5.26%
Notes payable (p).
|
|
|
604,964
|
|
|
|
624,581
|
|
|
Total
Debt
|
|
|
6,065,984
|
|
|
|
5,696,607
|
|
|
Current
Portion
|
|
|
4,284,160
|
|
|
|
4,763,107
|
|
|
Less:
Unamortized debt discount on Current Portion
|
|
|
-
|
|
|
|
-
|
|
|
Total
Notes Payable – Current Portion, net
|
|
|
4,284,160
|
|
|
|
4,763,107
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt:
|
|
$
|
1,781,824
|
|
|
|
933,500
|
|
|
Less:
Unamortized debt discount on Long-Term Debt
|
|
|
(119,882
|
)
|
|
|
(182,158
|
)
|
|
Total
Long-Term Debt, net
|
|
$
|
1,661,942
|
|
|
$
|
751,342
|
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
|
(a)
|
On
December 31, 2005, the Company closed E-Z Mining Co.,
Inc. These current notes consist of various third parties
related to the former CFO of the Company. All notes are due on
demand except $110,000, which is due from future royalties. All
notes are non-interest bearing.
|
|
|
(b)
|
From
February 22, 2005 through April 18, 2005, the Company entered into unit
purchase agreements with sixteen third-party investors for a total sale
amount of $1,425,000. Each unit was sold at $25,000 and
consisted of a 7% senior secured convertible note due March 6, 2006 and
3.75 Series A Warrants. The notes were secured by certain of
the Company’s assets and were initially convertible into shares of the
Company’s common stock at the rate of $20,000.00 per share, which
conversion price was subject to adjustment. Each Series A
Warrant was exercisable into one (1) share of common stock at an exercise
price of $200.00 and one (1) Series B Warrant. Each Series B
Warrant was exercisable into one (1) share of common stock at an exercise
price of $40,000.00. The Company categorized the convertible
notes as a liability in the amount of $1,425,000. During the
year ended December 31, 2006, the Company amended and restated the 7%
convertible notes in the aggregate principal amount of $1,250,000, which
became due on dates ranging from February 22, 2007 to April 18,
2007. As part of the amendments and restatements, one of the
noteholders forgave a 7% senior secured convertible note in the principal
amount of $125,000. The amended and restated notes are
convertible at the option of the holder at a conversion price of $3,000.00
per share; provided, that if the market price of the Company’s common
stock was less than $4,000.00 per share for ten consecutive trading days,
the conversion price would reduced to $2,000.00 per share; provided,
further, that if the market price of the Company’s common stock was less
than $2,000.00 per share for ten consecutive trading days, the conversion
price would become the lesser of (i) $2,000.00 per share
or (ii) 70% of the average of the 5 closing bid prices of the
common stock immediately preceding such conversion date. The
lenders have made periodic partial conversions to pay down the remaining
principal on the notes. As of June 30, 2009, only a partial
amount of accrued interest on the amended and restated notes
remains.
|
Quest had
recognized derivative liability of $1,580,575 upon restatement of these notes in
accordance with SFAS 133 and EITF 00-19. In particular, Quest
compared (a) the number of then authorized but unissued shares, less the maximum
number of shares that could be required to be delivered during the contract
period under existing commitments (i.e. the other convertible notes and
warrants) with (b) the maximum number of shares that could be required to be
delivered under share settlement (either net-share or physical) of these
notes. Since the amount in (b) exceeded the amount in (a), and because
Quest was required to obtain shareholder approval to increase its authorized
common shares or otherwise effect a recapitalization in order to net-share or
physically settle all contracts, Quest determined that share settlement was not
within its control, and accordingly, derivative liability classification was
required.
On
February 9, 2007, Quest amended its articles of incorporation to increase its
authorized common stock to 975,000,000 shares, and to authorize its board of
directors to effectuate a stock split or reverse stock split without stockholder
approval. As a result of this amendment, Quest no was no longer
required to obtain shareholder approval to effect a recapitalization in order to
net-share or physically settle any of its convertible notes or warrants, and
accordingly, obtained full control of share settlement of these
notes. As a result, Quest reclassified the conversion options on
these notes, then valued at $322,963, as permanent equity.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF 98-5”), the Company also recognized an
imbedded beneficial conversion feature present in these notes. The
Company allocated a portion of the proceeds equal to the intrinsic value of that
feature to additional paid in capital. The Company recognized and
measured $1,183,139 of the proceeds, which is equal to the intrinsic value of
the imbedded beneficial conversion feature, to additional paid in capital and a
discount against the notes. The debt discount attributed to the
beneficial conversion feature was amortized over the notes’ maturity period as
interest expense.
On
September 3, 2008, Quest issued 5,000 shares of common stock to a noteholder
that did not participate in the 2006 exchange in exchange of an original note of
$25,000 and warrants for 3.75 shares of common stock. Quest credited
the principal amount of $25,000 and accrued interest of $6,217 to paid-in
capital and also incurred $2,611 as an induced conversion expense in connection
with this exchange.
As of
June 30, 2009, $25,000 in principal amount of the original $1,425,000 in notes
remains outstanding and in default.
|
|
(c)
|
On
May 16, 2005, the Company entered into a credit agreement with a third
party lender in which $245,000 was issued as a 10% note due August 19,
2005. According to the credit agreement, the lender may, in its
sole and absolute discretion, make additional loans to the Company of
$255,000 for an aggregate total of $500,000. Additionally, the
lender was issued 257 warrants. The loans subject to the credit
agreement are secured by certain assets of the Company. The
warrants had an exercise price of $4,000.00 per share, subject to
adjustment, and expired on May 31, 2007. As of December
31, 2005, the Company had made a payment of $5,500. On February
14, 2006, in connection with a settlement agreement with the lender, the
Company made a payment of $264,000 and issued an amended and restated 10%
note in the amount of $100,000. The note covered accrued
interest and additional legal fees. The amended and restated
note is convertible into the Company’s common stock at a rate of $40.00
per share and was due February 22, 2007. On June 6, 2007, the
Company entered into an exchange agreement with the lender, under which
the holder exchanged the $100,000 note and all remaining warrants held by
such lender for a new convertible promissory note in the aggregate
principal amount of $100,000. The new note became due on June
6, 2008, with an annual interest rate of seven percent (7%), and is
convertible into Quest’s common shares at a conversion price of 70% of the
average of the 5 closing bid prices of the common stock immediately
preceding such conversion date. During the six months ended
June 30, 2009, the holder made a final conversion to satisfy the remaining
principal and interest on the note.
|
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF 98-5”), the Company recognized an imbedded
beneficial conversion feature present in this note. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid in capital. The Company recognized and measured
$43,944 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as interest
expense. During the years ended December 31, 2008 and December 31,
2007, amortization related to the beneficial conversion feature was $18,970 and
$24,974, respectively. The discount was fully amortized during the
year ended December 31, 2008.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
|
(d)
|
During
January of 2006, the Company entered into a loan agreement to receive up
to $300,000 in funds for operations in return for a 12% percent note due
in May of 2006. As 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. Since 2006 through June 30, 2009, the
lender, and its successor in interest, has continued to advance
operational funding into the Company. Since there had been no
formal agreement regarding the balance owed, the Company accrues a 5%
annual interest on the principal with the intent that a mutual arrangement
will be resolved between both
parties.
|
On June
26, 2009, the Company entered into an exchange agreement with the third party
investor, pursuant to which the investor exchanged approximately $1,082,411 of
the evidences of indebtedness, along with $ 124,195 of accrued interest thereon,
for a new convertible promissory note in the aggregate principal amount of
$1,200,000. The new note is due June 26, 2011 and bears interest at
an annual rate of six percent (6%). The new note is convertible into
shares of the Company’s common stock at a conversion price of $0.001 per share,
subject to adjustment.
As of
June 30, 2009, there continues to be no formal agreement regarding the remaining
evidences of indebtedness of $137,198, and the Company continues to accrue 5%
annual interest on the principal with the intent that a mutual arrangement will
be resolved between both parties.
|
|
(e)
|
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.
|
|
|
(f)
|
On
May 1, 2007, the Company entered into a settlement and release agreement
with a third party pursuant to which the Company issued a
convertible secured promissory note in the principal amount of
$10,000. The note was due on May 1, 2008, with an annual
interest rate of ten percent (10%). The note is convertible
into the Company’s common shares at a fixed rate of $160 per
share. The holder may not convert any outstanding
principal amount of this note or accrued and unpaid interest thereon to
the extent such conversion would result in the holder beneficially owning
in excess of 4.999% of the then issued and outstanding common shares of
the Company.
|
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF 98-5”), the Company also recognized an
imbedded beneficial conversion feature present in this note. The
Company allocated a portion of the proceeds equal to the intrinsic value of that
feature to additional paid in capital. The Company recognized and
measured $2,500 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and a
discount against the note. The debt discount attributed to the
beneficial conversion feature is amortized over the note’s maturity period as
interest expense. During the years ended December 31, 2008 and
December 31, 2007, amortization related to the beneficial conversion feature was
$833 and $1,667, respectively. The discount was fully amortized
during the year ended December 31, 2008.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
As of
June 30, 2009, the Company was in default of this obligation.
|
|
(g)
|
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.
|
Quest had
recognized derivative liability of $306,284 upon exchange of these notes in
accordance with SFAS 133 and EITF 00-19. In particular, Quest
compared (a) the number of then authorized but unissued shares, less the maximum
number of shares that could be required to be delivered during the contract
period under existing commitments (i.e. the other convertible notes and
warrants) with (b) the maximum number of shares that could be required to be
delivered under share settlement (either net-share or physical) of these
notes. Since the amount in (b) exceeded the amount in (a), and because
Quest was required to obtain shareholder approval to increase its authorized
common shares or otherwise effect a recapitalization in order to net-share or
physically settle all contracts, Quest determined that share settlement was not
within its control, and accordingly, derivative liability classification was
required.
On
February 9, 2007, Quest amended its articles of incorporation to increase its
authorized common stock to 975,000,000 shares, and to authorize its board of
directors to effectuate a stock split or reverse stock split without stockholder
approval. As a result of this amendment, Quest no was no longer
required to obtain shareholder approval to effect a recapitalization in order to
net-share or physically settle any of its convertible notes or warrants, and
accordingly, obtained full control of share settlement of these
notes. As a result, Quest reclassified the conversion options on
these notes, then valued at $768,069, as permanent equity.
On April
1, 2006, the Company entered into a settlement and release agreement
with a third party individual pursuant to which the Company
issued a convertible secured promissory note in the principal amount of
$300,000. The note was due on April 1, 2008, with an annual interest
rate of eight percent (8%). The note is convertible into the
Company’s common shares at an initial conversion price equal to the greater of
(a) $2.00 per share, and (b) 50% of the average market price during the three
trading days immediately preceding any conversion date. The
holder may not convert any outstanding principal amount of this note or accrued
and unpaid interest thereon to the extent such conversion would result in the
holder beneficially owning in excess of 4.999% of the then issued and
outstanding common shares of the Company.
Quest had
recognized derivative liability of $625,319 upon issuance of the note in
accordance with SFAS 133 and EITF 00-19. In particular, Quest
compared (a) the number of then authorized but unissued shares, less the maximum
number of shares that could be required to be delivered during the contract
period under existing commitments (i.e. the other convertible notes and
warrants) with (b) the maximum number of shares that could be required to be
delivered under share settlement (either net-share or physical) of the
note. Since the amount in (b) exceeded the amount in (a), and because
Quest was required to obtain shareholder approval to increase its authorized
common shares or otherwise effect a recapitalization in order to net-share or
physically settle all contracts, Quest determined that share settlement was not
within its control, and accordingly, derivative liability classification was
required.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
On
February 9, 2007, Quest amended its articles of incorporation to increase its
authorized common stock to 975,000,000 shares, and to authorize its board of
directors to effectuate a stock split or reverse stock split without stockholder
approval. As a result of this amendment, Quest no was no longer
required to obtain shareholder approval to effect a recapitalization in order to
net-share or physically settle any of its convertible notes or warrants, and
accordingly, obtained full control of share settlement of these
notes. As a result, Quest reclassified the conversion options on the
note, then valued at $593,709, as permanent equity.
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF 98-5”), the Company also recognized an
imbedded beneficial conversion feature present in this note. The
Company allocated a portion of the proceeds equal to the intrinsic value of that
feature to additional paid in capital. The Company recognized and
measured $300,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and a
discount against the note. The debt discount attributed to the
beneficial conversion feature is amortized over the note’s maturity period as
interest expense. During the years ended December 31, 2008 and
December 31, 2007, amortization related to the beneficial conversion feature was
$37,839 and $151,353, respectively. The discount was fully amortized
during the year ended December 31, 2008.
On June
6, 2008, the Company entered into an exchange agreement with the subsequent
holder of these notes, in the aggregate principal amount of $835,000, under
which the subsequent holder exchanged the notes held by such holder for a new
convertible promissory note in the aggregate principal amount of
$835,000. The new note is due June 6, 2010 and bears interest at an
annual interest rate of six percent (6%). The new note is convertible
into shares of the Company’s common stock at a conversion price of $0.001 per
share. During the year ended December 31, 2008 and the six months
ended June 30 ,2009, the holders have made partial conversions of principal and
interest due under these notes.
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(h)
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On
August 14, 2008, the Company entered into a purchase agreement with an
unrelated third party where the Company issued a $400,000 convertible
promissory note and granted a three (3) year royalty on future coal
sales. The note is due July 23, 2010 and bears interest at an
annual interest rate of eight percent (8%). The note is
convertible into shares of the Company’s common stock at a conversion
price of sixty percent (60%) of the average of the five (5) lowest per
share market value during the ten (10) trading days immediately preceding
a conversion date. The royalty is based on sliding scale
ranging from $0.00 to $0.75 per ton, depending on actual sale prices of
coal received by the Company.
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In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF 98-5”), the Company also recognized an
imbedded beneficial conversion feature present in this note. The
Company allocated a portion of the proceeds equal to the intrinsic value of that
feature to additional paid in capital. The Company recognized and
measured $225,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and a
discount against the note. The debt discount attributed to the
beneficial conversion feature is amortized over the note’s maturity period as
interest expense. During the year ended December 31, 2008,
amortization related to the beneficial conversion feature was $42,842, and
during the six months ended June 30, 2009, amortization related to the
beneficial conversion feature and the converted notes was $62,276. As
of June 30, 2009, an unamortized discount of $119,882 remains.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
In
addition, the Company recognized and measured $25,544 of the proceeds, which is
equal to the Company’s estimate of the royalty payable under this agreement, to
accrued royalties and a discount against the note. The debt discount
attributed to the accrued royalty is amortized over the note’s maturity period
as interest expense.
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(i)
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On
January 16, 2009, the Company borrowed $10,000, and in connection
therewith, issued a promissory note that is due on demand and bears
interest at an annual interest rate of six percent
(6%).
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(j)
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On
July 10, 2006, the Company entered into a settlement arrangement with an
existing equipment lessor for the bill of sale on two pieces of equipment,
of which the Company had retained possession while in default of prior
lease payments. On October 10, 2006, the Pike County Circuit
Court entered an order enforcing this settlement agreement, and on
December 19, 2006, the lessor was awarded summary judgment in the amount
of $35,000 plus 8% accrued interest from August 9, 2006. As of
June 30, 2009, the Company remains in
default.
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(k)
|
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 15.) As of June
30, 2009, 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, and security interests, all of which
are based on the note issued to Duke Energy of Kentucky, also referenced
in Note 15, to a third party investor. As of June 30, 2009, the
Company is currently negotiating resolution of this judgment in connection
with Gwenco’s plan of reorganization in
bankruptcy.
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(l)
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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. The Company is currently negotiating
resolution of these notes in connection with Gwenco’s plan of
reorganization in bankruptcy.
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(m)
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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 improperly 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 June 30, 2009,
the Company continues to negotiate the remaining balance of the judgment
in connection with Gwenco’s plan of reorganization in
bankruptcy.
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QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
On July
1, 2009, Gwenco entered into a settlement agreement with the holder of the
$229,130 judgment, pursuant to which the parties agreed that the holder would
have an allowed unsecured claim of $92,238, plus interest in the amount of
$25,000, for a total of $117,238, to be paid along with the other allowed
unsecured claims under Gwenco’s Chapter 11 plan of
reorganization. The former owner has the right to convert up to
$40,000 of the claim into the Company’s common stock at a conversion price of
eighty five percent (85%) of the average of the five (5) per share market values
immediately preceding a conversion date, with a minimum conversion price of the
par value of the Company’s common stock. On July 21, 2009, the Court
approved the settlement agreement. (See
Note
16
.)
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(n)
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On
June 30, 2009, Gwenco entered into a settlement agreement with another
former owner of Gwenco, pursuant to which the parties agreed that the
former owner would have an allowed unsecured claim of $161,824, plus
interest in the amount of $40,000, for a total of $201,824, to be paid
along with the other allowed unsecured claims under Gwenco’s Chapter 11
plan of reorganization. The former owner has the right to
convert up to $40,000 of the claim into the Company’s common stock at a
conversion price of eighty five percent (85%) of the average of the five
(5) per share market values immediately preceding a conversion date, with
a minimum conversion price of the par value of the Company’s common
stock. On July 21, 2009, the Court approved the settlement
agreement. As a result, the Company reclassified $166,542 of
its accrued royalties to Notes Payable and expensed the additional $40,000
of interest pursuant to the
agreement.
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(o)
|
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 carry a 17% interest rate per
annum and matured on July 31, 2008. As of June 30, 2009,
advances totaled $1,298,543 and continue to accrue
interest.
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On July
11, 2009, Gwenco and the lender under the Total Facility extended the maturity
date on the Total Facility to the earliest of (i) December 31, 2010, (ii) the
date of confirmation of a plan of reorganization or liquidation in the
Bankruptcy Case; (iii) the date of closing of a sale of all or substantially all
of Gwenco’s assets pursuant to the Bankruptcy Code; or (iv) the approval of a
disclosure statement in respect of a plan of reorganization or liquidation not
supported by the lender.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
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(p)
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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, 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 included the
accrued interest, has an interest rate of 5.26%, and is to be paid through
monthly payments equal to the sum of $.50 per clean sellable ton of coal
removed the property.
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The
Company recognized no income tax benefit for the loss generated for the periods
through June 30, 2009.
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.
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NOTE
10 -
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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
Company.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF 98-5”), the Company also recognized an
imbedded beneficial conversion feature present in the Series A Preferred
Stock. The Company allocated a portion of the proceeds equal to the
intrinsic value of that feature to additional paid in capital. The
Company recognized and measured $1,359,999 of the proceeds, which is equal to
the intrinsic value of the imbedded beneficial conversion feature, to additional
paid in capital and as interest expense.
As of
June 30, 2009, 427,807 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 3,500,000
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 effectuated a 10 to 1 reverse stock
split. As a result of the reverse split, the conversion price was
adjusted from $9.65688 to $96.5688.
On August
4, 2009, the Company effectuated a 100 to 1 reverse stock split. As a
result of the reverse split, the conversion price was adjusted from $96.5688 to
$9656.88.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
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.
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF 98-5”), the Company also recognized an
imbedded beneficial conversion feature present in the Series C Preferred
Stock. The Company allocated a portion of the proceeds equal to the
intrinsic value of that feature to additional paid in capital. The
Company recognized and measured $257,347 of the proceeds, which is equal to the
intrinsic value of the imbedded beneficial conversion feature, to additional
paid in capital and as interest expense.
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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
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 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 $0.32 or 100% of the 5-day average to the lower of
$3.20 or 100% of the 5-day average.
On August
4, 2009, the Company effectuated a 100 to 1 reverse common stock
split. As a result of the reverse split, the conversion price was
adjusted from the lower of $3.20 or 100% of the 5-day average to the lower of
$320 or 100% of the 5-day average.
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 from
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
September 9, 2008, the Company amended its articles of incorporation to increase
the number of shares of common stock that were authorized to issue from
975,000,000 to 2,500,000,000.
On
November 4, 2008, the Company effectuated 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 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 QMLM.
On August
4, 2009, the Company effectuated a 1 to 100 reverse stock split resulting in a
1,111,715,818 reduction of shares from 1,122,945,271 common shares outstanding
to 11,229,453 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 was changed to
QMIN.PK.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
All
references in the consolidated financial statements and notes to consolidated
financial statements, numbers of shares, and share amounts have been
retroactively restated to reflect the reverse splits, unless explicitly stated
otherwise.
During
the year ended December 31, 2008, holders of Amended and Restated 7% Senior
Secured Promissory Notes effectuated a series of partial conversions and were
issued an aggregate of 47,143 shares of common stock at a conversion price
averaging approximately $36.80 per share. In the aggregate, these
issuances reduced the debt by $195,452 in principal and $30,295 in accrued
interest.
During
the year ended December 31, 2008, holders of a restated 12% Promissory Note
effectuated a series of partial conversions and were issued an aggregate of
17,856 shares of common stock at a conversion price averaging approximately
$3.50 per share. In the aggregate, these issuances reduced the debt
by $32,399 in principal and $8,042 in accrued interest.
During
the year ended December 31, 2008, the holder of a 15% Promissory Note
effectuated a series of partial conversions and was issued an aggregate of
31,977 shares of common stock at a conversion price averaging approximately
$1.30 per share. In the aggregate, the issuances reduced the debt by
$32,777 in principal and $1,294 in accrued interest.
During
the year ended December 31, 2008, holders of the Company’s Series A Preferred
Stock converted an aggregate of 422,341 shares into 698,967 shares of common
stock, at a conversion price averaging $0.52 per share.
During
the year ended December 31, 2008, the Company issued an aggregate of 550,491
shares of common stock to various consultants. Expense of $1,086,652 was
recorded related to these shares, which was the market value of such shares
issued at prices varying from $2.0 to $2.90 per share.
During
the year ended December 31, 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 69,677 shares of common stock at a conversion price
of $1.00 per share. In the aggregate, these issuances reduced the
debt by $65,589 in principal and $4,088 in accrued interest.
During
the year ended December 31, 2008, the holders of a 6% convertible promissory
note effectuated a series of partial conversions and were issued an aggregate of
1,047,071 shares of common stock at a conversion price of $1.00 per
share. In the aggregate, these issuances reduced the debt by $301,500
in principal and $1,207 in accrued interest.
On March
20, 2008, Gross Foundation returned 2,094 shares of common stock that were
issued to them in error on December 14, 2007. The Company had issued
2,094 shares of common stock in error to due to a communication oversight to the
transfer agent relating to a conversion notice during the time in which the
Company’s 1 to 10 reverse split was effectuated. The issuance was
valued at market price and a capital allowance of $29,326 was posted until it
could be reconciled. The shares were subsequently cancelled and the
allowance was credited.
On August
13, 2008, the Company issued 21,000 shares of common stock a third party lender
at $4.80 per share pursuant to an exchange agreement, which satisfied an 8%
convertible note in the principal amount of $100,000 dated April 1, 2008 and all
accrued interest thereon.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
On
October 6, 2008, the Company issued 500 shares of common stock a third party
lender per share pursuant to an exchange agreement, which satisfied a 7%
convertible secured note in the principal amount of $25,000 dated March 4, 2005
and all accrued interest thereon.
During
the six months ended June 30, 2009, the Company issued an aggregate of 2,567,567
shares of common stock for consulting and legal services. Expense of
$308,465 was recorded related to these shares, which was the market value of
such shares issued at prices varying from $0.10 to $0.18 per share.
During
the six months ended June 30, 2009, the holders of a 6% convertible promissory
note effectuated a series of partial conversions and were issued an aggregate of
4,500,000 shares of common stock at a conversion price of $0.10 per
share. In the aggregate, these issuances reduced the debt by $450,000
in principal.
During
the six months ended June 30, 2009, the holder of a 7% Promissory Note
effectuated a partial conversion and was issued an aggregate of 100,000 shares
of common stock at a conversion price of $0.10 per share. The
issuance reduced the debt by $1,616 in principal and $8,384 in accrued
interest.
During
the six months ended June 30, 2009, the holder of an 8% Promissory Note
effectuated a partial conversion and was issued an aggregate of 200,000 shares
of common stock at a conversion price of $0.10 per share. The
issuance reduced the debt by $20,000 in principal.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
NOTE
12 -
|
STOCK
OPTION / WARRANTS
|
|
Stock
Option / Warrant Issuances Outstanding consist of the
following:
|
|
|
June
30,
2009 (Unaudited)
|
|
|
|
|
Options/
Warrants
|
|
|
Exercise
Price
|
|
|
Valuation
|
|
|
December
17, 2004 issuance of 15 warrants; expiration 2009 (a).
|
|
|
15
|
|
|
|
60,000
|
|
|
|
-
|
|
|
December
21, 2004 issuance of 5 warrants; expiration 2009 (b).
|
|
|
5
|
|
|
|
60,000
|
|
|
|
-
|
|
|
March
4, 2005 issuance of 11 series A warrants; expiration 2010
(c).
|
|
|
11
|
|
|
|
20,000
|
|
|
|
-
|
|
|
March
4, 2005 issuance of 11 series B warrants; expiration 2010
(c).
|
|
|
11
|
|
|
|
40,000
|
|
|
|
-
|
|
|
April
5, 2006 issuance of 29 warrants; expiration 2009 (d).
|
|
|
0
|
|
|
|
8,400
|
|
|
|
-
|
|
|
May
18, 2006 issuance of 75 options; expiration 2011 (e).
|
|
|
75
|
|
|
|
2,000
|
|
|
|
143,054
|
|
|
July
3, 2008 issuance of 25,000 options; expiration 2018 (f).
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
September
23, 2008 issuance of 25,000 options; expiration 2018 (g).
|
|
|
-
|
|
|
|
-
|
|
|
|
82,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTALS:
|
|
|
117
|
|
|
|
|
|
|
$
|
725,554
|
|
|
|
|
Warrants
|
|
|
|
|
|
Valuation (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Options / Warrants outstanding as of December 31, 2008
|
|
|
50,117
|
|
|
$
|
55.00
|
|
|
|
725,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
/ Warrants Issued (f)(g)
|
|
|
|
|
|
|
-
|
|
|
|
582,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
/ Warrants Expired / Cancelled (f)(g)
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
(582,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
/ Warrants Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Options / Warrants outstanding as of June 30, 2009 (f)(g)
|
|
|
117
|
|
|
$
|
1,723
|
|
|
|
725,554
|
|
All
references to the issuance of warrants have been retroactively adjusted to
account for reverse stock splits.
|
|
(a)
|
On
December 17, 2004, the Company signed a 15% per annum promissory note with
two third parties, each for $300,000 due on June 17, 2005. The
notes are secured by certain of the Company’s equipment. In the
event of default, the notes become convertible into shares of the
Company’s common stock at the option of the holder at a conversion price
of $4,000.00 per share. As additional compensation to these
lenders, the Company agreed to issue them 15 common stock warrants at
$60,000.00. The warrants have anti-dilution privileges and
piggyback registration
rights.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
|
(b)
|
On
December 21, 2004, the Company issued 5 common stock warrants at
$60,000.00 as finder’s fee. The warrants have anti-dilution
privileges and piggyback registration
rights.
|
|
|
(c)
|
On
March 4, 2005, the Company signed a series of unit purchase agreements
with thirteen individual third-party lenders for a total sale amount of
$375,000. Each unit was sold at $25,000 and consisted of a 7%
senior secured convertible note due March 6, 2006 and 3.75 Series A
Warrants. The notes are secured by certain of the Company’s
assets and were initially convertible into shares of the Company’s common
stock at the rate of $20,000.00 per share, which conversion price is
subject to adjustment. Each Series A Warrant is exercisable
into one (1) share of common stock at an exercise price of $20,000.00 and
one (1) Series B Warrant. Each Series B Warrant is exercisable
into one (1) share of common stock at an exercise price of
$40,000.00. During the six months ended June 30, 2007, 3.75
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, 7.5 Series A and
Series B warrants were cancelled.
|
|
|
(d)
|
On
April 5, 2006, the Company issued an aggregate of 1.25 units at a price of
$100,000 per unit. The aggregate gross proceeds from the sale
of the units were $125,000. Each unit consists of a convertible
promissory note in the principal amount of $100,000 and warrants to
purchase shares of the Company’s common stock at an exercise price of
$8,400 per share. The unit notes are due on July 5,
2007. The notes bear interest at a rate of six percent (6%) and
are convertible into Quest common shares at an initial conversion price of
$4,200 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. 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 23
warrants was exchanged for a 7% convertible note due March 31,
2009. The existing warrants were subsequently cancelled upon
issuance of this agreement.
|
|
|
(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 12.5 shares of the
Company’s common stock pursuant to a new stock compensation plan adopted
by the Company. The options would be exercisable at $2,000.00
per share, the fair market value at the time of grant, and would vest as
follows: (i) options to purchase up to 50 shares vesting
immediately, (ii) options to purchase up to 50 shares vesting upon the
Company’s receipt of an aggregate of $25,000 in cash or cash equivalents
in its accounts, and (iii) options to purchase up to 25 shares vesting six
months after the date of the option agreements. The 12.5
options were valued at $476,846 using the Black Scholes method, of which
$286,108 was deferred against Paid-in capital. Since 50 of
these options would vest six months from issuance and 75 would vest upon a
stipulated performance, the Company has accrued a deferred stock
compensation allowance against the issued capitalization. On
May 31, 2006, the Company’s then-President resigned. The
Company and the former President then entered into a consulting agreement,
under which it was agreed that 50 options initially awarded to him would
remain vested and 2,500 options would be allowed to vest in six
months. 50 options that vested upon the Company’s raising one
million dollars were mutually voided. The Company credited both
the deferred stock compensation and the accrued paid-in capital by
$95,369, which reversed the valued portion of the issuance. On
November 18, 2006, the 50 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.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
|
(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 25,000 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 $24.00 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. During the six months ended
June 30, 2009, these options were exchanged and cancelled for a new option
grant of equal value, which grant shall be consummated upon the Company’s
adoption of a new stock incentive
plan.
|
|
|
(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 25,000 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 $4.40 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. During the six months ended
June 30, 2009, these options were exchanged and cancelled for a new option
grant of equal value, which grant shall be consummated upon the Company’s
adoption of a new stock incentive
plan.
|
|
NOTE
13 -
|
STOCK
COMPENSATION PLAN
|
On May 8,
2006, the board of directors of the Company adopted its 2006 Stock Incentive
Plan, which allows for the issuance of up to 23,000,000 shares of the Company’s
Common Stock to officers, employees, directors, consultants, and
advisors. 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 shares under the Plan.
On
September 27, 2006, the board of directors of the Company adopted its 2006 Stock
Incentive Plan No. 2, which allows for the issuance of up to 30,000,000 shares
of the Company’s Common Stock to officers, employees, directors, consultants,
and advisors. 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 shares under the Plan.
On
February 21, 2007, the board of directors of the Company adopted its 2007 Stock
Incentive Plan, which allows for the issuance of up to 70,000,000 shares of the
Company’s Common Stock to officers, employees, directors, consultants, and
advisors. 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 shares under the Plan.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
On
November 19, 2007, the board of directors of the Company adopted its 2007 Stock
Incentive Plan No. 2, which allows for the issuance of up to 97,500,000 shares
of the Company’s Common Stock to officers, employees, directors, consultants,
and advisors. 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 shares under the Plan.
On June
18, 2009, the board of directors of the Company adopted its 2009 Stock Incentive
Plan, which allows for the issuance of up to 259,000,000 shares of the Company’s
Common Stock to officers, employees, directors, consultants, and
advisors. 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 shares under the Plan.
On June
18, 2009, the board of directors of the Company adopted its 2009 California
Stock Incentive Plan, which allows for the issuance of up to 259,000,000 shares
of the Company’s Common Stock to officers, employees, directors, consultants,
and advisors. 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 shares under the Plan.
On August
17, 2007, the Company effectuated a 1 to 4 reverse stock split.
On
December 14, 2007, the Company effectuated a 1 to 10 reverse stock
split.
On
November 4, 2008, the Company effectuated a 1 to 10 reverse stock
split
On August
4, 2009, the Company subsequently effectuated a 1 to 100 reverse stock
split
In
connection with each reverse stock split, pursuant to each plan, the Company’s
board of directors determined that the number of shares subject to previously
outstanding stock awards should be adjusted in proportion to the respective
reverse split. As a result, after each reverse split, the number of
shares subject to stock awards was reduced in proportion to the reverse
split. However, in accordance with each plan, the maximum number of shares
of common stock that may be issued and sold under any awards granted under each
plan was not reduced as a result of the reverse split and, accordingly, the
total number of shares available under the plan after each reverse split
remained the same as it was before such reverse split. Pursuant the
terms of each plan, the board of directors has full authority to interpret the
plans, and that interpretation is binding upon all parties.
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 and 2008. As of June 30, 2009, the following schedule shows the
remaining shares available for issuance under each plan:
|
Plan
|
Authorized
|
Granted
/ Reserved
|
Balance
Available
|
|
2004
Stock Compensation Plan
|
17,500,000
|
175,000
|
17,325,000
|
|
2005
Stock Incentive Plan
|
7,000,000
|
70,000
|
6,930,000
|
|
2005
Stock Incentive Plan No. 2
|
2,000,000
|
20,000
|
1,980,000
|
|
2006
Stock Incentive Plan
|
23,000,000
|
230,000
|
22,770,000
|
|
2006
Stock Incentive Plan No. 2
|
30,000,000
|
275,000
|
29,725,000
|
|
2007
Stock Incentive Plan
|
70,000,000
|
700,000
|
69,300,000
|
|
2007
Stock Incentive Plan No. 2
|
97,500,000
|
975,000
|
96,525,000
|
|
2009
Stock Incentive Plan
|
259,000,000
|
200,000
|
258,800,000
|
|
2009
California Stock Incentive Plan
|
259,000,000
|
435,808
|
258,564,192
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
|
NOTE
14 -
|
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 25 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 2,000
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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
The
Company leases office space under an operating lease in Paterson, New Jersey for
its corporate use from an entity where its President is a major
stockholder. There is no formal lease agreement or arrangement that
exists. The rent payments are generally month to month.
|
NOTE
15 -
|
COMMITMENTS
AND CONTINGENCIES
|
On
December 8, 2005, the Company entered into an employment agreement with the
Company's President. The agreement is for five years and provides for
an annual base salary during the term of the agreement as follows: (i) an annual
base salary of $120,000 for the first year of the agreement; (ii) an annual base
salary of $180,000 for the second year of the agreement; (iii) an annual base
salary of $240,000 for the third year of the agreement; (ii) an annual base
salary of $300,000 for the fourth year of the agreement; (ii) an annual base
salary of $360,000 for the fifth year of the agreement. In addition,
the President received options to purchase up to 12,500 shares of Quest’s common
stock at an exercise price of $20.00 per share. The President and the
Company mutually agreed to cancel this option in 2007. The agreement
also contains the following material provisions: (i) participation in
the Company's executive bonus plan on the same basis as other senior executive
officers of the Company; (ii) reimbursement for all reasonable travel and other
out-of-pocket expenses incurred in connection with his employment; (iii) four
(4) weeks paid vacation leave, which shall accumulate in the event that the
President elects not to take such vacation leave in any fiscal year; (iv)
medical and dental benefits as those provided to other senior executive officers
of the Company; (v) a severance payment of six (6) month’s salary at the
then-applicable base salary rate in the event that the Company terminates the
President's employment without cause; (vi) a severance payment of all
base salary due under the remaining term of the employment agreement in the
event that the President’s employment is terminated due to death or disability;
(vii) a payment of 5,000,000 shares of the Company's common stock in the event
of a change in control of the Company as such term is defined in the employment
agreement; (viii) a severance payment, at the President's election, in the event
that (a) the President is required to relocate as a condition of employment, (b)
there is a substantial change in the President's responsibilities at the
direction of the Company's board of directors, or (c) a change in control of the
Company.
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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
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 December 31, 2008, no outcome has
been determined.
In light
of these occurrences and due in part to the apparent participation of its former
Chief Financial Officer in this scheme, the Company determined that the design
and operation of its disclosure controls and procedures, as defined in Exchange
Act Rule 13a-15(f) have not been effective to ensure that information required
to be disclosed in its Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to them to allow timely decisions regarding required
disclosure. The Company is currently reviewing and revising its
controls and procedures to increase the effectiveness of its disclosure controls
and procedures.
In or
about May 2004, National City Bank of Kentucky commenced an action in Boyd
County Court, Kentucky against the Company’s indirect wholly owned subsidiary,
Gwenco, Inc., and a former director of the Company for breach of various
promissory notes issued by Gwenco. Duke Energy Merchants and First
Sentry Bank were joined in the action. National City Bank and Duke
Energy are collectively seeking approximately $1,100,000 in principal as well as
interests, fees, and costs. National City Bank has obtained judgment
in that action in the amount of approximately $340,000, and Duke Energy has
obtained judgment in the amount of approximately $670,000 as well.
In March,
2006, National City Bank commenced an action commenced an action in Pike County
Court, Kentucky against the Company, Gwenco, Inc., and Quest Energy, Ltd.
seeking to be adjudged a lien on certain real and personal property of Gwenco
pursuant to the aforementioned judgment and that said real and personal property
be sold to satisfy the aforesaid lien, and that the liens of National City Bank
attach to the proceeds of the sale. The Company intends to
defend this action while continuing negotiations with National City
Bank. On July 19, 2006, National City Bank of Kentucky sold its
right, title, and interest in and to various judgments, judgment liens, security
interests, and lines of credit, all of which are based on the Gwenco notes
issued to National City Bank of Kentucky, to a third party
investor. The third party investor has agreed to forbear on further
collection, enforcement, and foreclosure with respect to this indebtedness until
further notice.
On May
11, 2005, the former director of the Company, who is also the former stockholder
of Gwenco, filed a third party complaint in this action against the Company and
its subsidiary, Taylor Mining, seeking control of the mines leased by Gwenco
and/or damages for fraud in the inducement of the Gwenco purchase
agreement. On July 27, 2006, the Company settled the third party
complaint by the former owner of Gwenco. As part of the settlement,
Gwenco received mining permit renewal and transfer documentation, which Gwenco
is required to obtain in order to recommence mining operations at its Pond Creek
mine at Slater’s Branch, Kentucky. Further, the former Gwenco owner
agreed to provide all reasonable cooperation in recommencing mining operations
at the Slater’s Branch mine. The parties also agreed to terminate all
remaining rights, duties, and obligations under the original stock purchase
agreement entered into in connection with the acquisition of Gwenco by the
Company. The Company made a one-time cash payment of $75,000 and
issued 350,000 shares of the Company’s common stock, subject to a lock-up/leak
out agreement, to the former owner of Gwenco, upon conversion of his Series B
Preferred Stock, the terms of which were amended under the settlement
agreement. The Company also granted the former owner of Gwenco a
sliding scale royalty on coal sales. The Company also assumed two
promissory notes made by the former owner of Gwenco in the aggregate principal
amount of $290,561. The notes are in default. The parties
mutually dismissed their respective counter-claims against each other in the
civil action pending in Boyd County Court, Kentucky.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
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 June 30, 2009, the Company
remains in default.
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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
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 carry a 17% interest
rate per annum and matured on July 31, 2008.
On July
11, 2009, Gwenco and the lender under the Total Facility extended the maturity
date on the Total Facility to the earliest of (i) December 31, 2010, (ii) the
date of confirmation of a plan of reorganization or liquidation in the
Bankruptcy Case; (iii) the date of closing of a sale of all or substantially all
of Gwenco’s assets pursuant to the Bankruptcy Code; or (iv) the approval of a
disclosure statement in respect of a plan of reorganization or liquidation not
supported by the lender. (See
Note
16
.)
In the
second quarter of 2009, Gwenco commenced an adversary proceeding against two of
the former owners of Gwenco relating to the former owners’ claims against
Gwenco. One of the claims is based upon the $229,130 default judgment
described herein, and both claims are derived from accrued royalties owed to the
former owners under a 1990 stock purchase agreement. In the adversary
proceeding, Gwenco contends that the amounts of the claims that should be
allowed are substantially lower than the claims presented by the former
owners. In addition, Gwenco contends that the default judgment was
obtained without proper service of process and is void.
On June
30, 2009, Gwenco entered into a settlement agreement in connection with the
adversary proceeding with one of the former owners, pursuant to which the
parties agreed that the former owner would have an allowed unsecured claim of
$161,824, plus interest in the amount of $40,000, for a total of $201,824, to be
paid along with the other allowed unsecured claims under Gwenco’s Chapter 11
plan of reorganization. The former owner has the right to convert up
to $40,000 of the claim into the Company’s common stock at a conversion price of
eighty five percent (85%) of the average of the five (5) per share market values
immediately preceding a conversion date, with a minimum conversion price of the
par value of the Company’s common stock. On July 21, 2009, the Court
approved the settlement agreement.
On July
1, 2009, Gwenco entered into a settlement agreement in connection with the
adversary proceeding with the last former owner of Gwenco (and the holder of the
$229,130 judgment), pursuant to which the parties agreed that the former owner
would have an allowed unsecured claim of $92,238, plus interest in the amount of
$25,000, for a total of $117,238, to be paid along with the other allowed
unsecured claims under Gwenco’s Chapter 11 plan of
reorganization. The former owner has the right to convert up to
$40,000 of the claim into the Company’s common stock at a conversion price of
eighty five percent (85%) of the average of the five (5) per share market values
immediately preceding a conversion date, with a minimum conversion price of the
par value of the Company’s common stock. On July 21, 2009, the Court
approved the settlement agreement. (See
Note
16
.)
As of
June 30, 2009, Gwenco had assets of $5,570,449, which included all of the
mineral rights of the Company valued at $5,200,117 and liabilities (other than
liabilities that have been guaranteed by the Company or another of its
wholly-owned subsidiaries) of $7,447,158. Of these liabilities,
$3,443,438 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 June
30, 2009. 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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
The
following is the consolidating balance sheet of the Company at June 30, 2009,
which includes Gwenco, Inc. and the Company and its other
subsidiaries:
|
QUEST
MINERALS & MINING CORP.
|
|
|
|
CONSOLIDATING
BALANCE SHEET
|
|
JUNE
30, 2009
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QUEST
&SUB
|
|
|
GWENCO
|
|
|
ADJUSTMENTS
|
|
|
CONSOLIDATED
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
37
|
|
|
|
-
|
|
|
$
|
|
|
|
$
|
37
|
|
|
Total
current assets
|
|
|
37
|
|
|
|
-
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
Mineral Reserves, net
|
|
|
-
|
|
|
|
5,200,117
|
|
|
|
|
|
|
|
5,200,117
|
|
|
Mine
Development, net
|
|
|
-
|
|
|
|
169,807
|
|
|
|
|
|
|
|
169,807
|
|
|
Equipment,
net
|
|
|
-
|
|
|
|
151,227
|
|
|
|
|
|
|
|
151,227
|
|
|
Deposits
|
|
|
-
|
|
|
|
48,358
|
|
|
|
|
|
|
|
48,358
|
|
|
DIP
Cash, restricted
|
|
|
|
|
|
|
940
|
|
|
|
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
37
|
|
|
$
|
5,570,449
|
|
|
$
|
-
|
|
|
$
|
5,570,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND DEFICIENCY IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,374,449
|
|
|
$
|
1,246,424
|
|
|
$
|
|
|
|
$
|
3,620,873
|
|
|
Loans
payable-current portion, net
|
|
|
1,133,998
|
|
|
|
229,130
|
|
|
|
|
|
|
|
1,363,128
|
|
|
Bank
loans
|
|
|
-
|
|
|
|
1,017,525
|
|
|
|
|
|
|
|
1,017,525
|
|
|
Related
party loans
|
|
|
604,964
|
|
|
|
-
|
|
|
|
|
|
|
|
604,964
|
|
|
DIP
Financing
|
|
|
-
|
|
|
|
1,298,543
|
|
|
|
|
|
|
|
1,298,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
4,113,411
|
|
|
|
3,791,622
|
|
|
|
|
|
|
|
7,905,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
-
|
|
|
|
3,443,438
|
|
|
|
(3,443,438
|
)
|
|
|
-
|
|
|
Loans
payable- long term portion, net
|
|
|
1,661,942
|
|
|
|
-
|
|
|
|
|
|
|
|
1,661,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
5,775,353
|
|
|
|
7,235,060
|
|
|
|
(3,443,438
|
)
|
|
|
9,566,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficiency
in Stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.001, 25,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERIES
A - issued and outstanding 25,526 shares
|
|
|
26
|
|
|
|
-
|
|
|
|
|
|
|
|
26
|
|
|
SERIES
B - issued and outstanding 48,284 shares
|
|
|
-
|
|
|
|
48
|
|
|
|
|
|
|
|
48
|
|
|
SERIES
C - issued and outstanding 260,000 shares
|
|
|
260
|
|
|
|
-
|
|
|
|
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001, 2,500,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued
and outstanding 9,899,453 shares
|
|
|
9,900
|
|
|
|
4,500
|
|
|
|
(4,500
|
)
|
|
|
9,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
held in escrow
|
|
|
(587,500
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(587,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock to be issued
|
|
|
5,648
|
|
|
|
-
|
|
|
|
|
|
|
|
5,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
capital
|
|
|
61,943,573
|
|
|
|
2,557,049
|
|
|
|
|
|
|
|
64,500,622
|
|
|
Accumulated
Deficit
|
|
|
(66,935,125
|
)
|
|
|
(4,438,306
|
)
|
|
|
3,447,938
|
|
|
|
(67,925,493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deficiency in Stockholders' Equity
|
|
|
(5,563,218
|
)
|
|
|
(1,876,709
|
)
|
|
|
3,443,438
|
|
|
|
(3,996,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
|
|
$
|
212,135
|
|
|
$
|
5,358,351
|
|
|
$
|
-
|
|
|
$
|
5,570,486
|
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
In the
fourth quarter of 2008, a former attorney for the Company commenced an action
alleging breach of contract for unpaid legal fees. The Company has
denied the allegations and is actively defending the
matter. Furthermore, the Company has filed a counterclaim against the
attorney alleging legal malpractice in connection with the attorney’s
representation of the Company in several matters. The matter is
currently pending.
In
October 2008, the Company received a Wells notice (the “Notice”) from the staff
of the Salt Lake Regional Office of the Securities and Exchange Commission (the
“Commission”) stating that they are recommending an enforcement action be filed
against the Company based on the Company’s financial statements and other
information contained in reports filed with the Commission for the period 2004
and thereafter. The Notice states that the Commission anticipates
alleging that we have violated Sections 10(b), 13(a) and 13(b)(2) of the
Securities Exchange Act of 1934, as amended and Rules 10b-5, 12b-20, 13a-1 and
13a-13 thereunder. The Company contends that the Company did not
commit any wrongdoings or the violations referred to in the
Notice. The Company cannot predict whether the Commission will follow
the recommendations of the staff and file suit against the
Company. If any enforcement proceeding is instituted by the
Commission, and intends to vigorously defend itself against the Commission’s
claims.
The
Company believes that it may incur significant costs and expenses in connection
with this investigation. There can be no assurance that litigation
asserting such claims will not be initiated, or that the Company would prevail
in any such litigation.
The
Company is unable to predict the extent of its ultimate liability with respect
to any and all future securities, bankruptcy, or other litigation
matters. The costs and other effects of any future litigation,
bankruptcy proceedings, government investigations, legal and administrative
cases and proceedings, settlements, judgments and investigations, claims and
changes in these matters could have a material adverse effect on the Company’s
financial condition and operating results.
The
Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse
decisions or settlements may occur, the Company believes that the final
disposition of such matters should not have a material adverse effect on its
financial position, results of operations, or liquidity.
|
NOTE
16 -
|
SUBSEQUENT
EVENTS
|
On July
1, 2009, Gwenco entered into a settlement agreement with the last former owner
of Gwenco (and the holder of the $229,130 judgment), pursuant to which the
parties agreed that the former owner would have an allowed unsecured claim of
$92,238, plus interest in the amount of $25,000, for a total of $117,238, to be
paid along with the other allowed unsecured claims under Gwenco’s Chapter 11
plan of reorganization. The former owner has the right to convert up
to $40,000 of the claim into the Company’s common stock at a conversion price of
eighty five percent (85%) of the average of the five (5) per share market values
immediately preceding a conversion date, with a minimum conversion price of the
par value of the Company’s common stock. On July 21, 2009, the Court
approved the settlement agreement.
On July
11, 2009, the Company and Gwenco entered into a settlement and release agreement
with the Company’s largest lender to resolve various disputes that had arisen
between the Company and the lender. Pursuant to the settlement
agreement, the lender waived certain defaults under various debt
obligations. In addition, Gwenco and the lender under the
Debtor-in-Possession Total Facility extended the maturity date on the Total
Facility to the earliest of (i) December 31, 2010, (ii) the date of confirmation
of a plan of reorganization or liquidation in the Bankruptcy Case; (iii) the
date of closing of a sale of all or substantially all of Gwenco’s assets
pursuant to the Bankruptcy Code; or (iv) the approval of a disclosure statement
in respect of a plan of reorganization or liquidation not supported by the
lender. In exchange for this consideration, Quest issued the lender a
new convertible promissory note in the aggregate principal amount of
$1,000,000. The note is due July 11, 2011 and bears interest at an
annual interest rate of six percent (6%). The new note is convertible
into shares of the Company’s common stock at a conversion price of $0.001 per
share, subject to adjustment.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
On August
4, 2009, the Company effectuated a 1 to 100 reverse stock split resulting in a
1,111,715,818 reduction of shares from 1,122,945,271 common shares outstanding
to 11,229,453 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 was changed to
QMIN.PK. All references to the issuance of warrants have been
retroactively adjusted to account for this subsequent event.
|
NOTE
17 -
|
RESTATEMENT
OF PREVIOUSLY ISSUED FINANCIAL
STATEMENTS
|
The
Company’s previously issued financial statements have been restated as a result
of an internal review of its previously issued financial statements, which
review was prompted by the Company’s receipt of a Wells Notice from the United
States Securities and Exchange Commission. After review of the
inquiry and investigation and further analysis, the Company determined that it
had made several errors in the application of generally accepted accounting
principles relating to its accounting treatment in connection with convertible
debt and warrant financing transactions. These errors include the
following:
|
|
·
|
The
Company did not properly evaluate the fair value of the warrants and
beneficial conversion features associated with these financing
transactions;
|
|
|
·
|
The
Company did not properly account for the fair value of the warrants and
beneficial conversion features associated with these financing
transactions;
|
|
|
·
|
In
certain cases, the Company improperly recorded a derivative liability in
connection with these transactions;
|
|
|
·
|
In
those cases where the Company did properly record a derivative liability
in connection with a financing or a restructuring of a prior financing,
the Company did not properly calculate the derivative liability associated
therewith; and
|
|
|
·
|
In
certain cases, the Company did not properly account for the conversion of
the convertible notes and convertible preferred stock and the exercise of
the warrants.
|
The
Company also believes such restatements reflect the correction of any errors and
omissions of material disclosures in the financial statements in accordance with
SFAS 154,
Accounting Changes
and Error Corrections (as amended)
.
The
following are explanations of the restatement adjustments and presentation of
affected accounts in the consolidated balance sheets and statements of
operations as previously reported and restated:
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
June
30, 2008 Statement of Operations
As a
result of the restatements, the following changes were made:
For
the Three Months Ended June 30, 2008
Production
costs increased by $4,245 for the three months ended June 30, 2008, from $27,771
to $32,016 as a result of reclassification of expenditures relating to mine
operations.
Selling,
general, and administrative expenses decreased by $148,041 for the three months
ended June 30, 2008, from $519,864 to $371,823, due to the reversal of loan
settlement expenses that the Company previously recorded in connection with
conversion of convertible notes and convertible preferred stock.
Gain on
derivatives decreased by $1,087,062 for the three months ended June 30, 2008,
from $1,087,062 to $0, due to recalculation of derivative liability and due to
the reclassification of derivative liability to permanent equity.
Interest
expense increased by $50,255 for the three months ended June 30, 2008, from
$64,901 to $115,156, due to the recordation of amortization of beneficial
conversion discounts not previously recognized as well as reclassification of
beneficial conversion expense as interest expense.
Beneficial
conversion expense of $3,300,201 was reclassified as note discount.
As a
result of the foregoing, restated basic and diluted loss per common share
decreased by $1.24 for the three months ended June 30, 2008, from $1.34 per
share to a loss of $0.10 per share, due to the decrease in net loss of the
Company.
For
the Six Months Ended June 30, 2008
Production
costs increased by $13,819 for the six months ended June 30, 2008, from $27,771
to $41,590 as a result of reclassification of expenditures relating to mine
operations.
Selling,
general, and administrative expenses decreased by $298,011 for the six months
ended June 30, 2008, from $1,022,744 to $724,733, due to the reversal of loan
settlement expenses that the Company previously recorded in connection with
conversion of convertible notes and convertible preferred stock.
Gain on
derivatives decreased by $1,967,516 for the six months ended June 30, 2008, from
$1,967,516 to $0, due to recalculation of derivative liability and due to the
reclassification of derivative liability to permanent equity.
Interest
expense increased by $109,648 for the six months ended June 30, 2008, from
$152,877 to $262,525, due to the recordation of amortization of beneficial
conversion discounts not previously recognized as well as reclassification of
beneficial conversion expense as interest expense.
Beneficial
conversion expense of $3,523,255 was reclassified as note discount.
As a
result of the foregoing, restated basic and diluted loss per common share
decreased by $1.78 for the six months ended June 30, 2008, from $2.16 per share
to a loss of $0.38 per share, due to the increase in net loss of the
Company.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
June
30, 2008 Balance Sheet
Prepaid
expense increased by $10,571, from $0 to $10,571 as a result of insurance
expense allocations.
Mine
development, net, increased by $283,011, from $0 to $283,011, as a result of the
capitalization of certain costs of mine rehabilitation.
Deferred
debt issue cost, net, increased by $2,741, from $0 to $2,741, as a result of
capitalization of deferred debt issue costs.
As a
result, total assets increased by $296,323, from $5,387,658 to
$5,683,981.
Accounts
payable and accrued expenses decreased by $106,297, from $3,010,916 to
$2,904,619.
The
current portion of notes payable, net of discount, decreased by $844,435, from
$3,002,849 to $2,158,414, due to recognition of note discounts previously not
recognized and due to the reclassification of $835,000 of loans payable from a
current to a long-term liability.
DIP
financing payable of $524,586 was reclassified from a long-term to a current
liability.
As a
result of these adjustments, current liabilities decreased by $426,146, from
$7,689,314 to $7,263,168.
Loans
payable of $835,000 was reclassified from a current to a long-term
liability.
Derivative
liability of $873,687 was reclassified as paid-in capital as a result of
reclassification of the liability as permanent equity in accordance with SFAS
133 and EITF 00-19.
As result
of all of these adjustments, total liabilities were decreased by $989,419, from
$9,087,587 to $8,098,168.
Paid-in
capital increased by $3,748,224, from $57,735,084 to $61,483,308, to reflect
reclassification of derivative liability as permanent equity, the recordation of
note discounts, and prior year adjustments.
Accumulated
deficit increased by $1,730,415, from $61,593,182 to $63,323,597, to reflect the
restatements to the statements of operations in the first and second quarters of
2008, the year ended 2007 and prior years.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 AND 2008
(Unaudited)
Adjustments
The
consolidated financial statements as of June 30, 2008 and for the three and six
month periods then ended, and the notes thereto, have been restated to include
the items described above. The following financial statement line
items were impacted:
Consolidated
Balance Sheet
|
|
|
As
Previously Reported
June
30, 2008
|
|
|
Restated
June
30, 2008
|
|
|
Prepaid
expense
|
|
$
|
-
|
|
|
$
|
10,571
|
|
|
Mine
development, net
|
|
|
-
|
|
|
|
283,011
|
|
|
Deferred
debt issue cost, net
|
|
|
-
|
|
|
|
2,741
|
|
|
Total
assets
|
|
|
5,387,658
|
|
|
|
5,683,981
|
|
|
Accounts
payable and accrued expenses
|
|
|
3,010,916
|
|
|
|
2,904,619
|
|
|
Loans
payable-current portion, net
|
|
|
3,002,849
|
|
|
|
2,158,414
|
|
|
Derivative
liability
|
|
|
873,687
|
|
|
|
-
|
|
|
Loans
payable-long term portion, net
|
|
|
-
|
|
|
|
835,000
|
|
|
Total
liabilities
|
|
|
9,087,587
|
|
|
|
8,098,168
|
|
|
Paid-in
capital
|
|
|
57,735,084
|
|
|
|
61,483,308
|
|
|
Accumulated
deficit
|
|
|
(61,593,182
|
)
|
|
|
(63,323,597
|
)
|
|
Total
stockholders’ equity (deficit)
|
|
|
(3,699,929
|
)
|
|
|
(2,414,187
|
)
|
Consolidated
Statements of Operations
|
|
|
As
Previously Reported
Three
Months Ended
June
30, 2008
|
|
|
Restated
Three Months Ended
June
30, 2008
|
|
|
Production
costs
|
|
|
27,771
|
|
|
|
32,016
|
|
|
Selling,
general, and administrative
|
|
|
519,864
|
|
|
|
371,823
|
|
|
Total
operating expenses
|
|
|
3,939,255
|
|
|
|
398,341
|
|
|
Loss
from operations
|
|
|
(3,880,168
|
)
|
|
|
(371,270
|
)
|
|
Gain
on derivatives
|
|
|
1,087,062
|
|
|
|
--
|
|
|
Interest
|
|
|
64,901
|
|
|
|
115,156
|
|
|
Beneficial
conversion expense
|
|
|
3,300,201
|
|
|
|
--
|
|
|
Net
income (loss)
|
|
|
(5,129,895
|
)
|
|
|
(358,048
|
)
|
|
Basic
and diluted (loss) per common share
|
|
|
(1.34
|
)
|
|
|
(0.0934
|
)
|
|
|
|
As
Previously Reported
Six
Months Ended
June
30, 2008
|
|
|
Restated
Six
Months Ended
June
30, 2008
|
|
|
Production
costs
|
|
|
27,771
|
|
|
|
41,590
|
|
|
Selling,
general, and administrative
|
|
|
1,022,744
|
|
|
|
724,733
|
|
|
Total
operating expenses
|
|
|
4,778,872
|
|
|
|
776,958
|
|
|
Loss
from operations
|
|
|
(4,719,785
|
)
|
|
|
(759,461
|
)
|
|
Gain
on derivatives
|
|
|
1,967,516
|
|
|
|
-
|
|
|
Interest
|
|
|
152,877
|
|
|
|
262,525
|
|
|
Beneficial
conversion expense
|
|
|
3,523,255
|
|
|
|
--
|
|
|
Net
income (loss)
|
|
|
(5,089,058
|
)
|
|
|
(893,608
|
)
|
|
Basic
and diluted (loss) per common share
|
|
|
(2.16
|
)
|
|
|
(0.3787
|
)
|