SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended
September 30, 2009
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition period from
_________________ to _________________
Commission
File No.: 000-30291
|
|
QUEST
MINERALS & MINING CORP.
(Exact
name of registrant as specified in its charter)
Utah
|
87-0429950
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
18B
East 5
th
Street
Paterson,
NJ 07524
(Address of principal
executive offices)
Issuer’s
telephone number:
(973) 684-0075
Check
whether the registrant filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filter
¨
|
|
Accelerated
filter
¨
|
|
|
|
Non-accelerated
filter
¨
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes
¨
No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS
As of
November 18, 2009,
225,726,363
shares of our common stock were outstanding.
Transitional
Small Business Disclosure Format: Yes
¨
No
x
PART
1: FINANCIAL INFORMATION
ITEM
1 – FINANCIAL STATEMENTS
CONDENSED
CONSOLIDATED BALANCE SHEET
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
251
|
|
|
$
|
31,231
|
|
|
$
|
13,439
|
|
Prepaid
expense
|
|
|
10,828
|
|
|
|
10,571
|
|
|
|
1,993
|
|
Total
current assets
|
|
|
11,079
|
|
|
|
41,802
|
|
|
|
15,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
Mineral Reserves, net (Notes 2 & 5)
|
|
|
5,196,577
|
|
|
|
5,206,588
|
|
|
|
5,203,414
|
|
Mine
development, net
|
|
|
141,507
|
|
|
|
254,711
|
|
|
|
226,407
|
|
Equipment,
net (Note 6)
|
|
|
142,205
|
|
|
|
254,085
|
|
|
|
157,271
|
|
Deposits
|
|
|
48,358
|
|
|
|
41,846
|
|
|
|
42,442
|
|
Deferred
debt issue cost, net
|
|
|
—
|
|
|
|
1,208
|
|
|
|
226
|
|
DIP
Cash, Restricted (Note 14)
|
|
|
32,046
|
|
|
|
3,526
|
|
|
|
12,395
|
|
DIP
Receivables, Restricted (Note 14)
|
|
|
122,103
|
|
|
|
9,520
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
5,693,875
|
|
|
$
|
5,813,286
|
|
|
$
|
5,658,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND DEFICIENCY IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses (Note 7)
|
|
$
|
3,919,558
|
|
|
$
|
3,277,032
|
|
|
$
|
3,478,435
|
|
Loans
payable-current portion, net (Note 8)
|
|
|
1,205,268
|
|
|
|
2,112,255
|
|
|
|
2,197,958
|
|
Bank
loans (Note 8)
|
|
|
1,017,525
|
|
|
|
1,017,525
|
|
|
|
1,017,525
|
|
Related
party loans (Note 8)
|
|
|
593,703
|
|
|
|
641,418
|
|
|
|
624,581
|
|
DIP
Financing (Note 8)
|
|
|
1,710,374
|
|
|
|
694,043
|
|
|
|
923,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
8,446,428
|
|
|
|
7,742,273
|
|
|
|
8,241,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
payable-long term portion, net (Note 8)
|
|
|
2,468,566
|
|
|
|
904,486
|
|
|
|
751,342
|
|
Related
party loan (Note 8)
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
11,114,994
|
|
|
|
8,646,759
|
|
|
|
8,992,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 15)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficiency
in Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.001, 25,000,000 shares authorized (Note
10)
|
|
|
|
|
|
|
|
|
|
|
|
|
SERIES
A - issued and outstanding 25,526 shares
|
|
|
26
|
|
|
|
36
|
|
|
|
26
|
|
SERIES
B - issued and outstanding 48,284 shares
|
|
|
48
|
|
|
|
48
|
|
|
|
48
|
|
SERIES
C - issued and outstanding 260,000 shares
|
|
|
260
|
|
|
|
260
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001, 2,500,000,000 shares authorized (Note 11)
issued
and outstanding 59,084,360; 1,068,418 and 2,531,885 shares
as
of September 30, 2009, September 30, 2008 and December 31, 2008,
respectively
|
|
|
59,084
|
|
|
|
1,068
|
|
|
|
2,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock to be issued
|
|
|
5,648
|
|
|
|
5,648
|
|
|
|
5,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
allowance (Note 11)
|
|
|
(587,500
|
)
|
|
|
(587,500
|
)
|
|
|
(587,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
capital
|
|
|
65,383,377
|
|
|
|
63,326,524
|
|
|
|
63,719,525
|
|
Accumulated
Deficit
|
|
|
(70,282,062
|
)
|
|
|
(65,579,557
|
)
|
|
|
(66,474,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deficiency in Stockholders' Equity
|
|
|
(5,421,119
|
)
|
|
|
(2,833,473
|
)
|
|
|
(3,334,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
|
|
$
|
5,693,875
|
|
|
$
|
5,813,286
|
|
|
$
|
5,658,816
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the three months ended
September 30,
|
|
|
For the nine months ended
September 30,
|
|
|
|
|
|
|
RESTATED
|
|
|
|
|
|
RESTATED
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
revenues
|
|
$
|
348,334
|
|
|
$
|
223,305
|
|
|
$
|
678,648
|
|
|
$
|
282,392
|
|
Production
costs
|
|
|
(655,566
|
)
|
|
|
(582,639
|
)
|
|
|
(1,344,334
|
)
|
|
|
(624,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
(307,232
|
)
|
|
|
(359,334
|
)
|
|
|
(665,686
|
)
|
|
|
(341,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
574,981
|
|
|
|
1,500,787
|
|
|
|
1,295,002
|
|
|
|
2,225,520
|
|
Depreciation
and amortization
|
|
|
40,862
|
|
|
|
120,411
|
|
|
|
118,802
|
|
|
|
172,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
615,843
|
|
|
|
1,621,198
|
|
|
|
1,413,804
|
|
|
|
2,398,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Operations
|
|
|
(923,075
|
)
|
|
|
(1,980,532
|
)
|
|
|
(2,079,490
|
)
|
|
|
(2,739,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
settlement and extinguishment costs
|
|
|
(1,200,305
|
)
|
|
|
(78,635
|
)
|
|
|
(1,201,226
|
)
|
|
|
49,743
|
|
Interest,
net
|
|
|
(233,189
|
)
|
|
|
(196,793
|
)
|
|
|
(526,738
|
)
|
|
|
(459,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(2,356,569
|
)
|
|
|
(2,255,960
|
)
|
|
|
(3,807,454
|
)
|
|
|
(3,149,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(2,356,569
|
)
|
|
$
|
(2,255,960
|
)
|
|
$
|
(3,807,454
|
)
|
|
$
|
(3,149,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
diluted (loss) per common share
|
|
$
|
(0.1127
|
)
|
|
$
|
(2.4917
|
)
|
|
$
|
(0.3290
|
)
|
|
$
|
(6.7932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
20,916,424
|
|
|
|
905,402
|
|
|
|
11,571,770
|
|
|
|
463,633
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the nine months ended September, 2009 and 2008
(Unaudited)
|
|
|
|
|
RESTATED
|
|
|
|
2009
|
|
|
2008
|
|
Operating
Activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,807,454
|
)
|
|
$
|
(3,149,568
|
)
|
Adjustments
to reconcile net loss to net cash provided
(used)
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
118,802
|
|
|
|
172,636
|
|
Stock
issued for services
|
|
|
571,348
|
|
|
|
874,900
|
|
Loss
on debt extinguishments-net
|
|
|
1,201,226
|
|
|
|
(49,743
|
)
|
Amortization
of deferred issuance costs
|
|
|
226
|
|
|
|
2,971
|
|
Amortization
of discount on convertible notes
|
|
|
142,022
|
|
|
|
216,282
|
|
Amortization
of royalty costs
|
|
|
12,316
|
|
|
|
—
|
|
Write-off
of equipment
|
|
|
—
|
|
|
|
213,275
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase
in receivables
|
|
|
(120,873
|
)
|
|
|
(9,520
|
)
|
Increase
in prepaid expenses
|
|
|
(8,835
|
)
|
|
|
37,571
|
|
Increase
in accounts payable and accrued expenses
|
|
|
441,123
|
|
|
|
525,492
|
|
Increase
in debt transfers and credits from accrued expenses
|
|
|
543,678
|
|
|
|
47,005
|
|
Net
cash used by operating activities
|
|
|
(906,421
|
)
|
|
|
(1,118,699
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Mine
development
|
|
|
—
|
|
|
|
(339,611
|
)
|
Equipment
purchased
|
|
|
(12,000
|
)
|
|
|
166,388
|
|
Restricted
cash
|
|
|
(19,651
|
)
|
|
|
2,360
|
|
Security
deposits
|
|
|
(5,916
|
)
|
|
|
(1,203
|
)
|
Net
cash used in investing activities
|
|
|
(37,567
|
)
|
|
|
(172,066
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Repayment
of borrowings
|
|
|
(167,069
|
)
|
|
|
(36,000
|
)
|
Proceeds
from DIP Financing
|
|
|
915,372
|
|
|
|
358,279
|
|
Proceeds
from borrowings
|
|
|
182,497
|
|
|
|
995,253
|
|
Net
cash provided by financing activities
|
|
|
930,800
|
|
|
|
1,317,532
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash
|
|
|
(13,188
|
)
|
|
|
26,767
|
|
Cash
at beginning of period
|
|
|
13,439
|
|
|
|
4,464
|
|
Cash
at end of period
|
|
$
|
251
|
|
|
$
|
31,231
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,621
|
|
|
$
|
5,126
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
2,300
|
|
|
$
|
21,450
|
|
|
|
|
|
|
|
|
|
|
Stock
issued during the period for:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
571,348
|
|
|
$
|
874,900
|
|
|
|
|
|
|
|
|
|
|
Conversions
|
|
$
|
705,771
|
|
|
$
|
472,932
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
NOTE
1
– ORGANIZATION
& OPERATIONS
Quest
Minerals & Mining Corp. (“Quest,” the “Registrant,” or the “Company”) was
incorporated in Utah on November 21, 1985. The Company has leasehold
interests in certain properties in Eastern Kentucky, is seeking to re-commence
full coal mining operations on these properties, and is looking to acquire
additional coal properties.
Quest’s
subsidiary, Gwenco, Inc. (“Gwenco”), leases over 700 acres of coal mines, with
approximately 12,999,000 tons of coal in place in six seams. In 2004,
Gwenco had reopened Gwenco’s two former drift mines at Pond Creek and Lower
Cedar Grove, and had begun production at the Pond Creek seam. This
seam of high quality compliance coal is located at Slater’s Branch, South
Williamson, Kentucky.
On March
2, 2007, Gwenco filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the
Eastern District of Kentucky. Management felt this was a necessary
step to further the Company’s financial restructuring initiative and to protect
Gwenco’s assets from claims, debts, judgments, foreclosures, and forfeitures of
those creditors and stakeholders with whom both Quest and Gwenco were unable to
negotiate restructured agreements. 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.
On
September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan of
Reorganization (the “Plan”). Secured and non-priority unsecured
classes of creditors voted to approve the plan, with over 80% of the unsecured
claims in dollar amount voting for the plan, and over 90% of responding lessors
supporting it. The Plan became effective on October 12,
2009. Note 16 shows the effects of the above reorganization as though
it occurred as of the balance sheet date September 30, 2009.
Even
though the Bankruptcy Court has confirmed the Plan, it is still possible that
the Bankruptcy Court could convert Gwenco’s case to Chapter 7 and liquidate all
of Gwenco’s assets if the Court determines that Gwenco is unable to perform
under the Plan. In the case of a Chapter 7 conversion, the Company
would be materially impacted and could lose all of its working assets and have
only unpaid liabilities. In addition, the Company might be forced to
file for protection under Chapter 11 as it is the primary guarantor on a number
of Gwenco’s contracts.
NOTE
2
- SIGNIFICANT
ACCOUNTING POLICIES
General
The
accompanying unaudited condensed 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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
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 three month and nine month periods ended
September 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.
Principles
of Consolidation
The
unaudited condensed 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 three customers who accounted for 49%, 41% and 10%, respectively of
revenues in 2009.
Costs of
the Company’s two major vendors, who provided contract mining and trucking
services, accounted for 73% and 14%, respectively, of the Company’s production
costs for the period ended September 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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
Since the
Company’s continuation as a going concern is dependent upon its ability to
obtain adequate financing (see Note 3), the carrying value of the mineral rights
does not necessarily represent liquidation value if the Company were force to
sell the mineral rights in liquidation in a liquidation proceeding under Chapter
7 of the Bankruptcy Code.
Coal Acquisition Costs
The costs
to obtain coal lease rights are capitalized and amortized primarily by the
units-of-production method over the estimated recoverable
reserves. Amortization occurs either as the Company mines on the
property or as others mine on the property through subleasing
transactions.
Rights to
leased coal lands are often acquired through royalty payments. As
mining occurs on these leases, the accrued royalty is charged to cost of coal
sales.
Mining
Acquisition Costs
The costs
to obtain any interest in third-party mining operations are expensed unless
significantly proven reserves can be established for the entity. At
that point, capitalization would occur.
Mining
Equipment
Mining
equipment is recorded at cost. Expenditures that extend the useful
lives of existing plant and equipment or increase the productivity of the asset
are capitalized. Mining equipment is depreciated principally on the
straight-line method over the estimated useful lives of the assets, which range
from 3 to 15 years.
Deferred
Mine Expense
Costs of
developing new mines or significantly expanding the capacity of existing mines
are capitalized and amortized using the units-of-production method over the
estimated recoverable reserves that are associated with the property being
benefited.
Asset
Impairment
If facts
and circumstances suggest that a long-lived asset may be impaired, the carrying
value is reviewed under the guidance of ASC 360-10, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” If the review indicates
that the value of the asset will not be recoverable, as determined based on
projected undiscounted cash flows related to the asset over its remaining life,
then the carrying value of the asset is reduced to its estimated fair
value.
Revenue
Recognition
Coal
sales revenues are sales to customers of coal produced at the Company’s
operations. The Company recognizes revenue from coal sales at the
time title passes to the customer.
Stock-Based
Compensation
Effective
January 1, 2006, the Company began recording compensation expense associated
with stock options and other forms of equity compensation in accordance with
FASB ASC 718-10 “Stock Compensation”. 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 ASC 718-10, and,
consequently, has not retroactively adjusted results from prior
periods.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
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 September 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 September 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
The FASB
issued ASC 820-10, “Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. ASC 820-10 applies to other accounting
pronouncements that require or permit fair value measurements, but does not
require any new fair value measurements. ASC 820-10 is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years, with the exception of all
non-financial assets and liabilities, which will be effective for years
beginning after November 15, 2008. The Company adopted the required
provisions of ASC 820-10 that became effective in its first quarter of
2008. The adoption of these provisions did not have a material impact
on the Company’s consolidated financial statements. In February 2008,
the FASB issued ASC 820-10-15, “Effective Date of FASB ASC
820-10.” ASC 820-10-15 delays the effective date of ASC 820-10
for nonfinancial assets and nonfinancial liabilities, except for certain items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). In October 2008, the FASB issued
ASC 820-10-35, “Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active.” ASC 820-10-35 applies to financial
assets within the scope of accounting pronouncements that require or permit fair
value measurements in accordance with ASC 820-10. This ASC
clarifies the application of ASC 820-10 in determining the fair values of
assets or liabilities in a market that is not active. In April 2009,
the FASB issued ASC 820-10-65, “Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” ASC 820-10-65 does
not change the definition of fair value as detailed in ASC 820-10, but
provides additional guidance for estimating fair value in accordance with
ASC 820-10 when the volume and level of activity for the asset or liability
have significantly decreased. The provisions of ASC 820-10-65 are
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15,
2009. If early adoption is elected for either ASC 320-10 or ASC
825-10 and ASC 270-10, ASC 820-10-65 must also be adopted
early.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
ASC
820-10
defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820-10
requires that valuation
techniques maximize the use of observable inputs and minimize the use of
unobservable inputs. ASC 820-10 also establishes a fair value
hierarchy, which prioritizes the valuation inputs into three broad
levels.
There are
three general valuation techniques that may be used to measure fair value, as
described below:
|
·
|
Market
approach – Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities. Prices may be indicated by pricing guides, sale
transactions, market trades, or other
sources;
|
|
·
|
Cost
approach – Based on the amount that currently would be required to replace
the service capacity of an asset (replacement cost);
and
|
|
·
|
Income
approach – Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about the future
amounts (includes present value techniques and option-pricing models). Net
present value is an income approach where a stream of expected cash flows
is discounted at an appropriate market interest
rate.
|
Financial
assets and liabilities are valued using either level 1 inputs based on
unadjusted quoted market prices within active markets or using level 2 inputs
based primarily on quoted prices for similar assets or liabilities in active or
inactive markets. For certain debt, fair value is based on present
value techniques using inputs derived principally or corroborated from market
data. Using level 3 inputs using management’s assumptions about the
assumptions market participants would utilize in pricing the asset or
liability. In the Company’s case, this entailed assumptions used in
pricing models for note discounts. Valuation techniques utilized to
determine fair value are consistently applied.
The
Company’s notes payable are the only items that are subject to ASC 820-10
as of September 30, 2009
as follows:
|
|
|
|
|
Notes
Payable (level 1)
|
|
$
|
4,592,959
|
|
Convertible
Notes Payable (level 1)
|
|
|
2,431,190
|
|
Convertible
Notes Payable (level 3)
|
|
|
171,287
|
|
Earnings
(loss) per share
The
Company adopted ASC 260-10 and the guidance of SEC Staff Accounting
Bulletin (“SAB”) No. 98, 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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
Stock Split
All
references to common stock and per share data have been retroactively restated
to the earliest period presented to account for the 1 for 10 reverse stock split
effectuated on November 4, 2008. See Note 11 for
details.
All
references to common stock and per share data have been retroactively restated
once more to the earliest period presented to account for the 1 for 100 reverse
stock split effectuated on August 4, 2009. See Note 11 for
details.
Recently
Adopted Accounting Principles
In
September 2009, the FASB published FASB Accounting Standards Update No. 2009-12,
Fair Value Measurements and Disclosures (Topic 820)—Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent). This update amends Subtopic 820-10, Fair Value
Measurements and Disclosures—Overall, to permit a reporting entity to measure
the fair value of certain investments on the basis of the net asset value per
share of the investment (or its equivalent). This update also
requires new disclosures, by major category of investments about the attributes
of investments within the scope of this amendment to the
Codification. The guidance in this update is effective for interim
and annual periods ending after December 15, 2009. Early application
is permitted. The adoption of this update will not have a material
impact on the Company’s consolidated financial statements.
In August
2009, FASB Accounting Standards Update 2009-05 included amendments to Subtopic
820-10, Fair Value Measurements and Disclosures—Overall, for the fair value
measurement of liabilities and provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the techniques provided for in this update. This update also
clarifies that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of a
liability and that both a quoted price in an active market for the identical
liability at the measurement date and the quoted price for the identical
liability when traded as an asset in an active market when no adjustments to the
quoted price of the asset are required are Level 1 fair value
measurements. The adoption of this update did not have a material
impact on the Company’s consolidated financial statements.
In July
2009, the FASB issued ASC 105-10, “Generally Accepted Accounting
Principles.” ASC 105-10 established the FASB Accounting Standards
Codification as the single source of authoritative U.S. generally accepted
accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by
nongovernmental entities. ASC 105-10 will supersede all existing
non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in ASC 105-10 will
become nonauthoritative. Following ASC 105-10, the FASB will not
issue new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts. Instead, the FASB will issue Accounting
Standards Updates, which will serve only to: (a) update the Codification; (b)
provide background information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification. ASC 105-10 and the
Codification are effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of ASC
105-10 did not have a material impact on the Company’s consolidated financial
statements.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
The FASB
has issued ASC 855-10, “Subsequent Events.” ASC 855-10 established general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. Specifically, ASC 855-10 provides (a) the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements; (b) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements; and (c) the disclosures that an entity should
make about events or transactions that occurred after the balance sheet
date. ASC 855-10 is effective for interim or annual financial periods
ending after June 15, 2009, and shall be applied prospectively. The
adoption of this ASC did not have a material impact on the Company’s
consolidated financial statements.
The FASB
has issued ASC 825-10-65, “Interim Disclosures about Fair Value of Financial
Instruments.” ASC 825-10-65 amends ASC 825-10-50, Disclosures About
Fair Value of Financial Instrument, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. ASC 825-10-65 also amends
ASC 270-10, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. ASC
825-10-65 is effective for interim reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. ASC
825-10-65 does not require disclosures for earlier periods presented for
comparative purposes at initial adoption. In periods after initial adoption, ASC
825-10-65 requires comparative disclosures only for periods ending after initial
adoption. The adoption of this ASC did not have a material impact on
the Company’s consolidated financial statements.
The FASB
has issued ASC 805-10, “Accounting for Assets Acquired and Liabilities assumed
in a Business Combination That Arise from Contingencies —an amendment of FASB
Statement No. 141 (Revised December 2007), Business Combinations.” ASC
805-10 addresses application issues raised by preparers, auditors, and members
of the legal profession on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. ASC 805-10 is
effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. ASC 805-10 will have an impact on the Company’s accounting for
any future acquisitions and its consolidated financial statements.
The FASB
has issued ASC 350-10, “Determination of the Useful Life of Intangible
Assets.” ASC 350-10 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under ASC 350-10, “Goodwill and Other Intangible
Assets.” ASC No. 350-10 is effective for fiscal years beginning after
December 15, 2008. The adoption of this ASC did not have a material
impact on the Company’s consolidated financial statements.
The
FASB has issued ASC 815-10, “Disclosures about Derivative Instruments and
Hedging Activities — an amendment of FASB Statement
No. 133.” ASC 815-10 requires enhanced disclosures regarding
derivatives and hedging activities, including: (a) the manner in which an
entity uses derivative instruments; (b) the manner in which derivative
instruments and related hedged items are accounted for under Accounting
Standards Codification 815-10, “Accounting for Derivative Instruments and
Hedging Activities;” and (c) the effect of derivative instruments and related
hedged items on an entity’s financial position, financial performance, and cash
flows. ASC 815-10 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15,
2008. The Company adopted ASC 815-10 effective January 1, 2009
and the adoption had no material impact on the Company’s consolidated financial
statements and disclosures.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
The FASB
has issued ASC 810-10-65-1, “
Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51
” (“SFAS
No. 160”). In ASC 810-10-65-1, the FASB established accounting and
reporting standards that require non-controlling interests to be reported as a
component of equity, changes in a parent’s ownership interest while the parent
retains its controlling interest to be accounted for as equity transactions, and
any retained non-controlling equity investment upon the deconsolidation of a
subsidiary to be initially measured at fair value. ASC 810-10-65-1 is
effective for annual periods beginning on or after December 15,
2008. Retroactive application of ASC810-10-65-1 is
prohibited. The Company adopted ASC
810-10-65-1 effective January 1, 2009 and the adoption had
no material impact on the Company’s consolidated financial statements and
disclosures.
The FASB
has issued ASC 808-10, “
Accounting for Collaborative
Arrangements.
” ASC 808-10 prescribes the accounting for
parties of a collaborative arrangement to present the results of activities for
the party acting as the principal on a gross basis and report any payments
received from (made to) other collaborators based on other applicable GAAP or,
in the absence of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational, and consistently applied
accounting policy election. Further, ASC 808-10 clarified the
determination of whether transactions within a collaborative arrangement are
part of a vendor-customer (or analogous) relationship subject to Issue No. 01-9,
“Accounting for Consideration Given by a Vendor to a Customer.” ASC
808-10 is effective for collaborative arrangements that exist on January 1,
2009 and application is retrospective. The Company adopted ASC 808-10
effective January 1, 2009 and the adoption had no material effect on the
Company’s financial position or results of operations.
The FASB
issued ASC 815-40-15, “Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entity’s Own Stock.” ASC 815-40-15 provides that an
entity should use a two-step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument’s contingent exercise and settlement
provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. ASC 815-40-15 is effective for fiscal
years beginning after December 15, 2008. The Company adopted ASC
815-40-15 effective January 1, 2009, and the adoption had no material
effect on the Company’s financial position or results of
operations.
NOTE
3 - GOING
CONCERN
The
accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. The Company incurred net operating losses of $2,079,490 and
$2,739,993 for the periods ended September 30, 2009 and 2008 and had a working
capital deficit (current assets less current liabilities) of $8,435,349 and
$8,226,110 at September 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
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.
On
September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan of
Reorganization (the “Plan”). The Plan became effective on October 12,
2009. See Note 16 for the terms and effects of the Plan.
Even
though the Bankruptcy Court has confirmed the Plan, it is still possible that
the Bankruptcy Court could convert Gwenco’s case to Chapter 7 and liquidate all
of Gwenco’s assets if the Court determines that Gwenco is unable to perform
under the Plan. In the case of a Chapter 7 conversion, the Company
would be materially impacted and could lose all of its working assets and have
only unpaid liabilities. In 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.
NOTE
4
- LEASEHOLD
INTERESTS
The
Company maintains a number of coal leases with minimum lease or royalty payments
that vary by lease as defined in the separate
agreements. Several of the landowners have contended that
the Company is in default under certain of these leases and that said leases are
terminated. The Company disputes these contentions.
Certain
former owners of the Company’s indirect, wholly-owned subsidiary, Gwenco, Inc.
(“Gwenco”) commenced an action in the Circuit Court of Pike County against
Gwenco for damages resulting from an alleged failure to pay past royalties and
other amounts allegedly due. On May 19, 2006, the former owners
obtained a default judgment in this action in the amount of
$687,391. Foreclosure on the judgment 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 15 and
16.) On June 20, 2007, Gwenco entered into a settlement agreement
with one of the former owners (and the holder of the $458,260 judgment),
pursuant to which the former owner agreed to accept payment of $150,000 in
exchange for a release of the judgment amount of $458,260.
On July
1, 2009, Gwenco entered into a settlement agreement with another former owner
(and the holder of the $229,130 judgment), pursuant to which the parties agreed
that the former owner would have an allowed unsecured claim of $92,238, plus
interest in the amount of $25,000, for a total of $117,238, to be paid along
with the other allowed unsecured claims under Gwenco’s Chapter 11
Plan. The former owner has the right to convert up to $40,000 of the
claim into the Company’s common stock at a conversion price of eighty five
percent (85%) of the average of the five (5) per share market values immediately
preceding a conversion date, with a minimum conversion price of the par value of
the Company’s common stock. On July 21, 2009, the Court approved the
settlement agreement. (See Notes 15 and 16.)
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
On June
30, 2009, Gwenco entered into a settlement agreement with last former owner of
Gwenco, pursuant to which the parties agreed that the former owner would have an
allowed unsecured claim of $161,824, plus interest in the amount of $40,000, for
a total of $201,824, to be paid along with the other allowed unsecured claims
under Gwenco’s Chapter 11 Plan. The former owner has the right to
convert up to $40,000 of the claim into the Company’s common stock at a
conversion price of eighty five percent (85%) of the average of the five (5) per
share market values immediately preceding a conversion date, with a minimum
conversion price of the par value of the Company’s common stock. On
July 21, 2009, the Court approved the settlement agreement.
As of
September 30, 2009, Gwenco owed approximately $257,526 in lease and/or royalty
payments. Unless otherwise provided in the Plan, these accrued
amounts are due on or before October 12, 2012.
NOTE
5
- LEASED
MINERAL RESERVES
All of
the Company’s existing reserves remain in Gwenco, Inc., a wholly owned
subsidiary. The total reserves are a combination of several coal
seams throughout the spectrum of leased properties.
At
September 30, 2009, the leased mineral reserves, valued at $5,196,577, net
consisted of the following:
|
|
Proven Reserves
|
|
Seams
|
|
Tons
|
|
|
|
|
|
|
Winifrede
|
|
|
214,650
|
|
|
|
|
|
|
Taylor
|
|
|
1,783,500
|
|
|
|
|
|
|
Cedar
Grove
|
|
|
3,702,600
|
|
|
|
|
|
|
Pond
Creek
|
|
|
4,074,598
|
|
|
|
|
|
|
Total
Reserves
|
|
|
9,775,348
|
|
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 ASC 360-10, management has reviewed the
recoverable value of the Company’s mineral reserves and has determined that no
impairment loss has occurred as of September 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
NOTE
6
- EQUIPMENT
Equipment
consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
equipment
|
|
$
|
344,435
|
|
|
$
|
332,435
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
(202,230
|
)
|
|
|
(175,164
|
)
|
|
|
|
|
|
|
|
|
|
Equipment
- net
|
|
$
|
142,205
|
|
|
$
|
157,271
|
|
All of
the equipment currently in use by the Company is owned by the Company’s
wholly-owned subsidiary, Gwenco, Inc.
The
Company depreciates its mining equipment over a 5 year period, while the office
equipment is depreciated over a 7 year period. In both cases, the
straight-line method is used. Depending on the type of equipment
needed at any given point in production, the Company will sell existing
equipment and replace it with new or used machinery, which can reflect a
fluctuation in the asset valuation. Depreciation charged for the three and nine
month periods ended September 30, 2009 and 2008 were $9,022; $27,065 and
$34,026, $85,800 respectively.
NOTE
7 - ACCOUNTS
PAYABLE & ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following:
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,069,149
|
|
|
$
|
710,027
|
|
|
|
|
|
|
|
|
|
|
Accrued
royalties payable-operating (a)
|
|
|
257,526
|
|
|
|
354,126
|
|
|
|
|
|
|
|
|
|
|
Accrued
bank claim (b)
|
|
|
650,000
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
Accrued
taxes
|
|
|
87,315
|
|
|
|
87,315
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest
|
|
|
1,032,846
|
|
|
|
816,944
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses (c)
|
|
|
822,722
|
|
|
|
860,023
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,919,558
|
|
|
$
|
3,478,435
|
|
|
(a)
|
The
Company maintains a number of coal leases with minimum lease or royalty
payments that vary by lease as defined in the separate
agreements. Several of the landowners have contended that
the Company is in default under certain of these leases and that said
leases are terminated. The Company disputes these
contentions. As a result of the confirmation of Gwenco’s Plan,
Gwenco has assumed all coal leases and is obligated to pay cure claims due
under each lease. Unless otherwise provided in the Plan, these
accrued amounts are due on or before October 12,
2012.
|
On May
19, 2006, the former owners obtained a default judgment in this action in the
amount of $687,391. Since the judgment was approximately $500,000
above what the Company believes to have owed, the Company reclassified the
difference and recorded additional expense to account for the
liability.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
On June
20, 2007, Gwenco entered into a settlement agreement with one of the former
owners (and the holder of the $458,260 judgment), pursuant to which the former
owner agreed to accept payment of $150,000 in exchange for a release of the
judgment amount of $458,260. (See Notes 15 and 16.)
On July
1, 2009, Gwenco entered into a settlement agreement with another former owner
(and the holder of the $229,130 judgment), pursuant to which the parties agreed
that the former owner would have an allowed unsecured claim of $92,238, plus
interest in the amount of $25,000, for a total of $117,238, to be paid along
with the other allowed unsecured claims under Gwenco’s Chapter 11
Plan. The former owner has the right to convert up to $40,000 of the
claim into the Company’s common stock at a conversion price of eighty five
percent (85%) of the average of the five (5) per share market values immediately
preceding a conversion date, with a minimum conversion price of the par value of
the Company’s common stock. On July 21, 2009, the Court approved the
settlement agreement. (See Notes 8, 15, and 16.)
On June
30, 2009, Gwenco entered into a settlement agreement with last former owner of
Gwenco, pursuant to which the parties agreed that the former owner would have an
allowed unsecured claim of $161,824, plus interest in the amount of $40,000, for
a total of $201,824, to be paid along with the other allowed unsecured claims
under Gwenco’s Chapter 11 Plan. The former owner has the right to
convert up to $40,000 of the claim into the Company’s common stock at a
conversion price of eighty five percent (85%) of the average of the five (5) per
share market values immediately preceding a conversion date, with a minimum
conversion price of the par value of the Company’s common stock. On
July 21, 2009, the Court approved the settlement agreement. As a
result, the Company reclassified $166,542 of its accrued royalties to Notes
Payable and expensed the additional $40,000 of interest pursuant to the
agreement. (See Notes 8, 15, and 16).
In
addition, the Company accrued $25,544 as an estimated royalty payable in
connection with an August 2008 financing. This amount is currently
being amortized over the life of the underlying note involved in the
financing. (See Notes 8, 15, and 16).
|
(b)
|
During
the period ended December 31, 2004, the Company’s bank initiated a
claim for an overdraft recovery. Since
it was later determined that there was a much larger malice perpetrated
against the Company by existing bank employees, estimates for the
resolution of a claim against a defunct subsidiary have been accrued until
a resolution can be determined.
|
|
(c)
|
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
NOTE
8 -
NOTES PAYABLE
Notes
payable consist of the following:
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
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).
|
|
|
136,497
|
|
|
|
1,082,411
|
|
6%
Convertible Notes Due 2011 (d).
|
|
|
1,153,480
|
|
|
|
—
|
|
6%
Convertible Notes Due 2011 (e).
|
|
|
1,000,000
|
|
|
|
—
|
|
6%
Convertible Notes Due 2011 (f).
|
|
|
200,000
|
|
|
|
—
|
|
0%
Notes Due on Demand (g).
|
|
|
635,434
|
|
|
|
611,937
|
|
10%
Convertible Notes due 2008 (h).
|
|
|
10,000
|
|
|
|
10,000
|
|
6%
Convertible Notes due 2010 (i).
|
|
|
42,710
|
|
|
|
533,500
|
|
8%
Convertible Notes due 2010 (j).
|
|
|
254,125
|
|
|
|
400,000
|
|
8%
Convertible Notes due 2011 (k).
|
|
|
25,000
|
|
|
|
—
|
|
12%
Notes Due on Demand (l).
|
|
|
12,500
|
|
|
|
—
|
|
6%
Notes Due on Demand (m).
|
|
|
10,000
|
|
|
|
—
|
|
QUEST
ENERGY, LTD.
|
|
|
|
|
|
|
|
|
8%
Summary Judgment (n).
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
GWENCO,
INC.: (Bank Loans)
|
|
|
|
|
|
|
|
|
12%
Assigned Judgment (o).
|
|
|
726,964
|
|
|
|
726,964
|
|
9.5%
Note due 2004 (p)
|
|
|
262,402
|
|
|
|
262,402
|
|
6%
Note due 2004 (p)
|
|
|
28,159
|
|
|
|
28,159
|
|
0%
Unsecured Claim (q)
|
|
|
117,238
|
|
|
|
229,130
|
|
0%
Unsecured Claim (r)
|
|
|
201,824
|
|
|
|
—
|
|
17%
Debtor in Possession Financing due 2008 (s)
|
|
|
1,710,374
|
|
|
|
923,043
|
|
|
|
|
|
|
|
|
|
|
GWENCO,
INC.: (Related-Party Loans)
|
|
|
|
|
|
|
|
|
5.26%
Notes payable (t).
|
|
|
593,703
|
|
|
|
624,581
|
|
Total
Debt
|
|
|
7,383,274
|
|
|
|
5,696,607
|
|
Current
Portion
|
|
|
4,685,732
|
|
|
|
4,763,107
|
|
Less:
Unamortized debt discount on Current Portion
|
|
|
(158,862
|
)
|
|
|
—
|
|
Total
Notes Payable – Current Portion, net
|
|
|
4,526,870
|
|
|
|
4,763,107
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt:
|
|
|
2,697,542
|
|
|
|
933,500
|
|
Less:
Unamortized debt discount on Long-Term Debt
|
|
|
(28,976
|
)
|
|
|
(182,158
|
)
|
Total
Long-Term Debt, net
|
|
$
|
2,668,566
|
|
|
$
|
751,342
|
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
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
note holders forgave a 7% senior secured convertible note in the principal
amount of $125,000. The amended and restated notes are
convertible at the option of the holder at a conversion price of $3,000.00
per share; provided, that if the market price of the Company’s common
stock was less than $4,000.00 per share for ten consecutive trading days,
the conversion price would reduced to $2,000.00 per share; provided,
further, that if the market price of the Company’s common stock was less
than $2,000.00 per share for ten consecutive trading days, the conversion
price would become the lesser of (i) $2,000.00 per share
or (ii) 70% of the average of the 5 closing bid prices of the
common stock immediately preceding such conversion date. The
lenders have made periodic partial conversions to pay down the remaining
principal on the notes.
|
Quest had
recognized derivative liability of $1,580,575 upon restatement of these notes in
accordance with ASC 815-10 and ASC 815-40. In particular, Quest
compared (a) the number of then authorized but unissued shares, less the maximum
number of shares that could be required to be delivered during the contract
period under existing commitments (i.e. the other convertible notes and
warrants) with (b) the maximum number of shares that could be required to be
delivered under share settlement (either net-share or physical) of these
notes. Since the amount in (b) exceeded the amount in (a), and because
Quest was required to obtain shareholder approval to increase its authorized
common shares or otherwise effect a recapitalization in order to net-share or
physically settle all contracts, Quest determined that share settlement was not
within its control, and accordingly, derivative liability classification was
required.
On
February 9, 2007, Quest amended its articles of incorporation to increase its
authorized common stock to 975,000,000 shares, and to authorize its board of
directors to effectuate a stock split or reverse stock split without stockholder
approval. As a result of this amendment, Quest no was no longer
required to obtain shareholder approval to effect a recapitalization in order to
net-share or physically settle any of its convertible notes or warrants, and
accordingly, obtained full control of share settlement of these
notes. As a result, Quest reclassified the conversion options on
these notes, then valued at $322,963, as permanent equity.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
In
accordance with ASC 470-20, Debt with Conversions and Other Options, the Company
also recognized an imbedded beneficial conversion feature present in these
notes. The Company allocated a portion of the proceeds equal to the
intrinsic value of that feature to additional paid in capital. The
Company recognized and measured $1,183,139 of the proceeds, which is equal to
the intrinsic value of the imbedded beneficial conversion feature, to additional
paid in capital and a discount against the notes. The debt discount
attributed to the beneficial conversion feature was amortized over the notes’
maturity period as interest expense.
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
September 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 nine months ended
September 30, 2009, the holder made a final conversion to satisfy the
remaining principal and interest on the
note.
|
In
accordance with ASC 470-20, the Company recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$43,944 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as interest
expense. The balance of the discount was fully amortized during the
year ended December 31, 2008.
|
(d)
|
During
January of 2006, the Company entered into a loan agreement to receive up
to $300,000 in funds for operations in return for a 12% percent note due
in May of 2006. As 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.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
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
September 30, 2009, there continues to be no formal agreement regarding the
remaining evidences of indebtedness of $136,497, 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)
|
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.
|
|
(f)
|
On
July 13, 2009, the Company issued a consulting bonus in the form of a
convertible promissory note in the aggregate principal amount of $200,000
to a third party consulting company owned by a stockholder of the
Company. The note is due July 13, 2011 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. The Company recorded
consulting expense for $200,000 and interest expense of $2,633 for the
three and nine months ended September 30, 2009 in relation to the
convertible promissory note.
|
|
(g)
|
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.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
|
(h)
|
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 ASC 470-20, the Company also recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$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. The discount was fully amortized during the year ended
December 31, 2008.
As of
September 30, 2009, the Company was in default of this obligation.
|
(i)
|
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 ASC 815-10 and ASC 815-40. In particular, Quest
compared (a) the number of then authorized but unissued shares, less the maximum
number of shares that could be required to be delivered during the contract
period under existing commitments (i.e. the other convertible notes and
warrants) with (b) the maximum number of shares that could be required to be
delivered under share settlement (either net-share or physical) of these
notes. Since the amount in (b) exceeded the amount in (a), and because
Quest was required to obtain shareholder approval to increase its authorized
common shares or otherwise effect a recapitalization in order to net-share or
physically settle all contracts, Quest determined that share settlement was not
within its control, and accordingly, derivative liability classification was
required.
On
February 9, 2007, Quest amended its articles of incorporation to increase its
authorized common stock to 975,000,000 shares, and to authorize its board of
directors to effectuate a stock split or reverse stock split without stockholder
approval. As a result of this amendment, Quest no was no longer
required to obtain shareholder approval to effect a recapitalization in order to
net-share or physically settle any of its convertible notes or warrants, and
accordingly, obtained full control of share settlement of these
notes. As a result, Quest reclassified the conversion options on
these notes, then valued at $768,069, as permanent equity.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
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 ASC 815-10 and ASC 815-40. In particular, Quest
compared (a) the number of then authorized but unissued shares, less the maximum
number of shares that could be required to be delivered during the contract
period under existing commitments (i.e. the other convertible notes and
warrants) with (b) the maximum number of shares that could be required to be
delivered under share settlement (either net-share or physical) of 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.
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 ASC 470-20, the Company also recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$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. The balance of 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 nine months
ended September 30, 2009, the holders have made partial conversions of principal
and interest due under these notes.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
|
(j)
|
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. On August 28, 2009, the Company
amended the conversion price to be forty five percent (45%) of the average
of the five (5) lowest per share market value during the ten (10) trading
days immediately preceding a conversion
date.
|
In
accordance with ASC 470-20, the Company also recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$225,000 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as interest
expense. On August 28, 2009, pursuant to the amended conversion
feature agreement, the Company deemed the existing debt extinguished and
reissued it according to the new terms. The discounted
amortization was revised to $219,218. As of September 30, 2009,
unamortized discount of $158,862 remains.
In
addition, the Company recognized and measured $25,544 of the proceeds, which is
equal to the Company’s estimate of the royalty payable under this agreement, to
accrued royalties and a discount against the note. The debt discount
attributed to the accrued royalty is amortized over the note’s maturity period
as interest expense.
|
(k)
|
On
September 16, 2009, the Company issued a convertible promissory note to a
third party investor for facilitation of Gwenco’s Debtor-In-Possession
financing. The note is due September 16, 2011 and bears
interest at an annual interest rate of eight percent (8%). The
note is convertible into shares of the Company’s common stock at a
conversion price of forty five percent (45%) of the average of the five
(5) lowest per share market value during the ten (10) trading days
immediately preceding a conversion
date.
|
In
accordance with ASC 470-20, the Company also recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$25,000 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as interest
expense. As of September 30, 2009, an unamortized discount of $24,521
remains.
|
(l)
|
On
August 28, 2009, the Company borrowed $12,500, and in connection
therewith, issued a promissory note that is due on demand and bears
interest at an annual interest rate of twelve percent
(12%).
|
|
(m)
|
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%).
|
|
(n)
|
On
July 10, 2006, the Company entered into a settlement arrangement with an
existing equipment lessor for the bill of sale on two pieces of equipment,
of which the Company had retained possession while in default of prior
lease payments. On October 10, 2006, the Pike County Circuit
Court entered an order enforcing this settlement agreement, and on
December 19, 2006, the lessor was awarded summary judgment in the amount
of $35,000 plus 8% accrued interest from August 9, 2006. As of
September 30, 2009, the Company remains in
default.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
|
(o)
|
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
September 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. This claim is
classified as a Class 1 Claim in Gwenco’s Plan of Reorganization and will
be satisfied pursuant to the terms of the Plan. (See Note
16).
|
|
(p)
|
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. These claims are classified as Class 3
Claims in Gwenco’s Plan of Reorganization and will be satisfied pursuant
to the terms of the Plan. (See Note
16).
|
|
(q)
|
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. Foreclosure on the judgment
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 (and the
holder of the $458,260 judgment), pursuant to which the former owner
agreed to accept payment of $150,000 in exchange for a release of the
judgment amount of $458,260.
|
On July
1, 2009, Gwenco entered into a settlement agreement with another former owner
(and the holder of the $229,130 judgment), pursuant to which the parties agreed
that the former owner would have an allowed unsecured claim of $92,238, plus
interest in the amount of $25,000, for a total of $117,238, to be paid along
with the other allowed unsecured claims under Gwenco’s Chapter 11
Plan. The former owner has the right to convert up to $40,000 of the
claim into the Company’s common stock at a conversion price of eighty five
percent (85%) of the average of the five (5) per share market values immediately
preceding a conversion date, with a minimum conversion price of the par value of
the Company’s common stock. On July 21, 2009, the Court approved the
settlement agreement. (See Note 16.)
|
(r)
|
On
June 30, 2009, Gwenco entered into a settlement agreement with last former
owner of Gwenco, pursuant to which the parties agreed that the former
owner would have an allowed unsecured claim of $161,824, plus interest in
the amount of $40,000, for a total of $201,824, to be paid along with the
other allowed unsecured claims under Gwenco’s Chapter 11
Plan. The former owner has the right to convert up to $40,000
of the claim into the Company’s common stock at a conversion price of
eighty five percent (85%) of the average of the five (5) per share market
values immediately preceding a conversion date, with a minimum conversion
price of the par value of the Company’s common stock. On July
21, 2009, the 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.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
|
(s)
|
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 September 30, 2009,
advances totaled $1,710,374 and continue to accrue
interest.
|
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.
Under
Gwenco’s Plan of Reorganization, the Court approved an exit facility under which
Interstellar Holdings LLC will provide up to $2 million in financing to
Gwenco. Gwenco intends to pay off the Total Facility with borrowings
from the exit facility. The exit facility consists of a 5 year
secured convertible line of credit note, which note is convertible into common
stock of the Company at a rate of the lower of (i) $0.001 per share and (ii) 40%
of the average of the three lowest per shares market values of the Company’s
common stock during the 10 trading days before a conversion; provided that the
holder shall be prohibited from converting if such conversion would result in it
holding more than 4.99% of the Company’s outstanding common stock.
|
(t)
|
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 from the property. As of September 30, 2009, $593,703 of the notes
remains outstanding and in default.
|
These
claims are classified as Class 3 Claims in Gwenco’s Plan of Reorganization and
will be satisfied pursuant to the terms of the Plan. (See Note
16). The former stockholder also has the has the right to convert up
to $15,000 of the claim each month into the Company’s common stock at a
conversion price of eighty five percent (85%) of the average of the five (5) per
share market values immediately preceding a conversion date, with a minimum
conversion price of the par value of the Company’s common stock.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
The
Company recognized no income tax benefit for the loss generated for the periods
through September 30, 2009.
ASC
740-10 requires that a valuation allowance be provided if it is more likely than
not that some portion or all of a deferred tax asset will not be
realized. The Company’s ability to realize the benefit of its
deferred tax asset will depend on the generation of future taxable
income. Because the Company has yet to recognize significant revenue
from the sale of its products, it believes that the full valuation allowance
should be provided.
The
Company has not filed corporate federal, state, or local income tax returns
since 2002, and believes that, due to its operating losses, it does not have a
material tax liability.
NOTE
10 -
|
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. 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 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.
In
accordance with ASC 470-20, 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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
As of
September 30, 2009, 427,807 shares have been converted.
Series
B
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
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
$9,656.88.
Series
C
Each
share of the Company’s Series C Preferred Stock is convertible into shares of
the Company’s common stock. 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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
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 ASC 470-20, 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
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
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.
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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
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.
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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
During
the nine months ended September 30, 2009, the Company issued an aggregate of
14,737,567 shares of common stock for consulting and legal services.
Expense of $571,348 was recorded related to these shares, which was the
market value of such shares issued at prices varying from $0.01 to $0.18 per
share.
During
the nine months ended September 30, 2009, the holders of 6% convertible
promissory notes due June 6, 2010 effectuated a series of partial conversions
and were issued an aggregate of 20,720,000 shares of common stock at a
conversion price of $0.10 per share. In the aggregate, these
issuances reduced the debt by $490,790 in principal and $20,970 in accrued
interest.
During
the nine months ended September 30, 2009, the holders of 6% convertible
promissory notes due June 26, 2011, effectuated a series of partial conversions
and were issued an aggregate of 6,920,000 shares of common stock at a conversion
price of $0.10 per share. In the aggregate, these issuances reduced
the debt by $46,520 in principal.
During
the nine months ended September 30, 2009, the holder of 7% convertible
promissory notes 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 issuances reduced the debt by $1,616 in principal and
$6,891 in accrued interest on one note and $1,493 in accrued interest on the
other.
During
the nine months ended September 30, 2009, the holder of an 8% convertible
promissory note effectuated a partial conversion and was issued an aggregate of
14,074,294 shares of common stock at a conversion price varying from $0.005 to
$0.10 per share. The issuances reduced the debt by $145,875 in
principal.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
NOTE
12 -
|
STOCK
OPTION / WARRANTS
|
Stock
Option / Warrant Issuances Outstanding consist of the
following:
|
|
|
|
|
|
|
|
September 30,
2009
(Unaudited)
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
Avg.
|
|
|
Valuation
|
|
|
|
Warrants
|
|
|
Ex. Price ($)
|
|
|
(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 September 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
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 nine months
ended September 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 nine months
ended September 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
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
November 4, 2008, the Company effectuated a 1 to 10 reverse stock
split.
On August
4, 2009, the Company 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
2008 and 2009. As of September 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
|
|
|
|
3,780,000
|
|
|
|
255,220,000
|
|
2009
California Stock Incentive Plan
|
|
|
259,000,000
|
|
|
|
9,025,809
|
|
|
|
249,974,192
|
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
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 from
the property. The interest expense for the two notes amounted to
$7,545 and $21,918, respectively, for the nine months ended September 30,
2009. These claims are classified as Class 3 Claims in Gwenco’s Plan
of Reorganization and will be satisfied pursuant to the terms of the
Plan. (See Note 8(t)). The former stockholder also has the
has the right to convert up to $15,000 of the claim each month into the
Company’s common stock at a conversion price of eighty five percent (85%) of the
average of the five (5) per share market values immediately preceding a
conversion date, with a minimum conversion price of the par value of the
Company’s common stock.
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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
On
January 6, 2008, the Company amended a two-year agreement acquiring
administrative services from a third party consulting company owned by a
stockholder of the Company 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 Gwenco Chapter 11
reorganization.
On July
13, 2009, the Company issued a consulting bonus in the form of a convertible
promissory note in the aggregate principal amount of $200,000 to a third party
consulting company owned by a stockholder of the Company. The note is
due July 13, 2011 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. The
Company recorded consulting expense of $200,000 and interest expense of $2,633
for the three and nine months ended September 30, 2009 in relation to the
convertible promissory note.
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.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
On or
about December 21, 2004, the Company terminated its Chief Financial Officer for
cause, as it had reason to believe he had participated in a bank fraud
scheme. The Chief Financial Officer’s replacement has not been
appointed at this time.
During
the period ended December 31, 2004, the Company’s bank initiated a claim for an
overdraft recovery. Since it was later determined that there was a
much larger malice perpetrated against the Company by existing bank employees,
allowances have been accrued until a resolution can be
determined. The bank’s insurer commenced an action in Pike County
Court, Kentucky against Quest Energy, the Company’s subsidiary, for subrogation
of monies it has paid to the bank and repayment of deductibles by the bank as a
part of an alleged criminal scheme and conspiracy by former employees of the
bank and other individuals. The insurer alleged that former employees
or associates of Quest Energy, including the Company’s former CEO and CFO, were
primarily involved in the alleged scheme, that Quest Energy is accordingly
responsible for the actions of these former employees and associates, and that
Quest Energy obtained a substantial material benefit as a result of this alleged
scheme. Quest Energy has denied these allegations, that it had any
involvement with or responsibility for any of the actions alleged by the
insurer, and it further denies that it has benefited from any such alleged
scheme. Further, Quest Energy filed a counterclaim against the bank
and the insurer contending that the negligent actions and inactions by the bank
caused severe damage and loss to Quest Energy and the Company.
Since
management has determined that the existing liabilities and debt from the
Company were all related to the issues involving these claims, the assets have
been written down in consideration for the allowance already accrued by the
Company. The Company has accrued the existing liabilities until
validity can be determined. As of September 30, 2009, 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 obtained judgment in that action in the amounts of approximately $340,000
and $670,000, respectively, and have obtained judgment liens based
thereon.
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 judgment has since been
satisfied.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
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. This claim is classified as a Class 1
Claim in Gwenco’s Plan of Reorganization and will be satisfied pursuant to the
terms of the Plan. (See Note 16).
The
Company has not filed corporate federal, and state and local income tax returns
since 2002, and believes that, due to its operating losses, it does not have a
material tax liability and the penalties owed are minimal.
The
failure to file income tax returns may invoke penalties for failure to file from
the taxing authorities but these penalties are small in amounts and the company
had large losses in every one of the filing periods.
On July
10, 2006, the Company entered into a settlement arrangement with an existing
equipment lessor for the bill of sale on two pieces of equipment, of which the
Company had retained possession while in default of prior lease
payments. On October 10, 2006, the Pike County Circuit court entered
an order enforcing this settlement agreement, and on December 19, 2006, the
lessor was awarded summary judgment in the amount of $35,000 plus 8% accrued
interest from August 9, 2006. As of September 30, 2009, the Company
remains in default.
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. Foreclosure on the judgment 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 (and the holder of the $458,260 judgment), pursuant to which the former
owner agreed to accept payment of $150,000 in exchange for a release of the
judgment amount of $458,260.
On July
1, 2009, Gwenco entered into a settlement agreement with another former owner
(and the holder of the $229,130 judgment), pursuant to which the parties agreed
that the former owner would have an allowed unsecured claim of $92,238, plus
interest in the amount of $25,000, for a total of $117,238, to be paid along
with the other allowed unsecured claims under Gwenco’s Chapter 11
Plan. The former owner has the right to convert up to $40,000 of the
claim into the Company’s common stock at a conversion price of eighty five
percent (85%) of the average of the five (5) per share market values immediately
preceding a conversion date, with a minimum conversion price of the par value of
the Company’s common stock. On July 21, 2009, the Court approved the
settlement agreement. (See Note 16).
On June
30, 2009, Gwenco entered into a settlement agreement with last former owner of
Gwenco, pursuant to which the parties agreed that the former owner would have an
allowed unsecured claim of $161,824, plus interest in the amount of $40,000, for
a total of $201,824, to be paid along with the other allowed unsecured claims
under Gwenco’s Chapter 11 Plan. The former owner has the right to
convert up to $40,000 of the claim into the Company’s common stock at a
conversion price of eighty five percent (85%) of the average of the five (5) per
share market values immediately preceding a conversion date, with a minimum
conversion price of the par value of the Company’s common stock. On
July 21, 2009, the Court approved the settlement agreement. (See Note
16).
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
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 -
|
PLAN
OF REORGANIZATION
|
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. On September 30, 2009, the Bankruptcy
Court confirmed Gwenco’s Plan of Reorganization (the “Plan”). The
Plan became effective on October 12, 2009.
Under
Gwenco’s Plan of Reorganization, the Court approved an exit facility under which
Interstellar Holdings LLC will provide up to $2 million in financing to
Gwenco. Gwenco intends to pay off the Total Facility with borrowings
from the exit facility. The exit facility consists of a 5 year
secured convertible line of credit note, which note is convertible into common
stock of the Company at a rate of the lower of (i) $0.001 per share and (ii) 40%
of the average of the three lowest per shares market values of the Company’s
common stock during the 10 trading days before a conversion; provided that the
holder shall be prohibited from converting if such conversion would result in it
holding more than 4.99% of the Company’s outstanding common stock.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
There
were 5 classes of Claims under the Plan: (i) Class 1—The
Interstellar Duke claim, in the aggregate amount of $1,091,121; (ii) Class
2—Priority Claims, in aggregate amount of $391,558; (iii) Class 3—General
Unsecured Claims, in the aggregate amount of $1,415,661; (iv) Class
4-Subordinated Claims, consisting of claims of affiliates of the debtor totaling
$3,453,996; and (v) Class 5—Equity Holder Interest in the amount of
$202,954.
The Class
1 Claim will be satisfied by the issuance to Interstellar Holdings, LLC of a 5
year secured convertible promissory note, which note is convertible into common
stock of the Company at a rate of the lower of (i) $0.001 per share and (ii) 40%
of the average of the three lowest per shares market values of the Company’s
common stock during the 10 trading days before a conversion; provided that the
holder shall be prohibited from converting if such conversion would result in it
holding more than 4.99% of the Company’s outstanding common stock.
The Class
2 Claims were due and payable as of the effective date of the Plan.
The Class
3 Claims will be satisfied by cash payments equal to the value of their claim on
the earlier of (i) the 60
th
month
after the effective date of the Plan or (ii) the date on which, in Gwenco’s sole
discretion, proceeds from the exit facility are sufficient to satisfy the
claims. Further, Class 3 Claimholders shall receive their pro-rata
share of royalty payments to reduce their claims beginning in the month
following the Effective Date. Notwithstanding the foregoing, certain
creditors in this Class negotiated settlements as more specifically set forth in
the Plan.
The Class
4 Claims will be paid after holders of all allowed claims in other classes have
been paid in full. The Class 5 Claims were deemed
unimpaired.
Gwenco,
as a reorganized debtor, will operate its coal mining business and will use
current and future income from operations to meet current and future expenses
and to make payments called for under the Plan. In addition, the
Court approved an exit facility under which Interstellar Holdings LLC will
provide up to $2 million in financing to Gwenco. The exit facility
consists of a 5 year secured convertible line of credit note, which note is
convertible into common stock of the Company at a rate of the lower of (i)
$0.001 per share and (ii) 40% of the average of the three lowest per shares
market values of the Company’s common stock during the 10 trading days before a
conversion; provided that the holder shall be prohibited from converting if such
conversion would result in it holding more than 4.99% of the Company’s
outstanding common stock.
As of
September 30, 2009, Gwenco had assets of $5,693,624, which included all of the
mineral rights of the Company valued at $5,196,577 and liabilities (other than
liabilities that have been guaranteed by the Company or another of its
wholly-owned subsidiaries) of $7,911,522. Of these liabilities,
$3,453,996 was owed to Quest Minerals & Mining and Quest Energy,
Ltd. These receivables are unsecured and Quest Minerals & Mining
and Quest Energy, Ltd have reserved 100% of the receivable as doubtful at
September 30, 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.
The
Company accounted for the reorganization in accordance with ASC 852
“Reorganization,” formerly American Institute of Certified Public Accountants’
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code (“SOP 90-7”). In accordance with ASC 852,
entities whose plans have been confirmed by the court and have thereby emerged
from Chapter 11 should apply the reporting principles required by the standard
as of the confirmation date or as of a later date when all material conditions
precedent to the plan’s becoming binding are resolved. Hence, the
Company did not recognize the effect of the reorganizaton as of September 30,
2009 since the confirmation date of the Plan is subsequent to September 30,
2009. However, ASC 852 requires certain disclosures that give effect
to the confirmed Plan of Reorganization.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
The
following is the reorganized unaudited condensed consolidated proforma balance
sheet and proforma statement of operations of the Company as of September 30,
2009 and for the nine months then ended, which includes Gwenco, Inc. and the
Company and its other subsidiaries, along with adjustments showing the effective
debt settlements as a result of confirmation of the Plan:
QUEST
MINERALS & MINING CORP.
CONDENSED CONSOLIDATING PROFORMA BALANCE SHEET
SEPTEMBER
30, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROFORMA
|
|
|
PROFORMA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to Record
|
|
|
REORGANIZED
|
|
|
|
QUEST & SUB
|
|
|
GWENCO
|
|
|
ADJUSTMENTS
|
|
|
CONSOLIDATED
|
|
|
Confirmation
of
Plan
|
|
|
CONSOLIDATED
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
251
|
|
Total
current assets
|
|
|
251
|
|
|
|
—
|
|
|
|
—
|
|
|
|
251
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
Mineral Reserves, net
|
|
|
—
|
|
|
|
5,196,577
|
|
|
|
—
|
|
|
|
5,196,577
|
|
|
|
—
|
|
|
|
5,196,577
|
|
Mine
Development, net
|
|
|
—
|
|
|
|
141,507
|
|
|
|
—
|
|
|
|
141,507
|
|
|
|
—
|
|
|
|
141,507
|
|
Equipment,
net
|
|
|
—
|
|
|
|
142,205
|
|
|
|
—
|
|
|
|
142,205
|
|
|
|
—
|
|
|
|
142,205
|
|
Deposits
|
|
|
—
|
|
|
|
48,358
|
|
|
|
—
|
|
|
|
48,358
|
|
|
|
—
|
|
|
|
48,358
|
|
Prepaid Expense
|
|
|
—
|
|
|
|
10,828
|
|
|
|
—
|
|
|
|
10,828
|
|
|
|
—
|
|
|
|
10,828
|
|
DIP
Cash, restricted
|
|
|
|
|
|
|
32,046
|
|
|
|
—
|
|
|
|
32,046
|
|
|
|
—
|
|
|
|
32,046
|
|
DIP
Receivables, restricted
|
|
|
|
|
|
|
122,103
|
|
|
|
—
|
|
|
|
122,103
|
|
|
|
—
|
|
|
|
122,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
251
|
|
|
$
|
5,693,624
|
|
|
$
|
—
|
|
|
$
|
5,693,875
|
|
|
$
|
—
|
|
|
$
|
5,693,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND DEFICIENCY IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,504,531
|
|
|
$
|
1,415,027
|
|
|
$
|
—
|
|
|
$
|
3,919,558
|
|
|
$
|
(1,023,469
|
)
(a)
|
|
$
|
2,896,089
|
|
Loans
payable-current portion, net
|
|
|
1,205,268
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,205,268
|
|
|
|
|
|
|
|
1,205,268
|
|
Bank
loans
|
|
|
—
|
|
|
|
1,017,525
|
|
|
|
—
|
|
|
|
1,017,525
|
|
|
|
(1,017,525
|
)
(b)
|
|
|
—
|
|
Related
party loans
|
|
|
—
|
|
|
|
593,703
|
|
|
|
—
|
|
|
|
593,703
|
|
|
|
(593,703
|
)
(c)
|
|
|
—
|
|
DIP
Financing
|
|
|
—
|
|
|
|
1,710,374
|
|
|
|
—
|
|
|
|
1,710,374
|
|
|
|
(1,710,374
|
)
(d)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,709,799
|
|
|
|
4,736,629
|
|
|
|
—
|
|
|
|
8,446,428
|
|
|
|
(4,345,071
|
)
|
|
|
4,101,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
—
|
|
|
|
3,453,996
|
|
|
|
(3,453,996
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loans
payable- long term portion, net
|
|
|
2,153,966
|
|
|
|
314,600
|
|
|
|
—
|
|
|
|
2,468,566
|
|
|
|
(42,613
|
)
(a)
|
|
|
2,425,953
|
|
Bank
loans, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
147,488
|
(b)
|
|
|
147,488
|
|
Related
party loans, net
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
43,848
|
(c)
|
|
|
243,848
|
|
DIP
Financing, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
(d)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
6,063,765
|
|
|
|
8,505,225
|
|
|
|
(3,453,996
|
)
|
|
|
11,114,994
|
|
|
|
(4,196,348
|
)
|
|
|
6,918,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
—
|
|
|
|
26
|
|
SERIES
B - issued and outstanding 48,284 shares
|
|
|
—
|
|
|
|
48
|
|
|
|
—
|
|
|
|
48
|
|
|
|
—
|
|
|
|
48
|
|
SERIES
C - issued and outstanding 260,000 shares
|
|
|
260
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260
|
|
|
|
—
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001, 2,500,000,000 shares authorized issued and
outstanding 59,084,360 shares
|
|
|
59,087
|
|
|
|
4,500
|
|
|
|
(4,500
|
)
|
|
|
59,087
|
|
|
|
—
|
|
|
|
59,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Equity
held in escrow
|
|
|
(587,500
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(587,500
|
)
|
|
|
—
|
|
|
|
(587,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Common
stock to be issued
|
|
|
5,648
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,648
|
|
|
|
—
|
|
|
|
5,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Paid-in
capital
|
|
|
62,821,629
|
|
|
|
2,561,745
|
|
|
|
|
|
|
|
65,383,374
|
|
|
|
3,160,479
|
(e)
|
|
|
68,543,853
|
|
Accumulated
Deficit
|
|
|
(68,362,664
|
)
|
|
|
(5,377,894
|
)
|
|
|
3,458,496
|
|
|
|
(70,282,062
|
)
|
|
|
1,035,869
|
(f)
|
|
|
(69,246,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deficiency in Stockholders' Equity
|
|
|
(6,063,514
|
)
|
|
|
(2,811,601
|
)
|
|
|
3,453,996
|
|
|
|
(5,421,119
|
)
|
|
|
4,196,348
|
|
|
|
(1,224,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
|
|
$
|
251
|
|
|
$
|
5,693,624
|
|
|
$
|
—
|
|
|
$
|
5,693,875
|
|
|
$
|
—
|
|
|
$
|
5,693,875
|
|
(a)
|
Prior
to the Confirmed Plan of Reorganization, the Company itemized accrued
interest. Since most of the interest bearing claim amounts were
frozen and reclassed into long term payout plans, the various
accruals totaling $850,515 were recatagorized with their corresponding
long term classifications. The company also recatagorized
accrued uncured royalty claims of $202,954 (less net present value
adjustment) that were reclassified with a 3 year payout
plan. Furthermore, a $30,000 class 2 claim resulting from the
confirmed plan was accrued under current liabilities. The existing long
term debts were restructured with a conversion option allowing them to
convert a maximum of $40,000 of their remaining claims into the parent
company's underlying common stock at an 85% discount to
market. A beneficial discount of $4,696 was accrued against the
face-value of the notes and posted to Paid-in Capital. It will
be amortized as interest expense over the life of the
notes.
|
(b)
|
Pursuant
to the Confirmed Plan of Reorganization, the Company's bank loans were
restructured with a 5 year payout plan; which are to be paid through a
pro-rata basis of $2.50 per clean ton of coal sold by the
company. The present value amount of these Class 3 unsecured
loans totaling $147,488 were recatagorized under long term
debt.
|
(c)
|
Pursuant
to the Confirmed Plan of Reorganization, the Company's related party loans
were restructured with a 5 year payout plan and are to be paid through a
pro-rata basis of $2.50 per clean ton of coal sold by the
Company. The present value amount of these Class 3 unsecured
loans totaling $128,809 were recatagorized under long term
debt. In addition, these claims were given a conversion option,
which allows the holder to convert a portion of the debt each month into
the parent company's underlying common stock at an 85% discount to
market. A Beneficial discount of $84,961 was accrued against
the face value of the restructured debt and posted to Paid-in Capital. It
will be amortized as interest expense over the life of the
note.
|
(d)
|
Pursuant
to the Confirmed Plan of Reorganization, the Company's DIP financing was
recatagorized as a Class 1 secured claim with a 5 year payout plan
pursuant to the terms of the Exit Facility, which will allow the creditor
to convert the parent company's underlying common stock at a lower of 40%
discount to market or par ($.001) price. A beneficial
conversion discount of $1,984,397 was accrued against the face value of
the restructured debt and posted to Paid-in Capital. It will be
amortized as interest expense over the life of the
note.
|
(e)
|
Pursuant
to the conversion features awarded to the various Class 3 unsecured
claims, as well as the Class 1 secured claims, the Company accrued
additional face-value note beneficial conversion discounts of $3,160,479
that were posted against Paid-in Capital and will be amortized as interest
expense over the life of the notes.
|
(f)
|
As
a result of the Confirmed Plan of Reorganization, most of the Company's
debt was restructured with long term payout plans of 3 to 5
years. Based on an assumed 12% cost of capital and
the resulting present values of the restructured debt obligations, the
Company posted a gain on debt settlements for the difference between the
carrying value of the liabilities and the present value of the amounts to
be paid in accordance with the
Plan.
|
QUEST
MINERALS & MINING CORP.
CONDENSED
CONSOLIDATING PROFORMA STATEMENTS OF OPERATIONS
For
the nine months ended September 30, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
PROFORMA
|
|
|
PROFORMA
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to Record
|
|
|
REORGANIZED
|
|
|
|
QUEST & SUB
|
|
|
GWENCO
|
|
|
CONSOLIDATED
|
|
|
Confirmation of
Plan
|
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
revenues
|
|
$
|
—
|
|
|
$
|
678,648
|
|
|
$
|
678,648
|
|
|
$
|
—
|
|
|
$
|
678,648
|
|
Production
costs
|
|
|
—
|
|
|
|
(1,344,334
|
)
|
|
|
(1,344,334
|
)
|
|
|
—
|
|
|
|
(1,344,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
—
|
|
|
|
(665,686
|
)
|
|
|
(665,686
|
)
|
|
|
—
|
|
|
|
(665,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
1,243,286
|
|
|
|
51,716
|
|
|
|
1,295,002
|
|
|
|
—
|
|
|
|
1,295,002
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
118,802
|
|
|
|
118,802
|
|
|
|
|
|
|
|
118,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
1,243,286
|
|
|
|
170,518
|
|
|
|
1,413,804
|
|
|
|
—
|
|
|
|
1,413,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Operations
|
|
|
(1,243,286
|
)
|
|
|
(836,204
|
)
|
|
|
(2,079,490
|
)
|
|
|
—
|
|
|
|
(2,079,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
settlement and extinguishment gain (loss)
|
|
|
(1,312,197
|
)
|
|
|
110,971
|
|
|
|
(1,201,226
|
)
|
|
|
1,035,869
|
(f)
|
|
|
(165,357
|
)
|
Interest,
net
|
|
|
(258,963
|
)
|
|
|
(267,775
|
)
|
|
|
(526,738
|
)
|
|
|
—
|
|
|
|
(526,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(2,814,446
|
)
|
|
|
(993,008
|
)
|
|
|
(3,807,454
|
)
|
|
|
1,035,869
|
|
|
|
(2,771,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(2,814,446
|
)
|
|
$
|
(993,008
|
)
|
|
$
|
(3,807,454
|
)
|
|
$
|
1,035,869
|
|
|
$
|
(2,771,585
|
)
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
NOTE
17 -
|
SUBSEQUENT
EVENTS
|
In
accordance with FASB ASC 855, “Subsequent Events,” the Company has evaluated
subsequent events through the date of filing, November 23, 2009.
On
September 30, 2009, the U.S. Bankruptcy Court for the Eastern District of
Kentucky confirmed the Plan of Reorganization (the “Plan”) for the Company’s
subsidiary, Gwenco, Inc. The Plan became effective on October 12,
2009. Note 16 shows the effects of the Plan as though it became
effective as of September 30, 2009.
On
October 14, 2009, the Company entered into an exchange agreement with an
investor, pursuant to which the investor exchanged $125,000 of evidences of
indebtedness, for a new convertible promissory note in the aggregate principal
amount of $125,000. The new note is due October 14, 2014 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.
On
October 23, 2009, the Company entered into a purchase agreement with an
unrelated third party where the Company issued a $50,000 convertible promissory
note. The note is due October 23, 2011 and bears interest at an
annual interest rate of eight percent (8%). The note is convertible
into shares of the Company’s common stock at a conversion price of forty five
percent (45%) of the average of the five (5) lowest per share market value
during the ten (10) trading days immediately preceding a conversion
date.
NOTE
18 -
|
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.
|
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
The
Company also believes such restatements reflect the correction of any errors and
omissions of material disclosures in the financial statements in accordance with
ASC 250-10,
Accounting Changes
and Error Corrections
.
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:
September
30, 2008 Statement of Operations
As a
result of the restatements, the following changes were made:
For
the Three Months Ended September 30, 2008
Production
costs increased by $485,492 for the three months ended September 30, 2008, from
$97,147 to $582,639 as a result of reclassification of expenditures relating to
mine operations.
Selling,
general, and administrative expenses increased by $37,412 for the three months
ended September 30, 2008, from $1,463,375 to $1,500,787, due to the reversal of
loan settlement expenses that the Company previously recorded in connection with
conversion of convertible notes and convertible preferred stock and
capitalization of expenditures relating to mine development.
Gain on
derivatives decreased by $389,374 for the three months ended September 30, 2008,
from $389,374 to $0, due to recalculation of derivative liability and due to the
reclassification of derivative liability to permanent equity.
Interest
expense increased by $111,370 for the three months ended September 30, 2008,
from $85,420 to $196,790, 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 $887,753 was reclassified as note discount.
As a
result of the foregoing, restated basic and diluted loss per common share
decreased by $2.82 for the three months ended September 30, 2008, from $5.31 per
share to a loss of $2.49 per share, due to the decrease in net loss of the
Company.
For
the Nine Months Ended September 30, 2008
Production
costs increased by $216,911 for the nine months ended September 30, 2008, from
$407,318 to $624,229 as a result of reclassification of expenditures relating to
mine operations.
Selling,
general, and administrative expenses increased by $21,801 for the nine months
ended September 30, 2008, from $2,203,719 to $2,225,520, 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 $2,356,890 for the nine months ended September 30,
2008, from $2,356,890 to $0, due to recalculation of derivative liability and
due to the reclassification of derivative liability to permanent
equity.
Interest
expense increased by $221,021 for the nine months ended September 30, 2008, from
$238,297 to $459,318, due to the recordation of amortization of beneficial
conversion discounts not previously recognized as well as reclassification of
beneficial conversion expense as interest expense.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
Beneficial
conversion expense of $4,411,008 was reclassified as note discount.
As a
result of the foregoing, restated basic and diluted loss per common share
decreased by $14.56 for the nine months ended September 30, 2008, from $21.35
per share to a loss of $6.79 per share, due to the increase in net loss of the
Company.
September
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 $254,711, from $0 to $254,711, as a result of the
capitalization of certain costs of mine rehabilitation.
Deferred
debt issue cost, net, increased by $1,208, from $0 to $1,208, as a result of
capitalization of deferred debt issue costs.
As a
result, total assets increased by $266,490, from $5,546,796 to
$5,813,286.
Accounts
payable and accrued expenses decreased by $141, from $3,277,173 to
$3,277,032.
The
current portion of notes payable, net of discount, decreased by $849,438, from
$2,961,693 to $2,112,255, due to recognition of note discounts previously not
recognized and due to the reclassification of $890,000 of loans payable from a
current to a long-term liability.
DIP
financing payable of $694,043 was reclassified from a long-term to a current
liability.
As a
result of these adjustments, current liabilities decreased by $155,536, from
$7,897,809 to $7,742,273.
Loans
payable of $890,000 was reclassified from a current to a long-term
liability.
Derivative
liability of $484,313 was reclassified as paid-in capital as a result of
reclassification of the liability as permanent equity in accordance with ASC
815-10 and ASC 815-40.
As result
of all of these adjustments, total liabilities were decreased by $429,406, from
$9,076,165 to $8,646,759.
Paid-in
capital decreased by $26,095, from $63,352,664 to $63,326,569, to reflect
reclassification of derivative liability as permanent equity, the recordation of
note discounts, and prior year adjustments.
Accumulated
deficit decreased by $822,164, from $66,401,721 to $65,579,557, to reflect the
restatements to the statements of operations in the first, second and third
quarters of 2008, the year ended 2007 and prior years.
QUEST
MINERALS AND MINING CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(Unaudited)
Adjustments
The
consolidated financial statements as of September 30, 2008 and for the three and
nine 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
September 30,
2008
|
|
|
Restated
September 30,
2008
|
|
Prepaid
expense
|
|
$
|
—
|
|
|
$
|
10,571
|
|
Mine
development, net
|
|
|
—
|
|
|
|
254,711
|
|
Deferred
debt issue cost, net
|
|
|
—
|
|
|
|
1,208
|
|
Total
assets
|
|
|
5,546,796
|
|
|
|
5,813,286
|
|
Accounts
payable and accrued expenses
|
|
|
3,277,173
|
|
|
|
3,277,032
|
|
Loans
payable-current portion, net
|
|
|
2,961,693
|
|
|
|
2,112,255
|
|
Derivative
liability
|
|
|
484,313
|
|
|
|
—
|
|
Loans
payable-long term portion, net
|
|
|
—
|
|
|
|
904,486
|
|
Total
liabilities
|
|
|
9,076,165
|
|
|
|
8,646,759
|
|
Paid-in
capital
|
|
|
63,352,664
|
|
|
|
63,326,569
|
|
Accumulated
deficit
|
|
|
(66,401,721
|
)
|
|
|
(65,579,557
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
(3,529,369
|
)
|
|
|
(2,833,473
|
)
|
Consolidated
Statements of Operations
|
|
As Previously
Reported
Three Months
Ended
September 30,
2008
|
|
|
Restated
Three Months
Ended
September 30,
2008
|
|
Production
costs
|
|
$
|
97,147
|
|
|
$
|
582,639
|
|
Selling,
general, and administrative
|
|
|
1,463,375
|
|
|
|
1,500,787
|
|
Total
operating expenses
|
|
|
3,151,707
|
|
|
|
1,621,198
|
|
Loss
from operations
|
|
|
(2,928,315
|
)
|
|
|
(1,980,532
|
)
|
Gain
on derivatives
|
|
|
389,374
|
|
|
|
—
|
|
Interest
|
|
|
85,420
|
|
|
|
196,793
|
|
Beneficial
conversion expense
|
|
|
887,753
|
|
|
|
—
|
|
Net
income (loss)
|
|
|
(4,808,539
|
)
|
|
|
(2,255,960
|
)
|
Basic
and diluted (loss) per common share
|
|
|
(5.31
|
)
|
|
|
(2.49
|
)
|
|
|
As Previously
Reported
Nine Months
Ended
September 30,
2008
|
|
|
Restated
Nine Months
Ended
September 30,
2008
|
|
Production
costs
|
|
$
|
407,318
|
|
|
$
|
624,229
|
|
Selling,
general, and administrative
|
|
|
2,203,719
|
|
|
|
2,225,520
|
|
Total
operating expenses
|
|
|
7,930,578
|
|
|
|
2,398,156
|
|
Loss
from operations
|
|
|
(7,648,099
|
)
|
|
|
(2,739,993
|
)
|
Gain
on derivatives
|
|
|
2,356,890
|
|
|
|
—
|
|
Interest
|
|
|
238,297
|
|
|
|
459,318
|
|
Beneficial
conversion expense
|
|
|
4,411,008
|
|
|
|
—
|
|
Net
income (loss)
|
|
|
(9,897,596
|
)
|
|
|
(3,149,568
|
)
|
Basic
and diluted (loss) per common share
|
|
|
(21.35
|
)
|
|
|
(6.79
|
)
|
ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion and analysis should be read in conjunction with Quest’s
consolidated financial statements and related notes included in this
report. This report contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. The
statements contained in this report that are not historic in nature,
particularly those that utilize terminology such as “may,” “will,” “should,”
“expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable
terminology are forward-looking statements based on current expectations and
assumptions. Various risks and uncertainties could cause actual
results to differ materially from those expressed in forward-looking
statements. Please refer to the Risk Factors section of Quest’s
annual report on Form 10-K, as amended, for a description of these risks and
uncertainties.
All
forward-looking statements in this document are based on information currently
available to Quest as of the date of this report, and Quest assumes no
obligation to update any forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
General
Quest
Minerals & Mining Corp. acquires and operates energy and mineral related
properties in the southeastern part of the United States. Quest
focuses its efforts on properties that produce quality compliance blend
coal.
Quest is
a holding company for Quest Minerals & Mining, Ltd., a Nevada corporation,
or Quest (Nevada), which in turn is a holding company for Quest Energy, Ltd., a
Kentucky corporation, or Quest Energy, and of Gwenco, Inc., a Kentucky
corporation, or Gwenco. Quest Energy is the parent corporation of E-Z
Mining Co., Inc, a Kentucky corporation, or E-Z Mining, and of Quest Marine
Terminal, Ltd., a Kentucky corporation, or Quest Marine.
Gwenco
leases over 700 acres of coal mines, with approximately 12,999,000 tons of coal
in place in six seams. In 2004, Gwenco had reopened Gwenco’s two
former drift mines at Pond Creek and Lower Cedar Grove, and had begun production
at the Pond Creek seam. This seam of high quality compliance coal is
located at Slater’s Branch, South Williamson, Kentucky.
2009
Developments
Coal
Production
. Due to economic conditions in the first quarter of
2009, domestic steel production dropped significantly, thereby reducing demand
for Quest’s coal. In order to conserve costs, Quest temporarily
suspended operations in the second quarter of 2009. Quest procured a
new contract for the sale of coal to a new customer in the second quarter of
2009. In addition, it received new coal orders from another coal
distribution company and we re-started coal production in July
2009. In July and August 2009, Quest encountered temporary delays and
stoppages that are normally associated with resuming dormant mine
operations. In September, Quest was able to operate without any
significant delays or stoppages, which allowed it to increase coal production
and generate $235,000 in coal sales for the month. In October, Quest
increased its production to generate $292,000 in coal
sales. Furthermore, as Quest advances further in the mine, it has
been encountering thicker coal seams, which resulted in improved rates of
recovery in the recent months.
Gwenco, Inc. Chapter 11
Reorganization.
On March 2, 2007,
Quest’s wholly owned subsidiary, Gwenco, Inc., filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code with the United
States Bankruptcy Court for the Eastern District of
Kentucky. Management felt this was a necessary step to further the
company’s financial restructuring initiative and to protect Gwenco’s assets from
claims, debts, judgments, foreclosures, and forfeitures of those creditors and
stakeholders with whom both Quest and Gwenco were unable to negotiate
restructured agreements. The company is currently overseeing Gwenco’s
operations as a debtor in possession, subject to court approval of matters
outside the ordinary course of business.
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.
On
September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan of
Reorganization (the “Plan”). Secured and non-priority unsecured
classes of creditors voted to approve the plan, with over 80% of the unsecured
claims in dollar amount voting for the plan, and over 90% of responding lessors
supporting it. The Plan became effective on October 12,
2009. Note 16 shows the effects of the above reorganization as though
it occurred as of the balance sheet date September 30, 2009.
There
were 5 classes of Claims under the Plan: (i) Class 1—The
Interstellar Duke claim, in the aggregate amount of $1,091,121; (ii) Class
2—Priority Claims, in aggregate amount of $391,558; (iii) Class 3—General
Unsecured Claims, in the aggregate amount of $1,415,661; (iv) Class
4-Subordinated Claims, consisting of claims of affiliates of the debtor totaling
$3,453,996; and (v) Class 5—Equity Holder Interest in the amount of
$202,954.
The Class
1 Claim will be satisfied by the issuance to Interstellar Holdings, LLC of a 5
year secured convertible promissory note, which note is convertible into common
stock of the Company at a rate of the lower of (i) $0.001 per share and (ii) 40%
of the average of the three lowest per shares market values of the Company’s
common stock during the 10 trading days before a conversion; provided that the
holder shall be prohibited from converting if such conversion would result in it
holding more than 4.99% of the Company’s outstanding common stock.
The Class
2 Claims were due and payable as of the effective date of the Plan.
The Class
3 Claims will be satisfied by cash payments equal to the value of their claim on
the earlier of (i) the 60
th
month
after the effective date of the Plan or (ii) the date on which, in Gwenco’s sole
discretion, proceeds from the exit facility are sufficient to satisfy the
claims. Further, Class 3 Claimholders shall receive their pro-rata
share of royalty payments to reduce their claims beginning in the month
following the Effective Date. Notwithstanding the foregoing, certain
creditors in this Class negotiated settlements as more specifically set forth in
the Plan.
The Class
4 Claims will be paid after holders of all allowed claims in other classes have
been paid in full. The Class 5 Claims were deemed
unimpaired.
Gwenco,
as a reorganized debtor, will operate its coal mining business and will use
current and future income from operations to meet current and future expenses
and to make payments called for under the Plan. In addition, the
Court approved an exit facility under which Interstellar Holdings LLC will
provide up to $2 million in financing to Gwenco. The exit facility
consists of a 5 year secured convertible line of credit note, which note is
convertible into common stock of the Company at a rate of the lower of (i)
$0.001 per share and (ii) 40% of the average of the three lowest per shares
market values of the Company’s common stock during the 10 trading days before a
conversion; provided that the holder shall be prohibited from converting if such
conversion would result in it holding more than 4.99% of the Company’s
outstanding common stock.
Even
though the Bankruptcy Court has confirmed the Plan, it is still possible that
the Bankruptcy Court could convert Gwenco’s case to Chapter 7 and liquidate all
of Gwenco’s assets if the Court determines that Gwenco is unable to perform
under the Plan. In the case of a Chapter 7 conversion, the Company
would be materially impacted and could lose all of its working assets and have
only unpaid liabilities. In addition, the Company might be forced to
file for protection under Chapter 11 as it is the primary guarantor on a number
of Gwenco’s contracts.
Critical
Accounting Policies
The
discussion and analysis of Quest’s financial conditions and results of
operations is based upon Quest’s consolidated financial statements, which have
been prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements requires
managers to make estimates and disclosures on the date of the financial
statements. On an on-going basis, Quest evaluates its estimates,
including, but not limited to, those related to revenue
recognition. It uses authoritative pronouncements, historical
experience, and other assumptions as the basis for making
judgments. Actual results could differ from those
estimates. Quest believes the following critical accounting policies
affect its more significant judgments and estimates in the preparation of our
consolidated financial statements.
Mineral
Interests
The
purchase acquisition costs of mineral properties are deferred until the
properties are placed into production, sold or abandoned. These
deferred costs will be amortized on the unit-of-production basis over the
estimated useful life of the properties following the commencement of production
or written-off if the properties are sold, allowed to lapse or
abandoned.
Mineral
property acquisition costs include any cash consideration and the fair market
value of common shares and preferred shares, based on the trading price of the
shares, or, if no trading price exists, on other indicia of fair market value,
issued for mineral property interests, pursuant to the terms of the agreement or
based upon an independent appraisal.
Coal
Acquisition Costs
The costs
to obtain coal lease rights are capitalized and amortized primarily by the
units-of-production method over the estimated recoverable
reserves. Amortization occurs either as Quest mines on the property
or as others mine on the property through subleasing transactions.
Rights to
leased coal lands are often acquired through royalty payments. As
mining occurs on these leases, the accrued royalty is charged to cost of coal
sales.
Mining
Acquisition Costs
The costs
to obtain any interest in third-party mining operations are expensed unless
significantly proven reserves can be established for the entity. At
that point, capitalization would occur.
Deferred
Mine Equipment
Costs of
developing new mines or significantly expanding the capacity of existing mines
are capitalized and amortized using the units-of-production method over the
estimated recoverable reserves that are associated with the property being
benefited.
Asset
Impairment
If facts
and circumstances suggest that a long-lived asset may be impaired, the carrying
value is reviewed under the guidance of ASC 360-10, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” If the review indicates
that the value of the asset will not be recoverable, as determined based on
projected undiscounted cash flows related to the asset over its remaining life,
then the carrying value of the asset is reduced to its estimated fair
value.
Revenue
Recognition
Coal
sales revenues are sales to customers of coal produced at Quest’s
operations. Quest recognizes revenue from coal sales at the time
title passes to the customer.
Stock-Based
Compensation
Effective
January 1, 2006, Quest began recording compensation expense associated with
stock options and other forms of equity compensation in accordance with FASB ASC
718-10 “Stock Compensation.” Prior to January 1, 2006,
Quest 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. Quest adopted the modified prospective transition method
provided for ASC 718-10, and, consequently, has not retroactively adjusted
results from prior periods.
Income
Taxes
Quest
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 September 30, 2009, Quest had no material current tax
liability, deferred tax assets, or liabilities to impact on Quest’s financial
position because the deferred tax asset related to Quest’s net operating loss
carry forward was fully offset by a valuation allowance. However,
Quest has not filed its corporate income tax returns since 2002.
Fair
Value
The FASB
has issued ASC 820-10, “Fair Value Measurements”, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. ASC 820-10 applies to other accounting
pronouncements that require or permit fair value measurements, but does not
require any new fair value measurements. ASC 820-10 is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years, with the exception of all
non-financial assets and liabilities, which will be effective for years
beginning after November 15, 2008. Quest adopted the required
provisions of ASC 820-10 that became effective in its first quarter of
2008. The adoption of these provisions did not have a material impact
on Quest’s consolidated financial statements. In February 2008, the FASB issued
ASC 820-10-15, “Effective Date of FASB ASC 820-10.” ASC 820-10-15
delays the effective date of ASC 820-10 for nonfinancial assets and
nonfinancial liabilities, except for certain items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). In October 2008, the FASB issued ASC 820-10-35,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active.” ASC 820-10-35 applies to financial assets within the
scope of accounting pronouncements that require or permit fair value
measurements in accordance with ASC 820-10. This ASC clarifies
the application of ASC 820-10 in determining the fair values of assets or
liabilities in a market that is not active. In April 2009, the FASB
issued ASC 820-10-65, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.” ASC 820-10-65 does not change the
definition of fair value as detailed in ASC 820-10, but provides additional
guidance for estimating fair value in accordance with ASC 820-10 when the
volume and level of activity for the asset or liability have significantly
decreased. The provisions of ASC 820-10-65 are effective for interim
and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. If early adoption
is elected for either ASC 320-10 or ASC 825-10 and ASC 270-10, ASC 820-10-65
must also be adopted early.
ASC
820-10 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date ASC 820-10 requires that valuation
techniques maximize the use of observable inputs and minimize the use of
unobservable inputs. ASC 820-10 also establishes a fair value
hierarchy, which prioritizes the valuation inputs into three broad
levels.
There are
three general valuation techniques that may be used to measure fair value, as
described below:
|
·
|
Market
approach – Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities. Prices may be indicated by pricing guides, sale
transactions, market trades, or other
sources;
|
|
·
|
Cost
approach – Based on the amount that currently would be required to replace
the service capacity of an asset (replacement cost);
and
|
|
·
|
Income
approach – Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about the future
amounts (includes present value techniques and option-pricing models). Net
present value is an income approach where a stream of expected cash flows
is discounted at an appropriate market interest
rate.
|
Financial
assets and liabilities are valued using either level 1 inputs based on
unadjusted quoted market prices within active markets or using level 2 inputs
based primarily on quoted prices for similar assets or liabilities in active or
inactive markets. For certain debt, fair value is based on present
value techniques using inputs derived principally or corroborated from market
data. Using level 3 inputs using management’s assumptions about the
assumptions market participants would utilize in pricing the asset or
liability. In Quest’s case, this entailed assumptions used in pricing
models for note discounts. Valuation techniques utilized to determine
fair value are consistently applied.
Earnings
(loss) per share
Quest
adopted ASC 260-10 and the guidance of SEC Staff Accounting Bulletin
(“SAB”) No. 98, 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 account for the 1 for 10 reverse stock split effectuated on November 4,
2008 and the 1 for 100 reverse stock split effectuated on August 4,
2009.
Other
Recent Accounting Pronouncements
In
September 2009, the FASB published FASB Accounting Standards Update No. 2009-12,
Fair Value Measurements and Disclosures (Topic 820)—Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent). This update amends Subtopic 820-10, Fair Value
Measurements and Disclosures—Overall, to permit a reporting entity to measure
the fair value of certain investments on the basis of the net asset value per
share of the investment (or its equivalent). This update also
requires new disclosures, by major category of investments about the attributes
of investments within the scope of this amendment to the
Codification. The guidance in this update is effective for interim
and annual periods ending after December 15, 2009. Early application
is permitted. The adoption of this update will not have a material
impact on Quest’s consolidated financial statements.
In August
2009, FASB Accounting Standards Update 2009-05 included amendments to Subtopic
820-10, Fair Value Measurements and Disclosures—Overall, for the fair value
measurement of liabilities and provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the techniques provided for in this update. This update also clarifies
that when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents the transfer of a liability and
that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments to the quoted price of the
asset are required are Level 1 fair value measurements. The adoption
of this update did not have a material impact on Quest’s consolidated financial
statements.
Results
of Operations
Basis
of Presentation
The
following table sets forth, for the periods indicated, certain unaudited
selected financial data:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
RESTATED
|
|
|
|
|
|
RESTATED
|
|
Net
sales
|
|
$
|
348,334
|
|
|
$
|
223,305
|
|
|
$
|
678,648
|
|
|
$
|
282,392
|
|
Production
costs
|
|
|
(655,566
|
)
|
|
|
(582,639
|
)
|
|
|
(1,344,334
|
)
|
|
|
(624,229
|
)
|
Selling,
general and administrative
|
|
|
574,981
|
|
|
|
1,500,787
|
|
|
|
1,295,002
|
|
|
|
2,225,520
|
|
Depreciation
and amortization
|
|
|
40,862
|
|
|
|
120,411
|
|
|
|
118,802
|
|
|
|
172,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(923,075
|
)
|
|
$
|
(1,980,532
|
)
|
|
$
|
(2,079,490
|
)
|
|
$
|
(2,739,993
|
)
|
Comparison
of the three months ended September 30, 2009 and 2008
Net sales.
Revenues for Quest
were $348,334 for the three months ended September 30, 2009, as compared to
$223,305 for the three months ended September 30, 2008. In January
2008, we retained White Star Mining to conduct all mining operations at Pond
Creek. As a result of this change in mine operators, we had to cease
mining operations to obtain new permitting and to conduct further rehabilitation
of the mine. White Star retained all necessary permits to begin
mining operations in February 2008, and we resumed mining operations in July
2008. We generated revenues of $223,305 in the three months ended
September 30, 2008 as a result of coal produced in connection with remediation
of the mine prior to opening in July 2008.
We
continued to generate mining in the first quarter of 2009, similar to other
periods since reopening of the mine in July 2008. However, due
to economic conditions in the first quarter of 2009, domestic steel production
dropped significantly thereby reducing demand for our coal. In order
to conserve costs, we temporarily suspended operations in the second quarter of
2009.
Quest
procured a new contract for the sale of coal to a new customer in the second
quarter of 2009. In addition, it received new coal orders from
another coal distribution company and we re-started coal production in July
2009. In July and August 2009, Quest encountered temporary delays and
stoppages that are normally associated with resuming dormant mine
operations. In September, Quest was able to operate without any
significant delays or stoppages, which allowed it to increase coal
production. As a result, Quest was able to generate revenues of
$348,334 in the third quarter. Quest has continued to operate without
any significant delays or stoppages since the end of the third quarter through
the date of this report. Furthermore, as Quest advances further in
the mine, it has been encountering thicker coal seams, which has resulted in
improved rates of recovery in its mining operations.
Production
costs.
Production costs were $655,566 for the three months
ended September 30, 2009 as compared to $582,639 for the three months ended
September 30, 2008. Our increase in production costs is due to our
increased level of mining operations in the three months ended September 30,
2009 versus the comparable period in 2008. Furthermore, Quest and its
contract miner, White Star Mining, have modified their arrangement from a stated
dollar-per-ton mined basis to a “cost-plus” basis.
Selling, general, and
administrative.
Selling, general and administrative expenses
decreased to $574,981 for the three months ended September 30, 2009, from
$1,500,787 for the three months ended September 30, 2008. The
decrease in selling, general, and administrative expenses results primarily from
the elimination of compensation expense from the issuance of stock options as
well as significantly reduced consulting expense.
Depreciation and
amortization.
Depreciation and amortization expense decreased
to $40,862, or approximately 66%, for the three months ended September 30, 2009,
from $120,411 for the three months ended September 30, 2008. In 2008,
Quest wrote off approximately $213,000 in equipment, resulting in significantly
lower depreciation in the third quarter of 2009 as compared to the prior
period. This decrease was offset by amortization of mine development
expenditures that occurred in 2008.
Operating
loss.
Quest incurred an operating loss of $923,075 for the
three months ended September 30, 2009, compared to an operating loss of
$1,980,532 for the three months ended September 30, 2008. It
had lower operating losses in the three months ended September 30, 2009 as
compared to the three months ended September 30, 2008 primarily from the
decrease in selling, general and administrative expenses and lower
depreciation.
Loan settlement and extinguishment
cost.
Quest recorded a loss of $1,200,305 on loan settlement
and extinguishment costs in the three months ended September 30, 2009 as
compared to a loss of 78,635 on loan settlement and extinguishment costs in the
comparable period in 2008. This loss primarily results from
negotiated resolution of outstanding contested matter with Quest’s largest
creditor.
Interest.
Interest
expense increased to $233,189 for the three months ended September 30, 2009,
from $196,793 for the three months ended September 30, 2008. Quest’s
interest expense results from various outstanding debt obligations, including
obligations that Quest assumed in connection with the acquisition of Gwenco and
various notes issued in various financings since October 2004. In
addition, it includes expense associated with the issuance of securities with
beneficial conversion features. The increase results primarily from
increased borrowings as well an increase in beneficial conversion expense in the
third quarter of 2009 from the prior period.
Comparison
of the nine months ended September 30, 2009 and 2008
Net sales.
Revenues for Quest
were $678,648 for the nine months ended September 30, 2009, as compared to
$282,392 for the nine months ended September 30, 2008. In January
2008, we retained White Star Mining to conduct all mining operations at Pond
Creek. As a result of this change in mine operators, we had to cease
mining operations to obtain new permitting and to conduct further rehabilitation
of the mine. White Star retained all necessary permits to begin
mining operations in February 2008, and we resumed mining operations in July
2008. We have continued to generate mining in the first quarter of
2009, similar to other periods since reopening of the mine in July
2008. We generated revenues of $282,392 in the nine months
ended September 30, 2008 as a result of coal produced in connection with
remediation of the mine prior to opening in July 2008.
We
continued to generate mining in the first quarter of 2009, similar to other
periods since reopening of the mine in July 2008. However, due
to economic conditions in the first quarter of 2009, domestic steel production
dropped significantly thereby reducing demand for our coal. In order
to conserve costs, we temporarily suspended operations in the second quarter of
2009.
Quest
procured a new contract for the sale of coal to a new customer in the second
quarter of 2009. In addition, it received new coal orders from
another coal distribution company and we re-started coal production in July
2009. In July and August 2009, Quest encountered temporary delays and
stoppages that are normally associated with resuming dormant mine
operations. In September, Quest was able to operate without any
significant delays or stoppages, which allowed it to increase coal
production. As a result, Quest was able to generate revenues of
$348,334 in the third quarter. For the nine months ended September
30, 2009, coal revenues were $678,648. Quest has continued to operate
without any significant delays or stoppages since the end of the third quarter
through the date of this report. Furthermore, as Quest advances
further in the mine, it has been encountering thicker coal seams, which has
resulted in improved rates of recovery in its mining operations.
Production
costs.
Production costs were $1,344,334 for the nine months
ended September 30, 2009 as compared to $624,229 for the nine months ended
September 30, 2008. Our increase in production costs is due to our
increased level of mining operations in the nine months ended September 30, 2009
versus the comparable period in 2008. Furthermore, Quest and its
contract miner, White Star Mining, have modified their arrangement from a stated
dollar-per-ton mined basis to a “cost-plus” basis. As Quest’s
operations were dormant for significantly longer stretches during the nine
months ended September 30, 2008 than during the comparable period in 2009, the
costs of labor and supplies were commensurably higher.
Selling, general, and
administrative.
Selling, general and administrative expenses
decreased to $1,295,002 for the nine months ended September 30, 2009, from
$2,225,520 for the nine months ended September 30, 2008. The
decrease in selling, general, and administrative expenses results primarily from
the elimination of compensation expense from the issuance of stock options as
well as significantly reduced consulting expense.
Depreciation and
amortization.
Depreciation expense decreased to $118,802, or
approximately 31.2%, for the nine months ended September 30, 2009, from $172,636
for the nine months ended September 30, 2008. In 2008, Quest wrote
off approximately $213,000 in equipment, resulting in significantly lower
depreciation in the first nine months of 2009 as compared to the prior
period. This decrease was offset by amortization of mine development
expenditures that occurred in 2008.
Operating
loss.
Quest incurred an operating loss of $2,079,490 for the
nine months ended September 30, 2009, compared to an operating loss of
$2,739,993 for the nine months ended September 30, 2008. It had
lower operating losses in the nine months ended September 30, 2009 as compared
to the nine months ended September 30, 2008 primarily from the decrease in
selling, general and administrative expenses and lower depreciation, partially
offset by the increase in production costs associated with mining
operations.
Loan settlement and extinguishment
cost.
Quest recorded a loss of $1,201,226 on loan settlement
and extinguishment costs in the nine months ended September 30, 2009 as compared
to a gain of $49,743 on loan and settlement and extinguishment costs in the
comparable period in 2008. This loss primarily results from
negotiated resolution of outstanding contested matter with Quest’s largest
creditor.
Interest.
Interest
expense increased to $526,738 for the nine months ended September 30, 2009, from
$459,318 for the nine months ended September 30, 2008. Quest’s
interest expense results from various outstanding debt obligations, including
obligations that Quest assumed in connection with the acquisition of Gwenco and
various notes issued in various financings since October 2004. In
addition, it includes expense associated with the issuance of securities with
beneficial conversion features. The increase results primarily from
increased borrowings as well an increase in beneficial conversion expense in the
first three quarters of 2009 from the prior period.
Liquidity
and Capital Resources
Quest has
financed its operations, acquisitions, debt service, and capital requirements
through cash flows generated from operations, and through issuance of debt and
equity securities. Its working capital deficit at September 30, 2009
was $8,435,349. It had cash of $251 as of September 30,
2009. In addition, Gwenco, as debtor in possession, had $32,046 in
restricted cash and $122,103 in restricted accounts receivable as of September
30, 2009, which amounts are excluded from the working capital
deficit.
Quest
used $906,421 of net cash in operating activities for the nine months ended
September 30, 2009, compared to using $1,118,699 in the nine months ended
September 30, 2008. Cash used in operating activities for the nine
months ended September 30, 2009 was mainly due to Quest’s net loss of
$3,807,454. This was offset by non-cash expenses of $118,802 in
depreciation and amortization, $571,348 of stock issued for services, a loss on
debt extinguishment of $1,201,226, amortization of deferred issuance costs of
$226, $142,022 of amortized discount on convertible notes, $12,316 of amortized
royalty costs, an increase of accounts payable and accrued expenses of $441,123
and an increase in debt transfer and credits from accrued expenses of
$543,678. These amounts were offset by an increase of $120,873 in
accounts receivable and an increase of $8,835 in prepaid expenses.
Net cash
flows used in investing activities was $37,567 for the nine months ended
September 30, 2009, as compared to $172,066 of net cash flows used in investing
activities for the comparable period in 2008. The net cash flows used
in investing activities in 2009 resulted from $12,000 in equipment purchases and
$5,916 in security deposits, which was offset by an increase of $19,651 in
restricted cash.
Net cash
flows provided by financing activities were $930,800 for the nine months ended
September 30, 2009, compared to net cash flows provided by financing activities
of $1,317,532 for the nine months ended September 30, 2008. This
increase in net cash provided by financing activities is due to Quest’s
borrowings, including borrowings under its debtor-in-possession credit facility,
of $1,097,869, offset by repayment of $167,069 of debt.
Financings
and Debt Restructurings
On March
2, 2007, Gwenco filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the
Eastern District of Kentucky. Management felt this was a necessary
step to further the Company’s financial restructuring initiative and to protect
Gwenco’s assets from claims, debts, judgments, foreclosures, and forfeitures of
those creditors and stakeholders with whom both Quest and Gwenco were unable to
negotiate restructured agreements.
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.
Upon
Gwenco’s recommencement of mining operations in the third quarter of 2009, the
debtor-in-possession lender required Gwenco to assign all of its accounts
receivable to the lender and have all payments on the receivables paid into an
escrow account. The lender has been making advances under the
facility to Gwenco against the accounts receivable, and the advances are being
repaid as payments are made to the escrow account. In connection
therewith, the Company issued a convertible promissory note to a third party
investor for facilitation of the escrow arrangement. The note is due
September 16, 2011 and bears interest at an annual interest rate of eight
percent (8%). The note is convertible into shares of the Company’s
common stock at a conversion price of forty five percent (45%) of the average of
the five (5) lowest per share market value during the ten (10) trading days
immediately preceding a conversion date.
On
September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan of
Reorganization (the “Plan”). The Plan became effective on October 12,
2009. Under Gwenco’s Plan of Reorganization, the Court approved an
exit facility under which Interstellar Holdings LLC will provide up to $2
million in financing to Gwenco. Gwenco intends to pay off the Total
Facility with borrowings from the exit facility. The exit facility
consists of a 5 year secured convertible line of credit note, which note is
convertible into common stock of the Company at a rate of the lower of (i)
$0.001 per share and (ii) 40% of the average of the three lowest per shares
market values of the Company’s common stock during the 10 trading days before a
conversion; provided that the holder shall be prohibited from converting if such
conversion would result in it holding more than 4.99% of the Company’s
outstanding common stock.
A
third-party lender advances operational funding to Quest. Since there has been
no formal agreement regarding the balance owed, Quest accrues a 5% annual
interest on the principal with the intent that a mutual arrangement will be
resolved between both parties. On June 26, 2009, Quest entered into
an exchange agreement with the third party investor, pursuant to which the
investor exchanged approximately $1,082,411 of the evidences of indebtedness,
along with $ 124,195 of accrued interest thereon, for a new convertible
promissory note in the aggregate principal amount of $1,200,000. The new
note is due June 26, 2011 and bears interest at an annual rate of six percent
(6%). The new note is convertible into shares of Quest’s common stock at a
conversion price of $0.001 per share, subject to adjustment. As of
September 30, 2009, there continues to be no formal agreement regarding the
remaining evidences of indebtedness of $136,497, and Quest continues to accrue
5% annual interest on the principal with the intent that a mutual arrangement
will be resolved between both parties.
On August
14, 2008, Quest issued an 8% $400,000 convertible promissory note to a single
accredited investor. The note is due on July 23, 2010 and is convertible into
shares of our common stock at a conversion price of sixty percent (60%) of the
average of the five (5) lowest per share market value during the ten (10)
trading days immediately preceding a conversion date. The proceeds will be used
for working capital and general corporate purposes. The holder may not convert
any outstanding principal amount of this note or accrued and unpaid interest
thereon to the extent such conversion would result in the holder beneficially
owning in excess of 4.999% of the then issued and outstanding common shares of
Quest. On August 28, 2009, the Company amended the conversion price
to be forty five percent (45%) of the average of the five (5) lowest per share
market value during the ten (10) trading days immediately preceding a conversion
date in connection with the Company’s common stock being removed from quotation
from the OTC Bulletin Board.
On August
28, 2009, Quest borrowed $12,500, and in connection therewith, issued a
promissory note that is due on demand and bears interest at an annual interest
rate of twelve percent (12%).
On
October 23, 2009, the Company entered into a purchase agreement with an
unrelated third party where the Company issued a $50,000 convertible promissory
note. The note is due October 23, 2011 and bears interest at an
annual interest rate of eight percent (8%). The note is convertible
into shares of the Company’s common stock at a conversion price of forty five
percent (45%) of the average of the five (5) lowest per share market value
during the ten (10) trading days immediately preceding a conversion
date.
Capital
Requirements
As stated in the report of Quest’s
independent accountants for the fiscal year ended December 31, 2008, Quest has
incurred operating losses since inception and requires additional capital to
continue operations, and these conditions raise substantial doubt about its
ability to continue as a going concern. Quest believes that, as of
the date of this report, in order to fund its plan of operations over the next
12 months, it will need to fund its operations out of cash flows generated from
operations, to the extent such operations are resumed, and from the sale of
additional securities.
Quest is continuing to seek to fund its
capital requirements over the next 12 months from the additional sale of its
debt and equity securities. It is possible that Quest will be unable to obtain
sufficient additional capital through the sale of its securities as needed.
Quest has also obtained debtor-in-possession financing through the Gwenco
bankruptcy proceedings to fund the capital requirements of Gwenco,
Inc. Under Gwenco’s Plan of Reorganization, this debtor-in-possession
facility is to be replaced with an exit facility on the terms described
above.
Part of Quest’s growth strategy is to
acquire additional coal mining operations. Where appropriate, Quest will seek to
acquire operations located in markets where it currently operates to increase
utilization at existing facilities, thereby improving operating efficiencies and
more effectively using capital without a proportionate increase in
administrative costs. Quest does not currently have binding agreements or
understandings to acquire any other companies.
Quest intends to retain any future
earnings to pay its debts, finance the expansion of its business and any
necessary capital expenditures, and for general corporate purposes.
ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as
defined by Item 10 of Regulation S-K, we are not required to provide the
information required by this item.
ITEM
4 – CONTROLS AND PROCEDURES
We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our reports that we file under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure based on
the definition of “disclosure controls and procedures” in Rule
13a-15(e). In designing and evaluating the disclosure controls and
procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
At the
end of the period covered by this Quarterly Report on Form 10-Q, we carried out
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and
our Chief Financial Officer concluded that our disclosure controls and
procedures were not effective to ensure that all material information required
to be disclosed in this Quarterly Report on Form 10-Q has been made known to
them in a timely fashion.
In addition, our Chief
Executive Officer and Chief Financial Officer have identified significant
deficiencies that existed in the design or operation of our internal control
over financial reporting that they consider to be “material
weaknesses.” The Public Company Accounting Oversight Board has
defined a material weakness as a “significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected.” In light of the material weaknesses described
below, we performed additional procedures to ensure that the consolidated
financial statements are prepared in accordance with generally accepted
accounting principles. Accordingly, management believes that the
financial statements included in this Annual Report fairly present in all
material respects our financial condition, results of operations and cash flows
for the periods presented.
We did
not design and maintain effective entity-level controls as defined in the
Internal Control—Integrated
Framework published by the Committee of Sponsoring Organizations of the Treadway
Commission
(“COSO”). Specifically:
1. We
lacked the technical expertise and did not maintain adequate procedures to
ensure that the accounting for derivative financial instruments under
SFAS No. 133,
Accounting for Derivative
Instruments
, and under Emerging Issues Task Force 00-19, was
appropriate. Procedures relating to convertible debt and warrant
financing transactions did not operate effectively to (a) properly evaluate
embedded derivative liability and warrant liability accounting treatment,
(b) meet the documentation requirements of SFAS No. 133 and EITF
00-19, and (c) adequately assess and measure derivative liability values on
a quarterly basis. This material weakness resulted in a restatement
of prior financial statements, as described in Note 18 to the Consolidated
Financial Statements and, if not remediated, has the potential to cause a
material misstatement in the future.
2. We
did not maintain a sufficient complement of personnel with an appropriate level
of technical accounting knowledge, experience, and training in the application
of generally accepted accounting principles commensurate with our financial
accounting and reporting requirements and low materiality thresholds. This
material weakness contributed to the restatement of prior financial statements,
as described in Note 18 to the Consolidated Financial Statements and, if
not remediated, has the potential to cause a material misstatement in the
future.
3. Due
to the previously reported material weaknesses, as evidenced by the restatements
related to derivative liabilities, management has concluded that the controls
over the period-end financial reporting process were not operating effectively.
Specifically, controls were not effective to ensure that significant
non-routine transactions, accounting estimates, and other adjustments were
appropriately reviewed, analyzed, and monitored on a timely basis. A material
weakness in the period-end financial reporting process has resulted in our not
being able to meet our regulatory filing deadlines and, if not remediated, has
the potential to cause a material misstatement or to miss a filing deadline in
the future.
These
conditions constitute deficiencies in both the design and operation of
entity-level controls. As a result of these deficiencies, our
original Annual Report on Form 10-KSB did not contain all material information
which is required to be disclosed, and in particular, our consolidated financial
statements for the fiscal year ended December 31, 2006. In addition,
in 2007, we restated our consolidated financial statements for the fiscal years
ended December 31, 2005 and 2004 and the interim consolidated financial
statements for the periods ended March 31, 2005, June 30, 2005, September 30,
2005, March 31, 2006, June 30, 2006, and September 30,
2006. Furthermore, we have restated our consolidated financial
statements for the fiscal year ended December 31, 2007.
These
significant deficiencies in the design and operation of our internal controls
include the needs to hire additional staffing and to provide training to
existing and new personnel in SEC reporting requirements and generally accepted
accounting principles. Furthermore, the deficiencies include the need
for formal control systems for journal entries and closing procedures, the need
to form an independent audit committee as a form of internal checks and balances
and oversight of our management, to implement budget and reporting procedures,
and the need to provide internal review procedures for schedules, SEC reports,
and filings prior to submission to the auditors and/or filing with the
SEC.
These
deficiencies have been disclosed to our Board of
Directors. Additional effort is needed to fully remedy these
deficiencies and we are seeking to improve and strengthen our control processes
and procedures. We are in the process of improving our internal
control over financial reporting in an effort to remediate these deficiencies by
adding additional accounting personnel, improving supervision and increasing
training of our accounting staff with respect to generally accepted accounting
principles, providing additional training to our management regarding use of
estimates in accordance with generally accepted accounting principles,
increasing the use of contract accounting assistance, and increasing the
frequency of internal financial statement review. We will continue to
take additional steps necessary to remediate the material weaknesses described
above.
Our Chief Executive Officer and Chief
Financial Officer have also evaluated whether any change in our internal
controls occurred during the last fiscal quarter and have concluded that there
were no changes in our internal controls or in other factors that occurred
during the last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, these controls.
PART
II: OTHER INFORMATION
ITEM
1 – LEGAL PROCEEDINGS
Potential SEC
Action.
On October 31, 2008, we received a Wells notice (the
“Notice”) from the staff of the Salt Lake Regional Office of the Securities and
Exchange Commission (the “Commission”) stating that they are recommending an
enforcement action be filed against us based on our financial statements and
other information contained in reports filed by us with the Commission by us for
our 2004 year and thereafter. The Notice states that the Commission anticipates
alleging that we have violated Sections 10(b), 13(a) and 13(b)(2) of the
Securities Exchange Act of 1934, as amended and Rules 10b-5, 12b-20, 13a-1 and
13a-13 thereunder. We contend that we have not committed any
wrongdoing or the violations referred to in the Notice. We cannot
predict whether the Commission will follow the recommendations of the staff and
file suit against us. As of the date of this report, the Commission
has not commenced any enforcement action against us. If any
enforcement proceeding is instituted by the Commission, we will defend the
action. We cannot predict the outcome or timing of this
matter.
Gwenco, Inc. Chapter 11
Reorganization.
On March 2, 2007, our wholly owned subsidiary,
Gwenco, Inc., filed a voluntary petition for reorganization under Chapter 11 of
the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern
District of Kentucky. Management felt this was a necessary step to
further our financial restructuring initiative and to protect Gwenco’s assets
from claims, debts, judgments, foreclosures, and forfeitures of those creditors
and stakeholders with whom both Quest and Gwenco were unable to negotiate
restructured agreements. We are currently overseeing Gwenco’s
operations as a debtor in possession, subject to court approval of matters
outside the ordinary course of business. 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.
On
September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan of
Reorganization (the “Plan”). Secured and non-priority unsecured
classes of creditors voted to approve the plan, with over 80% of the unsecured
claims in dollar amount voting for the plan, and over 90% of responding lessors
supporting it. The Plan became effective on October 12,
2009.
There
were 5 classes of Claims under the Plan: (i) Class 1—The
Interstellar Duke claim, in the aggregate amount of $1,091,121; (ii) Class
2—Priority Claims, in aggregate amount of $391,558; (iii) Class 3—General
Unsecured Claims, in the aggregate amount of $1,415,661; (iv) Class
4-Subordinated Claims, consisting of claims of affiliates of the debtor totaling
$3,453,996; and (v) Class 5—Equity Holder Interest in the amount of
$202,954.
The Class
1 Claim will be satisfied by the issuance to Interstellar Holdings, LLC of a 5
year secured convertible promissory note, which note is convertible into common
stock of the Company at a rate of the lower of (i) $0.001 per share and (ii) 40%
of the average of the three lowest per shares market values of the Company’s
common stock during the 10 trading days before a conversion; provided that the
holder shall be prohibited from converting if such conversion would result in it
holding more than 4.99% of the Company’s outstanding common stock.
The Class
2 Claims were due and payable as of the effective date of the Plan.
The Class
3 Claims will be satisfied by cash payments equal to the value of their claim on
the earlier of (i) the 60
th
month
after the effective date of the Plan or (ii) the date on which, in Gwenco’s sole
discretion, proceeds from the exit facility are sufficient to satisfy the
claims. Further, Class 3 Claimholders shall receive their pro-rata
share of royalty payments to reduce their claims beginning in the month
following the Effective Date. Notwithstanding the foregoing, certain
creditors in this Class negotiated settlements as more specifically set forth in
the Plan.
The Class
4 Claims will be paid after holders of all allowed claims in other classes have
been paid in full. The Class 5 Claims were deemed
unimpaired.
Gwenco,
as a reorganized debtor, will operate its coal mining business and will use
current and future income from operations to meet current and future expenses
and to make payments called for under the Plan. In addition, the
Court approved an exit facility under which Interstellar Holdings LLC will
provide up to $2 million in financing to Gwenco. The exit facility
consists of a 5 year secured convertible line of credit note, which note is
convertible into common stock of the Company at a rate of the lower of (i)
$0.001 per share and (ii) 40% of the average of the three lowest per shares
market values of the Company’s common stock during the 10 trading days before a
conversion; provided that the holder shall be prohibited from converting if such
conversion would result in it holding more than 4.99% of the Company’s
outstanding common stock.
Even
though the Bankruptcy Court has confirmed the Plan, it is still possible that
the Bankruptcy Court could convert Gwenco’s case to Chapter 7 and liquidate all
of Gwenco’s assets if the Court determines that Gwenco is unable to perform
under the Plan. In the case of a Chapter 7 conversion, the Company
would be materially impacted and could lose all of its working assets and have
only unpaid liabilities. In addition, the Company might be forced to
file for protection under Chapter 11 as it is the primary guarantor on a number
of Gwenco’s contracts.
In or
about May 2004, National City Bank of Kentucky commenced an action in Boyd
County Court, Kentucky against Quest’s indirect wholly owned subsidiary, Gwenco,
Inc., and Albert Anderson for breach of various promissory notes issued by
Gwenco. Duke Energy Merchants and First Sentry Bank were joined in
the action. National City Bank and Duke Energy obtained judgment in
that action in the amounts of approximately $340,000 and $670,000, respectively,
and have obtained judgment liens based thereon.
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 judgment has since been
satisfied.
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 to a third party
investor. This claim is classified as a Class 1 Claim in Gwenco’s
Plan of Reorganization and will be satisfied pursuant to the terms of the
Plan.
On or
about August 25, 2004, Valley Personnel Services, Inc. commenced an action in
the Circuit Court of Mingo County, West Virginia against Quest’s indirect
wholly-owned subsidiaries, D&D Contracting, Inc. and Quest Energy, Ltd. for
damages in the amount of approximately $150,000, plus pre and post judgment
interest as provided by law, costs, and fees. This action was stayed
against Gwenco as a result of Gwenco’s Chapter 11 filing.
The
Federal Insurance Company, the insurer for Community Trust Bank, commenced an
action in Pike County Court, Kentucky against Quest Energy for subrogation of
monies it has paid to the bank and repayment of deductibles by Community Trust
as a part of an alleged criminal scheme and conspiracy by Mr. Runyon, Ms.
Holbrook, Mr. Stollings, and Mr. Wheeler. The insurer alleged that
former employees or associates of Quest Energy, including Mr. Runyon and Mr.
Wheeler, were primarily involved in the alleged scheme, that Quest Energy is
accordingly responsible for the actions of these former employees and
associates, and that Quest Energy obtained a substantial material benefit as a
result of this alleged scheme. Quest Energy has denied these
allegations, that it had any involvement with or responsibility for any of the
actions alleged by the insurer, and it further denies that it has benefited from
any such alleged scheme. Further, Quest Energy filed a counterclaim
against the Federal Insurance Company and Community Trust contending that the
negligent actions and inactions by Community Trust caused severe damage and loss
to Quest Energy and Quest. The court granted Community Trust’s motion
to dismiss the counterclaim.
Mountain
Edge Personnel has commenced an action in the Circuit Court of Mingo County,
West Virginia against Quest’s now-dissolved indirect wholly-owned subsidiary, J.
Taylor Mining, for damages in the amount of approximately $115,000, plus pre and
post judgment interest as provided by law, costs, and
fees. This matter was settled in January 2009 for payment of
approximately $25,000.
An action
has been commenced in the Circuit Court of Pike County, Kentucky against Quest
and its indirect, wholly-owned subsidiaries, Gwenco, Inc., Quest Energy, Ltd.,
and J. Taylor Mining, for unspecified damages resulting from personal injuries
suffered while working for Mountain Edge Personnel, an employee leasing agency
who leased employees to Quest’s subsidiaries. Quest Energy is
actively defending the action. This action was originally stayed
against Gwenco as a result of Gwenco’s Chapter 11
filing. However, in March, 2008, the plaintiff obtained relief
from stay and as a result the lawsuit has reopened against
Gwenco.
BHP, Inc.
commenced an action in the Circuit Court of Pike County, Kentucky against
Quest’s indirect, wholly-owned subsidiary, Quest Energy, Ltd., for damages
resulting an alleged failure to pay for certain equipment leases in the amount
of approximately $225,000, plus pre and post judgment interest as provided by
law, costs, and fees. July 10, 2006, Quest Energy entered into a
settlement arrangement with BHP for the bill of sale on two pieces of equipment,
of which Quest Energy had retained possession while in default of prior lease
payments. On October 10, 2006, the Pike County Circuit Court entered
an order enforcing this settlement agreement, and on December 19, 2006, BHP was
awarded summary judgment in the amount of $35,000 plus 8% accrued interest from
August 9, 2006. BHP, Inc. has since repossessed the
equipment.
Christopher
Younger and Sharon Preece commenced an action in the Circuit Court of Pike
County against Quest’s indirect, wholly-owned subsidiary, Gwenco, Inc., for
damages resulting from an alleged failure to pay past royalties and other
amounts allegedly due. The plaintiffs have obtained a default
judgment in this action in the amount of $687,391. Foreclosure on the
judgment 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. In 2007, Gwenco settled the claim of Sharon Preece for
$150,000. The settlement was approved by the bankruptcy
court.
In the
second quarter of 2009, Gwenco commenced an adversary proceeding against
Christopher Younger and Gwen Slater (the third former owner of Gwenco) relating
to their claims against Gwenco. One of the claims is based upon the
unsettled portion of the $687,391 default judgment described herein, and both
claims are derived from accrued royalties owed to them under a 1990 stock
purchase agreement. In the adversary proceeding, Gwenco contended 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.
Gwenco
has entered into settlement agreements with each of Gwen Slater and Christopher
Younger, pursuant to which the parties agreed that Ms. Slater would have an
allowed unsecured claim of $161,824, plus interest in the amount of $40,000, for
a total of $201,824, and that Mr. Younger would have an allowed unsecured claim
of $92,238, plus interest in the amount of $25,000, for a total of $117,238,
each of which is to be paid along with the other allowed unsecured claims under
Gwenco’s Chapter 11 plan of reorganization. Each of Ms. Slater and Mr.
Younger has the right to convert up to $40,000 of their claim into Quest’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 Quest’s common stock.
On July 21, 2009, the Court approved the settlement
agreements.
In the
fourth quarter of 2008, a former attorney for the Company commenced an action
alleging breach of contract for unpaid legal fees. The Company has
denied the allegations and is actively defending the
matter. Furthermore, the Company has filed a counterclaim against the
attorney alleging legal malpractice in connection with the attorney’s
representation of the Company in several matters. The matter is
currently pending.
ITEM
1A – RISK FACTORS
As a
“small reporting company” as defined by Item 10 of Regulation S-K, we are not
required to provide information required by this item.
ITEM
2 – CHANGES IN SECURITIES
(a)
(1) During
the quarter ended September 30, 2009, Quest issued an aggregate of 37,014,294
shares of common stock upon conversions of various convertible notes. The
aggregate principal and interest amount of these notes that were converted was
$234,155. The issuances were exempt pursuant to Section 3(a)(9) of
the Securities Act as well as Section 4(2) of the Securities
Act.
(2) On
July 11, 2009, Quest and Gwenco entered into a settlement and release agreement
with Quest’s largest lender to resolve various disputes that had arisen between
Quest and the lender. Pursuant to the settlement agreement, the
lender waived certain defaults under various debt obligations. 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 Quest’s
common stock at a conversion price of $0.001 per share, subject to
adjustment. The issuance was exempt pursuant to Section 4(2) of the
Securities Act.
(3) On
July 13, 2009, Quest issued a consulting bonus in the form of a convertible
promissory note in the aggregate principal amount of $200,000 to a third party
consulting company owned by a stockholder of Quest. The note is
due July 13, 2011 and bears interest at an annual interest rate of six percent
(6%). The new note is convertible into shares of Quest’s common stock
at a conversion price of $0.001 per share, subject to adjustment. The
issuance was exempt pursuant to Section 4(2) of the Securities Act.
(5) On
August 28, 2009, Quest borrowed $12,500, and in connection therewith, issued a
promissory note that is due on demand and bears interest at an annual interest
rate of twelve percent (12%). The issuance was exempt pursuant to
Section 4(2) of the Securities Act.
(6) On
September 16, 2009, Quest issued a convertible promissory note to a third party
investor for facilitation of Gwenco’s Debtor-In-Possession
financing. The note is due September 16, 2011 and bears interest at
an annual interest rate of eight percent (8%). The note is
convertible into shares of Quest’s common stock at a conversion price of forty
five percent (45%) of the average of the five (5) lowest per share market value
during the ten (10) trading days immediately preceding a conversion
date. The issuance was exempt pursuant to Section 4(2) of the
Securities Act.
(b) None.
(c) None.
ITEM
3 – DEFAULT UPON SENIOR SECURITIES
(a) Please
see our disclosure under Item 2—(a)(2) above which is incorporated herein by
reference.
(b) None.
ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Please see our Definitive Information
Statement on Schedule 14C filed with the SEC on September 22, 2009, which is
incorporated herein by reference.
ITEM
5 – OTHER INFORMATION
(1) Quest’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 Quest’s receipt of a Wells Notice from the United States Securities
and Exchange Commission. After review of the inquiry and
investigation and further analysis, Quest determined that it had made 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:
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·
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Quest
did not properly evaluate the fair value of the warrants and beneficial
conversion features associated with these financing
transactions;
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·
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Quest did
not properly account for the fair value of the warrants and beneficial
conversion features associated with these financing
transactions;
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·
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In
certain cases, Quest improperly recorded a derivative liability in
connection with these transactions;
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·
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In
those cases where Quest did properly record a derivative liability in
connection with a financing or a restructuring of a prior financing, Quest
did not properly calculate the derivative liability associated therewith;
and
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·
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In
certain cases, Quest did not properly account for the conversion of the
convertible notes and convertible preferred stock and the exercise of the
warrants.
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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
nature of the errors and the restatement adjustments that Quest has made to its
consolidated financial statements for the year ended December 31, 2007 are set
forth in Note 18 of its consolidated financial statements as of December 31,
2008 and December 31, 2007 and the years then ended as filed on Form 10-K for
the year then ended.
The
restatements also affected the quarterly results of operations for the periods
ended March 31, 2008, June 30, 2008, and September 30, 2008. The nature of
the errors and the restatement adjustments that Quest has made to its
consolidated financial statements for the three and nine months ended September
30, 2008 are set forth in Note 18 of its consolidated financial statements as of
September 30, 2009 and the three and nine months then ended, which are
contained in this report.
Accordingly,
the Board of Directors has determined that Quest’s previously issued
consolidated financial statements included in its Annual Report on Form 10-KSB
for the year ended December 31, 2007, and applicable reports of its independent
registered public accounting firm, and its Quarterly Reports on Form 10-Q
for the periods ended March 31, 2008, June 30, 2008, and September 30,
2008, should no longer be relied upon.
Quest has
filed with the SEC an Amendment No. 1 to its Annual Report on Form 10-K, an
Amendment No. 1 to its Quarterly Report on Form 10-Q and its Quarterly Report on
Form 10-Q, which contain restated financial statements for the above-referenced
periods. The Board of Directors and management of Quest have discussed the
matters disclosed herein with Quest’s independent registered public
accounting firm.
(2) On
November 23, 2009, Quest amended its articles of incorporation to reduce the par
value of our common stock from $0.001 per share to $0.0001 per
share.
ITEM
6 - EXHIBITS
Item
No.
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Description
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|
Method of Filing
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3.1
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Amendment
to Articles of Incorporation
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Incorporated
by reference to our Information Statement on Schedule 14C filed on
September 22, 2009
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4.1
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Settlement
Note
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Filed
herewith.
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4.2
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Consulting
Bonus Note
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Filed
herewith.
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4.3
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Amendment
to Convertible Note
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Filed
herewith.
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4.4
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Fee
Escrow Note
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Filed
herewith.
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4.5
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Demand
Note
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Filed
herewith.
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10.1
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Settlement
Agreement
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Filed
herewith.
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10.2
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Bonus
Agreement
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Filed
herewith.
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31.1
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Certification
of Eugene Chiaramonte, Jr. pursuant to Rule 13a-14(a)
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Filed
herewith.
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32.1
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Chief
Executive Officer and Chief Financial Officer Certification pursuant to 18
U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002
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Filed
herewith.
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SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
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QUEST
MINERALS & MINING CORP.
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November
23, 2009
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/s/ Eugene Chiaramonte, Jr.
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Eugene
Chiaramonte, Jr.
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President
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(Principal
Executive Officer and Principal
Accounting
Officer)
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