Item 1. Description of Business
Forward-looking Statements
This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable laws, including the securities laws of the United States, we do not intend to update any of the forward-looking statements so as to conform these statements to actual results.
As used in this annual report, the terms "we", "us", "our", “the Company”, and "Energy Quest" mean Energy Quest Inc., unless otherwise indicated.
All dollar amounts refer to US dollars unless otherwise indicated.
Overview
We were incorporated as a Nevada company on June 20, 1997. We changed our corporate name to Energy Quest Inc. on May 31, 2007. We are a development stage company in the development and production of hydrogen-enriched alternative fuels in an environmentally responsible manner. Our principal business involves an integrated gasification production system technology that combines modern gasification with turbine technologies to produce synthetic gas, hydrogen or electricity.
We plan to employ gasification technologies and catalytic conversion processes to produce clean fuels. In addition we have recently acquired technology for a High-Tech Portable Frac & Brine Water Emulsion Breaker System and a Water Purification System.
Our principal offices are located at 103 Firetower Road, Leesburg, Georgia 31763 and recently opened offices at the Frost Bank Tower, 402 Congress Avenue, Suite 1540, Austin, Texas 78701. Our fiscal year end is December 31.
Development
On August 3, 2009, we signed a Joint Venture Agreement with Crude Oil Petroleum Services Corporation to form a new company known as EnviroTec Services in the Province of Alberta, Canada. The new company will focus on the business of oil remediation consisting of sand, slop oil, sludge and tank cleaning. The agreement will continue for a period of 20 years and each party will contribute services on a 50:50 basis and share revenues accordingly. As of March 28, 2013, no transactions have taken place.
Our Products and Services
High-Tech Portable Frac & Brine Water Emulsion Breaker System
Our system works as follows. First we heat the Frac water emulsion and or oil sludge to 80 to 90 degrees Centigrade, remove rocks, rags and debris via screens pot or shaker system. The next stage comprises of chemically treating the incoming emulsified mixture. An acid is injected into the emulsion and it is then homogeneously blended with the stream. Due to the action of the acid the emulsion starts breaking down. The blending process is achieved by way vigorous agitation with a centrifugal pump assisted by a rotating and static blender respectively.
The next step is comprised of a three-phase separation in a specially designed vessel which employs both gravity and centrifugal forces. The light phase migrates to the upper part of the vessel whereas the solids and water settle in the lower portion where they are further easily separated. Water containing relatively small amounts of oil is then processed in a polishing unit designed to lower the oil content to less than 10 ppm THC. The polishing unit extracts the oil and delivers it to a storage tank where a settling process occurs to render the oil drier. Pipeline spec oil can then be reclaimed for various purposes. Clean water exiting the polishing unit is then neutralized by means of a hydroxide and can be easily recycled or disposed of in the producer’s disposal wells, without any issues about the water quality for disposal.
An additional set of modules can be easily added to produce potable water for crops and agricultural usage and also to produce high quality drinking water. The system is fully automatic and portable being installed on a low boy trailer. The system only requires one operator per shift plus one helper for safety and will easily process 20 cubic meters per hour.
Maintenance and operating cost are extremely low in comparison to any conventional methods to process slop oil’s and sludge’s such as heat exchange with centrifuges and or thermal processes.
Water Purification System
Our unique WaterFier (WATER puriFIER or Water Purification Module) is designed and made on the basis of Nano-technologies, and has the highest productivity in the World (0.5 tons of pure water per hour on 1 kW of applied power) and contains three main modules (optional water improvement and mineralizing module can be used to make ideally pure drinking water).
Our water purification module can operate together with a small Wind Turbine or a small diesel generator and or typical grid power. The ideal system of water purification is that purifies water, stores it and gives it back when needed. It is also desirable that such module would have the autonomous energy supply system, operate without supervision and should be relatively inexpensive. Wind Turbines (Wind Power Generators) of 3 and 30 kW power can solve this problem, starting from pumping the Frac water and or polluted Brine water into the input pipelines and finishing by pumping of pure water into the output pipelines and storage tanks for distribution. The system generates pure high quality drinking water from totally unused sources. It provides itself with power with the help of Wind Turbine (together with solar panels in some cases), and provides the pumping and purification of water.
The volume of the tank for water storage should meet the requirements of consumers and should be made in accordance with the power of energy source and volume of water purification. Optional ultra-violet or ultra-sound module can be used for further improvement of the quality of water purification. When water flow moves in electromagnetic field of specific intensity, the positively charged ions are being attracted to one side of the flow, closed to negative electrode, the negative ions - to the other side, to positive electrode. As the result the flow of pure water appears between these flows. Moving along the flat pipe of specific cross-section, water clears itself of salts and other suspensions. For compactness the flat pipe is rolled into the “helix”.
Fluidized Bed Gas Generator (Gasifier)
In Fiscal 2005 we acquired Syngas Energy along with all rights and title to its advanced gasification process. Subsequently, we completed a prototype of the gasification technology. The air blown fluid bed gasifier, which converts waste solid fuel sources into a gaseous form. The gas produced can be used in most boilers, kilns and furnaces to offset the use of natural gas.
The fluidized bed gasification process offers substantial benefits compared to simple burning processes, and other forms of gasification. The gasifier has been successfully used to convert biomass wastes (i.e. wood wastes, bark, and agricultural wastes) into a clean fuel gas that can be used to fire various types of industrial equipment.
The overall thermal efficiency of fluid bed gasifiers is typically in the range of 75% to over 90%, depending on the ash and moisture content of the fuel. Unlike some burners (such as suspension burners) or old style fixed bed gasifiers, the fluid bed gasifiers can operate satisfactorily with highly variable feed materials ranging from coal, shredded wood and bark to sawdust fines, or lump wood with particle sizes of less than 1 1/2 - 2 inches. In contrast, other types of gasifiers or burners require either dry pellets, nuggets of clean wood, or uniformly dry sander dust. Thus the various types of fuels generally available around lumber mills can be used in fluid bed gasifiers with good results. The fluid bed gasifier does not have moving grates or other moving parts in the high temperature regions of the bed. Where there are moving parts, heavy duty industrial components proven in lumber and pulp mill operations are used. Reliability is thus high.
The size of energy conversion systems is generally dictated by their air flow. Because fluid bed gasifiers use comparatively small amounts of air, the equipment is comparatively small and compact. This permits systems to be completely shop fabricated and assembled on skids thereby reducing purchase price and installed costs. Because the process produces a fuel gas rather than just quantities of heat, it can be easily applied to a variety of industrial processes including boilers, dry kilns, veneer dryers, or several pieces of equipment at once. Operation with wood/bark fuels results in very low emissions, including low NO2, carbon monoxide, and particulate emissions. No "tail end" exhaust cleanup devices are required.
Modular Advanced Controlled Air Incinerator
We have developed a Modular, Controlled Air, Factory Built and Packaged incinerator. The unit is a Starved Ignition Chamber, Excess Air Combustion Chamber. These are not Pyrolytic Units since air is introduced into the ignition chamber. All units are designed and rated on a Burning Rate Basis, meaning they will burn waste as fast as it is charged.
The integrated design of the ignition chamber, flame port and combustion chamber allows proper and constant gas velocities to insure proper air/fuel (waste) ratios for optimum combustion efficiency. The units are ideally suited for medical waste and moderately prepared municipal waste disposal.
Commercialization
We plan to focus on developing and marketing our current technologies while researching new methods of clean energy production. We intend to subcontract production to outside sources that have a proven track record of efficiency, reliability and competitive quality and pricing. Our distribution plan is to enter into technology licensing arrangements with energy producers and energy production technology distributors, to install our products and use them to create fuels produced with our technology, as well as to sell our technologies to other companies within exclusive geographic territories and to set up joint ventures with other companies.
We are focusing our efforts in getting our High-Tech Portable Frac & Brine Water Emulsion Breaker System and a Water Purification System to market.
Licensing Agreements with Re-Gen International, Beaufort Energy and Poly-Pacific International
We entered into a licensing agreement dated April 9, 2007, with Re-Gen International Corporation. Under the terms of the agreement, we agreed to grant licensing rights for our gasification technology in the United States of America. The term of the agreement is 10 years and is renewable at expiration for a further period of 10 years. Re-Gen International must pay us a royalty of 12% of defined profit, to be calculated each month, or a minimum of $30,000 every three months for the first year, whichever is greater. After the first year, the minimum will be adjusted to $60,000 every three months. We have not received any amounts and have not recognized any revenue under this agreement to date.
We entered into a licensing agreement dated April 24, 2007, with Beaufort Energy Solutions, Inc. Under the terms of the agreement, we agreed to grant licensing rights for our gasification technology in the Province of British Columbia, Canada. The term of the agreement is 20 years and is renewable at expiration for a further period of 10 years. Beaufort Energy must pay us a royalty of 10% of defined net income, to be paid within 30 days after the end of each quarterly accounting period.
On October 24, 2007 we entered into a licensing agreement with Poly-Pacific International Inc. According to the agreement, we agreed to grant licensing rights for our gasification technology in the territory of Ontario, Canada. The term of the agreement is 10 years. Poly-Pacific International must pay us a royalty of 10% of defined profit, to be calculated each month, approximately $5,000 upon signing the agreement (paid) and a further approximately $5,000 upon the completion of a working commercial demo unit.
Modular Bio-energy Units
On September 13, 2007 we completed the research and development of our small Modular Bio-energy units: Model FS324 and M2-3 Gasifier. By using our PyStR ™ and M2 gasification technologies, these units can convert waste biomass or coal to electricity and heat.
Our small Modular Bio-energy units will be deployed in remote areas of Canada, United States, South Africa and India. Our small Modular Bio-energy units will give remote areas an alternative energy source. These units have state of the art controls and are user friendly.
The Gasification and Energy Production Industry
The energy production industry is comprised of major industrial players with large-scale production facilities, and low cost per energy unit. Gasification technology is a niche market within the larger energy production industry. Gasification is a mature, moderate growth business, with reasonable margins. We are concentrating our business focus on the production and distribution of low-cost ½ to 10 megawatt waste to electrical power units or liquid fuels. This is a niche market which is not presently being aggressively pursued by the major industrial players.
Marketing
We are a new company and we have little market presence at this time.
We plan to market our gasification unit by means of demonstrating a portable mobile gasification unit which will showcase the gasifier to generating power from a variety of feedstock such as wood waste, bio-mass, coal, petroleum coke, lignite and in addition a second trailer featuring the PyStR ™ process combined with the gasifier generating hydrogen and oxygen from any available carbon source such as coal, wood waste, lignite and petroleum coke.
We plan on hiring consultants to contact companies with waste facilities, such as lumber waste and municipal waste. We believe that our PyStR ™ technology is suitable for companies in the oil and gas business and in the ammonia business. We plan on targeting such companies through sales consultants that we will hire. Our marketing plan includes attending several oil and gas, and alternative energy trade shows during the next year. We also plan to attend several trade conferences in this year.
Competition
Over the last century, several different methods of gasification have been developed. The most prominent gasification systems used today are fluidized bed gasification systems similar to ours. There are competitors around the world who convert biomass to energy, primarily electricity or thermal, co-generating the energy to reduce waste costs, and lower fuel costs. The table below lists some of our major competitors and the advantage we see in our technology compared to the competition.
Our competition includes small and mid-size independent contractors as well as major energy services companies with international operations. We believe that the principal competitive factors in the market areas that we serve are price, product and service quality, efficiency and availability of equipment and technical proficiency.
We differentiate ourselves from our major competition by our unique equipment. Our target market is independent energy production companies. Based on the experience of our directors, these independents typically are relationship driven and make decisions at the local level. We believe this business model will enable us to grow our business. However, we are a minor participant in the industry and compete in the energy production industry with many other companies having far greater financial, technical and other resources.
Research and Development
On September 13, 2007 we completed the research and development of our small Modular Bio-energy units: Model FS324 and M2-3 Gasifier. Since our inception, we have spent approximately $266,494 on research and development.
We anticipate that we will spend $2,500,000 on research and development over the next twelve months to develop and market our High-Tech Portable Frac & Brine Water Emulsion Breaker System and a Water Purification System. If we are successful in acquiring other technologies, we may increase our research and development budget.
Intellectual Property
On December 24, 2004, we purchased an integrated gasification production system from Wilfred J. Ouellette, our President, CEO and director. The technology combines modern gasification with gas turbine technologies to produce synthetic gas or electricity. By December 31, 2008, we have completed an initial payment of $25,000 and issued the 10,000,000 (500,000 post reverse stock-split) common shares to 975110 Alberta Ltd. in consideration for the transfer of 100% of the interest in all of the enhanced gasification intellectual property and a small gasification unit.
We plan to file patents on several technologies, including the PyStR ™ process and the M2 Fluidized Bed Gas Generator over next 12 months, but we have not filed for any protection of our intellectual properties.
Legislation and Government Regulation
Energy production and distribution is a highly regulated industry in North America and worldwide. Each of the provinces in Canada, and each US State, has regulatory provisions relating to the production of electricity and the distribution of electricity over the transmission grid. Electricity production and distribution is subject to control by differing regulatory agencies in each jurisdiction that may refuse to allow production and sale of electricity into the grid under their auspices, or periodically assign allowable rates of production. Changes in permits and allowable rates per energy unit may have a substantial effect on our operations and the operations of our customers, which in turn could affect the demand for our products and services and have a substantial effect on our operations. In addition to the forgoing, in the future our Canadian, US and global operations may be affected by political developments by Federal, provincial, state and local laws and regulations including but not limited to restrictions on emissions of greenhouse gases, price controls, tax increases, expropriation of property, modification or cancellation of contract rights, and environmental controls. Furthermore, operations may also be affected by energy trading regulations, import fees and restrictions.
As well, liquid fuels produced by our technologies are highly flammable and normally regulated under hazardous materials regulations in North America and worldwide. We are also subject to safety policies of jurisdictional-specific Workers Compensation Boards and like agencies regulating the health and safety of workers. Since our business strategy is to license our technology to energy producers, who will then face the legislative burden, we do not anticipate any significant compliance expense on our own behalf. However, the potential compliance expense for our customers may affect our operations.
Environmental Law Compliance
Since our business plan involves offering energy production equipment for license and lease to energy producers or users, we do not expect that we will be governed by the comprehensive federal, provincial, state and local laws that regulate discharge of materials into the environment or otherwise relate to health and safety or the protection of the environment. However, since our customers and partners will be subject to these laws, the effect of the regulatory scheme in various jurisdictions may have a substantial effect on our operations.
Each jurisdiction where we sell our product has an Energy and Utilities Board, or similar independent, quasi-judicial agency of government which regulates the safe, responsible and efficient generation and distribution of electricity and energy products. Since we plan to license our technologies to energy producer partners, we do not anticipate that we will be directly subject to the authority of these regulatory bodies. However, since our customers and partners are subject to these laws, the effect of the regulatory bodies in various jurisdictions may have a substantial effect on our operations.
Employees and Consultants
As of March 28, 2013, we have two full time employees, Ronald Foster, our President, CEO, CFO and Secretary and Michael Midagliotti our Vice President. On January 31, 2011 we entered into an executive employment agreement with Ronald Foster for the position of Chief Financial Officer, for a period of 60 months at a base salary of $150,000 per year. The agreement expires January 20, 2015.
In addition to the employees mentioned above, we also engage people as outside contractors and consultants for marketing, business development, investor relations, bookkeeping, legal, accounting, website development and audit functions.
Any increase in the number of employees or consultants may significantly increase our monthly expenses. To facilitate our growth we anticipate hiring more independent sales and marketing consultants. We currently engage people as outside contractors and consultants for bookkeeping, legal, accounting, consulting, marketing and audit functions.
Item 1A.
Item 1A. Risk Factors
Not Applicable.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Our principal executive offices are located at 103 Firetower Road, Leesburg, GA 31763-3755.
Item 3.
Item 3. Legal Proceedings
As of March 28, 2013, there are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we or any of our subsidiaries are a party or of which any of our properties is the subject. Also, our management is not aware of any legal proceedings contemplated by any governmental authority against us.
Item 4.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
Our common stock is not traded on any exchange. Our common stock is quoted on the OTC Bulletin Board, under the trading symbol “EQST.OB”. The market for our stock is highly volatile. We cannot assure you that there will be a market in the future for our common stock. The OTC Bulletin Board securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC Bulletin Board securities transactions are conducted through a telephone and computer network connecting dealers in stocks. OTC Bulletin Board stocks are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
The following table shows the high and low closing prices of our common shares on the OTC Bulletin Board for each quarter within the two most recent fiscal years. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
Holders
As of March 28, 2013, there were approximately 744 holders of record of our common stock.
Dividends
For the two most recent fiscal years we have not paid any cash dividends on our common shares and do not expect to declare or pay any cash dividends on our common shares in the foreseeable future. Payment of any dividends will depend upon future earnings, if any, our financial condition, and other factors as deemed relevant by our Board of Directors.
Equity Compensation Plans
According to the 2008 Stock Compensation Plan, we are authorized to issue up to 1,000,000 shares of our common stock to employees, executives and consultants. According to the 2008 Non-Qualified Stock Option Plan, we are authorized to issue up to 1,000,000 stock purchase options to employees, executives and consultants to purchase shares of our common stock. As of December 31, 2012, 1,000,000 shares were issued under the 2008 Stock Compensation Plan.
Recent Sales of Unregistered Securities
Not applicable.
Item 6.
Item 6. Selected Financial Data
Not applicable.
Item 7.
Item 7. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-K. The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.
Results of Operations
Limited Revenues
Since our inception on December 14, 2004 to December 31, 2012, we had earned limited revenues of $5,164. During the fiscal year ended December 31, 2012 we did not generate any revenues. As of December 31, 2012, we had an accumulated deficit of $10,520,739. At this time, our ability to generate any significant revenues continues to be uncertain. There is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Net Loss
We incurred net loss of $10,520,739 since December 14, 2004 (date of inception) to December 31, 2012. Our net loss decreased from $423,262 for the fiscal year ended December 31, 2011 to $199,853 for the fiscal year ended December 31, 2012, a decrease of $223,409. For the fiscal year ended December 31, 2012, our net loss per share was $0.00, compared to net loss of $0.02 per share for the same period in 2011.
Expenses
Our total operating expenses from December 14, 2004 (date of inception) to December 31, 2012 were $10,220,754 and consisted of $5,626,394 in consulting and management fees, $655,152 in general and administrative fees, $561,971 in professional fees, $266,494 in research and development, $398,077 in depreciation, $2,632,666 on impairment of intangible assets and $80,000 in other. Total expenses decreased $206,584 to $91,884 for the fiscal year ended December 31, 2012 from $298,468 for the same period in 2011.
Our consulting and management fees decreased $165,000 to $10,000 for the fiscal year ended December 31, 2012 from $175,000 for the same period in 2011 mostly due to a decrease in the amount of consulting services we required. Our consulting and management fees consisted mainly of amounts paid to our senior officers and fees paid to our other consultants.
Our general and administrative expenses decreased by $36,884 from $84,268 for the fiscal year ended December 31, 2011 to $47,384 for the same period ended December 31, 2012. The decrease in general and administrative expenses was mainly due to a slight decrease in our day to day operating activities. Our general and administrative expenses consist of office supplies, travel expenses, rent, communication expenses (cellular, internet, fax, telephone), office maintenance, courier and postage costs and office equipment.
Our professional fees decreased by $4,700, to $34,500 for the fiscal year ended December 31, 2012 from $39,200 for the same period in 2011. The decrease in professional fees was mostly due to less legal and auditing services provided during the fiscal year just ended as opposed to the fiscal year ended in 2011. Our professional fees consisted primarily of legal, accounting and auditing fees.
Liquidity and Capital Resources
We expect that we only can generate limited revenues over the next twelve months. As of December 31, 2012, our current assets totaled $1,109, which was comprised of cash and deferred financing cost. As of December 31, 2012 we had a working capital deficit of $449,068.
Our net loss of $10,520,739 from December 14, 2004 (date of inception) to December 31, 2012 was mostly funded by our equity financing. We expect to incur substantial losses over the next two years. During the fiscal year ended December 31, 2012 our cash position decreased by $60.
During the fiscal year ended December 31, 2012, we received net cash of $61,000 from financing activities compared to $64,000 for the same period in 2011. We used net cash of $61,469 in operating activities compared to $73,697 for the same period in 2011. We received net cash of $0 in investing activities compared to $2,000 used for the same period in 2011.
We are currently not in good short-term financial standing. We anticipate that we may only generate any limited revenues in the near future and we will not have enough positive internal operating cash flow until we can generate substantial revenues, which may take the next few years to fully realize. There is no assurance we will achieve profitable operations. We have historically financed our operations primarily by cash flows generated from the sale of our equity securities and through cash infusions from officers and outside investors in exchange for debt and/or common stock.
Our corporate strategy for the next 12 months includes the following:
•Produce, sell, lease and maintain energy generators that we have developed;
•License our integrated gasification technologies to third parties in North American, European and global markets;
•Continually improve our gasification technologies and commercializing our technologies;
•Complete potential deals regarding joint ventures for energy production facilities;
•File patents on several technologies, including the heavy oil upgrading technology process, and seek accredited valuations for these intellectual properties in a variety of markets including the U.S., Germany and Canada; and
•Create additional service lines to complement current operations.
We believe that we need approximately an additional $13,750,000 to meet our capital requirements over the next 12 months (beginning April 2013) for the following estimated expenses:
Of the $13,750,000, we had $197 in cash and cash equivalents as of December 31, 2012. We intend to meet the balance of our cash requirements for the next 12 months from external sources, through a combination of debt financing and equity financing through private placements.
We are seeking equity financing to provide for the capital required to market and develop our technologies and fully carry out our business plan. We cannot guarantee we will be successful in our business operations. A critical component of our operating plan impacting our continued existence is our ability to obtain additional capital through additional equity and/or debt financing. Obtaining additional financing will be subject to a number of factors including market conditions, investor acceptance of our business plan and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unattractive or unavailable to us. If financing is not available on satisfactory terms, we may be unable to continue, develop or expand our operations. If we are unable to raise additional financing, we will have to significantly reduce our spending, delay or cancel planned activities or substantially change our current corporate structure. In such an event, we intend to implement expense reduction plans in a timely manner. However, these actions would have material adverse effects on our business, revenues, operating results, and prospects, resulting in a possible failure of our business. If we raise funds through equity or convertible securities, our existing stockholders may experience dilution and our stock price may decline.
We have generated limited revenues and have incurred significant operating losses from operations. We may continue to experience net negative cash flows from operations and will be required to obtain additional financing to fund operations through equity securities’ offerings and bank borrowings to the extent necessary to provide working capital. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow from stockholders or other outside sources to sustain operations and meet our obligations on a timely basis and ultimately to attain profitability. We have limited capital with which to pursue our business plan. There can be no assurance that our future operations will be significant and profitable, or that we will have sufficient resources to meet our objectives.
These factors raise substantial doubt about our ability to continue as a going concern. Our auditors have issued a going concern opinion. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months. The financial statements do not include any adjustments that might result from the uncertainty about our ability to continue our business. If we are unable to obtain additional financing from outside sources and eventually produce enough revenues, we may be forced to sell our assets, curtail or cease our operations.
Known Material Trends and Uncertainties
On October 15, 2008, we entered into an agreement with CO.F.A.M.M. for the provision of assistance and advice to us on acquiring contracts in Italy, Romania, Greece, Morocco, the Middle East and Hungary. The agreement is for a period of three years and can be renewed annually thereafter, unless terminated by either party by written notice. Pursuant to the agreement, we will pay the cost of marketing or any other costs incurred by COFAMM, with our prior approval.
On September 19, 2008, we entered into an agreement with Access Energy Technologies for the provision of assistance and advice to us on acquiring contracts in Korea. The agreement is for a period of three years and can be renewed annually thereafter, unless terminated by either party by written notice. Pursuant to the agreement, we will pay the cost of marketing or any other costs incurred by Access with our prior approval.
Off-Balance Sheet Arrangements
As of December 31, 2012, we had no off balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the US. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an on-going basis, including those related to customer programs and incentives, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, impairment or disposal of long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be both those important to the portrayal of our financial condition and that require the subjective judgment:
Intangible Asset
In May of 2008, we issued 2,000,000 shares of stock valued at $1.50 per share to a third party for the purchase of various technologies and patents with a total estimated fair market value of $3,000,000 based on the market price of the consideration given . The patents relate to an integrated gasification production system. This patent and technology combines modern gasification with gas turbine technologies to produce synthetic gas, hydrogen or electricity. Amortization has been estimated on the economic useful life or expected legal life of the patent estimated to be 20 years.
On December 24, 2004, we purchased an integrated gasification production system from our CEO. The technology combines modern gasification with gas turbine technologies to produce synthetic gas, hydrogen or electricity. We intend to further develop the technology to make it commercially viable and intend to then sell or license the technology. We purchased the asset by issuing 10,000,000 (500,000 post reverse stock-split) shares of our common stock and a $25,000 payment. If by January 2006 the Company had not raised a minimum of $1,000,000 by way of equity private placements, it has the option, until June 30, 2007, of canceling the 10,000,000 shares issued to 975110 Alberta Ltd. and subject to escrow, in consideration for the transfer to 975110 Alberta Ltd. of 100% of the interest in all of the enhanced gasification intellectual property and a small gasification unit. By December 31, 2008, the 500,000 common shares were released from escrow. On September 20, 2012 this was returned to Mr. Ouellette for forgiveness of all debts due Mr. Ouellette.
Stock-Based Compensation
We record stock-based compensation in accordance with SFAS No. 123R “Share Based Payments”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the equity instrument issued. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.
On January 22, 2008 our Board of Directors approved the 2008 Stock Compensation Plan and the 2008 Non-Qualified Stock Option Plan. According to the 2008 Stock Compensation Plan, we are authorized to issue up to 1,000,000 shares of our common stock to employees, executives and consultants. According to the 2008 Non-Qualified Stock Option Plan, we are authorized to issue up to 1,000,000 stock purchase options to employees, executives and consultants to purchase shares of our common stock. As of March 28, 2013, no securities were issued under the two plans.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Energy Quest, Inc.
(A Development Stage Company)
Henderson, Nevada
We have audited the accompanying consolidated balance sheets of Energy Quest, Inc. and its subsidiary (a development stage company) (collectively, the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the years then ended and for the period from December 14, 2004 (inception) through December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Energy Quest, Inc. and its subsidiary as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years then ended and for the period from December 14, 2004 (inception) through December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company had no revenues in 2012 and has a working capital deficit as of December 31, 2012. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/MALONE BAILEY, LLP
www.malone-bailey.com
Houston, Texas
April 11, 2013
Energy Quest Inc.
(A Development Stage Company)
Consolidated Balance Sheets
Energy Quest Inc.
(A Development Stage Company)
Consolidated Statements of Operations
Energy Quest Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Energy Quest Inc.
(A Development Stage Company)
Consolidated Statement of Stockholders’ Equity (Deficit)
Energy Quest Inc.
(A Development Stage Company)
Consolidated Statement of Stockholders’ Equity (Deficit)
Energy Quest Inc.
(A Development Stage Company)
Consolidated Statement of Stockholders’ Equity (Deficit)
Energy Quest Inc.
(A Development Stage Company)
Consolidated Statement of Stockholders’ Equity (Deficit)
1. Nature of Operations
Energy Quest Inc.’s (“Energy Quest” or the “Company”) principal business is in oil refining and waste energy. On July 12, 2012, the Company acquired a 100% interest in Quest Communications Inc. (“Quest”), a private Nevada company, as a wholly-owned subsidiary. Energy Quest is in the development stage as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915, Development Stage Entities.
2. Going Concern
The Company has incurred losses from operations since December 14, 2004 (inception) to December 31, 2012, has a working capital deficiency and an accumulated deficit that creates substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements have been prepared on the assumption that the Company is a going concern, meaning it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s continuation as a going concern is dependent upon its ability to attain profitable operations and generate funds there-from, and/or raises equity capital or borrowings sufficient to meet current and future obligations. Management plans to raise equity financings over the next twelve months to finance operations. There is no guarantee that the Company will be able to complete any of these objectives.
3. Summary of Significant Policies
a)Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and are expressed in US dollars. These financial statements include accounts of the Company and its wholly-owned subsidiary, Quest Communication Inc. All intercompany transactions and balances have been eliminated. The Company’s fiscal year-end is December 31.
b)Use of Estimates
The preparation of financial statements in conformity with US generally accepted accounting principles 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. The Company regularly evaluates estimates and assumptions related to valuation of long-lived assets, stock based compensation and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
c)Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
d)Basic and Diluted Net Income (Loss) Per Share
The Company computes net earnings (loss) per share in accordance with ASC 260, Earnings Per Share, which requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net earnings (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
e)Foreign Currency Translation
The Company’s functional and reporting currency is the United States dollar. Occasional transactions may occur in Canadian dollars and management has adopted ASC 740 Foreign Currency Translation Matters. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. The Company has never entered into derivative instruments to offset the impact of foreign currency fluctuations.
f)Fair Value of Financial Instruments
Our financial instruments consist principally of cash, accounts payable, amounts due to related parties, notes payable, notes payable - related parties and convertible notes. Pursuant to ASC 820, Fair Value Measurements and Disclosures, and ASC 825, Financial Instruments the fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
g)Stock-Based Compensation
In accordance with ASC 718, Compensation - Stock Based Compensation, the Company accounts for share-based payments using the fair value method. Common shares issued to third parties for non-cash consideration are valued based on the fair market value of the services provided or the fair market value of the common stock on the measurement date, whichever is more readily determinable.
h)Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
4. Related Party Transactions
The following details amounts due to related parties at December 31, 2012:
a)During the year ended December 31, 2012, the Company recorded $0 (2011 - $87,500) for management services provided by the President of the Company. At December 31, 2012, $30,701 (2011 - $0) is owed to the President for expense paid on behalf of the Company.
b)On October 31, 2012, the Company received $2,000 from a company controlled by a director of the Company with no set terms in order to pay Company expenses. At December 31, 2012, the amount is included in amounts due to related parties.
The following details Notes payable - related parties:
c)On March 15, 2009, the Company received $15,051 (CDN $15,000) from a related party consultant in exchange for a promissory note payable. The note bears interest at 6% per annum and is due on demand. At December 31, 2012, this amount is included in notes payable - related party, and the related accrued interest of $3,432 (2011 - $2,469) is included in amounts due to related parties.
d)On November 5, 2007, the Company received $21,000 from a director in exchange for a promissory note payable. The note bears interest at 6% per annum, calculated annually, and is due on demand. At December 31, 2011, accrued interest of $6,500 (2011 - $5,237) is included in amounts due to related parties.
e)On March 10, 2012, the Company received $26,000 from the President of the Company in exchange for a promissory note payable. The note bears interest at 5% per annum and was due on October 10, or upon demand. At December 31, 2012, accrued interest of $1,055 is included in amounts due to related parties.
f)On July 30, 2012, the Company received $5,000 from the President of the Company in exchange for a promissory note payable. The note bears interest at 5% per annum and was due on October 10, 2012 or upon demand. At December 31, 2012, accrued interest of $106 is included in amounts due to related parties.
g)On August 3, 2012, the Company received $2,500 from the President of the Company in exchange for a promissory note payable. The note bears interest at 5% per annum and was due on October 10, or upon demand. At December 31, 2012, accrued interest of $51 is included in amounts due to related parties.
h)On October 9, 2012, the Company received $2,500 from a company controlled by a director of the Company in exchange for a promissory note payable. The note bears interest at 5% per annum and was due on December 10, or upon demand. At December 31, 2012, accrued interest of $28 is included in amounts due to related parties.
5.Convertible Debt
a)On January 29, 2010, the Company borrowed $50,000 from a private investor and issued a callable convertible note with an 8% interest rate, 22% interest rate upon default and a maturity of nine months. The Company paid a finders’ fee of $2,500. The note was convertible into common shares at 55% of the average of the lowest three closing prices for the Company’s common shares during the ten trading day period ending one trading day prior to the date the conversion notice is sent by the investor to the borrower.
The embedded conversion option contains a reset provision that can cause an adjustment to the conversion price if the Company sells or issues an equity instrument at a price lower than the initial conversion price. Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15. This fair value of the derivative liability at issuance of $81,995 resulted in a full discount to the note payable and a loss on the fair value of derivatives of $31,995. The carrying value of the convertible note was accreted over the term of the convertible note up to their value of $50,000. See Note 9.
As of December 31, 2011, the total balance of $50,000 plus $2,000 accrued interest (December 31, 2010 - $46,000), has been converted into 1,059,245 common shares in the years ended December 31, 2010 and 2011.
The following table summarizes the change in convertible debt as of December 31, 2012:
As of December 31, 2011, the Company has recorded $50,000 as the accretion of interest expense on the convertible note and recorded the cost associated with obtaining the convertible note as deferred financing cost of $2,500 on February 8, 2010. As of December 31, 2011, the Company recorded $2,500 on amortization of the deferred financing cost.
b)On November 24, 2010, the Company borrowed $50,000 from a private investor and issued a callable convertible note with an 8% interest rate, 150% of outstanding principal and unpaid interest upon default and a maturity of nine months. The Company paid a finders’ fee of $3,000. The note is convertible into common shares at 55% of the average of the lowest three closing prices for the Company’s common shares during the ten trading day period ending one trading day prior to the date the conversion notice is sent by the investor to the borrower.
The embedded conversion option contains a reset provision that can cause an adjustment to the conversion price if the Company sells or issues an equity instrument at a price lower than the initial conversion price. Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15. This fair value of the derivative liability at issuance of $71,911 resulted in a full discount to the note payable and a loss on the fair value of derivatives of $21,911. The carrying value of the convertible note was accreted over the term of the convertible note up to its value of $50,000. See Note 8.
During the years ended December 31, 2012 and 2011, the Company converted $6,500 and $26,000 into 1,969,697 and 1,994,491 shares of common stock, respectively. As at December 31, 2012, the carrying values of the convertible note, and accrued convertible interest payable thereon, were $29,500, (2011 - $24,000), and $5,802 (2011 - $3,417), respectively.
The following table summarizes the change in convertible debt as of December 31, 2012:
During the year ended December 31, 2012, the Company recorded $0 (2011 - $43,223) as the accretion of interest expense on the convertible note. During the year ended December 31, 2012, the Company recorded $0 (2011 - $2,407) on amortization of deferred financing cost. During the year ended December 31, 2012, the Company recorded $12,000 (2011 - $0) as penalty upon default. Per default terms, the principal of the note increased by 150% during the year.
c)On May 26, 2011, the Company borrowed $35,000 from a private investor and issued a callable convertible note with an 8% interest rate, 150% of outstanding principal and unpaid interest upon default and a maturity of nine months. The Company paid a finders’ fee of $2,500. The note is convertible into common shares at 50% of the average of the lowest three closing prices for the Company’s common shares during the ten trading day period ending one trading day prior to the date the conversion notice is sent by the investor to the borrower.
The embedded conversion option contains a reset provision that can cause an adjustment to the conversion price if the Company sells or issues an equity instrument at a price lower than the initial conversion price. Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15. This fair value of the derivative liability at issuance of $52,570 resulted in a full discount to the note payable and a loss on the fair value of derivatives of $17,570. The carrying value of the convertible note was accreted over the term of the convertible note up to its value of $35,000. See Note 8.
As at December 31, 2012, the carrying values of the convertible note and accrued convertible interest payable thereon were $52,500 (2011 - $27,572) and $5,542 (2011 - $1,680), respectively.
The following table summarize the change in convertible debt as of December 31, 2012:
During the year ended December 31, 2012, the Company recorded $7,428 (2011 - $27,572) as the accretion of interest expense on the convertible note. During the year ended December 31, 2012, the Company recorded $530 (2011 - $1,970) on amortization of deferred financing cost. During the year ended December 31, 2012, the Company recorded $17,500 (2011 - $0) as penalty upon default. Per default terms, the principal of the note increased by 150% during the year.
d)On July 6, 2012, the Company entered into a Securities Purchase Agreement with a private investor for the sale of a Convertible Promissory Note (the “Note”) in the principal amount of $27,500. The Company received net proceeds from the issuance of the Note in the amount of $25,000 and incurred debt financing costs of $2,500, which will be amortized over the term of the Note. The Note, which is due on April 10, 2013, bears interest at the rate of 8% per annum. Any amount of principal or interest on this note which is not paid when due shall bear interest at the rate of 22% per annum from the due date thereof until the same is paid. All principal and accrued interest on the Note is convertible into shares of the Company’s common stock at the election of the note holder at any time after days from July 10, at a conversion price equal to a 50% discount to the average of the 3 closing bid prices of the common stock during the 10 trading day period prior to conversion. The derivative treatment would not become applicable until the Note becomes convertible on January 6, 2013.
The Conversion Price is reduced when the Company issues or grants i) any shares of its common stock, or ii) any warrants, rights or options (not including employee stock option plans), whether or not immediately exercisable, or iii) other securities convertible into or exchangeable for common stock, in each case for consideration (or with a conversion price) per common share less than the conversion price in effect immediately prior to the issuance or sale of such securities or instruments, or without consideration. Upon the issuance or sale of such equity securities, the conversion price shall (until another such issuance or sale) be reduced to the price equal to the price (or conversion price) of any such securities or instruments.
At any time during the period beginning on July 10, 2012 (issue date) and ending on the 90th day following the issue date, the Company has the option to redeem this note and pay the note holder 150% of the unpaid principal and accrued interest. At any time during the period beginning on the 91st day from the issue date and ending on the 180th day following the issue date, the Company has the option to redeem this note and pay the note holder 175% of the unpaid principal and accrued interest. There is no right to repay after the 181st day of issuance.
6.Equity
a)During the year ended December 31, 2012, the Company issued 1,969,697 shares of common stock upon the partial conversion of the Notes referred to in Note 5.
b)During the year ended December 31, 2011, the Company issued 2,236,426 shares of common stock upon the partial conversion of the Notes referred to in Note 5.
c)On December 15, 2011, the Company issued 1,000,000 shares of common stock with a fair value of $10,000 for services received pursuant to the agreement referred to in Note 12(a).
d)On December 6, 2011, the Company issued 20,000,000 shares of common stock with a fair value of $400,000 for settlement of $361,654 due a related party. Since the fair value of the shares issued was more than the amounts due to related party, the Company recognized as stock compensation of $38,346 as the debt was due to a related party.
e)On August 10, 2011, the Company issued 239,914 shares of common stock for interest of the notes payable referred to in Note 9.
f)Effective September 20, 2011, the Company settled $563,586 of outstanding management fees and advances due to the former President of the Company by returning Syngas Energy Corporation, a wholly-owned subsidiary of the Company, and its technology to him. All amounts owed from Syngas to the Company were also forgiven. The Company recognized $563,586 as a contribution of capital. See Note 10.
7. Fair Value Measurements
ASC 825 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
ASC 825 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 825 establishes three levels of inputs that may be used to measure fair value.
Level 1 applies to assets and liabilities for which there are quoted prices in active markets for identical assets or liabilities. Valuations are based on quoted prices that are readily and regularly available in an active market and do not entail a significant degree of judgment.
Level 2 applies to assets and liabilities for which there are other than Level 1 observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 2 instruments require more management judgment and subjectivity as compared to Level 1 instruments. For instance: determining which instruments are most similar to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced; and determining whether a market is considered active requires management judgment.
Level 3 applies to assets and liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.
Pursuant to ASC 825, the fair value of the cash equivalent is determined based on “Level 1” inputs, which consists of quoted prices in active markets for identical assets. Convertible notes payable are valued based on “Level 2” inputs, consisting of quoted prices in less active markets. The Company believes that the recorded values of all of the other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
Assets and liabilities measured at fair value on a recurring basis were presented on the Company’s balance sheet as at December 31, 2012 as follows:
The fair values of other financial instruments, which include accounts payable and accrued liabilities, amounts due to related parties, notes payable, notes payable - related parties, convertible notes and derivative liabilities, approximate their carrying values due to the relatively short-term maturity of these instruments.
8. Derivative Liability
ASC 815-15 lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own common stock.
Convertible Debt - The embedded conversion option in the Company’s notes described in Note 5 contain a reset provision that can cause an adjustment to the conversion price if the Company sells or issues an equity instrument at a price lower than the initial conversion price. The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in our statement of operations as a gain or loss on derivative financial instruments.
The following table summarizes the change in derivative liabilities as of December 31, 2012:
The following table summarizes the loss on derivatives as of December 31, 2012:
The Company used the Black-Scholes option pricing model to value the embedded conversion feature using the following assumptions: number of options as set forth in the convertible notes agreements; no expected dividend yield; expected volatility ranging from 266% - 448%; risk-free interest rates ranging from 0.01% - 0.28% and expected terms based on the contractual term.
9. Notes Payable
On August 10, 2011, the Company received $30,000 from two lenders in exchange for two promissory notes payable. The notes bear interest at 8% per annum and are due on demand. On August 10, 2011, the Company issued 239,914 shares of common stock at a fair value of $8,397 for the $2,399 interest on the notes. This resulted in a loss of $5,998. As of December 31, 2012, accrued interest of $940 is included in accrued liabilities, and both notes are in default.
10. Acquisition
On July 12, 2012, the Company acquired a 100% interest in Quest Communications Inc. (“Quest”), a private Nevada company, in consideration for $15. Quest was incorporated on June 11, 2012 and has not yet commenced operations.
11. Sale of Subsidiary
The Company entered into an Agreement dated September 20, 2011 to return its wholly-owned subsidiary, Syngas Energy Corporation (“Syngas”) and its technology to the former President of the Company as full settlement of any debts owed or accrued to him. Upon the return of Syngas, the former President forever discharges and releases the Company from any and all claims, damages, actions, etc. which the former President had or may have arising out of the Debt Amount. As a term of the Agreement, the intercompany debt between Syngas and the Company is extinguished. The sole asset and liability of Syngas at the time of the transaction consisted of the intercompany debt of $61,457. The Company recognized the settlement of debt of the former President of $563,586 as a charge to additional paid-in capital as it was a related party transaction.
12. Commitments
In the normal course of business, we may become subject to lawsuits and other claims and proceedings. Such matters are subject to uncertainty and outcomes are not predictable with assurance. Management is not aware of any pending or threatened lawsuits or proceedings which would have a material effect on the Company’s financial position, liquidity, or results of operations.
•On December 15, 2011, the Company entered into an Agreement with a Consultant to provide services to the Company and to identify potential business opportunities or potential business acquisitions in the broadcasting, production and music media business. The term is for a period of one year. On December 20, 2011, the Consultant was issued 1,000,000 shares of common stock with a fair value of $10,000. The Agreement was cancelled on July 31, 2012.
13.Income Taxes
A reconciliation of the expected income tax recovery computed by applying the statutory United States federal income tax rate of 35% to income (loss) before taxes follows:
The components of the net deferred tax asset at December 31, 2012 and 2011 consist of:
Potential benefits of income taxes are not recognized in the accounts until realization is more likely than not. At December 31, 2012, the Company has a net operating loss carry-forward of $6,649,200 that expires in fiscal year 2031. Pursuant to ASC 740 the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefit of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
Current United States income tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited under IRC 382.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Since inception, we have had no changes in or disagreements with our accountants. Our audited financial statements for the fiscal years ended December 31, 2012 and 2011 have been included in this annual report in reliance upon Malone & Bailey PC, Independent Registered Public Accounting Firm, as experts in accounting and auditing.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer covered by this report, 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 as of December 31, 2012 (the “Evaluation Date”). Based upon the evaluation of our disclosure controls and procedures as of the Evaluation Date, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective because of the identification of a material weakness in our internal control over financial reporting which is identified below, which we view as an integral part of our disclosure controls and procedures.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and our receipts and expenditures of are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its evaluation, our management concluded that there is a material weakness in our internal control over financial reporting and Management has concluded that the Company’s internal controls over financial reporting are not effective as of December 31, 2012 due to a lack of qualified accounting personnel and an overreliance on consultants in the accounting and financial statement close process. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness relates to the lack of segregation of duties in our financial reporting process and we utilize outside third party consultants. We do not have a separately designated audit committee. This weakness is due to our lack of excess working capital to hire additional staff. To remedy this material weakness, we intend to engage an internal accountant to assist with financial reporting as soon as our finances will allow.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of our fiscal year ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.
The following table sets forth the name, age, and position of our executive officers and directors as of March 28, 2013.
The directors shall be elected at an annual meeting of the stockholders and except as otherwise provided within our Bylaws, as pertaining to vacancies, shall hold office until a successor is elected and qualified. There any arrangements or understanding between any of our directors or officers or any other person pursuant to which any officer or director was or is to be selected as an officer or director.
Ronald Foster, Director, President, Chief Financial Officer, and Secretary
Ronald Foster has been a director since July 8, 2008 and our President and Chief Executive Officer since August 1, 2011 and also serves as our Secretary and Chief Financial Officer since January 31, 2010. His primary responsibilities include finance, compliance and business development. In his career, Mr. Foster has held a number of senior-level executive positions with several publicly traded companies, including, ValCom Inc., SBI Communications, Inc., EL-Phills Inc., Golden American Network and ROPA Communications Inc. He created and produced “Stock Outlook 86, 87, 88, 89”, a video presentation of public companies through Financial News Network, (FNN) a national cable network. Mr. Foster has a tremendous amount of experience with mergers & acquisitions, restructuring and the operations of publicly traded companies. Mr. Foster developed a strong operational focus through his past operations, management and consulting positions in the marketing, entertainment and financial business in the different companies that he has been affiliated with.
Michael Midagliotti, Director, Vice President
Mr. Midagliotti is President & Owner of Friar Enterprises Inc., a residential general contractor from 1976 to present in the Northern Ohio area. Mr. Midagliotti directs a diverse organization that provides home remodeling and construction, directing and overseeing the company’s financial, business, and administrative services which are fundamental to both the company’s operations and the achievement of its operational and financial objectives. Mr. Midagliotti graduated from Miami University and holds a Bachelor of Science in Finance. Since 1976 to the present, Mr. Midagliotti has operated as a general contractor in the northern Ohio area. In 1984, Mr. Midagliotti entered the political arena and was unsuccessful for his bid for state representative in Ohio. Mr. Midagliotti is a Certified Remodeler and is a current member of the National Association of the Remodeling Industry. From 1995-97 he served as president and chairman of the board of the local Cleveland, Ohio chapter.
Peter J. Stephen, Director
Mr. Stephen was appointed as director on April 21, 2008. Mr. Stephens has experience assisting small businesses to become large and profitable corporations. He has experience in planning, implementing and managing service oriented companies and managing programs, policies and procedures in companies with interstate operations and offices. Mr. Stephens has developed a track record of utilizing available resources to improve operational efficiency which concurrently reducing costs. Mr. Stephens brings 18 years of business experience and creativity to the Company. He is currently the President of Alliance Overhead Door d.b.a. Garage Door Service Company, a position which he has held since 1996. During his tenure with Alliance Overhead Door, the company has grown to include 13 locations in 8 states with an average of $25 million in annual sales revenue. Prior to joining Alliance Overhead Door, Mr. Stephens was employed for two years as a salesman for Direct TV. His responsibilities included developing a detailed marketing plan for sales of Direct TV’s satellite product to consumers. Prior to that, Mr. Stephens worked for two years as a broker, preceded by two years spent as a realtor of residential and commercial property. Mr. Stephens completed his post-secondary education in sciences in 1990.
Abdulsalam Al Hamri, Director
Mr. Al Hamri was appointed as director on June 14, 2010. Mr. Al Hamri has a great deal of experience in corporate debt restructuring and negotiation, corporate management, business ownership and operation. He has international experience in project preparation, financing, finance and financial engineering, commodity trading (especially in the oil and gas sector), secondary market for sovereign and commercial debts. Mr. Al Hamri has lectured on macroeconomics, banking, privatization, economics of transition and transition economies. As well, Mr. Al Hamri has provided services and time to the National Administration, central bank-research, credits, foreign exchange, credit department, development projects, co-financing multilateral conditional lending. From 2005 until present, Mr. Al Hamri serves as Al Hamri Enterprises S.L. chairman of the board of directors. His primary responsibilities include finance, compliance and business development. From 1999 until 2005, he served as the President & CEO FTC / Qatar Royal Family.
Director Nominees
We do not have a nominating committee. The Board of Directors, sitting as a Board, selects individuals to stand for election as members of the Board. Since the Board of Directors does not include a majority of independent directors, the decision of the Board as to director nominees is made by persons who have an interest in the outcome of the determination. The Board will consider candidates for directors proposed by security holders, although no formal procedures for submitting candidates have been adopted. Unless otherwise determined, not less than 90 days prior to the next annual Board of Directors' meeting at which the slate of Board nominees is adopted, the Board will accept written submissions of proposed nominees that include the name, address and telephone number of the proposed nominee; a brief statement of the nominee’s qualifications to serve as a director; and a statement as to why the shareholder submitting the proposed nominee believes that the nomination would be in the best interests of shareholders. If the proposed nominee is not the same person as the shareholder submitting the name of the nominee, a letter from the nominee agreeing to the submission of his or her name for consideration should be provided at the time of submission. The letter should be accompanied by a résumé supporting the nominee's qualifications to serve on the Board of Directors, as well as a list of references.
The Board identifies director nominees through a combination of referrals from different people, including management, existing Board members and security holders. Once a candidate has been identified, the Board reviews the individual's experience and background and may discuss the proposed nominee with the source of the recommendation. If the Board believes it to be appropriate, Board members may meet with the proposed nominee before making a final determination whether to include the proposed nominee as a member of management's slate of director nominees submitted to shareholders for election to the Board.
Among the factors that the Board considers when evaluating proposed nominees are their knowledge of, and experience in business matters, finance, capital markets and mergers and acquisitions. The Board may request additional information from the candidate prior to reaching a determination. The Board is under no obligation to formally respond to all recommendations, although as a matter of practice, it will endeavor to do so.
Audit Committee
The functions of the Audit Committee are currently carried out by our Board of Directors. Our Board of Directors has determined that we do not have an audit committee financial expert on our Board of Directors carrying out the duties of the Audit Committee. The Board of Directors has determined that the cost of hiring a financial expert to act as a director of us and to be a member of the Audit Committee or otherwise perform Audit Committee functions outweighs the benefits of having a financial expert on the Audit Committee.
Significant Employees
Other than the senior officers described above, we do not expect any other individuals to make a significant contribution to our business.
Family Relationships
There are no family relationships among our officers, directors or persons nominated for such positions.
No Legal Proceedings
None of our directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:
•any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
•any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
•being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
•being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Section 16(a) Beneficial Ownership Compliance Reporting
Section 16(a) of the Securities Exchange Act of 1934 requires a company’s directors and officers, and persons who own more than ten-percent (10%) of the company’s common stock, to file with the Securities and Exchange Commission reports of ownership on Form 3 and reports of change in ownership on Forms 4 and 5. Such officers, directors and ten-percent stockholders are also required to furnish the company with copies of all Section 16(a) reports they file. Based solely on our review of the copies of such forms received by us and on written representations from certain reporting persons, we believe that all Section 16(a) reports applicable to our officers, directors and ten-percent stockholders with respect to the fiscal year ended December 31, 2011 were filed.
Code of Ethics
On February 11, 2008, we adopted an ethics policy and a human rights policy statement that apply to our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions) and employees. We have filed our ethics policy and human rights policy statement an exhibits to annual report on Form 10-K for the year ended December 31, 2008.
Item 11.
Item 11. Executive Compensation
The following table sets forth, as of December 31, 2012, compensation awarded to our Chief Executive Officer (CEO), and to other persons serving as executive officers whose salary and bonus for such year exceeded $100,000 (collectively, the “Named Executive Officers”) for the last two completed fiscal years.
(1)Mr. Foster has been our Chief Financial Officer since January 31, 2010, a Director, Secretary and Treasurer since July 1, and serves as our President and Chief Executive Officer since August 1, 2012.
(2)Mr. Ouellette has been a director since July 1, and our President, Chief Executive Officer since May 5, 2006. He was our Chief Financial Officer from May 5, to January 2, and our President and CEO until August 1, 2011.
Employment Agreements
None.
Option Grants
We did not grant any options or stock appreciation rights to our named executive officers or directors in the fiscal 2012. As of March 28, 2013, none of our executive officers or directors owned any of our derivative securities.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.
Compensation Committee
We currently do not have a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.
Compensation of Directors
We reimburse our directors for expenses incurred in connection with attending Board meetings. We did not pay director's fees or other cash compensation for services rendered as a director for the year ended December 31, 2012.
No cash compensation was paid to any of our directors for the director's services as a director during the fiscal year ended December 31, 2012. We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors except for the granting from time to time of incentive stock options. The Board of Directors may award special remuneration to any director undertaking any special services on behalf of our Company other than services ordinarily required of a director. Other than indicated below, no director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.
Change of Control
As of March 28, 2013 we had no pension plans or compensatory plans or other arrangements which provide compensation on the event of termination of employment or change in control of us.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information concerning the number of shares of the Company’s common stock owned beneficially as of March 28, 2013 by: (i) each of our directors; (ii) each of our named executive officers; and (iii) each person or group known by us to beneficially own more than 5% of our outstanding shares of common stock. Unless otherwise indicated, the shareholders listed below possess sole voting and investment power with respect to the shares they own.
As of March 28, 2013, there were 40,611,944 common shares issued and outstanding.
(1)The number and percentage of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within days through the exercise of any stock option or other right. The persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table.
(2)Based on 42,581,641 issued and outstanding shares of common stock as of March 28, 2013.
(3)Abdulsalam Al Hamri is a director.
(4)Shares held by Al Harmi Enterprises S L a copy that Abdulsalam Al Hamri controls.
(5)Ronald Foster is our director and our Chief Executive Officer, Chief Financial Officer and Secretary.
(6)Includes 1,878,286 held by Mr. Foster’s wife.
(7)Michael Midagliotti is our director and Vice President.
(8)Peter Stephens is our director
(9)Wilfred J. Ouellette was a former director, President and Chief Executive Officer.
(10)Includes 322,524 shares owned by 975110 Alberta Ltd., a company over which Wilfred J. Ouellette has the voting and investment control and 106,416 shares Mr. Ouellette owns in his own name.
Item 13.
Item 13. Certain Relationships, Related Transactions and Director Independence
On October 31, 2012, we received $2,000 from a company controlled by our director, with no set terms in order to pay expenses. At December 31, 2012, the amount is included in amounts due to related parties.
On March 10, 2012, we received $26,000 from our President in exchange for a promissory note payable. The note bears interest at 5% per annum and was due on October 10, 2012 or upon demand. At December 31, 2012, accrued interest of $1,055 is included in amounts due to related parties.
On July 30, 2012, we received $5,000 from our President in exchange for a promissory note payable. The note bears interest at 5% per annum and was due on October 10, 2012 or upon demand. At December 31, 2012, accrued interest of $106 is included in amounts due to related parties.
On August 3, 2012, we received $2,500 from our President in exchange for a promissory note payable. The note bears interest at 5% per annum and was due on October 10, 2012 or upon demand. At December 31, 2012, accrued interest of $51 is included in amounts due to related parties.
On October 9, 2012, we received $2,500 from a company controlled by a director in exchange for a promissory note payable. The note bears interest at 5% per annum and was due on December 10, 2012 or upon demand. At December 31, 2012, accrued interest of $28 is included in amounts due to related parties.
Other than as described above, we have not entered into any transactions with our officers, directors, persons nominated for these positions, beneficial owners of 5% or more of our common stock, or family members of these persons wherein the amount involved in the transaction or a series of similar transactions exceeded the lesser of $120,000 or 1% of the average of our total assets for the last three fiscal years.
Item 14.
Item 14. Principal Accountant Fees and Services.
Audit and Non-Audit Fees
The following table represents fees for the professional audit services and fees billed for other services rendered by our former auditors, Morgan & Company, and our current auditors, Malone & Bailey PC, for the audit of our annual financial statements respectively for the years ended December 31, 2012 and 2011 and any other fees billed for other services Malone & Bailey PC during these periods. All fees are paid by US dollars.
Since our inception, our Board of Directors, performing the duties of the Audit Committee, reviews all audit and non-audit related fees at least annually. The Board of Directors as the Audit Committee pre-approved all audit related services in the fiscal 2012.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
See “Index to Financial Statements” set forth on page.
(a) (2) Financial Statement Schedules
None. The financial statement schedules are omitted because they are inapplicable or the requested information is shown in our financial statements or related notes thereto.
(1) Included as exhibits to our Form 10-SB filed on November 30, 1999.
(2) Included as an exhibit to our Form 8- K filed on February 24, 2005.
(3) Included as exhibits to our Form SB-2 filed on July 17, 2007.
(4) Included as an exhibit to our Form 8- K filed on January 8, 2008.
(5) Included as an exhibit on our Form 10QSB filed November 19, 2007.
(6) Included as an exhibit on our Form 10QSB filed August 15, 2007.
(7) Included as an exhibit on our Form 10-K filed April 1, 2008.
(8) Included as an exhibit on our Form 8-K filed May 12, 2011
(9) Included as an exhibit on our Form 8-K filed June 1, 2011
(10) Included as an exhibit on our Form 8-K filed June 15, 2011
(11) Included as an exhibit on our Form 10-K/A filed July 16, 2011
(12) Included as an exhibit on our Form 10 Q filed May 24, 2011
(13) Included as an exhibit on our Form 10 Q filed August 16, 2011
(14) Included as an exhibit on our Form 10 Q/A file November 18, 2011
(15) Included as an exhibit on our Form 10-K filed March 30, 2012
(16) Included as an exhibit on our Form 10 Q filed May 23, 2012
(17) Included as an exhibit on our Form 8-K filed August 8, 2012
(18) Included as an exhibit on our Form 10 Q filed August 10, 2012
(19) Included as an exhibit on our Form 8-K filed October 5, 2012
(20) Included as an exhibit on our Form 10 Q file November 15, 2012
(21) Included as an exhibit on our Form 10 Q/A filed December 19, 2012
(22) Included as an exhibit on our Form 10 Q/A filed December 19, 2012
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 12, 2013
Energy Quest Inc.
By: /s/ Ronald Foster
Ronald Foster
President, Chief Executive Officer, Chief Financial Officer and Director
Pursuant to the requirements of the Exchange Act this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.