UNITED STATES

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549

 

**FORM 10-Q**

 

þ  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended **June 30, 2010**

 

o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

 

For the transition period from _________ to _________

 

Commission File Number: **000-28305**

 

**ENERGY QUEST, INC.**

(Name of Small Business Issuer in its charter)

 

| **Nevada**

**91-1880015**

(state or other jurisdiction of incorporation or organization)

(I.R.S. Employer I.D. No.)

 

 

**850 South Boulder Hwy, Suite 169**

**Henderson, Nevada**

**89015-7564**

(Address of principal executive offices)

(Zip Code)

**(702) 568-4131**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was require to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  **Yes  ****þ**   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o      Accelerated filer o     Non-accelerated filer o     **Smaller reporting company****þ**

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes **   **o     **No****  ****þ**

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

As of **August 16, 2010** the registrant had **15,818,294** shares of common stock outstanding.

 

 

 

                               
**Table of Contents**

 
**PART I - FINANCIAL INFORMATION3ITEM 2.  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.4ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.9ITEM 4.  CONTROL AND PROCEDURES.9ITEM 4T.  CONTROL AND PROCEDURES.9PART II – OTHER INFORMATION10ITEM 1.  LEGAL PROCEEDINGS.10ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES.10ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.10ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.10ITEM 5.  OTHER INFORMATION.10ITEM 6.  EXHIBITS.11      

2                               
**PART I - FINANCIAL INFORMATION**

Energy Quest Inc.

 

(A Development Stage Company)

 

 

 

 

 

June 30, 2010

 

 

 

 

Index

Consolidated Balance Sheets (Unaudited)

F-1

 

 

Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited)

F-2

 

 

Consolidated Statements of Cash Flows (Unaudited)

F-3

 

 

Notes to the Unaudited Consolidated Financial Statements

F-4

 

 
3                               
Energy Quest Inc.

(A Development Stage Company)

Consolidated Balance Sheets

(Unaudited)

 

June 30,

2010

December 31,

2009

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash

$

65,409 

$

816 

Deferred financing cost

1,200 

                   –

 

 

 

Total Current Assets

66,609 

816 

 

 

 

Intangible Assets, net 

2,706,255 

2,781,224 

 

 

 

Total Assets

2,772,864 

2,782,040 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable and accrued liabilities

36,647 

36,294 

Amounts due to related parties

600,403 

516,881 

Notes payable – related parties

85,313 

35,298 

Convertible note, net 

30,674 

                   –

 

 

 

Total Liabilities

753,037 

588,473 

 

 

 

Stockholders' Equity

 

 

 

 

 

Preferred Stock

 

 

Authorized: 1,000,000 shares, with a $0.01 par value;

none issued or outstanding

                              –

                   –

 

 

 

Common Stock

 

 

Authorized:  200,000,000 shares, with a $0.001 par value;

Issued:  15,818,294 and 13,818, 294  shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively

15,818 

13,818 

 

 

 

Additional Paid-in Capital

8,794,929 

8,663,596 

 

 

 

Accumulated Other Comprehensive Income

3,981 

3,946 

 

 

 

Deficit Accumulated During the Development Stage

(6,794,901)

(6,487,793)

 

 

 

Total Stockholders’ Equity

2,019,827 

2,193,567 

 

 

 

Total Liabilities and Stockholders’ Equity

$

2,772,864 

$

2,782,040 

  

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

F-1                                
Energy Quest Inc.

(A Development Stage Company) 

Consolidated Statements of Operations and Other Comprehensive Loss

(Unaudited)

 

For the Three

Months Ended

June 30,

2010

For the Three

Months Ended

June 30,

2009

For the Six

Months Ended

June 30,

2010

For the Six

Months Ended

June 30,

2009

Period from

December 14, 2004

(Date of Inception) to

June 30,

2010

Revenue

   $                   –

   $                      –

   $                –

   $                  –

$

5,164 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

Consulting and management fees

75,000 

150,812 

150,000 

253,687 

5,291,394 

General and administrative

20,513 

48,186 

26,776 

55,274 

451,063 

Professional fees

24,790 

24,636 

35,175 

41,356 

476,123 

Research and development

                        –

14,338 

1,500 

14,338 

266,494 

Depreciation, depletion, and impairment

37,500 

37,500 

75,000 

75,000 

323,077 

Loss on theft of cash

                        –

                            –

    –

     –

80,000 

 

 

 

 

 

 

 

157,803 

275,472 

288,451 

439,655 

6,888,151 

 

 

 

 

 

 

Loss from operations:

(157,803)

(275,472)

(288,451)

(439,655)

(6,882,987)

 

 

 

 

 

 

Interest income

                        –

                            –

    –

     –

2,089 

Interest expense

(2,133)

(965)

(3,350)

(1,538)

(14,777)

Gain on settlement of former shareholder advances

                        –

                            –

    –

     –

310,003 

Accretion of convertible debt discount

(9,584)

                            –

(14,007)

     –

(14,007)

Financing Cost

(833)

                            –

(1,300)

     –

(1,300)

Loss on write-off of loan receivable

                        –

                            –

    –

     –

(193,922)

 

 

 

 

 

 

Net loss

(170,353)

(276,437)

(307,108)

(441,193)

(6,794,901)

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

(839)

1,273 

35 

1,293 

3,981 

 

 

 

 

 

 

Total Comprehensive Loss

$

(171,192)

$

(275,164)

$

(307,073)

$

(439,900)

$

(6,670,920)

 

 

 

 

 

 

Net Loss Per Share – Basic and Diluted

$

(0.01)

$

(0.03)

$

(0.02)

$

(0.04)

 

 

 

 

 

 

 

Weighted Average Shares Outstanding –

Basic and Diluted

14,368,000 

10,771,000 

14,095,000 

10,167,000 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

F-2                                
Energy Quest Inc.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Unaudited)

 

For the Six

Months Ended

June 30,

2010

For the Six

Months Ended

June 30,

2009

Accumulated from

December 14, 2004

(Date of Inception) to

June 30,

2010

Cash Flows Used In Operating Activities

 

 

 

Net loss

$

(307,108)

$

(441,193)

$

(6,794,901)

 

 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

Accretion of convertible debt discount

14,007 

                         –

14,007 

Shares issued for services

  –

158,250 

4,571,306 

Loss on shares issued for amounts due related parties

  –

15,976 

15,976 

Loss on theft of cash

  –

                         –

80,000 

Loss on write-off of loan receivable

  –

                         –

193,922 

Amortization of intangible assets

75,000 

75,000 

323,077 

Gain on settlement of former shareholder advances

  –

                         –

(310,003)

Amortization of deferred financing cost

1,300 

                         –

1,300 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

Accounts payable and accrued liabilities

353 

5,946 

22,838 

Due to related parties

83,522 

46,629 

914,823 

 

 

 

 

Net Cash Used in Operating Activities

(132,926)

(139,392)

(967,655)

 

 

 

 

Investing Activities

 

 

 

Loan receivable

  –

                         –

(193,922)

Net cash acquired on business acquisition

  –

                         –

565 

Change in restricted cash

  –

                         –

(80,000)

Purchase of intangible assets

  –

                         –

(25,000)

 

 

 

 

Net Cash Used In Investing Activities

  –

                         –

(298,357)

 

 

 

 

Financing Activities

 

 

 

Proceeds from issuance of common stock

100,000 

180,000 

744,307 

Payment of deferred financing cost

(2,500)

                         –

(2,500)

Proceeds from convertible note

50,000 

                         –

50,000 

Proceeds from notes payable

50,000 

41,448 

568,214 

Re-payment of note payable

  –

(6,808)

(28,005)

 

 

 

 

Net Cash Provided By Financing Activities

197,500 

214,640 

1,332,016 

 

 

 

 

Effect of Exchange Rate Changes on Cash

19 

366 

(595)

 

 

 

 

Increase in Cash and Cash Equivalents

64,593 

75,614 

65,409 

 

 

 

 

Cash and Cash Equivalents, beginning

816 

792 

                        –

 

 

 

 

Cash and Cash Equivalents, end 

$

65,409 

   $

76,406 

    $

65,409 

 

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

 

 

Cash paid for taxes

   $                          –

$                     –

$                      –

Cash paid for interest

  –

                       –

                        –

 

 

 

 

Non-Cash Activities

 

 

 

 

 

 

 

Common stock issued for intangible assets

   $                          –

$                     –

    $

3,000,204 

Common stock issued for stock payable

  –

                       –

161,550 

Common stock issued for amounts due to related parties

  –

16,629 

360,954 

Debt Discount

33,333 

                       –

33,333 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

F-3                                
Energy Quest Inc.

(A Development Stage Company)

Notes to the Unaudited Consolidated Financial Statements

1.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Energy Quest, Inc. (“Energy Quest” or 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 should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Energy Quest’s Annual Report filed with the SEC on Form 10-K.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year.  Notes to the consolidated financial statements which substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2009 as reported in the Form 10-K have been omitted.

2.

Going Concern

The Company has incurred losses from operations since inception and at June 30, 2010, 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.

Recent Accounting Pronouncements

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

 

 

 

F-4

                               
4.

Related Party Transactions

The following details amounts due to related parties at June 30, 2010:

a.

During the six months period ended June 30, 2010, the Company recorded $75,000 (2009 - $75,000) for management services provided by the President of the Company.  At June 30, 2010, $415,964 (December 31, 2009 - $363,964) is included in due to related parties.

b.

During the six months period ended June 30, 2010, the Company recorded $75,000 (2009 - $Nil) for management services provided by the Secretary of the Company.  At June 30, 2010, $184,439 (December 31, 2009 - $152,917) is included in due to related parties.

The following details Notes payable – related parties:

c.

During the six month period ended June 30, 2010, the Company received an advance of $Nil (2009 - $14,313) from a related party consultant.  At June 30, 2010, this amount is included in note payable – related party, and the related accrued interest of $426 (2009 - $252) is included in accrued liabilities.

d.

On November 5, 2007, the Company received $21,000 in exchange for a promissory note payable.  The note bears interest at 6% per annum, calculated annually, and is due on demand.  At June 30, 2010, accrued interest of $625 (2009 - $625) is included in accrued liabilities.

e.

On April 14, 2010, the Company received $50,000 in exchange for a promissory note payable.  The note bears interest at 6% per annum and is due on August 31, 2010.  The Company has secured the note with 1,000,000 shares of common stock to be issued upon default.  At June 30, 2010, accrued interest of $633 (2009 - $Nil) is included in accrued liabilities.

5.

Convertible Debt

On January 29, 2010, the Company completed a financing agreement for $50,000 with a private investor (the “Investor”) and issued a callable convertible note totaling $50,000 with 8% interest rate, 22% interest rate upon default and a maturity of nine months (the “Note”).  The Company paid a finders’ fee of $2,500.  The note is convertible into shares of common stock at 55% of the average of the lowest three closing prices for the Company’s shares of common stock 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 Company evaluated the conversion feature under ASC 815 to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. Based on the fact that the debt is only convertible to the extent that there are available common shares, the Company determined that there was no embedded derivative instrument. 

The Company then evaluated the instrument under ASC 470-20 for consideration of any beneficial conversion feature. As a result, the Company recognized the intrinsic value of the embedded beneficial conversion feature of $33,333 as additional paid-in capital and reduced the carrying value of the convertible note to $16,667.  The carrying value of the convertible note is to be accreted over the term of the convertible note up to their face value of $50,000.  As at June 30, 2010, the carrying values of the convertible note and accrued convertible interest payable thereon were $30,674 and $1,666, respectively.

For the six months ended June 30, 2010, the Company recorded $14,007 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 June 30, 2010, the Company recorded $1,300 on amortization of deferred financing cost.

6.

Equity

On June 5, 2010, the Company issued 2,000,000 shares of common stock pursuant to a private placement at $0.05 per share for cash proceeds of $100,000.

 

F-5

                               
**ITEM 2.  Management Discussion and Analysis of Financial Condition and Results of Operations.  **

**Safe Harbor Statement**

This report on Form 10-Q contains certain forward-looking statements.  All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements. 

These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues.  Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors.  These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements.  The following discusses our financial condition and results of operations based upon our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States.  It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein. 

The following discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q.  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.

**Overview**

We are engaged in the development and production of hydrogen-enriched alternative fuels.  We plan to employ gasification technologies and catalytic conversion processes to produce clean fuels.  We design, build, lease and in some cases operate the gasification technologies with broad potential application within the energy field.  Our various technologies allow for the use of steam for reformation of coal and other carbonaceous feedstocks, conversion of waste solid fuel sources into gaseous form and allow for incineration of waste in an environmentally friendly manner. 

We have one wholly-owned subsidiary, Syngas Energy Corp., and its principal business involves an integrated gasification production system technology that combines modern gasification with turbine technologies to produce synthetic gas, hydrogen or electricity. 

4                                
On May 31, 2010, we entered into a Joint Venture Agreement with ZAO Transmashholding, a company registered in Moscow, Russia.  The business purpose of the Joint Venture is to use the knowledge, connections and efforts of both parties to enhance their financial capacities in order to achieve their common business goals.  Transmashholding has set up a bank account with $102,368,000 (Rub 3,200,000,000) to act as collateral for the Joint Venture to acquire lines of credit for financing its business projects.  We are solely responsible for acquiring the lines of credit against the provided collateral, and will assume the main responsibility of finding and arranging investment opportunities for the Joint Venture.  All revenues generated by the Joint Venture will be divided equally between both parties.  Each party will be responsible for their own costs and neither party shall be liable for mistakes made by the other.

**Liquidity and Capital Resources**

As of June 30, 2010, we had cash and cash equivalents of $65,409 and a working capital deficiency of $686,428.  As of June 30, 2010 our accumulated deficit was $6,794,901.  For the six months ended June 30, 2010 our net loss was $307,108 compared to $441,193 during the same period in 2009.  This decrease was due mostly to lower consulting and management fees and general and administrative fees.

Our loss was funded by proceeds from shareholder loans and from the sale of our common stock.  During the six months ended June 30, 2010, we raised in net proceeds $197,500 through financing activities and our cash position increased by $64,593.  

We used net cash of $132,926 in operating activities for the six months ended June 30, 2010 compared to net cash of $139,392 in operating activities for the same period in 2009.  We did not use any money in investing activities for the six months ended June 30, 2010 nor did we use any money for investing activities during the same period in 2009.  The effect of exchange rates on cash was an increase in cash of $19 for the six months ended June 30, 2010 compared to an increase of $366 during six months ended June 30, 2009.

During the six months ended June 30, 2010 our monthly cash requirement was approximately $22,154, compared to approximately $23,232 for the same period in 2009.  We expect to require a total of approximately $26,585,000 to fully carry out our business plan over the next twelve months beginning September 2010 as set out in this table: 

 

5                                
**Description**  

**Estimated Expense**

Marketing our gasification technologies 

$200,000

Continued improvement of our PyStRTM and other technologies 

$1,200,000

Further commercializing our gasification technologies 

$400,000

Manufacturing of Modular Bio-energy units 

$400,000

Payment of accounts payable and accrued liabilities   

$250,000

General and administrative expenses 

$500,000

Professional fees 

$100,000

Consulting fees 

$200,000

Investor relations expenses 

$100,000

Patent application costs (including legal fees) 

$100,000

Heavy Oil Upgrader Plant (Northern Alberta Oil)

$23,135,000

**Total**  

**$26,585,000**

We intend to meet our cash requirements for the next 12 months through external sources: a combination of debt financing and equity financing through private placements.  We are currently not in good short-term financial standing.  We anticipate that we may not generate any 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.

These consolidated financial statements have been prepared on the assumption that we are a going concern, meaning we will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations.  Different bases of measurement may be appropriate when a company is not expected to continue operations for the foreseeable future.  Our continuation as a going concern is dependent upon our ability to attain profitable operations and generate funds there-from, and/or raise 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 we will be able to complete any of these objectives.  We have incurred losses from operations since inception and at June 30, 2010, have a working capital deficiency and an accumulated deficit that creates substantial doubt about our ability to continue as a going concern.

 

 

6                                 
**Results of Operations for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and from inception to June 30, 2010.**

*Limited Revenues*

Since our inception on December 14, 2004 to June 30, 2010, we have earned limited revenue of $5,164.  As of June 30, 2010, we have an accumulated deficit of $6,794,901 and we did not earn any revenues during the three months ending on June 30, 2010.  At this time, our ability to generate any significant revenues continues to be uncertain.  Our financial statements contain an additional explanatory paragraph in Note 2, which identifies issues that raise 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 a net loss of $170,353 for the three months ended June 30, 2010, compared to a net loss of $276,437 for the same period in 2009.  This decrease in net loss is mostly due to lower consulting and management fees, general and administrative fees and research and development expenses.  From inception on December 14, 2004 to June 30, 2010, we have incurred a net loss of $6,794,901.  Our basic and diluted loss per share was $0.01 for the three months ended June 30, 2010, and $0.03 for the same period in 2009.  

*Expenses*

Our total operating expenses increased from $157,803 to $275,472 for the three months ended June 30, 2010 compared to the same period in 2009.  This increase in expenses is mostly due to higher consulting and management fees, general and administrative fees and research and development expenses.  Since our inception on December 14, 2004 to June 30, 2010, we have incurred total operating expenses of $6,888,151.

Our consulting and management fees decreased $75,812 from $150,812 to $75,000 for the three months ended June 30, 2010 compared to the same period in 2009.  This decrease was largely due to lower payments made to our consultants.  Since our inception on December 14, 2004 until June 30, 2010 we have spent $5,291,394 on consulting and management fees.

Our general and administrative expenses consist of bank charges, travel, meals and entertainment, office maintenance, communication expenses (internet, fax, and telephone), courier, postage costs, office supplies.  Our general and administrative expenses decreased $27,673 from $48,186 to $20,513 for the three months ended June 30, 2010 compared to the same period in 2009.  Since our inception on December 14, 2004 until June 30, 2010 we have spent $451,063 on general and administrative expenses.

We spent $0 on research and development expenses for the three months ended June 30, 2010 compared to $14,338 spent on research and development during the three months ended June 30, 2009.  Since our inception on December 14, 2004 until June 30, 2010 we have spent $266,494 on research and development.  Going forward, we anticipate that we will spend approximately $1,600,000 on research and development during the next 12 months.  

Our professional fees, consisting primarily of legal, accounting and auditing fees, increased by $154 to $24,790 for the three months ended June 30, 2010 from $24,636 for the same period in 2009, mainly due to slightly increased legal and auditing services provided in the three month periods ended June 30, 2010. 

 

7                                 
**Results of Operations for the six months ended June 30, 2010 compared to the six months ended June 30, 2009**

*Limited Revenues*

We did not earn any revenues during the six months ending on June 30, 2010, nor did we earn any revenues in the same period in 2009.  At this time, our ability to generate any significant revenues continues to be uncertain.

*Net Loss*

We incurred a net loss of $288,451 for the six months ended June 30, 2010, compared to a net loss of $439,655 for the same period in 2009.  This decrease in net loss is mostly due to lower consulting and management fees as well as general and administrative fees.  Our basic and diluted loss per share was $0.02 for the six months ended June 30, 2010, and $0.04 for the same period in 2009.  

*Expenses*

Our total operating expenses decreased from $439,655 to $288,451 for the six months ended June 30, 2010 compared to the same period in 2009.  This decrease in expenses is mostly due to lower consulting and management fees as well as general and administrative fees.  

Our consulting and management fees decreased $103,687 from $253,687 to $150,000 for the six months ended June 30, 2010 compared to the same period in 2009.  This increase was largely due to lower payments made to our consultants.

Our general and administrative expenses consist of bank charges, travel, meals and entertainment, office maintenance, communication expenses (internet, fax, and telephone), courier, postage costs, office supplies.  Our general and administrative expenses decreased $28,498 from $55,274 to $26,776 for the six months ended June 30, 2010 compared to the same period in 2009.

We spent $1,500 on research and development expenses for the six months ended June 30, 2010 compared to $14,338 spent on research and development during the six months ended June 30, 2009.  

Our professional fees, consisting primarily of legal, accounting and auditing fees, decreased by $6,181 to $35,175 for the six months ended June 30, 2010 from $41,356 for the same period in 2009, mainly due to decreased legal and auditing services provided in the six month period ended June 30, 2010.

**Inflation**

The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position.  The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.

8                                 
**Off-Balance Sheet Arrangements**

As of June 30, 2010, 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. 

**ITEM 3.  Quantitative and Qualitative Disclosure About Market Risks.**

Not applicable. 

**ITEM 4.  Control and Procedures.**

Not applicable

**ITEM 4T.  Control and Procedures.**

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is collected and communicated to management to allow timely decisions regarding required disclosures.  The Chief Executive Officer and the Chief Financial Officer have concluded, based on their evaluation as of June 30, 2010 that, as a result of the following material weaknesses in internal control over financial reporting as described further in our Annual Report on Form 10-K/A filed with the SEC on July 16, 2010, disclosure controls and procedures were not effective in providing reasonable assurance that material information is made known to them by others within the Company:

a)    We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of generally accepted accounting principles commensurate with our complexity and our financial accounting and reporting requirements.  We have limited experience in the areas of financial reporting and disclosure controls and procedures.  Also, we do not have an independent audit committee.  As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the consolidated financial statements, including disclosures, will not be prevented or detected on a timely basis; and

b)    Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process.  The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment.  This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis.

**Changes in Internal Control Over Financial Reporting**  

There were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

9                                 
**Limitations On The Effectiveness Of Internal Controls**

Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error.  An internal 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 the 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 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 override of the internal 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, control may become inadequate because of changes in conditions, and/or the degree of compliance with the policies or procedures may deteriorate. 

**PART II – OTHER INFORMATION**

**ITEM 1.  Legal Proceedings.**

As of August 16, 2010 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 2.  Unregistered Sales of Equity Securities.**

On June 5, 2010, we issued 2,000,000 shares of common stock pursuant to a private placement at $0.05 per share for cash proceeds of $100,000 to us.

**ITEM 3.  Defaults Upon Senior Securities.**

None.

**ITEM 4.  Submission of Matters to a Vote of Security Holders.**

None.

**ITEM 5.  Other Information.**

None.

 

 

10                               
**ITEM 6.  Exhibits.**

**Number**

 

**Description**

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

  

**ENERGY QUEST INC.**

 

 

(REGISTRANT)

  

 

Date:  August 16, 2010

/s/ *Wilf Ouellette*

 

 

Wilf Ouellette

  

 

President, Chief Executive Officer, Director

 

 

(Authorized Officer for Registrant)

 

 

Date:  August 16, 2010

/s/ *Ronald Foster*

 

 

Ronald Foster

 

 

Chief Financial Officer, Director, Principal Accounting Officer

    

 
11                               ** |
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