SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended June 30,
2010
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition period from
_________________ to _________________
Commission
File No.: 000-30291
|
KENTUCKY
ENERGY, INC.
(Exact
name of registrant as specified in its charter)
Utah
|
87-0429950
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
18B
East 5
th
Street
Paterson,
NJ 07524
(Address
of principal executive offices)
|
Issuer’s
telephone number:
(973) 684-0075
Check
whether the registrant filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filter
¨
|
Accelerated
filter
¨
|
|
|
Non-accelerated
filter
¨
(Do not check if
a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes
¨
No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS
As of
August 18, 2010, 209,076,048 shares of our common stock were
outstanding.
Transitional
Small Business Disclosure Format: Yes
¨
No
x
PART
1: FINANCIAL
INFORMATION
ITEM
1 – FINANCIAL STATEMENTS
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
|
|
$
|
7,587
|
|
|
$
|
7,254
|
|
Receivables
|
|
|
91,412
|
|
|
|
112,282
|
|
Prepaid
expenses
|
|
|
3,025
|
|
|
|
8,227
|
|
Total
current assets
|
|
|
102,024
|
|
|
|
127,763
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Leased
Mineral Reserves, net
|
|
|
5,173,892
|
|
|
|
5,187,317
|
|
Mine
development, net
|
|
|
56,607
|
|
|
|
113,207
|
|
Equipment,
net
|
|
|
115,140
|
|
|
|
133,184
|
|
Deposits
|
|
|
49,479
|
|
|
|
48,986
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
5,497,142
|
|
|
$
|
5,610,457
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND DEFICIENCY IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses (Note 3)
|
|
$
|
3,435,668
|
|
|
$
|
3,060,061
|
|
Loans
payable-current portion, net (Note 4)
|
|
|
1,793,170
|
|
|
|
996,995
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
5,228,838
|
|
|
|
4,057,056
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Loans
payable-long term portion, net (Note 4)
|
|
|
1,101,906
|
|
|
|
2,075,927
|
|
Restructured
debt - long term portion, net (Note 4)
|
|
|
1,500,345
|
|
|
|
558,833
|
|
Related
party loans, net (Note 4)
|
|
|
681,940
|
|
|
|
300,468
|
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
3,284,191
|
|
|
|
2,935,228
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
8,513,029
|
|
|
|
6,992,284
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deficiency
in stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.001, 25,000,000 shares authorized
|
|
|
|
|
|
|
|
|
SERIES
A - issued and outstanding 20,726 shares
|
|
|
21
|
|
|
|
21
|
|
SERIES
B - issued and outstanding 48,284 shares
|
|
|
48
|
|
|
|
48
|
|
SERIES
C - issued and outstanding 260,000 shares
|
|
|
260
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.0001, 2,500,000,000 shares authorized (Note 6) issued
and outstanding 117,823,963 and 17,457,239 shares as of June 30, 2010 and
December 31, 2009, respectively
|
|
|
11,783
|
|
|
|
1,746
|
|
|
|
|
|
|
|
|
|
|
Common
stock to be issued
|
|
|
5,648
|
|
|
|
5,648
|
|
|
|
|
|
|
|
|
|
|
Equity
allowance
|
|
|
(587,500
|
)
|
|
|
(587,500
|
)
|
|
|
|
|
|
|
|
|
|
Paid-in
capital
|
|
|
70,351,234
|
|
|
|
69,846,336
|
|
Accumulated
deficit
|
|
|
(72,797,381
|
)
|
|
|
(70,648,386
|
)
|
|
|
|
|
|
|
|
|
|
Total
deficiency in stockholders' equity
|
|
|
(3,015,887
|
)
|
|
|
(1,381,827
|
)
|
|
|
|
|
|
|
|
|
|
Total
liabilities and deficiency in stockholders' equity
|
|
$
|
5,497,142
|
|
|
$
|
5,610,457
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
revenues
|
|
$
|
774,846
|
|
|
$
|
-
|
|
|
$
|
1,458,351
|
|
|
$
|
330,314
|
|
Production
costs
|
|
|
(854,879
|
)
|
|
|
(56,038
|
)
|
|
|
(1,829,179
|
)
|
|
|
(688,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
(80,033
|
)
|
|
|
(56,038
|
)
|
|
|
(370,828
|
)
|
|
|
(358,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
474,702
|
|
|
|
381,662
|
|
|
|
708,203
|
|
|
|
720,021
|
|
Depreciation
and amortization
|
|
|
44,154
|
|
|
|
37,321
|
|
|
|
88,069
|
|
|
|
77,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
518,856
|
|
|
|
418,983
|
|
|
|
796,272
|
|
|
|
797,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
|
(598,889
|
)
|
|
|
(475,021
|
)
|
|
|
(1,167,100
|
)
|
|
|
(1,156,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on debt settlements
|
|
|
5,841
|
|
|
|
(35,282
|
)
|
|
|
16,026
|
|
|
|
(921
|
)
|
Interest,
net
|
|
|
(417,752
|
)
|
|
|
(152,655
|
)
|
|
|
(997,921
|
)
|
|
|
(293,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(1,010,800
|
)
|
|
|
(662,958
|
)
|
|
|
(2,148,995
|
)
|
|
|
(1,450,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,010,800
|
)
|
|
$
|
(662,958
|
)
|
|
$
|
(2,148,995
|
)
|
|
$
|
(1,450,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(1.49
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(4.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
89,634,837
|
|
|
|
443,732
|
|
|
|
61,925,471
|
|
|
|
339,378
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,148,995
|
)
|
|
$
|
(1,450,885
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
88,069
|
|
|
|
77,940
|
|
Stock
issued for interest
|
|
|
10,968
|
|
|
|
-
|
|
Stock
issued for services
|
|
|
215,310
|
|
|
|
308,465
|
|
Stock
compensation
|
|
|
100,000
|
|
|
|
-
|
|
Gain
(loss) on debt settlements
|
|
|
-
|
|
|
|
921
|
|
Amortization
of discount on convertible notes - interest expense
|
|
|
659,142
|
|
|
|
62,276
|
|
Amortization
of deferred issuance costs
|
|
|
-
|
|
|
|
226
|
|
Amortization
of royalty costs
|
|
|
2,606
|
|
|
|
6,615
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in receivables
|
|
|
20,870
|
|
|
|
1,230
|
|
Decrease
in prepaid expenses
|
|
|
5,202
|
|
|
|
1,993
|
|
Increase
in accounts payable and accrued expenses
|
|
|
626,268
|
|
|
|
474,580
|
|
Net
cash used in operating activities
|
|
|
(420,560
|
)
|
|
|
(516,639
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Mine
development
|
|
|
-
|
|
|
|
-
|
|
Equipment
purchased
|
|
|
-
|
|
|
|
(12,000
|
)
|
Restricted
cash
|
|
|
-
|
|
|
|
11,455
|
|
Security
deposits
|
|
|
(493
|
)
|
|
|
(5,916
|
)
|
Net
cash used in investing activities
|
|
|
(493
|
)
|
|
|
(6,461
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Repayment
of borrowings
|
|
|
(1,131,397
|
)
|
|
|
(21,500
|
)
|
Proceeds
from DIP Financing
|
|
|
-
|
|
|
|
375,500
|
|
Proceeds
from borrowings, net
|
|
|
1,552,783
|
|
|
|
155,698
|
|
Net
cash provided by financing activities
|
|
|
421,386
|
|
|
|
509,698
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash
|
|
|
333
|
|
|
|
(13,402
|
)
|
Cash
at beginning of period
|
|
|
7,254
|
|
|
|
13,439
|
|
Cash
at end of period
|
|
$
|
7,587
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow
Information
|
|
|
|
|
|
|
|
|
Cash
paid during the year:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
1,881
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
22,974
|
|
|
$
|
2,300
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activites:
|
|
|
|
|
|
|
|
|
Conversions
of note principal and interest
|
|
$
|
557,500
|
|
|
$
|
480,000
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
NOTE
1 –
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying condensed consolidated financial statements as of June 30, 2010 and
for the three and six months ended June 30, 2010 and 2009 are
unaudited.
These
financial statements have been prepared in accordance with the instructions to
Form 10-Q, and therefore, do not include all the information necessary for a
fair presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles.
In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 2010 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2010. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated December 31, 2009
financial statements and footnotes thereto included in the Company’s Annual
Report on Form 10-K filed with the Securities and Exchange Commission (the
“SEC”).
On June
10, 2010, the Company filed an amendment to its Articles of Incorporation to
change its corporate name from Quest Minerals & Mining Corp. to Kentucky
Energy, Inc. The change in corporate name took effect on June 16,
2010.
The
unaudited condensed consolidated financial statements include our accounts and
the accounts for our wholly owned subsidiaries, Quest Minerals & Mining,
Ltd. (“Quest Ltd.”), Quest Energy, Ltd. (“Quest Energy”), E-Z Mining Co., Inc.
(“E-Z Mining”), and Gwenco, Inc. (“Gwenco”). Significant intercompany
transactions and accounts are eliminated in consolidation.
Fair
Value of Financial Instruments
In the
first quarter of fiscal year 2008, the Company adopted Accounting Standards
Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC
820-10”). ASC 820-10 defines fair value, establishes a framework for
measuring fair value, and enhances fair value measurement disclosure. ASC 820-10
delays, until the first quarter of fiscal year 2009, the effective date for ASC
820-10 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The adoption of
ASC 820-10 did not have a material impact on the Company’s financial position or
operations.
Effective
October 1, 2008, the Company adopted Accounting Standards Codification subtopic
820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting
Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”),
which permits entities to choose to measure many financial instruments and
certain other items at fair value. Neither of these statements had an impact on
the Company’s unaudited condensed consolidated financial position, results of
operations nor cash flows. The carrying value of current and non-current loans
payable, restructured debt and related party loans, as reflected in the balance
sheets, approximate its fair values.
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
Going
Concern
The
accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business and does
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or liabilities that might be
necessary should the Company be unable to continue as a going
concern. The Company incurred net losses from operations of
$1,167,100 and $1,156,415 for the periods ended June 30, 2010 and 2009 and had a
working capital deficit (current assets less current liabilities) of $5,126,814
and $3,929,293 at June 30, 2010 and December 31, 2009,
respectively. These factors indicate that the Company’s continuation
as a going concern is dependent upon its ability to increase its cash flows from
operations or to obtain adequate financing.
The
Company will likely require substantial additional funds to finance its business
activities on an ongoing basis and will have a continuing long-term need to
obtain additional financing if it cannot improve its cash flows from
operations. The Company may also seek to dispose of some or all of
its assets or operations. The Company’s future capital requirements
will depend on numerous factors including, but not limited to, increasing mine
production and continued progress developing additional mines.
On March
2, 2007, Gwenco filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the
Eastern District of Kentucky. Management felt this was a necessary step to
further the company’s financial restructuring initiative and to protect Gwenco’s
assets from claims, debts, judgments, foreclosures, and forfeitures of those
creditors and stakeholders with whom both Quest and Gwenco were unable to
negotiate restructured agreements. Prior to October 12, 2009, Gwenco oversaw its
operations as a debtor in possession, subject to court approval of matters
outside the ordinary course of business. In 2007, the Bankruptcy Court approved
Gwenco’s request for debtor-in-possession financing in an amount of up to
$2,000,000 from holders of Gwenco’s existing debt obligations in order to fund
operating expenses. Under Chapter 11, all claims against Gwenco in existence
prior to the filing of the petitions for reorganization relief under the federal
bankruptcy laws were stayed while Gwenco was in bankruptcy.
On
September 30, 2009, the Bankruptcy Court confirmed Gwenco’s Plan of
Reorganization (the “Plan”). Secured and non-priority unsecured classes of
creditors voted to approve the Plan, with over 80% of the unsecured claims in
dollar amount voting for the plan, and over 90% of responding lessors supporting
it. The Plan became effective on October 12, 2009.
Even
though the Bankruptcy Court has confirmed the Plan, it is still possible that
the Bankruptcy Court could convert Gwenco’s case to Chapter 7 and liquidate all
of Gwenco’s assets if the Court determines that Gwenco is unable to perform
under the Plan. In the case of a Chapter 7 conversion, the Company would be
materially impacted and could lose all of its working assets and have only
unpaid liabilities. In addition, the Company might be forced to file for
protection under Chapter 11 as it is the primary guarantor on a number of
Gwenco’s contracts.
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
Recent
Accounting Pronouncements
In
January 2010, the FASB issued an accounting standard update, amending disclosure
requirements related to Fair Value Measurements and Disclosures, as
follows:
|
1.
|
Significant
transfers between Level 1 and 2 shall be disclosed separately, including
the reasons for the transfers; and
|
|
2.
|
Information
about purchases, sales, issuances and settlements shall be disclosed
separately in the reconciliation of activity in Level 3 fair value
measurements.
|
This
accounting standard update is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlements in the reconciliation of activity in Level 3
fair value measurements, which are effective for interim and annual reporting
periods beginning after December 15, 2010. The adoption of this
accounting standard update did not have a material impact on our financial
position or results of operations.
Effective
January 1, 2010, the Company applied ASU No. 2009-17, which requires
consolidation of certain special purpose entities that were previously exempted
from consolidation. The revised criteria define a controlling
financial interest for requiring consolidation as: the power to direct the
activities that most significantly affect the entity’s performance, and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity. The initial adoption had no effect on the Company’s
financial statements.
In
January and April 2010, respectively, the FASB issued ASU 2010-03, Extractive
Activities-Oil and Gas (Topic 932) and 2010-14, Accounting for Extractive
Activities-Oil & Gas. The objective of these updates is to align
the oil and gas accounting and reserve estimation and disclosure requirements of
Extractive Activities-Oil & Gas (Topic 932) with the requirements of the
Securities and Exchange Commission’s (SEC) Release 33-8895, Modernization of Oil
and Gas Reporting, which became effective for registration statements filed
beginning January 1, 2010 and for annual reports for years ending on or after
December 31, 2009. SEC Release 33-8895 was issued to provide
investors with more meaningful information on which to base their evaluations of
oil and gas companies, taking into account the significant technological
advances that have occurred since the original SEC rules were issued some three
decades ago. The Company is applying the requirements of Release
33-8895, though it has not yet reported information regarding reserves in its
annual reports.
In
January 2010, the FASB issued Update No. 2010-05 “Compensation—Stock
Compensation—Escrowed Share Arrangements and Presumption of Compensation”
(“2010-05”). 2010-05 re-asserts that the Staff of the SEC has stated
the presumption that for certain shareholders escrowed shares represent a
compensatory arrangement. 2010-05 further clarifies the criteria
required to be met to establish a position different from the SEC Staff’s
position. The Company does not believe this pronouncement will have
any material impact on its financial position, results of operations, or cash
flows.
In
January 2010, the FASB issued Update No. 2010-04 “Accounting for Various
Topics—Technical Corrections to SEC Paragraphs” (“2010-04”). 2010-04
represents technical corrections to SEC paragraphs within various sections of
the Codification. Management is currently evaluating whether these
changes will have any material impact on its financial position, results of
operations or cash flows.
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
In
January 2010, the FASB issued Update No. 2010-02 “Accounting and Reporting for
Decreases in Ownership of a Subsidiary—a Scope Clarification” (“2010-02”) an
update of ASC 810 “Consolidation.” 2010-02 clarifies the scope of ASC
810 with respect to decreases in ownership in a subsidiary to those of a
subsidiary or group of assets that are a business or nonprofit, a subsidiary
that is transferred to an equity method investee or joint venture, and an
exchange of a group of assets that constitutes a business or nonprofit activity
to a non-controlling interest including an equity method investee or a joint
venture. Management does not expect adoption of this standard to have
any material impact on its financial position, results of operations or
operating cash flows. Management does not intend to decrease its
ownership in any of its wholly-owned subsidiaries.
In
January 2010, the FASB issued Update No. 2010-01 “Accounting for Distributions
to Shareholders with Components of Stock and Cash—a consensus of the FASB
Emerging Issues Task Force” (“2010-03”) an update of ASC 505
“Equity.” 2010-03 clarifies the treatment of stock distributions as
dividends to shareholders and their affect on the computation of earnings per
shares. Management does not expect adoption of this standard to have
any material impact on its financial position, results of operations or
operating cash flows.
In April
2010, the FASB issued an accounting standard update, amending disclosure
requirements related to income taxes, as a result of the Patient Protection and
Affordable Care Act (“PPACA”), which became law on March 23, 2010, and was
subsequently amended on March 30, 2010. The adoption of this
accounting standard update did not have a material impact on our financial
position or results of operations.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
consolidated financial statements.
NOTE
2 -
|
PLAN
OF REORGANIZATION
|
In 2009,
the United States Bankruptcy Court for the Eastern District of Kentucky
confirmed Gwenco’s Plan of Reorganization (the “Plan”) pursuant to Chapter 11 of
the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern
District of Kentucky. The Plan became effective on October 12,
2009. See Note 16 to our consolidated financial statements as of
December 31, 2009 and 2008 and for each of the years then ended, as set forth in
our Annual Report on Form 10-K for the year ended December 31, 2009, for a
description of the Plan and its effect on our financial statements.
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
NOTE
3 -
|
ACCOUNTS
PAYABLE & ACCRUED EXPENSES
|
Accounts
payable and accrued expenses consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
(Unaudited)
|
|
|
2009
|
|
Accounts
payable
|
|
$
|
1,324,636
|
|
|
|
1,074,035
|
|
Accrued
royalties payable-operating (a)
|
|
|
229,587
|
|
|
|
125,894
|
|
Accrued
bank claim (b)
|
|
|
650,000
|
|
|
|
650,000
|
|
Accrued
taxes
|
|
|
87,316
|
|
|
|
87,315
|
|
Accrued
interest (c)
|
|
|
291,407
|
|
|
|
220,095
|
|
Accrued
expenses (d)
|
|
|
852,722
|
|
|
|
902,722
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,435,668
|
|
|
$
|
3,060,061
|
|
|
(a)
|
The
Company maintains a number of coal leases with minimum lease or royalty
payments that vary by lease as defined in each lease agreement. As a
result of the confirmation of Gwenco’s Plan, Gwenco has assumed all coal
leases and is obligated to pay cure claims due under each lease. In
addition, the Company has granted overriding royalties to third
parties. Unless otherwise provided in the Plan, all accrued amounts
due under the leases and overriding royalty obligations are due on or
before October 12, 2012. As a result, most of the existing
royalties, which accrued up until the effective date, were re-categorized
as Cure Claims totaling $199,213. As of June 30, 2010, the Company
owed approximately $229,587 in current lease and/or royalty
payments.
|
Certain
accrued overriding royalties owed to former owners totaling $319,062 have been
reclassified as allowed unsecured claims under Gwenco’s Plan, to be paid along
with the other allowed unsecured claims under Gwenco’s Plan. (See Note
4.)
In
addition, the Company accrued $25,544 as an estimated royalty payable in
connection with an August 2008 financing. This amount is currently being
amortized over the life of the underlying note involved in the financing.
(See Note 4.)
|
(b)
|
Community
Trust Bank and its insurer, the Federal Insurance Company, commenced an
action in Pike County Court, Kentucky against Quest Energy alleging that
former employees or associates of Quest Energy engaged in a criminal
scheme and conspiracy to defraud Community Trust Bank, that Quest Energy
is accordingly responsible for the actions of these former employees and
associates, and that Quest Energy obtained a substantial material benefit
as a result of this alleged scheme. Quest Energy has denied these
allegations. As of June 30, 2010, the matter is closed and off the
Court’s docket, and no outcome has been determined. While we believe
that this matter will be resolved without a material adverse impact on our
cash flows, results of operation, or financial condition, it is reasonably
possible that our judgments regarding this matter could change in the
future.
|
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
|
(c)
|
As
a result of the confirmation of Gwenco’s Plan, most of the existing debts,
which included the accrued interest up until the effective date, were
prioritized under various long-term debt classifications and no longer
accrue interest. The Company made an $864,175 adjustment to
re-categorize the existing interest as long-term debt. Most of
these claim amounts are now due on or before October 12,
2014.
|
|
(d)
|
The
Company recorded an accrued liability for indemnification obligations of
$390,000 to its officers, which represents the fair value of shares of the
Company’s common stock, which the officers pledged as collateral for
personal guarantees of a loan to the Company. The Company
defaulted on the loan and the lender foreclosed on the officer’s pledged
shares. In January 2007, the Company satisfied $260,000 of this
accrued liability by issuing 260,000 shares of Series C Preferred
Stock. See Note 11. The Company has accrued the remaining
$130,000 due to its former officer. In addition, during
the period ended December 31, 2004, the Company had recorded accrued
expenses of $468,585 from its subsidiaries, E-Z Mining Co. and Gwenco,
Inc. as acquisition for mining expenses recorded on their books and
records. The Company continues to carry these balances until
further validity can be determined.
|
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
Notes
payable consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
(Unaudited)
|
|
|
2009
|
|
Kentucky
Energy, Inc.
|
|
|
|
|
|
|
0%
Notes Due on Demand (a).
|
|
$
|
202,864
|
|
|
$
|
$202,864
|
|
7%
Senior Secured Convertible Notes Due 2007 (b).
|
|
|
25,000
|
|
|
|
25,000
|
|
5%
Unsecured Advances Due on Demand (c).
|
|
|
130,857
|
|
|
|
130,857
|
|
6%
Convertible Notes Due 2011 (c).
|
|
|
865,418
|
|
|
|
1,044,580
|
|
6%
Convertible Notes Due 2011 (d).
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
6%
Convertible Notes Due 2011 (e).
|
|
|
174,000
|
|
|
|
200,000
|
|
0%
Notes Due on Demand (f).
|
|
|
483,171
|
|
|
|
480,434
|
|
10%
Convertible Notes due 2008 (g).
|
|
|
10,000
|
|
|
|
10,000
|
|
6%
Convertible Notes due 2010 (h).
|
|
|
2,300
|
|
|
|
27,304
|
|
8%
Convertible Notes due 2010 (i).
|
|
|
3,330
|
|
|
|
117,010
|
|
8%
Convertible Notes due 2011 (j).
|
|
|
25,000
|
|
|
|
25,000
|
|
5%
Convertible Notes due 2014 (k).
|
|
|
51,000
|
|
|
|
90,500
|
|
4%
Convertible Notes due 2011 (l).
|
|
|
-
|
|
|
|
30,000
|
|
8%
Convertible Notes due 2011 (m).
|
|
|
50,000
|
|
|
|
50,000
|
|
12%
Notes Due on Demand (n).
|
|
|
12,500
|
|
|
|
12,500
|
|
6%
Notes Due on Demand (o).
|
|
|
10,000
|
|
|
|
10,000
|
|
5%
Convertible Notes due 2012 (p).
|
|
|
95,000
|
|
|
|
-
|
|
8%
Convertible Notes due 2012 (q).
|
|
|
55,000
|
|
|
|
-
|
|
8%
Convertible Notes due 2011 (r).
|
|
|
50,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
QUEST
ENERGY, LTD.
|
|
|
|
|
|
|
|
|
8%
Summary Judgment (s).
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
GWENCO,
INC.: (Restructured Debt)
|
|
|
|
|
|
|
|
|
CLASS
1 – Secured Claim with conversion option (t).
|
|
|
1,191,290
|
|
|
|
1,753,377
|
|
CLASS
1 – Secured claim with conversion option (u)
|
|
|
2,491,480
|
|
|
|
3,207,376
|
|
CLASS
3 – Unsecured Claims (v)
|
|
|
385,900
|
|
|
|
413,741
|
|
CLASS
3 - Unsecured Claims with conversion option (w)
|
|
|
319,062
|
|
|
|
319,062
|
|
CLASS
5 – Cured Claims (x)
|
|
|
199,213
|
|
|
|
199,213
|
|
|
|
|
|
|
|
|
|
|
GWENCO,
INC.: (Related-Party Loans)
|
|
|
|
|
|
|
|
|
CLASS
3 - Unsecured Claim with conversion option (y).
|
|
|
576,967
|
|
|
|
651,967
|
|
|
|
|
|
|
|
|
|
|
Total
Debt
|
|
|
8,444,351
|
|
|
|
10,035,785
|
|
|
|
|
|
|
|
|
|
|
Current
Portion
|
|
|
1,830,439
|
|
|
|
1,050,969
|
|
|
|
|
|
|
|
|
|
|
Less:
Unamortized debt discount on Current Portion
|
|
|
(37,269
|
)
|
|
|
(53,974
|
)
|
|
|
|
|
|
|
|
|
|
Total
Notes Payable – Current Portion, net
|
|
$
|
1,793,170
|
|
|
$
|
996,995
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt:
|
|
$
|
6,613,912
|
|
|
$
|
8,984,816
|
|
Less:
Unamortized present value and debt discount on Long-Term
Debt
|
|
|
(3,329,721
|
)
|
|
|
(6,049,588
|
)
|
|
|
|
|
|
|
|
|
|
Total
Long-Term Debt, net
|
|
$
|
3,284,191
|
|
|
$
|
2,935,228
|
|
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
|
(a)
|
On
December 31, 2005, the Company closed E-Z Mining Co.,
Inc. These current notes consist of various third parties
related to the former CFO of the Company. All notes are
unsecured and due on demand except $110,000, which is due from future
royalties. All notes are non-interest
bearing.
|
|
(b)
|
From
February 22, 2005 through April 18, 2005, the Company entered into unit
purchase agreements with sixteen third-party investors for a total sale
amount of $1,425,000. Each unit was sold at $25,000 and
consisted of a 7% senior secured convertible note due March 6, 2006 and
3.75 Series A Warrants. The notes were secured by certain of
the Company’s assets and were initially convertible into shares of the
Company’s common stock at the rate of $20,000.00 per share, which
conversion price was subject to adjustment. Each Series A
Warrant was exercisable into one (1) share of common stock at an exercise
price of $200.00 and one (1) Series B Warrant. Each Series B
Warrant was exercisable into one (1) share of common stock at an exercise
price of $40,000.00. As of June 30, 2010, $25,000 in principal
amount of the original $1,425,000 in notes remains outstanding and in
default. This default should not have any material impact on
the Company.
|
|
(c)
|
Since
2006 through June 30, 2010, a third party investor, and its successor in
interest, has advanced operational funding into the
Company. Since there had been no formal agreement regarding the
balance owed, the Company accrues a 5% annual interest on the principal
with the intent that a mutual arrangement will be resolved between both
parties.
|
On June
26, 2009, the Company entered into an exchange agreement with the third party
investor, pursuant to which the investor exchanged approximately $1,082,411 of
the evidences of indebtedness, along with $124,195 of accrued interest thereon,
for a new convertible promissory note in the aggregate principal amount of
$1,200,000. The new note is due June 26, 2011, is unsecured, and
bears interest at an annual rate of six percent (6%). The new note
was initially convertible into shares of the Company’s common stock at a
conversion price of $0.001 per share. The conversion price has since
adjusted to $0.0001 pursuant to rate adjustment terms set forth in the
note. During the year ended December 31, 2009, the holders have made
various conversions to the principal and interest outstanding.
As of
June 30, 2010, there continues to be no formal agreement regarding the remaining
evidences of indebtedness of $130,857, and the Company continues to accrue 5%
annual interest on the principal with the intent that a mutual arrangement will
be resolved between both parties.
|
(d)
|
On
July 11, 2009, the Company and Gwenco entered into a settlement and
release agreement with the Company’s largest lender to resolve various
disputes that had arisen between the Company and the
lender. Pursuant to the settlement agreement, the lender waived
certain defaults under various debt obligations. In addition,
Gwenco and the lender under the Debtor-in-Possession Total Facility
extended the maturity date on the Total Facility to the earliest of (i)
December 31, 2010, (ii) the date of confirmation of a plan of
reorganization or liquidation in the Bankruptcy Case; (iii) the date of
closing of a sale of all or substantially all of Gwenco’s assets pursuant
to the Bankruptcy Code; or (iv) the approval of a disclosure statement in
respect of a plan of reorganization or liquidation not supported by the
lender. In exchange for this consideration, Quest issued the
lender a new convertible promissory note in the aggregate principal amount
of $1,000,000. The note is due July 11, 2011, is unsecured, and
bears interest at an annual interest rate of six percent
(6%). The new note was initially convertible into shares of the
Company’s common stock at a conversion price of $0.001 per
share. The conversion price has since adjusted to $0.0001
pursuant to rate adjustment terms set forth in the
note.
|
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
|
(e)
|
On
July 13, 2009, the Company issued a consulting bonus in the form of a
convertible promissory note in the aggregate principal amount of $200,000
to a third party consulting company owned by a stockholder of the
Company. The note is due July 13, 2011, is unsecured, and bears
interest at an annual interest rate of six percent (6%). The
new note was initially convertible into shares of the Company’s common
stock at a conversion price of $0.001 per share. The conversion
price has since adjusted to $0.0001 pursuant to rate adjustment terms set
forth in the note. The Company recorded consulting expense for
$200,000 and continues to accrue interest in relation to the convertible
promissory note.
|
|
(f)
|
Periodically,
the Company receives cash advances from unrelated third party
investors. Since these advances are open accounts, are
unsecured, and have no fixed or determined dates for repayment, the
amounts carry a 0% interest rate.
|
|
(g)
|
On
May 1, 2007, the Company entered into a settlement and release agreement
with a third party pursuant to which the Company issued a
convertible secured promissory note in the principal amount of
$10,000. The note was due on May 1, 2008, is unsecured, and
bears interest at the annual rate of ten percent (10%). The
note is convertible into the Company’s common shares at a fixed rate of
$160 per share. The holder may not convert any
outstanding principal amount of this note or accrued and unpaid interest
thereon to the extent such conversion would result in the holder
beneficially owning in excess of 4.999% of the then issued and outstanding
common shares of the Company.
|
As of
June 30, 2010, the Company was in default of this obligation. This
default should not have any material impact on the Company.
|
(h)
|
On
December 8, 2005, the Company issued a convertible secured promissory note
in the principal amount of $335,000. The note was due on
December 8, 2006, with an annual interest rate of eight percent (8%), and
is convertible into the Company’s common shares at an initial conversion
price of $20.00 per share, subject to adjustment. As of
December 31, 2006, the Company was in default. In January,
2007, the Company entered into an exchange agreement with the note holder
and holders of 150,000 shares of the Company’s common stock, under which
the holders exchanged the note and the 150,000 shares of the Company’s
common stock for a series of new convertible promissory notes in the
aggregate principal amount of $635,000. The new notes were due
on March 31, 2007, with an annual interest rate of eight percent (8%), and
are convertible into the Company’s common shares at an initial conversion
price of the greater of (i) $2.00 per share or (ii) 50% of the average of
the 5 closing bid prices of the common stock immediately preceding such
conversion date. During the first quarter of 2007, the note
holders made partial conversions of the principal and accruing
interest.
|
On April
1, 2006, the Company entered into a settlement and release agreement
with a third party individual pursuant to which the Company
issued a convertible secured promissory note in the principal amount of
$300,000. The note was due on April 1, 2008, with an annual interest
rate of eight percent (8%). The note is convertible into the
Company’s common shares at an initial conversion price equal to the greater of
(a) $2.00 per share, and (b) 50% of the average market price during the three
trading days immediately preceding any conversion date. The
holder may not convert any outstanding principal amount of this note or accrued
and unpaid interest thereon to the extent such conversion would result in the
holder beneficially owning in excess of 4.999% of the then issued and
outstanding common shares of the Company.
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
On June
6, 2008, the Company entered into an exchange agreement with the subsequent
holder of these notes, in the aggregate principal amount of $835,000, under
which the subsequent holder exchanged the notes held by such holder for a new
convertible promissory note in the aggregate principal amount of
$835,000. The new note is due June 6, 2010, is unsecured, and bears
interest at an annual interest rate of six percent (6%). The new note
is convertible into shares of the Company’s common stock at a conversion price
of $0.001 per share.
As of
June 30, 2010, the Company was in default of this obligation. This
default should not have any material impact on the Company.
|
(i)
|
On
August 14, 2008, the Company entered into a purchase agreement with an
unrelated third party where the Company issued a $400,000 convertible
promissory note and granted a three (3) year royalty on future coal
sales. The note is due July 23, 2010, is unsecured, and bears
interest at an annual interest rate of eight percent (8%). The
note is convertible into shares of the Company’s common stock at a
conversion price of sixty percent (60%) of the average of the five (5)
lowest per share market value during the ten (10) trading days immediately
preceding a conversion date. The royalty is based on sliding
scale ranging from $0.00 to $0.75 per ton, depending on actual sale prices
of coal received by the Company. On August 28, 2009, the
Company amended the conversion price to be forty five percent (45%) of the
average of the five (5) lowest per share market value during the ten (10)
trading days immediately preceding a conversion
date.
|
In
accordance with ASC 470-20, the Company also recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$225,000 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as interest
expense. On August 28, 2009, pursuant to the amended conversion
feature agreement, the Company deemed the existing debt extinguished and
reissued it according to the new terms. The discounted
amortization was revised to $219,218. As of June 30, 2010,
unamortized discount of $843 remains.
In
addition, the Company recognized and measured $25,544 of the proceeds, which is
equal to the Company’s estimate of the royalty payable under this agreement, to
accrued royalties and a discount against the note. The debt discount
attributed to the accrued royalty is amortized over the note’s maturity period
as interest expense.
|
(j)
|
On
September 16, 2009, the Company issued a convertible promissory note to a
third party investor for facilitation of Gwenco’s Debtor-In-Possession
financing. The note is due September 16, 2011, is unsecured,
and bears interest at an annual interest rate of eight percent
(8%). The note is convertible into shares of the Company’s
common stock at a conversion price of forty five percent (45%) of the
average of the five (5) lowest per share market value during the ten (10)
trading days immediately preceding a conversion
date.
|
In
accordance with ASC 470-20, the Company also recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$25,000 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as interest
expense. As of June 30, 2010, unamortized discount of $16,318
remains.
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
|
(k)
|
On
October 14, 2009, the Company entered into an exchange agreement with a
third party investor, pursuant to which the investor exchanged
approximately $125,000 of evidences of indebtedness, for a new convertible
promissory note in the aggregate principal amount of
$125,000. The new note is due October 14, 2014, is unsecured,
and bears interest at an annual rate of six percent (6%). The
new note was initially convertible into shares of the Company’s common
stock at a conversion price of $0.001 per share. The conversion
price has since adjusted to $0.0001 pursuant to rate adjustment terms set
forth in the note. During the year ended December 31, 2009, the
holders have made various conversions to the principal and interest
outstanding. Subsequent to December 31, 2009, the note was
amended to reduce the interest rate to 5% and to amend certain adjustment
terms in the conversion price.
|
In
accordance with ASC 470-20, the Company recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$125,000 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as interest
expense. As of June 30, 2010, unamortized discount of $44,033 still
remains.
|
(l)
|
On
December 14, 2009, the Company entered into an exchange agreement with a
third party investor, pursuant to which the investor exchanged
approximately $30,000 of the evidences of indebtedness through unsecured
cash advances, for a new convertible promissory note in the aggregate
principal amount of $30,000. The new note is due December 14,
2011, is unsecured, and bears interest at an annual rate of four percent
(4%). The new note is convertible into shares of the Company’s
common stock at a conversion price of 50% of the average of the per share
market values during the three (3) trading days immediately preceding a
conversion date, subject to
adjustments.
|
In
accordance with ASC 470-20, the Company recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$28,554 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as interest
expense. As of June 30, 2010, the debt principal has been fully
satisfied through conversions with only $240 remaining in unpaid
interest.
|
(m)
|
On
October 23, 2009, the Company issued a convertible note to a third party
investor in the amount of 50,000. The note is due October 23,
2011, is unsecured, and bears interest at an annual rate of six percent
(8%). The note is convertible into shares of the Company’s
common stock at a conversion price of 45% of the average of the five (5)
lowest per share market values during the ten (10) trading days
immediately preceding a conversion
date.
|
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
In
accordance with ASC 470-20, the Company recognized an imbedded beneficial
conversion feature present in this note. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$31,064 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as interest
expense. As of June 30, 2010, unamortized discount of $21,501 still
remains.
|
(n)
|
On
August 28, 2009, the Company borrowed $12,500 from an unrelated third
party, and in connection therewith, issued a promissory note that is due
on demand, is unsecured, and bears interest at an annual interest rate of
twelve percent (12%).
|
|
(o)
|
On
January 16, 2009, the Company borrowed $10,000 from an unrelated third
party, and in connection therewith, issued a promissory note that is due
on demand, is unsecured, and bears interest at an annual interest rate of
six percent (6%).
|
|
(p)
|
On
February 4, 2010, the Company entered into a purchase agreement with an
unrelated third party where the Company issued a $95,000 convertible
promissory note. The note is due February 4, 2012 and bears
interest at an annual interest rate of five percent (5%). The
note is convertible into shares of the Company’s common stock at a
conversion price of $0.0001 per share due to variable rate
adjustments. The Company recorded a note discount of $20,000,
which is being amortized over the term of the
note.
|
|
(q)
|
On
February 26, 2010, the Company entered into a purchase agreement with an
unrelated third party where the Company issued a $55,000 convertible
promissory note. The note is due February 26, 2012 and bears
interest at an annual interest rate of eight percent (8%). The
note is convertible into shares of the Company’s common stock at a
conversion price of forty five percent (45%) of the average of the five
(5) lowest per share market value during the five (5) trading days
immediately preceding a conversion date. The Company recorded a
note discount of $5,000, which is being amortized over the term of the
note.
|
|
(r)
|
On
March 22, 2010, the Company entered into a purchase agreement with an
unrelated third party where the Company issued a $50,000 convertible
promissory note. The note is due March 22, 2011 and bears
interest at an annual interest rate of eight percent (8%). The
note is convertible into shares of the Company’s common stock at a
conversion price of forty five percent (40%) of the average of the three
(3) lowest per share market value during the ten (10) trading days
immediately preceding a conversion date. The Company recorded a
note discount of $50,000, which is being amortized over the term of the
note.
|
|
(s)
|
On
July 10, 2006, the Company entered into a settlement arrangement with an
existing equipment lessor for the bill of sale on two pieces of equipment,
of which the Company had retained possession while in default of prior
lease payments. On October 10, 2006, the Pike County Circuit
Court entered an order enforcing this settlement agreement, and on
December 19, 2006, the lessor was awarded summary judgment in the amount
of $35,000 plus 8% accrued interest from August 9, 2006. As of
June 30, 2010, the Company remains in default. The lessor has
since repossessed the equipment.
|
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
|
(t)
|
Under
Gwenco’s Plan of Reorganization, a judgment in favor of Interstellar
Holdings, LLC was classified as a Class 1 Claim and was satisfied by the
issuance to Interstellar Holdings of a 5 year secured convertible
promissory note, which note is convertible into common stock of the
Company at a rate of the lower of (i) $0.001 per share and (ii) 40% of the
average of the three lowest per shares market values of the Company’s
common stock during the 10 trading days before a conversion; provided that
the holder is prohibited from converting if such conversion would result
in it holding more than 4.99% of the Company’s outstanding common stock.
In
accordance with ASC 470-20, the Company recognized an imbedded beneficial
conversion feature present in this note. The Company allocated
a portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$1,093,771 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and
a discount against the note. The debt discount attributed to
the beneficial conversion feature is amortized over the note’s maturity
period as interest expense. As of June 30, 2010, unamortized
discount of $938,820 still
remains.
|
|
(u)
|
Under
Gwenco’s Plan of Reorganization, the Court approved an exit facility under
which Interstellar Holdings, LLC will provide up to $2 million in
financing to Gwenco, which Gwenco used to pay off its Debtor In Possession
Total Facility. The exit facility consists of a 5 year secured
convertible line of credit note, which note is convertible into common
stock of the Company at a rate of the lower of (i) $0.001 per share and
(ii) 40% of the average of the three lowest per shares market values of
the Company’s common stock during the 10 trading days before a conversion;
provided that the holder is prohibited from converting if such conversion
would result in it holding more than 4.99% of the Company’s outstanding
common stock. In accordance with ASC 470-20, the Company recognized an
imbedded beneficial conversion feature present in this
note. The Company allocated a portion of the proceeds equal to
the intrinsic value of that feature to additional paid in
capital. The Company recognized and measured $1,968,281 of the
proceeds, which is equal to the intrinsic value of the imbedded beneficial
conversion feature, to additional paid in capital and a discount against
the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period as
interest expense. As of June 30, 2010, unamortized discount of
$1,689,441 still remains.
|
|
(v)
|
Certain
unsecured promissory notes which Gwenco assumed in connection with a
settlement agreement with a former owner were classified as unsecured
Class 3 Claims in Gwenco’s Plan of Reorganization. These claims
will be satisfied by cash payments equal to the value of their claim on
the earlier of (i) October 12, 2014 or (ii) the date on which, in Gwenco’s
sole discretion, proceeds from the exit facility are sufficient to satisfy
the claims. Further, these claimholders shall receive their
pro-rata share of royalty payments to reduce their
claims.
|
|
(w)
|
Certain
accrued overriding royalties owed to former owners totaling $319,062 have
been reclassified as allowed unsecured claims under Gwenco’s Plan, to be
paid along with the other allowed unsecured claims under Gwenco’s
Plan. Each former owner has the right to convert up to $40,000
of his or her claim into the Company’s common stock at a conversion price
of eighty five percent (85%) of the average of the five (5) per share
market values immediately preceding a conversion date, with a minimum
conversion price of the par value of the Company’s common stock. In
accordance with ASC 470-20, the Company recognized an imbedded beneficial
conversion feature present in this note. The Company allocated
a portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured
$1,634 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and
a discount against the note. The debt discount attributed to
the beneficial conversion feature is amortized over the note’s maturity
period as interest expense. As of June 30, 2010, unamortized
discount of $1,307 still
remains.
|
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
|
(x)
|
Pursuant
to the Plan, most of the existing royalties, which accrued up until the
effective date, were re-categorized as unsecured Cure Claims totaling
$199,213. These claim amounts are now due on or before October
12, 2012.
|
|
(y)
|
Certain
promissory notes issued to a former stockholder of Gwenco were classified
as unsecured Class 3 Claims in Gwenco’s Plan of
Reorganization. The claims are also guaranteed by the Company
and Quest Ltd. and are secured by 50% of Quest Ltd.’s ownership of
Gwenco. The former stockholder also has the has the right to
convert up to $15,000 of the claim each month into the Company’s common
stock at a conversion price of eighty five percent (85%) of the average of
the five (5) per share market values immediately preceding a conversion
date, with a minimum conversion price of the par value of the Company’s
common stock.
|
Reclassification
During
the six months ended June 30, 2010, the Company revised its methodology of
estimating the fair value of obligations modified as a result of the
confirmation of Gwenco’s Plan of Reorganization. This resulted in a
reclassification of approximately $480,000 from additional paid in capital to
restructured debt.
The
Company recognized no income tax benefit for the loss generated for the periods
through June 30, 2010.
ASC
740-10 requires that a valuation allowance be provided if it is more likely than
not that some portion or all of a deferred tax asset will not be
realized. The Company’s ability to realize the benefit of its
deferred tax asset will depend on the generation of future taxable
income. Because the Company has yet to recognize significant revenue
from the sale of its products, it believes that the full valuation allowance
should be provided.
The
Company has not filed corporate federal, state, or local income tax returns
since 2002, and believes that, due to its operating losses, it does not have a
material tax liability.
On June
16, 2010, the Company effectuated a 1 to 20 reverse stock split resulting in a
1,858,642,772 reduction of shares from 1,956,466,735 common shares outstanding
to 97,823,963 common shares outstanding. The reverse stock split did
not affect the amount of authorized shares of the
Company. Additionally, the board approved the issuance of up to 500
shares of the Company’s common stock for rounding up of fractional shares in
connection with the reverse stock split.
All
references in the condensed consolidated financial statements and notes to
condensed consolidated financial statements, numbers of shares, and share
amounts have been retroactively restated to reflect the reverse splits, unless
explicitly stated otherwise.
During
the six months ended June 30, 2010, the Company issued an aggregate of
13,715,000 shares of common stock for consulting and legal services.
Expense of $215,310 was recorded related to these shares, which was the
market value of such shares issued at prices ranging from $0.00040 to $0.00181
per share.
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
During
the six months ended June 30, 2010, the holders of 7% convertible promissory
notes effectuated a final conversion of 332,917 shares of common stock at a
conversion price of $0.0168 per share to satisfy the remaining $5,593 of accrued
interest.
During
the six months ended June 30, 2010, the holders of 8% convertible promissory
notes due August 14, 2010, effectuated a series of partial conversions and were
issued an aggregate of 10,000,000 shares of common stock at conversion prices
ranging from $0.006 to $0.02 per share. In the aggregate, these
issuances reduced the debt by $113,680 in principal.
During
the six months ended June 30, 2010, the holders of 4% convertible promissory
notes due December 14, 2011, effectuated a series of partial conversions and
were issued an aggregate of 2,556,762 shares of common stock at conversion
prices ranging from $0.006 to $0.022 per share. In the aggregate,
these issuances reduced the debt by $30,000 in principal.
During
the six months ended June 30, 2010, the holders of 6% convertible promissory
notes due July 13, 2011, effectuated a series of partial conversions and were
issued an aggregate of 5,400,000 shares of common stock at conversion prices
ranging from $0.002 to $0.01 per share. In the aggregate, these
issuances reduced the debt by $26,000 in principal.
During
the six months ended June 30, 2010, the holders of 6% convertible promissory
notes due October 14, 2014, effectuated a series of partial conversions and were
issued an aggregate of 11,600,000 shares of common stock at conversion prices
ranging from $0.002 to $0.02 per share. In the aggregate, these
issuances reduced the debt by $39,500 in principal.
During
the six months ended June 30, 2010, the holders of 6% convertible promissory
notes due June 26, 2011, effectuated a series of partial conversions and were
issued an aggregate of 38,750,000 shares of common stock at conversion prices
ranging from $0.002 to $0.02 per share. In the aggregate, these
issuances reduced the debt by $179,163 in principal and $3,338 in accrued
interest.
During
the six months ended June 30, 2010, the holders of 6% convertible promissory
notes due June 6, 2010, effectuated a series of partial conversions and were
issued an aggregate of 1,352,036 shares of common stock at a conversion price of
$0.02 per share. In the aggregate, these issuances reduced the debt
by $25,004 in principal and $2,037 in accrued interest.
During
the six months ended June 30, 2010, the holders of a Class 3 Claim under the
Gwenco Plan of Reorganization, due October 12, 2014, exercised its conversion
option pursuant to the Plan to effectuate a series of partial conversions and
were issued an aggregate of 5,159,383 shares of common stock at conversion
prices ranging from $0.0076 to $0.0274 per share. In the aggregate,
these issuances reduced the debt by $75,000 in principal.
During
the six months ended June 30, 2010, the holders of a Class 1 Claim under the
Gwenco Plan of Reorganization, due October 12, 2014, exercised its conversion
option within the Exit Facility terms pursuant to the Plan to effectuate a
series of partial conversions and were issued an aggregate of 11,500,000 shares
of common stock at conversion prices ranging from $0.004 to $0.01 per
share. In the aggregate, these issuances reduced the debt by $58,187
in principal.
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
NOTE
7 -
|
COMMITMENTS
AND CONTINGENCIES
|
Valley Personnel
Services.
On or about August 25, 2004, Valley Personnel
Services, Inc. commenced an action in the Circuit Court of Mingo County, West
Virginia against Quest’s indirect wholly-owned subsidiaries, D&D
Contracting, Inc. and Quest Energy, Ltd. for damages in the amount of
approximately $150,000, plus pre and post judgment interest as provided by law,
costs, and fees.
Community Trust
Bank.
Community Trust Bank and its insurer, the Federal
Insurance Company, commenced an action in Pike County Court, Kentucky against
Quest Energy alleging that former employees or associates of Quest Energy
engaged in a criminal scheme and conspiracy to defraud Community Trust Bank,
that Quest Energy is accordingly responsible for the actions of these former
employees and associates, and that Quest Energy obtained a substantial material
benefit as a result of this alleged scheme. Quest Energy has denied
these allegations. As of June 30, 2010, the matter is closed and off
the Court’s docket, and no outcome has been determined. We have
previously recorded an accrual of $650,000 for our best estimate of probable
loss related to this matter. While we believe that this matter will
be resolved without a material adverse impact on our cash flows, results of
operation, or financial condition, it is reasonably possible that our judgments
regarding this matter could change in the future.
Personal Injury
.
An action has been
commenced in the Circuit Court of Pike County, Kentucky against the Company and
its subsidiaries for unspecified damages resulting from personal injuries
suffered while working for Mountain Edge Personnel, an employee leasing agency
who leased employees to the subsidiaries. The action has since been
dismissed without prejudice.
Fidler
. In the
fourth quarter of 2008, a former attorney for the Company commenced an action
alleging breach of contract for unpaid legal fees. The Company has
denied the allegations and is actively defending the
matter. Furthermore, the Company has filed a counterclaim against the
attorney alleging legal malpractice in connection with the attorney’s
representation of the Company in several matters. The parties have
agreed in principle to settle the matter, subject to completion of definitive
settlement documents.
Potential SEC
Action
. In October 2008, the Company received a Wells notice
(the “Notice”) from the staff of the Salt Lake Regional Office of the Securities
and Exchange Commission (the “Commission”) stating that they are recommending an
enforcement action be filed against the Company based on the Company’s financial
statements and other information contained in reports filed with the Commission
for the period 2004 and thereafter. The Notice states that the
Commission anticipates alleging that we have violated Sections 10(b), 13(a)
and 13(b)(2) of the Securities Exchange Act of 1934, as amended and Rules 10b-5,
12b-20, 13a-1 and 13a-13 thereunder. The Company contends that the
Company did not commit any wrongdoings or the violations referred to in the
Notice. The Company cannot predict whether the Commission will follow
the recommendations of the staff and file suit against the
Company. If any enforcement proceeding is instituted by the
Commission, and intends to vigorously defend itself against the Commission’s
claims.
The
Company believes that it may incur significant costs and expenses in connection
with this investigation. There can be no assurance that litigation
asserting such claims will not be initiated, or that the Company would prevail
in any such litigation.
KENTUCKY
ENERGY, INC.
(formerly
Quest Minerals and Mining Corp.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
The
Company is unable to predict the extent of its ultimate liability with respect
to any and all future securities, bankruptcy, or other litigation
matters. The costs and other effects of any future litigation,
bankruptcy proceedings, government investigations, legal and administrative
cases and proceedings, settlements, judgments and investigations, claims and
changes in these matters could have a material adverse effect on the Company’s
financial condition and operating results.
The
Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse
decisions or settlements may occur, the Company believes that the final
disposition of such matters should not have a material adverse effect on its
financial position, results of operations, or liquidity.
NOTE
8 -
|
SUBSEQUENT
EVENTS
|
On July
16, 2010, the Company entered into an exchange agreement with an unrelated third
party where the Company issued a $13,862 convertible promissory note in exchange
for an existing demand note of $12,500 plus accrued interest. The
note is due July 16, 2012 and bears interest at an annual interest rate of eight
percent (8%). The note is convertible into shares of the Company’s
common stock at a conversion price of forty percent (40%) of the average of the
three (3) lowest per share market value during the ten (10) trading days
immediately preceding a conversion date.
On July
21, 2010, the Company entered into an agreement with an unrelated third party to
obtain up to 100 drill sites and a 100% working interest of the oil and gas
rights on approximately 3,000 acres of property located in Rockcastle County,
Kentucky for $50,000. In addition, the unrelated third party is to drill a well
for additional consideration of $125,000 if paid by November 5, 2010. This well
will be used to test thoroughly the main oil and gas horizons.
From July
1, 2010 through August 19, 2010, the Company issued an aggregate of 88,622,085
shares of common stock as conversion pursuant to convertible notes and under the
exit facility and 8,000,000 shares of common stock for services
rendered.
ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included in this
report.
This
report and the documents to which we refer you and incorporate into this report
by reference contain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. In addition, from
time to time, we or our representatives may make such forward-looking statements
orally or in writing. These are statements that relate to future
periods and include statements regarding our future strategic, operational, and
financial plans, anticipated capital expenditures, projected cash flows,
borrowings and other sources of funding, anticipated or projected revenues,
expenses, and operational growth, the adequacy of our current equipment and
supplies as well as our ability to obtain additional equipment and supplies, and
our ability to expand our operations.
The
statements contained in this report that are not historic in nature,
particularly those that utilize terminology such as “may,” “will,” “should,”
“expects,” “anticipates,” “estimates,” “believes,” “plans,” “target,” “goal,”
“objective,” or comparable terminology are forward-looking statements based on
current expectations and assumptions. Various risks and uncertainties
could cause actual results to differ materially from those expressed in
forward-looking statements.
All
forward-looking statements in this document are based on information currently
available to us as of the date of this report, and we assume no obligation to
update any forward-looking statements. Forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements, including,
but not limited to, the following:
|
(i)
|
our
cash flows, results of operations, or financial
condition;
|
|
(ii)
|
our
ability to continue as a going
concern;
|
|
(iii)
|
the
possibility that the assets of our wholly owned subsidiary, Gwenco, Inc.,
could be liquidated in the future if its bankruptcy case is converted to a
Chapter 7 liquidation;
|
|
(iv)
|
our
need to continue to finance our operations through additional borrowings
or other capital financings, which may not be available as
needed;
|
|
(v)
|
our
substantial indebtedness outstanding and significantly leveraged
operations;
|
|
(vi)
|
our
ability to timely obtain necessary supplies and
equipment;
|
|
(vii)
|
the
impact of the recent mine explosion at the Upper Big Branch mine in West
Virginia;
|
|
(viii)
|
governmental
policies, laws, regulatory actions and court decisions affecting the coal
industry or our customers’ coal
usage;
|
|
(ix)
|
legal
and administrative proceedings, settlements, investigations and claims and
the availability of insurance coverage related thereto, including, but not
limited to, any SEC enforcement action that may be brought in the
future;
|
|
(x)
|
our
interpretation and application of accounting literature related to mining
specific issues;
|
|
(xi)
|
our
assumptions and projections concerning economically recoverable coal
reserve estimates;
|
|
(xii)
|
inherent
risks of coal mining beyond our control, including weather and geologic
conditions or catastrophic weather-related
damage;
|
|
(xiii)
|
inherent
complexities which make it more difficult and costly to mine in Central
Appalachia than in other parts of the United
States;
|
|
(xiv)
|
our
production capabilities to meet market expectations and customer
requirements;
|
|
(xv)
|
the
cost and availability of transportation for our produced
coal;
|
|
(xvi)
|
our
ability to obtain and renew permits necessary for our existing and any
future operations in a timely
manner;
|
|
(xvii)
|
our
ability to expand our mining
capacity;
|
|
(xviii)
|
our
ability to manage production costs, including labor
costs;
|
|
(xix)
|
adjustments
made in price, volume, or terms to existing coal supply
arrangements;
|
|
(xx)
|
the
worldwide market demand for coal, electricity, and
steel;
|
|
(xxi)
|
environmental
concerns related to coal mining and combustion and the cost and perceived
benefits of alternative sources of energy such as natural gas and nuclear
energy;
|
|
(xxii)
|
our
reliance upon and relationships with our customers and
suppliers;
|
|
(xxiii)
|
the
creditworthiness of our customers and
suppliers;
|
|
(xxiv)
|
the
lack of insurance against all potential operating
risks;
|
|
(xxv)
|
competition
among coal and other energy producers, in the United States and
internationally;
|
|
(xxvi)
|
our
ability to attract, train and retain a skilled workforce to meet
replacement or expansion needs;
|
|
(xxvii)
|
future
economic or capital market
conditions;
|
|
(xxviii)
|
the
availability and costs of credit, surety bonds and letters of credit that
we require;
|
|
(xxix)
|
foreign
currency fluctuations;
|
|
(xxx)
|
the
successful completion of acquisition, disposition, or financing
transactions and the effect thereof on our business;
and
|
|
(xxxi)
|
the
successful implementation of our strategic plans and objectives for future
operations and expansion or
consolidation.
|
We include these cautionary statements
in this report to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 as well as
the “bespeaks caution” doctrine. Any forward-looking statements
should be considered in context with the various disclosures made by us about
our company in our public filings with the SEC, including, without limitation,
the Risk Factors more specifically described on our annual report on Form 10-K
for the year ended December 31, 2009, as amended. The forward-looking
statements speak only as of the date hereof, and we expressly disclaim any
obligation to publicly release the results of any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this filing unless required by securities law, and we caution the reader not to
rely on them unduly.
General
Kentucky
Energy Inc. (f/k/a Quest Minerals & Mining Corp.) acquires and
operates energy and mineral related properties in the southeastern part of the
United States. We focus our efforts on operating properties that
produce quality compliance blend coal, generating revenues and cash flow through
the mining, processing, and selling of the coal located on these
properties.
We are a
holding company for Quest Minerals & Mining, Ltd., a Nevada corporation, or
Quest (Nevada), which in turn is a holding company for Quest Energy, Ltd., a
Kentucky corporation, or Quest Energy, and of Gwenco, Inc., a Kentucky
corporation, or Gwenco. Quest Energy is the parent corporation of E-Z
Mining Co., Inc, a Kentucky corporation, or E-Z Mining, and of Quest Marine
Terminal, Ltd., a Kentucky corporation, or Quest Marine.
Gwenco
leases over 700 acres of coal mines, with approximately 12,999,000 tons of coal
in place in six seams. In 2004, Gwenco had reopened Gwenco’s two
former drift mines at Pond Creek and Lower Cedar Grove, and had begun production
at the Pond Creek seam. This seam of high quality compliance coal is
located at Slater’s Branch, South Williamson, Kentucky.
In 2009,
the United States Bankruptcy Court for the Eastern District of Kentucky
confirmed Gwenco’s Plan of Reorganization (the “Plan”) pursuant to Chapter 11 of
the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern
District of Kentucky. The Plan became effective on October 12,
2009. A description of the Plan and a copy of the Plan are set forth
in our Current Report on Form 8-K dated October 2, 2009.
Fiscal
2010 Developments
Operations
Overview.
In the first half of 2010, we continued to conduct
mining operations. We generated coal revenues of $1.45 million for
the first half of 2010, compared to $0.33 million for the first
half of 2009. Other than with respect to the West Virginia
explosion discussed below, we did not have to shut down our operations during
the first half of 2010. However, we did encounter temporary delays
and stoppages, due to either breakdowns in equipment, a lack of necessary
supplies, weather-related production issues, or regulatory
inspections. We continue to encounter thicker coal seams as we
advance further into the mine.
While
certain general business conditions continue to improve, the continued effects
of the recent recession, credit crisis, and related turmoil in the global
financial system has had and may continue to have a negative impact on our
business, financial condition, and liquidity. We may face significant
future challenges if conditions in the financial markets do not continue to
improve. Worldwide demand for coal has been adversely impacted by the
global recession, but the steel industry and the global metallurgical coal
markets have shown signs of improvement. If this trend continues,
coal demand should increase and improve our opportunities to sell our coal
products at higher prices.
West Virginia
Explosion.
On April 5, 2010, an explosion occurred at the
Upper Big Branch mine in Montcoal, West Virginia, operated by Performance Coal
Company, a subsidiary of Massey Energy. According to news reports,
the explosion resulted in 29 fatalities. We are deeply saddened by
the loss of these members of the industry. In response to this
tragedy, the Federal Mine Safety and Health Administration (“MSHA”) conducted
inspections of most mines in the region, including Pond Creek. As a
result of these inspections, MSHA issued an order to Gwenco to take certain
precautionary measures, including upgrades to its ventilation system, CO system,
and airlock system. In addition, MSHA conducted simulated evacuations
and conducted underground training seminars. Gwenco ceased mining
operations during this period in order to allow the inspections, implement the
precautionary measures, and conduct the simulations and
training. Gwenco reopened the mining operations approximately two
weeks after the inspections commenced. We are unable to
ascertain or estimate at this time what additional effect the explosion will
have on our current or future operations, or whether our operations will become
subject to additional regulation.
Name Change.
On
June 10, 2010, we filed an amendment to our Articles of Incorporation to change
corporate name from Quest Minerals & Mining Corp. to “Kentucky Energy,
Inc. The change in corporate name took effect on June 16,
2010.
Drilling
Contract.
On July 21, 2010, we entered into an agreement
with an unrelated third party to obtain up to 100 drill sites and a 100% working
interest of the oil and gas rights on approximately 3,000 acres of property
located in Rockcastle County, Kentucky for $50,000. In addition, the unrelated
third party is to drill a well for additional consideration of $125,000 if paid
by November 5, 2010. This well will be used to test thoroughly the main oil and
gas horizons.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United
States. The preparation of financial statements requires managers to
make estimates and disclosures on the date of the financial
statements. On an on-going basis, we evaluate our estimates,
including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical
experience, and other assumptions as the basis for making
judgments. Actual results could differ from those
estimates. We believe the following critical accounting policies
affect its more significant judgments and estimates in the preparation of our
consolidated financial statements.
Mineral
Interests
The
purchase acquisition costs of mineral properties are deferred until the
properties are placed into production, sold or abandoned. These
deferred costs will be amortized on the unit-of-production basis over the
estimated useful life of the properties following the commencement of production
or written-off if the properties are sold, allowed to lapse or
abandoned.
Mineral
property acquisition costs include any cash consideration and the fair market
value of common shares and preferred shares, based on the trading price of the
shares, or, if no trading price exists, on other indicia of fair market value,
issued for mineral property interests, pursuant to the terms of the agreement or
based upon an independent appraisal.
Administrative
expenditures are expensed in the year incurred.
Coal
Acquisition Costs
The costs
to obtain coal lease rights are capitalized and amortized primarily by the
units-of-production method over the estimated recoverable
reserves. Amortization occurs either as we mine on the property or as
others mine on the property through subleasing transactions.
Rights to
leased coal lands are often acquired through royalty payments. As
mining occurs on these leases, the accrued royalty is charged to cost of coal
sales.
Mining
Acquisition Costs
The costs
to obtain any interest in third-party mining operations are expensed unless
significantly proven reserves can be established for the entity. At
that point, capitalization would occur.
Mining
Equipment
Mining
equipment is recorded at cost. Expenditures that extend the useful
lives of existing plant and equipment or increase the productivity of the asset
are capitalized. Mining equipment is depreciated principally on the
straight-line method over the estimated useful lives of the assets, which range
from three to 15 years.
Deferred
Mine Equipment
Costs of
developing new mines or significantly expanding the capacity of existing mines
are capitalized and amortized using the units-of-production method over the
estimated recoverable reserves that are associated with the property being
benefited.
Asset
Impairment
If facts
and circumstances suggest that a long-lived asset may be impaired, the carrying
value is reviewed. If the review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying value
of the asset is reduced to its estimated fair value.
Revenue
Recognition
Coal
sales revenues are sales to customers of coal produced at our
operations. We recognize revenue from coal sales at the time title
passes to the customer. Under the typical terms of sale, title and
risk of loss transfer to the customer at the mine (or dock, or port) where coal
is loaded to the truck (or rail, barge, ocean-going vessel, or other
transportation source) that serves our mines.
Income
Taxes
We
provide for the tax effects of transactions reported in the financial
statements. The provision, if any, consists of taxes currently due
plus deferred taxes related primarily to differences between the basis of assets
and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities, if any, represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. As of June 30, 2010, we had
no material current tax liability, deferred tax assets, or liabilities to impact
on its financial position because the deferred tax asset related to our net
operating loss carry forward was fully offset by a valuation
allowance. However, we have not filed our corporate income tax
returns since 2002.
Fair
Value
Our
financial instruments, as defined by FASB ASC Topic 825-10-50, “Financial
Instruments”, include cash, advances to affiliate, trade accounts receivable,
investment in securities available-for-sale, restricted cash, accounts payable
and accrued expenses and short-term borrowings. All instruments other
than the investment in securities available-for-sale are accounted for on a
historical cost basis, which, due to the short maturity of these financial
instruments, approximates fair value as at June 30, 2010.
Earnings
loss per share
We
adopted FASB ASC Topic 260, “Earnings per Share”, which provides for the
calculation of “basic” and “diluted” earnings per share. Basic
earnings per share includes no dilution and is computed by dividing net income
available to common stockholders by the weighted average common shares
outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings similar to
fully diluted earnings per share; however, the potential dilution becomes
anti-dilutive in the case of a loss and, therefore, basic and fully diluted loss
per share are the same.
Stock
Split
All
references to common stock and per share date have been retroactively restated
to account for the 1 for 100 reverse stock split effectuated on August 4,
2009.
All
references to common stock and per share date have been retroactively restated
to account for the 1 for 20 reverse stock split effectuated on June 16,
2010.
Other
Recent Accounting Pronouncements
We do not
expect that the adoption of other recent pronouncements from the Public Company
Oversight Board to have any impact on its financial statements.
Results
of Operations
Basis
of Presentation
The
following table sets forth, for the periods indicated, certain unaudited
selected financial data:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
774,846
|
|
|
$
|
—
|
|
|
$
|
1,458,351
|
|
|
$
|
330,314
|
|
Production
costs
|
|
|
(854,879
|
)
|
|
|
(56,038
|
)
|
|
|
(1,829,179
|
)
|
|
|
(688,768
|
)
|
Selling,
general and administrative
|
|
|
474,702
|
|
|
|
381,662
|
|
|
|
708,203
|
|
|
|
720,021
|
|
Depreciation
and amortization
|
|
|
44,154
|
|
|
|
37,321
|
|
|
|
88,069
|
|
|
|
77,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(598,889
|
)
|
|
$
|
(475,021
|
)
|
|
$
|
(1,167,100
|
)
|
|
$
|
(1,156,415
|
)
|
Comparison
of the three months ended June 30, 2010 and 2009
Coal Revenues.
Our
coal revenues were $774,846 for the three months ended June 30, 2010, as
compared to $0 for the three months ended June 30, 2009. Our increase
in revenues was due to our increased level of mining operations in the second
quarter of 2010 versus 2009. This increase resulted from our ability
to mine on a more consistent basis as compared to the prior
period. We added and upgraded equipment which allowed us to be in
production more consistently. In addition, as we advanced further
into the mine, the coal seam thickened, which resulted in improved rates of
recovery and a higher percentage of coal per gross ton
extracted. Finally, the completion of the Gwenco bankruptcy allowed
us to access additional working capital that allowed us to obtain necessary
labor and supplies for production.
Production
costs.
Production costs were $854,879 for the three months
ended June 30, 2010 as compared to $56,038 for the three months ended June 30,
2009, an increase over 1425%. As a percentage of sales, our
productions cost were approximately 110% for the three months ended June 30,
2010. In order to increase our mining production, we needed to
contract for additional labor, purchase additional supplies, and conduct
additional repairs, all of which led to an increase in production
costs. Furthermore, we incurred increased shipping charges, as the
shipping distance to our new customers was further than our prior
customers. In addition, we incurred increased royalty expense as we
increased mining production and sales. As a percentage of net sales,
our production costs decreased, as our additional cost expenditures resulted in
more efficient and productive mining operations.
Selling, general, and
administrative.
Selling, general, and administrative expenses
increased to $474,702 for the three months ended June 30, 2010, from $381,662
for the three months ended June 30, 2009, an increase of approximately
33%. The increase resulted from increases in compensation
costs, equipment lease payments and professional fees.
Depreciation and
amortization.
Depreciation expense increased to $44,154 for
the three months ended June 30, 2010, from $37,321 for the three months ended
June 30, 2009. The increase results from our putting additional
equipment into service in 2009.
Operating loss.
We
incurred an operating loss of $598,889 for the three months ended June 30, 2010,
compared to an operating loss of $475,021 for the three months ended June 30,
2009. We had higher operating losses in the three months ended
June 30, 2010 as compared to the comparable period of 2009 primarily from the
production costs associated with producing our coal revenues as well as an
increase in selling, general, and administrative expenses.
Loss on debt
settlements.
We recorded $5,841 in gain on debt settlements in
the three months ended June 30, 2010, as opposed to a loss of $35,282 on loan
settlements from the prior comparable period. The gain on debt
settlement in the three months ended June 30, 2010 resulted from the payment of
accrued royalties and corresponding reduction of a note
payable.
Interest.
Interest
expense increased to $417,752 for the three months ended June 30, 2010 from
$152,655 for the three months ended June 30, 2009. Our interest
expense results from various outstanding debt obligations, including obligations
that we assumed in connection with the acquisition of Gwenco and various notes
issued in various financings since October 2004. In addition, it
includes expense associated with the issuance of securities with beneficial
conversion features. The increase results primarily from interest
computed in accruing present values of the principal amounts and future interest
requirements of our restructured debt obligations pursuant to Gwenco’s plan of
reorganization. It also results from additional borrowings which
occurred in 2009.
Comparison
of the six months ended June 30, 2010 and 2009
Coal Revenues.
Our
coal revenues were $1,458,351 for the six months ended June 30, 2010, as
compared to $330,314 for the six months ended June 30, 2009, an increase of
approximately 341%. Our increase in revenues was due to our increased
level of mining operations in the first six months of 2010 versus
2009. This increase resulted from our ability to mine on a more
consistent basis as compared to the prior period. We added and
upgraded equipment which allowed us to be in production more
consistently. In addition, as we advanced further into the mine, the
coal seam thickened, which resulted in improved rates of recovery and a higher
percentage of coal per gross ton extracted. Finally, the completion
of the Gwenco bankruptcy allowed us to access additional working capital that
allowed us to obtain necessary labor and supplies for production.
Production
costs.
Production costs were $1,829,179 for the six months
ended June 30, 2010 as compared to $688,768 for the six months ended June 30,
2009, an increase of approximately 165%. As a percentage of sales,
our productions cost decreased to 125% in the six months ended June 30, 2010
from 208% for the comparable period in 2009. In order to increase our
mining production, we needed to contract for additional labor, purchase
additional supplies, and conduct additional repairs, all of which led to an
increase in production costs. Furthermore, we incurred increased
shipping charges, as the shipping distance to our new customers was further than
our prior customers. In addition, we incurred increased royalty
expense as we increased mining production and sales. As a percentage
of net sales, our production costs decreased, as our additional cost
expenditures resulted in more efficient and productive mining
operations.
Selling, general, and
administrative.
Selling, general, and administrative expenses
decreased to $708,203 for the six months ended June 30, 2010, from $720,021 for
the six months ended June 30, 2009.
Depreciation and
amortization.
Depreciation expense increased to $88,069 for
the six months ended June 30, 2010, from $77,940 for the six months ended June
30, 2009. The increase results from our putting additional equipment
into service in 2009.
Operating loss.
We
incurred an operating loss of $1,167,100 for the six months ended June 30, 2010,
compared to an operating loss of $1,156,415 for the six months ended June 30,
2009. We had lower operating losses in the first quarter of
2010 as compared to the comparable period of 2009 primarily from increase in
coal revenues as well as a decrease in selling, general, and administrative
expenses which was offset by increased production costs related to our coal
production.
Loss on debt
settlements.
We recorded $16,026 in gain on debt settlements
in the six months ended June 30, 2010, as opposed to a loss of $921 on loan
settlements from the prior comparable period. The gain on debt
settlement in the first six months of 2010 resulted from the payment of accrued
royalties and corresponding reduction of a note payable.
Interest.
Interest
expense increased to $997,921 for the six months ended June 30, 2010 from
$293,549 for the six months ended June 30, 2009. Our interest expense
results from various outstanding debt obligations, including obligations that we
assumed in connection with the acquisition of Gwenco and various notes issued in
various financings since October 2004. In addition, it includes
expense associated with the issuance of securities with beneficial conversion
features. The increase results primarily from interest computed in
accruing present values of the principal amounts and future interest
requirements of our restructured debt obligations pursuant to Gwenco’s plan of
reorganization. It also results from additional borrowings which
occurred in 2009.
Liquidity
and Capital Resources
We have
financed its operations, acquisitions, debt service, and capital requirements
through cash flows generated from operations and through issuance of debt and
equity securities. Our working capital deficit at June 30, 2010 was
$5,126,814. We had cash of $7,587 as of June 30,
2010.
We used
$420,560 of net cash in operating activities for the six months ended June 30,
2010, compared to using $516,639 in the six months ended June 30,
2009. Cash used in operating activities for the six months ended June
30, 2010 was due to our net loss of $2,148,995. This was offset by
non-cash expenses of $88,069 in depreciation and amortization, $10,968 of stock
issued for interest, $215,310 of stock issued for services, $100,000 of stock
option compensation, $659,142 of amortized discount on convertible notes, $2,606
of amortized royalty costs, a decrease of $20,870 in receivables, a decrease of
$5,202 in prepaid expenses and an increase of accounts payable and accrued
expenses of $626,268.
Net cash
flows used in investing activities was $493 for the six months ended June 30,
2010, as compared to $6,461 of net cash flows used in investing activities for
the comparable period in 2009. The net cash flows used in investing
activities in the six months ended June 30, 2010 resulted from $493 in security
deposits.
Net cash
flows provided by financing activities were $421,386 for the six months ended
June 30, 2010, compared to net cash flows provided by financing activities of
$509,698 for the six months ended June 30, 2009. This decrease in net
cash provided by financing activities is due to our borrowings of $1,552,783
under our Exit Facility in the Gwenco reorganization and other borrowings,
offset by repayment of $1,131,397 under our Exit Facility.
Exit
Facility
Under
Gwenco’s Plan of Reorganization, the Court approved an exit facility under which
Interstellar Holdings, LLC will provide up to $2 million in financing to
Gwenco. The exit facility consists of a 12% secured convertible line
of credit note due March 2015. The note is convertible into our
common stock at a rate of the lower of (i) $0.001 per share and (ii) 40% of the
average of the three lowest per shares market values of our common stock during
the 10 trading days before a conversion; provided that the holder is prohibited
from converting if such conversion would result in it holding more than 4.99% of
our outstanding common stock. The obligations under the exit facility
are secured and guaranteed by us and our subsidiaries. As of June 30,
2010, the outstanding balance on the exit facility was approximately $2.49
million. On June 14, 2010, Interstellar sent us notice of
an alleged default under the exit facility. We denied that any such
default occurred or is continuing. See Part II, Item 5 of this report
for additional details.
Pursuant
to the exit facility, Interstellar required Gwenco to assign all of its accounts
receivable to Interstellar and have all payments on the receivables paid into an
escrow account. Interstellar had been making advances under the
facility to Gwenco against the accounts receivable, and the advances were being
repaid as payments are made to the escrow account. In connection
therewith, the Company issued a convertible promissory note to a third party
investor for facilitation of the escrow arrangement. The note is due
September 16, 2011 and bears interest at an annual interest rate of eight
percent (8%). The note is convertible into shares of the Company’s
common stock at a conversion price of forty five percent (45%) of the average of
the five (5) lowest per share market value during the ten (10) trading days
immediately preceding a conversion date. In addition, the third-party
investors who facilitated the escrow arrangement received a commission of 2.5%
of each advance made. Gwenco, Interstellar, and the third-party
investors terminated this escrow arrangement in March 2010.
Capital
Requirements
The report of our independent
accountants for the fiscal year ended December 31, 2009 states that we have
incurred operating losses since inception and require additional capital to
continue operations, and that these conditions raise substantial doubt about our
ability to continue as a going concern. We believe that, as of the
date of this report, in order to fund our plan of operations over the next 12
months, we will need to fund our operations and capital requirements out of cash
flows generated from operations and from borrowings and/or the sale of
additional debt, equity, or convertible securities. We have obtained
exit facility financing through the Gwenco bankruptcy proceedings to fund the
capital requirements of Gwenco; however, the borrowings under this financing may
not be sufficient to address all of our capital requirements for the next 12
months, as we have exceeded the maximum capacity under the line. We
may also seek to dispose of some or all of our assets or
operations. It is possible that we will be unable to obtain
sufficient additional capital through the sale of our securities as
needed.
Part of our growth strategy is to
acquire additional coal mining operations. Where appropriate, we will
seek to acquire operations located in markets where we currently operate to
increase utilization at existing facilities, thereby improving operating
efficiencies and more effectively using capital without a proportionate increase
in administrative costs. We do not currently have binding agreements or
understandings to acquire any other companies.
We intend to retain any future earnings
to pay our debts, finance the expansion of our business and any necessary
capital expenditures, and for general corporate purposes.
ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as
defined by Item 10 of Regulation S-K, we are not required to provide the
information required by this item.
ITEM
4 – CONTROLS AND PROCEDURES
We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our reports that we file under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure based on
the definition of “disclosure controls and procedures” in Rule
13a-15(e). In designing and evaluating the disclosure controls and
procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
At the
end of the period covered by this Quarterly Report on Form 10-Q, we carried out
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and
our Chief Financial Officer concluded that our disclosure controls and
procedures were not effective to ensure that all material information required
to be disclosed in this Quarterly Report on Form 10-Q has been made known to
them in a timely fashion.
In addition, our Chief
Executive Officer and Chief Financial Officer have identified significant
deficiencies that existed in the design or operation of our internal control
over financial reporting that they consider to be “material
weaknesses.” The Public Company Accounting Oversight Board has
defined a material weakness as a “significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected.” In light of the material weaknesses described
below, we performed additional procedures to ensure that the consolidated
financial statements are prepared in accordance with generally accepted
accounting principles. Accordingly, management believes that the
financial statements included in this Quarterly Report fairly present in all
material respects our financial condition, results of operations and cash flows
for the periods presented.
We did
not design and maintain effective entity-level controls as defined in the
Internal Control—Integrated
Framework published by the Committee of Sponsoring Organizations of the Treadway
Commission
(“COSO”). Specifically:
1. We
did not maintain a sufficient complement of personnel with an appropriate level
of technical accounting knowledge, experience, and training in the application
of generally accepted accounting principles commensurate with our financial
accounting and reporting requirements and low materiality thresholds. This
material weakness contributed to the restatement of prior financial statements
in the past and, if not remediated, has the potential to cause a material
misstatement in the future.
2. Due
to the previously reported material weaknesses, as evidenced by previous
restatements, as well as lack of formal documentation of systems and procedures,
and lack of consistent application of record keeping procedures, management has
concluded that the controls over the period-end financial reporting process were
not operating effectively. Specifically, controls were not effective to
ensure that significant non-routine transactions, accounting estimates, and
other adjustments were appropriately reviewed, analyzed, and monitored on a
timely basis. These conditions constitute deficiencies in both the
design and operation of entity-level controls. A material weakness in
the period-end financial reporting process could result in our not being able to
meet our regulatory filing deadlines and, if not remediated, has the
potential to cause a material misstatement or to miss a filing deadline in the
future.
These
significant deficiencies in the design and operation of our internal controls
include the needs to hire additional staffing and to provide training to
existing and new personnel in SEC reporting requirements and generally accepted
accounting principles. Furthermore, the deficiencies include the need for formal
control systems for journal entries, recording of transactions, closing
procedures, the preparation of financial statements, the need to form an
independent audit committee as a form of internal checks and balances and
oversight of our management, to implement budget and reporting procedures, and
the need to provide internal review procedures for schedules, SEC reports, and
filings prior to submission to the auditors and/or filing with the
SEC.
These
deficiencies have been disclosed to our Board of Directors. Additional effort is
needed to fully remedy these deficiencies and we are seeking to improve and
strengthen our control processes and procedures. We are in the process of
improving our internal control over financial reporting in an effort to
remediate these deficiencies. We have appointed an independent director as a
form of internal checks and balances and to provide oversight over management.
In addition, we are also seeking to improve our internal control over financial
reporting by adding additional accounting personnel, improving supervision and
increasing training of our accounting staff with respect to generally accepted
accounting principles, providing additional training to our management regarding
use of estimates in accordance with generally accepted accounting principles,
increasing the use of contract accounting assistance, and increasing the
frequency of internal financial statement review. We will continue to take
additional steps necessary to remediate the material weaknesses described
above.
Our Chief
Executive Officer and Chief Financial Officer have also evaluated whether any
change in our internal controls occurred during the last fiscal quarter and have
concluded that there were no changes in our internal controls or in other
factors that occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, these
controls.
PART
II: OTHER INFORMATION
ITEM
1 – LEGAL PROCEEDINGS
Material developments in legal
proceedings affecting us are described in Part I, Item 3 – Legal Proceedings, of
our Annual Report on Form 10-K for the year ended December 31, 2009, as they
relate to the fiscal quarter ended June 30, 2010, are set forth in Note 7,
“Commitments and Contingencies,” of the Notes to Condensed Consolidated
Financial Statements in this Quarterly Report on Form 10-Q and are incorporated
herein by reference.
ITEM
1A – RISK FACTORS
As a
“small reporting company” as defined by Item 10 of Regulation S-K, we are not
required to provide information required by this item.
ITEM
2 – CHANGES IN SECURITIES
(a)
(1) During
the quarter ended June 30, 2010, we issued an aggregate of 35,653,846 shares of
common stock upon conversions of various convertible notes. The aggregate
principal and interest amount of these notes that were converted was
$58,500. The issuances were exempt pursuant to Section 3(a)(9) of the
Securities Act as well as Section 4(2) of the Securities
Act.
(2) During
the quarter ended June 30, 2010, we issued an aggregate of 10,912,958 shares of
common stock pursuant to Gwenco’s Plan of Reorganization in partial satisfaction
of certain claims against Gwenco in the Gwenco Bankruptcy
proceedings. The aggregate amount of claims satisfied pursuant to
these issuances was $56,600. The issuances were exempt pursuant to
Section 1145 of the Bankruptcy Code.
(3) On
July 16, 2010, we entered into an exchange agreement with a third party
investor, pursuant to which the investor exchanged a $12,500 demand note (plus
accrued interest) for a $13,862 8% convertible promissory note due July 16,
2012. The note is convertible into shares of our common stock at a
conversion price of 40% of the average of the three lowest per shares market
values during the ten trading days immediately preceding a conversion
date. The holder may not convert any outstanding principal amount of this
note or accrued and unpaid interest thereon to the extent such conversion would
result in the holder beneficially owning in excess of 4.999% of our then issued
and outstanding common shares of Quest. The issuance was exempt pursuant
to Section 3(a)(9) of the Securities Act as well as Section 4(2) of the
Securities Act.
(b) None.
(c) None.
ITEM
3 – DEFAULT UPON SENIOR SECURITIES
(a) None.
(b) None.
ITEM
4 – (REMOVED AND RESERVED)
None.
ITEM
5 – OTHER INFORMATION
1. On
June 14, 2010, Interstellar Holdings, LLC, our secured lender under the exit
facility, delivered a notice of default relating to that certain Loan and
Security Agreement dated March 8, 2010 by and among Gwenco, Inc., Interstellar
Holdings, Inc., Kentucky Energy, Inc. (f/k/a Quest Minerals & Mining Corp).
and Quest Minerals & Mining Ltd. Under the notice, Interstellar
alleged an Event of Default under the Loan Agreement occurred and was continuing
pursuant to Section 8.21 thereunder as Interstellar allegedly deemed itself
“insecure” under the Loan Agreement. We denied Interstellar’s
allegation of an Event of Default under the Loan Agreement and contend that no
such Event of Default under the Loan Agreement has occurred or is
continuing. On June 17, 2010, Gwenco and Interstellar entered
into an agreement pursuant to which, among other things, Interstellar agreed to
forbear under the Loan Agreement for a period of 90 days. We continue
to contend that no default under the exit facility has
occurred.
2. On
July 21, 2010, we entered into an agreement with an unrelated third party to
obtain up to 100 drill sites and a 100% working interest of the oil and gas
rights on approximately 3,000 acres of property located in Rockcastle County,
Kentucky for $50,000. In addition, the unrelated third party is to drill a well
for additional consideration of $125,000 if paid by November 5, 2010. This well
will be used to test thoroughly the main oil and gas horizons.
ITEM
6 - EXHIBITS
Item
No.
|
|
Description
|
|
Method of Filing
|
|
|
|
|
|
4.1
|
|
Articles
of Amendment
|
|
Incorporated
by reference to our Current Report on Form 8-K filed on June 16,
2010.
|
4.2
|
|
8%
Convertible Note
|
|
Filed
herewith.
|
31.1
|
|
Certification
of Eugene Chiaramonte, Jr. pursuant to Rule 13a-14(a)
|
|
Filed
herewith.
|
32.1
|
|
Chief
Executive Officer and Chief Financial Officer Certification pursuant to 18
U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002
|
|
Filed
herewith.
|
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
KENTUCKY
ENERGY, INC.
|
|
|
August
23, 2010
|
/s/ Eugene Chiaramonte,
Jr.
|
|
Eugene
Chiaramonte, Jr.
|
|
President
|
|
(Principal
Executive Officer and Principal
Accounting
Officer)
|