- Current report filing (8-K)
02 Januar 2009 - 11:15PM
Edgar (US Regulatory)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: December 31, 2008
(Date of earliest event reported)
QUEST RESOURCE CORPORATION
(Exact name of registrant as specified in its charter)
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Nevada
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0-17371
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90-0196936
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(State or other jurisdiction
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(Commission
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(I.R.S. Employer Identification
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of incorporation or organization)
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File Number)
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Number)
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210 Park Avenue, Suite 2750
Oklahoma City, Oklahoma 73102
(Address of principal executive offices, including zip code)
(405) 600-7704
(Registrants telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy
the filing obligation of the registrant under any of the following provisions (see General
Instruction A.2. below):
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or
Completed Review.
On December 31, 2008, the board of directors (the Board) of Quest Resource Corporation, a
Nevada corporation (the Company), determined that the audited consolidated financial statements
of the Company as of and for the years ended December 31, 2005, 2006 and 2007 and the Companys
unaudited consolidated financial statements as of and for the three months ended March 31, 2008 and
as of and for the three and six months ended June 30, 2008 (the Affected Financial Statements)
should no longer be relied upon.
As previously reported, a joint special committee of the Board, the board of directors of the
general partner of Quest Energy Partners, L.P., a subsidiary of the Company, and the board of
directors of the general partner of Quest Midstream Partners, L.P., another subsidiary of the
Company (the Special Committee), was appointed to conduct an internal investigation (the
Investigation) of certain questionable transfers, repayments and re-transfers of funds from
subsidiaries of the Company to entities controlled by the Companys former chief executive officer,
Mr. Jerry D. Cash (the Transfers). The Company commenced the Investigation upon receiving an
inquiry from the Oklahoma Department of Securities regarding the Transfers. Management has
concluded that the Affected Financial Statements should be restated to reflect the Transfers and
their effect on the Affected Financial Statements. The restated financial statements to be
prepared for the dates and periods covered by the Affected Financial Statements are referred to in
this report as the Restated Financial Statements.
Management
has concluded that the reported cash balances of the Company for periods ended on
and after December 31, 2007 will be reduced by a total of $10,000,000 as a result of the Transfers
(as the Company previously reported) and the Companys reported accumulated deficit for periods
ended on and after December 31, 2007 will be increased by the same amount. The Transfers began in
June of 2004 and continued through July 1, 2008, but as a result of certain repayments and the
amounts involved, the Companys cash balance and accumulated deficit as reported on the Companys
consolidated balance sheet as of December 31, 2004 were not materially inaccurate as a result of
the Transfers made prior to that date.
The following table shows the net increase in the amount of Transfers that occurred (i.e., the
amount of additional expense that will be recognized) in each of the following periods.
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Annual
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Period Covered by
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Increase in
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Statements of Operations
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Net Transfers
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Year ended December 31, 2005
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$
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2,000,000
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Year ended December 31, 2006
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6,000,000
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Year ended December 31, 2007
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2,000,000
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The
cumulative Transfers will decrease the reported cash balances and will increase the
reported accumulated deficit at year end for each of these years. The Transfers will also have a
corresponding effect on the Companys net cash provided by (used in) operating activities. The
Restated Financial Statements will reflect the recognition of additional expense in each period in
which the Transfers resulted in a net increase in the total amount of the Transfers. The amount of
expense recognized in any such period will equal the amount of such net increase in the Transfers
occurring in that period.
The
Company is actively seeking restitution, including from Mr. Cash.
There can be no assurance that the Company will be successful in recovering any amounts. Some of the recovery may consist of assets other than
cash and accurately valuing such assets in the current economic climate may be difficult. Any
amounts recovered
will be recognized by the Company for financial accounting purposes only in the
period in which the recovery occurs.
In connection with a further management review of the Affected Financial Statements, other
material errors have been identified in the Affected Financial Statements relating to the manner in
which the Company accounted for certain non-cash items, including: (1) derivative instruments (which were incorrectly
accounted for as cash flow hedges; the correction of the error will result in the change in derivative fair value that
was included in other comprehensive income for each period being included in the net income (or loss) for such period),
(2) stock compensation cost (amounts reported in 2006 and 2007 are likely to be overstated), (3) depreciation, depletion
and amortization (amounts reported in 2006 and 2007 are likely to be overstated) and (4) impairment of its oil and gas
properties (impairment recorded in 2006 is likely to be overstated). The Company is still evaluating the impact of these
errors on the unaudited consolidated financial statements for the three months ended March 31, 2008 and the three and six
months ended June 30, 2008. The Company has not completed its review of the
Affected Financial Statements and is in the process of discussing these errors with its prior
independent accountants and therefore is not able to provide an estimate of the magnitude of these
errors at this time. The Restated Financial Statements will reflect the correction of these errors
as well as any other errors that may be identified. However, the Company does not believe that
these non-cash items will affect the amount of the previously reported net cash provided by (used
in) operating activities.
As a result of matters identified in the Investigation and other identified errors in
previously issued financial statements, the Board of Directors concluded on December 31, 2008 that
the Company has material weaknesses in its internal control over financial reporting, including its
entity level controls, controls related to accounting for derivative instruments, controls related
to the determination of impairment and the calculation of depletion of its oil and gas properties
and controls over the accounting for equity based compensation. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the Companys annual or
interim financial statements will not be prevented or detected on a timely basis. The existence of
one or more material weaknesses precludes a conclusion by management that a corporations internal
control over financial reporting is effective. The Company is currently in the process of
remediating the weaknesses in internal control over financial reporting referred to above
by designing and implementing new procedures and controls throughout the Company and
its subsidiaries and by strengthening its accounting department
through adding new personnel and resources.
The Company intends to issue the Restated Financial Statements as soon as practicable after
the conclusion of the Investigation and the preparation and completion of the Restated Financial
Statements. At this time, however, the Company cannot accurately predict when the preparation of the Restated
Financial Statements will be completed.
The foregoing information is based on facts obtained from the Investigation and the reviews of
previously issued financial statements of the Company to date. Additional information could be
discovered through the remaining work to be conducted in the Investigation or as a result of the
preparation of the Restated Financial Statements. Such information could result in the Company
having to make additional adjustments to one or more of the Affected Financial Statements, or
identifying and having to remediate other material weaknesses in its internal control over
financial reporting.
The Board and management of the Company have discussed with UHY LLP, the Companys current
independent registered public accounting firm, the matters discussed in this report. In addition,
management has discussed these matters with Murrell, Hall, McIntosh & Co., PLLP, the Companys
independent registered public accounting firm for the years ended December 31, 2007, 2006 and 2005
and the quarter ended March 31, 2008 and Eide Bailly, LLP, the Companys independent registered
public accounting firm for the quarter ended June 30, 2008.
Forward-Looking Statements
The foregoing discussions includes statements and information that constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, and that
are intended to enjoy the protection of the safe harbor for forward-looking statements provided by
that Act.
The forward looking statements include, but are not limited to, information regarding
restitution, the material errors and the estimated effects of the Transfers and the anticipated
impact on the Affected Financial Statements. The forward-looking statements are identified by the
use of the words anticipated, estimated, expect, expected, will be, will be recognized,
or will be reflected in the statement or with respect to the information. These forward-looking
statements are subject to risks, uncertainties and
other factors, including discovery of information in addition to or different from the
information on which such estimates are based. As a result of these matters, the actual
adjustments reflected in the Restated Financial Statements to be issued by the Company and the
ability of the Company to fund its operations in the future may differ materially from the
anticipated results expressed or implied in the forward-looking statements made in the foregoing
discussion. The Company urges readers to take such factors and the possibility of such differences
into account in any consideration of the forward-looking statements included in this report and not
place undue reliance on such statements. The forward-looking statements included in this report
are made only as of the date of this report, and the Company undertakes no obligation to update any
of these forward-looking statements to reflect subsequent events or circumstances.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
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QUEST RESOURCE CORPORATION
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By:
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/s/ Jack Collins
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Jack Collins
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Interim Chief Financial Officer
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Date:
January 2, 2009
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