UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedAugust 31 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________to __________
Commission file number000-30299
SOUTHERN STAR ENERGY INC.
(Exact name of small business issuer as specified in its charter)
| Nevada | 20-2514234 |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
307 – 1178 Hamilton Street, Vancouver, British Columbia, Canada V6B 2S2
(Address of principal executive offices)
604.307.4274
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:30,806,251 common shares issued and outstanding as of October 4, 2007
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
It is the opinion of management that the interim consolidated financial statements for the quarter ended August 31, 2007 include all adjustments necessary in order to ensure that the interim consolidated financial statements are not misleading.
| Southern Star Energy Inc. |
| (formerly Surge Enterprises, Inc.) |
| (An Exploration Stage Company) |
| (Unaudited) |
| August 31, 2007 |
| Index | |
| Consolidated Balance Sheets | F–1 |
| Interim Consolidated Statements of Operations | F–2 |
| Interim Consolidated Statements of Cash Flows | F–3 |
| Notes to the Consolidated Financial Statements | F–4 |
| Southern Star Energy Inc. |
| (formerly Surge Enterprises, Inc.) |
| (An Exploration Stage Company) |
| Consolidated Balance Sheets |
| (Unaudited) |
| (Unaudited) | ||||||
| ASSETS | ||||||
| Current Assets | ||||||
| Cash | 871,252 | 737,588 | ||||
| Accounts Receivable (Note 2) | – | 23,900 | ||||
| Deferred Cost (Note 6(c)) | 25,000 | – | ||||
| Prepaids | 391,063 | 239,418 | ||||
| Total Current Assets | 1,287,315 | 1,000,906 | ||||
| Surety Bond (Note 2) | 10,000 | 10,000 | ||||
| Oil and Gas Properties, unproven (Note 4) | 3,426,331 | 2,796,962 | ||||
| Total Assets | 4,723,646 | 3,807,868 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| Current Liabilities | ||||||
| Accounts Payable and Accrued Liabilities | 484,118 | 646,803 | ||||
| Advances (Note 4) | 740,820 | 82,540 | ||||
| Due to Related Party (Note 4) | 7,040 | 282 | ||||
| Total Current Liabilities | 1,231,978 | 729,625 | ||||
| Convertible Debentures, less unamortized discount of $507,868 (Note 5) | 892,132 | 838,538 | ||||
| Total Liabilities | 2,124,110 | 1,568,163 | ||||
| Contingency and Commitments (Notes 1 and 6) | ||||||
| Stockholders’ Equity | ||||||
| Common Stock | ||||||
| Authorized: 843,750,000 shares, par value $0.001 | ||||||
| Issued: 30,806,250 shares (May 31, 2007 – 30,806,250 shares) | 30,806 | 30,806 | ||||
| Additional Paid-In Capital | 2,671,819 | 2,265,819 | ||||
| Convertible Units (Note 5) | 2,430,000 | 1,850,000 | ||||
| Deficit Accumulated During the Development Stage | (21,286 | ) | (21,286 | ) | ||
| Deficit Accumulated During the Exploration Stage | (2,511,803 | ) | (1,885,634 | ) | ||
| Total Stockholders’ Equity | 2,599,536 | 2,239,705 | ||||
| Total Liabilities and Stockholders’ Equity | 4,723,646 | 3,807,868 |
Subsequent Event (Note 7)
The accompanying notes are an integral part of these consolidated financial statements.
F-1
| Southern Star Energy Inc. |
| (formerly Surge Enterprises, Inc.) |
| (An Exploration Stage Company) |
| Interim Consolidated Statements of Operations |
| (Unaudited) |
| Accumulated from | For the Three Month | For the Three Month | |||||||
| February 7, 2005 | Period | Period | |||||||
| (date of inception) | Ended | Ended | |||||||
| to August 31, | August 31, | August 31, | |||||||
| 2007 | 2007 | 2006 | |||||||
| $ | $ | $ | |||||||
| Operating Expenses | |||||||||
| General and administrative | 435,799 | 112,152 | – | ||||||
| Travel | 58,872 | 19,423 | – | ||||||
| Total Operating Expenses | 494,671 | 131,575 | – | ||||||
| Other Expenses | |||||||||
| Accretion of discount on convertible debenture (Note 3) | (132,132 | ) | (53,594 | ) | – | ||||
| Financing costs (Note 5) | (1,775,000 | ) | (406,000 | ) | – | ||||
| Interest on convertible debenture (Note 3) | (110,000 | ) | (35,000 | ) | – | ||||
| Total Other Expenses | (2,017,132 | ) | (494,594 | ) | – | ||||
| Net Loss Before Discontinued Operations | (2,511,803 | ) | (626,169 | ) | – | ||||
| Discontinued operations | (21,286 | ) | – | (12,104 | ) | ||||
| Net Loss | (2,533,089 | ) | (626,169 | ) | (12,104 | ) | |||
| Net Loss Per Share | |||||||||
| Continuing Operations – Basic and Diluted | (0.02 | ) | – | ||||||
| Discontinued Operations – Basic and Diluted | – | (0.00 | ) | ||||||
| (0.02 | ) | (0.00 | ) | ||||||
| Weighted Average Number of Shares Outstanding | 30,806,250 | 84,937,500 |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
| Southern Star Energy Inc. |
| (formerly Surge Enterprises, Inc.) |
| (An Exploration Stage Company) |
| Interim Consolidated Statements of Cash Flows |
| (Unaudited) |
| Accumulated | |||||||||
| From February 7, | For the Three | For the Three | |||||||
| 2005 (Date of | Month Period | Month Period | |||||||
| Inception) to | Ended | Ended | |||||||
| August 31, | August 31, | August 31, | |||||||
| 2007 | 2007 | 2006 | |||||||
| $ | $ | $ | |||||||
| Operating Activities | |||||||||
| Net loss | (2,533,089 | ) | (626,169 | ) | (12,104 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating | |||||||||
| activities: | |||||||||
| Depreciation | 885 | – | 530 | ||||||
| Accretion of convertible debentures discount | 132,132 | 53,594 | – | ||||||
| Intrinsic value of convertible units | 1,775,000 | 406,000 | – | ||||||
| Interest accrued on convertible debentures | 110,000 | 35,000 | – | ||||||
| Changes in operating assets and liabilities | |||||||||
| Customer deposits | – | – | (3,040 | ) | |||||
| Accounts receivable | (13,760 | ) | – | (6,191 | ) | ||||
| Prepaids | 19,528 | 24,076 | – | ||||||
| Accounts payable and accrued liabilities | (223,577 | ) | (407,958 | ) | 26,024 | ||||
| Deferred revenue | 18,708 | – | – | ||||||
| Due to a related party | (19,570 | ) | 6,758 | (65 | ) | ||||
| Net Cash Provided by (Used in) Continuing Operations | (733,743 | ) | (508,699 | ) | – | ||||
| Discontinued operations | (38,215 | ) | – | 5,154 | |||||
| Net Cash Provided by (Used in) Operating Activities | (771,958 | ) | (508,699 | ) | 5,154 | ||||
| Investing Activities | |||||||||
| Acquisition of equipment | (7,216 | ) | – | – | |||||
| Surety bond | (10,000 | ) | – | – | |||||
| Advances from joint interest owners | 740,820 | 658,280 | – | ||||||
| Oil and gas property expenditures | (3,175,581 | ) | (570,917 | ) | – | ||||
| Net Cash Used in Investing Activities | (2,451,977 | ) | 87,363 | – | |||||
| Financing Activities | |||||||||
| Deferred cost | (25,000 | ) | (25,000 | ) | – | ||||
| Proceeds from issuance of common stock | 287,625 | – | – | ||||||
| Proceeds from convertible units | 2,430,000 | 580,000 | – | ||||||
| Advances from related party | 6,400 | – | – | ||||||
| Proceeds from issuance of convertible debentures | 1,400,000 | – | – | ||||||
| Net Cash Provided by Financing Activities | 4,099,025 | 555,000 | – | ||||||
| Effect of exchange rate on cash | (3,838 | ) | – | 89 | |||||
| Change in Cash | 871,252 | 133,664 | 5,243 | ||||||
| Cash – Beginning | – | 737,588 | 25,507 | ||||||
| Cash – Ending | 871,252 | 871,252 | 30,750 | ||||||
| Supplemental Disclosures: | |||||||||
| Oil and gas property expenditures recorded in prepaids | 381,565 | 381,565 | – | ||||||
| Oil and gas property expenditures recorded in accounts payable and | |||||||||
| accrued liabilities | 210,273 | 210,273 | – | ||||||
| Cash paid for: | |||||||||
| Interest | – | – | – | ||||||
| Income taxes | – | – | – |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
| 1. | Nature of Operations and Continuance of Business |
The Company was incorporated in the State of Nevada on February 7, 2005 under the name Surge Enterprises, Inc. Pursuant to a Restructuring Agreement dated November 6, 2006, the Company disposed of its interest in its wholly- owned subsidiary, Surge Marketing Corp. (“Surge Marketing”). On November 13, 2006 the Company changed its name to Southern Star Energy Inc. | |
The Company previously focused its business efforts on software sales and website development. On November 2, 2006, the Company commenced the business of the acquisition, exploration and development of oil and gas resources with the acquisition of a 20% interest in certain oil and gas leases located in Louisiana. | |
The Company has been in the exploration stage since completion of its restructuring in November, 2006 and has not yet realized any revenues from its planned operations. Previously, it was in the development stage, pursuant to Statements of Financial Accounting Standards (“SFAS”) No. 7 “Accounting and Reporting by Development Stage Enterprises”, and had not generated or sustained significant revenues. These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern and the ability of the Company to emerge from the exploration stage are dependent upon its successful efforts to raise additional equity financing to continue operations and generate sustainable significant revenue. There is no guarantee that the Company will be able to raise adequate equity financings or generate profitable operations. As at August 31, 2007, the Company has incurred losses of $2,533,089 since inception. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. | |
Unaudited Interim Financial Statements | |
The unaudited interim consolidated financial statements have been prepared by Southern Star Energy Inc. (the “Company”) in accordance with generally accepted accounting principles in the United States for interim financial information and conforms with instructions to Form 10-QSB of Regulation S-B and reflects all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for fair presentation of the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending May 31, 2008. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted. These unaudited interim consolidated financial statements and notes included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended May 31, 2007, included in the Company’s Annual Report on Form 10-KSB. The accounting principles applied in the preparation of these interim consolidated financial statements are consistent with those applied for the year ended May 31, 2007. |
F-4
| 2. | Oil and Gas Property |
On November 6, 2006, the Company entered into a restructuring agreement (the “Restructuring Agreement”) between the Company, Big Sky Management (“Big Sky”), Eric Boehnke (the President of the Company) and two former officers of the Company. Pursuant to the terms of the Restructuring Agreement, Big Sky, a company owned by the President of the Company, agreed to assign all rights, title and interest to the Company of a 20% working interest in certain oil and gas leases located in Louisiana, known as the D Duck Prospect (the “D Duck Prospect”). Pursuant to a prospect acquisition agreement with Dynamic Resources Corporation (“Dynamic”), dated October 10, 2006, Big Sky was obligated to pay Dynamic $97,634. Big Sky also was obligated to pay 100% of Dynamic’s remaining share, being 20%, of the drilling and completion costs on the initial two wells drilled on the property up to a maximum of $400,000 per well. As at November 6, 2006, the date of the Restructuring Agreement, Big Sky had not made any payments for the D Duck Prospect. The Company paid $97,634 to Dynamic for its 20% interest and $144,116 was paid to Dynamic by Ramshorn Investments, Inc. (“Ramshorn”) for its 40% interest. The Company’s working interest is subject to a 20% royalty interest. As a result, the Company is entitled to receive 80% of its interest in of any production from the prospect, less all exploration and development costs, and the holder of the royalty interest is entitled to the remaining 20% of any production. The holder of the royalty interest is not responsible for any exploration or development costs. | |
On November 2, 2006, the Company acquired another 20% working interest in the property for $290,062, resulting in a combined interest of 40%, and became the Operator of the D Duck Prospect. An additional 40% working interest is held by Ramshorn who has agreed to pay 40% of the Company’s drilling costs on the D Duck Prospect. | |
On February 12, 2007, the Company entered into the subscription agreement described in Note 5(b). Pursuant to the agreement, the subscriber is to receive 1% of the net proceeds from production attributable to the Company’s interest in certain wells located on the D Duck Prospect. | |
On July 11, 2007, the Company entered into the subscription agreement described in Note 5(a). Pursuant to the agreement, the subscriber is to receive 1.98% of the net proceeds from production attributable to the Company’s interest in certain wells located on the D Duck Prospect. | |
Pursuant to a Farmout Agreement entered into on September 1, 2006 with the owner of the D Duck Prospect, to retain its interest in one section of the D Duck Prospect, the Company, Dynamic and Ramshorn (the “Farmees”) are obligated to drill a test well on the D Duck Prospect on or before March 1, 2007. During the three month period ended August 31, 2007, the Company paid a further $15,000 (May 31, 2007 - $45,000) to extend the deadline to August 31, 2007, of which $9,000 (May 31, 2007 - $27,000) has been billed to the Farmees for their share of this cost. During the three month period ended August 31, 2007, the Company drilled the required test well. | |
During the period ended August 31, 2007, the Company incurred additional acquisition costs relating to lease rentals and extensions totaling $15,471 (May 31, 2007 - $63,467). | |
The Company’s portion of drilling costs incurred during the three month period ended August 31, 2007 was $607,898 (May 31, 2007 - $2,327,799). During the year ended May 31, 2007 the Company provided a $10,000 certificate of deposit towards a $25,000 surety bond which was requested by the Bureau of Land Management of the state of Louisiana, before drilling can commence. The surety bond was allocated between the Company, Dynamic and Ramshorn based on their working interest on the D Duck Prospect, being 40%, 40% and 20% respectively. | |
At August 31, 2007, Ramshorn and Dynamic have prepaid $740,820 towards future costs (May 31, 2007 - Dynamic has prepaid $82,540), recorded as advances on the balance sheet. At August 31, 2007, the Company was owed $Nil (May 31, 2007 - $23,900) from Ramshorn and Dynamic. | |
All of the Company’s oil and gas properties are located in the United States and are unproven. The total costs incurred and excluded from depletion and amortization are as follows: |
| August 31, | May 31, | ||||||
| 2007 | 2007 | ||||||
| $ | $ | ||||||
| Acquisition costs | 490,634 | 469,163 | |||||
| Exploration costs | 2,935,697 | 2,327,799 | |||||
| Total | 3,426,331 | 2,796,962 |
F-5
| 3. | Convertible Debentures | |
| a) | On November 1, 2006, the Company issued a 10% convertible debenture with a principal amount of $600,000 which is due and payable on November 1, 2008. The principal and accrued interest on the debenture may be converted into shares of the Company’s common stock at $0.33 per share, at the option of the holder. An equity portion representing the beneficial conversion feature has not been recorded, as there was no intrinsic value at the date of commitment. At August 31, 2007, interest expense of $50,000 has been included in accrued liabilities. | |
| b) | On December 1, 2006, the Company issued a 10% convertible debenture with a principal amount of $800,000 which is due and payable on December 1, 2008. The principal and accrued interest on the debenture may be converted into shares of the Company’s common stock at $0.33 per share, at the option of the holder. | |
In accordance with Emerging Issues Task Force (“EITF”) 98-5“Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”,the Company recognized the value of the embedded beneficial conversion feature of $640,000 as additional paid-in capital and an equivalent discount which will be expensed over the term of the convertible debenture. The Company will record interest expense over the term of the convertible debenture of $640,000 resulting from the difference between the stated value and carrying value at the date of issuance. During the three month period ended August 31, 2007, the Company accreted interest expense of $53,594. At August 31, 2007, accrued interest of $60,000 has been included in accrued liabilities, and interest expense of $132,132 has been accreted increasing the carrying value of the convertible debentures to $292,132. | ||
| 4. | Related Party Transactions | |
At August 31, 2007, the Company owes $7,040 (May 31, 2007 - $Nil) to the President and $Nil (May 31, 2007 - $282) to the former President for expenses incurred on behalf of the Company. These amounts are unsecured, non-interest bearing and are due on demand. | ||
| 5. | Convertible Units | |
| a) | On July 11, 2007, the Company entered into a subscription agreement for the issuance of 11.6 units at $50,000 per unit for proceeds of $580,000. Each unit entitles the subscriber to receive 1.98% of the net proceeds from production attributable to the Company’s interest in certain wells located on the D Duck Prospect (Note 2). Each unit is convertible into shares of the Company’s common stock at a rate of 1 share for every $0.50 of investment. During the three month period ended August 31, 2007, pursuant to EITF 98-5 “Accounting for Convertible Securities and Beneficial Conversion features or Contingently Adjustable Conversion Ratios” and EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments” the Company recorded the $406,000 intrinsic value of the beneficial conversion feature upon issuance. | |
| b) | On February 12, 2007, the Company entered into a subscription agreement for the issuance of 37 units at $50,000 per unit for proceeds of $1,850,000. Each unit entitles the subscriber to receive 1% of the net proceeds from production attributable to the Company’s interest in certain wells located on the D Duck Prospect (Note 2). Each unit is convertible into shares of the Company’s common stock at a rate of 1.5 shares for every $0.50 of investment. During the year ended May 31, 2007, pursuant to EITF 98-5 “Accounting for Convertible Securities and Beneficial Conversion features or Contingently Adjustable Conversion Ratios” and EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments” the Company recorded the $1,369,000 intrinsic value of the beneficial conversion feature upon issuance. | |
F-6
| 6. | Commitments | |
| a) | On February 27, 2007 the Company entered into a services agreement with a consultant who will provide consulting services in consideration for $140 per hour of services and 375,000 shares of the Company’s common stock. The Company is to issue 187,500 shares upon the generation of revenues from the D Duck Prospect in excess of all costs reasonably incurred in relation to the drilling of the well. The Company is also obligated to issue 187,500 shares to be held in escrow for a period of one year upon the D Duck Prospect generating more than 15 bullion cubic feet equivalent of natural gas or having reserves greater than $75,000,000 calculated on a 10% discounted cash flow. As at August 31, 2007, no shares have been issued under this services agreement. | |
| b) | On May 3, 2007, the Company entered into a marketing agreement with RedChip Companies Inc. (“RedChip”) for an initial term of 12 months in consideration of $7,500 per month, and commencing August 1, 2007, an equivalent value of $5,000 per month payable in shares of the Company’s common stock, the value of which will be determined based upon the closing price of the shares as reported by StockWatch Inc. on the first business day of each quarterly period. The shares will be issued by the Company to RedChip on a quarterly basis no later than ten days after the first day of each subsequent quarter. A late fee of 5% of the monthly fee will be billed if the payment is received more than 15 days after the due date. | |
| c) | On June 18, 2007, the Company entered into a services agreement with a financial advisor who will provide services related to assisting the Company in future financing activities in consideration of a 8% cash fee and a warrant to purchase the higher of 8% of the dollar amount or the number of equity securities issued in the financing or 8% of the face value of any debt securities sold in the financing on at least the following minimum terms and conditions: (i) purchase price of $0.01, (ii) exercise price set at the closing price of the Company’s common stock on the closing date of the financing; (iii) warrant term of 3 years; and (iv) The Company has the right on 15 days written notice to require the Warrant holder to exercise the Warrant so long as the closing price of the common shares of the Company equals or exceeds $1.75 per common share for at least 20 consecutive trading days prior to the date of the call notice. The Company paid an initial cash deposit of $25,000, which has been recorded as a deferral cost. Upon successful completion of the future financing, this cost will be recorded as a reduction of additional paid-in capital. If the future financing is not successfully completed, this cost will be charged to the consolidated statement of operations. | |
| 7. | Subsequent Event | |
On September 18, 2007, the Company issued a 10% convertible debenture with a principal amount of $1,300,000 which is due and payable on September 18, 2009. The principal and accrued interest on the debenture may be converted into shares of the Company’s common stock at $0.50 per share, at the option of the holder. | ||
F-7
4
Item2. Management's Discussion and Analysis or Plan of Operation.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Financial information contained in this quarterly report and in our consolidated unaudited financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our consolidated unaudited financial statements and the related notes that appear elsewhere in this quarterly report.
As used in this quarterly report, and unless otherwise indicated, the terms "we", "us" and "our" refer to Southern Star Energy Inc. and our wholly-owned subsidiary, Southern Star Operating Inc.
Summary of Description of Business
We are an exploration stage company engaged in the acquisition of prospective oil and gas properties. We conduct due diligence on potential acquisitions of suitable oil and gas properties and have acquired various leasehold rights from land owners in an area which comprises approximately 5,300 acres in the prospect area within Bossier Parish and Caddo Parish Louisiana, commonly referred to as the D Duck Prospect. Southern Star Operating currently holds a 40% working interest in the prospect area and is the operator of the prospect. We intend to undertake exploration activities and, if warranted, develop the properties pursuant to the leasehold rights we have acquired within our prospect area. As partial owner of the working interest in and to the leasehold rights, we, together with the other interest holders, have the exclusive right to explore and exploit any oil and gas and mineral resources contained in the prospect area.
The 100% working interest in the prospect is held by the following non-affiliated parties: Dynamic Resources Corp. holds a 20% working interest; Southern Star Operating holds a 40% working interest; and Ramshorn Investments, Inc. holds the remaining 40% interest. The working interest is subject to a royalty interest of approximately 20% for the leases in the prospect area. As a result, the holders of the working interest are entitled to receive 80% of any production from the prospect, less all exploration and development costs, and the holder of the royalty interest is entitled to the remaining 20% of any production. The royalty interest is not responsible for any exploration or development costs.
In November 2006, we spudded our first well (the Atkins Lincoln 18-1) and drilled it to a depth of approximately 9,950 feet. In February 2007, we spudded our second well (the Atkins Etal 8-1) and drilled it to a depth of approximately 9,950 feet. We set production casing in both wells and anticipate completing them before the end of December 31, 2007. In June 2007, we spudded our third well (the Rendall 7) and drilled it to approximately 5,000 feet. We have also laid 15,000 feet of pipeline to service both the Atkins Lincoln 18-1 well and the Atkins Etal 8-1 well. In September 2007, we drilled our fourth well (the Atkins-Lincoln 18-2) to a depth of approximately 9,950 feet. We intend to have two wells in production before December 31, 2007.
5
PLAN OF OPERATIONS
Overview
Discussion of our financial condition and results of operations should be read in conjunction with our consolidated unaudited financial statements and the notes thereto included elsewhere in this quarterly report prepared in accordance with accounting principles generally accepted in the United States. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements.
Plan of Operation
We are an exploration stage oil and gas company.
We estimate our general operating expenses for the next twelve month period to be as follows:
| Estimated Operating Expenses For the Next Twelve Month Period | ||||
| Operating Expenses | ||||
| Exploration Costs | $ | 4,000,000 | ||
| Employee and Consultant Compensation | $ | 220,000 | ||
| Professional Fees | $ | 100,000 | ||
| General and Administrative Expenses | $ | 100,000 | ||
| Total | $ | 4,420,000 | ||
Exploration Costs
Our property interests in the D Duck Prospect are presently considered underdeveloped acreage. We have successfully drilled four evaluation wells, consisting of the Atkins-Lincoln 18-1 well, the R.C. Atkins 8-1 well, the Atkins-Lincoln 18-2 well and the Rendall 7 well, the first three wells to a depth of approximately 9,950 feet and the fourth well to a depth of 5,000 feet. Our company hopes to complete two of the four wells before December 31, 2007. If the completion reports indicate satisfactory results, we intend to develop the prospect by drilling one well per 160 acres. However, until we determine that development is warranted, we will not know the extent of development costs to bring the acreage to production. If development is warranted, we intend to drill between the pre-existing wells from the 1950's and 1960's followed by step-out drilling to discover possible extensions and parallel deposits to any out-cropping deposit zones. Apart from our current drilling program, and until we are able to review the results from our drilling program, we have no current plans to conduct any additional exploration on the property. We estimate that our exploration costs during the next twelve month period will be approximately $4,000,000.
Employee and Consultant Compensation
On October 1, 2007, we appointed Bruce Ganer as our Vice President of Exploration and Development. We are currently in negotiations regarding the compensation payable to Mr. Ganer. We anticipate that such consideration will consist of a salary of approximately $120,000 per year plus appropriate stock and option awards. However, we can offer no assurance that both parties will agree to this amount. Given the early stage of our operations, we intend to continue to outsource our professional and personnel requirements by retaining consultants on an as-needed basis. We estimate that our consultant and related professional compensation expenses for the next twelve month period will be approximately $100,000.
Professional Fees
We expect to incur on-going legal, accounting and audit expenses to comply with our reporting responsibilities as a public company under the United States Securities Exchange Act of 1934, as amended. We estimate such expenses for the next fiscal year to be approximately $100,000.
6
General and Administrative Expenses
We anticipate spending $100,000 on general and administrative costs in the next twelve month period. These costs primarily consist of expenses such as office supplies and office equipment.
Liquidity and Capital Resources
As of August 31, 2007, we had cash of $871,252 and $1,231,978 in current liabilities. The current liabilities consisted of accounts payable and accrued liabilities, advances and amounts due to related parties. We had working capital $55,337 as of August 31, 2007.
To date, we have had negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We expect this situation to continue for the foreseeable future. We anticipate that we will have negative cash flows during the next twelve month period.
We incurred a net loss of $626,169 for the three months ended August 31, 2007. As indicated above, we anticipate that our estimated operating expenses for the next twelve months will be $4,420,000. As we anticipate that our estimated operating expenses for the next twelve months will be $4,420,000, we do not have sufficient working capital to enable us to complete our drilling program of exploration wells or to finance our normal operations for the next twelve month period. As a result, we will be required to raise additional funds through the issuance of equity securities or through debt financing in order to carry-out our plan of operations for the next twelve month period. There can be no assurance that we will be successful in raising the required capital or that actual cash requirements will not exceed our estimates.
Given that we have not achieved profitable operations to date, our cash requirements are subject to numerous contingencies and risk factors beyond our control, including operational and development risks, competition from well-funded competitors, and our ability to manage growth. We can offer no assurance that our company will generate cash flow sufficient to achieve profitable operations or that our expenses will not exceed our projections. If our expenses exceed estimates, we will require additional monies during the next twelve months to execute our business plan.
There are no assurances that we will be able to obtain funds required for our continued operation. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease the operation of our business.
There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further long-term financing, successful exploration and development of our oil and gas properties and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Future Financings
We anticipate that additional funding, when required, will be in the form of equity financing from the sale of our common stock or through debt financing. However, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock or through debt financing on commercially reasonable terms to fund operations. We do not currently have any arrangements in place for any future equity or debt financing. Our limited operating history and our lack of significant tangible capital assets makes it unlikely that we will be able to obtain significant debt financing in the near future.
Capital Expenditures
As of August 31, 2007, our company did not have any material commitments for capital expenditures and management does not anticipate that our company will spend additional material amounts on capital expenditures during the next twelve month period.
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Off-Balance Sheet Arrangements
Our company has no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. Our company does not engage in trading activities involving non-exchange traded contracts.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures of our company. Although these estimates are based on management's knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates.
Going Concern
The audited financial statements included with our annual report filed with the Securities and Exchange Commission on August 28, 2007 have been prepared on the going concern basis which assumes that adequate sources of financing will be obtained as required and that our assets will be realized and liabilities settled in the ordinary course of business. Accordingly, the audited financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern. In order to continue as a going concern, we require additional financing. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to continue as a going concern, we would likely be unable to realize the carrying value of our assets reflected in the balances set out in our financial statements.
Oil and Gas Properties
Our company utilizes the full-cost method of accounting for petroleum and natural gas properties. Under this method, our company capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. As of August 31, 2007, we had no properties with proven reserves. When our company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such determination is made our company assesses annually whether impairment has occurred, and includes in the amortization base drilling exploratory dry holes associated with unproved properties.
Our company applies a ceiling test to the capitalized cost in the full cost pool. The ceiling test limits such cost to the estimated present value, using a ten percent discount rate, of the future net revenue from proved reserves, based on current economic and operating conditions. Specifically, our company computes the ceiling test so that capitalized cost, less accumulated depletion and related deferred income tax, do not exceed an amount (the ceiling) equal to the sum of: (A) the present value of estimated future net revenue computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current cost) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus (B) the cost of property not being amortized; plus (C) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the property.
For unproven properties, our company excludes from capitalized costs subject to depletion, all costs directly associated with the acquisition and evaluation of the unproved property until it is determined whether or not proved reserves can be assigned to the property. Until such a determination is made, our company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment our company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. Our company adds the amount of impairment assessed to the cost to be
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amortized subject to the ceiling test. As of August 31, 2007, all of our company’s oil and gas properties were unproved and were excluded from amortization.
RECENT ACCOUNTING PRONOUNCEMENTS
There were no recent accounting pronouncements as at October 4, 2007 which materially affected our company.
RISK FACTORS
Much of the information included in this quarterly report includes or is based upon estimates, projections or other forward-looking statements. Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.
Such estimates, projections or other forward-looking statements involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other forward-looking statements. Prospective investors should consider carefully the risk factors set out below.
RISKS RELATED TO OUR BUSINESS
We have had negative cash flows from operations and if we are not able to continue to obtain further financing, our business operations may fail.
To date, we have had negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements and have incurred a net loss of $626,169 for the three month period ended August 31, 2007, and a net loss of $2,533,089 from inception to August 31, 2007. As of August 31, 2007, we had working capital of $55,337. Subsequent to the quarter ended August 31, 2007, we issued a 10% convertible debenture in the principal amount of $1,300,000 which is due and payable on September 18, 2009. We do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that:
the costs to acquire further acreage are more than we currently anticipate;
drilling and completion costs for wells increase beyond our expectations; or
we encounter greater costs associated with our projected operating expenses.
The occurrence of any of the aforementioned events could adversely affect our ability to meet our business plans.
We depend almost exclusively on outside capital to pay for the continued exploration and development of our properties. Such outside capital may include the sale of additional stock and/or commercial borrowing. Capital may not continue to be available if necessary to meet these continuing development costs or, if the capital is available, that it will be on terms acceptable to us. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment.
If we issue additional shares in the future, it will result in dilution to our existing stockholders.
We are authorized to issue 843,750,000 shares of common stock. Our board of directors has the authority to issue
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additional shares up to the authorized capital of our company. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will also cause a reduction in the proportionate ownership and voting power of all other stockholders. Further, any such issuance may result in a change of control of our company.
We have a history of losses and fluctuating operating results which raise substantial doubt about our ability to continue as a going concern.
Since inception through August 31, 2007, we have incurred aggregate losses of $2,533,089. There is no assurance that we will operate profitably or will generate positive cash flow in the future. In addition, our operating results in the future may be subject to significant fluctuations due to many factors not within our control, such as the general economic cycle, the market price of oil and gas and exploration and development costs. If we cannot generate positive cash flows in the future, or raise sufficient financing to continue our normal operations, then we may be forced to scale down or even close our operations. Until such time as we generate revenues, we expect an increase in development costs and operating costs. Consequently, we expect to incur operating losses and negative cash flow until our properties enter commercial production.
We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations.
We have yet to generate positive earnings and there can be no assurance that we will ever operate profitably. Our company has a limited operating history and must be considered in the development stage. The success of our company is significantly dependent on a successful acquisition, drilling, completion and production program. Our company's operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to locate recoverable reserves or operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.
Due to the speculative nature of the exploration of oil and gas properties, there is substantial risk that our business will fail.
The business of oil and gas exploration and development is highly speculative involving substantial risk. There is generally no way to recover any funds expended on a particular property unless reserves are established and unless we can exploit such reserves in an economic manner. We can provide investors with no assurance that any property interest that we may acquire will provide commercially exploitable reserves. Any expenditures by our company in connection with locating, acquiring and developing an interest in a mineral or oil and gas property may not provide or contain commercial quantities of reserves.
Because of the early stage of development and the nature of our business, our securities are considered highly speculative.
Our securities must be considered highly speculative, generally because of the nature of our business and the early stage of our development. We are engaged in the business of exploring and, if warranted, developing commercial reserves of oil and gas. Our properties are in the exploration stage only and are without known reserves of oil and gas. Accordingly, we have not generated any revenues from our oil and gas business nor have we realized a profit from our operations to date and there is little likelihood that we will generate any revenues or realize any profits in the short term. Any profitability in the future from our business will be dependent upon locating and developing economic reserves of oil and gas, which itself is subject to numerous risk factors as set forth herein. Since we have not generated any revenues, we will have to raise additional monies through the sale of our equity securities or debt in order to continue our business operations.
The potential profitability of oil and gas ventures depends upon factors beyond the control of our company.
The oil and gas industry in general is cyclical in nature. It tends to reflect and be amplified by general economic conditions, both domestically and abroad. Historically, in periods of recession or periods of minimal economic growth, the operations of oil and gas companies have been adversely affected. Certain end-use markets for oil and petroleum products
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experience demand cycles that are highly correlated to the general economic environment which is sensitive to a number of factors outside our control. A recession or a slowing of the economy could have a material adverse effect on our financial results and proposed plan of operations. A recession may lead to significant fluctuations in demand and pricing for oil and gas. If we elect to proceed with the development of any of our property interests, our profitability may be significantly affected by decreased demand and pricing of oil and gas. Reduced demand and pricing pressures will adversely affect our financial condition and results of operations. We are not able to predict the timing, extent and duration of the economic cycles in the markets in which we operate.
The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance.
Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in our company not receiving an adequate return on invested capital.
The oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring additional property interests.
The oil and gas industry is very competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staffs. Accordingly, there is a high degree of competition for desirable oil and gas interests, suitable properties for drilling operations and necessary drilling equipment, as well as for access to funds. We cannot predict if the necessary funds can be raised or that any projected work will be completed.
We are required to obtain licenses and permits from various governmental authorities. We anticipate that we will be able to obtain all necessary licenses and permits to carry on the activities which we intend to conduct, and that we intend to comply in all material respects with the terms of such licenses and permits. However, there can be no guarantee that we will be able to obtain and maintain, at all times, all necessary licenses and permits required to undertake our proposed exploration and development or to place our properties into commercial production. In the event that we proceed with our operation without necessary licenses and permits, we may be subject to large fines and possibly even court orders and injunctions to cease operations.
The acquisition of oil and gas interests involve many risks and disputes as to the title of such interests will result in a material adverse effect on our company.
The acquisition of oil and gas interests involves certain risks. Title to property claims and the borders of such claims may be disputed. The leases may be subject to prior unregistered agreements or transfers and title may be affected by undetected defects. If it is determined that any of our company's leases are based upon a claim with an invalid title, a disputed border, or subject to a prior right, the balance sheet of our company will be adversely affected and we may not be able to recover damages without incurring expensive litigation costs.
The marketability of natural resources will be affected by numerous factors beyond our control which may result in us not receiving an adequate return on invested capital to be profitable or viable.
The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation
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concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable.
Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our company.
Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted, and no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive premium costs and other reasons. To date, we have not been required to spend any material amount on compliance with environmental regulations. However, we may be required to do so in the future and this may affect our ability to expand or maintain our operations.
Exploration and production activities are subject to certain environmental regulations which may prevent or delay the commencement or continuance of our operations.
In general, our exploration and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry.
We believe that our operations comply, in all material respects, with all applicable environmental regulations. However, we are not fully insured against all possible environmental risks.
Any future operations will involve many risks and we may become liable for pollution or other liabilities which may have an adverse effect on our financial position.
In the course of the exploration, acquisition and development of mineral properties, several risks and, in particular, unexpected or unusual geological or operating conditions may occur. Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labour, and other risks are involved. We may become subject to liability for pollution. It is not always possible to fully insure against such risks, and we do not currently have any insurance against such risks nor do we intend to obtain such insurance in the near future due to high costs of insurance. Should such liabilities arise, they could reduce or eliminate any future profitability and result in an increase in costs and a decline in value of the securities of our company.
We are not insured against most environmental risks. Insurance against environmental risks (including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from exploration and production) has not been generally available to companies within the industry. We will periodically evaluate the cost and coverage of such insurance. If we became subject to environmental liabilities and do not have insurance against such liabilities, the payment of such liabilities would reduce or eliminate our available funds and may result in bankruptcy. Should we be unable to fully fund the remedial cost of an environmental problem, we might be required to enter into interim compliance measures pending completion of the required remedy.
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Resource exploration involves many risks, regardless of the experience, knowledge and careful evaluation of the property by our company. These hazards include unusual or unexpected formations, formation pressures, fires, power outages, labour disruptions, flooding, explosions and the inability to obtain suitable or adequate machinery, equipment or labour.
Operations in which we will have a direct or indirect interest will be subject to all the hazards and risks normally incidental to the exploration, development and production of resource properties, any of which could result in damage to or destruction of mines and other producing facilities, damage to life and property, environmental damage and possible legal liability for any or all damage. We do not currently maintain liability insurance and may not obtain such insurance in the future. The nature of these risks is such that liabilities could represent a significant cost to our company, and may ultimately force our company to become bankrupt and cease operations.
Any change to government regulation/administrative practices may have a negative impact on our ability to operate.
The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter the ability of our company to carry on our business.
The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably.
If we are unable to hire and retain key personnel, we may not be able to implement our plan of operation and our business may fail.
Our success will be largely dependent on our ability to hire and retain highly qualified personnel. This is particularly true in the highly technical businesses of oil and gas exploration. These individuals may be in high demand and we may not be able to attract the staff we need. In addition, we may not be able to afford the high salaries and fees demanded by qualified personnel, or we may fail to retain such employees after they are hired. At present, we have not hired any key personnel. Our failure to hire key personnel when needed will have a significant negative effect on our business.
Our sole executive officer has other business interests, and as a result, he may not be willing or able to devote a sufficient amount of time to our business operations, thereby limiting the success of our company.
Eric Boehnke presently spends approximately 50% of his business time on business management services for our company and retains the necessary consultants to assist in the development of our properties on an as needed basis. Due to the time commitments from Mr. Boehnke's other business interests, however, Mr. Boehnke may not be able to provide sufficient time to the management of our business in the future and our business may be periodically interrupted or delayed as a result of Mr. Boehnke's other business interests. To mitigate any such interruption, we are currently seeking to add additional management and intend to continue to retain the necessary consultants in future exploration activities.
RISKS ASSOCIATED WITH OUR COMMON STOCK
A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been primarily financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to explore and develop new properties and continue our exploration and development of our current property interests. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.
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Our stock is a penny stock. Trading of our stock may be restricted by the Securities and Exchange Commission's penny stock regulations which may limit a stockholder's ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder's ability to buy and sell our stock.
In addition to the "penny stock" rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Item 3. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under theSecurities 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 president (who is also our secretary and treasurer) to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of August 31, 2007, the three month period year covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our president (who is also our secretary and treasurer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president (who is also our secretary and treasurer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no significant changes in our internal controls over financial reporting that occurred during the quarter ended August 31, 2007 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
On October 1, 2007, we appointed Bruce Ganer to our board of directors and as an executive officer under the title Vice President of Exploration and Development.
Item 6. Exhibits.
| (3) | (i) Articles of Incorporation; and (ii) Bylaws |
| 3.1 | Articles of Incorporation (incorporated by reference from our SB-2 filed on October 13, 2005) |
| 3.2 | Bylaws (incorporated by reference from our SB-2 filed on October 13, 2005) |
| 3.3 | Certificate of Correction (incorporated by reference from our SB-2 filed on October 13, 2005) |
| 3.4 | Articles of Merger filed with the Secretary of Sate of Nevada on November 7, 2006 and which is effective November 13, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 13, 2006) |
| 3.5 | Certificate of Change filed with the Secretary of State of Nevada on November 7, 2006 and which is effective November 13, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 13, 2006) |
| 3.6 | Certificate of Change filed with the Secretary of State of Nevada on April 2 2007 and which is effective April 2, 2007 (incorporated by reference from our Current Report on Form 8-K filed on April 4, 2007) |
| (10) | Material Contracts |
| 10.1 | Subscription Agreement dated November 1, 2006 with Sovereign Services Limited (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006) |
| 10.2 | Convertible Debenture dated November 1, 2006 with Sovereign Services Limited (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006) |
| 10.3 | Assignment of Oil, Gas and Mineral Leases dated November 3, 2006 by Meagher Oil & Gas Properties, Inc. (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006) |
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| 10.4 | Purchase and Sale Agreement dated November 2, 2006 with Dynamic Resources Corporation, Tyner Texas Operating Company, Tyner Texas Resources LP and Ramshorn Investments, Inc. (incorporated by reference from our Current Report on Form 8-K filed on January 3, 2007) |
| 10.5 | Restructuring Agreement dated November 6, 2006 with Southern Star Operating, Inc., Big Sky Management, Ltd., Eric Boehnke, Troy Mutter and Frank Hollmann (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006) |
| 10.6 | Amendment Agreement dated December 22, 2006 with Southern Star Operating, Inc., Big Sky Management, Ltd., Eric Boehnke, Troy Mutter and Frank Hollmann (incorporated by reference from our Current Report on Form 8-K filed on January 3, 2007) |
| 10.7 | Oil and Gas Services Agreement dated January 22, 2007 with Sunland Production Company (incorporated by reference from our Current Report on Form 8-K filed on February 23, 2007) Amended and Restated Subscription Agreement dated July 10, 2007 between our company and Venture |
| 10.8 | Capital Asset Management Ag (incorporated by reference from our Current Report on Form 8-K filed on July 18, 2007) |
| 10.9* | |
| (14) | Code of Ethics |
| 14.1 | Code of Ethics (incorporated by reference from our annual report on Form 10-KSB filed on September 13, 2006) |
| (31) | Rule 13a-14(a)/15d-14(a) Certifications |
| 31.1* | |
| (32) | Section 1350 Certifications |
| 32.1* |
* Filed herewith.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHERN STAR ENERGY INC.
| /s/ Eric Boehnke | |
| By: Eric Boehnke, President, Secretary, Treasurer and Director | |
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | |
| Dated: October 15, 2007 | |
