[As adopted in Release No. 34-32231, April 28, 1993, 58 F.R. 26509]
U.S. 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 ended: June 30, 2006
--------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from________to________
Commission file number 333-102930
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Silver Star Energy, Inc.
----------------------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Nevada 90-0220668
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
9595 Wilshire Boulevard, Suite 900, Beverly Hills, California 90212
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(310) 477-2211
Issuer's telephone number
(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 by
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant 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 practical date: June 30, 2006 96,221,035
Transitional Small Business Disclosure Format (check one).
Yes ; No X
---- -----
PART I
ITEM 1. FINANCIAL STATEMENTS
SILVER STAR ENERGY, INC.
BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 2006 2005
- ------ ------------------ -----------------
Current Assets
Cash $ 51,420 $ 1,087,163
Accounts Receivable 373,647 506,016
Prepaid Expense 76,042 16,976
Other Receivable - 992,117
Due from Related Party - 183,900
------------------ -----------------
Total Current Assets 501,109 2,786,172
------------------ -----------------
Fixed Assets
Furniture and Fixtures 7,751 7,751
Computers 6,222 6,222
Vehicles 64,087 64,087
Accumulated Depreciation (19,774) (11,553)
------------------ -----------------
Net Fixed Assets 58,286 66,507
------------------ -----------------
Other Assets
Oil and gas properties, full cost method, net of depletion
$254,276 and $132,121, respectively 2,771,436 1,345,384
Unproved oil and gas properties 1,753,086 1,733,086
Debt Issue Costs, net of amortization of $161,973 and $47,973 318,027 432,227
------------------ -----------------
Total Other Assets 4,842,549 3,510,697
------------------ -----------------
Total Assets $ 5,401,944 $ 6,363,376
================== =================
3
SILVER STAR ENERGY, INC.
BALANCE SHEETS
(Continued)
(Unaudited)
June 30, December 31,
2006 2005
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 17,089 $ 30,930
Accrued Liabilities 14,025 142,602
Convertible debentures - 560,000
Accrued interest - 85,545
------------------- ------------------
Total Current Liabilities 31,114 819,077
------------------- ------------------
Long-Term Liabilities
Asset retirement obligation 45,000 45,000
Convertible debentures 3,430,000 3,430,000
Accrued interest 279,499 160,786
Beneficial conversion liability 6,458,056 6,458,056
------------------- ------------------
Total Long-Term Liabilities 10,212,555 10,093,842
------------------- ------------------
Total Liabilities 10,243,669 10,912,919
------------------- ------------------
Stockholders' Equity
Preferred stock (Par Value $.001), 5,000,000 shares
authorized. -0- issued at June 30, 2006 and
December 31, 2005 - -
Common Stock (Par Value $.001), 300,000,000 shares
authorized. 96,221,035 issued and outstanding at
June 30, 2006 and
85,021,035 issued and outstanding
at December 31, 2005 96,221 85,021
Paid in Capital in Excess of Par Value 6,119,457 3,056,658
Retained Deficit (11,057,403) (7,691,222)
------------------- ------------------
Total Stockholders' Equity (4,841,725) (4,549,543)
------------------- ------------------
Total Liabilities and Stockholders' Equity $ 5,401,944 $ 6,363,376
=================== ==================
See accompanying notes.
4
SILVER STAR ENERGY, INC.
STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2006 2005 2006 2005
----------------- ----------------- ------------------ ------------------
Oil Revenue $ 27,819 $ 255,062 $ 119,390 $ 283,802
Gas Revenue 490,509 202,951 929,945 202,951
----------------- ----------------- ------------------ ------------------
Total Income $ 518,328 $ 458,013 $ 1,049,335 $ 486,753
----------------- ----------------- ------------------ ------------------
Expenses
Production Costs 103,020 259,595 206,797 259,595
Consulting and Management
Fees 3,268,974 109,000 3,464,799 172,045
General and Administrative 129,416 148,196 312,985 281,278
Professional Fees 59,927 14,601 137,967 31,276
----------------- ----------------- ------------------ ------------------
Total Expenses 3,561,337 531,392 4,122,548 744,194
----------------- ----------------- ------------------ ------------------
Other Income ( Expense)
Interest Expense (133,339) (58,414) (264,157) (106,059)
Interest Income - - 1,552 -
Gain/Loss on Foreign
Exchange 38,237 - 38,237 -
Financing Penalty Payouts - - (68,600) -
----------------- ----------------- ------------------ ------------------
Total Other Income
(Expense) (95,102) (58,414) (292,968) (106,059)
----------------- ----------------- ------------------ ------------------
Net Income (Loss) $ (3,138,111) $ (131,793) $ (3,366,181) $ (363,500)
================= ================= ================== ==================
Income (Loss) per Common
Share $ (0.03) $ - $ (0.03) $ -
================= ================= ================== ==================
Weighted Average Shares
Outstanding 92,348,511 85,021,035 88,705,014 85,021,035
================= ================= ================== ==================
See accompanying notes.
5
SILVER STAR ENERGY, INC.
STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
2006 2005
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (3,366,181) $ (363,500)
Adjustments used to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation, Amortization and Depletion 244,575 159,313
Common stock issued for expenses 3,074,000 -
(Increase) decrease in other assets & prepaids (59,066) 2,986
(Increase) decrease in accounts receivable 132,369 (219,160)
(Increase) decrease in other receivable 1,176,017 -
Increase (decrease) in accounts payable (13,841) (43,157)
Increase (decrease) in accrued interest 33,168 -
Increase (decrease) in accrued liabilities (128,577) 67,827
------------------ ------------------
Net cash used in operating activities 1,092,464 (395,691)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition/Sale of equipment, net - (2,448)
Acquisition of oil & gas property interests (1,568,207) (685,949)
------------------ ------------------
Net cash used by investing activities (1,568,207) (688,397)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debentures - 1,060,000
Payments on convertible debentures (560,000) -
------------------ ------------------
Net Cash Provided by Financing Activities (560,000) 1,060,000
------------------ ------------------
6
SILVER STAR ENERGY, INC.
STATEMENTS OF CASH FLOWS
(continued)
For the Six Months Ended
June 30,
2006 2005
------------------ ------------------
Net Increase (Decrease) in
Cash and Cash Equivalents (1,035,743) (24,088)
Cash and Cash Equivalents at
Beginning of the Period 1,087,163 138,005
------------------ ------------------
Cash and Cash Equivalents at
End of the Period $ 51,420 $ 113,917
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest $ - $ -
Income Taxes $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES: NONE
- -----------
See accompanying notes.
7
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a "going concern", which assume that the
Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
The unaudited financial statements as of June 30, 2006, and for the six
month period then ended, reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly state the
financial position and results of operations for the three and six months.
Operating results for interim periods are not necessarily indicative of the
results which can be expected for full years.
The Company's general business strategy is to acquire oil and gas
properties either directly or through the acquisition of operating entities. The
continued operations of the Company and the recoverability of oil and gas
property acquisition, exploration and development costs is dependent upon the
existence of economically recoverable reserves and the ability of the Company to
obtain necessary financing to complete the development of those reserves, and
upon future profitable production. The Company is planning additional ongoing
equity financing by way of private placements to fund its obligations and
operations.
The Company's future capital requirements will depend on many factors,
including costs of exploration of the properties, cash flow from operations,
costs to complete well production, if warranted, and competition and global
market conditions. The Company's present cash flow from operations now exceeds
its monthly general and administrative and other operational expenses. As of
October 2005, the Company has closed and received the net proceeds of a
financing totaling a gross amount of $3,430,000.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, will mitigate the
adverse conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that these actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.
Organization and Basis of Presentation
Silver Star Energy, Inc. (the "Company") was incorporated on September
25, 2002 in the State of Nevada and commenced operations on October 3, 2002.
During the year ended December 31, 2003, the Company changed its name from
Movito Holdings Ltd. to Silver Star Energy Inc.
8
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN (continued)
Nature of Business
The Company is in the production stage of the oil and gas industry. The
Company's primary objective is to identify, acquire and develop significant
working interest percentages in underdeveloped oil and gas projects that do not
meet the requirements of the larger producers and developers. During 2003 and
2004 the Company was in the development stage and acquired interests in several
oil and gas prospects and in 2005 and 2006 has set up the extraction process and
is further continuing that program.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
This summary of accounting policies for Silver Star Energy, Inc. is
presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
Cash Equivalents
For the purpose of reporting cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in the 2005 financial
statements to conform with the 2006 presentation.
Concentration of Credit Risk
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements.
9
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Earnings per Share
Basic loss per share has been computed by dividing net loss for the
year applicable to the common stockholders by the weighted average number of
shares of common shares outstanding during the year. Convertible equity
instruments such as stock options, warrants, convertible debentures and notes
payable are excluded from the computation of diluted loss per share, as the
effect of the assumed exercises would be anti-dilutive.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets which range
from three to seven years. Fixed assets consisted of the following at June 30,
2006 and December 31, 2005:
(Unaudited)
June 30, December 31,
2006 2005
------------------ ------------------
Furniture and Fixtures $ 7,751 $ 7,751
Computers 6,222 6,222
Vehicles 64,087 64,087
Less: Accumulated Depreciation (19,774) (11,553)
------------------ ------------------
Total $ 58,286 $ 66,507
================== ==================
One-half year depreciation is taken in the year of acquisition on
certain fixed assets.
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the property and related
accumulated depreciation accounts, and any resulting gain or loss is credited or
charged to income.
Total depreciation expense for the six months ended June 30, 2006 and
2005 was $8,221 and $3,739, respectively.
Intangibles
The Company has adopted the provisions of the Financial Accounting
Standards Board ("FASB") Statement No. 142, "Goodwill and Intangible Assets"
("SFAS 142"). Under SFAS 142, goodwill and intangible assets with indefinite
lives will no longer be amortized and will be tested for impairment annually.
The determination of any impairment would include a comparison of estimated
future operating cash flows anticipated during the remaining life with the net
carrying value of the asset as well as a comparison of the fair value to the
book value of the Company or the reporting unit to which the goodwill can be
attributed.
10
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and
gas properties. Under this method, all costs associated with acquisition,
exploration, and development of oil and gas properties are capitalized. Such
costs include land and lease acquisition costs, annual carrying charges of
non-producing properties, geological and geophysical costs, costs of drilling
and equipping productive and non-productive wells, asset retirement costs, and
direct exploration salaries and related benefits. Capitalized costs are
categorized as being subject to amortization or not subject to amortization. The
Company operates in two cost centers, being Canada and the U.S.A.
The capitalized costs of oil and gas properties are amortized on the
unit-of-production method using estimates of proved reserves as determined by
independent engineers. Investments in unproved properties are not amortized
until proved reserves associated with projects can be determined or until
impairment occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized costs to
be amortized. Depletion expense for the six months ended June 30, 2006 and 2005
was $122,155 and $100,488, respectively.
The Company applies a ceiling test to capitalized costs to ensure that
such costs do not exceed estimated future net revenues from production of proven
reserves at year end market prices less future production, administrative,
financing, site restoration, and income tax costs plus the lower of cost or
estimated market value of unproved properties. If capitalized costs are
determined to exceed estimated future net revenues, a write-down of carrying
value is charged to depletion in the period.
Proceeds from the sale of oil and gas properties are recorded as a
reduction of the related capitalized costs without recognition of a gain or loss
unless such sales involve a significant change in the relationship between costs
and the value of proved reserves or the underlying value of unproved properties,
in which case a gain or loss is recognized.
The Company is in the process of exploring its unproved oil and natural
gas properties and has not yet determined whether these properties contain
reserves that are economically recoverable. The recoverability of amounts shown
for oil and natural gas properties is dependent upon the discovery of
economically recoverable reserves, confirmation of the Company's interest in the
underlying oil and gas leases, the ability of the Company to obtain necessary
financing to complete their exploration and development and future profitable
production or sufficient proceeds from the disposition thereof.
11
SILVER STAR ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Asset Retirement Obligations
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS "SFAS
143"). This statement applies to obligations associated with the retirement of
tangible long-lived assets that result from the acquisition, construction and
development of the assets. SFAS 143 requires that the fair value of a liability
for a retirement obligation be recognized in the period in which the liability
is incurred. For oil and gas properties, this is the period in which an oil or
gas well is acquired or drilled. The asset retirement obligation is capitalized
as part of the carrying amount of our oil and gas properties at its discounted
fair value. The liability is then accreted each period until the liability is
settled or the well is sold, at which time the liability is reversed.
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, the Company has
determined the estimated fair value of financial instruments using available
market information and appropriate valuation methodologies. The fair value of
financial instruments classified as current assets or liabilities approximate
carrying value due to the short-term maturity of the instruments.
Foreign currency transactions
The financial statements are presented in United States dollars. In
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation", foreign denominated monetary assets and liabilities are
translated to their United States dollar equivalents using foreign exchange
rates that prevailed at the balance sheet date. Revenue and expenses are
translated at average rates of exchange during the year. Related translation
adjustments are reported as a separate component of stockholders' equity,
whereas gains or losses resulting from foreign currency transactions are
included in results of operations.
Stock-based compensation
In December 2002, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION
- - TRANSITION AND DISCLOSURE" ("SFAS No. 148"), an amendment of Financial
Accounting Standard No. 123 "ACCOUNTING FOR STOCK- BASED COMPENSATION" ("SFAS
No. 123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation, (2) amend the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation, and (3) to require disclosure of those effects in interim
financial information. The disclosure provisions of SFAS No. 148 were effective
for the Company commencing December 31, 2002.
12
SILVER STAR ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Recent accounting pronouncements
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES", which clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 does not
affect the Company's financial position or results of operations.
In May 2003, SFAS 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY", was issued. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Generally, a financial instrument, whether
in the form of shares or otherwise, that is mandatorily redeemable, i.e. that
embodies an unconditional obligation requiring the issuer to redeem it by
transferring its shares or assets at a specified or determinable date (or dates)
or upon an event that is certain to occur, must be classified as a liability (or
asset in some circumstances). In some cases, a financial instrument that is
conditionally redeemable may also be subject to the same treatment. This
Statement does not apply to features that are embedded in a financial instrument
that is not a derivative (as defined) in its entirety. For public entities, this
Statement is effective for financial instruments entered into or modified after
May 31, 2003. The adoption of SFAS 150 does not affect the Company's financial
position or results of operations.
In November 2004, the FASB issued Statement No. 151, INVENTORY COSTS,
to amend the guidance in Chapter 4, INVENTORY PRICING, of FASB Accounting
Research Bulletin No. 43, RESTATEMENT AND REVISION OF ACCOUNTING RESEARCH
BULLETINS, which will become effective for the Company in fiscal year 2006.
Statement 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The Statement
requires that those items be recognized as current-period charges. Additionally,
Statement 151 requires that allocation of fixed production overhead to the costs
of conversion be based on the normal capacity of the production facilities. The
adoption of SFAS 151 will not affect the Company's financial position or results
of operations.
13
SILVER STAR ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
In December 2004, FASB issued Statement No. 123 (R), SHARE-BASED
PAYMENT, which establishes accounting standards for transactions in which an
entity receives employee services in exchange for (a) equity instruments of the
entity or (b) liabilities that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of equity instruments.
Effective in the third quarter of 2005, SFAS 123(R) will require us to recognize
the grant-date fair value of stock options and equity based compensation issued
to employees in the statement of operations. The statement also requires that
such transactions be accounted for using the fair-value-based method, thereby
eliminating use of the intrinsic value method of accounting in APB No. 25,
Accounting for STOCK ISSUED TO EMPLOYEES, which was permitted under Statement
123, as originally issued. We currently are evaluating the impact of Statement
123 (R) on our financial condition and results of operations.
Revenue Recognition
The Company recognizes oil and gas revenue from its interests in
producing wells as oil and gas is produced and sold from those wells. Oil and
gas sold is not significantly different from the Company's share of production.
Revenues from the purchase, sale and transportation of natural gas are
recognized upon completion of the sale and when transported volumes are
delivered. Shipping and handling costs in connection with such deliveries are
included in production costs. Revenue under carried interest agreements is
recorded in the period when the net proceeds become receivable, measurable and
collection is reasonably assured. The time the net revenues become receivable
and collection is reasonably assured depends on the terms and conditions of the
relevant agreements and the practices followed by the operator. As a result, net
revenues may lag the production month by one or more months.
NOTE 3 - OIL AND GAS PROPERTIES
The Company entered into agreements to acquire interests in various
unproven oil and gas properties as follows:
Alberta Prospects, Canada
In October 2003, the Company entered into two agreements with 1048136
Alberta Ltd. Pursuant to these agreements, the Company acquired the right to
participate and earn an interest in two oil and gas exploration and development
projects located in the province of Alberta, Canada known respectively as the
Evi prospect and the Verdigris prospect. In February 2004, the Company entered
into two agreements with 1048136 Alberta Ltd. to acquire the right to
participate and earn an interest in two additional oil and gas exploration and
development projects located in the province of Alberta known as the Joarcam
prospect and the Buffalo Lake prospect. 1048136 Alberta Ltd. is a private
Alberta company (see Note 6).
14
SILVER STAR ENERGY, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - OIL AND GAS PROPERTIES (continued)
Pursuant to the agreements, the Company shall advance funds, as
required, in connection with the drilling, testing, completion, capping and/or
abandonment of up to three wells on each of the properties. Once the Company has
completed its funding obligation, it will have earned the following interest in
each prospect:
Evi Prospect 66.67%
Verdigris Prospect 66.67%
Joarcam Prospect 70.00%
Buffalo Lake Prospect 70.00%
In the event the Company does not provide the funds as required, the
Company will retain no interest in the prospects.
During the year ended December 31, 2004, the Company paid $1,283,149
towards the exploration and development of the oil and gas prospects in Alberta.
During the year ended December 31, 2005, the Company paid $730,822 towards the
exploration and development of the oil and gas prospects in Alberta. For the six
months ended June 30, 2006, $285,975 was spent to install the production
facilities at the EVI well. All of these costs have been capitalized.
During 2005, the Joarcam property in Alberta was determined to have
proved oil reserves. The total capitalized costs for the Joarcam property were
removed from the unproved properties and classified as proved properties. For
2005, the Company received $305,235 in revenues from the Joarcam property. On
November 10, 2005, the Company sold its interest in the Joarcam property for
$1,930,225. Total capitalized costs relating to the Joarcam property at November
10, 2005 were $962,545, and total depletion expense relating to the Joarcam
property at November 10, 2005 was $73,811. The Company recognized a gain on the
sale of the Joarcam property of $1,041,491. The Company received proceeds of
$965,108 and recorded a receivable of $965,117 related to the sale of the
property. During the period ended June 30, 2006, the receivable of $965,117
related to the sale of the Joarcam property was received by the Company.
California Prospects, U.S.A.
On December 5, 2003, the Company entered into two option agreements
with Archer Exploration, Inc. (Archer) to acquire Archer's interest in certain
unproven oil and gas prospects located in the State of California, U.S.A., known
as North Franklin Prospect and Winter Pinchout Prospect.
To earn an assignment of 100% of Archer's interests in the North
Franklin Prospect, being a 100% working interest (76% net revenue interest), the
Company made an initial cash payment of $85,000 and is required to pay $15,000
at spud of the initial test well and $25,000 at completion of the initial test
well. In addition, the Company is responsible for all expenses for lease
extensions and rental of existing leases (including a 20% fee), acquisition of
any additional leases (including a 20% fee) and costs in connection with
drilling and completion of the initial test well.
15
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - OIL AND GAS PROPERTIES (continued)
Pursuant to the agreement, Archer retains a 2.5% overriding royalty, a
5% working interest through the completion of the initial test well and the
right to participate in a 5% working interest.
The Company has an agreement to farm-out a 35% working interest in the
North Franklin Project to Fidelis Energy, Inc. (see Note 6). Under the terms of
the agreement, Fidelis will contribute $500,000 towards the drilling and
completion of the Archer-Whitney #1 well and participate as a full working
interest partner on all further costs including drilling of any additional wells
on the project.
To earn an assignment of 100% of Archer's interests in the Winter
Pinchout Prospect, being a 100% working interest (76% net revenue interest), the
Company made an initial cash payment of $100,000 and is required to pay $15,000
at spud of the initial test well of the first three prospects drilled and
$25,000 at completion of the initial test well of each prospect drilled. In
addition, the Company is responsible for all expenses for acquisition of leases
acquired (including a 20% fee), acquisition and analysis of seismic data,
drilling and completion of the initial test well on the first prospect drilled
and a monthly management fee in the amount of $10,000 commencing January 2004.
Pursuant to the agreement, Archer retains a 2.5% overriding royalty, a
5% working interest through the completion of the initial test well and the
right to participate in a 10% working interest.
In August 2004, the Company executed acquisition and joint operating
agreements on five natural gas propects in California with Archer Exploration,
Inc. Pursuant to the agreements, the Company has acquired a 7.5% carried working
interest on four of the prospects and has acquired a 25% carried working
interest in the fifth prospect. The Company is carried on all costs related to
the prospect through the licensing, permitting, drilling and completion of the
first well on each project. In the event of a successful gas well being drilled,
the Company, following testing and completion, would be responsible for the
working interest costs of well tie-in and pipeline. The Company would also be a
working interest participant on any additional gas wells drilled.
During the year ended December 31, 2003, the Company incurred a total
of $405,000 in acquisition and exploration costs relating to the California
prospects. During the year ended December 31, 2004, the Company incurred a total
of $898,204 in acquisition, exploration and development costs relating to the
California prospects. During the year ended December 31, 2005, the Company
incurred a total of $756,675 in acquisition, exploration and development costs
relating to the California prospects. As of June 30, 2006, total capitalized
costs for the California prospects was $3,322,111.
During 2005, the North Franklin property was determined to have proved
gas reserves. Total capitalized costs for the North Franklin property were
removed from the unproved properties and classified as proved properties. For
2005, the Company received revenues of $1,372,675 from the North Franklin
property. As of December 31, 2005, the total capitalized costs related to the
North Franklin property, net of depletion of $132,121 was $1,345,384. For the
six months ended June 30, 2006, the Company received revenues of $1,033,081 from
the North Franklin Property.
16
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - OIL AND GAS PROPERTIES (continued)
Kansas Prospects, U.S.A.
During 2005, the Company acquired an interest in some oil and gas
properties in Kansas. As of December 31, 2005, the Company had spent $54,286 on
these properties. During the six months ended June 30, 2006, the Company
incurred $20,000 in costs related to this property. These costs have been
capitalized as part of unproved properties.
NOTE 4 - ASSET RETIREMENT OBLIGATION
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS ("SFAS
143"). This statement applies to obligations associated with the retirement of
tangible long-lived assets that result from the acquisition, construction and
development of the assets.
SFAS 143 requires that the fair value of a liability for a retirement
obligation be recognized in the period in which the liability is incurred. For
oil and gas properties, this is the period in which an oil or gas well is
acquired or drilled. The asset retirement obligation is capitalized as part of
the carrying amount of the asset at its discounted fair value. The liability is
then accreted each period until the liability is settled or the asset is sold,
at which time the liability is reversed.
The Company identified and estimated all of its asset retirement
obligations for tangible, long-lived assets as of January 1, 2003. These
obligations were for plugging and abandonment costs for depleted oil and gas
wells. The Company had no proved reserves in 2003 or 2004, therefore the Company
did not record an asset retirement obligation. During the year ended December
31, 2005, the Company estimated its asset retirement obligation to be $45,000.
Upon recognition of this asset retirement obligation, a liability of $45,000 was
recorded and the capitalized costs of proved properties was increased by
$45,000.
NOTE 5 - CONCENTRATIONS
At June 30, 2006, approximately 85% of the Company's revenues come from
three gas wells in California. The loss of these wells, or a disruption in
production from these wells, would adversely effect the operations of the
Company.
NOTE 6 - COMMON STOCK
On November 20, 2003, the Company restructured its share capital
whereby the total common shares presently issued and outstanding was forward
split on a 1 (old) to 12 (new) basis. Effective January 5, 2004 the Company
restructured its share capital whereby the total common shares presently issued
and outstanding was forward split on a 1 (old) to 2 (new) basis. All references
to common stock, common shares outstanding, average numbers of common shares
outstanding and per share amounts in these Financial Statements and Notes to
Financial Statements prior to the effective date of the forward stock splits
have been restated to reflect the 12:1 and the 2:1 common stock splits on a
retroactive basis.
17
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - COMMON STOCK (continued)
On December 5, 2003, the Company received $500,000 in subscription
proceeds from a director and officer for the purchase of 444,444 common shares
of the company's stock pursuant to a Regulation S Private Placement Financing
which was announced on November 25, 2003 and whereby the Company plans to issue
up to 3,555,556 common shares of its capital stock. During the three months
ended March 31, 2004, the Company received subscription proceeds of $750,000
pursuant to the Private Placement Financing. During the three months ended March
31, 2004, 1,112,102 shares were issued in accordance with the $1,250,000 in
subscription proceeds received.
On March 23, 2004, the Company entered into an agreement with two
shareholders for the shareholders to surrender for cancellation 24,600,000
regulation 144 restricted shares of the Company's common stock.
During the three months ended June 30, 2004, the Company received
subscription proceeds of $630,000 pursuant to the Private Placement Financing.
During the three months ended June 30, 2004, 661,915 shares were issued in
accordance with the $630,000 in subscription proceeds received.
On June 30, 2004, the Company received share subscription proceeds of
$275,000 for 500,000 shares of restricted common stock pursuant to the Private
Placement Financing announced on November 25, 2003. During the three months
ended September 30, 2004, 500,000 shares were issued in accordance with the
$275,000 in subscription proceeds received.
On August 18, 2004, the Company issued 250,000 restricted shares of
common stock for $25,000 in accounts payable.
On October 18, 2004, the Company issued 156,000 restricted shares of
common stock for consulting expense of $15,600.
On November 23, 2004, the Company issued 362,394 shares of common stock
for debt issue costs of $350,000 associated with the Company's issuance of
convertible debt.
On April 28, 2006, the Company issued 1,200,000 shares of common stock
for consulting services valued at $324,000.
On May 3, 2006, the Company issued 10,000,000 shares of common stock to
its officers and directors for services valued at $2,750,000.
As of June 30, 2006, the Company has not adopted a stock option plan or
granted any stock options and accordingly has not recorded any stock-based
compensation.
18
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7- RELATED PARTY TRANSACTIONS
Pursuant to consulting agreements dated November 15, 2003 and
renegotiated July 1, 2005 the Company agreed to pay $15,000 per month to the CFO
and director of the Company and $20,000 per month to the President and director
of the Company.
During 2003 and 2004, the Company entered into several acquisition
agreements with 1048136 Alberta Ltd. (see Note 4). The Company's current
president, Robert McIntosh, was a director of 1048136 Alberta Ltd. and had
resigned from that position prior to his involvement with the Company. Sak
Narwal, a shareholder of the Company, was also a director of 1048136 Alberta Ltd
and Scott Marshall, the majority shareholder of 1048136 Alberta Ltd., is the
spouse of Naomi Patricia Johnston, owner of a 11.76% interest in the Company.
Despite the existence of these related parties, the consideration exchanged
under the Agreements described above was negotiated at "arms length," and the
directors and executive officers of the Company used criteria used in similar
uncompleted proposals involving the Company in comparison to those of 1048136
Alberta Ltd.
At June 30, 2006 and December 31, 2005, the Company was due $0 and
$183,900 from 1048136 Alberta Ltd. related to oil and gas development.
The Company has a "working interest" relationship with joint venture
partner Fidelis Energy Inc. (FDEI: OTC: BB) (see Note 4). Both companies have an
interest in the North Franklin gas project in Sacramento, California. More
recently in January 2005 Fidelis entered into an agreement to acquire an
interest in 2 oil wells at the Joarcam Project located in Alberta Canada. The
Company is earning a 70% working interest in the entire Joarcam Project. Fidelis
has also entered into an agreement for the first right of refusal to acquire the
remaining 30% working interest on all future drilling locations at Joarcam.
Silver Star and Fidelis will collectively have acquired a 100% working interest
at Joarcam.
In addition, Silver Star and Fidelis management work closely in the
evaluation of other potential, jointly feasible exploration prospects. Also, the
two companies share a common origin in that certain beneficial shareholders of
both companies have contributed to their formation.
NOTE 8 - INCOME TAXES
As of December 31, 2005, the Company has incurred operating losses of
approximately $1,134,000 which, if utilized, will expire through 2025. Future
tax benefits which may arise as a result of these losses and resource deductions
have not been recognized in these financial statements, as their realization is
determined not likely to occur.
19
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - LEASE COMMITMENT
On December 1, 2005, the Company entered into a lease agreement for
approximately 129 square feet of office space at 9595 Wilshire Blvd., Suite 900,
in Beverly Hills, California. The lease expires November 30, 2006 and continues
on a month ot month after that date. The lease payments are $1,814 per month.
The minimum future lease payments under these leases for the next five
years are:
Year Ended December 31,
2006 $ 19,954
2007 -
2008 -
2009 -
2010 -
-------------
Total minimum future lease payments $ 19,954
=============
NOTE 10 - CONVERTIBLE DEBENTURES
On November 23, 2004, the Company issued a convertible debenture and
warrents to Cornell Capital Partners, L.P. ("Cornel"). The $750,000 in
convertible debentures and 750,000 warrants require the Company to register the
resale of the shares of common stock upon conversion or exercise of these
securities.
The convertible debenture carry's an interest rate of 5% per annum.
Principal and interest will be due on November 23, 2007. At any time, Cornell is
entitled to convert all or any part of the principal amount of the debenture,
plus accrued interest, into shares of the Company's common stock. On November
23, 2007, at the Company's option, the entire principal amount and all accrued
interest shall be either (a) paid to Cornell or (b) converted to common stock.
The Warrant's to purchase 750,000 of the Company's common stock will
expire on November 23, 2009. The exercise price of the warrant is one hundred
twenty percent (120%) of the closing bid price of the Company's common stock on
the exercise date or as subsequently adjusted. The Company accounts for the fair
value of these outstanding warrants to purchase common stock and conversion
feature of its convertible notes in accordance with SFAS No. 133 "Accounting For
Derivative Instruments and Hedging Activities" and EITF Issue No. 00-19
"Accounting For Derivative Financial Instruments Indexed To And Potentially
Settled In A Company's Own Stock;" which requires the Company to bifurcate and
separately account for the conversion feature and warrants as embedded
derivatives contained in the Company's convertible notes.
20
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - CONVERTIBLE DEBENTURES (continued)
Pursuant to SFAS No. 133, the Company bifurcated the fair value of the
conversion feature from the convertible notes, since the conversion feature was
determined to not be clearly and closely related to the debt host. In addition,
since the effective registration of the securities underlying the conversion
feature and warrants is an event outside of the control of the Company, pursuant
to EITF Issue No. 00-19, the Company recorded the fair value of the conversion
feature and warrants as long- term liabilities as it was assumed that the
Company would be required to net-cash settle the underlying securities.
The Company is required to carry these embedded derivatives on its
balance sheet at fair value and unrealized changes in the values of these
embedded derivatives are reflected in the consolidated statement of operation as
"Gain (loss) on value of warrants and conversion feature. In 2004, the Company
recognized a liability and expense of $835,315 related to these derivatives. On
October 14, 2005, the Company paid $782,175 to pay-off the convertible note. The
warrants were also cancelled. Since the convertible note related to these
derivatives was paid during 2005 and the warrants cancelled, the entry recording
the liability and expense was reversed in 2005.
On November 23, 2004, the Company paid $102,500 in cash for debt issue
costs. The Company also issued 362,394 shares of common stock valued at $350,000
for debt issue costs. Total debt issue costs of $452,500 were capitalized in
financial statements. These debt issue costs were being amortized over three
years. Since the convertible debentures related to these debt issue costs were
paid-off in October 2005, the Company expensed the remaining $358,814 of the
debt issue costs related to these convertible debentures.
On March 10, 2005, the Company executed a Convertible Debenture for
$550,000. The note is due and payable in full on or before March 10, 2006 and
carries an interest rate of 5% per annum. The notes are convertible, at the
discretion of the holder, into shares of common stock of the Company at a
conversion price of $1.00 per share. On March 30, 2005, the Company executed a
Convertible Debenture for $200,000. The note is due and payable in full on or
before March 10, 2006 and carries an interest rate of 5% per annum. The notes
are convertible, at the discretion of the holder, into shares of common stock of
the Company at a conversion price of $1.00 per share. On December 13, 2005, the
Company paid $134,424 towards this note. On June 30, 2006, this note was paid in
full.
On April 8, 2005, the Company executed a Convertible Debenture for
$160,000. The note is due and payable in full on or before April 8, 2006 and
carries an interest rate of 5% per annum. The notes are convertible, at the
discretion of the holder, into shares of common stock of the Company at a
conversion price of $1.00 per share. On May 17, 2005, the Company executed a
Convertible Debenture for $150,000. The note is due and payable in full on or
before May 17, 2006 and carries an interest rate of 5% per annum. The notes are
convertible, at the discretion of the holder, into shares of common stock of the
Company at a conversion price of $1.00 per share. On December 13, 2005, this
note was paid in full. The Company paid a total of $319,880 for principal and
interest.
21
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - CONVERTIBLE DEBENTURES (continued)
On October 14, 2005, we entered into a securities purchase agreement
with H.C. Wainwright for a PIPE Offering which is a private investment
opportunity in a public company for an aggregate purchase price of $3,430,000,
of which we have issued (i) a $3,430,000 secured convertible debenture,
convertible into shares of our common stock at a fixed conversion price of
$.315, par value $0.001, with a Beneficial Conversion Liability of $1,034,439
and (ii) a warrant to purchase an aggregate of 34,408,717 additional shares of
our common stock at an exercise price of $.315 and $.63 per share with a
Beneficial Conversion Liability of $5,423,617 and are exercisable until October
14, 2010.
Beginning on the six (6) month anniversary of the Closing, and on the
first business day of each month thereafter until the Notes are no longer
outstanding the Company shall pay 1/18th of the original principal amount of the
Notes and all accrued and unpaid interest. The Company shall elect to make such
payments in shares of the Company's common stock. Each share of the Company's
common stock will be valued at 92.5% of the five (5) day VWAP immediately prior
to the payment date. The interest on the convertible debenture shall accrue on
the outstanding principal balance at a rate of 8% per annum. As of June 30,
2006, $193,959 has been charged as interest expense related to this debt.
The Warrants to purchase 34,408,717 of the Company's common stock will
expire on October 14, 2010. The exercise price of the warrant is fixed at $.315
and $.63 and has an exercise period of five years. The Company accounts for the
fair value of these outstanding warrants to purchase common stock and the
conversion feature of its convertible notes in accordance with SFAS No. 133
"Accounting For Derivative Instruments And Hedging Activities" and EITF Issue
No. 00-19 "Accounting For Derivative Financial Instruments Indexed To And
Potentially Settled In A Company's Own Stock;" which requires the Company to
bifurcate and separately account for the conversion feature and warrants as
embedded derivatives contained in the Company's convertible notes.
Pursuant to SFAS No. 133, the Company bifurcated the fair value of the
conversion feature from the convertible notes, since the conversion feature were
determined to not be clearly and closely related to the debt host. In addition,
since the effective registration of the securities underlying the conversion
feature and warrants is an event outside of the control of the Company, pursuant
to EITF
Issue No. 00-19, the Company recorded the fair value of the conversion
feature and warrants as long-term liabilities as it was assumed that the Company
would be required to net-cash settle the underlying securities.
The Company is required to carry these embedded derivatives on its
balance sheet at fair value and unrealized changes in the values of these
embedded derivatives are reflected in the consolidated statement of operation as
"Gain (loss) on value of warrants and conversion feature.
22
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - CONVERTIBLE DEBENTURES (continued)
Beneficial Conversion expense of the debenture was calculated by the
Company based upon the difference between the market price of shares of the
Company's stock as of the date of issuance and the conversion price applicable
to the convertible debentures.
The value of the warrants have been calculated using the Black-Scholes
method as of the date of grant based on the following assumptions: an average
risk free rate of 4.25; a dividend yield of 0.00%; an average volatility factor
of the expected market price of the Company's common stock of 102.61% for 2004;
and an expected life of 5 years.
In addition 8,711,084 warrants have been issued to H.C Wainwright, John
R. Clarke, Scott F. Koch, Ari Fuchs, Jason A. Stein and First SB Inc.
respectively, with series A, and C each exercisable at $.315 and series B and D
each exercisable at $.63 with terms of 1 year from October 14, 2005. The value
of these warrants have also been calculated using the Black-Scholes method as of
the date of grant based on the following assumptions: an average risk free rate
of 4.25; a dividend yield of 0.00%; an average volatility factor of the expected
market price of the Company's common stock of 102.61%; and an expected life of 5
years.
Warrants
-----------------
H.C. Wainwright & Co. Ltd. 2,177,768
John R. Clarke 947,328
Scott F. Koch 947,328
Ari J. Fuchs 217,776
Jason A. Stein 65,332
1st SB Partners Ltd. 4,355,552
-----------------
Total $ 8,711,084
=================
On October 14, 2005, the Company paid $480,000 in cash for debt issue
costs related to the convertible debenture of $3,430,000. These debt issue costs
were capitalized in the financial statements and are being amortized over two
years using the interest method. At June 30, 2006 and December 31, 2005, net
debt issue costs related to these convertible debentures were $318,027 and
$432,227, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL - This discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's annual report on Form 10-KSB for the year ended December 31, 2005.
23
PLAN OF OPERATIONS
NORTH FRANKLIN PROJECT, SACRAMENTO CALIFORNIA:
We reported on April 3 the results of the "Archer-F-1" gas well at the
North Franklin Project, Sacramento California. The "Archer-F-1" well was
designed to test both the producing Winters sands as well as the Forbes; the
primary objective of this well. The well reached a total depth of 10,567 feet.
The well cut Winters sand pay with excellent gas shows and the suite of
Resistivity and Sonic electronic logs showed clean sand with 100% gas fill-up
within the pay zone. The intersected sand pay and gas shows exceeds in thickness
what is producing at the "Archer-Whitney" and "Archer-Wildlands" wells. This
Winters portion of the well is now to be completed and put into production
immediately.
The Forbes Sand was encountered and contained excellent gas shows.
However, the Forbes sands were directly above other sand that contained high
pressure gas and salt water. During this operational period, the well lost
circulation during the open hole conditioning for electric logs. The hole broke
down within 100 feet of the shoe, took drilling fluid and allowed the well to
flow gas and salt water, from the target zones into the well bore. The flow of
gas and water from the Forbes reduced the hydrostatic column creating an unsafe
condition to log or drill any further. Several days of conditioning the drilling
fluid (increasing mud weight up to 15.9 lbs per gal) and numerous attempts to
maintain a static well failed due to the salt water and gas cutting the mud
weight needed to compensate for the higher than expected formation pressures.
The project partners made a decision to plug the open hole below the
casing shoe that was set at the bottom of the production casing to protect the
Winters pay interval. The plugging process included the setting of a cement
retainer and the drill pipe was pulled out of the hole in preparation for rig
release. By setting the retainer and cementing, additional drilling operations
can be attempted from the cased upper hole. It is now possible to re-drill the
lower hole and evaluate the excellent gas shows encountered within the Forbes
sands above the high pressure water sands. The prospect has not been fully
evaluated and still has the potential for a commercial gas discovery. From this
well bore, or a new location, it is possible to drill farther up- dip and there
is the possibility the lower sands are gas filled in that up-dip location.
We reported on April 7 March gas production at the North Franklin
Project from the Company's two gas wells, the "Archer-Whitney #1" and
"Archer-Wildlands #1" that totaled 92.85 Mmcf. The average daily production rate
for the month of March totaled 3.0 Mmcf per day from the two wells combined. The
project partners prepared to complete the"Archer-F-1" well in the Winters gas
reservoir and put it into immediate production. A completion rig was being
sourced and all parties have contributed the required funds for this operation.
The well tie-in is very short to the existing gas gathering system and pipeline.
We reported on May 3 the April gas production at the North Franklin
Project from "Archer- Whitney #1" and "Archer-Wildlands #1" that totaled 89.85
Mmcf. The average daily production rate for the month of March totaled 3.0 Mmcf
per day from the two wells combined. We updated the progress of the completion
and tie-in the"Archer-F-1" well in the Winters gas reservoir. The completion rig
will be onsite on May 5th after a short delay to let the lease dry up. The
perforation
24
of the Winters sand and subsequent tie-in to the existing gas gathering system
and pipeline is estimated to take 3 to 5 days thereafter. The operator has fully
constructed the "F-1" site facilities.
On May 15 we reported on the inaugural "Archer-F-1" well gas
production. The well was successfully perforated, completed and tied-in to the
pipeline from the Winters sands. During the completion program, the well was
flow tested up to a rate of 2MMCF per day. The short tie-in to the pipeline was
finished this past weekend and the well has begun commercial production at an
I.P.R. (initial production rate) of 1.0 MMCF per day. As the pressures are
evaluated over the initial weeks, the operator and working interest partners
will determine the optimal production rate for the well. With the onset of
production from "F-1", Silver Star now has three gas wells at North Franklin and
its resulting cash flow is expected to increase by 35%. These wells are, as of
today, producing a combined 4.0 MMCF per day.
We announced the planning a minimum of two more wells in the near
future after reviewing a recently completed, very favorable property-wide,
geological study. On May 18 details of the comprehensive overview of the Winters
Formation underlying the A.M.I. (area of mutual interest) and current lease
holdings was announced. The partners commissioned the report to identify other
potential sand channels that may hold exploration and gas potential. The report
concluded that there is a strong indication of an additional five (5) Winters
sand channels that have geological and geophysical similarities and may be
analogs to the current area in production from the Company's three gas wells.
The five new target areas have been developed and ranked as to potential and
risk based on varying levels of data available at the present time. Each of the
five targets, if proven, would hold multiple well locations and each could
contain similar gas equivalent to the current production area. All of the new
targets have been geologically mapped and have received varying degrees of
geophysical interpretation towards the goal of creating suitable site locations
for exploration wells. Silver Star recently announced that the Company and
partners are planning to drill a minimum of two more wells in the near future
after reviewing this recently completed property-wide, study. The two wells that
have been agreed on by the North Franklin partners include one development well
in the current producing field and one exploration well in the first of the five
newly identified channels.
Following the drilling of these two wells this summer, additional
geophysics is planned to further define future well site locations. The Company
and the operator are now undertaking a cost estimate of this geophysical program
that will occur in conjunction with the drilling of the wells. Silver Star has
executed A.F.E.'s (Authority for Expenditure) for well licensing, permitting and
site preparation on the next two wells at North Franklin.
We reported on June 5 the May gas production at the North Franklin
Project now producing gas from three wells, the "Archer-Whitney #1",
"Archer-Wildlands #1"and "Archer-F1". Production totaled 110.57 MMCF. The
"Archer-F-1" well began official commercial production on May 16th and produced
a total of 14.915 MMCF at an average initial production rate of 932 MCF per day.
The three wells currently are producing over 4.0 MMCF per day combined.
EVI PROJECT, ALBERTA
The "7-11" oil well produced 624 barrels of oil for the quarter
attributable to Silver Star's interest. Due to road access restrictions, the
well was put on standby for several weeks as site access was impossible to truck
the oil to the Husky tank battery.
25
CORPORATE RELATED EVENTS
We announced on May5 the resignation of two directors. Mr. William
Marshall and Mr. Glen Harder resigned from the Board of the Company for personal
reasons. They will continue to consult to the Company on an as required basis.
The Company is searching for qualified independent directors in order to broaden
the breadth of experience possessed at the Board level.
SUBSEQUENT EVENTS:
On July 5th announced that the Company had received authorizations for
expenditure (A.F.E.s) from the operator on account of its 40% working interest
share in an upcoming drilling program at its North Franklin natural gas project.
The Company intends to fully fund its share of the costs for a pending 2-well
drilling program which will target the proven Winters formation. The new wells,
the first of which is expected to spud in August 2006, will represent the fourth
and fifth of a series of production wells that are planned for the North
Franklin gas field. In August 2005 the Company and partners announced the
acquisition of participation rights to a large database encompassing a
geophysical survey of approximately one million acres, located in central Kansas
covering parts of Ellsworth, Salina, McPherson, Reno, Harvey, Kingman, and
Sedgwick counties. After a thorough review of the data purchased, the prospects
selected for exploration and discussions with its consultants and operator, the
Company has determined that it will no longer participate in the Kansas program.
Although the project appears to have considerable merit, the Company has
determined that its resources are presently better spent in the additional
development of the North Franklin natural gas field.
On July 13 we reported the June gas production at the North Franklin
Project from the Company's three (3) gas wells; the "Archer-Whitney #1",
"Archer-Wildlands #1"and "Archer-F1" that totaled 120.82 MMCF. This was an
increase over May production of 110.57 MMCF. The three wells combined averaged a
production rate of 4.03 MMCF per day.
In summary, gas production for the April-June quarter totaled 321.24
MMCF. Oil production totaled 624 barrels. The Company received a total of
$525,716 in revenue from all projects.
RESULTS OF OPERATIONS
REVENUE
Revenue increased to $518,328 for the quarter ended June 30, 2006 up
from $458,013 in the same period in 2005. This increase is a result of our
properties continuing production at the North Franklin for revenue of $490,509,
and the addition of our well at the EVI that produced $27,819 in revenue.
COST OF REVENUE
The Company recorded cost of revenue and depletion of $103,020 during
the quarter ended June 30, 2006 down from $259,595 during the quarter ended June
30, 2005. This decrease is reflective of less depletion due to the sale of the
Joarcam property.
26
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of accounting,
legal, depreciation and selling and marketing expenses. The general and
administrative expenses for the quarter ended June 30, 2006 are $129,416. This
is a decrease from 2005 of $18,780 and is reflective of decreased travel for the
quarter. Professional fees which include legal and accounting were $59,927 for
the quarter ended June 30, 2006 compared to $14,601 and this increase is due to
ongoing legal fees incurred to file the SB2 registration for our financing that
closed in October 2005.
Consulting and Management fees were $3,268,974 for the quarter ended
June 30, 2006 and increased over the same period in 2005 by $3,159,974. This
increase was due to the expenses recorded for the issuance of common stock.
Other operational expenses for the quarter include production royalties of
$36,788. We expect to continue to incur general and administrative expenses to
support the business.
INTEREST EXPENSE
Interest expense increased for the quarter ended June 30, 2006 with
$133,339 compared to $58,414 for the quarter ended June 30, 2005. This is
reflective of interest charges that accrued from our financing that closed on
October 14, 2005.
LOSS PER SHARE AND NET LOSS
The Company ended the second quarter of June 30, 2006 with a net loss
of ($3,138,111) compared to ($131,793) in 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents from inception have been insufficient to
provide the operating capital necessary to operate the Company. The necessary
capital to operate the Company was initially provided by the principals and
founders of the Company in the form of both debt and capital stock issuances as
set forth in the financial statements incorporated herein. The working capital
necessary to operate the Company and provide for acquisition capital came from
the proceeds of loans, a credit line and production revenue as previously
disclosed.
In summary, the Company now has sufficient liquidity and capital
resources to operate profitably due to the sale of gas from the tie-ins of the
Archer-Whitney #1 and Archer-Wildlands #1 gas wells in 2005. The Company expects
to continue to operate with cash flow and anticipates improving its financial
position as production increases in the future. However, currently financing
sources are being evaluated that would expedite the expansion of the Company's
production.
The Company had cash and cash equivalents of $51,420 and working
capital of $469,995 at June 30, 2006. This compares to cash and cash equivalents
of $1,087,163 and working capital of 1,967,095 at December 31, 2005.
During the quarter ended June 30, 2006, the Company was provided cash
of $1,092,464 in operating activities compared to using $395,691 in the prior
year. As at June 30, 2006 the company had an outstanding receivable of $373,647.
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Net cash provided by (used by) financing activities was ($560,000) for
the six months ended June 30, 2006, which compares to $1,060,000 for the same
period in 2005.
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer are
responsible for establishing and maintaining disclosure controls and procedures
for the Company.
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's President, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Based upon the evaluation, the Company's President
concluded that, as of the end of the period, the Company's disclosure controls
and procedures were effective in timely alerting him to material information
relating to the Company required to be included in the reports that the Company
files and submits pursuant to the Exchange Act.
(b) Changes in Internal Controls
Based on his evaluation as of June 30, 2006, there were no significant
changes in the Company's internal controls over financial reporting or in any
other areas that could significantly affect the Company's internal controls
subsequent to the date of his most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings pending or threatened against us.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Number Title of Document
10.1 Robert McIntosh's Consulting Agreement dated November 15, 2003, filed
on April 21, 2004 on Form 10KSB/A.
10.2 David Naylor's Consulting Agreement dated November 15, 2003, filed on
April 21, 2004 on Form 10KSB/A.
10.3 Robert McIntosh's Loan Agreement dated December 31, 2003, filed on
April 21, 2004 on Form 10KSB/A.
10.4 Agreement dated October 21, 2003 between the Company and Adil Dinani
disposing of 657333 BC Ltd. (Netcash), filed on November 13, 2003 on
Form 8- K.
10.5 Agreement dated October 29, 2003 between the Company and 1048136
Alberta, Ltd. respecting the acquisition of the Evi oil and gas
prospect, filed on November 13, 2003 on Form 8-K.
10.6 Agreement dated October 29, 2003 between the Company and 1048136
Alberta, Ltd. respecting the acquisition of the Verdigris oil and gas
prospect, filed on November 13, 2003 on Form 8-K.
10.7 Agreement dated December 5, 2003 between the Company and Archer
Exploration, Inc. respecting the North Franklin oil and gas prospect,
filed on December 23, 2003 on Form 8-K.
10.8 Agreement dated December 5, 2003 between the Company and Archer
Exploration, Inc. respecting the Winter Pinchout oil and gas project,
filed on December 23, 2003 on Form 8-K.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K filed.
On July 11, 2006, the Company filed a report on Form 8-K under Item
7.01, Regulation FD Disclosure.
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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.
Silver Star Energy, Inc.
(Registrant)
DATE: August 11, 2006
By: /s/ Robert McIntosh
Robert McIntosh
President, CEO & Director
(Principal Executive Officer)
By: /s/ David Naylor
David Naylor
Treasurer, Director
(Principal Financial Officer)
30