[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: September 30, 2006
-------------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from to
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Commission file number 333-102930
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Silver Star Energy, Inc.
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(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: September 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)
September 30, December 31,
ASSETS 2006 2005
- ------ ------------------ -----------------
Current Assets
Cash $ 96,179 $ 1,087,163
Accounts Receivable 383,896 506,016
Prepaid Expense 9,689 16,976
Other Receivable 319,972 992,117
Due from Related Party - 183,900
------------------ -----------------
Total Current Assets 809,736 2,786,172
------------------ -----------------
Fixed Assets
Furniture and Fixtures 7,751 7,751
Computers 6,222 6,222
Vehicles 64,087 64,087
Accumulated Depreciation (23,884) (11,553)
------------------ -----------------
Net Fixed Assets 54,176 66,507
------------------ -----------------
Other Assets
Oil and gas properties, full cost method, net of depletion
$316,276 and $132,121, respectively 2,528,719 1,345,384
Unproved oil and gas properties 1,753,086 1,733,086
Debt Issue Costs, net of amortization of $221,867 and $47,973 258,333 432,227
------------------ -----------------
Total Other Assets 4,540,138 3,510,697
------------------ -----------------
Total Assets $ 5,404,050 $ 6,363,376
================== =================
3
SILVER STAR ENERGY, INC.
BALANCE SHEETS
(Continued)
(Unaudited)
September 30, December 31,
2006 2005
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 15,278 $ 30,930
Accrued Liabilities 353,479 142,602
Convertible debentures - 560,000
Accrued interest - 85,545
------------------- ------------------
Total Current Liabilities 368,757 819,077
------------------- ------------------
Long-Term Liabilities
Asset retirement obligation 45,000 45,000
Convertible debentures 3,430,000 3,430,000
Accrued interest 348,663 160,786
Beneficial conversion liability 6,458,056 6,458,056
------------------- ------------------
Total Long-Term Liabilities 10,281,719 10,093,842
------------------- ------------------
Total Liabilities 10,650,476 10,912,919
------------------- ------------------
Stockholders' Equity
Preferred stock (Par Value $.001), 5,000,000 shares
authorized. -0- issued at September 30, 2006 and
December 31, 2005 - -
Common Stock (Par Value $.001), 300,000,000 shares
authorized. 96,221,035 issued and outstanding at September 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 (11,462,104) (7,691,222)
------------------- ------------------
Total Stockholders' Equity (5,246,426) (4,549,543)
------------------- ------------------
Total Liabilities and Stockholders' Equity $ 5,404,050 $ 6,363,376
=================== ==================
See accompanying notes.
4
SILVER STAR ENERGY, INC.
STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
----------------- ----------------- ------------------ ------------------
Oil Revenue $ 72,101 $ 142,228 $ 191,491 $ 426,030
Gas Revenue 477,852 397,186 1,407,797 600,137
----------------- ----------------- ------------------ ------------------
Total Income $ 549,953 $ 539,414 $ 1,599,288 $ 1,026,167
----------------- ----------------- ------------------ ------------------
Expenses
Production Costs 82,276 144,760 289,073 404,355
Consulting and Management
Fees 181,293 134,403 3,646,092 306,448
General and Administrative 190,904 108,409 503,889 389,687
Professional Fees 46,501 52,220 184,468 83,496
----------------- ----------------- ------------------ ------------------
Total Expenses 500,974 439,792 4,623,522 1,183,986
----------------- ----------------- ------------------ ------------------
Other Income ( Expense)
Interest Expense (128,858) (60,140) (393,015) (166,199)
Interest Income 1,029 - 2,581 -
Gain/Loss on Disposal of
Assets - (3,237) - (3,237)
Gain/Loss on Foreign
Exchange - - 38,237 -
Financing Penalty Payouts (325,849) - (394,449) -
----------------- ----------------- ------------------ ------------------
Total Other Income
(Expense) (453,678) (63,377) (746,646) (169,436)
----------------- ----------------- ------------------ ------------------
Net Income (Loss) $ (404,699) $ (36,245) $ (3,770,880) $ (327,255)
================= ================= ================== ==================
Income (Loss) per Common
Share $ - $ - $ (0.04) $ -
================= ================= ================== ==================
Weighted Average Shares
Outstanding 96,221,035 85,021,035 91,306,959 85,021,035
================= ================= ================== ==================
See accompanying notes.
5
SILVER STAR ENERGY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30,
2006 2005
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (3,770,880) $ (327,255)
Adjustments used to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation, Amortization and Depletion 370,379 245,094
Common stock issued for expenses 3,074,000 -
(Gain) loss on disposal of assets - 3,237
(Increase) decrease in other assets & prepaids 7,287 5,825
(Increase) decrease in accounts receivable 122,120 (243,614)
(Increase) decrease in other receivable 856,045 -
Increase (decrease) in accounts payable (15,652) 4,428
Increase (decrease) in accrued interest 102,330 -
Increase (decrease) in accrued liabilities 210,877 138,819
------------------ ------------------
Net cash used in operating activities 956,506 (173,466)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition/Sale of equipment, net - (56,036)
Acquisition of oil & gas property interests (1,387,490) (960,288)
------------------ ------------------
Net cash used by investing activities (1,387,490) (1,016,324)
------------------ ------------------
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)
(Unaudited)
For the Nine Months Ended
September 30,
2006 2005
------------------ ------------------
Net Increase (Decrease) in
Cash and Cash Equivalents (990,984) (129,790)
Cash and Cash Equivalents at
Beginning of the Period 1,087,163 138,005
------------------ ------------------
Cash and Cash Equivalents at
End of the Period $ 96,179 $ 8,215
================== ==================
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 September 30, 2006, and for
the nine 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
nine 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 September
30, 2006 and December 31, 2005:
(Unaudited)
September 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 (23,884) (11,553)
------------------ ------------------
Total $ 54,176 $ 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 nine months ended September 30, 2006
and 2005 was $12,331 and $7,653, 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 nine months ended September 30, 2006 and
2005 was $184,155 and $154,813, 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
Effective January 1, 2006, the company adopted the provisions of SFAS
No. 123(R). SFAS No. 123(R) requires employee equity awards to be accounted for
under the fair value method. Accordingly, share-based compensation is measured
at grant date, based on the fair value of the award. Prior to January 1, 2006,
the company accounted for awards granted to employees under its equity incentive
plans under the intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related interpretations, and provided the required pro forma disclosures
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), as amended. No stock options were granted to employees during the three
and nine months ended September 30, 2006 or 2005 and accordingly, no
compensation expense was recognized under APB No. 25 for the three and nine
months ended September 30, 2006 or 2005. In addition, no compensation expense is
required to be recognized under provisions of SFAS No. 123(R) with respect to
employees.
12
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Under the modified prospective method of adoption for SFAS No. 123(R),
the compensation cost recognized by the company beginning on January 1, 2006
includes (a) compensation cost for all equity incentive awards granted prior to,
but not yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all equity incentive awards granted subsequent to January
1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The company uses the straight-line attribution
method to recognize share-based compensation costs over the service period of
the award. Upon exercise, cancellation, forfeiture, or expiration of stock
options, or upon vesting or forfeiture of restricted stock units, deferred tax
assets for options and restricted stock units with multiple vesting dates are
eliminated for each vesting period on a first-in, first-out basis as if each
vesting period was a separate award. To calculate the excess tax benefits
available for use in offsetting future tax shortfalls as of the date of
implementation, the company followed the alternative transition method discussed
in FASB Staff Position No. 123(R)-3.
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.
13
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
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
nine months ended September 30, 2006, $285,975 was spent to install the
production facilities at the EVI well. All of these costs have been capitalized.
During 2006, EVI property was determined to have proved oil reserves.
Total capitalized costs for the EVI property were removed from the unproved
properties and classified as proved properties. For the nine months ended
September 30, 2006, the Company has received revenues of $191,491 from the EVI
property. As of September 30, 2006, the total capitalized costs related to the
EVI property, net of depletion of $48,585 was $237,390.
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.
15
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - OIL AND GAS PROPERTIES (continued)
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.
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 September 30, 2006, total
capitalized costs for the California prospects was $3,141,394.
16
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - OIL AND GAS PROPERTIES (continued)
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
nine months ended September 30, 2006, the Company received revenues of
$1,550,245 from the North Franklin Property. As of September 30, 2006, the total
capitalized costs related to the North Franklin property, net of depletion of
$267,691 was $2,291,329.
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 nine months ended September 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 September 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.
17
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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.
18
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - COMMON STOCK (continued)
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 September 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.
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 September 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.
19
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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 to 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. For the nine months
ended September 30, 2006, $205,236 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 September 30, 2006 and December 31, 2005,
net debt issue costs related to these convertible debentures were $258,333 and
$432,227, respectively.
Silver Star Energy is in default of the October 14, 2005 terms of the
convertible debenture. This Company has been unable to have the Registration
Statement on Form SB2 declared effective within the 90 days after closing as was
required. Liquidated damages in the amount of $68,600 or 2% of the offering
amount of $3,430,000 have been paid. Further liquidated damages of 1% per month
of the offering amount, totaling $325,850 have been accrued. This represents the
default period from January 14, 2006 to September 30, 2006. No formal notice of
default has been received by the Company from the agent representing the
lenders.
23
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - CONVERTIBLE DEBENTURES (continued)
Amortization payments of 1/18th of the original amount of $3,340,000 is
required to be paid on the six month anniversary of the closing and on the first
business day of each month thereafter until the notes are no longer outstanding.
The company may elect to make these payments in cash or in payments of the
company's stock.
At this time no payments have been made. The company continues in its
efforts of clearing the registration statement and attempting to have it
declared effective concurrently while evaluating alternatives to repay the
convertible debenture. At this time the company does not have sufficient cash
flow to repay the original offering amount in cash, based on the 18 month
amortization period.
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.
PLAN OF OPERATIONS
NORTH FRANKLIN PROJECT, SACRAMENTO CALIFORNIA:
We reported on August 7th the July gas production at the North Franklin
Project, Sacramento California. Production from the Company's three (3) gas
wells; the "Archer-Whitney #1", "Archer- Wildlands #1"and "Archer-F1" totaled
125.713 MMCF. This was an increase over June production of 120.82 MMCF. The
three wells combined averaged a production rate of 4.06 MMCF per day. In
addition, we reported the commencement of drilling operations at North Franklin
with the "Archer- Wurster #1" well. Silver Star and partners have now commenced
a 2 well drilling program which will target further production from the Winters
formation. The new wells will represent the fourth and fifth of a series of
production wells that are planned for the North Franklin gas field.
We reported on August 16th that the "Archer-Tsakopoulos #1" well was
successfully drilled to depth and will now be completed as the fourth gas well
at North Franklin, Sacramento California. A suite of electronic logs confirmed
100% gas filled sand in the producing Winters Formation. Casing was set and the
well is to be perforated, completed and tied-in to the pipeline from the Winters
sands. The new gas well will add to current production from the Company's three
(3) gas wells; the "Archer-Whitney #1", "Archer-Wildlands #1"and "Archer-F1"
which totaled 125.713 MMCF in July. The Company anticipates a 25% increase in
net monthly gas production from the addition of this well. The Company also
reported the next gas well, the "Archer-Wurster #1" is expected to spud August
17th.
24
We reported on October 3rd the Q3 gas production at the North Franklin
Project, Sacramento California that totaled 368.46 MMCF from combined production
at the Company's three gas wells. July production totaled 125.71 MMCF at an
average rate of 4.05 MMCF per day; August produced 124.86 MMCF at an average
rate of 4.03 MMCF per day for 31 days and September production totaled 117.88
MMCF at an average rate of 3.93 MMCF per day. In total, the average daily rate
of gas production from the Company's three (3) gas wells; the "Archer-Whitney
#1", "Archer- Wildlands #1"and "Archer-F1" was 4.00 MMCF per day for the
quarter.
The Company also wishes to update the ongoing field operations at North
Franklin. Silver Star and partners are still waiting for a completion rig to
perforate and tie-in the fourth well, "Archer- Tsakopolous #1". Silver Star is
currently in line for a completion rig and one should be available this month.
Rig availability is currently very tight in California and the Company and
operator are keeping in contact with drilling contractors regarding
availability.
In addition, we reported that the "Archer-Wurster #1" well, drilled on
a different southerly sand channel, will not be a commercial producer. This well
was a higher risk exploration well and the partners are reviewing the future
options in and around the well location. The Company feels that more seismic
will be required to fully understand this area. Silver Star has commissioned a
new reservoir engineering report that will incorporate all the latest drilling
results, production records regarding reservoir parameters and most recent
scoping geological study on the Winters Formation. This report will be used as a
valuation for the proposed buyout by PrimeGen Energy Corp.
EVI PROJECT, ALBERTA
The "7-11" oil well produced 1,289 barrels of oil for the quarter.
Production was temporarily interrupted due to downhole rod separation for
several days but was rectified. Due this situation, the daily production for the
quarter averaged 14.01 barrels per day.
CORPORATE RELATED EVENTS
On August 24, PrimeGen Energy Corp. (OTCBB:PGNE) formerly Maysia
Resources Corporation (OTCBB: MYAR) ("Maysia/PrimeGen"), and Silver Star Energy
Inc. announced that they had executed a letter of intent for Maysia/PrimeGen to
purchase the interests in the "North Franklin Project" held by Silver Star.
Silver Star has a 40% working interest.
The consideration for the purchase will consist of a combination of
cash and Maysia/PrimeGen common shares. The cash consideration and number of
Maysia/PrimeGen shares to be issued will be determined by a valuation of the
interests based upon a geological reserve report being prepared. The cash
portion will be to satisfy the outstanding secured debt obligations of Silver
Star in order that their interests can be transferred free and clear of all
charges and security interests. The balance of the purchase will be paid in
Maysia/PrimeGen shares, to be issued pro rata to Silver Star proportionate to
its interests. The intention is that the Maysia/PrimeGen shares will then be
paid as a dividend to the Silver Star shareholders. The letter of intent and
proposed purchase and sale is subject to the completion of due diligence
reviews, board approvals, shareholder approval of Silver Star, Maysia/PrimeGen
securing financing for the cash portion of the purchase, the
satisfaction/release of any security interests held in the North Franklin
Project interests to be conveyed, and the execution of a definitive agreement
and related formal documentation.
25
We announced on August 25 that the Company had received notice of the
private purchase of 11,700,000 restricted shares of the Company by Mr. William
Marshall from Mr. Sak Narwal. Management was advised that these shares represent
Mr. Narwal's entire share position. On September 1, we announced that Mr. Gordon
Sampson had resigned from the Board of Company to pursue other interests.
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. On
July 5, we announced that 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.
SUBSEQUENT EVENTS:
On October 18th, we reported that the "Archer-Tsakopoulos #1" well was
successfully completed and will be tied in as the fourth well at North Franklin,
Sacramento California. The well was perforated in the Winters sands and, during
the completion program, was tested to a stabilized rate of 1.139 MMCF per day.
The tie-in to the pipeline will occur after site facilities are installed at the
well location. Gas samples confirm similar BTU quality to the other wells in the
reservoir. As the pressures are evaluated over the initial weeks following
tie-in, the operator and working interest partners will determine the optimal
production rate for the well. Currently the reservoir is producing a combined
4.0 MMCF per day from three wells.
In the month of October, the EVI "7-11" well produced 396 barrels oil.
RESULTS OF OPERATIONS
REVENUE
Revenue increased to $549,953 for the quarter ended September 30, 2006
up from $539,414 in the same period in 2005. This increase is a result of our
properties continuing production at the North Franklin for revenue of $477,852,
and the addition of our well at the EVI that produced $72,101 in revenue.
COST OF REVENUE
The Company recorded cost of revenue and depletion of $82,276 during
the quarter ended September 30, 2006 down from $144,760 during the quarter ended
September 30, 2005. This decrease is reflective of less depletion due to the
sale of the Joarcam property.
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
26
September 30, 2006 are $190,904. This is an increase from 2005 of $82,495 and is
reflective of increased travel for the quarter. Professional fees which include
legal and accounting were $46,501 for the quarter ended September 30, 2006
compared to $52,220 and this decrease is due to a decrease in legal fees for the
quarter.
Consulting and Management fees were $181,293 for the quarter ended
September 30, 2006 and increased over the same period in 2005 by $46,890. This
increase was due to an increase in consulting expenses. We expect to continue to
incur general and administrative expenses to support the business.
INTEREST EXPENSE
Interest expense increased for the quarter ended September 30, 2006
with $128,858 compared to $60,140 for the quarter ended September 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 third quarter of September 30, 2006 with a net
loss of ($404,699) compared to ($36,245) for the same period 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 $96,179 and working
capital of $440,979 at September 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 nine months ended September 30, 2006, the Company was
provided cash of $956,506 in operating activities compared to using $173,466 in
the prior year. At September 30, 2006 the company had an outstanding receivable
of $383,896.
Net cash provided by (used by) financing activities was ($560,000) for
the nine months ended September 30, 2006, which compares to $1,060,000 for the
same period in 2005.
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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 September 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
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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 August 28, 2006, the Company filed a report on Form 8-K under Item
7.01, Regulation FD Disclosure.
On September 6, 2006, the Company filed a report on Form 8-K under Item
5.02, Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers.
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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: November 10, 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