UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10Q
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(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, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
Commission file number: 333-151398
GULFSTAR ENERGY CORPORATION
(Formerly known as: Bedrock Energy, Inc.)
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(Exact name of registrant as specified in its charter)
Colorado 02-0511381
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(State of Incorporation) (IRS Employer ID Number)
3410 Embassy Drive, West Palm Beach, FL 33401
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(Address of principal executive offices)
800-820-1632
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(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do
not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 5, 2010, there were 16,087,797 shares of the registrant's common
stock issued and outstanding.
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2010 (Unaudited)
and December 31, 2009 1
CondensedConsolidated Statements of Operations (Unaudited) - Three and
Nine months ended September 30, 2010 and 2009 and From May 19,
2006 (Inception) through September 30, 2010 2 -3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 2010 and 2009 and
From May 19, 2006 (Inception) through September 30, 2010 4
Notes to the Condensed Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures - Market Risk - Not Applicable 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -Not Applicable 18
Item 1A. Risk Factors - Not Applicable 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities - Not Applicable 18
Item 4. Removed and Reserved 18
Item 5. Other Information - Not Applicable 19
Item 6. Exhibits 19
SIGNATURES 20
PART I
ITEM 1. FINANCIAL STATEMENTS
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(FORMERLY BEDROCK ENERGY, INC.)
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 DECEMBER 31, 2009
-------------------- ----------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 240,127 $ 645,622
Certificate of deposit 60,793 60,000
Account receivable 10,465 10,000
-------------------- ----------------
Total current assets 311,385 715,622
-------------------- ----------------
Property and equipment, net 4,170,979 3,610,092
-------------------- ----------------
Note receivable, related party - 82,325
Goodwill 368,369 -
Intangible assets 169,374 169,374
-------------------- ----------------
Total other assets 537,743 251,699
-------------------- ----------------
Total assets $ 5,020,107 $ 4,577,413
==================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 956,038 $ 842,149
Litigation settlement payment 30,000 70,000
Deposits 45,043 503,224
Short term loan 30,000 -
Accrued expenses and liabilities 376,756 30,655
-------------------- ----------------
Total current liabilities 1,437,837 1,446,028
-------------------- ----------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY - Unaudited
Preferred shares, no par value, 100,000,000 shares authorized;
no shares issued and outstanding - -
Common shares, $0.001 par value, 200,000,000 shares authorized;
16,047,797 and 11,659,659 shares issued and outstanding
at September 30, 2010 and December 31, 2009, respectively 16,048 11,660
Additional paid in capital 6,015,281 6,180,126
Accumulated deficit (3,781,926) (3,060,401)
-------------------- ----------------
Stockholders' equity before non-controlling interest 2,249,403 3,131,385
Non-controlling interest 1,332,867 -
-------------------- ----------------
Total stockholders' equity 3,582,270 3,131,385
-------------------- ----------------
Total liabilities and stockholders' equity $ 5,020,107 $ 4,577,413
==================== ================
The accompanying notes are an integral part of the financial statements.
1
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(FORMERLY BEDROCK ENERGY, INC.)
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2010 2009 2010 2009
----------------------------------------------------------------------
Net revenues $ 32,007 $ - $ 69,310 $ -
Cost of sales 16,500 - 27,842 -
------------- --------------- -------------- -----------------
Gross profit 15,507 - 41,468 -
------------- --------------- -------------- -----------------
Operating expenses:
General and administrative expense 483,336 336,856 1,108,536 634,126
------------- --------------- -------------- -----------------
Total operating expenses 483,336 336,856 1,108,536 634,126
------------- --------------- -------------- -----------------
Loss from operations (467,829) (336,856) (1,067,068) (634,126)
------------- --------------- -------------- -----------------
Other income:
Other income 778 - 234,131 -
Other expense - - - -
------------- --------------- -------------- -----------------
778 - 234,131 -
------------- --------------- -------------- -----------------
Loss before income taxes (467,051) (336,856) (832,937) (634,126)
Income taxes - - - -
------------- --------------- -------------- -----------------
Net loss (467,051) (336,856) (832,937) (634,126)
Less: Net loss attributable to the
non-conrolling interest 114,412 - 114,412 -
------------- --------------- -------------- -----------------
Net loss attributable to Gulfstar Energy
Corporation and Subsidiaries $ (352,639)$ (336,856)$ (718,525)$ (634,126)
============= =============== ============== =================
Basic and diluted net loss
per common share $ (0.02)$ $ (0.03)$ (0.05)$ $ (0.06)
============= =============== ============== =================
Weighted average number of
common shares outstanding 15,983,209 11,499,653 13,239,794 11,051,699
============= =============== ============== =================
2
The accompanying notes are an integral part of the financial statements.
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(FORMERLY BEDROCK ENERGY, INC.)
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(continued)
Period From May 19, 2006
(Inception) Through
September 30, 2010
- ---------------
$ 69,310
27,842
- ---------------
41,468
- ---------------
3,944,508
- ---------------
3,944,508
- ---------------
(3,903,040)
- ---------------
248,680
(238,978)
- ---------------
9,702
- ---------------
(3,893,338)
-
- ---------------
(3,893,338)
114,412
- ---------------
$(3,778,926)
===============
The accompanying notes are an integral part of the financial statements.
3
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(FORMERLY BEDROCK ENERGY, INC.)
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Period From
OPERATING ACTIVITIES September 30, September 30, (Inception) May19, 2006
2010 2009 Through September 30, 2010
------------- --------------- ---------------
Net loss attributable to Gulfstar Energy
Corporation and Subsidiaries $ (718,525)$ (634,126)$ (3,778,926)
Adjustments to reconcile net loss to net cash
flows provided by (used in) operating activities:
Non-controlling interest (114,412) - (114,412)
Transfer of officer note receivable to compensation 82,325 - -
Depreciation 126,238 13,742 155,011
Changes in:
Other receivables and current assets (465) - (10,465)
Accounts payable and accrued
expenses 114,916 712,060 987,720
Litigation settlement payable (40,000) - 30,000
Deposits (458,181) 501,228 45,043
------------- --------------- ---------------
Net cash provided by (used in) operating activities (1,008,104) 592,904 (2,686,029)
------------- --------------- ---------------
INVESTING ACTIVITIES
Expenditures for property and equipment (24,318) (43,835) (131,222)
Expenditures for construction in progress (661,685) (2,247,621) (4,193,646)
Acquisition of Talon, net of cash acquired 76,977 - 76,977
Investment in certificate of deposit (793) - (60,793)
Expenditures for intangible assets - (114,342) (169,374)
------------- --------------- ---------------
Net cash used in investing activities (609,819) (2,405,798) (4,478,058)
------------- --------------- ---------------
FINANCING ACTIVITIES
Short term loan 30,000 - 30,000
Equity redemptions (54,347) (50,000) (195,983)
Equity contributions 1,236,775 1,886,809 7,570,197
------------- --------------- ---------------
Net cash provided by financing activities 1,212,428 1,836,809 7,404,214
------------- --------------- ---------------
NET CHANGE IN CASH (405,495) 23,915 240,127
CASH, Beginning 645,622 582,749 -
------------- --------------- ---------------
CASH, Ending $ 240,127 $ 606,664 $ 240,127
============= =============== ===============
4
The accompanying notes are an integral part of the financial statements.
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(Formerly Bedrock Energy, Inc.)
(A Company in the Development Stage)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Bedrock Energy, Inc., (the Company) was incorporated in Colorado on August 11,
2004 and on May 5, 2010, its name changed to Gulfstar Energy Corporation.
Acquisitions
On May 5, 2010, Gulfstar Energy Corporation ("the Company") entered into Share
Exchange Agreement (Agreement) with Talon Energy Corporation (Talon). Talon is a
Florida Company engaged in management activities in the oil and gas industry. On
June 24, 2010, the Agreement was replaced by a Revised and Amended share
Exchange and Acquisition Agreement providing essentially the same terms and
requiring and contemplating the delivery of a Share Exchange Agreement for
approximately 60% of Gulfstar Energy Group, LLC and closing thereon and delivery
of an Acquisition Agreement for approximately 40% of Gulfstar Energy Group LLC.
The Agreement provided for the Company to issue 3,509,530 restricted shares of
its common stock to the shareholders of Talon in exchange for the issued and
outstanding shares of Talon. After the exchange of such shares the Company owns
100% of the issued and outstanding stock of Talon.
On June 24, 2010, the Company entered into and completed a Share Exchange
Agreement with Jason Sharp and Timothy Sharp, officers and shareholders of
Gulfstar Energy Group, LLC, a Mississippi Limited Liability Company, for
approximately 60% of Gulfstar Energy Group, LLC, for 11,659,659 shares
(restricted) of common stock of the Company. The Agreement was effective June
30, 2010.
The accounting rules of recapitalization treat Gulfstar Energy Group, LLC as the
acquirer, and accordingly, income statement activity prior to June 30, 2010 will
only include the results of Gulfstar Energy Group, LLC. The income statement
activity of Gulfstar Energy Corporation and Talon Energy Corporation after June
30, 2010 will be consolidated with Gulfstar Energy Group LLC. The Balance Sheets
of Gulfstar Energy Corporation and Talon Energy Corporation are consolidated
with Gulfstar Energy Group, LLC and are shown accordingly, as the condensed
consolidated Balance Sheets as of September 30, 2010.
The Acquisition Agreement with Gulfstar Energy Group, LLC, provides for the
Acquisition of the remaining approximately 40% of the outstanding interests of
the Gulfstar Energy Group, LLC, but requires the effectiveness of a Registration
Statement filed with the Securities and Exchange Commission to register the
remaining shares of common stock offered to the individual interest holders of
Gulfstar Energy Group, LLC.
5
Gulfstar Energy Group, LLC operates a pipeline in Western Kentucky and acts as
syndicator of financing for wells and as the designated operator for wells. It
has mineral right leases on approximately 9,000 acres, has acted as syndicator
and operator of 24 natural gas wells in Kentucky, has built and operates a
16-mile gas pipeline and is transporting gas.
The Company, through its subsidiaries, is currently focusing its operational
efforts, initially, on the operation of and management of its pipeline gas
system and management of existing oil and gas wells and intends to be involved
in oil and gas operation exploration and development drilling. Geographically,
the Company is focused on oil and non-conventional shale gas in the Illinois
Basin of Western Kentucky. The Company's strategic focus will be on lower risk
profile income producing oil and gas assets that have sizable developmental
drilling potential with multiple pay zones. The Company intends to focus its
pipeline development efforts on private producers of constrained and shut-in
natural gas assets in Western Kentucky. The Company intends to provide producers
in its area with a turn key solution of access to an additional developmental
drilling partner, midstream management, and to provide an economical downstream
solution to move existing production towards liquidity.
The Gulfstar Energy Group, LLC acquisition was accounted for as a reverse
recapitalization in which Gulfstar Energy Group, LLC was determined to be the
acquirer for accounting purposes. Prior periods represent those of Gulfstar
Energy Group, LLC and the financial statements have been reclassified for such
presentation. The Talon Energy transaction was accounted for as an acquisition.
Interim Presentation
In the opinion of the management of the Company, the accompanying unaudited
financial statements include all material adjustments, including all normal and
recurring adjustments, considered necessary to present fairly the financial
position and operating results of the Company for the periods presented. The
financial statements and notes are presented as permitted by Form 10-Q, and do
not contain certain information included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2009. It is the Company's opinion
that when the interim financial statements are read in conjunction with the
December 31, 2009 Annual Report on Form 10-K and its Current Report on Form10-Q,
the disclosures are adequate to make the information presented not misleading.
Interim results are not indicative of results for a full year or any future
period.
Principles of Consolidation
The accompanying condensed consolidated balance sheet as of December 31, 2009
and the condensed statements of operations and cash flows for the three and nine
months ended September 30, 2009 and for the period from (inception) May 19, 2006
through June 30, 2010 include the accounts of Gulfstar Energy Group, LLC only.
The accompanying condensed balance sheet as of September 30, 2010 and the
condensed consolidated statements of operations and cash flows for the three and
nine months ended September 30, 2010 include the accounts of Gulfstar Energy
Corporation, Gulfstar Energy Group, LLC and Talon Energy Corporation. All
significant inter-company balances and transactions have been eliminated during
consolidation.
Reclassification
Certain amounts previously reported have been reclassified in connection with
the recapitalization and to conform to current presentation.
6
Going Concern
The Company's financial statements for the nine months ended September 30, 2010
have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. The Company reported an accumulated deficit of $3,781,926 as of
September 30, 2010. The Company recognized revenues from its activities of
$69,310 during the nine months ended September 30, 2010. At September 30, 2010,
the Company had total current assets of $311,385 and total current liabilities
of $1,437,837 for a working capital deficit of $1,126,452. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management is actively pursuing additional financing and revenue solutions but
no assurance can be given that these effects will be successful in raising
capital sufficient to fund operations.
The accompanying financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
Development Stage
The Company, through its subsidiaries, is currently focusing its initial
operational efforts on the exploration of and management of its gas pipeline
system and management of existing oil and gas wells. It intends to be involved
in the oil and gas operation exploration and development drilling. Significant
additional efforts, and funding, neither of which is assured, are required for
the Company to achieve its intended normalized operating level. Substantially
all of the Company's efforts are devoted to the establishment of sufficient
resources and revenue producing assets in order to achieve its overall
operational goals. Though planned principal operations have commenced, no
significant revenue is currently being realized from the company's to-date
activities. The condensed consolidated statement of operations will be shown
inclusive of all cumulative revenue and expense activity since the inception
date of the Company, May 19, 2006, while the company is in the development
stage,
Non-controlling Interest
The non-controlling interest is related to Gulfstar Energy Group, LLC which is
consolidated, but not wholly owned by the Company. The Company holds
approximately 60% of the equity interest in Gulfstar Energy Group, LLC. At
September 30, 2010, the non-controlling interest of approximately 40% was
$1,332,867.
Income Taxes
Income tax expense includes federal and state taxes currently payable and
deferred taxes arising from temporary differences between income for financial
reporting and income tax purposes.
Income taxes are provided at the applicable rates on the basis of items included
in the determination of income for income tax purposes. The Company's effective
income tax rate is different than what would be expected by applying Federal and
State statutory rates to income from continuing operations primarily due to
recording a valuation allowance for the future tax benefit of current operating
losses. The significant permanent difference is meals and entertainment expense.
7
Effective January 1, 2009, the Company adopted ASC guidance regarding accounting
for uncertainty in income taxes. This guidance clarifies the accounting for
income taxes by prescribing the minimum recognition threshold an income tax
position is required to meet before being recognized in the financial statements
and applies to all income tax positions. Each income tax position is assessed
using a two step process. A determination is first made as to whether it is more
likely than not that the income tax position will be sustained, based upon
technical merits, upon examination by the taxing authorities. If the income tax
position is expected to meet the more likely than not criteria, the benefit
recorded in the financial statements equals the largest amount that is greater
than 50% likely to be realized upon its ultimate settlement. At September 30,
2010 and December 31, 2009, there were no uncertain tax positions that required
accrual.
None of the Company's federal or state income tax returns are currently under
examination by the Internal Revenue Service ("IRS") or state authorities.
However calendar years 2006 and later remain subject to examination by the IRS
and respective states.
Deferred income Taxes
Deferred income taxes are provided for timing differences between financial
reporting and income tax purposes under the provisions of accounting for income
taxes, which requires deferred income taxes to be computed on the liability
method and deferred tax assets are recognized only when realization is more
likely than not. The primary timing differences between financial and tax
reporting arise from federal net operating loss carryforwards, accrued officer
compensation, amortization of goodwill for tax reporting and the straight - line
depreciation method that is used for consolidated financial reporting and an
accelerated depreciation method used for tax reporting.
As of September 30, 2010, the Company had net operating loss carryforwards for
income tax and financial reporting purposes of approximately $1,466,338 expiring
in the years 2019 through 2029. The Company has timing differences related to
accrued officer compensation totaling $357,623 and depreciation and amortization
totaling $313,809. The net deferred tax asset resulting from such items is
$515,390.
The Company assessed the likelihood of utilization of the deferred tax assets,
in light of recent and expected continuing losses. As a result of this review,
the deferred tax assets have been fully reserved at September 30, 2010.
Income Per Share
Income per share requires presentation of both basic and diluted income per
common share. Common share equivalents, if used, would consist of any options,
warrants and contingent shares, and would not be included in the weighted
average calculation since their effect would be anti-dilutive due to the net
losses.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures 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,
and such differences may be material to the financial statements.
8
Revenue Recognition
The Company recognizes revenue from its gas and oil activities upon shipment of
the gas and oil to its customers. Royalty revenue is recognized from the
company's well-management activities upon receipt of payment from the customer.
Property and Equipment
Management capitalizes additions to property and equipment. Expenditures for
repairs and maintenance are charged to expense. Property and equipment are
carried at cost. Adjustment of the asset and the related accumulated
depreciation accounts are made for property and equipment retirements and
disposals, with the resulting gain or loss included in the condensed
consolidated statements of operations.
Goodwill
Goodwill of $368,369 consists of the assumption by the Company of Talon's
negative equity of $263,083 and the purchase of Talon's 3,509,530 common shares
valued at $.03 each which totaled $105,286.
Intangible Assets
Intangible assets consist of right of way deposits, which are contracts allowing
the Company to install pipeline on private land. The rights exist indefinitely;
accordingly, no amortization has been recorded. Management evaluates the assets
for impairment whenever events or circumstances indicate a possible impairment.
Significant Customer
The Company's pipeline construction was finished during the six months ended
June 30, 2010 and is currently designed to deliver natural gas to one
manufacturing customer located in Kentucky.
Depreciation
For financial reporting purposes, depreciation of property and equipment is
computed using the straight-line method over the estimated useful lives of
assets at acquisition. For tax reporting purposes, depreciation of property and
equipment is computed using the straight-line and accelerated methods over the
estimated useful lives of assets at acquisition.
Recent Accounting Pronouncements
There were accounting standards and interpretations issued during the nine
months ended September 30, 2010, none of which are expected to have a material
impact on the Company's financial position, operations or cash flows.
9
NOTE 2 - RELATED PARTY TRANSACTIONS
Note Receivable
At December 31, 2009, the Company was owed $82,325 from an officer. The note was
non-interest bearing, unsecured and due no later than two years after the
completion of the pipeline, which was completed during the second quarter of
2010. During the second quarter ended September 30, 2010 and prior to the
acquisition of Gulfstar Energy Group, LLC, the note receivable was written-off
as compensation expense to the officer.
Deposits
At September 30, 2010 and December 31, 2009, the Company had deposits of $45,043
and $503,224, respectively, due to the drilling partnerships described in Note
4.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
September 30, December 31,
2010 2009
-------------------- --------------------
Oil and Gas lease $ 1,122 $ -
Furniture 27,112 12,964
Vehicles 104,110 93,940
Pipeline Supply System 4,193,646 3,531,961
-------------------- --------------------
4,325,990 3,638,865
Less: Accumulated Depreciation 155,011 28,773
-------------------- --------------------
$ 4,170,979 $ 3,610,092
==================== ====================
The Company's natural gas pipeline supply system was placed into operation
during the second quarter of 2010. Depreciation expense was $72,234 and
$126,238, respectively, for the three and nine months ended September 30, 2010,
and $3,966 and $13,742 for the three and nine months ended September 30, 2009.
NOTE 4 - DRILLING VENTURES
As of September 30, 2010 and December 31, 2009, the Company holds net revenue
interests of 12.5% in various wells in Kentucky. The Company syndicates the
financing of these wells through working interest holders and provides
management and operator services. In return for these services, the Company
receives net royalty revenue, only, in the wells, of typically 12.5%. This
income is shown as royalty income in Note 7 - Information on business segments.
As part of its services provided to the drilling partnerships, the Company
collects the contributions of the drilling partnerships' investors. Using these
funds, the Company pays for the expenses incurred by the partnerships. The
Company records no expenses of the partnerships on its own statements of
operations. The excess of contributions collected over partnership expenses paid
are shown as deposits on the balance sheets. As of September 30, 2010 and
December 31, 2009, the Company had deposits due to the drilling partnerships in
the amounts of $45,043 and $503,224, respectively.
10
NOTE 5 - LITIGATION SETTLEMENT PAYMENT
In March 2010, the Company settled certain environmental litigation, which was
in process at December 31, 2009. As a result of the settlement, the Company was
required to pay $70,000 during the year ending December 31, 2010. This amount
was paid by the Company during the second quarter of 2010 in addition to
$100,000, which was paid during the year ended December 31, 2009. Additionally,
the Company received $230,000 from a consultant contracted by the Company for
services provided related to the environmental litigation. The income from the
settlement with the consultant was recognized as Other Income during the first
quarter of 2010 and is included in the Condensed Consolidated Statement of
Operations.
In February, 2009, the Company received two Notices of Violation from the
Commonwealth of Kentucky's Energy and Environment Cabinet ("Cabinet") as a
result of the Company's failure to obtain appropriate Permits in advance of
certain construction activities and for "causing or contributing to the
pollution of the waters of the Commonwealth of Kentucky" during 2007. The
Company neither admitted to nor denied the alleged violations but accepted civil
responsibility for the violations on May 6, 2010. As a result of the settlement
of the dispute, the Company has agreed to pay a civil penalty of $60,000 to the
Commonwealth of Kentucky by way of 12 equal monthly installment payments,
beginning in May of 2010. The Company recorded a $60,000 General &
Administration Expense during the second quarter of 2010 to recognize the
settlement with the Cabinet and as of September 30, 2010, $30,000 of the
Liability remains unpaid and is included in Accounts Payable.
NOTE 6 - OPERATING LEASES
During April 2009, the Company entered into a lease agreement with an unrelated
third party for a building. The lease agreement requires monthly payments of
$750 and expires April 2012. Total rent expense under this lease was $6,750 for
the nine months ended September 30, 2010.
The following is a schedule of minimum future rental payments under the
operating lease described above:
Year ending December 31, Amount
------------------------ ------
2010 $ 9,000
2011 9,000
2012 3,000
--------
$ 21,000
========
NOTE 7 - Information on Business Segments
The Company organizes its business segments based on the nature of the products
and services offered. The Company primarily focuses on the management of its
pipeline gas system and management of existing oil and gas wells and intends to
be involved in oil and gas operation exploration and development drilling. Such
management and operational activities are concentrated in Gulfstar Energy Group,
LLC.
11
The Company operates two business segments: Royalty Income activities resulting
from its 12.5% share of gas and oil revenues from each producing well that it
manages and Pipeline activities from which the Company buys gas and oil from its
pipeline suppliers and sells the gas and oil to its Customer.
During the second quarter, the Company completed its pipeline project thereby
allowing it to connect the pipeline to producing wells. Gas that was captured
from the wells was transported via the pipeline and sold to its Customer. Based
on an agreement with its Customer, a portion of the final selling price of the
gas that the Company receives from its Customer will be paid to the Suppliers.
This payment Agreement represents the Company's direct cost of sales of the gas
purchase. All gas sales occur at the spot price of the day's shipment and no
hedging of the purchases or expected sales is made by the Company.
The Assets of the Royalty Income segment represent the unused investment
proceeds that have been received from the Investors and the amount of
capitalized leases that the Company has with its Customers that provide the
Company with access to the owners' land-sites. The Assets of the Pipeline
Segment represent the net capitalized cost of the Pipeline Project.
The following data is presented for the Company's two Operating Segments:
Royalty Income activities and Pipeline activities.
Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
Net Revenues
Royalty Income Activities 7,134 - 16,192 -
Pipeline Activities 24,873 - 53,118 -
----------------- ---------------- ----------------- ----------------
Total Revenue 32,007 - 69,310 -
Operating Income (Loss)
Royalty Income Activities 7134 - 16,192 -
Pipeline Activities 8,373 - 25,276 -
Corporate Expenses (483,336) (336,856) (1,108,536) (634,126)
Other Income 778 - 234,131 -
----------------- ---------------- ----------------- ----------------
Loss before income taxes (476,051) (336,856) (832,937) (634,126)
================= ================ ================= ================
Total Assets 9/30/2010 12/31/2009
------------ -------- --------
Royalty Income Activities 83,138 521,835
Pipeline Activities 4,936,969 4,055,578
----------------- ----------------
Total Assets 5,020,107 4,577,413
================= ================
NOTE 8 - STOCKHOLDERS' EQUITY
Preferred Shares
The Company is authorized to issue 100,000,000 shares of no par value preferred
stock. As of September 30, 2010, the Company has no shares issued and
outstanding.
Common Shares
The Company is authorized to issue 200,000,000 shares of $.001 voting common
stock. As of September 30, 2010 there were a total of 16,047,797 shares of
common stock issued and outstanding. On May 5, 2010, the Board of Directors of
the Company authorized a one share for eight share reverse stock split,
effective on May 5, 2010. All share references have been adjusted for the
reverse split.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward-looking statements.
OPERATIONS
On May 5, 2010, Gulfstar Energy Corporation ("the Company") entered into Share
Exchange Agreement (Agreement) with Talon Energy Corporation (Talon). Talon is a
Florida Company engaged in management activities in the oil and gas industry. On
June 24, 2010, the Agreement was replaced by a Revised and Amended share
Exchange and Acquisition Agreement providing essentially the same terms and
requiring and contemplating the delivery of a Share Exchange Agreement for
approximately 60% of Gulfstar Energy Group, LLC and closing thereon and delivery
of an Acquisition Agreement for approximately 40% of Gulfstar Energy Group, LLC.
The Agreement provided for the Company to issue 3,509,530 restricted shares of
its common stock to the shareholders of Talon in exchange for the issued and
outstanding shares of Talon. After the exchange of such shares the Company owns
100% of the issued and outstanding stock of Talon.
On June 24, 2010, the Company entered into and completed a Share Exchange
Agreement with Jason Sharp and Timothy Sharp, officers and equity members of
Gulfstar Energy Group, LLC, a Mississippi Limited Liability Company, for
approximately 60% of Gulfstar Energy Group, LLC, for 11,659,659 shares
(restricted) of common stock of the Company. The Agreement was effective on June
30, 2010.
The accounting rules of recapitalization treat Gulfstar Energy Group, LLC as the
acquirer, and accordingly, income statement activity prior to June 30, 2010 will
only include the results of Gulfstar Energy Group, LLC. The income statement
activity of Gulfstar Energy Corporation and Talon Energy Corporation after June
30, 2010 will be consolidated with Gulfstar Energy Group LLC. The Balance Sheets
of Gulfstar Energy Corporation and Talon Energy Corporation are consolidated
with Gulfstar Energy Group, LLC and are shown accordingly, as the condensed
consolidated Balance Sheets as of September 30, 2010.
The Acquisition Agreement with Gulfstar Energy Group, LLC, provides for the
Acquisition of the remaining approximately 40% of the outstanding interests of
Gulfstar Energy Group, LLC, but requires the effectiveness of a Registration
Statement filed with Securities and Exchange Commission to register the
remaining shares of common stock offered to the individual interest holders of
Gulfstar Energy Group, LLC.
13
The Company, through its new subsidiaries, is initially focusing its efforts, on
the operation and continuing construction of its, pipeline gas system and
management of existing oil and gas wells. Initial construction of the pipeline
was completed the second quarter of 2010. The Company intends to be involved in
oil and gas operations, exploration and development drilling which is
geographically focused on oil and non-conventional shale gas in the Illinois
Basin of Western Kentucky. The Company's strategic focus is on lower risk
profile income producing oil and gas assets that have sizable developmental
drilling potential with multiple pay zones. The Company intends to focus its
pipeline development efforts on private producers of constrained and shut-in
natural gas assets in Western Kentucky. The Company intends to provide producers
in its area with a turnkey solution of access to an additional developmental
drilling partner, midstream management, and to provide an economical downstream
solution to move existing production towards liquidity.
As of September 30, 2010 and December 31, 2009, the Company holds net revenue
interests of 12.5% in various wells in Kentucky. The Company syndicates the
financing of these wells through working interest holders and provides
management and operator services. In return for these services, the Company
receives a net revenue interest, only, in the wells, of typically 12.5%. This
income is shown as royalty income in Note 7 - Information on Business Segments.
As part of its services provided to the drilling partnerships, the Company
collects the contributions of the drilling partnerships' investors. Using these
funds, the Company pays for the expenses incurred by the partnerships. The
Company records no expenses of the partnerships on its own statements of
operations. The excess of contributions collected over partnership expenses paid
are shown as deposits on the balance sheets. As of September 30, 2010 and
December 31, 2009, the Company had deposits due to the drilling partnerships in
the amounts of $45,043 and $503,224, respectively.
The Company will need substantial additional capital to support its proposed
future energy operations. There are currently minimal revenues and limited
committed sources for additional funds as of date hereof. No representation is
made that any funds will be available when needed. In the event funds cannot be
raised when needed, the Company may not be able to carry out its business plan,
may never achieve projected levels of sales or royalty income, and could fail in
business as a result of these uncertainties.
Decisions regarding future participation in exploration wells or geophysical
studies or other activities will be made on a case-by-case basis and in any
particular case, decide to participate or decline participation. If
participating, we may pay our proportionate share of costs to maintain our
proportionate interest through cash flow or debt or equity financing. If
participation is declined, we may elect to farmout, non-consent, sell or
otherwise negotiate a method of cost sharing in order to maintain some
continuing interest in the prospect.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2010 Compared to the Three Months Ended
September 30, 2009
During the three months ended September 30, 2010, we recognized revenues of
$32,007 from our pipeline and oil and gas management activities with
corresponding direct costs of $16,500 for a gross profit of $15,507.
14
During the three months ended September 30, 2010, we incurred total operating
expenses of $483,336 compared to $336,856 during the three months ended
September 30, 2009. The increase of $146,480 is the result of increases in
general and administrative expenses resulting from the recapitalization of
Gulfstar Energy Group, LLC and the acquisition of Talon Energy Corporation and
the increased operational activities of the Company as a result of completion of
the pipeline.
During the three months ended September 30, 2010, we incurred a net loss of
$352,639 compared to a net loss of $336,856 during the three months ended
September 30, 2009. The increase of $15,783 is the result of $114,412 in net
loss attributable to the non-controlling interest and increases in general and
administrative expenses of $141,482, which are reduced by the increase in gross
profit of $15,507 and other income of $778.
For the Nine Months Ended September 30, 2010 Compared to the Nine Months Ended
September 30, 2009
During the nine months ended September 30, 2010, we recognized revenues of
$69,310 from our pipeline and oil and gas management activities with a
corresponding direct cost of $27,842, which yielded a gross profit of $41,468.
During the nine months ended September 30, 2010, we incurred total operating
expenses of $1,108,536 compared to $634,126 during the nine months ended
September 30, 2009. The increase of $474,410 is the result of increases in
general and administrative expenses resulting from the recapitalization of
Gulfstar Energy Group, LLC and the acquisition of Talon Energy Corporation and
the Company's increased spending activities associated with the completion of
the pipeline.
During the nine months ended September 30, 2010, we incurred a net loss of
$718,525 compared to a net loss of $634,126 during the nine months ended
September 30, 2009. The increase of $84,399 is the result of $114,412 in net
loss attributable to the non-controlling interest and increases in general and
administrative expenses of $474,410, which are reduced by the increase in gross
profit of $41,468 and other income of $234,131. The increase in other income was
primarily the result of a favorable litigation settlement of $230,000 recognized
in the first quarter of 2010 that related to a disputed consulting agreement
with an outside consultant.
LIQUIDITY
At September 30, 2010, we had total current assets of $311,385 consisting of
$240,127 in cash and cash equivalents, $60,793 in a Certificate of Deposit and
$10,465 in accounts receivable. At September 30, 2010, we had total current
liabilities of $1,437,837, consisting of $956,038 in accounts payable, $30,000
litigation settlement payment, deposits of $45,043 and $376,756 in accrued
expenses and liabilities. At September 30, 2010, we had a working capital
deficit of $1,126,452 and an accumulated deficit of $3,781,926.
15
During the nine months ended September 30, 2010, we used net cash of $1,008,104
in operational activities. During the nine months ended September 30, 2009, we
received net cash of $592,904 from operational activities.
During the nine months ended September 30, 2010, we recognized a net loss of
$718,525 which was adjusted for a non-cash activity of $94,151. During the nine
months ended September 30, 2009, we recognized a net loss of $634,126 which was
adjusted for non-cash activity of $13,742.
During the nine months ended September 30, 2010, the Company used funds of
$609,819 in its investing activities. Investing activities included expenditures
of $661,685 in construction of the pipeline and $24,318 for property and
equipment.
During the nine months ended September 30, 2009, the Company used $2,405,798 in
its investing activities. Investing activities included expenditures of
$2,247,621 in construction of the pipeline, $43,835 for property and equipment
and $114,342 for intangible assets.
During the nine months ended September 30, 2010, the Company received $1,212,428
net proceeds from its financing activities. Financing activities included
$1,236,775 in equity contributions, $54,347 paid in equity redemptions and
$30,000 in proceeds from a short term loan.
During the nine months ended September 30, 2009, the Company received $1,836,809
net proceeds from its financing activities. Financing activities included
$1,886,809 in equity contributions and $50,000 paid in equity redemptions.
In March 2010, the Company settled certain environmental litigation, which was
in process at December 31, 2009. As a result of the settlement, the Company was
required to pay $70,000 during the year ending December 31, 2010. This amount
was paid by the Company during the second quarter of 2010 in addition to
$100,000, which was paid during the year ended December 31, 2009. Additionally,
the Company received $230,000 from a consultant contracted by the Company for
services provided related to the environmental litigation.
Need for Additional Financing
We do not have capital sufficient to meet our cash needs. We will have to seek
loans or equity placements to cover such cash needs. Once exploration commences,
our needs for additional financing are likely to substantially increase.
No commitments to provide additional funds have been made by our management or
other stockholders. Accordingly, there can be no assurance that any additional
funds will be available to us to allow us to cover our expenses as they may be
incurred.
Going Concern
The Company's financial statements for the nine months ended September 30, 2010
have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. The Company reported an accumulated deficit of $3,781,926 as of
September 30, 2010. The Company recognized revenues from its activities of
$69,310 during the nine months ended September 30, 2010. At September 30, 2010,
the Company had total current assets of $311,385 and total current liabilities
of $1,437,838 for a working capital deficit of $1,126,452. This condition raises
substantial doubt about the Company's ability to continue as a going concern.
16
Management is actively pursuing additional financing and revenue solutions.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal Financial Officer), as
appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), our Chief Executive Officer and Chief
Financial Officer for the quarter ended September 30, 2010, carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures are ineffective in timely alerting them to material information
required to be included in our periodic SEC filings and to ensure that
information required to be disclosed in our periodic SEC filings is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required
disclosure.
We have identified certain material weaknesses of accounting relating to a
shortage of accounting and reporting personnel due to limited financial
resources and the size of our Company. This material weakness can lead to the
following:
o An inability to ensure there is timely analysis and review of accounting
records, spreadsheets, and supporting data; and
o an inability to effectively monitor access to, or maintain effective
controls over changes to, certain financial application programs and
related data.
Considering the nature and extent of our current operations and any risks or
errors in financial reporting under current operations and the fact that we have
been a small business with limited employees, such items caused a weakness in
internal controls involving the areas disclosed above.
Due to financial restrictions at this time, the Company has not taken any action
to resolve such weakness.
There was no change in our internal control over financial reporting that
occurred during the fiscal quarter ended September 30, 2010, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company made the following unregistered sales of its securities from July 1,
2010 through September 30, 2010.
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
------------ ------------------- ------------- ------------- ------------------
July 2010 Common Stock 50,000 Cash Proceeds Business Associates
August 2010 Common Stock 176,667 Cash Proceeds Business Associates
September 2010 Common Stock 10,000 Cash Proceeds Business Associates
Exemption From Registration Claimed
All of the sales by the Company of its unregistered securities were made by the
Company in reliance upon Section 4(2) of the Securities Act of 1933, as amended
(the "1933 Act"). All of the individuals and/or entities listed above that
purchased the unregistered securities were almost all existing shareholders, all
known to the Company and its management, through pre-existing business
relationships, as long standing business associates and employees. All
purchasers were provided access to all material information, which they
requested, and all information necessary to verify such information and were
afforded access to management of the Company in connection with their purchases.
All purchasers of the unregistered securities acquired such securities for
investment and not with a view toward distribution, acknowledging such intent to
the Company. All certificates or agreements representing such securities that
were issued contained restrictive legends, prohibiting further transfer of the
certificates or agreements representing such securities, without such securities
either being first registered or otherwise exempt from registration in any
further resale or disposition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. REMOVED AND RESERVED
18
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS
Exhibits. The following is a complete list of exhibits filed as part of this
Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 10.1 Material Contracts - Letter of Intent with Maxim Group, LLC
regarding proposed private placement, filed as Form 8-K dated August 26, 2010.
Exhibit 10.2 Material Contracts - Letter of Intent with Timberline Production
Company, LLC, regarding acquisition of working interest, filed as Form 8-K dated
October 18, 2010.
Exhibit 19 Report Furnished to Security Holders - Notice of Exempt Offering of
Securities, filed as Form D dated October 25, 2010.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act*
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act*
Exhibit 32.1 Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act*
Exhibit 32.1 Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act*
*Filed herewith.
19
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Gulfstar Energy, Inc.
(Registrant)
Dated: November 15, 2010 By: /s/Robert McCann
----------------
Robert McCann,
Chief Executive Officer
Dated: November 15, 2010 By: /s/Stephen Warner
-----------------
Stephen Warner,
Chief Financial Officer
20