UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2010
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _____________
Commission file number: 333-151398
GULFSTAR ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
Colorado 02-0511381
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State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
600 17th Street Suite 2800 Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
303-260-6492
Securities registered pursuant to Section 12(b) of the Act:
Title of each class registered Name of each exchange
on which registered
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Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. |_|
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 preceding 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 has submitted electronically and
posted on its corporate Website, if any, every Interactive Data file required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (section 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One).
Large accelerated filer [___] Accelerated filer [___] Non-accelerated filer
[___] 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|
The aggregate market value of voting stock held by non-affiliates of the
registrant was $0 as of June 30, 2010, since the common stock of the Gulfstar
Energy does not trade on any of the markets.
There were 17,494,087 shares outstanding of the registrant's Common Stock as of
April 13, 2011.
Page
TABLE OF CONTENTS
PART I
ITEM 1 Business 1
ITEM 1 A. Risk Factors 10
ITEM 1 B. Unresolved Staff Comments 18
ITEM 2 Properties 18
ITEM 3 Legal Proceedings 19
ITEM 4 Removed and Reserved 19
PART II
ITEM 5 Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 20
ITEM 6 Selected Financial Data 22
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 32
ITEM 7 A. Quantitative and Qualitative Disclosures About Market Risk 33
ITEM 8 Financial Statements and Supplementary Data 30
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 54
ITEM 9 A. Controls and Procedures 55
ITEM 9B Other Information 56
PART III
ITEM 10 Directors, Executive Officers, and Corporate Governance 57
ITEM 11 Executive Compensation 60
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 64
ITEM 13 Certain Relationships and Related Transactions, and Director Independence 66
ITEM 14 Principal Accounting Fees and Services 67
PART IV
ITEM 15 Exhibits, Financial Statement Schedules 68
SIGNATURES 69
FORWARD LOOKING STATEMENTS
This document includes forward-looking statements, including, without
limitation, statements relating to Gulfstar Energy Corporation ("Gulfstar")
plans, strategies, objectives, expectations, intentions and adequacy of
resources. These forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause Gulfstar's actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. These factors include, among others, the following: ability of
Gulfstar to implement its business strategy; ability to obtain additional
financing; Gulfstar's limited operating history; unknown liabilities associated
with future acquisitions; ability to manage growth; significant competition;
ability to attract and retain talented employees; future government regulations;
and other factors described in this Annual Report on Form 10-K or in other of
Gulfstar's filings with the Securities and Exchange Commission (SEC). Gulfstar
is under no obligation, to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
For further information about these and other risks, uncertainties and factors,
please review the disclosure included in this report under Item 1A "Risk
Factors."
PART I
ITEM 1. BUSINESS
General
The following is a summary of some of the information contained in this
document. Unless the context requires otherwise, references in this document to
"We," Us," or the "Company" are to Gulfstar Energy Corporation.
Description of Business
History of Gulfstar Energy Corporation
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CellTouch, Inc., now known as Gulfstar Energy Corporation, was incorporated in
Colorado on August 11, 2004 and changed its name to Bedrock Energy, Inc. on
October 18, 2007. On September 21, 2004, CellTouch, Inc. and Enviromart.com
Corporation were merged under the laws of the State of Colorado and CellTouch
Inc. became the surviving entity. Activities through December 31, 2009 included
the raising of equity capital and the formation of a business plan to merge with
or acquire and develop assets from a company in the oil and gas industry.
On May 5, 2010, the Board of Directors of the Company and a majority of the
Company's stockholders approved a reverse split of the Company's issued and
outstanding common stock on May 5, 2010 on a 1 for 8 basis. In addition, on May
5, 2010, the Company filed an Amendment to its Articles of Incorporation with
the Secretary of State of Colorado to change its name from Bedrock Energy, Inc.
to Gulfstar Energy Corporation.
1
Gulfstar Energy Group, LLC Reverse Recapitalization and Talon Energy Corporation
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Acquisition
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On May 5, 2010, the Company entered into Share Exchange Agreement (Agreement)
with Talon Energy Corporation (Talon). Talon is a Florida Company engaged in
management and capital 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 58.3% of Gulfstar
Energy Group LLC and closing thereon and delivery of an Acquisition Agreement
for 41.7% 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 owned 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 ("Gulfstar LLC"), a Mississippi Limited Liability
Company, for 58.3% of Gulfstar, LLC, for 11,659,659 shares of restricted common
stock of the Company.
The Share Exchange Agreement with Gulfstar LLC, provides for the acquisition of
the remaining outstanding interests of the Gulfstar LLC, but requires the
effectiveness of a Registration Statement filed with SEC to register the
remaining shares of common stock for offering to the individual interest holders
of Gulfstar LLC. The Company at the time of this filing has not acquired the
remaining 41.6% of Gulfstar LLC.
As a result, the Company now owns 58.4% of Gulfstar LLC and 100% of Talon.
The accounting rules for recapitalizations require Gulfstar LLC to be treated as
the acquirer, and accordingly, financial information prior to June 30, 2010 only
includes Gulfstar LLC. The financial information of Gulfstar Energy Corporation
and Talon after June 30, 2010 is consolidated with Gulfstar LLC.
Company Overview
The Company, through its subsidiaries as described below, is currently focusing
its operational efforts, initially, on the operation and management of its
pipeline gas gathering system and management of existing oil and gas wells and
intends to be involved in oil and gas operation exploration. The Company
intends to leverage its assets to develop energy prospects for its own account
or co-venture with other companies which can benefit from an association with
the Company's pipelines and management.
The Company's strategic focus in this area 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 initial 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.
The Company needs substantial additional capital to support its proposed future
operations. There are currently minimal revenues and limited committed sources
for additional funding. No representation can be made that 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.
2
Gulfstar LLC
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Gulfstar LLC, the Company's 58.4% owned subsidiary, operates in Western
Kentucky. During the year ended December 31, 2010, it completed construction of
its gas gathering pipeline system that includes approximately 16 miles of main
pipeline. The pipeline transports natural gas to a gas plant and includes
approximately 5 miles of feeder lines, which are connected to 18 producing
wells. During the second half of 2010, Gulfstar LLC started transporting limited
quantities of gas.
In addition to the management and operation of the pipeline, Gulfstar LLC serves
as a manager and operator of approximately 20 wells. Gulfstar LLC holds
overriding royalty interests of approximately 12.5% in the wells and has
financed these wells through offering a 100% working interest in the wells in
exchange for contribution of funds to drill the wells.
The Pipeline
Gulfstar LLC's pipeline is located in the Illinois Basin of Western Kentucky.
This area is known for its oil production in the early to mid 1900s and its
non-conventional shale gas. Shale gas is considered an "unconventional" source
of natural gas due to the insufficient permeability of shale formations. Because
of this low permeability, shale deposits require fracturing in order to release
the oil and gas supplies. Recent technology developments, such as horizontal
drilling and hydraulic fracturing, have made the drilling for gas in this area
possible and economical.
In addition to the current 18 producing wells connected to the gas gathering
pipeline system that includes a total of approximately 21 miles of pipeline,
Gulfstar LLC has identified up to 50 additional wells that are available for
connection to the pipeline from other independent owners in the area.
The pipeline has a throughput capacity of 18 Million Cubic Feet per Day
(MMcf/d.) During the year ended December 31, 2010, the pipeline transported an
average of 119 Mcf/d of gas. Currently, the pipeline is not operating at full
capacity.
With approximately 300 shut in wells within 3.5 miles of Gulfstar LLC's
pipelines, Gulfstar LLC believes it is positioned to be the most viable gas
gatherer in the area. Gulfstar LLC intends to contract for existing shut-in gas
production between 45% to 55% of market price, and subsequently sell the gas
downstream at market price for its own account.
The pipeline operations transport the gas to a burner tip processing plant near
Bowling Green, KY where it is sold pursuant to a gas purchase agreement.
During the fourth quarter of 2010, Gulfstar LLC began drilling a horizontal well
located in Warren County, KY with total costs of $287,024 as of December 31,
2010. Gulfstar LLC owns a working interest of 58.4% and a net revenue interest
of 43.8% and Gulfstar LLC anticipates completion of this well during the second
quarter of 2011. After completion, this well will be connected to the pipeline.
3
There are a large number of companies and individuals engaged in the exploration
for minerals and oil and gas; accordingly, there is a high degree of competition
for desirable properties. Almost all of the competing companies and individuals
engaged have substantially greater technical and financial resources than does
the Company.
Oil and Gas Property Management
Gulfstar LLC is the manager and operator of approximately 20 wells in the
Illinois Basin in Western Kentucky. Of these 20 wells, 18 wells are connected to
the pipeline that is operated by Gulfstar LLC. Gulfstar LLC managed to date the
drilling of the 20 wells of which 15 wells produce only high BTU content gas, 2
wells produce both gas and oil and 3 wells produce only oil. Based on initial
well production, the Company believes further developmental work on its existing
wells is required to achieve desired gas production rates.
Chart Production Type of Wells
Oil Gas Total
--- --- -----
5 17 20
Gulfstar LLC holds overriding royalty interests of approximately 12.5% in the
wells. Gulfstar LLC has financed the cost of these wells through working
interest holders and does not hold any working interest in the wells.
Location Gross Producing Wells Net Producing Wells
-------- --------------------- -------------------
Kentucky 20 3 (12.5% Royalty)
As part of its services provided in management of the wells, Gulfstar LLC offers
working interests in the properties on behalf of the leaseholders. Using these
funds, Gulfstar LLC pays for the costs incurred in the construction, reworking
and development of the wells.
Gulfstar LLC has approximately 9,000 acres under an 87.5% net lease with
approximately 10,000 acres under option. Under its proposed drilling program,
Gulfstar LLC has:
Location Gross Acres Net Acres
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Kentucky 9,232 8,078 (87.5%)
*There are approximately 3,925 acres held by production.
Competition
Gulfstar LLC competes for market growth with other natural gas-transmission
companies in the Illinois Basin region and with other companies providing
natural gas-storage services. In addition, Gulfstar LLC faces growing
competition from third-party gathering companies that build gathering lines to
allow producers to make direct connections to competing pipeline systems.
Other Oil and Gas Opportunities
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On February 12, 2009, the Company, through leases, acquired a 100% net revenue
interest in 240 acres in Morgan County Colorado, which is located approximately
forty five miles north of Denver, Colorado and lies in what is called the
Denver, Julesberg Basin (DJ Basin). The DJ Basin is the predominant geological
structure in Northern Colorado. The shallow "J" and "D" sand formations of the
DJ Basin constitutes a common source of oil and gas. The acreage in Morgan
County has forty (40) acre drilling and spacing units for the production of oil
and gas from the "D" and "J" sand formations.
The acreage contained within these leases have a 10-year "primary term" (2018),
but may be extended if drilling operations are in progress, or if other
conditions are met. The term of the lease can continue as long as the lessee
produces oil and gas in paying quantities during the term of the lease.
4
The Morgan County acreage lies a short distance from the western portion of the
prolific Niobrara Beecher Island natural gas trend and deeper Lansing-Kansas
City oil production. Nearby fields include the Frenchman Creek prospect area in
Phillips County, Colorado containing multiple Niobrara structures which could
yield up to 20 billion cubic feet (Bcf) gross of natural gas resource potential,
the DeNova Field, which has produced greater than 30 Bcf of natural gas to date,
and the Republican and Mildred Fields, which have produced greater than 62 Bcf
of natural gas.
Currently, the Company has not taken any action to develop this opportunity.
On October 18, 2010, the Company entered into a Letter of Intent with Timberline
Production Company, LLC of Casper, WY to purchase 100% of the working interests
in and assets connected to oil and gas leases located in the Greasewood Field in
Niobrara County, WY for cash of $75 Million. In conjunction with this
transaction, the Company revised its engagement with Maxim Group LLC to provide
gross proceeds of up to $100 Million from a proposed private placement of
Company equity and/or convertible debt. The precise terms of the private
placement will be negotiated between Maxim Group LLC, potential investors and
the Company. At the time of this filing, these proposed transactions have not
been finalized or closed.
Further, on January 19, 2011, the Company signed a Letter Agreement with Wright
Capital Corporation to pursue a proposed financing of up to $90 Million to be
used to assist the Company in the proposed purchase of Timberline Production
Company's 100% working interest in and assets connected to oil and gas leases
and for the further development of the Company's existing pipeline structure in
Kentucky. The definitive terms of the proposed transaction is subject to an
agreement between Wright Capital Corporation and the Company.
Talon
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As of June 30, 2010, Talon, a Florida corporation, was engaged in management and
capital activities in the oil and gas industry and provided the capabilities to
identify potential oil and gas opportunities. Robert McCann and Steve Warner,
officers and directors of Talon and who are now officers and directors of the
Company, have brought years of experience to the Company with the ability to
raise capital for operations and possible acquisitions by the Company as well as
their experience with public companies.
As of December 31, 2010, Talon has merged its operations into the Company and
both Robert McCann and Steve Warner are now working for the Company.
The Markets
Natural Gas Supply and Demand:
The National Petroleum council estimates the U.S. demand for natural gas to
increase from 22 trillion cubic feet (TCF) in 1998 to over 31 TCF by 2015. This
nearly 50% increase in demand for natural gas, coupled with constrained supplies
from conventional sources and storage facilities, suggests a need for new gas
sources. Although conventional gas sources such as high permeability sandstones
supply about 60% of the U.S. demand (13 TCF in 1998), projections indicate a
flat to declining supply through year 2015. The shortfall in conventional gas
supply is expected to be taken up by production from un-conventional sources
such as tight gas sandstones/shales, associated gas, and coal bed methane.
5
Oil and Gas:
The availability of a ready market for oil and gas discovered, if any, will
depend on numerous factors beyond the Company's control, including the proximity
and capacity of refineries, pipelines, and the effect of state regulation of
production and of federal regulations of products sold in interstate commerce,
and recent intrastate sales. The market price of oil and gas are volatile and
beyond the Company's control. The market for natural gas is also unsettled, and
gas prices have increased dramatically in the past four years with substantial
fluctuation, seasonally and annually.
There generally are only a limited number of gas transmission companies with
existing pipelines in the vicinity of a gas well or wells. In the event that
producing gas properties are not subject to purchase contracts or that any such
contracts terminate and other parties do not purchase the Company's gas
production, there is no assurance that the Company will be able to enter into
purchase contracts with any transmission companies or other purchasers of
natural gas and there can be no assurance regarding the price which such
purchasers would be willing to pay for such gas. There presently exists an
oversupply of gas in the certain areas of the marketplace due to pipeline
capacity, the extent and duration of which is not known. Such oversupply may
result in restrictions of purchases by principal gas pipeline purchasers.
Global Oil Supply and Demand: World demand for oil has fluctuated wildly in the
past year.
While there has been much growth in demand from Asia, due mainly to rapidly
growing economies in China and India, there has been a decline in oil demand due
to the worldwide recession. In 2004, China passed Japan as the world's
second-largest consumer of oil. It used an average of 6.63 million barrels of
oil every day, which is about twice what it produces. Its oil imports doubled
between 1999 and 2004. China's demand for oil is expected to continue to
increase each year. If that happens, China will surpass the United States as the
world's largest consumer of oil by 2015. Similarly, India's oil needs are
expected to grow by four to seven percent a year.
Up to this point, the world's oil producers have been able to meet demand.
However, should demand increase substantially, or production decrease for any
reason, there could be a significant spike in the price of oil and possible
shortages. The London-based Oil Depletion Analysis Centre recently released a
study that predicted tight oil supplies through the rest of this decade, even if
all of the new major oil recovery projects scheduled to come on stream over the
next six years meet their targets. The only way to avoid it, the study said, is
for demand to drop sharply, which it did in the last half of 2008.
Increasing Supply: There are two ways to increase oil supply: getting more oil
out of existing wells and finding new sources. Extraction from existing wells
has been getting steadily more efficient; according to The Economist, "A few
decades ago, the average oil recovery rate from reservoirs was 20%; thanks to
remarkable advances in technology, this has risen to about 35%," with future
increases expected. Methods for recovering oil from shale are notable for
continuing to improve. Furthermore new sources, including the continental shelf,
continue to be opened for exploration.
6
Areas of Interest and Property: We will consider the following criteria when
evaluating whether to acquire an oil and gas prospect:
1) Proximity to existing production;
2) Target zone is less than 4,000 feet in depth;
3) Location in a known producing region;
4) Whether there is well control data from nearby drill sites;
5) Favorable geologic evaluations by local geologists of production
potential;
6) Reasonable cost of acquisition;
7) Term of lease and drilling commitment, if any; and
8) Reasonable drilling cost estimates.
Upon selecting a lease for purchase, a geochemical survey of the property will
be initiated.
COMPETITION, MARKETS, REGULATION AND TAXATION
Competition: There are a large number of companies and individuals engaged in
the exploration for minerals and oil and gas; accordingly, there is a high
degree of competition for desirable properties. Most of the domestic natural gas
reserves are concentrated in larger U.S. based companies. Many of the companies
and individuals so engaged have substantially greater technical and financial
resources than us.
Markets: The availability of a ready market for oil and gas discovered will
depend on numerous factors beyond the control of us, including the proximity and
capacity of refineries, pipelines, and the effect of state regulation of
production and of federal regulations of products sold in interstate commerce,
and recent intrastate sales. The market price of oil and gas are volatile and
beyond our control with substantial fluctuation, seasonally and annually.
There generally are only a limited number of gas transmission companies with
existing pipelines in the vicinity of a gas well or wells. In the event that
producing gas properties are not subject to purchase contracts or that any such
contracts terminate and other parties do not purchase our gas production, there
is no assurance that we will be able to enter into purchase contracts with any
transmission companies or other purchasers of natural gas and there can be no
assurance regarding the price which such purchasers would be willing to pay for
such gas. There presently exists an oversupply of gas in the certain areas of
the marketplace due to pipeline capacity, the extent and duration of which is
not known. Such oversupply may result in restrictions of purchases by principal
gas pipeline purchasers.
Governmental Regulations: Regulation of Oil and Natural Gas Production. Our oil
and natural gas exploration, production and related operations, when developed,
are subject to extensive rules and regulations promulgated by federal, state,
tribal and local authorities and agencies. For example, some states in which we
may operate require permits for drilling operations, drilling bonds and reports
concerning operations and impose other requirements relating to the exploration
and production of oil and natural gas. Such states may also have statutes or
regulations addressing conservation matters, including provisions for the
unitization or pooling of oil and natural gas properties, the establishment of
maximum rates of production from wells, and the regulation of spacing, plugging
and abandonment of such wells. Failure to comply with any such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and gas industry will most likely increase our cost of doing business and
may affect our profitability. Although we believe we are currently in
substantial compliance with all applicable laws and regulations, because such
rules and regulations are frequently amended or reinterpreted, we are unable to
predict the future cost or impact of complying with such laws. Significant
expenditures may be required to comply with governmental laws and regulations
and may have a material adverse effect on our financial condition and results of
operations.
7
Federal Regulation of Natural Gas: The Federal Energy Regulatory Commission
("FERC") regulates interstate natural gas transportation rates and service
conditions, which may affect the marketing of natural gas produced by us, as
well as the revenues that may be received by us for sales of such production.
Since the mid-1980s, FERC has issued a series of orders, culminating in Order
Nos. 636, 636-A and 636-B ("Order 636"), that have significantly altered the
marketing and transportation of natural gas. Order 636 mandated a fundamental
restructuring of interstate pipeline sales and transportation service, including
the unbundling by interstate pipelines of the sale, transportation, storage and
other components of the city-gate sales services such pipelines previously
performed. One of FERC's purposes in issuing the order was to increase
competition within all phases of the natural gas industry. The United States
Court of Appeals for the District of Columbia Circuit largely upheld Order 636
and the Supreme Court has declined to hear the appeal from that decision.
Generally, Order 636 has eliminated or substantially reduced the interstate
pipelines' traditional role as wholesalers of natural gas in favor of providing
only storage and transportation service, and has substantially increased
competition and volatility in natural gas markets.
The price we may receive from the sale of oil and natural gas liquids will be
affected by the cost of transporting products to markets. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. We are not able to
predict with certainty the effect, if any, of these regulations on our intended
operations. However, the regulations may increase transportation costs or reduce
well head prices for oil and natural gas liquids.
Compliance with Environmental Laws and Regulations: Our operations are subject
to local, state and federal laws and regulations governing environmental quality
and pollution control. To date our compliance with these regulations has had no
material effect on our operations, capital, earnings, or competitive position,
and the cost of such compliance has not been material. We are unable to assess
or predict at this time what effect additional regulations or legislation could
have on our activities.
Effect of Changing Industry Conditions on Drilling Activity: Lower oil and gas
prices have caused a decline in drilling activity in the U.S. from time to time.
However, such reduced activity has also resulted in a decline in drilling costs,
lease acquisition costs and equipment costs, and an improvement in the terms
under which drilling prospects are generally available. We cannot predict what
oil and gas prices will be in the future and what effect those prices may have
on drilling activities in general, or on its ability to generate economic
drilling prospects and to raise the necessary funds with which to drill them.
Regulation and Pricing of Natural Gas: Our operations may be subject to the
jurisdiction of the Federal Energy Regulatory Commission (FERC) with respect to
the sale of natural gas for resale in interstate and intrastate commerce. State
regulatory agencies may exercise or attempt to exercise similar powers with
respect to intrastate sales of gas. Because of its complexity and broad scope,
the price impact of future legislation on the operation of us cannot be
determined at this time.
State Regulations: Our production of oil and gas, if any, will be subject to
regulation by state regulatory authorities in the states in which we may produce
oil and gas. In general, these regulatory authorities are empowered to make and
enforce regulations to prevent waste of oil and gas and to protect correlative
rights and opportunities to produce oil and gas as between owners of a common
reservoir. Some regulatory authorities may also regulate the amount of oil and
gas produced by assigning allowable rates of production.
8
Proposed Legislation: A number of legislative proposals have been and probably
will continue to be introduced in Congress and in the legislatures of various
states, which, if enacted, would significantly affect the petroleum industries.
Such proposals and executive actions involve, among other things, the imposition
of land use controls such as prohibiting drilling activities on certain federal
and state lands in roadless wilderness areas. At present, it is impossible to
predict what proposals, if any, will actually be enacted by Congress or the
various state legislatures and what effect, if any, such proposals will have.
However, the establishment of numerous National Monuments by executive order has
had the effect of precluding drilling across vast areas of the Rocky Mountain
West.
Environmental Laws: Oil and gas exploration and development are specifically
subject to existing federal and state laws and regulations governing
environmental quality and pollution control. Such laws and regulations may
substantially increase the costs of exploring for, developing, or producing oil
and gas and may prevent or delay the commencement or continuation of a given
operation.
All of our operations involving the exploration for or the production of any
minerals are subject to existing laws and regulations relating to exploration
procedures, safety precautions, employee health and safety, air quality
standards, pollution of stream and fresh water sources, odor, noise, dust, and
other environmental protection controls adopted by federal, state and local
governmental authorities as well as the right of adjoining property owners. We
may be required to prepare and present to federal, state or local authorities
data pertaining to the effect or impact that any proposed exploration for or
production of minerals may have upon the environment. All requirements imposed
by any such authorities may be costly, time consuming, and may delay
commencement or continuation of exploration or production operations.
It may be anticipated that future legislation will significantly emphasize the
protection of the environment, and that, as a consequence, our activities may be
more closely regulated to further the cause of environmental protection. Such
legislation, as well as future interpretation of existing laws, may require
substantial increases in equipment and operating costs to us and delays,
interruptions, or a termination of operations, the extent to which cannot now be
predicted.
External Growth Strategy: Oil and gas production companies are subject to
international competition, particularly as businesses in this industry becomes
more global in nature.
As a result of these and other factors affecting industry today, such as
deregulation, capital market intervention, and new developments in recovery
technologies, small businesses and large corporations are being forced to adapt
quickly to such transformations in order to thrive or even merely survive.
Many private company managers have concluded that it is timely and prudent to
look at being acquired by a properly capitalized strategic partner in order to
remain competitive in this type of economic environment. This new strategic
alliance could come from a publicly traded company or a privately held
competitor with greater access to equity or debt capital, or one that possesses
enhanced advertising and marketing capabilities, and has capital intensive,
expansive product engineering, and sales and support capabilities.
For these and other reasons, there has been significant energy involving mergers
and acquisitions in the oil and gas industries at present. Many large firms
involved in this industry have established corporate growth strategies that
consistently include acquisitions. These experienced buyers search for companies
that fit their well-defined acquisition criteria, often attempting to buy
companies that are not actively for sale, seeking to generate exponential growth
through the purchase of complimentary businesses.
9
Production companies are obvious targets of interest partly because they have
established revenue streams and are compatible with our core revenue generating
business model. Service related businesses, such as drillers, are also of
interest because they will allow us to control our recompletion and drilling
schedules on our leased acreage. Therefore, during the coming months, in an
effort to broaden our revenue generating capabilities, we plan to aggressively
explore and pursue these types of strategic acquisition opportunities.
Title to Properties:
The Company has s Bureau of Land Management ("BLM") interest of approximately
240 gross/net acres located in Morgan County, Colorado.
Our prospects are subject to royalty, overriding royalty and other interests
customary in the industry, liens incident to agreements, current taxes and other
burdens, minor encumbrances, easements and restrictions. Although we are not
aware of any material title defects or disputes with respect to its undeveloped
acreage, to the extent such defects or disputes exist, we would suffer title
failures.
Gulfstar LLC has approximately 9,000 acres under an 87.5% net lease with
approximately 10,000 acres under option. Under its proposed drilling program,
Gulfstar LLC has:
Location Gross Acres Net Acres
--------- ----------- ---------
Kentucky 9,232 8,078 (87.5%)
*There are approximately 3,925 acres held by production.
Backlog of Orders: We currently have no orders for sales at this time.
Government Contracts: We have no government contracts.
Company Sponsored Research and Development: We are not conducting any research.
Number of Persons Employed: As of December 31, 2010, Gulfstar LLC had 8
full-time employees in Kentucky and Gulfstar had 2 employees.
ITEM 1A. RISK FACTORS
----------------------
FORWARD LOOKING STATEMENTS
This document includes forward-looking statements, including, without
limitation, statements relating to Gulfstar's plans, strategies, objectives,
expectations, intentions and adequacy of resources. These forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause Gulfstar's actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. These factors include,
among others, the following: ability of Gulfstar to implement its business
strategy; ability to obtain additional financing; Gulfstar's limited operating
history; unknown liabilities associated with future acquisitions; ability to
manage growth; significant competition; ability to attract and retain talented
employees; and future government regulations; and other factors described in
this Annual Report on Form 10-K or in other of Gulfstar filings with the
Securities and Exchange Commission. Gulfstar is under no obligation, to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
10
RISK FACTORS
GENERAL BUSINESS RISK FACTORS
Our business is a development stage company that is unproven and therefore
--------------------------------------------------------------------------------
risky.
-----
Potential investors should be made aware of the risk and difficulties
encountered by a new enterprise in the energy business, especially in view of
the intense competition from existing businesses in the industry.
We have a lack of revenue history and investors cannot view our past
--------------------------------------------------------------------------------
performance.
-----------
We have had no revenues prior to June of 2010. We are not profitable and the
business effort is considered to be in an early development stage. We must be
regarded as a new or development venture with all of the unforeseen costs,
expenses, problems, risks and difficulties to which such ventures are subject.
We can give no assurance of success or profitability to our investors.
---------------------------------------------------------------------
There is no assurance that we will ever operate profitably. There is no
assurance that we will generate revenues or profits, or that the market price of
our common stock will be increased thereby.
We may have a shortage of working capital in the future which could jeopardize
--------------------------------------------------------------------------------
our ability to carry out our business plan.
------------------------------------------
Our capital needs consist primarily of costs related to developing gas
production on our leases, additional pipeline infrastructure and general and
administrative expenses. Our needs could exceed several million dollars in the
next twelve months. Such funds are not currently committed, and we have cash at
December 31, 2010 of $65,799.
We have limited funds and such funds may not be adequate to carry out the
business plan in the energy business. Our ultimate success depends upon our
ability to raise additional capital. We need additional capital, but we have no
assurance that funds will be available from any source or, if available, that
they can be obtained on terms acceptable to us. If not available, our business
may fail.
During the period January 1, 2011 through March 28, 2011, the Company issued
509,001 shares of its restricted common stock in exchange for cash of $763,501
in order to support operations. The shares were sold at $1.50 per share.
Our officers and directors may have conflicts of interest which may not be
--------------------------------------------------------------------------------
resolved favorably to us.
------------------------
Certain conflicts of interest may exist between us and our officers and
directors. Our Officers and Directors have other business interests to which
they devote their attention and may be expected to continue to do so although
management time should be devoted to our business. As a result, conflicts of
interest may arise that can be resolved only through exercise of such judgment
as is consistent with fiduciary duties to us.
11
We may in the future issue more shares of common stock which could cause a loss
--------------------------------------------------------------------------------
of control by our present management and current stockholders.
-------------------------------------------------------------
We may issue further shares of common stock as consideration for the cash or
assets or services out of our authorized but unissued common stock that would,
upon issuance, represent a majority of the voting power and equity of our
Company. The result of such an issuance would be those new stockholders and
management would control our Company, and persons unknown could replace our
management at this time. Such an occurrence would result in a greatly reduced
percentage of ownership of our Company by our current shareholders, which could
present significant risks to investors.
We are not diversified and we will be dependent on only one business.
--------------------------------------------------------------------
Because of the limited financial resources that we have, it is unlikely that we
will be able to diversify our operations. Our probable inability to diversify
our activities into more than one area will subject us to economic fluctuations
within the energy industry and therefore increase the risks associated with our
operations due to lack of diversification.
We will depend upon management.
------------------------------
We currently have three individuals who are serving as our officers. We will be
heavily dependent upon their skills, talents, and abilities, as well as several
consultants to us, to implement our business plan. Because investors will not
be able to manage our business, they should critically assess all of the
information concerning our officers and directors.
Our officers and directors may have conflicts of interests as to corporate
--------------------------------------------------------------------------------
opportunities which we may not be able or allowed to participate in.
-------------------------------------------------------------------
Presently there is no requirement contained in our Articles of Incorporation,
Bylaws, or minutes which requires officers and directors of our business to
disclose to us business opportunities which come to their attention. Our
officers and directors do, however, have a fiduciary duty of loyalty to us to
disclose to us any business opportunities which come to their attention, in
their capacity as an officer and/or director or otherwise. Excluded from this
duty would be opportunities which the person learns about through his
involvement as an officer and director of another company. We have no intention
of merging with or acquiring any business opportunity or mineral interest from
any affiliate or officer or director.
RISK FACTORS RELATING TO OUR COMPANY AND OUR BUSINESS
Specifically, the investor should consider, among others, the following risks:
Our business, the oil and gas business, has numerous risks which could render us
--------------------------------------------------------------------------------
unsuccessful.
------------
The search for new oil and gas reserves frequently results in unprofitable
efforts, not only from dry holes, but also from wells which, though productive,
will not produce oil or gas in sufficient quantities to return a profit on the
costs incurred. There is no assurance we will find or produce oil or gas from
any of the undeveloped acreage farmed out to us or which may be acquired by us,
nor are there any assurances that if we ever obtain any production it will be
profitable.
12
We have substantial competitors who have an advantage over us in resources and
--------------------------------------------------------------------------------
management.
----------
We are and will continue to be an insignificant participant in the oil and gas
business. Most of our competitors have significantly greater financial
resources, technical expertise and managerial capabilities than us and,
consequently, we will be at a competitive disadvantage in identifying and
developing or exploring suitable prospects. Competitor's resources could
overwhelm our restricted efforts to acquire and explore oil and gas prospects
and cause failure of our business plan.
We will be subject to all of the market forces in the energy business, many of
which could pose a significant risk to our operations.
The marketing of natural gas and oil which may be produced by our prospects will
be affected by a number of factors beyond our control. These factors include the
extent of the supply of oil or gas in the market, the availability of
competitive fuels, crude oil imports, the world-wide political situation, price
regulation, and other factors. Recently, there have been dramatic fluctuations
in oil prices. Any significant decrease in the market prices of oil and gas
could materially affect our profitability of oil and gas activities.
There generally are only a limited number of gas transmission companies with
existing pipelines in the vicinity of a gas well or wells. In the event that
producing gas properties are not subject to purchase contracts or that any such
contracts terminate and other parties do not purchase our gas production, there
is assurance that we will be able to enter into purchase contracts with any
transmission companies or other purchasers of natural gas and there can be no
assurance regarding the price which such purchasers would be willing to pay for
such gas. There may, on occasion, be an oversupply of gas in the marketplace or
in pipelines the extent and duration may affect prices adversely. Such
oversupply may result in reductions of purchases and prices paid to producers by
principal gas pipeline purchasers.
Our business is subject to significant weather interruptions.
------------------------------------------------------------
Our activities may be subject to periodic interruptions due to weather
conditions. Weather-imposed restrictions during certain times of the year on
roads accessing properties could adversely affect our ability to benefit from
production on such properties or could increase the costs of drilling new wells
because of delays.
We will have significant additional financing requirements to fund our future
--------------------------------------------------------------------------------
activities.
----------
If we find oil and gas reserves to exist on a prospect we will need substantial
additional financing to fund the necessary exploration and development work.
Furthermore, if the results of that exploration and development work are
successful, we will need substantial additional funds for continued development.
We currently do not have sufficient funds to conduct such work and, therefore,
we will need to obtain the necessary funds either through debt or equity
financing, some form of cost-sharing arrangement with others, or the sale of all
or part of the property. There is no assurance that we will be successful in
obtaining any financing. These various financing alternatives may dilute the
interest of our shareholders and/or reduce our interest in the properties.
13
We are subject to significant operating hazards and uninsured risk in the energy
--------------------------------------------------------------------------------
industry.
--------
Our proposed operations will be subject to all of the operating hazards and
risks normally incident to exploring, drilling for and producing oil and gas,
such as encountering unusual or unexpected formations and pressures, blowouts,
environmental pollution and personal injury. We will maintain general liability
insurance but we have not obtained insurance against such things as blowouts and
pollution risks because of the prohibitive expense. Should we sustain an
uninsured loss or liability, or a loss in excess of policy limits, our ability
to operate may be materially adversely affected.
We are subject to Federal Income Tax laws and changes therein which could
--------------------------------------------------------------------------------
adversely impact us.
-------------------
Federal income tax laws are of particular significance to the oil and gas
industry in which we intend to engage. Legislation has eroded various benefits
of oil and gas producers and subsequent legislation could continue this trend.
Congress is continually considering proposals with respect to Federal income
taxation which could have a material adverse effect on our future operations and
on our ability to obtain risk capital which our industry has traditionally
attracted from taxpayers in high tax brackets.
We are subject to substantial government regulation in the energy industry which
--------------------------------------------------------------------------------
could adversely impact us.
-------------------------
The production and sale of oil and gas are subject to regulation by state and
federal authorities, the spacing of wells and the prevention of waste. There are
both federal and state laws regarding environmental controls which may
necessitate significant capital outlays, resulting in extended delays,
materially affect our earnings potential and cause material changes in the in
our proposed business. We cannot predict what legislation, if any, may be passed
by Congress or state legislatures in the future, or the effect of such
legislation, if any, on us. Such regulations may have a significant affect on
our operating results.
We believe investors should consider certain negative aspects of our operations.
--------------------------------------------------------------------------------
Dry Holes: We may expend substantial funds acquiring and potentially
participating in exploring properties which we later determine not to be
productive. All funds so expended will be a total loss to us.
Technical Assistance: We will find it necessary to employ technical assistance
in the operation of our business. As of the date of this Annual Report, we have
not contracted for any technical assistance. When we need it such assistance it
is likely to be available at compensation levels we would be able to pay.
Uncertainty of Title: We will attempt to acquire leases or interests in leases
by option, lease, farmout or by purchase. The validity of title to oil and gas
property depends upon numerous circumstances and factual matters (many of which
are not discoverable of record or by other readily available means) and is
subject to many uncertainties of existing law and our application. We intend to
obtain an oil and gas attorney's opinion of valid title before any significant
expenditure upon a lease.
Government Regulations: The area of exploration of natural resources has become
significantly regulated by state and federal governmental agencies, and such
regulation could have an adverse effect on our operations. Compliance with
statutes and regulations governing the oil and gas industry could significantly
increase the capital expenditures necessary to develop our prospects.
14
Nature of our Business: Our business is highly speculative, involves the
commitment of high-risk capital, and exposes us to potentially substantial
losses. In addition, we will be in direct competition with other organizations
which are significantly better financed and staffed than we are.
General Economic and Other Conditions: Our business may be adversely affected
from time to time by such matters as changes in general economic, industrial and
international conditions; changes in taxes; oil and gas prices and costs; excess
supplies and other factors of a general nature.
We will experience substantial competition for supplies in the energy industry.
--------------------------------------------------------------------------------
We will be required to compete with a large number of entities which are larger,
have greater resources and more extensive operating histories than we do.
Shortages of supplies may result from this competition and will lead to
increased costs and delays in operations which will have a material adverse
effect on us.
We will be subject to many factors beyond our control.
-----------------------------------------------------
The acquisition, exploration, development, production and sale of oil and gas
are subject to many factors which are outside our control. These factors include
general economic conditions, proximities to pipelines, oil import quotas, supply
and price of other fuels and the regulation of transportation by federal and
state governmental authorities.
We anticipate substantial competition in our effort to explore oil and gas
properties and may have difficulty in putting together drilling participants and
getting prospects drilled and explored. Established companies have an advantage
over us because of substantially greater resources to devote to property
acquisition and to obtain drilling rigs, equipment and personnel. If we are
unable to compete for capital, participation and drilling rigs, equipment and
personnel, our business will be adversely affected.
We have agreed to indemnification of officers and directors as is provided by
--------------------------------------------------------------------------------
Colorado Revised Statute.
-------------------------
Colorado Revised Statutes provide for the indemnification of our directors,
officers, employees, and agents, under certain circumstances, against attorney's
fees and other expenses incurred by them in any litigation to which they become
a party arising from their association with or on activities our behalf. We will
also bear the expenses of such litigation for any of our directors, officers,
employees, or agents, upon such person's promise to repay us therefore if it is
ultimately determined that any such person shall not have been entitled to
indemnification. This indemnification policy could result in substantial
expenditures by us that we will be unable to recoup.
Our directors' liability to us and shareholders is limited
Colorado Revised Statutes exclude personal liability of our directors and our
stockholders for monetary damages for breach of fiduciary duty except in certain
specified circumstances. Accordingly, we will have a much more limited right of
action against our directors than otherwise would be the case. This provision
does not affect the liability of any director under federal or applicable state
securities laws.
15
We may depend upon outside advisors, who may not be available on reasonable
--------------------------------------------------------------------------------
terms and as needed.
-------------------
To supplement the business experience of our officers and directors, we may be
required to employ accountants, technical experts, appraisers, attorneys, or
other consultants or advisors. Our Officers and Directors without any input from
stockholders will make the selection of any such advisors. Furthermore, we
anticipate that such persons will be engaged on an "as needed" basis without a
continuing fiduciary or other obligation to us. In the event we consider it
necessary to hire outside advisors, we may elect to hire persons who are
affiliates, if they are able to provide the required services.
RISK FACTORS RELATED TO OUR STOCK
The regulation of penny stocks by SEC and FINRA may discourage the tradability
--------------------------------------------------------------------------------
of our securities.
-----------------
We are a "penny stock" company. None of our securities currently trade in any
market and, if ever available for trading, will be subject to a Securities and
Exchange Commission rule that imposes special sales practice requirements upon
broker-dealers who sell such securities to persons other than established
customers or accredited investors. For purposes of the rule, the phrase
"accredited investors" means, in general terms, institutions with assets in
excess of $5,000,000, or individuals having a net worth in excess of $1,000,000
or having an annual income that exceeds $200,000 (or that, when combined with a
spouse's income, exceeds $300,000). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Effectively, this discourages broker-dealers from executing trades in
penny stocks.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks". Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange
Act of 1934, as amended. Because our securities constitute "penny stocks" within
the meaning of the rules, the rules would apply to us and to our securities. The
rules will further affect the ability of owners of shares to sell our securities
in any market that might develop for them because it imposes additional
regulatory burdens on penny stock transactions.
Shareholders should be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed
bid-ask differentials and markups by selling broker-dealers; and (v) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired consequent investor losses. Our
management is aware of the abuses that have occurred historically in the penny
stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
16
We will pay no foreseeable dividends in the future.
---------------------------------------------------
We have not paid dividends on our common stock and do not anticipate paying such
dividends in the foreseeable future.
No public market exists for our common stock at this time, and there is no
--------------------------------------------------------------------------------
assurance of a future market.
----------------------------
There is no public market for our common stock, and no assurance can be given
that a market will develop or that a shareholder ever will be able to liquidate
his investment without considerable delay, if at all. If a market should
develop, the price may be highly volatile. Factors such as those discussed in
the "Risk Factors" section may have a significant impact upon the market price
of shares.
Rule 144 sales in the future may have a depressive effect on our stock price.
----------------------------------------------------------------------------
All of the outstanding shares of common stock held by our present officers,
directors, and affiliate stockholders are "restricted securities" within the
meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted
Shares, these shares may be resold only pursuant to an effective registration
statement or under the requirements of Rule 144 or other applicable exemptions
from registration under the Act and as required under applicable state
securities laws. Rule 144 provides in essence that a person who has held
restricted securities for six months, under certain conditions, may sell every
three months, in brokerage transactions, a number of shares that does not exceed
the greater of 1.0% of a company's outstanding common stock or the average
weekly trading volume during the four calendar weeks prior to the sale. There is
no limit on the amount of restricted securities that may be sold by a
non-affiliate after the owner has held the restricted securities for a period of
two years. A sale under Rule 144 or under any other exemption from the Act, if
available, or pursuant to subsequent registration of shares of common stock of
present stockholders, may have a depressive effect upon the price of the common
stock in any market that may develop.
Our investors may suffer future dilution due to issuances of shares for various
--------------------------------------------------------------------------------
considerations in the future.
----------------------------
There may be substantial dilution to our shareholders as a result of future
decisions of the Board to issue shares without shareholder approval for cash,
services, or acquisitions.
17
Our stock will in all likelihood be thinly traded and as a result you may be
--------------------------------------------------------------------------------
unable to sell at or near ask prices or at all if you need to liquidate your
--------------------------------------------------------------------------------
shares.
------
The shares of our common stock, if listed, may be thinly-traded on the
Over-the-Counter Market, meaning that the number of persons interested in
purchasing our common shares at or near ask prices at any given time may be
relatively small or non-existent. This situation is attributable to a number of
factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven, early stage company such as ours or
purchase or recommend the purchase of any of our Securities until such time as
we became more seasoned and viable. As a consequence, there may be periods of
several days or more when trading activity in our Securities is minimal or
non-existent, as compared to a seasoned issuer which has a large and steady
volume of trading activity that will generally support continuous sales without
an adverse effect on Securities price. We cannot give you any assurance that a
broader or more active public trading market for our common Securities will
develop or be sustained, or that any trading levels will be sustained. Due to
these conditions, we can give investors no assurance that they will be able to
sell their shares at or near ask prices or at all if they need money or
otherwise desire to liquidate their securities of our Company.
Our business is highly speculative and the investment is therefore risky.
------------------------------------------------------------------------
Due to the speculative nature of our business, it is probable that the
investment in shares will result in a total loss to the investor. Investors
should be able to financially bear the loss of their entire investment.
Investment should, therefore, be limited to that portion of discretionary funds
not needed for normal living purposes or for reserves for disability and
retirement.
ITEM 1B. UNRESOLVED STAFF COMMENTS
----------------------------------
Not required for smaller reporting registrants.
ITEM 2. PROPERTIES
-------------------
The Company's headquarters are located at 600 17th Street Suite 2800 Denver,
Colorado 80202. The Company leases a virtual office space at a rate of $1,499
per month that includes secretarial and support services and the lease will
expire in May 2011. Total rent expense under this lease was $2,998 and $0 for
the years ended December 31, 2010 and 2009 respectively.
The Company also shares an office space in West Palm Beach, Florida with an
officer and director of the Company at no cost to the Company.
Gulfstar LLC's headquarters and operations are located in Morgantown, Kentucky.
During April 2009, Gulfstar LLC 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 $9,000 and
$6,000 for the years ended December 31, 2010 and 2009, respectively.
DESCRIPTION OF PROPERTIES/ASSETS/OIL AND GAS PROSPECTS
(a) Real Estate: None.
(b) Title to properties: None.
18
(c) Oil and Gas Prospects:
Gulfstar LLC has approximately 9,000 acres under an 87.5% net lease
with approximately 10,000 acres under option. Under its proposed
drilling program, Gulfstar LLC has:
Location Gross Acres Net Acres
--------- ----------- ---------
Kentucky 9,232 8,078 (87.5%)
*There are approximately 3,925 acres held by production.
Horizontal Well - During the fourth quarter of 2010, Gulfstar LLC began drilling
a horizontal well located in Warren County, KY with total costs of $287,024 as
of December 31, 2010. Gulfstar LLC owns a working interest of 58.4% and a net
revenue interest of 43.8% and Gulfstar LLC anticipates completion of this well
during the second quarter of 2011. After completion, this well will be connected
to the pipeline.
On February 12, 2009, the Company bid upon and acquired a lease of 240
acres in Morgan County, Colorado at the BLM auction located in
Lakewood, Colorado. The interest of the Company is 100% in this
prospect.
(d) Patents: None.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
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 ended December 31, 2010. This amount was
paid by the Company during the second quarter of 2010 and was 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 consolidated statement of operations for
the year ended December 31, 2010.
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 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 December 31, 2010, $15,000 of the
liability remains unpaid.
ITEM 4. (REMOVED AND RESERVED)
-------------------------------
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
--------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------
Market Information
There is no public trading market for the common stock at this time.
Holders
There are approximately 796 holders of record of Gulfstar's common stock as of
December 31, 2010.
Dividend Policy
Holders of Gulfstar's common stock are entitled to receive such dividends as may
be declared by Gulfstar's board of directors. Gulfstar has not declared or paid
any dividends on Gulfstar's common shares and it does not plan on declaring any
dividends in the near future. Gulfstar currently intends to use all available
funds to finance the operation and expansion of its business.
Recent Sales of Unregistered Securities
The Company made the following unregistered sales of its securities from January
1, 2010 through June 30, 2010. The Company in May 2010, effected a reverse split
of its common stock on a 1 new share for every 8 old shares. On June 30, 2010,
the Company completed its acquisition of Gulfstar Energy Group, LLC, which was
accounted for as a reverse re-capitalization of the Company. At December 31,
2010, the Company had outstanding 494,753 unregistered shares that are included
as part of the "reclassification of shares" reported in the consolidated
statements of stockholders' equity for the year end December 31, 2010. Shares
included below are post the reverse stock split.
This table shows all issuances of unregistered shares of the Company prior to
from January 1, 2010 to June 30, 2010.
CLASS OF
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION PURCHASER
------------- ------------------- -------------- ------------- ---------
2/16/10 Common Shares 5,000 $4,000 in services Former Officer &
Director
2/16/10 Common Shares 5,000 $4,000 in services Director
2/16/10 Common Shares 7,500 Payment of $4,650 in debt Former Officer &
2/16/10 Common Shares 7,500 Payment of $4,650 in debt Director
2/25/10 Common Shares 12,500 $10,000 in services Business
6/30/10 Common Shares 2,500 Payment of $2,000 loan Former Officer &
6/30/10 Common Shares 2,500 Payment of $2,000 loan Director
6/30/10 Common Shares 52,500 $42,000 in services Former Officer &
6/30/10 Common Shares 52,500 $42,000 in services Director
20
CLASS OF
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION PURCHASER
------------ ------------------- ------------- ------------- ---------
6/24/10 Common Shares 729,310 $21,879 in services Affiliate of an
Officer & Director
6/24/10 Common Shares 10,000 $300 in services Business
Associate
6/24/10 Common Shares 30,000 $900 in services Business
Associate
6/30/10 Common Shares 100,000 $3,000 in services Director
6/30/10 Common Shares 11,659,659 Exchange for 58.3% equity Equity Members
in Gulfstar Energy Group, LLC
6/30/10 Common Shares 3,509,530 Exchange for 100% issued and Talon Energy
Outstanding Corporation
Exemption From Registration Claimed
All of the above 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 that purchased
the unregistered securities were primarily existing shareholders, 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.
The Company made the following unregistered sales of its securities from July 1,
2010 to December 31, 2010 under Rule 506 of Regulation D of the Securities
Act of 1933.
TITLE OF
DATE OF SALE SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
------------ ---------- ------------- ------------- ------------------
August 2010 through Common Shares 304,334 $456,500 Business Associates
December 31, 2010
21
Exemption From Registration Claimed
All of the above sales by the Company of its unregistered securities were made
by the Company in reliance upon Rule 506 of Regulation D of the Securities Act
of 1933, as amended (the "1933 Act"). All of the individuals and/or entities
that purchased the unregistered securities were primarily existing shareholders,
known to the Company and its management, through pre-existing business
relationships, as long standing business associates. 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.
Issuer Purchases of Equity Securities
The Company did not repurchase any shares of its common stock during the year
ended December 31, 2010.
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion should be read in conjunction with our audited
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.
PLAN OF OPERATIONS
The Company is currently focusing its operational efforts on the operation of
its pipeline gas gathering system and management of existing oil and gas wells
and intends to be involved in oil and gas operation exploration and development
drilling. The Company intends to leverage its assets to develop energy prospects
for its own account or co-venture with other companies which can benefit from an
association with the Company's pipelines and management.
22
The Company's strategic focus in this area 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 initial 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.
On May 5, 2010, the Company entered into a Share Exchange Agreement with Talon.
On June 24, 2010, the Share Exchange Agreement with Talon was replaced by a
similar Revised and Amended Share Acquisition Agreement between Talon and the
Company and in conjunction with a June 24, 2010 Share Exchange Agreement between
the Company and Gulfstar LLC, a privately held Mississippi Limited Liability
Company, for 58.3% of the outstanding equity interests of Gulfstar LLC, and an
Acquisition Agreement between the Company and Gulfstar LLC to acquire the
remaining 41.7% of the outstanding equity interests of Gulfstar LLC. The Revised
and Amended Share Acquisition Agreement and Share Exchange Agreement were both
effective as of June 30, 2010. At December 31, 2010, the Company owned 58.4% of
Gulfstar LLC with a non-controlling interest of 41.6%.
During the second half of 2010, Gulfstar LLC started transporting limited
quantities of gas via its pipeline system. In addition to the management and
operation of the pipeline, Gulfstar LLC operates as a manager and operator of
approximately 20 natural gas wells. Gulfstar LLC holds overriding royalty
interests of approximately 12.5% in the wells. Gulfstar LLC has financed these
wells through offering a 100% working interest in the wells in exchange for
contribution of funds to drill the wells and therefore does not hold any working
interest in the wells.
On October 18, 2010, the Company entered into a Letter of Intent with Timberline
Production Company, LLC of Casper, WY to purchase 100% of the working interests
in and assets connected to oil and gas leases located in the Greasewood Field in
Niobrara County, WY for cash of $75 Million. In conjunction with this
transaction, the Company revised its engagement with Maxim Group LLC to provide
gross proceeds of up to $100 Million from a proposed private placement of
Company equity and/or convertible debt. The precise terms of the private
placement will be negotiated between Maxim Group LLC, potential investors and
the Company.
On January 19, 2011, the Company signed a Letter Agreement with Wright Capital
Corporation to pursue a proposed financing of up to $90 Million to be used to
assist the Company in the proposed purchase of Timberline Production Company's
100% working interest in and assets connected to oil and gas leases and for the
further development of the Company's existing pipeline structure in Kentucky.
The definitive terms of the proposed transaction are subject to an agreement
between Wright Capital Corporation and the Company.
The Company will need substantial additional capital to support its proposed
future operations and as such is aggressively seeking this capital. Nonetheless,
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.
23
RESULTS OF OPERATIONS
--------------------
For the Year Ended December 31, 2010 Compared to the Year Ended December 31,
2009
During the year ended December 31, 2010, the Company recognized total revenues
of $86,990 from the transportation of gas through its pipeline and $14,287 from
the royalties in connection with its well management services. Cost of sales
during the year ended December 31, 2010 were $36,842, resulting in a gross
profit of $64,435. During the year ended December 31, 2009, the Company did not
recognize any revenue from its operating activities.
During the year ended December 31, 2010, the Company incurred total operating
expenses of $1,919,775 compared to $596,198 during the year ended December 31,
2009. The increase of $1,323,577 was a result of increases in the Company's
operational activities due to completing the construction of the pipeline, but
also a result of the Company's increased accounting and legal costs in
connection with the Company's acquisition of Gulfstar LLC and Talon. During the
year ended December 31, 2010, the Company incurred professional fees of $282,071
consisting of both legal and accounting fees. In addition, during the year ended
December 31, 2010, the Company incurred officers' compensation of $96,000 and
expenses and costs in connection with the operation of the pipeline of $192,294.
During the year ended December 31, 2010, we recognized a net loss of $1,272,302
compared to $755,650 during the year ended December 31, 2009. The increase of
$516,652 was a result of the $1,323,577 increase in operating expenses, offset
by the $64,435 increase in gross profit, the $393,231 increase in other income
and an allocation of $349,259 in losses attributable to non-controlling
interests.
LIQUIDITY
---------
At December 31, 2010, we had total current assets of $133,112 consisting of
$65,799 in cash and cash equivalents, $33,653 in accounts receivable and $33,660
in prepaids and other assets. At December 31, 2010, we had total current
liabilities of $1,808,353 consisting of $936,418 in accounts payable, $15,000 in
litigation settlement payment, $33,477 in oil and gas proceeds due to others,
$488,380 in accrued expenses and liabilities and $335,078 loan payable due to an
affiliate of the Company.
At December 31, 2010, we had a working capital deficit of $1,675,241 and an
accumulated deficit of $4,332,703.
During the year ended December 31, 2010, we used net cash of $1,435,740 in
operational activities and during the year ended December 31, 2009, we received
net cash of $390,453 from operational activities.
During the year ended December 31, 2010, we recognized a net loss of $1,272,302
which was adjusted for non-cash activity of a net loss of $349,259 attributable
to the non-controlling interest of Gulfstar LLC, $82,325 due to conversion of a
note receivable to compensation, $331,565 from the issuances of equity for
services and $154,776 in depreciation expense. During the year ended December
31, 2009, we recognized a net loss of $755,650 which was adjusted for non-cash
activity of $15,295 in depreciation expense.
During the year ended December 31, 2010, the Company used funds of $863,521 in
its investing activities that included expenditures of $587,924 in construction
of the pipeline, $1,500 for intangible assets, $74,050 for property and
equipment, $287,024 for drilling of oil and gas properties, $76,977 in cash from
the acquisition of Talon and receipt of $10,000 from a note receivable.
24
During the year ended December 31, 2009, the Company used $3,090,484 in its
investing activities that included expenditures of $2,916,368 in construction of
the pipeline, $49,774 for property and equipment, $114,342 for intangible assets
and $10,000 in the issuance of a note receivable.
During the year ended December 31, 2010, the Company received $1,784,621 net
proceeds from its financing activities that included $1,481,890 in equity
contributions and $335,078 in proceeds from a short term loan.
During the year ended December 31, 2009, the Company received $2,822,904 net
proceeds from its financing activities that included $2,914,540 in equity
contributions and $91,636 paid out 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 ended December 31, 2010. This amount was
paid by the Company during the second quarter of 2010 and was 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 that 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 consolidated statement of
operations for the year ended December 31, 2010.
During the year ended December 31, 2010, the Company issued 304,334 shares of
its restricted common shares in exchange for cash of $445,110 in order to
support operations. The shares were sold at $1.50 per share and are included in
the $1,324,360 in equity contributions received during the year ended December
31, 2010.
During the period January 1, 2011 through March 28, 2011, the Company issued
509,001 shares of its restricted common stock in exchange for cash of $763,501
in order to support operations. The shares were sold at $1.50 per share.
Note Payable
During the year ended December 31, 2010, the Company borrowed a total of
$335,078 from an affiliate of a member-manager of Gulfstar LLC and a greater
than 5% shareholder of the Company and in exchange issued an unsecured
promissory note dated November 30, 2010 that is due in full on or before
December 31, 2011. Interest is accrued at the rate of one
percent (1.0%) per annum. As of December 31, 2010, the Company owes $335,078 on
the promissory note. Accrued interest of $279 is included in accrued liabilities
on the consolidated balance at December 31, 2010
The Company holds overriding royalty interests in various wells in Kentucky. The
Company syndicated the financing of these wells through offering a 100% working
interest in the wells in exchange for contribution of funds to drill the wells.
As part of the transaction, the Company retained approximately 12.5% overriding
royalty interests in the wells and also agreed to provide management services on
behalf of the working interest owners in the wells. This income from the wells
earned by the Company is reported as royalty income.
As part of the management services provided, the Company collects the royalties
generated from the wells on behalf of the working interest owners and pays the
various costs and expenses incurred on behalf of the wells. The Company records
no costs or expenses relative to these wells on its consolidated statements of
operations. The excess of the royalties collected by the Company on behalf of
the working interest owners were recorded as oil and gas proceeds due to others
on the consolidated balance sheets of the Company. At December 31, 2010 and
2009, the Company owed oil and gas proceeds to working interest owners in the
amount of $33,477 and $0, respectively.
25
Also, as part of the management services provided, the Company collected the
contributions from the working interest owners to drill the wells and paid the
various costs and expenses incurred on behalf of the wells. The Company recorded
no costs or expenses relative to these wells on its consolidated statements of
operations. The excess of the contributions collected from the working interest
owners over and above the costs or expenses incurred on behalf of these wells
were reported as deposits on the consolidated balance sheets of the Company. At
December 31, 2010 and 2009, the Company had deposits due to the working interest
owners in the amounts of $0 and $503,224, respectively.
The Gulfstar LLC operating agreement provides a priority preference as to any
future cash distributions paid by Gulfstar LLC to the owners of its equity
interests. As such, fifty percent (50%) of all cash distributions shall be paid
first to the non-controlling equity interests until such time they have received
in full their capital contributions. After which time, cash distributions shall
be paid in proportion to the percentage of all equity interests. As of December
31, 2010, Gulfstar LLC has not repaid any of the non-controlling equity
interests capital contributions.
Capital Resources
We have only common stock as our capital resource.
We have no material commitments for capital expenditures within the next year,
however if operations are commenced, substantial capital will be needed to pay
for participation, investigation, exploration, acquisition and working capital.
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 and therefore the Company:
On October 18, 2010, the Company entered into a Letter of Intent with Timberline
Production Company, LLC of Casper, WY to purchase 100% of the working interests
in and assets connected to oil and gas leases located in the Greasewood Field in
Niobrara County, WY for cash of $75 Million. In conjunction with this
transaction, the Company revised its engagement with Maxim Group LLC to provide
gross proceeds of up to $100 Million from a proposed private placement of
Company equity and/or convertible debt. The precise terms of the private
placement will be negotiated between Maxim Group LLC, potential investors and
the Company.
Further, on January 19, 2011, the Company signed a Letter Agreement with Wright
Capital Corporation to pursue a proposed financing of up to $90 Million to be
used to assist the Company in the proposed purchase of Timberline Production
Company's 100% working interest in and assets connected to oil and gas leases
and for the further development of the Company's existing pipeline structure in
Kentucky. The definitive terms of the proposed transaction are subject to an
agreement between Wright Capital Corporation and the Company.
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 it to cover our expenses as they may be
incurred.
Going Concern
The Company's financial statements for the year ended December 31, 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 $4,332,703 as of
December 31, 2010. The Company recognized a net loss of $1,272,302 during the
year ended December 31, 2010. At December 31, 2010, the Company had total
current assets of $133,112 and total current liabilities of $1,808,353 for a
working capital deficit of $1,675,241. This condition raises substantial doubt
about the Company's ability to continue as a going concern.
26
Management is actively pursuing additional financing and revenue solutions as
stated elsewhere in this report. During the period January 1, 2011 through March
28, 2011, the Company issued 509,001 shares of its restricted common stock in
exchange for cash of $763,501 in order to support operations. The shares were
sold at $1.50 per share.
CRITICAL ACCOUNTING POLICIES
Gulfstar has identified the policies below as critical to its business
operations and the understanding of results from operations. The impact and any
associated risks related to these policies on the Company's business operations
is discussed throughout Management's Discussion and Analysis of Financial
Conditions and Results of Operations where such policies affect Gulfstar's
reported and expected financial results. For a detailed discussion on the
application of these and other accounting policies, see Note 1 in the Notes to
the Financial Statements for the years ended December 31, 2010 and 2009. Note
that Gulfstar's preparation of this document requires Gulfstar to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of Gulfstar's
financial statements, and the reported amounts of expenses during the reporting
periods. There can be no assurance that actual results will not differ from
those estimates.
Principles of Consolidation
The accompanying consolidated balance sheet as of December 31, 2009 and the
consolidated statement of operations and cash flows for the year ended December
31, 2009 and for the period from (inception) May 19, 2006 through June 30, 2010
include only the accounts of Gulfstar LLC. The accompanying balance sheet as of
December 31, 2010 and the consolidated statement of operations and cash flows
for the period beginning July 1, 2010 (date of acquisition) through December 31,
2010 include the accounts of Gulfstar Energy Corporation, Gulfstar LLC and
Talon. All significant inter-company balances and transactions have been
eliminated during consolidation.
Reclassification
Certain amounts previously reported have been reclassified in connection with
the reverse recapitalization and to conform to current presentation.
Revenue Recognition
The Company recognizes revenue from its pipeline activities upon shipment of the
gas to its customers. Royalty revenue is recognized from the Company's
well-management activities in the period of delivery.
Accounts Receivable
Accounts receivable are stated at their cost less any allowance for doubtful
accounts. The allowance for doubtful accounts is based on the management's
assessment of the collectability of specific customer accounts and the aging of
the accounts receivable. If there is deterioration in a major customer's
creditworthiness or if actual defaults are higher than the historical
experience, the management's estimates of the recoverability of amounts due to
the Company could be adversely affected. Based on the management's assessment,
there is no reserve recorded as of December 31, 2010.
Non-controlling Interest
The non-controlling interest is related to Gulfstar LLC, which is consolidated,
but not wholly owned by the Company. At December 31, 2010, the Company owned
58.4% of the equity interest of Gulfstar LLC and therefore, the non-controlling
interest of 41.6% was $1,287,173.
Property and Equipment
The Company follows the full cost method of accounting for oil and natural gas
operations. Under this method all productive and nonproductive costs incurred in
connection with the acquisition, exploration, and development of oil and natural
gas reserves are capitalized. No gains or losses are recognized upon the sale or
other disposition of oil and natural gas properties except in transactions that
would significantly alter the relationship between capitalized costs and proved
reserves. The costs of unevaluated oil and natural gas properties are excluded
from the amortizable base until the time that either proven reserves are found
or it has been determined that such properties are impaired. As properties
become evaluated, the related costs transfer to proved oil and natural gas
properties using full cost accounting. None of the capitalized costs in the
amount of $276,533 were included in the amortization base as of December 31,
2010 nor did the Company expense any capitalized costs during the years ended
December 31, 2010 and 2009. The Company does not have significant oil and gas
producing activities and its oil and gas properties are unevaluated as of
December 31, 2010.
27
Management capitalizes additions to property and equipment including its
pipeline. 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
consolidated statements of operations.
The Company has capitalized internal costs of approximately $25,800 and $10,500
for the years ended December 31, 2010 and 2009 respectively. Such capitalized
costs include benefits of individuals directly involved in the Company's
construction of its pipeline based on the percentage of their time devoted to
such activities.
In accordance with authoritative guidance on accounting for the impairment of
disposal of long-lived assets, as set forth in Topic 360 of the ASC, the Company
assesses the recoverability of the carrying value of its non-oil and gas
long-lived assets when events occur that indicate an impairment in value may
exist. An impairment loss is indicated if the sum of the expected undiscounted
future net cash flows is less than the carrying amount of the assets. If this
occurs, an impairment loss is recognized for the amount by which the carrying
amount of the assets exceeds the estimated fair value of the asset. No events
occurred during the years ended December 31, 2010 and 2009 that would be
indicative of possible impairment.
Goodwill
In accordance with generally accepted accounting principles, goodwill cannot be
amortized, however, it must be tested annually for impairment. This impairment
test is calculated at the reporting unit level. The goodwill impairment test has
two steps. The first identifies potential impairments by comparing the fair
value of a reporting unit with its book value, including goodwill. If the fair
value of the reporting unit exceeds the carrying amount, goodwill is not
impaired and the second step is not necessary. If the carrying value exceeds the
fair value, the second step calculates the possible impairment loss by comparing
the implied fair value of goodwill with the carrying amount. If the implied
goodwill is less than the carrying amount, a write-down is recorded. Management
tests goodwill each year for impairment, or when facts or circumstances indicate
impairment has occurred. No facts or circumstances were noted during the year
ended December 31, 2010, which would be indicative of possible impairment.
Significant Customer
The Company's pipeline construction was finished during the first half of 2010
and is currently delivering natural gas to one manufacturing customer located in
Kentucky.
Income Taxes
Gulfstar LLC is a limited liability company, which is not a tax paying entity
for Federal income tax purposes. Its pro rata shares of income, losses and tax
credits is passed through to its members and reported by its members on their
individual income tax returns. Thus, since the consolidated statement of
operations for the year ended December 31, 2009 and for the period January 1,
2010 through June 30, 2010 include the accounts of Gulfstar LLC only, no
provision for federal income taxes or for deferred taxes has been determined for
these periods. Therefore, the Company has determined only for the period July 1,
2010 through December 31, 2010 any provision for income taxes or deferred taxes
and this determination has been based upon the accounts of Gulfstar Energy
Corporation and Talon including the pro rata loss of Gulfstar LLC passed through
and reportable by Gulfstar Energy Corporation.
28
The Company accounts for income taxes under the liability method as prescribed
by ASC authoritative guidance. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted rates expected to be in effect during
the year in which the basis difference reverses. The realizability of deferred
tax assets are evaluated quarterly and a valuation allowance is provided if it
is more likely than not that the deferred tax assets will not give rise to
future benefits in the Company's income tax returns. The primary timing
differences between financial and tax reporting arise from federal net operating
loss carryforwards, amortization of start up costs, and accrual to cash
conversions that is used for income tax purposes.
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 asset of $758,227 has been fully reserved at December 31, 2010.
As of December 31, 2010, the Company had net operating loss carryforwards for
income tax and financial reporting purposes of approximately $1,132,511 expiring
in the years 2019 through 2030.
The Company has 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 December 31, 2010 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 or state authorities. However
calendar years 2007 and later remain subject to examination by the Internal
Revenue Service and respective states.
Business Combinations
The Company accounts for acquisitions in accordance with guidance found in ASC
805, Business Combinations. The guidance, effective January 1, 2009, requires
consideration given, including contingent consideration, assets acquired and
liabilities assumed to be valued at their fair market values at the acquisition
date. The guidance further provides that: (1) in-process research and
development will be recorded at fair value as an indefinite-lived intangible
assets; (2) acquisition costs will generally be expensed as incurred, (3)
restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; and (4) changes in deferred tax
asset valuations and income tax uncertainties after the acquisition date
generally will affect income tax expense.
ASC 805 requires that any excess of purchase price over fair value of assets
acquired, including identifiable intangibles and liabilities assumed be
recognized as goodwill. In accordance with ASC 805, any excess off fair value of
acquired net assets, including identifiable intangible assets, over the
acquisition consideration results in a bargain purchase gain. Prior to recording
a gain, the acquiring entity must reassess whether all acquired assets and
assumed liabilities have been identified and recognized and perform
re-measurements to verify that the consideration paid, assets acquired and
liabilities assumed have been properly valued.
29
Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)", which amends the consolidation guidance applicable to variable
interest entities, later codified under ASC 810. It replaces the
quantitative-based risks and rewards calculation for determining whether an
enterprise is the primary beneficiary in a variable interest entity with an
approach that is primarily qualitative and requires ongoing assessments of
whether an enterprise is the primary beneficiary of a variable interest entity.
This standard also requires additional disclosures about an enterprise's
involvement in variable interest entities. This standard is effective for us in
our interim and annual reporting periods beginning on and after January 1, 2010.
Earlier application is prohibited. Adoption of this guidance did not have a
significant impact on the determination or reporting of our financial results.
In January 2010, the FASB issued Accounting Standards Update 2010-02,
Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership
of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the
scope of current US GAAP. It clarifies the decrease in ownership provisions of
Subtopic 810-10 and removes the potential conflict between guidance in that
Subtopic and asset derecognition and gain or loss recognition guidance that may
exist in other US GAAP. An entity will be required to follow the amended
guidance beginning in the period that it first adopts FAS 160 (now included in
Subtopic 810-10). For those entities that have already adopted FAS 160, the
amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The adoption did not have
a material impact on the Company's Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures about Fair
Value Measurements". This update requires additional disclosure within the roll
forward of activity for assets and liabilities measured at fair value on a
recurring basis, including transfers of assets and liabilities between Level 1
and Level 2 of the fair value hierarchy and the separate presentation of
purchases, sales, issuances and settlements of assets and liabilities within
Level 3 of the fair value hierarchy. In addition, the update requires enhanced
disclosures of the valuation techniques and inputs used in the fair value
measurements within Levels 2 and 3. The new disclosure requirements are
effective for interim and annual periods beginning after 15 December 2009,
except for the disclosure of purchases, sales, issuances and settlements of
Level 3 measurements. Those disclosures are effective for fiscal years beginning
after 15 December 2010. As ASU 2010-06 only requires enhanced disclosures, the
Company does not expect that the adoption of this update will have a material
effect on its financial statements.
30
In February 2010, the FASB issued Accounting Standards Update 2010-09,
Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a
date through which subsequent events have been evaluated in both issued and
revised financial statements. Revised financial statements include financial
statements revised as a result of either correction of an error or retrospective
application of U.S. GAAP. The FASB also clarified that if the financial
statements have been revised, then an entity that is not an SEC filer should
disclose both the date that the financial statements were issued or available to
be issued and the date the revised financial statements were issued or available
to be issued. The FASB believes these amendments remove potential conflicts with
the SEC's literature. In addition, the amendments in the ASU requires an entity
that is a conduit bond obligor for conduit debt securities that are traded in a
public market to evaluate subsequent events through the date of issuance of its
financial statements and must disclose such date. All of the amendments in the
ASU were effective upon issuance (February 24, 2010) except for the use of the
issued date for conduit debt obligors. That amendment is effective for interim
or annual periods ending after June 15, 2010. The guidance, except for that
related to conduit debt obligations, has been adopted and did not have a
material impact on the Company's Consolidated Financial Statements.
In December 2010, the FASB issued ASU 2010-28, Intangibles--Goodwill and Other
(Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts ("ASU 2010-28"). ASU
2010-28 modifies Step 1 of the goodwill impairment test for reporting units with
zero or negative carrying amounts and requires the company to perform Step 2 if
it is more likely than not that a goodwill impairment may exist. ASU 2010-28 is
effective for fiscal years and interim periods within those years, beginning
after December 15, 2010. Early adoption is not permitted. The Company will adopt
these standards on January 1, 2011 and is currently assessing the impact on its
condensed consolidated financial statements. Under the guidance any impairment
recorded upon adoption is recorded as a cumulative-effect adjustment to
beginning retained earnings in the period of adoption.
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic
805)--Disclosure of Supplementary Pro Forma Information for Business
Combinations ("ASU 2010-29"). This standard update clarifies that, when
presenting comparative financial statements, SEC registrants should disclose
revenue and earnings of the combined entity as though the current period
business combinations had occurred as of the beginning of the comparable prior
annual reporting period only. The update also expands the supplemental pro forma
disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and earnings. ASU 2010-29
is effective prospectively for material (either on an individual or aggregate
basis) business combinations entered into in fiscal years beginning on or after
December 15, 2010 with early adoption permitted. ASU 2010-29 is therefore
effective for acquisitions made after January 1, 2011. We expect that ASU
2010-29 may impact our disclosures for any future business combinations, but the
effect will depend on acquisitions that may be made in the future.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
Not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The audited financial statements of the Company for the years ended December 31,
2010 and 2009, at the end of the document.
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Larry O'Donnell, CPA, PC formerly the independent registered public accountant
for Gulfstar Energy Corporation was dismissed as the Company's independent
registered public accountant on July 8, 2010.
Effective December 14, 2010, the Public Accounting Oversight Board ("PCAOB")
revoked Larry O'Donnell, CPA, P.C.'s registration as a registered public
accountant.
On July 9, 2010, the Board of Directors of the Company approved the engagement
of new auditors, UHY LLP, of Sterling Heights, Michigan to be the Company's
independent registered public accountant. At the time, no audit committee
existed, other than the members of the Board of Directors.
The action to engage new auditors was approved by the Board of Directors. At the
time of this action no audit committee existed, other than the members of the
Board of Directors.
In connection with audit of fiscal years ended December 31, 2009 and 2008 and
the cumulative period of January 1, 2010 through March 31, 2010 and through the
date of termination of the accountants, no disagreements exist with the former
independent registered public accountant on any matter of accounting principles
or practices, financial statement disclosure, internal control assessment, or
auditing scope of procedure, which disagreements if not resolved to the
satisfaction of the former accountant would have caused them to make reference
in connection with their report to the subject of the disagreement(s).
The Independent Auditor Report by Larry O'Donnell, CPA, PC for the fiscal years
ended December 31, 2009 and 2008, contained an opinion which included a
paragraph discussing uncertainties related to continuation of the Company as a
going concern.
54
ITEM 9A. 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 year ended December 31, 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 internal controls
over financial reporting 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.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company in accordance with as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes
those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial statements.
55
We have identified certain material weaknesses in internal control over
financial reporting relating to a shortage of accounting and reporting personnel
due to limited financial resources and the size of our Company, as detailed
below:
(1) The Company currently does not have, but is in the process of
developing formally documented accounting policies and procedures,
which includes establishing a well-defined process for financial
reporting. In January of 2011, we have hired an outside consultant to
assist us with the financial reporting function. After documentation of
our accounting policies and procedures takes place, we plan to focus on
performing and documenting tests of our internal controls on an ongoing
basis throughout the year.
(2) Management has identified the need to perform account reconciliations
on a monthly and quarterly basis to ensure that misstatements are
prevented and detected on a timely basis. We believe these
reconciliations are critical to ensuring the accuracy of our financial
reporting.
(3) Due to the limited size of our accounting department, we currently lack
the resources to handle complex accounting transaction. We believe this
deficiency could lead to errors in the presentation and disclosure of
financial information in our annual, quarterly, and other filings.
(4) As is the case with many companies of similar size, we currently a lack
of segregation of duties in the accounting department. Until our
operations expand and additional cash flow is generated from
operations, a complete segregation of duties within our accounting
function will not be possible.
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.
After January 1, 2011, the Company engaged a certified public accountant to
ensure that our financial statements and disclosures are prepared in accordance
with accounting principles generally accepted in the United States of America.
Due to financial restraints, the Company has not taken any other action to
resolve such weaknesses.
We have concluded that our internal controls over financial reporting were
ineffective as of December 31, 2010, due to the existence of the material
weaknesses noted above that we have yet to fully remediate.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to permanent rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
There was no change in our internal control over financial reporting that
occurred during the fiscal year ended December 31, 2010, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
---------------------------
Not applicable.
56
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
----------------------------------------------------------------
The following table sets forth information as to persons who currently serve as
Gulfstar's directors or executive officers, including their ages as of December
31, 2010.
Name Age Position Term
---------------------------- ------------------------- ---------------------------- -------------------------
Robert McCann 50 President, CEO, Chairman Annual
and Director
Stephen Warner 71 Chief Financial Officer Annual
Secretary and Director
Jason Sharp 38 Vice President and Director Annual
Manager of Gulfstar, LLC
W. Edward Nichols 68 Director Annual
William Young 62 Director Annual
Gulfstar officers are elected by the board of directors at the first meeting
after each annual meeting of Gulfstar shareholders and hold office until their
successors are duly elected and qualified under Gulfstar's bylaws.
The directors named above will serve until the next annual meeting of Gulfstar's
stockholders. Thereafter, directors will be elected for one-year terms at the
annual stockholders' meeting. Officers will hold their positions at the pleasure
of the board of directors absent any employment agreement. There is no
arrangement or understanding between the directors and officers of Gulfstar and
any other person pursuant to which any director or officer was or is to be
selected as a director or officer.
Biographical Information
Robert McCann, President, Chief Executive Officer and Director
Mr. McCann, age 50, earned his Bachelor of Science degree in Finance from Wagner
College in 1981. From 1981 through 1984, he worked with the investment banking
firm of Donaldson, Lufkin and Jenrette. In 1984 Mr. McCann moved into the Public
Finance sector serving as the Treasurer for the City of West Palm Beach. During
his tenure there until in 1986, he was instrumental in raising funds for the
city in sewer, water, parking General Obligation Bonds, while managing a fixed
income portfolio and acting as the custodian of the retirement funds for the
firefighters, police, and general employees pension funds. Returning back to the
private sector in 1991, Mr. McCann assisted in raising in funds for private and
public companies, often working with them in multiple areas such as mergers and
acquisitions and capital restructuring as the Managing Partner at Continuum
Capital Partners, Inc. until 2003. Mr. McCann founded Maxim TEP in January 2004,
where he has served as Founder and Vice Chairman and the largest shareholder.
Maxim has raised funding for both oil and gas assets and pipeline
infrastructure. Maxim has subsequently merged with Conquest Petroleum, a public
corporation. Mr. McCann was appointed the President, CEO and Director of the
Company on May 5, 2010.
57
Stephen J. Warner, Chief Financial Officer, Secretary and Director
Mr. Warner, age 71, was a co-founder of Crossbow Ventures a venture capital
management company in West Palm Beach, Florida. Steve served as President, Chief
Executive Officer, and co-founder of Merrill Lynch Venture Capital, Inc. In
addition, Steve served on the internal investment committees for the selection
of venture capital, leveraged buyout, research and development, real estate, oil
& gas and equipment leasing investments for Merrill Lynch executives. Steve has
also served as a U.S. Government consultant to evaluate the American Enterprise
Funds, established by the U.S. Congress to promote the development of free
enterprise and entrepreneurship in Eastern Europe. For the past five years, Mr.
Warner has served on Boards of Directors for both public and private companies.
Those public companies include Rock Energy Resources, Dyadic International and
AOI Medical. Private boards have included Chairman of Maxim TEP, Search
Transport Industries Inc. and UCT Coatings Inc. Mr. Warner received a Bachelor
of Science degree from Massachusetts Institute of Technology (MIT) and an MBA
from the Wharton School of Business, University of Pennsylvania. Mr. Warner was
appointed an officer and director of the Company on May 5, 2010.
Jason Sharp, Vice President, Chairman and Director
Jason Sharp, age 38, holds a Masters degree in Statistics from the University of
Tennessee and a Masters degree in Business Administration from Mississippi State
University. Jason has served as Chief Financial Officer for Gulfstar Energy
Group, a start-up project where Jason helped develop the business plan and all
financial budgets and projections for a natural gas pipeline gathering system in
Butler County, KY. Jason completed one-off financial analysis on the project,
created a private placement vehicle for raising start-up capital, created and
reviewed key gas purchase and sales contracts, while serving on the board of
this natural gas Company.
For the period of 2001 to 2005 he worked as a Professor in the Business
Department at Mississippi State University, Meridian, Mississippi Campus where
he specialized in business planning and forecasting. Jason also recently served
as Vice President - Chief Management Accountant with Indymac Bank, Pasadena,
California, where he was responsible for financial control of over 65% of
expenses for this 10,000 employee financial services Company.
Mr. Sharp was appointed an officer and director of the Company on June 24, 2010.
William F. Young, Director
William Young, age 62, served four years in the U.S. Navy 1968-72, and spent 12
Years in Transportation Management with Roadway Express 1972-1983. For the past
27 Years he has been a Wholesale Oil Distributor and is currently the President
of Georgia Energy and Engineering Incorporated which concentrates on wholesale
lubricants, gasoline, jet fuel, diesel and propane. Mr. Young was appointed a
director of the Company on June 24, 2010. Mr. Young has been appointed to the
Company's audit committee.
W. Edward Nichols: Director
Mr. Nichols, age 68, is currently a practicing attorney with Nichols & Nichols
in Denver, Colorado. He is authorized to practice in the states of Colorado and
Kansas, the United States Federal Courts, and Supreme Court of the United
States. He is also Managing Director of Nichols & Company LLC, a management
consulting firm and has worked as a private investment banker and consultant
with venture capital companies in the U.S. and Europe. Mr. Nichols grew up in
the oil patch and has owned and operated gas processing plants in Kansas and
Wyoming. He has also co-owned and operated oil drilling, production and gas
gathering companies in Kansas.
58
Mr. Nichols served as the Chief Executive Officer and President of the Company
from August 11, 2004 through May 5, 2010. He has served as a director of the
Company since 2004. Mr. Nichols has been appointed to the Company's audit
committee.
Key Employee
Timothy Sharp, President and Manager of Gulfstar LLC
Mr. Timothy Sharp is the founder of Gulfstar LLC and he manages the day to day
operations of the wells and the pipeline.
Tim, age 57, has over 25 years in the petroleum business. He received a B.A.
from the University of Minnesota in Business Administration. Tim has been
involved in the implementation of numerous gas transportation lines including
Allen County Gas, Burkesville Gas Company, Cajun Gas Co-op, Cumberland Valley
Gas, G-Go Oil and Gas, and SETCO. Tim also serves as president of Indian Gold,
LLC and operating manager and director of Magnolia Lake Estates, both of which
are real estate development companies in Mississippi.
Committees of the Board of Directors
Gulfstar is managed under the direction of its board of directors.
Executive Committee
The Company does not have a separate executive committee. The Board as a whole
functions as the Executive Committee for Gulfstar.
Audit Committee
The Company's Board of Directors, in December 2010, appointed Messrs. Nichols
and Young to serve as the Company's Audit Committee. At the time of this filing,
the Audit Committee does not have a charter and does not have a member that is a
financial expert.
Previous "Blank Check" or "Shell" Company Involvement
Management of Gulfstar has not been involved in prior private "blank-check" or
"shell" companies.
Conflicts of Interest - General.
-------------------------------
Our directors and officers are, or may become, in their individual capacities,
officers, directors, controlling shareholder and/or partners of other entities
engaged in a variety of businesses. Thus, there exist potential conflicts of
interest including, among other things, time, efforts and corporation
opportunity, involved in participation with such other business entities. While
each officer and director of our business is engaged in business activities
outside of our business, the amount of time they devote to our business will be
up to approximately 40 hours per week.
59
Conflicts of Interest - Corporate Opportunities
-----------------------------------------------
Presently no requirement contained in our Articles of Incorporation, Bylaws, or
minutes which requires officers and directors of our business to disclose to us
business opportunities which come to their attention. Our officers and directors
do, however, have a fiduciary duty of loyalty to us to disclose to us any
business opportunities which come to their attention, in their capacity as an
officer and/or director or otherwise. Excluded from this duty would be
opportunities which the person learns about through his involvement as an
officer and director of another company. We have no intention of merging with or
acquiring an affiliate, associate person or business opportunity from any
affiliate or any client of any such person.
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
The following table sets forth the compensation paid to officers and board
members during the fiscal years ended December 31, 2010 and 2009. The table sets
forth this information for Gulfstar, including salary, bonus, and certain other
compensation to the Board members and named executive officers for the past two
fiscal years and includes all Board Members and Officers as of December 31,
2010.
SUMMARY EXECUTIVES COMPENSATION TABLE
Non-equity Non-qualified
incentive deferred
Stock Option plan compensation All other
Salary Bonus awards awards compensation earnings compensation Total
Name & Position Year ($) ($) ($) ($) ($) ($) ($) ($)
Robert McCann, 2010 81,879 0 0 0 0 0 0 81,879
President & CEO (1) 2009 0 0 0 0 0 0 0 0
Stephen J. Warner, 2010 36,000 0 0 0 0 0 0 36,000
CFO (2) 2009 0 0 0 0 0 0 0 0
James Sharp, Vice 2010 107,000 0 0 0 0 0 0 107,000
President (3) 2009 0 0 0 0 0 0 0 0
Timothy Sharp,
President of
Gulfstar Energy 2010 260,781 0 0 0 0 0 0 260,781
Group, LLC (4) 2009 0 0 0 0 0 0 0 0
Edward Nichols (5) 2010 0 0 49,000 0 0 0 0 49,000
2009 0 0 12,500 0 0 0 0 12,500
Herbert Sears (6) 2010 0 0 46,000 0 0 0 0 46,000
2009 0 0 5,000 0 0 0 0 5,000
Ronald Bleckiki, 2010 0 0 0 0 0 0 0 0
Vice President (7) 2009 0 0 15,000 0 0 0 0 15,000
60
(1) Mr. McCann was appointed the President and Chief Executive Officer on May
5, 2010. During the year ended December 31, 2010, Mr. McCann was not paid
his salary rather it has been accrued until such time the Company has
adequate cash reserves to pay his salary. During the year ended December
31, 2010, Safe Harbor Equity Partners, LLC, of which Mr. McCann, the
Company's CEO is an affiliate of, was issued 729,310 shares of restricted
common stock for services.
(2) Mr. Warner was appointed the Chief Financial Officer on May 5, 2010. During
the year ended December 31, 2010, Mr. McCann was not paid his salary rather
it has been accrued until such time the Company has adequate cash reserves
to pay his salary.
(3) Mr. James Sharp was appointed Vice President on June 24, 2010. Mr. Sharp
compensated through the Company's subsidiary, Gulfstar LLC.
(4) Mr. Timothy Sharp is the President of Gulfstar LLC. During the year ended
December 31, 2010, Mr. Timothy Sharp received a salary of $260,781 from
GulfStar LLC.
(5) Mr. Nichols resigned as the President and Chief Executive Officer on May 5,
2010. During the year ended December 31, 2010, Mr. Nichols was issued a
total of 157,500 shares of restricted common stock for his services, as an
officer and director. During the year ended December 31, 2009, Mr. Nichols
was issued 31,250 shares of its common stock for services. The shares of
common stock were valued based upon the price that the Company sells its
commons stock and the value of the shares it issued in connection with its
recent acquisitions.
(6) Mr. Sears resigned as the Company's Chief Financial Officer on May 5, 2010.
During the year ended December 31, 2010, Mr. Sears was issued 57,500 shares
for his services as an officer and director. During the year ended December
31, 2009, Mr. Sears was issued 12,500 shares of common stock in exchange
for services. The shares of common stock were valued based upon the price
that the Company sells its commons stock and the value of the shares it
issued in connection with its recent acquisitions.
(7) Mr. Bleckiki served as the Company's Vice-President from March 1, 2009
through December 1, 2009. During the year ended December 31, 2009, the
Company issued Mr. Bleckicki 37,500 shares of its restricted common stock
in return for services. The shares of common stock were valued based upon
the price that the Company was selling it common stock at the time.
Employment Agreements and Termination of Employment and Change-In-Control
Arrangements
Effective July 1, 2010, Mr. Robert McCann is employed under a 2 year contract at
$120,000 per year, plus participation in Employee Stock Option Plans and any
Bonus Plans. His salary will increase to $264,000 after the completion of at
least $2,000,000 in financing.
Effective July 1, 2010, Mr. Stephen Warner is employed under a 2 year contract
at $72,000 per year, plus participation in Employee Stock Option Plans and any
Bonus Plans. His salary will increase to $120,000 per year after the completion
of at least $2,000,000 in financing
Effective July 1, 2010, Mr. Jason Sharp is employed under a 2 year contract at
$180,000 per year, plus participation in Employee Stock Option Plans and any
Bonus Plans. His salary will increase to $216,000 per year after the completion
of at least $2,000,000 in financing.
Effective July 1, 2010, Mr. Timothy Sharp is employed under a 2 year contract at
$300,000 per year, plus participation in Employee Stock Option Plans and any
Bonus Plans for the 60% Subsidiary Gulfstar Energy Group LLC. His salary will
increase to $360,000 per year after the completion at least $2,000,000 in
financing.
The Employment Agreements provided for termination by Gulfstar for cause upon 30
days written notice with cause being defined as:
(i) Conviction of a felony, a crime or moral turpitude or commission of an act
of embezzlement or fraud against the Company;
(ii) Deliberate dishonesty of the Executive resulting in damages to the Company;
(iii) Dereliction of duty, misfeasance or malfeasance; and
(iv) Any breach of Executive of the agreement or any other agreement between the
Executive and the Company.
61
The employment agreements provide for the executive to terminate for Good
reason. The Executive must give written notice to the Company of his intent to
terminate for Good Reason and offer the Company 30 days in which to resolve the
circumstances giving rise to the notice. If such event or circumstances shall
remain unremedied, the Executive may then terminate his employment for Good
Reason by further written notice effective immediately. Good Reason is defined
as: the breach by the Company of any material provision of this Agreement or the
failure of the Company, its directors or officers while acting on behalf of the
Company, to comply with all applicable laws and government rules and
regulations.
The Company has no pension, health, annuity, bonus, insurance, stock options,
profit sharing or similar benefit plans; however, the Company may adopt such
plans in the future. There are presently no personal benefits available for
directors, officers, or employees of the Company.
Compensation Committee Interlocks and Insider Participation
The Gulfstar board of directors in its entirety acts as the compensation
committee for Gulfstar.
Director Compensation
The following table sets forth certain information concerning compensation paid
to our directors for services as directors, but not including compensation for
services as officers reported in the "Summary Executives Compensation Table"
during the year ended December 31, 2010:
Fees Non-equity Non-qualified
earned incentive deferred
Name or paid plan compensation All other
in cash Stock Option compensation earnings compensation Total
($) awards ($) awards ($) ($) ($) ($) ($)
------------------------- ---------- ----------- ----------- --------------- --------------- ---------------- -----------
Robert McCann (1) $ -0- $ -0- $ -0- $ -0- $ -0- $ 81,879 $81,879
Stephen Warner (2) $ -0- $ -0- $ -0- $ -0- $ -0- $ 36,000 $36,000
Jason Sharp (3) $ -0- $ -0- $ -0- $ -0- $ -0- $107,000 $107,000
William Young (4) $ -0- $ -0- $ -0- $ -0- $ -0- $ -0- $ -0-
W. Edward Nichols (5) $ -0- $ -0- $ -0- $ -0- $ -0- $ 49,000 $49,000
Herbert T. Sears(6) $ -0- $ -0- $ -0- $ -0- $ -0- $ 46,000 $ 46,000
62
(1) Mr. McCann was appointed a director and Chief Executive Officer on May
5, 2010. During the year ended December 31, 2010, Mr. McCann was not
paid his salary for his services as an officer of the Company rather it
has been accrued until such time the Company has adequate cash reserves
to pay his salary.During the year ended December 31, 2010, Safe
Harbor Equity Partners, LLC, of which Mr. McCann , the Company's
CEO is an affiliate of, was issued 729,310 shares of restricted
common stock for services.
(2) Mr. Warner was appointed a director the Chief Financial Officer on May
5, 2010. During the year ended December 31, 2010, Mr. Warner was not
paid his salary for his services as an officer of the Company rather it
has been accrued until such time the Company has adequate cash reserves
to pay his salary.
(3) Mr. James Sharp was appointed Vice President and a director on June
24, 2010. Mr. Sharp receives compensation for his services as an
officer through the Company's subsidiary Gulfstar LLC.
(4) Mr. Young was appointed a director of the Company on May 5, 2010.
(5) Mr. Nichols resigned as the President and Chief Executive Officer on
May 5, 2010. During the year ended December 31, 2010, Mr. Nichols was
issued a total of 157,500 shares of restricted common stock for his
services, as an officer and director. The shares of common stock were
valued based upon the price that the Company sells its commons stock
and the value of the shares it issued in connection with its recent
acquisitions.
(6) Mr. Sears resigned as the Company's Chief Financial Officer and a
director of the Company on May 5, 2010. During the year ended December
31, 2010, Mr. Sears was issued 57,500 shares for his services as an
officer and director. The shares of common stock were valued based upon
the price that the Company sells its commons stock and the value of the
shares it issued in connection with its recent acquisitions.
All of our officers and/or directors will continue to be active in other
companies. All officers and directors have retained the right to conduct their
own independent business interests.
It is possible that situations may arise in the future where the personal
interests of the officers and directors may conflict with our interests. Such
conflicts could include determining what portion of their working time will be
spent on our business and what portion on other business interest. To the best
ability and in the best judgment of our officers and directors, any conflicts of
interest between us and the personal interests of our officers and directors
will be resolved in a fair manner which will protect our interests. Any
transactions between us and entities affiliated with our officers and directors
will be on terms which are fair and equitable to us. Our Board of Directors
intends to continually review all corporate opportunities to further attempt to
safeguard against conflicts of interest between their business interests and our
interests.
We have no intention of merging with or acquiring an affiliate, associated
person or business opportunity from any affiliate or any client of any such
person.
Limitation on Liability and Indemnification
The Colorado Business Corporation Act requires us to indemnify officers and
directors for any expenses incurred by any officer or director in connection
with any actions or proceedings, whether civil, criminal, administrative, or
investigative, brought against such officer or director because of his or her
status as an officer or director, to the extent that the director or officer has
been successful on the merits or otherwise in defense of the action or
proceeding. The Colorado Business Corporation Act permits a corporation to
indemnify an officer or director, even in the absence of an agreement to do so,
for expenses incurred in connection with any action or proceeding if such
officer or director acted in good faith and in a manner in which he or she
reasonably believed to be in or not opposed to the best interests of us and such
indemnification is authorized by the stockholders, by a quorum of disinterested
directors, by independent legal counsel in a written opinion authorized by a
majority vote of a quorum of directors consisting of disinterested directors, or
by independent legal counsel in a written opinion if a quorum of disinterested
directors cannot be obtained.
63
The Colorado Business Corporation Act prohibits indemnification of a director or
officer if a final adjudication establishes that the officer's or director's
acts or omissions involved intentional misconduct, fraud, or a knowing violation
of the law and were material to the cause of action. Despite the foregoing
limitations on indemnification, the Colorado Business Corporation Act may permit
an officer or director to apply to the court for approval of indemnification
even if the officer or director is adjudged to have committed intentional
misconduct, fraud, or a knowing violation of the law.
The Colorado Business Corporation Act also provides that indemnification of
directors is not permitted for the unlawful payment of distributions, except for
those directors registering their dissent to the payment of the distribution.
According to our bylaws, we are authorized to indemnify our directors to the
fullest extent authorized under Colorado Law subject to certain specified
limitations.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and persons controlling
us pursuant to the foregoing provisions or otherwise, we are advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
EQUITY COMPENSATION PLAN INFORMATION
The Company has not established an equity compensation plan or Incentive Stock
Option Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
--------------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS.
---------------------------
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding common stock by:
o each person who is known by the Company to be the beneficial owner of five
percent (5%) or more of Gulfstar's common stock;
o the Company's chief executive officer, its other executive officers, and
each director as identified in the "Management-- Executive Compensation"
section; and
o all of the Company's directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock and options, warrants
and convertible securities that are currently exercisable or convertible within
60 days of the date of this document into shares of the Company's common stock
are deemed to be outstanding and to be beneficially owned by the person holding
the options, warrants or convertible securities for the purpose of computing the
percentage ownership of the person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
The information below is based on the number of shares of Company's common stock
that Gulfstar believes was beneficially owned by each person or entity as of
December 31, 2010.
64
Title of Class Name and Address of Beneficial Amount and Percent of Class(1)
Owner Nature of
Beneficial Owner
----------------- ----------------------------------- ------------------ ---------------------
Common shares Jason Sharp, Vice President 2,000,000 11.77%
and Director
Common shares Timothy Sharp, CEO of Gulfstar LLC 9,659,659 56.87%
Common shares Robert McCann, CEO and Director (2) 1,718,750 10.11%
Common shares Stephen Warner, CFO and Director(3) 750,000 4.41%
Common shares W. Edward Nichols Director (3) 283,574 1.66%
William F. Young, 0 0%
Common shares Director
------------------ ---------------------
All Officers and Directors as a
group (5 individuals) 4,752,324 27.97%
(1) Based on 16,985,086 shares of common stock issued and outstanding on
December 31, 2010.
(2) Mr. McCann holds 1,525,000 shares directly and 193,750 shares beneficially
through the Robert McCann Trust.
(3) Mr. Warner holds 750,000 shares beneficially through the Warner Lakeside
Trust.
(4) Mr. Nichols owns 269,002 shares of common stock directly, 2,200 shares of
common stock jointly with his wife and 12,372 shares indirectly though his
wife
Rule 13d-3 under the Securities Exchange Act of 1934 governs the
determination of beneficial ownership of securities. That rule provides
that a beneficial owner of a security includes any person who directly or
indirectly has or shares voting power and/or investment power with respect
to such security. Rule 13d-3 also provides that a beneficial owner of a
security includes any person who has the right to acquire beneficial
ownership of such security within sixty days, including through the
exercise of any option, warrant or conversion of a security. Any securities
not outstanding which are subject to such options, warrants or conversion
privileges are deemed to be outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by such person.
Those securities are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person. Included
in this table are only those derivative securities with exercise prices
that Gulfstar believes have a reasonable likelihood of being "in the money"
within the next sixty days.
65
EQUITY COMPENSATION PLAN INFORMATION
The Company has not established an equity compensation plan or Incentive Stock
Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
During the year ended December 31, 2010, the Company entered into Employment
Agreements with Messrs. McCann, Warner and Sharp officers and directors of the
Company. In addition, the Company has entered into an Employment Agreement with
Mr. Timothy Sharp, a majority shareholder in the Company. These agreements are
described in detail under "Executive Compensation."
During the years ended December 31, 2010 and December 31, 2009, the following
officers and directors received stock as part of the acquisitions of Talon and
Gulfstar LLC:
Name Number of Shares
---------------------------- ----- --------------------------
Robert McCann 1,943,750
Stephen Warner 750,000
Jason Sharp 2,000,000
Timothy Sharp 9,659,659
As part of the acquisition of Talon, Safe Harbor Equity Partners, LLC, of which
Mr. McCann, the Company's CEO is an affiliate of, was issued 729,310 shares of
the Company's common stock for services.
During the year ended December 31, 2010, Barren River Partners LLC, an affiliate
of Mr. Timothy Sharp, a greater than 5% shareholder of the Company and a
member-manager of Gulfstar LLC advanced Gulfstar LLC funds of $335,078. Such
funds are due by December 31, 2011.
During the year ended December 31, 2010, the Company made issuance of its common
stock for the services and debt to the following:
Name Number of Shares Reason
------------------------------------- ---- ------------------------- --- ------------------------
Edward Nichols,
Director and Former Officer 10,000 Debt of $6,649
Edward Nichols,
Director and Former Officer 157,500 $49,000 Services
Herbert Sears, 10,000 Debt of $6,649
Herbert Sears 57,500 $46,000 Services
During the year ended December 31, 2009, the Company made issuance of its common
stock as follows:
Name Number of Shares $ Value of Shares
---- ---------------- -----------------
W. Edward Nichols,
Director and Former Officer 31,250 $12,500
Herbert T. Sears,
Former Officer and Director 12,500 $5,000
Ron Blekicki,
Former Officer and Director 37,500 $15,000
66
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
-----------------------------------------------
UHY LLP is our current independent registered public accounting firm. UHY LLP
personnel work under the direct control of UHY LLP partners and are leased from
wholly-owned subsidiaries of UHY Advisors, Inc. in an alternative practice
structure.
We were billed by UHY LLP $120,980 and $0 during the years ended December 31,
2010 and 2009, respectively, for professional services, which include fees
associated with the annual audit of the consolidated financial statements and
review of our quarterly reports on Form 10-Q and other SEC filings. UHY LLP's
fees include audit work for Gulfstar LLC the years ended December 31, 2009 and
2008, prior to the reverse recapitalization.
Year Ended December 31,
2010 2009
----------------------------- ----------------------------
Audit Fees $38,760 $0
Audit-related Fees $68,690 $0
Tax Fees $0 $0
All Other Fees $13,530 $0
----------------------------- ----------------------------
Total Fees $120,980 $0
Audit Committee Pre-Approval Policy and Permissible Non-Audit Services of
Independent Public Accounting Firm
Our Audit Committee pre-approves all audit and permissible non-audit services
provided by our independent registered public accounting firm. These services
may include audit services, audit-related services, tax services, and other
services. Pre-approval is generally provided for up to one year, and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The engagement of our independent
registered public accounting firm was approved by our Board of Directors,
functioning as our Audit Committee, prior to the start of providing quarterly
and annual services related to the year ended December 31, 2010.
67
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
-------------------------------------------------
The following is a complete list of exhibits filed as part of this Form 10K.
Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of
Regulation S-K.
(a) Audited financial statements for years ended December 31, 2010 and 2009
(b) Exhibit No. Description
----------- -----------
2.1 Revised and Amended Share Purchase and Exchange Agreement by and between
Bedrock Energy, Inc. and Talon Energy Corporation (1)
2.2 Acquisition Agreement, dated as of June 23,2010, by and among Gulfstar
Energy Corporation and Gulfstar Energy Group, LLC on behalf of certain
investment holders (10
2.3 Share Exchange Agreement, dated June 23, 2010 by and between Gulfstar Energy
Corporation, Jason Sharp and Timothy Sharp and Gulfstar Energy, LLC (1)
2.4 Assignment of Interest in Gulfstar Energy Group, LLC Consent of Manager,
3.3(ii) Operating Agreement of Gulfstar Energy Group, LLC (1)
10.1 Employment Agreement - Robert McCann, dated June 23, 2010 (1)
10.2 Employment Agreement - Stephen J. Warner, dated June 23, 2010 (1)
10.3 Employment Agreement - Jason Sharp, dated June 23, 2010 (1)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act (2)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act (2)
32.1 Certification of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act (2)
32.2 Certification of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act (2)
(1) Incorporated by reference from the exhibits to the Company's Current Report
on Form 8-K filed with the Securities and Exchange Commission on August 5,
2010.
(2) Filed Herewith.
68
UHY LLP
Certified Public Accountants
12900 Hall Road, Suite 510
Sterling Heights, MI 48313-1153
Telephone 586-254-8141
Fax 586-254-9406
Web www.uhy-us.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and
Shareholders of Gulfstar Energy Corporation
We have audited the accompanying consolidated balance sheets of Gulfstar Energy
Corporation and Subsidiaries as of December 31, 2010 and 2009 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years then ended. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted my audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidation financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Gulfstar Energy Corporation and
Subsidiaries as of December 31, 2010 and 2009, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As described in Note 3 to the consolidated financial statements, the
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company's recurring losses
from operations, accumulated deficit and working capital deficit raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also discussed in Note 3 to the consolidated
financial statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ UHY LLP
Sterling Heights, Michigan
April 22, 2011
33
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(FORMERLY BEDROCK ENERGY, INC)
(A Company in the Development Stage)
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
2010 2009
ASSETS
--------------- ----------------
Cash and cash equivalents $ 65,799 $ 705,622
Accounts receivable:
Pipeline receivable 11,446 -
Joint interest operations 22,207 -
Prepaids and other assets 33,660 -
Note receivable - 10,000
--------------- ----------------
Total current assets 133,112 715,622
--------------- ----------------
Property and equipment
Non oil and gas properties 180,954 106,904
Pipeline 4,119,885 3,531,961
Oil and gas properties 287,024 -
Accumulated depreciation (183,549) (28,773)
--------------- ----------------
Net property and equipment 4,404,314 3,610,092
--------------- ----------------
Note receivable, related party - 82,325
Goodwill 368,369 -
Intangible assets 170,874 169,374
--------------- ----------------
Total other assets 539,243 251,699
--------------- ----------------
Total assets $ 5,076,669 $ 4,577,413
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 936,418 $ 842,149
Litigation settlement payable 15,000 70,000
Oil and gas proceeds due to others 33,477 -
Deposits - 503,224
Loan payable, related party 335,078 -
Accrued liabilities 488,380 30,655
--------------- ----------------
Total current liabilities 1,808,353 1,446,028
--------------- ----------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
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;
16,985,086 and 11,659,659 shares issued and outstanding
at December 31, 2010 and December 31, 2009, respectively 16,985 11,660
Additional paid-in capital 6,296,861 6,180,126
Accumulated deficit (4,332,703) (3,060,401)
--------------- ----------------
Stockholders' equity before non-controlling interest 1,981,143 3,131,385
Non-controlling interest 1,287,173 -
--------------- ----------------
Total stockholders' equity 3,268,316 3,131,385
--------------- ----------------
Total liabilities and stockholders' equity $ 5,076,669 $ 4,577,413
================ ================
The accompanying notes are an integral part of the consolidated financial statements.
34
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(FORMERLY BEDROCK ENERGY, INC)
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
May 19, 2006
Years Ended December 31, (Inception) through
-----------------------------------------------
2010 2009 December 31, 2010
--------------------- -------------------- ------------------------
Net revenues $ 101,277 $ - $ 101,277
Cost of revenues 36,842 - 36,842
--------------------- -------------------- ------------------------
Gross profit 64,435 - 64,435
--------------------- -------------------- ------------------------
Operating expenses:
General and administrative expenses 1,919,775 596,198 4,755,747
--------------------- -------------------- ------------------------
Total operating expenses 1,919,775 596,198 4,755,747
--------------------- -------------------- ------------------------
Loss from operations (1,855,340) (596,198) (4,691,312)
--------------------- -------------------- ------------------------
Other income (expense)
Interest income 3,926 764 5,347
Interest expense (279) - (279)
Other income 230,132 9,784 243,260
Other expense - (170,000) (238,978)
--------------------- -------------------- ------------------------
Total other income (expense) 233,779 (159,452) 9,350
--------------------- -------------------- ------------------------
Loss before income taxes (1,621,561) (755,650) (4,681,962)
Income taxes - - -
--------------------- -------------------- ------------------------
Net loss (1,621,561) (755,650) (4,681,962)
Less: net loss attributable to the
non-controlling interest 349,259 - 349,259
--------------------- -------------------- ------------------------
Net loss attributable to
Common Stockholders $ (1,272,302) $ (755,650) $ (4,332,703)
===================== ==================== ========================
Basic and diluted net loss
per common share $ (0.09) $ (0.06)
===================== ====================
Weighted average number of
common shares outstanding 14,244,250 11,659,659
===================== ====================
The accompanying notes are an integral part of the consolidated financial statements.
35
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(FORMERLY BEDROCK ENERGY, INC)
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Shares Common Shares Additional Total Gulfstar Non-con- Total Share
No Par Value $.001 Par Value Paid-in Accumulated Shareholders' trolling holders'
Shares Amount Shares Amount Capital Deficit Equity Interest Equity
--------------------------------------------------------------------------------------------------------------------
BALANCES,
January
1, 2009 - $ - $ 11,659,659 $ 11,660 3,357,222 $(2,304,751) $ 1,064,131 $ - $ 1,064,131
Issuance of
shares - - 2,914,540 - 2,914,540 - 2,914,540
Redemption
of shares - - - - (91,636) - (91,636) - (91,636)
Net loss - - - - - (755,650) (755,650) - (755,650)
------ ------ ----------- ----------- -------------- ----------- ------------ ----------- --------------
BALANCES,
December
31, 2009 - - 11,659,659 11,660 6,180,126 (3,060,401) 3,131,385 - 3,131,385
Issuance of
shares
relating to
acquisition
of Talon
Energy
Corporation - - 3,509,530 3,509 101,776 - 105,285 - 105,285
Recapitaliza-
tion of
shares - - 1,511,563 1,512 20,686 - 22,198 - 22,198
Non-controll-
ing
interest
relating to
acquisition
of Gulfstar
Energy
Group LLC - - - - (1,444,281) - (1,444,281) 1,444,281 -
Issuance of
shares, net
of costs - - 304,334 304 445,110 - 445,414 - 445,414
Members cash
contribu-
tions,
net of
costs - - - - 879,250 - 879,250 - 879,250
Non-cash
members'
contribu-
tions - - - - 306,345 - 306,345 - 306,345
Adjustment
to non-
controlling
interest
due to
subsidiary
equity
changes - - - - (192,151) - (192,151) 192,151 -
Net loss - - - - - (1,272,302) (1,272,302) (349,259) (1,621,561)
------ ------ ----------- ----------- -------------- ----------- ------------ ----------- --------------
BALANCES,
December
31, 2010 - $ - 16,985,086 $ 16,985 $ 6,296,861 $(4,332,703) $ 1,981,143 $1,287,173 $ 3,268,316
====== ====== =========== =========== ============== =========== ============ =========== ==============
The accompanying notes are an integral part of the consolidated financial statements.
36
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(FORMERLY BEDROCK ENERGY, INC)
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period From
May 19, 2006
Years Ended December 31, (Inception) through
----------------------------------------
2010 2009 December 31, 2010
------------------- ------------------ ----------------------
OPERATING ACTIVITIES
Net loss attributable to common stockholders $ (1,272,302) $ (755,650) $ (4,332,703)
Adjustments to reconcile net loss to net cash
flows provided by (used in) operating activities:
Non-controlling interest (349,259) - (349,259)
Conversion of related party note receivable to compensation 82,325 - 82,325
Non-cash issuance of equity for services 331,565 - 331,565
Depreciation 154,776 15,295 183,549
Changes in: -
Accounts receivable (33,653) - (33,653)
Prepaids and other assets (33,660) - (33,660)
Accounts payable and accrued liabilities 209,215 797,120 1,082,019
Litigation settlement payable (55,000) 70,000 15,000
Oil and gas proceeds due to others 33,477 33,477
Deposits (503,224) 263,688 -
------------------- ------------------ ----------------------
Net cash provided by (used in) operating activities (1,435,740) 390,453 (3,021,340)
------------------- ------------------ ----------------------
INVESTING ACTIVITIES
Expenditures for non oil & gas property and equipment (74,050) (49,774) (180,954)
Expenditures for oil and gas properties (287,024) - (287,024)
Expenditures for pipeline (587,924) (2,916,368) (4,119,885)
Acquisition of Talon Energy Corporation, cash acquired 76,977 - 76,977
Expenditures for intangible assets (1,500) (114,342) (170,874)
Issuance of related party note receivable - - (82,325)
Net activity under note receivable 10,000 (10,000) -
------------------- ------------------ ----------------------
Net cash used in investing activities (863,521) (3,090,484) (4,764,085)
------------------- ------------------ ----------------------
FINANCING ACTIVITIES
Issuance of shares and member contributions 1,324,360 2,914,540 7,657,782
Redemption of shares - (91,636) (141,636)
Proceeds from related party loan payable 335,078 - 335,078
------------------- ------------------ ----------------------
Net cash provided by financing activities 1,659,438 2,822,904 7,851,224
------------------- ------------------ ----------------------
NET CHANGE IN CASH (639,823) 122,873 65,799
CASH, Beginning 705,622 582,749 -
------------------- ------------------ ----------------------
CASH, Ending $ 65,799 $ 705,622 $ 65,799
=================== ================== ======================
The accompanying notes are an integral part of the consolidated financial statements.
37
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(Formerly Bedrock Energy, Inc.)
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Organization
Bedrock Energy, Inc. was incorporated in Colorado on August 11, 2004 and on May
5, 2010 its name was changed to Gulfstar Energy Corporation ("Company").
On May 5, 2010, the Company entered into a Share Exchange 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 Share Exchange
Agreement with Talon was replaced by a similar Revised and Amended Share
Acquisition Agreement between Talon and the Company and in conjunction with a
June 24, 2010 Share Exchange Agreement between the Company and Gulfstar Energy
Group, LLC ("Gulfstar LLC"), a privately held Mississippi Limited Liability
Company, for 58.3% of the outstanding equity interests of Gulfstar LLC, and an
Acquisition Agreement between the Company and Gulfstar LLC to acquire the
remaining 41.7% of the outstanding equity interests of Gulfstar LLC. The Revised
and Amended Share Acquisition Agreement and Share Exchange Agreement were both
effective as of June 30, 2010.
The Revised and Amended Share Acquisition Agreement with Talon 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 owned 100% of the issued
and outstanding shares of Talon.
The Share Exchange Agreement between the Company and Gulfstar LLC provided for
Jason Sharp and Timothy Sharp, officers and members of Gulfstar LLC, to exchange
their 58.3% of Gulfstar LLC outstanding equity interests for 11,659,659
restricted shares of common stock of the Company.
The Gulfstar LLC exchange was accounted for as a reverse recapitalization in
which Gulfstar LLC was determined to be the acquirer for accounting purposes.
The June 24, 2010 Acquisition Agreement between the Company and Gulfstar LLC
provides for the acquisition of the remaining outstanding equity interests of
Gulfstar 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 by the Company to the individual equity interest holders of
Gulfstar LLC. Therefore, as of December 31, 2010, the remaining 41.6% equity
interests of Gulfstar LLC have not been acquired by the Company.
Gulfstar LLC built and currently operates a 16-mile natural gas pipeline supply
system in Western Kentucky for the transportation of natural gas and provides
management services for the operation of 20 wells in Kentucky of which it holds
overriding royalty interest of approximately 12.5%and holds mineral rights on
approximately 9,000 acres of leased land. The pipeline has become the main
operation of the Company while the Company continues to manage the existing oil
and gas wells. Geographically, the Company is focused on oil and
non-conventional shale gas in the Illinois Basin of Western Kentucky while its
strategy is to concentrate on lower risk profile income producing oil and gas
assets that have sizable developmental drilling potential with multiple pay
zones. The Company intends to enhance its Pipeline development efforts with
private producers of constrained and shut-in natural gas assets in Western
Kentucky. As such, the Company will provide producers in its area with a turnkey
solution to move existing production towards liquidity.
38
Principles of Consolidation
The accompanying consolidated balance sheet as of December 31, 2009 and the
consolidated statement of operations and cash flows for the year ended December
31, 2009 and for the period from (inception) May 19, 2006 through June 30, 2010
include only the accounts of Gulfstar LLC. The accompanying balance sheet as of
December 31, 2010 and the consolidated statement of operations and cash flows
for the period beginning July 1, 2010 (date of acquisition) through December 31,
2010 include the accounts of Gulfstar Energy Corporation, Gulfstar LLC and
Talon. All significant inter-company balances and transactions have been
eliminated during consolidation.
Reclassification
Certain amounts previously reported have been reclassified in connection with
the reverse recapitalization and to conform to current presentation.
Development Stage
The Company, through its subsidiaries, is currently focusing on the operation of
its pipeline system and management of existing oil and gas wells. 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 has been realized from the Company's to-date activities. The
consolidated statements of operations are 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 LLC, which is consolidated,
but not wholly owned by the Company. At December 31, 2010, the Company owned
58.4% of the equity interest of Gulfstar LLC and therefore, the non-controlling
interest of 41.6% was $1,287,171.
Income Taxes
Gulfstar LLC is a limited liability company, which is not a tax paying entity
for Federal income tax purposes. Its pro rata shares of income, losses and tax
credits is passed through to its members and reported by its members on their
individual income tax returns. Thus, since the consolidated statement of
operations for the year ended December 31, 2009 and for the period January 1,
2010 through June 30, 2010 include the accounts of Gulfstar LLC, only no
provision for federal income taxes or for deferred taxes has been determined for
these periods. Therefore, the Company has determined only for the period July 1,
2010 through December 31, 2010 any provision for income taxes or deferred taxes
and this determination has been based upon the accounts of Gulfstar Energy
Corporation and Talon including the pro rata loss of Gulfstar LLC passed through
and reportable by Gulfstar Energy Corporation.
39
The Company accounts for income taxes under the liability method as prescribed
by ASC authoritative guidance. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted rates expected to be in effect during
the year in which the basis difference reverses. The realizability of deferred
tax assets are evaluated quarterly and a valuation allowance is provided if it
is more likely than not that the deferred tax assets will not give rise to
future benefits in the Company's income tax returns. The primary timing
differences between financial and tax reporting arise from federal net operating
loss carryforwards, amortization of start up costs, and accrual to cash
conversions that is used for income tax purposes.
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 asset of $758,227 has been fully reserved at December 31, 2010.
As of December 31, 2010, the Company had net operating loss carryforwards for
income tax and financial reporting purposes of approximately $1,132,511 expiring
in the years 2019 through 2030.
The Company has 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 December 31, 2010 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 or state authorities. However
calendar years 2007 and later remain subject to examination by the Internal
Revenue Service and respective states.
Business Combinations
The Company accounts for acquisitions in accordance with guidance found in ASC
805, Business Combinations. The guidance, effective January 1, 2009, requires
consideration given, including contingent consideration, assets acquired and
liabilities assumed to be valued at their fair market values at the acquisition
date. The guidance further provides that: (1) in-process research and
development will be recorded at fair value as an indefinite-lived intangible
assets; (2) acquisition costs will generally be expensed as incurred, (3)
restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; and (4) changes in deferred tax
asset valuations and income tax uncertainties after the acquisition date
generally will affect income tax expense.
ASC 805 requires that any excess of purchase price over fair value of assets
acquired, including identifiable intangibles and liabilities assumed be
recognized as goodwill. In accordance with ASC 805, any excess off fair value of
acquired net assets, including identifiable intangible assets, over the
acquisition consideration results in a bargain purchase gain. Prior to recording
a gain, the acquiring entity must reassess whether all acquired assets and
assumed liabilities have been identified and recognized and perform
re-measurements to verify that the consideration paid, assets acquired and
liabilities assumed have been properly valued.
Loss Per Share
Loss per share requires presentation of both basic and diluted loss 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. As
of December 31, 2010 and 2009, the Company had outstanding no options, warrants
or contingent shares.
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.
40
Concentration of Credit Risk
The Company, from time to time during the periods covered by these consolidated
financial statements, may have bank balances in excess of its insured limits.
Management has deemed this a normal business risk.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all cash and
highly liquid investments with initial maturities of three months or less to be
cash equivalents.
Accounts Receivable
Accounts receivable are stated at their cost less any allowance for doubtful
accounts. The allowance for doubtful accounts is based on the management's
assessment of the collectibility of specific customer accounts and the aging of
the accounts receivable. If there is deterioration in a major customer's
creditworthiness or if actual defaults are higher than the historical
experience, the management's estimates of the recoverability of amounts due to
the Company could be adversely affected. Based on the management's assessment,
there is no reserves recorded as of December 31, 2010.
Revenue Recognition
The Company recognizes revenue from its Pipeline activities upon shipment of the
gas to its customers. Royalty revenue is recognized from the Company's
well-management activities in the period of delivery.
Property and Equipment
The Company follows the full cost method of accounting for oil and natural gas
operations. Under this method all productive and nonproductive costs incurred in
connection with the acquisition, exploration, and development of oil and natural
gas reserves are capitalized. No gains or losses are recognized upon the sale or
other disposition of oil and natural gas properties except in transactions that
would significantly alter the relationship between capitalized costs and proved
reserves. The costs of unevaluated oil and natural gas properties are excluded
from the amortizable base until the time that either proven reserves are found
or it has been determined that such properties are impaired. As properties
become evaluated, the related costs transfer to proved oil and natural gas
properties using full cost accounting. None of the capitalized costs in the
amount of $276,533 were included in the amortization base as of December 31,
2010 nor did the Company expense any capitalized costs during the years ended
December 31, 2010 and 2009. The Company does not have significant oil and gas
producing activities as of December 31, 2010 and its oil and gas properties are
still in the drilling phase and have not been evaluated.
Management capitalizes additions to property and equipment including its
pipeline. 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
consolidated statements of operations.
41
The Company has capitalized internal costs of approximately $25,800 and $10,500
for the years ended December 31, 2010 and 2009 respectively. Such capitalized
costs include benefits of individuals directly involved in the Company's
construction of its pipeline based on the percentage of their time devoted to
such activities.
In accordance with authoritative guidance on accounting for the impairment of
disposal of long-lived assets, as set forth in Topic 360 of the ASC, the Company
assesses the recoverability of the carrying value of its non-oil and gas
long-lived assets when events occur that indicate an impairment in value may
exist. An impairment loss is indicated if the sum of the expected undiscounted
future net cash flows is less than the carrying amount of the assets. If this
occurs, an impairment loss is recognized for the amount by which the carrying
amount of the assets exceeds the estimated fair value of the asset. No events
occurred during the years ended December 31, 2010 and 2009 that would be
indicative of possible impairment.
Goodwill
In accordance with generally accepted accounting principles, goodwill cannot be
amortized, however, it must be tested annually for impairment. This impairment
test is calculated at the reporting unit level. The goodwill impairment test has
two steps. The first identifies potential impairments by comparing the fair
value of a reporting unit with its book value, including goodwill. If the fair
value of the reporting unit exceeds the carrying amount, goodwill is not
impaired and the second step is not necessary. If the carrying value exceeds the
fair value, the second step calculates the possible impairment loss by comparing
the implied fair value of goodwill with the carrying amount. If the implied
goodwill is less than the carrying amount, a write-down is recorded. Management
tests goodwill each year for impairment, or when facts or circumstances indicate
impairment has occurred. No facts or circumstances were noted during the year
ended December 31, 2010, which would be indicative of possible impairment.
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
and therefore, 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 first half of 2010
and is currently delivering 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 income 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.
42
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss) and
accordingly, net loss is equal to comprehensive loss in all periods.
Share-Based Compensation
The Company accounts for share-based payment accruals under authoritative
guidance on stock compensation as set forth in Topic 718 of the Codification.
The guidance requires all share-based payments to employees, including grants of
employee stock option, to be recognized in the financial statements based on
their fair values.
Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)", which amends the consolidation guidance applicable to variable
interest entities, later codified under ASC 810. It replaces the
quantitative-based risks and rewards calculation for determining whether an
enterprise is the primary beneficiary in a variable interest entity with an
approach that is primarily qualitative and requires ongoing assessments of
whether an enterprise is the primary beneficiary of a variable interest entity.
This standard also requires additional disclosures about an enterprise's
involvement in variable interest entities. This standard is effective for us in
our interim and annual reporting periods beginning on and after January 1, 2010.
Earlier application is prohibited. Adoption of this guidance did not have a
significant impact on the determination or reporting of our financial results.
In January 2010, the FASB issued Accounting Standards Update 2010-02,
Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership
of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the
scope of current US GAAP. It clarifies the decrease in ownership provisions of
Subtopic 810-10 and removes the potential conflict between guidance in that
Subtopic and asset derecognition and gain or loss recognition guidance that may
exist in other US GAAP. An entity will be required to follow the amended
guidance beginning in the period that it first adopts FAS 160 (now included in
Subtopic 810-10). For those entities that have already adopted FAS 160, the
amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The adoption did not have
a material impact on the Company's Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures about Fair
Value Measurements". This update requires additional disclosure within the roll
forward of activity for assets and liabilities measured at fair value on a
recurring basis, including transfers of assets and liabilities between Level 1
and Level 2 of the fair value hierarchy and the separate presentation of
purchases, sales, issuances and settlements of assets and liabilities within
Level 3 of the fair value hierarchy. In addition, the update requires enhanced
disclosures of the valuation techniques and inputs used in the fair value
measurements within Levels 2 and 3. The new disclosure requirements are
effective for interim and annual periods beginning after 15 December 2009,
except for the disclosure of purchases, sales, issuances and settlements of
Level 3 measurements. Those disclosures are effective for fiscal years beginning
after 15 December 2010. As ASU 2010-06 only requires enhanced disclosures, the
Company does not expect that the adoption of this update will have a material
effect on its financial statements.
43
In February 2010, the FASB issued Accounting Standards Update 2010-09,
Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a
date through which subsequent events have been evaluated in both issued and
revised financial statements. Revised financial statements include financial
statements revised as a result of either correction of an error or retrospective
application of U.S. GAAP. The FASB also clarified that if the financial
statements have been revised, then an entity that is not an SEC filer should
disclose both the date that the financial statements were issued or available to
be issued and the date the revised financial statements were issued or available
to be issued. The FASB believes these amendments remove potential conflicts with
the SEC's literature. In addition, the amendments in the ASU requires an entity
that is a conduit bond obligor for conduit debt securities that are traded in a
public market to evaluate subsequent events through the date of issuance of its
financial statements and must disclose such date. All of the amendments in the
ASU were effective upon issuance (February 24, 2010) except for the use of the
issued date for conduit debt obligors. That amendment is effective for interim
or annual periods ending after June 15, 2010. The guidance, except for that
related to conduit debt obligations, has been adopted and did not have a
material impact on the Company's Consolidated Financial Statements.
In December 2010, the FASB issued ASU 2010-28, Intangibles--Goodwill and Other
(Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts ("ASU 2010-28"). ASU
2010-28 modifies Step 1 of the goodwill impairment test for reporting units with
zero or negative carrying amounts and requires the company to perform Step 2 if
it is more likely than not that a goodwill impairment may exist. ASU 2010-28 is
effective for fiscal years and interim periods within those years, beginning
after December 15, 2010. Early adoption is not permitted. The Company will adopt
these standards on January 1, 2011 and is currently assessing the impact on its
condensed consolidated financial statements. Under the guidance any impairment
recorded upon adoption is recorded as a cumulative-effect adjustment to
beginning retained earnings in the period of adoption.
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic
805)--Disclosure of Supplementary Pro Forma Information for Business
Combinations ("ASU 2010-29"). This standard update clarifies that, when
presenting comparative financial statements, SEC registrants should disclose
revenue and earnings of the combined entity as though the current period
business combinations had occurred as of the beginning of the comparable prior
annual reporting period only. The update also expands the supplemental pro forma
disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and earnings. ASU 2010-29
is effective prospectively for material (either on an individual or aggregate
basis) business combinations entered into in fiscal years beginning on or after
December 15, 2010 with early adoption permitted. ASU 2010-29 is therefore
effective for acquisitions made after January 1, 2011. We expect that ASU
2010-29 may impact our disclosures for any future business combinations, but the
effect will depend on acquisitions that may be made in the future.
Subsequent Events
The Company evaluates events and transactions after the balance sheet date but
before the financial statements are filed with the U.S. Securities and Exchange
Commission.
NOTE 2 - SIGNIFICANT ACQUISITIONS
Effective June 30, 2010, the Company acquired 100% of the issued and outstanding
stock of Talon. Talon provides management services in the oil and gas industry
and the ability to obtain capital. As a result of the acquisition, the Company
has been able to use this management experience as well as the ability to obtain
capital for the acquisitions and development of oil and gas properties. The
acquisition was accounted for using the purchase method in accordance with
guidance provided in Topic 805 of the Codification.
The following table presents the allocation of the purchase price to the assets
acquired and liabilities assumed, based on their fair values at June 30, 2010:
44
Purchase price
Accrued liabilities in excess of cash $263,083
3,509,530 shares of the Company common
Stock valued at $.03 per share $105,286
--------
Total consideration $368,369
========
Allocation of purchase price
Goodwill $368,369
--------
Net assets acquired $368,369
========
Goodwill associated with the above transaction is not amortizable for tax
purposes.
Subsequent to June 30, 2010, Talon had no revenues or expenses. Gulfstar had no
revenues but incurred expenses totaling $400,629, which are included in the
consolidated statement of operations for the year ended December 31, 2010. The
unaudited pro forma condensed combined results of operations are presented below
as though the acquisitions of Talon and Gulfstar LLC (reverse recapitalization)
occurred on January 1, 2009.
Revenue Net Loss
Year ended December 31, 2010 - as reported $101,277 $1,272,302
Year ended December 31, 2010 - pro forma $101,277 $1,556,960
Year ended December 31, 2009 - as reported $ 0 $ 755,560
Year ended December 31, 2009 - pro forma $ 0 $ 891,380
NOTE 3 - GOING CONCERN AND MANAGEMENTS' PLAN
As shown in the accompanying consolidated financial statements, the Company has
recognized a net loss of $1,272,302 for the year ended December 31, 2010 and
reported an accumulated deficit of $4,332,703. At December 31, 2010, the Company
had total current assets of $133,112 and total current liabilities of $1,808,353
for a working capital deficient of $1,675,241.
To the extent the Company's operations are not sufficient to fund the Company's
capital requirements; the Company will attempt to enter into a revolving loan
agreement with a financial institution or attempt to raise capital through the
sale of additional capital stock or through the issuance of debt. At the present
time, the Company does not have a revolving loan agreement with any financial
institution nor can the Company provide assurance that it will be able to enter
into any such agreement in the future or be able to raise funds through the
further issuance of debt or equity in the Company.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, however, the above conditions
raise substantial doubt about the Company's ability to do so. The Consolidated
financial statements do not include any adjustment to reflect the possible
future effect on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result should the Company be unable
to continue as a going concern.
45
NOTE 4 - 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 second quarter of 2010 and prior to the acquisition of Gulfstar
LLC, the note receivable was written-off as compensation expense.
Oil and Gas Proceeds due to Others
As described in Note 6, the Company owed oil and gas proceeds to working
interest owners of $33,477 and $0 as of December 31, 2009, respectively.
Deposits
As described in Note 6, the Company had deposits in excess of expenses related
to drilling joint ventures of $0 and $503,224 as of December 31, 2010 and 2009
respectively.
Note Payable
During the year ended December 31, 2010, the Company borrowed a total of
$335,078 from an affiliate of a member-manager of Gulfstar LLC and a greater
than 5% shareholder of the Company and in exchange issued an unsecured
promissory note dated November 30, 2010 that is due in full on or before
December 31, 2011. Interest is accrued at the rate of one percent (1.0%) per
annum. As of December 31, 2010, the Company owes $335,078 on the promissory
note. Accrued interest of $279 is included in accrued liabilities on the
consolidated balance as of December 31, 2010.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
December 31, 2010 December 31, 2009
----------------- -----------------
Pipeline $ 4,119,885 $3,531,961
Oil and Gas Properties (in process) 287,024 -
Office Equipment 27,014 12,964
Vehicles 103,940 93,940
--------- --------
Land
Total Property & Equipment 4,587,863 3,638,865
Less Accumulated Depreciation (183,549) (28,773)
--------- --------
Net Property & Equipment $ 4,404,314 $3,610,092
===================== ==========
Depreciation expense was $154,776 and $15,295, respectively, for the years ended
December 31, 2010 and 2009.
46
NOTE 6 - DRILLING VENTURES
The Company holds overriding royalty interests in various wells in Kentucky. The
Company syndicated the financing of these wells through offering a 100% working
interest in the wells in exchange for contribution of funds to drill the wells.
As part of the transaction, the Company retained approximately 12.5% overriding
royalty interests in the wells and also agreed to provide management services on
behalf of the working interest owners in the wells. This income from the wells
earned by the Company is reported as royalty income and reflected in Note 9 -
Information on business segments.
As part of the management services provided, the Company collects the royalties
generated from the wells on behalf of the working interest owners and pays the
various costs and expenses incurred on behalf of the wells. The Company records
no costs or expenses relative to these wells on its consolidated statements of
operations. The excess of the royalties collected by the Company on behalf of
the working interest owners were recorded as oil and gas proceeds due to others
on the consolidated balance sheets of the Company. At December 31, 2010 and
2009, the Company owed oil and gas proceeds to working interest owners in the
amount of $33,477 and $0, respectively.
Also, as part of the management services provided, the Company collected the
contributions from the working interest owners to drill the wells and paid the
various costs and expenses incurred on behalf of the wells. The Company recorded
no costs or expenses relative to these wells on its consolidated statements of
operations. The excess of the contributions collected from the working interest
owners over and above the costs or expenses incurred on behalf of these wells
were reported as deposits on the consolidated balance sheets of the Company. At
December 31, 2010 and 2009, the Company had deposits due to the working interest
owners in the amounts of $0 and $503,224, respectively.
NOTE 7- 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 ended 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. As a result, $170,000
was recorded as other expense in the consolidated statement of operations for
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 consolidated statement of operations for the year ended December 31, 2010.
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 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 December 31, 2010, $15,000 of the
liability remains unpaid and is accrued.
47
NOTE 8 - INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: Pipeline, Oil and Gas Property
Management, and Exploration and Production.
Pipeline
Gulfstar LLC has built and currently operates a 16-mile nature gas pipeline
located in Western Kentucky for the transportation of natural gas. The pipeline
operations transport gas to a burner tip processing plant located near Bowling
Green, Kentucky where it is sold pursuant to a gas purchase agreement. Pipeline
revenue is recognized upon delivery of the gas to its customer. The pipeline has
a throughput capacity of 18 Million Cubic Feet per day (MMcf/d). The pipeline is
currently not operating at full capacity as it transported an average of 119
Mcf/d of gas during December 31, 2010.
Oil and Gas Property Management
Gulfstar LLC is the manager and operator of 20 wells in Western Kentucky.
Gulfstar LLC offers working interests in the properties on behalf of the
leaseholders. Using these funds, Gulfstar LLC pays for the costs incurred in
drilling, reworking and development of the wells. Gulfstar LLC holds an
overriding royalty interest of approximately 12.5% and holds mineral rights on
approximately 9,000 acres of leased land. Gulfstar collects revenues on behalf
of the working interest holders and distributes each working interest holders'
share of revenue when collected. A receivable is recorded for oil and gas
revenue when earned and a related payable due to interest holders is recorded
net of the 12.5% revenue interest and direct costs due to Gulfstar LLC.
Exploration and Production
During the fourth quarter of 2010, Gulfstar LLC began drilling a horizontal well
located in Warren County, Kentucky with total capitalized costs of $287,024 as
of December 31,2 010. Gulfstar LLC owns a working interest of 58.4% and a net
revenue interest of 43.8% in this well and anticipates completion of this well
during the second quarter of 2011. After completion, the well will be connected
to the Gulfstar LLC's pipeline for delivery of gas.
In addition, during the year ended December 31, 2010, the Company acquired Talon
and $368,369 of the purchase price was allocated to goodwill. The owners and
management of Talon have significant experience in oil and gas exploration.
48
The following data is presented for the Company's three operating segments:
Pipeline activities, Royalty Income activities and exploration and production
activities.
Years Ended December 31,
---------------------------------------------------------
2010 2009
---- ----
Net Revenues
Pipeline Activities $86,990 $0
Royalty Income Activities 14,287 0
E&P Activities 0 0
------------------------- ------------------------
Total Net Revenues 101,277 0
Operating Income (Loss)
Pipeline Activities (142,146) 0
Royalty Income 14,287 0
E&P Activities 0 0
Corporate Expenses (1,919,775) (596,198)
------------------------- ------------------------
Total Operating Loss (1,651,678) (596,198)
------------------------- ------------------------
Other Income (Expense) 233,779 (159,452)
------------------------- ------------------------
Pre-Tax Loss $(1,621,561) $(755,650)
========================= ========================
December 31,
---------------------------------------------------------
2010 2009
---- ----
Total Assets
Pipeline Activities $4,213,513 $3,903,733
Royalty Income Activities 3,758 503,224
E&P Activities 706,893 0
Corporate 152,505 170,456
--------- ---------
Total Assets $5,076,669 $4,577,413
49
NOTE 9 - STOCKHOLDERS' EQUITY
Preferred Shares
The Company is authorized to issue 100,000,000 shares of no par value preferred
stock. As of December 31, 2010 and 2009, 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. At December 31, 2010 there were a total of 16,985,086 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.
NOTE 10- INCOME TAXES
Information pertaining to the Company's income before income taxes is as
follows. Gulfstar LLC is a limited liability company, which is not a tax paying
entity for Federal income tax purposes, thus, no provision for federal income
taxes or deferred taxes has been determined for the year ended December 31,
2009.
Year ended December 31,
2010 2009
--------------------- -------------------
Net loss attributable to common stockholders $1,272,302 $ -
===================== ===================
There is no provision (benefit) for federal income taxes for the years ended
December 31, 2010 and 2009.
Year ended December 31,
2010 2009
---------------------- -------------------
Provision (benefit) for income taxes
Current $ - $ -
Deferred (758,227) -
Valuation Allowance 758,227 -
---------------------- -------------------
Total provision (benefit) for income taxes $ - $ -
====================== ===================
50
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. Significant components of the Company's
deferred tax assets are as follows:
Year ended December 31,
2010 2009
-------------------- ------------------
Current:
Accounts payable and accruals $ 54,199 $ -
Deferred compensation 137,912 -
Long-term:
Net operating loss carryforwards 385,054 -
Amortization and deprecation 181,062 -
-------------------- ------------------
Total deferred tax assets 758,227 -
Valuation Allowance (758,227) -
-------------------- ------------------
Total deferred tax asset net of valuation allowance
$ - $ -
==================== ==================
The effective tax rate before income taxes varies from the current statutory
federal income tax rate as follows:
Year ended December 31,
2010 2009
-------------------- -----------------
Statutory rate 34.00% -%
Deferred tax assets from acquisitions 26.40% -%
Valuation allowance from acquisitions (26.40)% -%
Valuation allowance (34.00)% -%
-------------------- -----------------
Effective rate 0.00% -%
==================== =================
51
As of December 31, 2010, the Company had net operating loss carryforwards for
income tax purposes from Gulfstar Energy Corporation of approximately
$1,132,511. Such loss carryforwards expire beginning in 2019 through 2030, if
not utilized, and may be subject to certain utilization limitation provided by
the Internal Revenue Code.
Under current accounting guidance, the Company reviewed its uncertain tax
positions and determined there was no reserve needed.
The Company files federal income tax returns in the United States as well as
various state and local tax jurisdictions with varying statutes of limitations.
The 2007 through 2010 tax years generally remain subject to examination by
federal, and most state tax authorities and no income tax returns are currently
under examination by such jurisdictions.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Operating Leases
During April 2009, the Company entered into an agreement with an unrelated third
party to lease a building. The lease agreement requires monthly payments of $750
and expires April 2012. Total rent expense under this lease was $9,000 and
$6,000 for the years ended December 31, 2010 and 2009.
In addition, the Company leases an office space in Colorado at the rate of
$1,499 per month and the lease expires May 2011. Total rent expense under this
lease was $2,998 and $0 for the years ended December 31, 2010 and 2009
respectively.
The following is a schedule of minimum future rental payments under the
operating leases described above:
Year Ending December 31, Amount
------
2011 $16,495
2012 3,000
-----
$19,495
Litigation
The Company is involved in legal proceedings and litigation in the ordinary
course of business. In the opinion of management, the outcome of such matters
will not have a material adverse effect on the Company's financial position or
results of operations.
52
NOTE 12 - LETTER OF INTENT
On October 18, 2010, the Company entered into a Letter of Intent with Timberline
Production Company, LLC of Casper, WY to purchase 100% of the working interests
in and assets connected to oil and gas leases located in the Greasewood Field in
Niobrara County, WY for cash of $75 Million. In conjunction with this
transaction, the Company revised its engagement with Maxim Group LLC to provide
gross proceeds of up to $100 Million from a proposed private placement of
Company equity and/or convertible debt. The precise terms of the private
placement will be negotiated between Maxim Group LLC, potential investors and
the Company.
NOTE 13 - GULFSTAR LLC CASH DISTRIBUTIONS
The Gulfstar LLC operating agreement provides a priority preference as to any
future cash distributions paid by Gulfstar LLC to the owners of its equity
interests. As such, fifty percent (50%) of all cash distributions shall be paid
first to the non-controlling equity interests until such time they have received
in full their capital contributions. After which time, cash distributions shall
be paid in proportion to the percentage of all equity interests. As of December
31, 2011. Gulfstar LLC has not repaid any of the non-controlling equity
interests capital contributions.
NOTE 14-- SUBSEQUENT EVENTS
During the period January 1, 2011 through March 28, 2011, the Company issued
509,001 shares of its restricted common stock in exchange for cash of $763,501
in order to support operations. The shares were sold at $1.50 per share.
On January 19, 2011, the Company signed a Letter Agreement with Wright Capital
Corporation to pursue a proposed financing of up to $90 Million to be used to
assist the Company in the proposed purchase of Timberline Production Company's
100% working interest in oil and gas leases and for the further development of
the Company's existing pipeline structure in Kentucky. The definitive terms of
the proposed transaction are subject to an agreement between Wright Capital
Corporation and the Company.
On March 24, 2011, the Company and Gulfstar LLC approved an amendment to the
Acquisition Agreement between the Company and Gulfstar LLC relative to the
Company's acquisition of the remaining 41.6% of the outstanding equity interests
of Gulfstar LLC. As such, the Company has until September 30, 2011 to file a
Registration Statement with the Securities and Exchange Commission to register
these shares of common stock offered by the Company to the equity interest
holders of Gulfstar LLC and until December 31, 2011 for the Registration to
become effective.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 Corporation
Dated: April 22, 2011
By: /s/ Robert McCann
----------------------------------
Robert McCann
President, Chief Executive
Officer and Chairman
By: /s/ Stephen Warner
---------------------------------
Stephen Warner
Chief Financial Officer,
Secretary and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: April 22, 2011
Gulfstar Energy Corporation
----------------------------------
By: /s/ Robert McCann
---------------------
Robert McCann
President, Chief Executive
Officer and Chairman
By: /s/ Stephen Warner
------------------
Stephen Warner
Chief Financial Officer,
Secretary and Director
By: /s/ Edward Nichols
------------------
Edward Nichols, Director
By:/s/ William Young
-----------------
William Young, Director
By:/s/ Jason Sharp
---------------
Jason Sharp, Vice President
and Director
69