UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10Q
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(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2011
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
Commission file number: 333-151398
GULFSTAR ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
Colorado 02-0511381
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(State of Incorporation) (IRS Employer ID Number)
600 17th Street, Suite 2800, Denver, Colorado 80202
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(Address of principal executive offices)
303-260-6492
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(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do
not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 12, 2011, there were 17,574,088 shares of the registrant's common
stock issued and outstanding.
PART I - FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) - March 31, 2011
and December 31, 2010 1
Condensed Consolidated Statements of Operations (Unaudited) -
Three months ended March 31, 2011 and 2010 and
From May 19, 2006 (Inception) to March 31, 2011 2
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three
months ended March 31, 2011 and 2010 and
From May 19, 2006 (Inception) to March 31, 2011 3
Notes to the Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Not Applicable 19
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -Not Applicable 21
Item 1A. Risk Factors - Not Applicable 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Removed and Reserved 21
Item 5. Other Information 21
Item 6. Exhibits 22
SIGNATURES 23
PART I
ITEM 1. FINANCIAL STATEMENTS
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2011 2010
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ASSETS
Cash and cash equivalents $ 575,929 $ 65,799
Accounts receivable 31,466 33,653
Prepaids and other assets 50,604 33,660
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Total current assets 657,999 133,112
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Property, plant and equipment, net 4,443,066 4,404,314
Goodwill 368,369 368,369
Intangible assets 170,874 170,874
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Total other assets 539,243 539,243
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Total assets $ 5,640,308 $ 5,076,669
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 832,373 $ 936,418
Litigation settlement payment - 15,000
Oil and gas proceeds due to others 31,587 33,477
Notes payable, related party 370,289 335,078
Accrued liabilities 550,652 488,380
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Total current liabilities 1,784,901 1,808,353
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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;
17,574,088 and 16,985,086 shares issued and outstanding
at March 31, 2011 and December 31, 2010, respectively 17,574 16,985
Additional paid in capital 7,294,073 6,296,863
Accumulated deficit (4,750,132) (4,332,703)
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Stockholders' equity before non-controlling interest 2,561,515 1,981,145
Non-controlling interest 1,293,892 1,287,171
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Total stockholders' equity 3,855,407 3,268,316
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Total liabilities and stockholders' equity $ 5,640,308 $ 5,076,669
================== =================
The accompanying notes are an integral part of these financial statements.
1
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period from May 19, 2006
Three Months Ended March 31, (Inception) through
--------------------------------- ------------------------
2011 2010 March 31, 2011
------------------ ----------------- -----------------
Net revenues $ 45,692 $ 4,169 $ 146,969
Cost of sales 8,431 - 45,273
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Gross profit 37,261 4,169 101,696
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Operating expenses:
General and administrative expenses 552,782 201,632 5,308,529
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Total operating expenses 552,782 201,632 5,308,529
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Loss from operations (515,521) (197,463) (5,206,833)
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Other income (expense)
Other income 16 231,365 248,623
Other expense (931) - (240,188)
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Total other income (expense) (915) 231,365 8,435
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(Loss) income before income taxes (516,436) 33,902 (5,198,398)
Income taxes - - -
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Net (loss) income (516,436) 33,902 (5,198,398)
Less: net loss attributable to the
non-controlling interest 99,007 - 448,266
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Net (loss) income attributable to
Gulfstar common stockholders $ (417,429) $ 33,902 $ (4,750,132)
================== ================= =================
Basic and diluted net loss
per common share $ (0.02) $ -
================== =================
Weighted average number of
common shares outstanding 17,361,836 11,659,659
================== =================
The accompanying notes are an integral part of these financial statements.
2
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
May 19, 2006
Three Months Ended March 31, (Inception)
----------------------------------- through
2011 2010 March 31, 2011
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OPERATING ACTIVITIES
Net (loss) income attributable to Gulfstar common stockholders $ (417,429) $ 33,902 $ (4,750,132)
Adjustments to reconcile net (loss) income to net cash
flows used for operating activities:
Non-controlling interest (99,007) - (448,266)
Non-cash transfer of related party note receivable - - 82,325
Non-cash issuance (correction) of equity for services - - 331,565
Depreciation 55,860 4,386 239,409
Changes in:
Account receivable 2,187 - (31,466)
Prepaids and other assets (16,944) - (50,604)
Accounts payable and accrued liabilities (58,662) (207,528) 1,071,834
------------------ ----------------- ---------------
Net cash used for operating activities (533,995) (169,240) (3,555,335)
------------------ ----------------- ---------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1) (19,612) (458,787) (4,607,475)
Acquisition of Talon Energy Corporation, cash acquired - - 76,977
Expenditures for intangible assets - - (170,874)
Issuance of related party note receivable - - (82,325)
------------------ ----------------- ---------------
Net cash used in investing activities (19,612) (458,787) (4,783,697)
------------------ ----------------- ---------------
FINANCING ACTIVITIES
Issuance of shares and member contributions (1) 1,028,526 557,791 8,686,308
Redemption of shares - (19,000) (141,636)
Proceeds from related party loan payable, net of repayments 35,211 - 370,289
------------------ ----------------- ---------------
Net cash provided by financing activities 1,063,737 538,791 8,914,961
------------------ ----------------- ---------------
NET CHANGE IN CASH 510,130 (89,236) 575,929
CASH, Beginning 65,799 705,622 -
------------------ ----------------- ---------------
CASH, Ending $ 575,929 $ 616,386 $ 575,929
================== ================= ===============
(1) During the 1st quarter of 2011, Gulfstar LLC issued 50,000 shares of member
interests in exchange for property and equipment of $75,000. Accordingly, the
cash flow statement excludes the impact of this transaction.
The accompanying notes are an integral part of these financial statements.
3
GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 and 2010
(Unaudited)
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 ("Gulfstar" or the
"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 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 a Registration Statement to be filed with the
Securities and Exchange Commission by September 30, 2011 to register these
remaining shares of common stock offered by the Company to the individual equity
interest holders of Gulfstar LLC. This Registration Statement has until December
31, 2011 to become effective. As of March 31, 2011, these remaining 41.7% equity
interests of Gulfstar LLC have not been acquired by the Company.
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.
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.
4
Interim Presentation
In the opinion of the management of the Company, the accompanying unaudited
financial statements include all material adjustments, including normal and
recurring adjustments, considered necessary to present fairly the financial
position and operating results of the Company for the period presented. The
financial statements and notes are presented as permitted by Form 10-Q, and do
not contain certain information included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2010. It is the Company's opinion
that when the interim financial statements are read in conjunction with the
December 31, 2010 Annual Report on Form 10-K and its Current Report on Form
10-Q, the disclosures are adequate to make the information presented not
misleading. Interim results are not indicative of results for a full year or any
future period.
Principles of Consolidation
Gulfstar LLC was determined to be the accounting acquirer in the reverse
recapitalization that occurred on June 30, 2010. As a result, all financial
information prior to June 30, 2010 will include only the accounts of Gulfstar
LLC. Subsequent to June 30, 2010, the accompanying financial information will
include the accounts of Gulfstar, its wholly owned subsidiary, Talon, and its
majority owned subsidiary, Gulfstar LLC. All significant inter-company balances
and transactions have been eliminated during consolidation.
Development Stage
The Company, through its subsidiaries, is currently focusing on the operation of
its pipeline system, management of existing oil and gas wells and exploration
and production activities. 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 March 31, 2011, the Company owned 58% of
the equity interest of Gulfstar LLC and therefore, the non-controlling interest
of 42% was $1,293,892. 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, a limited liability company, is not a tax paying entity for
Federal income tax purposes. Its pro rata share of income, losses and tax
credits is passed through to its members and reported by its members on their
individual income tax returns. The consolidated statement of operations for the
three months ended March 31, 2010 and for the period from May 19, 2006
(inception) through March 31, 2010 include the accounts of Gulfstar LLC only,
therefore, no provision for federal income taxes or for deferred taxes has been
determined. The Company has determined, for the period June 1, 2010 through
December 31, 2010 and for the period January 1, 2011 through March 31, 2011, any
provision for income taxes or deferred taxes and this determination has been
based upon the accounts of Gulfstar Energy Corporation, Talon and the pro rata
loss of Gulfstar LLC passed through and reportable by Gulfstar Energy
Corporation.
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 accrued expenses.
5
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 $896,416 and $758,227 has been fully reserved at March
31, 2011 and December 31, 2010, respectively. As of March 31, 2011, the Company
had net operating loss carryforwards for income tax and financial reporting
purposes of approximately $1,567,080 expiring in the years 2020 through 2031.
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 March 31, 2011, 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. Common share equivalents would not be included in the
weighted average calculation since their effect would be anti-dilutive due to
the net losses. As of March 31, 2011 and December 31, 2010, 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.
6
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 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,
no reserve is deemed necessary at March 31, 2011 and December 31, 2010.
Revenue Recognition
The Company recognizes revenue from its Pipeline segment upon shipment of the
gas to its customers. Royalty revenue is recognized from the Company's oil and
gas property management and exploration and production segment in the period of
production.
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 $306,996 were included in the amortization
base as of March 31, 2011, nor did the Company expense any capitalized costs
during the three months ended March 31, 2011 and 2010. The Company does not have
significant oil and gas producing activities as of March 31, 2011 and 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.
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. 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 three months ended March 31, 2011 and 2010 that would be
indicative of possible impairment.
7
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 three
months ended March 31, 2011, 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 second quarter of
2010 and is currently delivering natural gas to one manufacturing customer
located in Kentucky. Revenue earned from the oil and gas property management
segment and exploration and production segment are determined based upon
division orders with one purchaser.
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.
Recent Accounting Pronouncements
There were accounting standards and interpretations issued during the three
months ended March 31, 2011, none of which are expected to have a material
impact on the Company's financial position, operations or cash flows.
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.
8
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:
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.
NOTE 3 - GOING CONCERN AND MANAGEMENTS' PLAN
As shown in the accompanying consolidated financial statements, the Company has
recognized a net loss of $417,429 for the three months ended March 31, 2011 and
reported an accumulated deficit of $4,750,132. At March 31, 2011, the Company
had total current assets of $657,999 and total current liabilities of $1,784,901
for a working capital deficient of $1,126,902.
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.
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.
9
Oil and Gas Proceeds due to Others
As described in Note 6, the Company owed oil and gas proceeds to working
interest owners totaling $31,587 and $33,477 as of March 31, 2011 and December
31, 2010, respectively.
Note Payable
During the three months ended March 31, 2011, the Company borrowed $40,000 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 January 4, 2011 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 March 31,
2011, the Company owes $40,000 on the promissory note.
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, 2011 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 March 31, 2011, the Company owes $330,289 on the promissory note.
10
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
March 31, December 31,
2011 2010
---- ----
Pipeline $ 4,194,885 $4,119,885
Oil and Gas Properties (in process) 306,996 287,024
Office Equipment 26,654 27,014
Vehicles 103,940 103,940
Land 50,000 50,000
------------ ----------
Total Property & Equipment 4,682,475 4,587,863
Less Accumulated Depreciation (239,409) (183,549)
Net Property & Equipment $ 4,443,066 $4,404,314
=========== ==========
Depreciation expense was $55,860 and $4,386, respectively, for the three months
ended March 31, 2011 and 2010.
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 as 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 March 31, 2011 and
December 31, 2010, the Company owed oil and gas proceeds to working interest
owners in the amount of $31,587 and $33,477, respectively.
NOTE 7- LITIGATION SETTLEMENT PAYMENT
In March 2010, the Company settled certain environmental litigation. 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.
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 March 31, 2011, the liability was paid in
full.
11
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 79
Mcf/d of gas during the three months ended March 31, 2011. The pipeline was not
operational as of March 31, 2010.
Oil and Gas Property Management ("O&G Property Mgmt")
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 ("E&P")
During the fourth quarter of 2010, Gulfstar LLC began drilling a horizontal well
located in Warren County, Kentucky with total capitalized costs of $292,636 as
of March 31, 2011. 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.
The following data is presented for the Company's three operating segments:
Pipeline, O&G Property Mgmt and E&P.
Three Months Ended March 31,
---------------------------------------------------------
2011 2010
---- ----
Net Revenues
Pipeline $17,122 $ -
O&G Property Mgmt 9,037 4,169
E&P 19,533 -
------------------------- ------------------------
Total Net Revenues 45,692 4,169
Operating Income (Loss)
Pipeline (68,329) -
O&G Property Mgmt 9,037 4,169
E&P 19,533 -
Corporate (475,762) (201,632)
------------------------- ------------------------
Total Operating Loss (515,521) (197,463)
------------------------- ------------------------
Other Income (Expense) (915) 231,635
------------------------- ------------------------
Pre-Tax Loss $(516,436) $33,902
========================= ========================
12
March 31, 2011 December 31, 2010
-------------- -----------------
Total Assets
Pipeline $4,230,582 $4,213,513
O&G Property Mgmt 17,712 3,758
E&P 726,865 706,893
Corporate 665,149 170,456
--------------- --------------------
Total Assets $ 5,640,308 $5,076,669
=============== ====================
NOTE 9 - STOCKHOLDERS' EQUITY
Preferred Shares
The Company is authorized to issue 100,000,000 shares of no par value preferred
stock. As of March 31, 2011 and December 31, 2010, the Company has no shares
issued and outstanding.
Common Shares
The Company is authorized to issue 200,000,000 shares of $.001 voting common
stock. At March 31, 2011 and December 31, 2010, there were a total of 17,574,088
and 16,985,086 shares of common stock issued and outstanding, respectively. 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 and per
share references have been adjusted for the reverse split.
Stock Option Plan
In the first quarter of 2011, the Company adopted the 2011 Stock Option Plan.
The maximum number of shares of common stock reserved for issuance under the
plan is 3,000,000 shares. The number of shares, however, may be adjusted to
reflect certain corporate transactions or changes in our capital structure. All
employees of the Company and its subsidiaries, including employees who are
officers or members of our board of directors and non-employee members of our
board of directors are eligible to participate in the plan. In addition, key
advisors who perform services for the Company and its subsidiaries are eligible
to participate in the plan. The plan is administered by our board of directors
and they have the authority to, among other things, select plan participants,
determine the type and amount of awards, determine awards terms, and interpret
the plan and any plan awards. During any calendar year, participants are limited
in the number of grants they may receive under the plan. In any year, an
individual may not receive options for more than 300,000 shares. The plan
requires that the exercise price for stock options be equal to or greater than
the fair market value of our common stock on the date of the grant. If the
option is granted to an employee who, at the time of grant, owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or subsidiary of the Company, the exercise price
shall not be less than one-hundred and ten percent of the fair market value of
our common stock on the date of the grant. As of March 31, 2011, no shares have
been issued in relation to the 2011 Stock Option Plan.
NOTE 10 - AGREEMENTS
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 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.
NOTE 11 - 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 March 31,
2011 and December 31, 2010, Gulfstar LLC has not repaid any of the
non-controlling equity interests' capital contributions.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward-looking statements.
OPERATIONS
----------
On 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. As of March 31, 2011, the
Company is in the due diligence stage of acquiring assets as part of its
exploration and production segment and anticipates significant revenue from
operations will be obtained as a result of this acquisition.
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. As of March 31, 2011, the Company is evaluating various
alternatives to increase the flow of natural gas through the pipeline system as
the Company considers the current flow of natural gas to be at a minimum,
compared to its full capacity.
Therefore, the Company is currently operating at a minimum its pipeline gas
gathering system and managing the existing oil and gas wells and its main focus
is to be involved in oil and gas exploration and development. 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 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 will need substantial additional capital to support its proposed
future operations and as such is aggressively seeking this capital, as evidenced
by its current arrangement with Wright Capital Corporation. Nonetheless, there
are currently minimal revenues and limited committed sources for additional
funds as of the 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.
14
RESULTS OF OPERATIONS
---------------------
For the Three Months Ended March 31, 2011 Compared to the Three Months Ended
March 31, 2010
During the three months ended March 31, 2011, we recognized net revenues of
$45,692 with corresponding direct costs of $8,431 for a gross profit of $37,261.
During the three months ended March 31, 2010, we recognized revenues of $4,169.
During the three months ended March 31, 2011, we incurred total operating
expenses of $552,782 compared to $201,632 during the three months ended March
31, 2010. The increase of $351,150 was a result of increases in general and
administrative expenses resulting from both the increased operational activities
of the Company as a result of completion of the pipeline during the first half
of last year and the Company's expenses related to its compliance with the
financial reporting requirements of the SEC. Management of the Company does
expect that operational expenses to stable as the Company focuses on its
operational activities.
During the three months ended March 31, 2011, we incurred a net loss of $417,429
compared to net income of $33,902 during the three months ended March 31, 2010.
The increase in net loss of $451,331 is a result of the increase of $33,092 in
revenues offset by the $351,150 increase in general and administrative expenses,
the $232,280 increase in other expenses and the $99,007 of net loss attributable
to the non-controlling interest.
LIQUIDITY
---------
At March 31, 2011, we had total current assets of $657,999 consisting of
$575,929 in cash and cash equivalents, $31,466 in accounts receivable and
$50,604 in prepaids and other assets. At June 30, 2010, we had total current
liabilities of $1,784,901, consisting of $823,373 in accounts payable, $31,587
in oil and gas proceeds which are due to others, $370,289 in related party notes
payable and $550,652 in accrued liabilities. At March 31, 2011, we had a working
capital deficit of $1,126,902 and an accumulated deficit of $4,750,132.
During the three months ended March 31, 2011, we used net cash of $533,995 in
operational activities. During the three months ended March 31, 2010, we used
net cash of $169,240 from operational activities.
During the three months ended March 31, 2011, we recognized a net loss of
$417,429, which was adjusted for a non-cash activity of $55,860 and net loss
attributable to the non-controlling interest of $99,007. During the three months
ended March 31, 2010, we recognized a net income of $33,902, which was adjusted
for a non-cash activity of $4,386.
During the three months ended March 31, 2011, the Company used funds of $19,612
in its investing activities. Investing activities included expenditures of
$19,612 in oil and gas properties.
During the three months ended March 31, 2010, the Company used $458,787 in its
investing activities. Investing activities included expenditures of $458,787 in
construction of the pipeline.
During the three months ended March 31, 2011, the Company received $1,063,737
net proceeds from its financing activities. Financing activities included
$1,028,526 in issuance of shares and equity contributions and $35,211 in net
proceeds from a related party note payable.
During the three months ended March 31, 2010, the Company received $538,791 from
its financing activities. Financing activities during the three months ended
March 31, 2010, included equity contributions of $557,791 and $19,000 paid in
equity redemptions.
During the three months ended March 31, 2011, the Company borrowed $40,000 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 January 4, 2011 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 March 31,
2011, the Company owes $40,000 on the promissory note.
15
During the year ended December 31, 2011, 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, 2011 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 March 31, 2011, the Company owes $330,289 on the promissory note.
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 March 31,
2011, 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
As shown in the accompanying consolidated financial statements, the Company has
recognized a net loss of $417,429 for the three months ended March 31, 2011 and
reported an accumulated deficit of $4,750,132. At March 31, 2011, the Company
had total current assets of $657,999 and total current liabilities of $1,784,901
for a working capital deficit of $1,126,902.
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.
Management is actively pursuing additional financing and revenue solutions as
stated elsewhere in this report.
16
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. 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
Gulfstar LLC was determined to be the accounting acquirer in the reverse
recapitalization that occurred on June 30, 2010. As a result, all financial
information prior to June 30, 2010 will include only the accounts of Gulfstar
LLC. Subsequent to June 30, 2010, the accompanying financial information will
include the accounts of Gulfstar, its wholly owned subsidiary, Talon, and its
majority owned subsidiary, Gulfstar LLC. All significant inter-company balances
and transactions have been eliminated during consolidation.
Revenue Recognition
The Company recognizes revenue from its Pipeline segment upon shipment of the
gas to its customers. Royalty revenue is recognized from the Company's oil and
gas property management and exploration and production segment in the period of
production.
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,
no reserve is deemed necessary at March 31, 2011 and 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 March 31, 2011, the Company owned 58% of
the equity interest of Gulfstar LLC and therefore, the non-controlling interest
of 42% was $1,293,892. 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.
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 $306,996 were included in the amortization
base as of March 31, 2011, nor did the Company expense any capitalized costs
during the three months ended March 31, 2011 and 2010. The Company does not have
significant oil and gas producing activities as of March 31, 2011 and December
31, 2010, and its oil and gas properties are still in the drilling phase and
have not been evaluated.
17
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.
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. 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 three months ended March 31, 2011 and 2010 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 three
months ended March 31, 2011, 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 second quarter of
2010 and is currently delivering natural gas to one manufacturing customer
located in Kentucky. Revenue earned from the oil and gas property management
segment and exploration and production segment are determined based upon
division orders with one purchaser.
Income Taxes
Gulfstar LLC, a limited liability company, is not a tax paying entity for
Federal income tax purposes. It's pro rata share of income, losses and tax
credits is passed through to its members and reported by its members on their
individual income tax returns. The consolidated statement of operations for the
three months ended March 31, 2010 and for the period from May 19, 2006
(inception) through March 31, 2010 include the accounts of Gulfstar LLC only,
therefore, no provision for federal income taxes or for deferred taxes has been
determined. The Company has determined, for the period June 1, 2010 through
December 31, 2010 and for the period January 1, 2011 through March 31, 2011, any
provision for income taxes or deferred taxes and this determination has been
based upon the accounts of Gulfstar Energy Corporation, Talon and the pro rata
loss of Gulfstar LLC passed through and reportable by Gulfstar Energy
Corporation.
18
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 accrued expenses.
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 $896,416 and $758,227 has been fully reserved at March
31, 2011 and December 31, 2010, respectively. As of March 31, 2011, the Company
had net operating loss carryforwards for income tax and financial reporting
purposes of approximately $1,567,080 expiring in the years 2020 through 2031.
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 March 31, 2011, 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.
Recent Accounting Pronouncements
There were accounting standards and interpretations issued during the three
months ended March 31, 2011, none of which are expected to have a material
impact on the Company's financial position, operations or cash flows.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
19
ITEM 4. CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal Financial Officer), as
appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), our Chief Executive Officer and Chief
Financial Officer for the quarter ended March 31, 2011, carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures are ineffective in timely alerting them to material information
required to be included in our periodic SEC filings and to ensure that
information required to be disclosed in our periodic SEC filings is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required
disclosure.
We have identified certain material weaknesses 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. After our 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. Due to the limited size of our accounting department, we currently lack
the resources to handle complex accounting transactions. We believe
this deficiency could lead to errors in the presentation and disclosure
of financial information in our annual, quarterly, and other filings.
3. As is the case with many companies of similar size, we currently have a
lack of segregation of duties within our accounting department. Until
our operations expand and additional cash flow is generated from
operations, a complete segregation of duties 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.
Due to financial restrictions at this time, the Company has not taken any action
to resolve such weakness.
There was no change in our internal control over financial reporting that
occurred during the quarter ended March 31, 2011, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company made the following unregistered sales of its securities from January
1, 2011 through March 31, 2011.
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
------------ ------------------- ------------- ------------- ------------------
January 1, 2011 through
March 31, 2011 Common Stock 589,002 Cash Business Associates
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION
NONE.
21
ITEM 6. EXHIBITS
Exhibits. The following is a complete list of exhibits filed as part of this
Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
22
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GULFSTAR ENERGY CORPORATION
(Registrant)
Dated: May 16, 2011 By: /s/Robert McCann
----------------
Robert McCann, Chief
Executive Officer
Dated: May __, 2011 By: /s/Stephen Warner
-----------------
Stephen Warner, Chief
Financial Officer
(Principal Accounting Officer)
23