On May 7, 2007, the Company agreed to issue 49,045,225 shares of common
stock in exchange for the remaining debt totaling $1,030,000 of principal and
$931,811 on its convertible debt. As of June 30, 2007, the common stock has not
been issued.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a "going concern", which assume that the
Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
The unaudited financial statements as of June 30, 2007, and for the
three and six month period then ended, reflect, in the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
fairly state the financial position and results of operations for the three and
six months. Operating results for interim periods are not necessarily indicative
of the results which can be expected for full years.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has a retained deficit of
approximately $6,600,000, and was in default of the October 14, 2005 terms of
its convertible debenture. As of June 30, 2007, the Company sold its 40%
interest North Franklin gas field to repay a portion of its convertible
debenture, leaving its Canadian oil field as its only revenue producing
property. These factors raise substantial doubt about the Company's ability to
continue as a going concern.
The Company's general business strategy is to acquire oil and gas
properties either directly or through the acquisition of operating entities. The
continued operations of the Company and the recoverability of oil and gas
property acquisition, exploration and development costs is dependent upon the
existence of economically recoverable reserves and the ability of the Company to
obtain necessary financing to complete the development of those reserves, and
upon future profitable production. The Company is planning additional ongoing
equity financing by way of private placements to fund its obligations and
operations.
The Company's future capital requirements will depend on many factors,
including costs of exploration of the properties, cash flow from operations,
costs to complete well production, if warranted, and competition and global
market conditions.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, will mitigate the
adverse conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that these actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.
8
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN (continued)
Organization and Basis of Presentation
Silver Star Energy, Inc. (the "Company") was incorporated on September
25, 2002 in the State of Nevada and commenced operations on October 3, 2002.
During the year ended December 31, 2003, the Company changed its name from
Movito Holdings Ltd. to Silver Star Energy Inc.
Nature of Business
The Company is in the production stage of the oil and gas industry. The
Company's primary objective is to identify, acquire and develop significant
working interest percentages in underdeveloped oil and gas projects that do not
meet the requirements of the larger producers and developers. During 2003 and
2004 the Company was in the development stage and acquired interests in several
oil and gas prospects, and in 2005 and 2006, has set up the extraction process
and is further continuing that program.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
This summary of accounting policies for Silver Star Energy, Inc. is
presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
Cash Equivalents
For the purpose of reporting cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements.
9
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Earnings per Share
Basic loss per share has been computed by dividing net loss for the
year applicable to the common stockholders by the weighted average number of
shares of common shares outstanding during the year. Convertible equity
instruments such as stock options, warrants, convertible debentures and notes
payable are excluded from the computation of diluted loss per share, as the
effect of the assumed exercises would be anti-dilutive.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets which range
from three to seven years. Fixed assets consisted of the following at June 30,
2007 and December 31, 2006:
(Unaudited)
June 30, December 31,
2007 2006
------------------ ------------------
Furniture and Fixtures $ 7,751 $ 7,751
Computers 6,222 6,222
Vehicles 64,087 64,087
Less: Accumulated Depreciation (36,007) (27,994)
------------------ ------------------
Total $ 42,053 $ 50,066
================== ==================
|
One-half year depreciation is taken in the year of acquisition on
certain fixed assets.
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the property and related
accumulated depreciation accounts, and any resulting gain or loss is credited or
charged to income.
Total depreciation expense for the six months ended June 30, 2007 and
2006 was $8,013 and $8,221, respectively.
Intangibles
The Company has adopted the provisions of the Financial Accounting
Standards Board ("FASB") Statement No. 142, "Goodwill and Intangible Assets"
("SFAS 142"). Under SFAS 142, goodwill and intangible assets with indefinite
lives will no longer be amortized and will be tested for impairment annually.
The determination of any impairment would include a comparison of estimated
future operating cash flows anticipated during the remaining life with the net
carrying value of the asset as well as a comparison of the fair value to the
book value of the Company or the reporting unit to which the goodwill can be
attributed.
10
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and
gas properties. Under this method, all costs associated with acquisition,
exploration, and development of oil and gas properties are capitalized. Such
costs include land and lease acquisition costs, annual carrying charges of
non-producing properties, geological and geophysical costs, costs of drilling
and equipping productive and non-productive wells, asset retirement costs, and
direct exploration salaries and related benefits. Capitalized costs are
categorized as being subject to amortization or not subject to amortization. The
Company operates in two cost centers, being Canada and the U.S.A.
The capitalized costs of oil and gas properties are amortized on the
unit-of-production method using estimates of proved reserves as determined by
independent engineers. Investments in unproved properties are not amortized
until proved reserves associated with projects can be determined or until
impairment occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized costs to
be amortized. Depletion expense for the six months ended June 30, 2007 and 2006
was $135,000 and $122,155, respectively.
The Company applies a ceiling test to capitalized costs to ensure that
such costs do not exceed estimated future net revenues from production of proven
reserves at year end market prices less future production, administrative,
financing, site restoration, and income tax costs plus the lower of cost or
estimated market value of unproved properties. If capitalized costs are
determined to exceed estimated future net revenues, a write-down of carrying
value is charged to depletion in the period.
Proceeds from the sale of oil and gas properties are recorded as a
reduction of the related capitalized costs without recognition of a gain or loss
unless such sales involve a significant change in the relationship between costs
and the value of proved reserves or the underlying value of unproved properties,
in which case a gain or loss is recognized.
The Company is in the process of exploring its unproved oil and natural
gas properties and has not yet determined whether these properties contain
reserves that are economically recoverable. The recoverability of amounts shown
for oil and natural gas properties is dependent upon the discovery of
economically recoverable reserves, confirmation of the Company's interest in the
underlying oil and gas leases, the ability of the Company to obtain necessary
financing to complete their exploration and development and future profitable
production or sufficient proceeds from the disposition thereof.
11
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Asset Retirement Obligations
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS "SFAS
143"). This statement applies to obligations associated with the retirement of
tangible long-lived assets that result from the acquisition, construction and
development of the assets. SFAS 143 requires that the fair value of a liability
for a retirement obligation be recognized in the period in which the liability
is incurred. For oil and gas properties, this is the period in which an oil or
gas well is acquired or drilled. The asset retirement obligation is capitalized
as part of the carrying amount of our oil and gas properties at its discounted
fair value. The liability is then accreted each period until the liability is
settled or the well is sold, at which time the liability is reversed.
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, the Company has
determined the estimated fair value of financial instruments using available
market information and appropriate valuation methodologies. The fair value of
financial instruments classified as current assets or liabilities approximate
carrying value due to the short-term maturity of the instruments.
Foreign currency transactions
The financial statements are presented in United States dollars. In
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation", foreign denominated monetary assets and liabilities are
translated to their United States dollar equivalents using foreign exchange
rates that prevailed at the balance sheet date. Revenue and expenses are
translated at average rates of exchange during the year. Related translation
adjustments are reported as a separate component of stockholders' equity,
whereas gains or losses resulting from foreign currency transactions are
included in results of operations.
Stock-based compensation
Effective January 1, 2006, the company adopted the provisions of SFAS
No. 123(R). SFAS No. 123(R) requires employee equity awards to be accounted for
under the fair value method. Accordingly, share-based compensation is measured
at grant date, based on the fair value of the award. Prior to January 1, 2006,
the company accounted for awards granted to employees under its equity incentive
plans under the intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related interpretations, and provided the required pro forma disclosures
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), as amended. No stock options were granted to employees during the year
ended December 31, 2006 or 2005 and accordingly, no compensation expense was
recognized under APB No. 25 for the year ended December 31, 2006 or 2005. In
addition, no compensation expense is required to be recognized under provisions
of SFAS No. 123(R) with respect to employees.
12
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Under the modified prospective method of adoption for SFAS No. 123(R),
the compensation cost recognized by the company beginning on January 1, 2006
includes (a) compensation cost for all equity incentive awards granted prior to,
but not yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all equity incentive awards granted subsequent to January
1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The company uses the straight-line attribution
method to recognize share-based compensation costs over the service period of
the award. Upon exercise, cancellation, forfeiture, or expiration of stock
options, or upon vesting or forfeiture of restricted stock units, deferred tax
assets for options and restricted stock units with multiple vesting dates are
eliminated for each vesting period on a first-in, first-out basis as if each
vesting period was a separate award. To calculate the excess tax benefits
available for use in offsetting future tax shortfalls as of the date of
implementation, the company followed the alternative transition method discussed
in FASB Staff Position No. 123(R)-3.
Recent accounting pronouncements
In June, 2006 the FASB issued FIN 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement No. 109". This Interpretation
clarifies, among other things, the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition is effective for fiscal years beginning after
December 15, 2006. Earlier application is encouraged if the enterprise has not
yet issued financial statements, including interim financial statements, in the
period the Interpretation is adopted. FIN 48, Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement No. 109, is effective for
fiscal years beginning after December 15, 2006. Earlier application is
encouraged if the enterprise has not yet issued financial statements, including
interim financial statements, in the period the Interpretation is adopted.
Management is evaluating the financial impact of this pronouncement.
In September 2006, the FASB issued SFAS No. 157, "Accounting for Fair
Value Measurements." SFAS No. 157 defines fair value, and establishes a
framework for measuring fair value in generally accepted accounting principles
and expandsdisclosure about fair value measurements. SFAS No. 157 is effective
for the Company for financial statements issued subsequent to November 15, 2007.
The Company does not expect the new standard to have any material impact on the
financial position and results of operations.
In September 2006, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 108 ("SAB 108") which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
SAB 108 becomes effective in fiscal 2007. Management is evaluating the financial
impact of this pronouncement.
13
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition
The Company recognizes oil and gas revenue from its interests in
producing wells as oil and gas is produced and sold from those wells. Oil and
gas sold is not significantly different from the Company's share of production.
Revenues from the purchase, sale and transportation of natural gas are
recognized upon completion of the sale and when transported volumes are
delivered. Shipping and handling costs in connection with such deliveries are
included in production costs. Revenue under carried interest agreements is
recorded in the period when the net proceeds become receivable, measurable and
collection is reasonably assured. The time the net revenues become receivable
and collection is reasonably assured depends on the terms and conditions of the
relevant agreements and the practices followed by the operator. As a result, net
revenues may lag the production month by one or more months.
NOTE 3 - OIL AND GAS PROPERTIES
The Company entered into agreements to acquire interests in various
unproven oil and gas properties as follows:
Alberta Prospects, Canada
In October 2003, the Company entered into two agreements with 1048136
Alberta Ltd. Pursuant to these agreements, the Company acquired the right to
participate and earn an interest in two oil and gas exploration and development
projects located in the province of Alberta, Canada known respectively as the
Evi prospect and the Verdigris prospect. In February 2004, the Company entered
into two agreements with 1048136 Alberta Ltd. to acquire the right to
participate and earn an interest in two additional oil and gas exploration and
development projects located in the province of Alberta known as the Joarcam
prospect and the Buffalo Lake prospect. 1048136 Alberta Ltd. is a private
Alberta company (see Note 6).
Pursuant to the agreements, the Company shall advance funds, as
required, in connection with the drilling, testing, completion, capping and/or
abandonment of up to three wells on each of the properties. Once the Company has
completed its funding obligation, it will have earned the following interest in
each prospect:
Evi Prospect 66.67%
Verdigris Prospect 66.67%
Joarcam Prospect 70.00%
Buffalo Lake Prospect 70.00%
|
14
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - OIL AND GAS PROPERTIES (continued)
In the event the Company does not provide the funds as required, the
Company will retain no interest in the prospects.
During the year ended December 31, 2004, the Company paid $1,283,149
towards the exploration and development of the oil and gas prospects in Alberta.
During the year ended December 31, 2005, the Company paid $730,822 towards the
exploration and development of the oil and gas prospects in Alberta. For the
year ended December 31, 2006, $285,975 was spent to install the production
facilities at the EVI well. All of these costs have been capitalized.
During 2006, EVI property was determined to have proved oil reserves.
Total capitalized costs for the EVI property were removed from the unproved
properties and classified as proved properties. For the year ended December 31,
2006, the Company received revenues of $213,398 from the EVI property. For the
three months ended March 31, 2007, the Company received revenues of $50,852 from
the EVI property. As of December 31, 2006, the total capitalized costs related
to the EVI property, net of depletion of $75,103 was 1,262,298. As of June 30,
2007, the total capitalized costs related to the EVI property, net of depletion
of $115,103 was $1,228,546.
During 2005, the Joarcam property in Alberta was determined to have
proved oil reserves. The total capitalized costs for the Joarcam property were
removed from the unproved properties and classified as proved properties. For
2005, the Company received $305,235 in revenues from the Joarcam property. On
November 10, 2005, the Company sold its interest in the Joarcam property for
$1,930,225. Total capitalized costs relating to the Joarcam property at November
10, 2005 were $962,545, and total depletion expense relating to the Joarcam
property at November 10, 2005 was $73,811. The Company recognized a gain on the
sale of the Joarcam property of $1,041,491. The Company received proceeds of
$965,108 and recorded a receivable of $965,117 related to the sale of the
property. During the period ended June 30, 2006, the receivable of $965,117
related to the sale of the Joarcam property was received by the Company.
During the quarter ended June 30, 2007, the Company executed an
agreement with MB Gas, Inc. ("MB"), a private Alberta, Canada, oil and gas
exploration company, whereby the Company acquired an interest in the revenues
generated by MB from its oil and gas operations. The Company advanced $500,000
to MB in return for the assignment of revenue from MB's oil and gas operations.
The $500,000 has been capitalized as part of proved oil and gas properties.
California Prospects, U.S.A.
On December 5, 2003, the Company entered into two option agreements
with Archer Exploration, Inc. (Archer) to acquire Archer's interest in certain
unproven oil and gas prospects located in the State of California, U.S.A., known
as North Franklin Prospect and Winter Pinchout Prospect.
15
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - OIL AND GAS PROPERTIES (continued)
To earn an assignment of 100% of Archer's interests in the North
Franklin Prospect, being a 100% working interest (76% net revenue interest), the
Company made an initial cash payment of $85,000 and is required to pay $15,000
at spud of the initial test well and $25,000 at completion of the initial test
well. In addition, the Company is responsible for all expenses for lease
extensions and rental of existing leases (including a 20% fee), acquisition of
any additional leases (including a 20% fee) and costs in connection with
drilling and completion of the initial test well.
Pursuant to the agreement, Archer retained a 2.5% overriding royalty, a
5% working interest through the completion of the initial test well and the
right to participate in a 5% working interest.
The Company had an agreement to farm-out a 35% working interest in the
North Franklin Project to Fidelis Energy, Inc. (see Note 6). Under the terms of
the agreement, Fidelis would contribute $500,000 towards the drilling and
completion of the Archer-Whitney #1 well and participate as a full working
interest partner on all further costs including drilling of any additional wells
on the project.
To earn an assignment of 100% of Archer's interests in the Winter
Pinchout Prospect, being a 100% working interest (76% net revenue interest), the
Company made an initial cash payment of $100,000 and is required to pay $15,000
at spud of the initial test well of the first three prospects drilled and
$25,000 at completion of the initial test well of each prospect drilled. In
addition, the Company is responsible for all expenses for acquisition of leases
acquired (including a 20% fee), acquisition and analysis of seismic data,
drilling and completion of the initial test well on the first prospect drilled
and a monthly management fee in the amount of $10,000 commencing January 2004.
Pursuant to the agreement, Archer retains a 2.5% overriding royalty, a
5% working interest through the completion of the initial test well and the
right to participate in a 10% working interest.
In August 2004, the Company executed acquisition and joint operating
agreements on five natural gas prospects in California with Archer Exploration,
Inc. Pursuant to the agreements, the Company has acquired a 7.5% carried working
interest on four of the prospects and has acquired a 25% carried working
interest in the fifth prospect. The Company is carried on all costs related to
the prospect through the licensing, permitting, drilling and completion of the
first well on each project. In the event of a successful gas well being drilled,
the Company, following testing and completion, would be responsible for the
working interest costs of well tie-in and pipeline. The Company would also be a
working interest participant on any additional gas wells drilled.
During the year ended December 31, 2003, the Company incurred a total
of $405,000 in acquisition and exploration costs relating to the California
prospects. During the year ended December 31, 2004, the Company incurred a total
of $898,204 in acquisition, exploration and development costs relating to the
California prospects. During the year ended December 31, 2005, the Company
incurred a total of $756,675 in acquisition, exploration and development costs
relating to the California prospects. During the year ended December 31, 2006,
the Company incurred a total of $1,081,515 in acquisition, exploration and
development costs relating to the California prospects.
16
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - OIL AND GAS PROPERTIES (continued)
During 2005, the North Franklin property was determined to have proved
gas reserves. Total capitalized costs for the North Franklin property were
removed from the unproved properties and classified as proved properties. For
2005, the Company received revenues of $1,372,675 from the North Franklin
property. As of December 31, 2005, the total capitalized costs related to the
North Franklin property, net of depletion of $132,121 was $1,345,384. For the
three months ended March 31, 2007 and 2006, the Company received revenues of
$569,495 and $505,754 from the North Franklin Property. As of December 31, 2006,
the total capitalized costs related to the North Franklin property, net of
depletion of $469,530 was $2,110,736.
On May 7, 2007, the Company sold its 40% interest North Franklin
property for $3,100,000. As of the date of the sale, the Company had capitalized
$2,514,019 in costs related to the North Franklin property and had recorded
total depletion of $564,530. The Company recognized a gain of $1,150,511 on the
sale of the North Franklin property.
During the quarter ended June 30, 2007, capitalized costs of $627,375
in unproved properties related to the Winter Pinchout Prospect was written-off
and expensed.
As of June 30, 2007, the Company no longer had any properties in
California.
Kansas Prospects, U.S.A.
During 2005, the Company acquired an interest in some oil and gas
properties in Kansas. As of December 31, 2005, the Company had spent $54,286 on
these properties. During the year ended December 31, 2006, the Company incurred
$20,000 in costs related to this property. These costs were capitalized as part
of unproved properties. In June 2006, the Company abandoned the Kansas property,
and the capitalized cost of $74,286 was expensed.
NOTE 4 - ASSET RETIREMENT OBLIGATION
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS ("SFAS
143"). This statement applies to obligations associated with the retirement of
tangible long-lived assets that result from the acquisition, construction and
development of the assets.
SFAS 143 requires that the fair value of a liability for a retirement
obligation be recognized in the period in which the liability is incurred. For
oil and gas properties, this is the period in which an oil or gas well is
acquired or drilled. The asset retirement obligation is capitalized as part of
the carrying amount of the asset at its discounted fair value. The liability is
then accreted each period until the liability is settled or the asset is sold,
at which time the liability is reversed.
17
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - ASSET RETIREMENT OBLIGATION (continued)
The Company identified and estimated all of its asset retirement
obligations for tangible, long-lived assets as of January 1, 2003. These
obligations were for plugging and abandonment costs for depleted oil and gas
wells. The Company had no proved reserves in 2003 or 2004, therefore the Company
did not record an asset retirement obligation. During the year ended December
31, 2005, the Company estimated its asset retirement obligation to be $45,000,
for three gas wells at the North Franklin property. Upon recognition of this
asset retirement obligation, a liability of $45,000 was recorded and the
capitalized costs of proved properties was increased by $45,000.
During the year ended December 31, 2006, a fourth producing gas well
was operating at the North Franklin property. The Company estimated the asset
retirement obligation for this well to be $15,000. Upon recognition of this
asset retirement obligation, an additional liability of $15,000 was recorded in
the asset retirement obligation and the capitalized costs of the proved
properties was increased by $15,000.
During the quarter ended June 30, 2007, the Company sold the North
Franklin property and the asset retirement obligation of $60,000 was reversed
and removed from capitalized costs. At June 30, 2007 and December 31, 2006, the
asset retirement obligation was $0 and $60,000, respectively.
NOTE 5 - CONCENTRATIONS
As of June 30, 2007, approximately 100% of the Company's revenues are
from oil property in Canada. The loss of these wells, or a disruption in
production from these wells, would adversely effect the operations of the
Company.
NOTE 6 - COMMON STOCK
On November 20, 2003, the Company restructured its share capital
whereby the total common shares presently issued and outstanding was forward
split on a 1 (old) to 12 (new) basis. Effective January 5, 2004 the Company
restructured its share capital whereby the total common shares presently issued
and outstanding was forward split on a 1 (old) to 2 (new) basis. All references
to common stock, common shares outstanding, average numbers of common shares
outstanding and per share amounts in these Financial Statements and Notes to
Financial Statements prior to the effective date of the forward stock splits
have been restated to reflect the 12:1 and the 2:1 common stock splits on a
retroactive basis.
On December 5, 2003, the Company received $500,000 in subscription
proceeds from a director and officer for the purchase of 444,444 common shares
of the company's stock pursuant to a Regulation S Private Placement Financing
which was announced on November 25, 2003 and whereby the Company plans to issue
up to 3,555,556 common shares of its capital stock. During the three months
ended March 31, 2004, the Company received subscription proceeds of $750,000
pursuant to the Private Placement Financing. During the three months ended March
31, 2004, 1,112,102 shares were issued in accordance with the $1,250,000 in
subscription proceeds received.
18
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - COMMON STOCK (continued)
On March 23, 2004, the Company entered into an agreement with two
shareholders for the shareholders to surrender for cancellation 24,600,000
regulation 144 restricted shares of the Company's common stock.
During the three months ended June 30, 2004, the Company received
subscription proceeds of $630,000 pursuant to the Private Placement Financing.
During the three months ended June 30, 2004, 661,915 shares were issued in
accordance with the $630,000 in subscription proceeds received.
On June 30, 2004, the Company received share subscription proceeds of
$275,000 for 500,000 shares of restricted common stock pursuant to the Private
Placement Financing announced on November 25, 2003. During the three months
ended September 30, 2004, 500,000 shares were issued in accordance with the
$275,000 in subscription proceeds received.
On August 18, 2004, the Company issued 250,000 restricted shares of
common stock for $25,000 in accounts payable.
On October 18, 2004, the Company issued 156,000 restricted shares of
common stock for consulting expense of $15,600.
|
On November 23, 2004, the Company issued 362,394 shares of common stock
for debt issue costs of $350,000 associated with the Company's issuance of
convertible debt.
On April 28, 2006, the Company issued 1,200,000 shares of common stock
for consulting services valued at $324,000.
On May 3, 2006, the Company issued 10,000,000 shares of common stock to
its officers and directors for services valued at $2,750,000.
On May 7, 2007, the Company agreed to issue 49,045,225 shares of common
stock in exchange for the remaining debt totaling $1,030,000 of principal and
$931,811 on its convertible debt. As of June 30, 2007, the common stock has not
been issued.
As of June 30, 2007, the Company has not adopted a stock option plan or
granted any stock options and accordingly has not recorded any stock-based
compensation.
NOTE 7- RELATED PARTY TRANSACTIONS
Pursuant to consulting agreements dated November 15, 2003 and
renegotiated July 1, 2005 the Company agreed to pay $15,000 per month to the CFO
and director of the Company and $20,000 per month to the President and director
of the Company.
19
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7- RELATED PARTY TRANSACTIONS (continued)
During 2003 and 2004, the Company entered into several acquisition
agreements with 1048136 Alberta Ltd. (see Note 4). The Company's current
president, Robert McIntosh, was a director of 1048136 Alberta Ltd. and had
resigned from that position prior to his involvement with the Company. Sak
Narwal, a shareholder of the Company, was also a director of 1048136 Alberta Ltd
and Scott Marshall, the majority shareholder of 1048136 Alberta Ltd., is the
spouse of Naomi Patricia Johnston, owner of a 11.76% interest in the Company.
Despite the existence of these related parties, the consideration exchanged
under the Agreements described above was negotiated at "arms length," and the
directors and executive officers of the Company used criteria used in similar
uncompleted proposals involving the Company in comparison to those of 1048136
Alberta Ltd.
The Company has a "working interest" relationship with joint venture
partner Fidelis Energy Inc. (FDEI: OTC: BB) (see Note 4). Both companies have an
interest in the North Franklin gas project in Sacramento, California. More
recently, in January 2005, Fidelis entered into an agreement to acquire an
interest in two oil wells at the Joarcam Project located in Alberta Canada. The
Company was earning a 70% working interest in the entire Joarcam Project.
Fidelis also entered into an agreement for the first right of refusal to acquire
the remaining 30% working interest on all future drilling locations at Joarcam.
Silver Star and Fidelis collectively acquired a 100% working interest at
Joarcam. On October 6, 2005 the 100% working interest at Joarcam was sold to
Enermark, Inc.
In addition, Silver Star and Fidelis management work closely in the
evaluation of other potential, jointly feasible exploration prospects. Also, the
two companies share a common origin in that certain beneficial shareholders of
both companies have contributed to their formation.
NOTE 8 - INCOME TAXES
As of December 31, 2006, the Company had a net operating loss carry
forward for income tax reporting purposes of approximately $5,552,391 that may
be offset against future taxable income through 2026. Current tax laws limit the
amount of loss available to be offset against future taxable income when a
substantial change in ownership occurs. Therefore, the amount available to
offset future taxable income may be limited. No tax benefit has been reported in
the financial statements, because the Company believes there is a 50% or greater
chance the carry-forwards will expire unused. Accordingly, the potential tax
benefits of the loss carry-forwards are offset by a valuation allowance of the
same amount.
2006 2005
Net Operating Losses $ 832,852 $ 173,082
Valuation Allowance (832,852) (173,082)
------------------ ------------------
$ - $ -
================== ==================
|
20
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (continued)
The provision for income taxes differs from the amount computed using
the federal US statutory income tax rate as follows:
2006 2005
Provision (Benefit) at US Statutory Rate $ 659,770 $ (8,727)
Increase (Decrease) in Valuation Allowance (659,770) 8,727
---------------- ----------------
$ - $ -
================ ================
|
The Company evaluates its valuation allowance requirements based on
projected future operations. When circumstances change and causes a change in
management's judgment about the recoverability of deferred tax assets, the
impact of the change on the valuation is reflected in current income.
NOTE 9 - LEASE COMMITMENT
On December 1, 2005, the Company entered into a lease agreement for
approximately 129 square feet of office space at 9595 Wilshire Blvd., Suite 900,
in Beverly Hills, California. The lease expired November 30, 2006 and continues
on a month to month basis after that date. The lease payments were $1,814 per
month. On December 1, 2006, the Company has contracted a Business Identity Plan
Agreement (BIP) at the same address for a fee of $300 per month. This is an
annual contract and replaces the former lease agreement.
The minimum future lease payments under these leases for the next five
years are:
Year Ended December 31,
2007 $ 3,600
2008 -
2009 -
2010 -
2011 -
-------------
Total minimum future lease payments $ 3,600
=============
|
21
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - CONVERTIBLE DEBENTURES
On March 10, 2005, the Company executed a Convertible Debenture for
$550,000. The note is due and payable in full on or before March 10, 2006 and
carries an interest rate of 5% per annum. The notes are convertible, at the
discretion of the holder, into shares of common stock of the Company at a
conversion price of $1.00 per share. On March 30, 2005, the Company executed a
Convertible Debenture for $200,000. The note is due and payable in full on or
before March 10, 2006 and carries an interest rate of 5% per annum. The notes
are convertible, at the discretion of the holder, into shares of common stock of
the Company at a conversion price of $1.00 per share. On December 13, 2005, the
Company paid $134,424 towards this note. On June 30, 2006, this note was paid in
full.
On April 8, 2005, the Company executed a Convertible Debenture for
$160,000. The note is due and payable in full on or before April 8, 2006 and
carries an interest rate of 5% per annum. The notes are convertible, at the
discretion of the holder, into shares of common stock of the Company at a
conversion price of $1.00 per share. On May 17, 2005, the Company executed a
Convertible Debenture for $150,000. The note is due and payable in full on or
before May 17, 2006 and carries an interest rate of 5% per annum. The notes are
convertible, at the discretion of the holder, into shares of common stock of the
Company at a conversion price of $1.00 per share. On December 13, 2005, this
note was paid in full. The Company paid a total of $319,880 for principal and
interest.
On October 14, 2005, we entered into a securities purchase agreement
with H.C. Wainwright for a PIPE Offering which is a private investment
opportunity in a public company for an aggregate purchase price of $3,430,000,
of which we have issued (i) a $3,430,000 secured convertible debenture,
convertible into shares of our common stock at a fixed conversion price of
$.315, par value $0.001, and (ii) a warrant to purchase an aggregate of
34,408,717 additional shares of our common stock at an exercise price of $.315
and $.63 per share and are exercisable until October 14, 2010.
Beginning on the six (6) month anniversary of the Closing, and on the
first business day of each month thereafter until the Notes are no longer
outstanding the Company shall pay 1/18th of the original principal amount of the
Notes and all accrued and unpaid interest. The Company shall elect to make such
payments in shares of the Company's common stock. Each share of the Company's
common stock will be valued at 92.5% of the five (5) day VWAP immediately prior
to the payment date. The interest on the convertible debenture shall accrue on
the outstanding principal balance at a rate of 8% per annum. For the three
months ended March 31, 2007, $67,660 has been charged as interest expense
related to this debt.
22
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - CONVERTIBLE DEBENTURES (continued)
The Warrants to purchase 34,408,717 of the Company's common stock will
expire on October 14, 2010. The exercise price of the warrant is fixed at $.315
and $.63 and has an exercise period of five years. The Company accounts for the
fair value of these outstanding warrants to purchase common stock and the
conversion feature of its convertible notes in accordance with SFAS No. 133
"Accounting For Derivative Instruments And Hedging Activities" and EITF Issue
No. 00-19 "Accounting For Derivative Financial Instruments Indexed To And
Potentially Settled In A Company's Own Stock;" which requires the Company to
bifurcate and separately account for the conversion feature and warrants as
embedded derivatives contained in the Company's convertible notes.
Pursuant to SFAS No. 133, the Company bifurcated the fair value of the
conversion feature from the convertible notes, since the conversion feature was
determined to not be clearly and closely related to the debt host, and since the
effective registration of the securities underlying the conversion feature and
warrants is an event outside of the control of the Company, pursuant to EITF
00-19. The Company recorded the fair value of the conversion feature and
warrants as long-term liabilities as it was assumed the Company would be
required to net-cash settle the underlying securities.
The Company is required to carry these derivatives on its balance sheet
at fair value and unrealized changes in the values of these derivatives are
reflected in the statement of operation as "derivative valuation gain (loss)".
In addition 8,711,084 warrants have been issued to H.C. Wainwright,
John R. Clarke, Scott F. Koch, Ari Fuchs, Jason A. Stein and First SB Inc.
respectively, with series A, and C each exercisable at $.315 and series B and D
each exercisable at $.63 with terms of 1 year from October 14, 2005.
Warrants
-----------------
H.C. Wainwright & Co. Ltd. 2,177,768
John R. Clarke 947,328
Scott F. Koch 947,328
Ari J. Fuchs 217,776
Jason A. Stein 65,332
1st SB Partners Ltd. 4,355,552
-----------------
Total $ 8,711,084
=================
|
For 2005, the value of the conversion feature and warrants was
calculated using the Black-Scholes method as of December 31, 2005 based on the
following assumptions: an average risk free rate of 4.25; a dividend yield of
0.00%; and an average volatility factor of the expected market price of the
Company's common stock of 102.61%. The market value of the common stock at
December 31, 2005 was $.22 per share. At December 31, 2005, the derivative
liability was $6,458,056 and the loss on derivative valuation was $5,622,741.
23
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - CONVERTIBLE DEBENTURES (continued)
For 2006, the value of the conversion feature and warrants was
calculated using the Black- Scholes method as of December 31, 2006 based on the
following assumptions: an average risk free rate of 4.85; a dividend yield of
0.00%; and an average volatility factor of the expected market price of the
Company's common stock of 93.8%. The market value of the common stock at
December 31, 2006 was $.047 per share. At December 31, 2006, the derivative
liability was $279,074 and the gain on derivative valuation was $6,178,983. On
May 7, 2007, the remaining derivative liability of $279,074 was written off and
a derivative valuation gain of $279,074 was recognized, due to the amended
agreements relating to the convertible debt.
On October 14, 2005, the Company paid $480,000 in cash for debt issue
costs related to the convertible debenture of $3,430,000. These debt issue costs
were capitalized in the financial statements and are being amortized over two
years using the interest method. On May 7, 2007, the remaining debt issue costs
of $136,835 were expensed, due to the payoff of the convertible debt as part of
the amended agreements relating to the convertible debt. At June 30, 2007 and
December 31, 2006, net debt issue costs related to these convertible debentures
were $0 and $197,494, respectively.
Silver Star Energy is in default of the October 14, 2005 terms of the
convertible debenture. This Company has been unable to have the Registration
Statement on Form SB2 declared effective within the 90 days after closing as was
required. Liquidated damages in the amount of $68,600 or 2% of the offering
amount of $3,430,000 have been paid. Further liquidated damages of 1% per month
of the offering amount, totaling $531,649 have been accrued. This represents the
default period from January 14, 2006 to March 31, 2007.
Amortization payments of 1/18th of the original amount of $3,430,000 is
required to be paid on the six month anniversary of the closing and on the first
business day of each month thereafter until the notes are no longer outstanding.
The company may elect to make these payments in cash or in payments of the
company's stock.
On March 8, 2007 three of our creditors from our October 14, 2005
financing filed a claim for monies owed under the Note and Warrant Purchase
Agreement in the United States Bankruptcy Court Central District of California.
These three creditors represent $950,000 of the $3,430,000 that was raised. The
Company and its legal counsel have since reached a negotiated settlement that
all of the lenders have now accepted. The settlement resulted in the sale of the
Company's 40% interest North Franklin Gas Field to an arm's-length third party,
the repayment of $2.4 million pro-rata to the lenders and the purchase of a
revenue interest in the MB Gas Inc., a private Alberta, Canada, oil and gas
exploration company. The Company sold its interest in the Franklin gas field for
a total of $3,100,000 and repaid in cash $2,400,000 of the approximately
$3,429,885 of principal and $931,926 of accrued interest that was owing to the
Lenders. This Asset Sale Agreement closed on May 7, 2007. In order to settle the
balance, the Company amended the related lending documents to allow for
conversion of such debt into common shares at a deemed conversion price of $0.04
per share. The remainder of the debt totaling $1,961,811 will be converted to
49,045,225 shares of common stock. As of June 30, 2007, the common stock has not
been issued.
24
SILVER STAR ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - CONVERTIBLE DEBENTURES (continued)
The Company also re-priced 12,500,000 outstanding warrants to allow
exercise at a price of $0.04. The value of the new warrants was calculated using
the Black-Scholes method as of May 7, 2007 based on the following assumptions:
an average risk free rate of 4.70; a dividend yield of 0.00%; and an average
volatility factor of the expected market price of the Company's common stock of
117.8%. The market value of the common stock at May 7, 2007 was $.04 per share.
The warrants were valued at $375,501. As of June 30, 2007, the Company
recognized $375,501 of interest expense related to the warrants.
