NOTES
TO FINANCIAL STATEMENTS
NOTE
1
- NATURE OF OPERATIONS AND GOING CONCERN
The
accompanying financial statements
have been prepared on the basis of accounting principles applicable to a “going
concern”, which assume that the Company will continue in operation for at least
one year and will be able to realize its assets and discharge its liabilities
in
the normal course of operations.
The
unaudited financial statements as
of September 30, 2007, and for the three and nine month period then ended,
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly state the financial position
and results of operations for the three and nine months. Operating
results for interim periods are not necessarily indicative of the results which
can be expected for full years.
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
$6,700,000, 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.
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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
2
- SUMMARY OF ACCOUNTING POLICIES (continued)
Earnings
per Share
Basic
loss per share has been computed
by dividing net loss for the year applicable to the common stockholders by
the
weighted average number of shares of common shares outstanding during the
year. Convertible equity instruments such as stock options, warrants,
convertible debentures and notes payable are excluded from the computation
of
diluted loss per share, as the effect of the assumed exercises would be
anti-dilutive.
Fixed
Assets
Fixed
assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives
of
the assets which range from three to seven years. Fixed assets
consisted of the following at September 30, 2007 and December 31,
2006:
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
September
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
|
|
|
(39,763
|
)
|
|
|
(27,994
|
)
|
|
Total
|
|
$
|
38,297
|
|
|
$
|
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 nine
months ended September 30, 2007 and 2006 was $11,769 and $12,331,
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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
2
- SUMMARY OF ACCOUNTING POLICIES (continued)
Oil
and Gas Properties
The
Company follows the full cost
method of accounting for its oil and gas properties. Under this
method, all costs associated with acquisition, exploration, and development
of
oil and gas properties are capitalized. Such costs include land and
lease acquisition costs, annual carrying charges of non-producing properties,
geological and geophysical costs, costs of drilling and equipping productive
and
non-productive wells, asset retirement costs, and direct exploration salaries
and related benefits. Capitalized costs are categorized as being
subject to amortization or not subject to amortization. The Company
operates in two cost centers, being Canada and the U.S.A.
The
capitalized costs of oil and gas
properties are amortized on the unit-of-production method using estimates of
proved reserves as determined by independent engineers. Investments
in unproved properties are not amortized until proved reserves associated with
projects can be determined or until impairment occurs. If the results
of an assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be
amortized. Depletion expense for the nine months ended September 30,
2007 and 2006 was $147,000 and $184,155, 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.
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.
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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
2
- SUMMARY OF ACCOUNTING POLICIES (continued)
In
February 2007, the FASB issued SFAS
no, 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”). SFAS 159 provides companies with an option to report
selected financials assets and liabilities at fair value. The
objective of SFAS 159 is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. Generally accepted accounting principles
have required different measurement attributes for different assets and
liabilities that can create artificial volatility in earnings. The
FASB has indicated it believes that SFAS 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets
and
liabilities at fair value, which would likely reduce the need for companies
to
comply with detailed rules for hedge accounting. SFAS 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS
157
and SFA No. 107, “Disclosures about Fair Value of Financial Instruments.”SFAS
159 is effective for the Company as of the beginning of fiscal year
2008. The adoption of this pronouncement is not expected to have an
impact on the Company’s financial position, results of operations or cash
flows.
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:
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
3
- OIL AND GAS PROPERTIES (continued)
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%
|
|
|
|
|
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 $127,103 was $1,216,546.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
3
- OIL AND GAS PROPERTIES (continued)
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.
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.
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 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.
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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
3
- OIL AND GAS PROPERTIES (continued)
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.
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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
5
- CONCENTRATIONS
As
of September 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.
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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
6
- COMMON STOCK (continued)
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 September 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.
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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
7- RELATED PARTY TRANSACTIONS (continued)
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
|
)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
9
- LEASE COMMITMENT (continued)
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
|
|
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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
10 - CONVERTIBLE DEBENTURES (continued)
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
1/18
th
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.
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)”.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
10 - CONVERTIBLE DEBENTURES (continued)
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
|
|
|
1
st
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.
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 September 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.
SILVER
STAR ENERGY, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
10 - CONVERTIBLE DEBENTURES (continued)
Amortization
payments of 1/18
th
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.
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.
