10-Q 1 gec10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------- FORM 10Q ----------------- (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2011 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to ___________ Commission file number: 333-151398 GULFSTAR ENERGY CORPORATION ----------------------------------------- (Exact name of registrant as specified in its charter) Colorado 02-0511381 -------- ---------- (State of Incorporation) (IRS Employer ID Number) 600 17th Street, Suite 2800, Denver, Colorado 80202 ----------------------------------------------- (Address of principal executive offices) 303-260-6492 -------------------------- (Registrant's Telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X] Indicate the number of share outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 9, 2011, there were 11,499,479 shares of the registrant's common stock outstanding.

PART I ITEM 1. FINANCIAL STATEMENTS

F-1

F-2

F-3 GULFSTAR ENERGY CORPORATION AND SUBSIDIARIES (A Company in the Development Stage) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 and 2010 (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Organization Bedrock Energy, Inc. was incorporated in Colorado on August 11, 2004 and on May 5, 2010 its name was changed to Gulfstar Energy Corporation ("Gulfstar" or the "Company"). On May 5, 2010, the Company entered into a Share Exchange Agreement with Talon Energy Corporation ("Talon"). Talon was a Florida company engaged in management activities in the oil and gas industry. On June 24, 2010, the Share Exchange Agreement with Talon was replaced by a similar Revised and Amended Share Acquisition Agreement between Talon and the Company and in conjunction with a June 24, 2010 Share Exchange Agreement between the Company and Gulfstar Energy Group, LLC ("Gulfstar LLC"), a privately held Mississippi Limited Liability Company, for 58.3% of the outstanding equity interests of Gulfstar LLC, and an Acquisition Agreement between the Company and Gulfstar LLC to acquire the remaining 41.7% of the outstanding equity interests of Gulfstar LLC. The Revised and Amended Share Acquisition Agreement and Share Exchange Agreement were both effective as of June 30, 2010. The Share Exchange Agreement between the Company and Gulfstar LLC provided for Jason Sharp and Timothy Sharp ("Sharps"), officers and members of Gulfstar LLC, to exchange their 58.3% of Gulfstar LLC outstanding equity interests for 11,659,659 restricted shares of common stock of the Company. The Gulfstar LLC exchange was accounted for as a reverse recapitalization in which Gulfstar LLC was determined to be the acquirer for accounting purposes. The June 24, 2010 Acquisition Agreement between the Company and Gulfstar LLC provides for the acquisition of the remaining outstanding equity interests of Gulfstar LLC through the filing of a Registration Statement with the Securities and Exchange Commission to register these remaining shares of common stock offered by the Company to the individual equity interest holders of Gulfstar LLC. As of September 30, 2011, these remaining 41.7% equity interests of Gulfstar LLC have not been acquired by the Company. The Revised and Amended Share Acquisition Agreement with Talon provided for the Company to issue 3,509,530 restricted shares of its common stock to the shareholders of Talon in exchange for the issued and outstanding shares of Talon. After the exchange of such shares the Company owned 100% of the issued and outstanding shares of Talon. On June 15, 2011, the Company entered into an Agreement with Gulfstar LLC and the Sharps in order for the Sharps to compensate the Company as a result of events that had taken place over a period of time since July 2010 and as such adjust the share consideration for the change in value of the assets previously acquired. The parties acknowledged that this Agreement was not intended to otherwise change or amend that certain Acquisition Agreement and Share Exchange Agreement entered into on June 24, 2010 by and between the parties. As a result and as part of the Agreement, the Sharps agreed to return to the Company 6,659,659 shares of their common stock valued at $929,744 or approximately $.14 per share. The Company has recorded these shares as Treasury Shares and recorded the claims settlement as other income during the second quarter of 2011. In addition, as part of this Agreement, the Sharps agreed to place into escrow 2,408,985 shares of their remaining 5,000,000 shares of common stock for the benefit of the remaining minority equity holders of Gulfstar LLC subject to the filing and effectiveness of the Registration Statement with the Security and Exchange Commission. As a result of this Agreement, the Sharps have retained an ownership of 2,591,015 shares of common stock of the Company. F-4 Gulfstar LLC built and currently operates a 16-mile natural gas pipeline supply system in Western Kentucky for the transportation of natural gas and provides property management services for the operation of 20 wells in Kentucky of which it holds overriding royalty interest of approximately 12.5% and holds mineral rights on approximately 9,000 acres of leased land. Since the inception of the Pipeline and the flow of natural gas during the second quarter of 2010, Gulfstar LLC has encountered significant challenges in increasing the flow of natural gas through its Pipeline. As a result of these challenges and limited ability of the Company to fund future development of natural gas wells to the Pipeline, the Company has decided to additionally focus on the exploration and production of oil and gas leases located in other parts of the United States, including Kentucky and Colorado. As part of its focus on exploration and production, the Company acquired on August 5, 2011 at a cost of $80,000 a 100% working interest and an 81.25% net revenue interest in approximately 320 acres in Weld County, Colorado, which is located about 40 miles north of Denver, Colorado and lies in what is called the Denver Julesberg Basin (DJ Basin). The DJ Basin is the predominant geological structure in Northern Colorado. The shallow "J" and "D" sand formations of the DJ Basin constitute a common source of oil and gas. The acreage in Weld County has forty (40) acre drilling and spacing units for the production of oil and gas from the "D" and "J" sand formations. The acreage contained within this lease has an 18-month term ("Primary Term"), and may be extended if the Company drills two wells during the Primary Term, or if other conditions are met. The term of the lease can continue as long as the Company produces oil and gas in paying quantities during the term of the lease. As of September 30, 2011, the Company has yet to drill any wells on this acreage. Interim Presentation In the opinion of the management of the Company, the accompanying unaudited financial statements include all material adjustments, including normal and recurring adjustments, considered necessary to present fairly the financial position and operating results of the Company for the period presented. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010. It is the Company's opinion that when the interim financial statements are read in conjunction with the December 31, 2010 Annual Report on Form 10-K and its Current Report on Form 10-Q, the disclosures are adequate to make the information presented not misleading. Interim results are not indicative of results for a full year or any future period. Principles of Consolidation Gulfstar LLC was determined to be the accounting acquirer in the reverse recapitalization that occurred on June 30, 2010. As a result, all financial information prior to June 30, 2010 will include only the accounts of Gulfstar LLC. Subsequent to June 30, 2010, the accompanying financial information will include the accounts of Gulfstar, its wholly owned subsidiary, Talon, and its majority owned subsidiary, Gulfstar LLC. As of June 30, 2011, Gulfstar liquidated Talon and assumed net liabilities in the amount of $263,083. All significant inter-company balances and transactions have been eliminated during consolidation. Development Stage The Company and its subsidiaries are currently focusing on the exploration and production activities, limited operation of its pipeline gathering system and management of existing oil and gas wells. Significant additional efforts, and funding, neither of which is assured, are required for the Company to achieve its intended normalized operating level. Substantially all of the Company's efforts are devoted to the establishment of sufficient resources and revenue producing assets in order to achieve its overall operational goals. Though planned principal operations are anticipated to commence, no significant revenue has been realized from the Company's to-date activities. The consolidated statements of operations are shown inclusive of all cumulative revenue and expense activity since the inception date of the Company, May 19, 2006, while the Company is in the development stage. F-5 Non-Controlling Interest The non-controlling interest is related to Gulfstar LLC, which is consolidated, but not wholly owned by the Company. At September 30, 2011, the Company owned 58.3% of the equity interest of Gulfstar LLC and therefore, the non-controlling interest of 41.7% was $1,268,479. At December 31, 2010, the Company owned 58.4% of the equity interest of Gulfstar LLC and therefore, the non-controlling interest of 41.6% was $1,287,171. Income Taxes Gulfstar LLC, a limited liability company, is not a tax paying entity for Federal income tax purposes. Its pro rata share of income, losses and tax credits is passed through to its members and reported by its members on their individual income tax returns. The consolidated statement of operations for the six months ended June 30, 2010 and for the period from May 19, 2006 (inception) through June 30, 2010 includes the accounts of Gulfstar LLC only, therefore, no provision for federal income taxes or for deferred taxes has been determined. The Company has determined, for the period July 1, 2010 through December 31, 2010 and for the period January 1, 2011 through September 30, 2011, any provision for income taxes or deferred taxes and this determination has been based upon the accounts of Gulfstar Energy Corporation, Talon and the pro rata loss of Gulfstar LLC passed through and reportable by Gulfstar Energy Corporation. The Company accounts for income taxes under the liability method as prescribed by ASC authoritative guidance. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rates expected to be in effect during the year in which the basis difference reverses. The realizability of deferred tax assets are evaluated quarterly and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits in the Company's income tax returns. The primary timing differences between financial and tax reporting arise from federal net operating loss carryforwards, amortization of start up costs, and accrued expenses. The Company assessed the likelihood of utilization of the deferred tax assets, in light of recent and expected continuing losses. As a result of this review, the deferred tax asset of $835,147 and $758,227 has been fully reserved at September 30, 2011 and December 31, 2010, respectively. As of September 30, 2011, the Company had net operating loss carryforwards for income tax and financial reporting purposes of approximately $1,023,000 expiring in the years 2020 through 2031. The Company has adopted ASC guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all income tax positions. Each income tax position is assessed using a two step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At September 30, 2011, there were no uncertain tax positions. None of the Company's federal or state income tax returns are currently under examination by the Internal Revenue Service or state authorities. However, calendar years 2007 and later remain subject to examination by the Internal Revenue Service and respective states. F-6 Business Combinations The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance, effective January 1, 2009, requires consideration given, including contingent consideration, assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible assets; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuations and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities assumed be recognized as goodwill. In accordance with ASC 805, any excess of fair value of acquired net assets, including identifiable intangible assets, over the acquisition consideration results in a bargain purchase gain. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed have been properly valued. Loss Per Share Loss per share is computed by dividing net loss by the weighted average number of common shares outstanding and requires presentation of both basic and diluted loss per common share. Common share equivalents, if used, would consist of any options, warrants and contingent shares. Common share equivalents would not be included in the weighted average calculation for the periods that reported a net loss since their effect would be anti-dilutive. As described in Note 10, the Company had outstanding as of September 30, 2011, options to acquire 925,000 shares of common stock; but no warrants or contingent shares. As of December 31, 2010, the Company had no outstanding options, warrants or contingent shares. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements. Concentration of Credit Risk The Company, from time to time during the periods covered by these consolidated financial statements, may have bank balances in excess of its insured limits. Management has deemed this a normal business risk. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all cash and highly liquid investments with initial maturities of three months or less to be cash equivalents. Accounts Receivable Accounts receivable are stated at their cost less any allowance for doubtful accounts. The allowance for doubtful accounts is based on management's assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there is deterioration in a major customer's creditworthiness or if actual defaults are higher than the historical experience, the management's estimates of the recoverability of amounts due to the Company could be adversely affected. Based on the management's assessment, no reserve is deemed necessary at September 30, 2011 and December 31, 2010. F-7 Revenue Recognition The Company recognizes revenue from its Pipeline segment upon shipment of the gas to its customers. Royalty revenue is recognized from the Company's oil and gas property management and exploration and production segment in the period of production. Property and Equipment The Company follows the full cost method of accounting for oil and natural gas operations. Under this method, all productive and nonproductive costs incurred in connection with the acquisition, exploration, and development of oil and natural gas reserves are capitalized. No gains or losses are recognized upon the sale or other disposition of oil and natural gas properties except in transactions that would significantly alter the relationship between capitalized costs and proved reserves. The costs of unevaluated oil and natural gas properties are excluded from the amortizable base until the time that either proven reserves are found or it has been determined that such properties are impaired. As properties become evaluated, the related costs transfer to proved oil and natural gas properties using full cost accounting. None of the capitalized costs in the amount of $400,980 were included in the amortization base as of September 30, 2011, nor did the Company expense any capitalized costs during the nine months ended September 30, 2011 and 2010. The Company does not have significant oil and gas producing activities as of September 30, 2011 and December 31, 2010, and its oil and gas properties are still in the drilling phase and have not been evaluated. Management capitalizes additions to property and equipment including its pipeline. Expenditures for repairs and maintenance are charged to expense. Property and equipment are carried at cost. Adjustment of the asset and the related accumulated depreciation accounts are made for property and equipment retirements and disposals, with the resulting gain or loss included in the consolidated statements of operations. In accordance with authoritative guidance on accounting for the impairment of disposal of long-lived assets, as set forth in Topic 360 of the ASC, the Company assesses the recoverability of the carrying value of its non-oil and gas long-lived assets when events occur that indicate an impairment in value may exist. An impairment loss is indicated if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If this occurs, an impairment loss is recognized for the amount by which the carrying amount of the assets exceed the estimated fair value of the assets. During the quarter ended June 30, 2011, the Company entered into an agreement with Gulfstar LLC and the Sharps, which the Company determined is an event that required the Company to assess whether the carrying value of the Pipeline was impaired. As a result of the Company's analysis, the Company assessed there was no impairment to the Pipeline. No events occurred during the quarter ended September 30, 2011 that would be indicative of possible impairment. Goodwill In accordance with generally accepted accounting principles, goodwill cannot be amortized, however, it must be tested annually for impairment. This impairment test is calculated at the reporting unit level. The goodwill impairment test has two steps. The first identifies potential impairments by comparing the fair value of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down is recorded. Management tests goodwill each year for impairment, or when facts or circumstances indicate impairment has occurred. During the quarter ended June 30, 2011, the Company entered into an agreement with Gulfstar LLC and the Sharps, which the Company determined is an event that required the Company to assess whether the carrying value of goodwill was impaired. As a result of the Company's analysis, the Company assessed that goodwill was impaired and an impairment loss was recorded in the amount of $368,369 as during the second quarter of 2011. F-8 Intangible Assets Intangible assets consist of right of way deposits, which are contracts allowing the Company to install pipeline on private land. The rights exist indefinitely and therefore, no amortization has been recorded. Management evaluates the assets for impairment whenever events or circumstances indicate a possible impairment. During the quarter ended June 30, 2011, the Company entered into an agreement with Gulfstar LLC and the Sharps, which the Company determined is an event that required the Company to assess whether the carrying value of the right of ways were impaired. As a result of the Company's analysis, the Company assessed there was no impairment to the right of ways. Significant Customer The Company's pipeline construction was finished during the second quarter of 2010 and is currently delivering natural gas to one manufacturing customer located in Kentucky. Revenue earned from the oil and gas property management segment and exploration and production segment are determined based upon division orders with two purchasers. Depreciation For financial reporting purposes, depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of assets at acquisition. For income tax reporting purposes, depreciation of property and equipment is computed using the straight-line and accelerated methods over the estimated useful lives of assets at acquisition. Recent Accounting Pronouncements In December 2010, the Financial Accounting Standard Board issued ASC Topic 350 update 2010-28, "Intangibles - Goodwill and Other". The update modifies the two step process of the goodwill impairment test for reporting units with zero or negative carrying amounts. The update is effective for interim and annual periods beginning after December 15, 2010. We adopted the provisions of the standard on January 1, 2011, which did not have a material impact on our financial statements. There were other accounting standards and interpretations issued during the nine months ended September 30, 2011, none of which are expected to have a material impact on the Company's financial position, operations or cash flows. NOTE 2 - SIGNIFICANT ACQUISITIONS Effective June 30, 2010, the Company acquired 100% of the issued and outstanding stock of Talon. The acquisition was accounted for using the purchase method in accordance with guidance provided in Topic 805 of the Codification. As of June 30, 2011, Talon has been liquidated with Gulfstar assuming $263,083 of net liabilities. The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values at June 30, 2010:

F-9 Goodwill associated with the above transaction is not amortizable for tax purposes. During the quarter ended June 30, 2011, the Company wrote off goodwill as an operating expense after the Company assessed that goodwill has been impaired. NOTE 3 - GOING CONCERN AND MANAGEMENT'S PLAN As shown in the accompanying consolidated financial statements, the Company has recognized a net loss of $374,852 for the nine months ended September 30, 2011 and reported an accumulated deficit of $4,707,555. At September 30, 2011, the Company had total current assets of $225,041 and total current liabilities of $777,470 for a working capital deficiency of $552,429. To the extent the Company's operations are not sufficient to fund the Company's capital requirements, the Company will attempt to enter into a revolving loan agreement with a financial institution or attempt to raise capital through the sale of additional capital stock or through the issuance of debt. At the present time, the Company does not have a revolving loan agreement with any financial institution nor can the Company provide assurance that it will be able to enter into any such agreement in the future or be able to raise funds through the further issuance of debt or equity in the Company. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company's ability to do so. The consolidated financial statements do not include any adjustment to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. NOTE 4 - RELATED PARTY TRANSACTIONS Note Receivable At December 31, 2009, the Company was owed $82,325 from an officer. The note was non-interest bearing, unsecured and due no later than two years after the completion of the pipeline, which was completed during the second quarter of 2010. During second quarter of 2010 and prior to the acquisition of Gulfstar LLC, the note receivable was written-off as compensation expense. Oil and Gas Proceeds Due to Others As described in Note 6, the Company owed oil and gas proceeds to working interest owners totaling $40,883 and $33,477 as of September 30, 2011 and December 31, 2010, respectively. Accrued Expenses During the quarter ended September 30, 2011, the Company reimbursed an officer and director of the Company $25,000 and $21,601 for accrued expenses incurred in the current and prior periods, respectively. Notes Payable The Company borrowed $40,000 from an affiliate of a member-manager of Gulfstar LLC and a greater than 5% shareholder of the Company and in exchange issued an unsecured promissory note dated January 4, 2011 that is due in full on or before December 31, 2011. Interest is accrued at the rate of one percent (1.0%) per annum. As of September 30, 2011, the Company owes $7,882 on the promissory note. F-10 The Company borrowed a total of $335,078 from an affiliate of a member-manager of Gulfstar LLC and a greater than 5% shareholder of the Company and in exchange issued an unsecured promissory note dated November 30, 2010 that is due in full on or before December 31, 2011. Interest is accrued at the rate of one percent (1.0%) per annum. On May 30, 2011, the Company and the affiliate entered into an agreement whereby the parties agreed to pay the promissory in full in exchange for 223,385 shares of the Company's common stock valued at $.14 per share. As a result of this agreement, Gulfstar LLC recognized a gain on extinguishment of debt in the amount of $303,804 that was recorded as other income during the second quarter of 2011. NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment consist of the following at:

Depreciation expense was $57,555 and $173,315, respectively, for the three months and nine months ended September 30, 2011 and $72,233 and $126,238, respectively, for the three and nine months ended September 30, 2010. NOTE 6 - DRILLING VENTURES The Company holds overriding royalty interests in various wells in Kentucky. The Company syndicated the financing of these wells through offering a 100% working interest in the wells in exchange for contribution of funds to drill the wells. As part of the transaction, the Company retained approximately 12.5% overriding royalty interests in the wells and also agreed to provide property management services on behalf of the working interest owners in the wells. This income from the wells earned by the Company is reported as royalty income as reflected in Note 9 - Information on Business Segments. As part of the property management services provided, the Company collects the royalties generated from the wells on behalf of the working interest owners and pays the various costs and expenses incurred on behalf of the wells. The Company records no costs or expenses relative to these wells on its consolidated statements of operations. The excess of the royalties collected by the Company on behalf of the working interest owners were recorded as oil and gas proceeds due to others on the consolidated balance sheets of the Company. At September 30, 2011 and December 31, 2010, the Company owed oil and gas proceeds to working interest owners in the amount of $40,883 and $33,477, respectively. NOTE 7- LITIGATION SETTLEMENT PAYMENT In March 2010, the Company settled certain environmental litigation. As a result of the settlement, the Company was required to pay $70,000 during the year ended December 31, 2010. This amount was paid by the Company during the second quarter of 2010, in addition to $100,000, which was paid during the year ended December 31, 2009. As a result, $170,000 was recorded as other expense in the consolidated statement of operations for the year ended December 31, 2009. Additionally, the Company received $230,000 from a consultant contracted by the Company for services provided related to the environmental litigation. The income from the settlement with the consultant was recognized as other income during the first quarter of 2010. F-11 In February, 2009, the Company received two Notices of Violation from the Commonwealth of Kentucky's Energy and Environment Cabinet ("Cabinet") as a result of the Company's failure to obtain appropriate permits in advance of certain construction activities and for "causing or contributing to the pollution of the waters of the Commonwealth of Kentucky" during 2007. The Company neither admitted to nor denied the alleged violations but accepted civil responsibility for the violations on May 6, 2010. As a result of the settlement of the dispute, the Company agreed to pay a civil penalty of $60,000 to the Commonwealth of Kentucky by way of 12 equal monthly installment payments, beginning in May of 2010. The Company recorded a $60,000 General & Administration Expense during the second quarter of 2010 to recognize the settlement with the Cabinet and as of June 30, 2011, the liability was paid in full. NOTE 8 - NOTE PAYABLE The Company borrowed funds in the amount of $48,000 from a financial institution for working capital purposes during the second quarter of 2011 and the loan is evidenced by a promissory note dated April 7, 2011 that is collateralized by vehicles. The promissory note is due on demand and matures on April 7, 2012 at an interest rate of 6.99% per annum with monthly interest only payments. As of September 30, 2011, the Company owes $30,233. Interest expense was $891 and $3,532, respectively, during the three and nine months ended September 30, 2011. In September 2011, Gulfstar and Gulfstar LLC settled all claims arising from a trade payable amount of $735,035 owed to a creditor in exchange for Gulfstar LLC issuing a six percent (6%) unsecured promissory note due March 1, 2014 with interest only semi-annual payments and Gulfstar issuing 175,000 shares of its common stock valued at $24,500. As part of this settlement, costs of $32,500, consisting of an additional $8,000 of trade payables owed to the creditor at the date of the settlement plus the value of the shares in the amount of $24,500, were included in general and administrative expense and interest cost of $3,675 was included in other expense for the quarter ended September 30, 2011. NOTE 9 - INFORMATION ON BUSINESS SEGMENTS The Company operates in three business segments: Pipeline, Oil and Gas Property Management, and Exploration and Production. Pipeline Gulfstar LLC has built and currently operates a 16-mile nature gas pipeline located in Western Kentucky for the transportation of natural gas. The pipeline operations transport gas to a burner tip processing plant located near Bowling Green, Kentucky where it is sold pursuant to a gas purchase agreement. Pipeline revenue is recognized upon delivery of the gas to its customer. The pipeline has a throughput capacity of 18 Million Cubic Feet per day (MMcf/d). The pipeline is currently not operating at full capacity as it transported an average of 71 and 78 Mcf/d, respectively, of natural gas during the three and nine months ended September 30, 2011 and an average of 109 and 71 Mcf/d, respectively, of natural gas during the three and nine months ended September 30, 2010. Oil and Gas Property Management ("O&G Property Mgmt") Gulfstar LLC is the manager and operator of 20 wells in Western Kentucky. Gulfstar LLC offers working interests in the properties on behalf of the leaseholders. Using these funds, Gulfstar LLC pays for the costs incurred in drilling, reworking and development of the wells. Gulfstar LLC holds an overriding royalty interest of approximately 12.5% and holds mineral rights on approximately 9,000 acres of leased land. Gulfstar collects revenues on behalf of the working interest holders and distributes each working interest holders' share of revenue when collected. A receivable is recorded for oil and gas revenue when earned and a related payable due to interest holders is recorded net of the 12.5% revenue interest and direct costs due to Gulfstar LLC. F-12 Exploration and Production ("E&P") During the fourth quarter of 2010, Gulfstar LLC began drilling a horizontal well located in Warren County, Kentucky with total capitalized costs of $320,980 as of September 30, 2011. Gulfstar LLC owns a working interest of 64.0% and a net revenue interest of 48.0% in this well and anticipates completion of this well by the end of 2011. After completion, the well will be connected to Gulfstar LLC's pipeline for delivery of gas. Also, Gulfstar LLC own a similar working and net revenue interest in an offset well that produces oil. During the three and nine months ended September 30, 2011, this well produced net revenue of $8,102 and $35,402, respectively. The Company acquired on August 5, 2011 at a cost of $80,000 a 100% working interest, 81.25% net revenue interest, in approximately 320 acres in Weld County, Colorado which is located about 40 miles north of Denver, Colorado and lies in what is called the Denver, Julesberg Basin (DJ Basin). The acreage contained within this lease has an 18-month term ("Primary Term"), and may be extended if the Company drills two wells during the Primary Term, or if other conditions are met. The term of the lease can continue as long as the Company produces oil and gas in paying quantities during the term of the lease. The following data is presented for the Company's three operating segments: Pipeline, O&G Property Management and E&P.

F-13 NOTE 10 - STOCKHOLDERS' EQUITY Preferred Shares The Company is authorized to issue 100,000,000 shares of no par value preferred stock. As of September 30, 2011 and December 31, 2010, the Company has no shares issued and outstanding. Common Shares The Company is authorized to issue 200,000,000 shares of $.001 voting common stock. At September 30, 2011 and December 31, 2010, there were a total of 18,159,138 and 16,985,086 shares of common stock issued and 11,499,479 and 16,985,086 shares of common stock outstanding, respectively. On May 5, 2010, the Board of Directors of the Company authorized a one share for eight share reverse stock split, effective on May 5, 2010. All share and per share references have been adjusted for the reverse split. Treasury Shares On May 30, 2011 the Company acquired 6,659,659 shares of common stock from the Sharps in exchange for the payment of claims valued at $929,744 and these shares are still in treasury as of September 30, 2011. Stock Option Plan In the first quarter of 2011, the Company adopted the 2011 Stock Option Plan. The maximum number of shares of common stock reserved for issuance under the Plan is 3,000,000 shares. The number of shares, however, may be adjusted to reflect certain corporate transactions or changes in our capital structure. All employees of the Company and its subsidiaries, including employees who are officers or members of our Board of Directors and non-employee members of our Board of Directors are eligible to participate in the Plan. In addition, key advisors who perform services for the Company and its subsidiaries are eligible to participate in the Plan. The Plan is administered by our Board of Directors and they have the authority to, among other things, select plan participants, determine the type and amount of awards, determine awards terms, and interpret the Plan and any Plan awards. During any calendar year, participants are limited in the number of grants they may receive under the Plan. In any year, an individual may not receive options for more than 300,000 shares. The Plan requires that the exercise price for stock options be equal to or greater than the fair market value of our common stock on the date of the grant. If the option is granted to an employee who, at the time of grant, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or subsidiary of the Company, the exercise price shall not be less than one-hundred and ten percent of the fair market value of our common stock on the date of the grant. During the quarter ended September 30, 2011, the Company granted options as follows and these options were valued using the Black Scholes method:

As of September 30, 2011, no shares have been issued in relation to the 2011 Stock Option Plan. NOTE 11 - AGREEMENTS On October 20, 2010, the Company engaged Maxim Group LLC to provide gross proceeds of up to $100 Million from a proposed private placement of Company equity and/or convertible debt. The precise terms of the private placement will be negotiated between Maxim Group LLC, potential investors and the Company. As of September 30, 2011 there is no financing in place. F-14 On January 19, 2011, the Company signed a letter agreement with Wright Capital Corporation to pursue a proposed financing of up to $90 Million to be used to assist the Company in the proposed purchase of assets connected to oil and gas leases and for the further development of the Company's existing pipeline structure in Kentucky. The Company was unsuccessful in purchasing these oil and gas leases. However the Company will continue its relationship with Wright Capital in an effort to bring additional financing to the Company and as of September 30, 2011 there is no financing in place. NOTE 12 - GULFSTAR LLC CASH DISTRIBUTIONS The Gulfstar LLC operating agreement provides a priority preference as to any future cash distributions paid by Gulfstar LLC to the owners of its equity interests. As such, fifty percent (50%) of all cash distributions shall be paid first to the non-controlling equity interests until such time they have received in full their capital contributions. After which time, cash distributions shall be paid in proportion to the percentage of all equity interests. As of September 30, 2011 and December 31, 2010, Gulfstar LLC has not repaid any of the non-controlling equity interests' capital contributions. F-15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our unaudited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward-looking statements. OPERATIONS ---------- Since the second half of 2010, Gulfstar LLC has transported limited quantities of gas via its pipeline system due to its inability to bring additional flow of natural gas from existing wells. The Company has worked with its drilling partners to increase the production of natural gas through reworking the wells but has found limited success. Also, Gulfstar LLC operates as a manager and operator of these wells that are connected to the Pipeline. Gulfstar LLC holds overriding royalty interests of approximately 12.5% in these wells and financed these wells through offering a 100% working interest in the wells in exchange for contribution of funds to drill the wells. Therefore, Gulfstar LLC does not hold any working interest in the wells. As a result of its limited success in owning and operating the Pipeline, the Company has decided to additionally focus its operations on exploration & production. As part of its focus on exploration and production, the Company acquired on August 5, 2011 at a cost of $80,000 in cash a 100% working interest and an 81.25% net revenue interest in approximately 320 acres in Weld County, Colorado, which is located about 40 miles north of Denver, Colorado and lies in what is called the Denver Julesberg Basin (DJ Basin). The DJ Basin is the predominant geological structure in Northern Colorado. The shallow "J" and "D" sand formations of the DJ Basin constitute a common source of oil and gas. The acreage in Weld County has forty (40) acre drilling and spacing units for the production of oil and gas from the "D" and "J" sand formations. The acreage contained within this lease has an 18-month term ("Primary Term"), and may be extended if the Company drills two wells during the Primary Term, or if other conditions are met. The term of the lease can continue as long as the Company produces oil and gas in paying quantities during the term of the lease. As of September 30, 2011, the Company has yet to drill any wells on this acreage. Further, the Company is currently in discussions to acquire additional acreage of oil and gas leases located in other parts of the United States that will greatly benefit its revenues and intends to leverage its assets to develop energy prospects for its own account or co-venture with other companies, which can benefit from an association with the Company's management. On January 19, 2011, the Company signed a letter agreement with Wright Capital Corporation to pursue a proposed financing of up to $90 Million to be used to assist the Company in the proposed purchase of assets connected to oil and gas leases and for the further development of the Company's existing pipeline structure in Kentucky. The Company was unsuccessful in purchasing these oil and gas leases. However, the Company will continue its relationship with Wright Capital in an effort to bring additional financing to the Company. The Company cannot make any assurances that it will obtain any funds from such proposed financing. The Company will need substantial additional capital to support its proposed future operations and as such is aggressively seeking this capital, as evidenced by its current arrangement with Wright Capital Corporation and the arrangement entered into in October 2010 with Maxim Group LLC. Nonetheless, there are currently minimal revenues and limited committed sources for additional funds as of the date hereof. No representation is made that any funds will be available when needed. In the event funds cannot be raised when needed, the Company may not be able to carry out its business plan, may never achieve projected levels of sales or royalty income, and could fail in business as a result of these uncertainties. 1 RESULTS OF OPERATIONS For the Three and Nine Months Ended September 30, 2011 Compared to the Three and Nine Months Ended September 30, 2010 During the three and nine months ended September 30, 2011, we recognized net revenues of $34,776 and $117,143 as more specifically described in the notes to the financial statements with corresponding direct costs of $6,323 and $22,551 for a gross profit of $28,453 and $94,592, respectively. During the three and nine months ended September 30, 2010, we recognized net revenues of $32,007 and $69,310 with corresponding direct costs of $16,500 and $27,842 for a gross profit of $15,507 and $41,468, respectively. The increase in net revenues of $47,833 for the nine months ended September 30, 2011 as compared to September 30, 2010 was due to the pipeline not being in service until the second quarter of 2010. During the three months ended September 30, 2011, we incurred total operating expenses of $445,486 as compared to $483,336 for the three months ended September 30, 2010. This decrease of $37,850 was due to a decrease in general and administrative expenses. During the nine months ended September 30, 2011, we incurred total operating expenses of $1,826,593 as compared to $1,108,536 for the nine months ended September 30, 2010. The increase of $718,057 was the result of a write off of goodwill in the amount of $368,369 and an increase of $349,688 in general and administrative expenses due to increased operational activities of the Company, the pipeline being in existence for the entire nine months of 2011 as compared to only the second and third quarters of 2010 and the Company's expenses related to its compliance with the financial reporting requirements of the SEC. Management of the Company does expect operational expenses to be stable as the Company focuses on its operational activities. During the three months ended September 30, 2011, we incurred a net loss of $262,579 compared to net loss of $352,639 during the three months ended September 30, 2010. The decrease in net loss of $90,060 was due primarily to a decrease in operating expenses. During the nine months ended September 30, 2011, we incurred a net loss of $374,852 compared to a net loss of $718,525 during the nine months ended September 30, 2010. The decrease in net loss of $343,673 was due primarily to an increase of $47,833 in revenues offset by the $349,688 increase in operating expenses and the write off of goodwill in the amount of $368,369, the $998,598 increase in other income primarily due to the one-time gain from the settlement and extinguishment of debt and the $10,008 decrease of net loss attributable to the non-controlling interest. LIQUIDITY --------- At September 30, 2011, we had total current assets of $265,924 consisting of $144,068 in cash and cash equivalents, $106,379 in accounts receivable and $15,477 in prepaids. At September 30, 2011, we had total current liabilities of $818,353, consisting of $80,172 in accounts payable, $40,883 in oil and gas proceeds due to others, $7,882 in related party notes payable, $30,233 in notes payable and $659,183 in accrued liabilities. At September 30, 2011, we had a working capital deficit of $552,429 and an accumulated deficit of $4,707,555. During the nine months ended September 30, 2011, we used net cash of $1,185,282 in operational activities. During the nine months ended September 30, 2010, we used net cash of $1,008,104 from operational activities. During the nine months ended September 30, 2011, we recognized a net loss of $374,852 which was adjusted for a non-cash activity consisting of depreciation of $173,315, issuance of equity for $24,500 in services, net loss attributable to the non-controlling interest of $124,220, gain on settlement of $929,744, gain on reduction of note payable related party of $303,804, impairment loss on goodwill of $368,369 and a gain on disposal on equipment of $6,101. During the nine months ended September 30, 2010, we recognized a net loss of $718,525, which was adjusted for a non-cash activity of $82,325 from related party note receivable, depreciation of $126,238 and a net loss attributable to the non-controlling interest of $114,412. During the nine months ended September 30, 2011, the Company used funds of $79,096 in its investing activities. Investing activities included expenditures of $113,596 in property, plant and equipment net of $34,500 from the sale of equipment. During the nine months ended September 30, 2010, the Company used $609,819 in its investing activities. Investing activities included expenditures of $686,003 in property, plant and equipment, $793 from the collection of a note receivable and $76,977 from cash acquired through the acquisition of Talon Energy Corporation. 2 During the nine months ended September 30, 2011, the Company received $1,342,647 net proceeds from its financing activities. Financing activities included equity contributions of $1,304,532, net proceeds from short term loan of $30,233 and net proceeds from related party loan payable of $7,882. During the nine months ended September 30, 2010, the Company received $1,212,428 from its financing activities. Financing activities included equity contributions of $1,236,775, equity redemptions paid of $54,347 and net proceeds from short term loan of $30,000. The Company borrowed $40,000 from an affiliate of a member-manager of Gulfstar LLC and a greater than 5% shareholder of the Company and in exchange issued an unsecured promissory note dated January 4, 2011 that is due in full on or before December 31, 2011. Interest is accrued at the rate of one percent (1.0%) per annum. As of September 30, 2011, the Company owes $7,882 on the promissory note. The Company borrowed a total of $335,078 from an affiliate of a member-manager of Gulfstar LLC and a greater than 5% shareholder of the Company and in exchange issued an unsecured promissory note dated November 30, 2011 that is due in full on or before December 31, 2011. Interest is accrued at the rate of one percent (1.0%) per annum. On May 30, 2011, the Company and the affiliate entered into an agreement whereby the parties agreed to pay the promissory in full in exchange for 223,385 shares of the Company's common stock valued at $.14 per share. As a result of this agreement, Gulfstar LLC recognized a gain on extinguishment of debt in the amount of $303,804 that was recorded as other income during the second quarter of 2011. In September 2011, Gulfstar and Gulfstar LLC settled all claims arising from a trade payable amount of $735,035 owed to a creditor in exchange for Gulfstar LLC issuing a six percent (6%) unsecured promissory note due March 1, 2014 with interest only semi-annual payments and Gulfstar issuing 175,000 shares of its common stock valued at $24,500. The Gulfstar LLC operating agreement provides a priority preference as to any future cash distributions paid by Gulfstar LLC to the owners of its equity interests. As such, fifty percent (50%) of all cash distributions shall be paid first to the non-controlling equity interests until such time they have received in full their capital contributions. After which time, cash distributions shall be paid in proportion to the percentage of all equity interests. As of September 30, 2011 and December 31, 2010, Gulfstar LLC has not repaid any of the non-controlling equity interests' capital contributions. Capital Resources We have only common stock as our capital resource. We have no material commitments for capital expenditures within the next year, however if operations are commenced, substantial capital will be needed to pay for participation, investigation, exploration, acquisition and working capital. Need for Additional Financing We do not have capital sufficient to meet our cash needs. We will have to seek loans or equity placements to cover such cash needs and therefore the Company currently is still seeking financing with Maxim Group LLC to provide gross proceeds of up to $100 Million from a proposed private placement of Company equity and/or convertible debt. The precise terms of the private placement will be negotiated between Maxim Group LLC, potential investors and the Company. We cannot give any assurances that we will receive funds from a private placement with the Maxim Group, LLC. Further, the Company is seeking through Wright Capital Corporation to pursue proposed financing of up to $90 Million to be used to assist the Company in the proposed purchase of assets connected to oil and gas leases and for the further development of the Company's existing pipeline structure in Kentucky. The definitive terms of the proposed transaction are subject to an agreement between Wright Capital Corporation and the Company. We cannot make any assurances that we will be able to enter into a definitive agreement with Wright Capital Corporation. No commitments to provide additional funds have been made by our management or other stockholders. Accordingly, there can be no assurance that any additional funds will be available to us to allow it to cover our expenses as they may be incurred. 3 Going Concern As shown in the accompanying consolidated financial statements, the Company has recognized a net loss of $374,852 for the nine months ended September 30, 2011 and reported an accumulated deficit of $4,707,555. At September 30, 2011, the Company had total current assets of $225,041 and total current liabilities of $777,470 for a working capital deficit of $552,429. To the extent the Company's operations are not sufficient to fund the Company's capital requirements, the Company will attempt to enter into a revolving loan agreement with a financial institution or attempt to raise capital through the sale of additional capital stock or through the issuance of debt. At the present time, the Company does not have a revolving loan agreement with any financial institution nor can the Company provide assurance that it will be able to enter into any such agreement in the future or be able to raise funds through the further issuance of debt or equity in the Company. Management is actively pursuing additional financing and revenue solutions as stated elsewhere in this report. CRITICAL ACCOUNTING POLICIES Gulfstar has identified the policies below as critical to its business operations and the understanding of results from operations. The impact and any associated risks related to these policies on the Company's business operations is discussed throughout Management's Discussion and Analysis of Financial Conditions and Results of Operations where such policies affect Gulfstar's reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Financial Statements. Note that Gulfstar's preparation of this document requires Gulfstar to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of Gulfstar's financial statements, and the reported amounts of expenses during the reporting periods. There can be no assurance that actual results will not differ from those estimates. Revenue Recognition The Company recognizes revenue from its Pipeline segment upon shipment of the gas to its customers. Royalty revenue is recognized from the Company's oil and gas property management and exploration and production segment in the period of production. Accounts Receivable Accounts receivable are stated at their cost less any allowance for doubtful accounts. The allowance for doubtful accounts is based on management's assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there is deterioration in a major customer's creditworthiness or if actual defaults are higher than the historical experience, the management's estimates of the recoverability of amounts due to the Company could be adversely affected. Based on the management's assessment, no reserve is deemed necessary at September 30, 2011 and December 31, 2010. Property and Equipment The Company follows the full cost method of accounting for oil and natural gas operations. Under this method, all productive and nonproductive costs incurred in connection with the acquisition, exploration, and development of oil and natural gas reserves are capitalized. No gains or losses are recognized upon the sale or other disposition of oil and natural gas properties except in transactions that would significantly alter the relationship between capitalized costs and proved reserves. The costs of unevaluated oil and natural gas properties are excluded from the amortizable base until the time that either proven reserves are found or it has been determined that such properties are impaired. As properties become evaluated, the related costs transfer to proved oil and natural gas properties using full cost accounting. None of the capitalized costs in the amount of $400,980 were included in the amortization base as of September 30, 2011, nor did the Company expense any capitalized costs during the nine months ended September 30, 2011 and 2010. The Company does not have significant oil and gas producing activities as of September 30, 2011 and December 31, 2010, and its oil and gas properties are still in the drilling phase and have not been evaluated. 4 Management capitalizes additions to property and equipment including its pipeline. Expenditures for repairs and maintenance are charged to expense. Property and equipment are carried at cost. Adjustment of the asset and the related accumulated depreciation accounts are made for property and equipment retirements and disposals, with the resulting gain or loss included in the consolidated statements of operations. In accordance with authoritative guidance on accounting for the impairment of disposal of long-lived assets, as set forth in Topic 360 of the ASC, the Company assesses the recoverability of the carrying value of its non-oil and gas long-lived assets when events occur that indicate an impairment in value may exist. An impairment loss is indicated if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If this occurs, an impairment loss is recognized for the amount by which the carrying amount of the assets exceed the estimated fair value of the assets. During the quarter ended June 30, 2011, the Company entered into an agreement with Gulfstar LLC and the Sharps which the Company determined is an event that required the Company to assess whether the carrying value of the Pipeline was impaired. As a result of the Company's analysis, the Company assessed there was no impairment to the Pipeline. Goodwill In accordance with generally accepted accounting principles, goodwill cannot be amortized, however, it must be tested annually for impairment. This impairment test is calculated at the reporting unit level. The goodwill impairment test has two steps. The first identifies potential impairments by comparing the fair value of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down is recorded. Management tests goodwill each year for impairment, or when facts or circumstances indicate impairment has occurred. During the quarter ended June 30, 2011, the Company entered into an agreement with Gulfstar LLC and the Sharps, which the Company determined is an event that required the Company to assess whether the carrying value of goodwill was impaired. As a result of the Company's analysis, the Company assessed that goodwill was impaired and an impairment loss was recorded in the amount of $369,369 during the second quarter of 2011. Intangible Assets Intangible assets consist of right of way deposits, which are contracts allowing the Company to install pipeline on private land. The rights exist indefinitely and therefore, no amortization has been recorded. Management evaluates the assets for impairment whenever events or circumstances indicate a possible impairment. During the quarter ended June 30, 2011, the Company entered into an agreement with Gulfstar LLC and the Sharps, which the Company determined is an event that required the Company to assess whether the carrying value of the right of ways were impaired. As a result of the Company's analysis, the Company assessed there was no impairment to the right of ways. Income Taxes Gulfstar LLC, a limited liability company, is not a tax paying entity for Federal income tax purposes. It's pro rata share of income, losses and tax credits is passed through to its members and reported by its members on their individual income tax returns. The consolidated statement of operations for the six months ended June 30, 2010 and for the period from May 19, 2006 (inception) through June 30, 2010 includes the accounts of Gulfstar LLC only, therefore, no provision for federal income taxes or for deferred taxes has been determined. The Company has determined, for the period July 1, 2010 through December 31, 2010 and for the period January 1, 2011 through September 30, 2011, any provision for income taxes or deferred taxes and this determination has been based upon the accounts of Gulfstar Energy Corporation, Talon and the pro rata loss of Gulfstar LLC passed through and reportable by Gulfstar Energy Corporation. 5 The Company accounts for income taxes under the liability method as prescribed by ASC authoritative guidance. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rates expected to be in effect during the year in which the basis difference reverses. The realizability of deferred tax assets are evaluated quarterly and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits in the Company's income tax returns. The primary timing differences between financial and tax reporting arise from federal net operating loss carryforwards, amortization of start up costs, and accrued expenses. The Company assessed the likelihood of utilization of the deferred tax assets, in light of recent and expected continuing losses. As a result of this review, the deferred tax asset of $835,147 and $758,227 has been fully reserved at September 30, 2011 and December 31, 2010, respectively. As of September 30, 2011, the Company had net operating loss carryforwards for income tax and financial reporting purposes of approximately $1,023,000 expiring in the years 2020 through 2031. The Company has adopted ASC guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all income tax positions. Each income tax position is assessed using a two step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At September 30, 2011, there were no uncertain tax positions. None of the Company's federal or state income tax returns are currently under examination by the Internal Revenue Service or state authorities. However, calendar years 2007 and later remain subject to examination by the Internal Revenue Service and respective states. Business Combinations The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance, effective January 1, 2009, requires consideration given, including contingent consideration, assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible assets; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuations and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities assumed be recognized as goodwill. In accordance with ASC 805, any excess of fair value of acquired net assets, including identifiable intangible assets, over the acquisition consideration results in a bargain purchase gain. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed have been properly valued. Recent Accounting Pronouncements In December 2010, the Financial Accounting Standard Board issued ASC Topic 350 update 2010-28, "Intangibles - Goodwill and Other". The update modifies the two step process of the goodwill impairment test for reporting units with zero or negative carrying amounts. The update is effective for interim and annual periods beginning after December 15, 2010. We adopted the provisions of the standard on January 1, 2011, which did not have a material impact on our financial statements. There were other accounting standards and interpretations issued during the nine months ended September 30, 2011, none of which are expected to have a material impact on the Company's financial position, operations or cash flows. 6 ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. ITEM 4. CONTROLS AND PROCEDURES Disclosures Controls and Procedures We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC's rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure. As required by SEC Rule 15d-15(b), our Chief Executive Officer and Chief Financial Officer for the quarter ended September 30, 2011, carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are ineffective in timely alerting them to material information required to be included in our periodic SEC filings and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. We have identified certain material weaknesses in internal control over financial reporting relating to a shortage of accounting and reporting personnel due to limited financial resources and the size of our Company, as detailed below: 1. The Company currently does not have, but is in the process of developing formally documented accounting policies and procedures, which includes establishing a well-defined process for financial reporting. After our documentation of our accounting policies and procedures takes place, we plan to focus on performing and documenting tests of our internal controls on an ongoing basis throughout the year. 2. Due to the limited size of our accounting department, we currently lack the resources to handle complex accounting transactions. We believe this deficiency could lead to errors in the presentation and disclosure of financial information in our annual, quarterly, and other filings. 3. We currently have a lack of segregation of duties within our accounting department. Until our operations expand and additional cash flow is generated from operations, a complete segregation of duties will not be possible. Considering the nature and extent of our current operations and any risks or errors in financial reporting under current operations and the fact that we have been a small business with limited employees, such items caused a weakness in internal controls involving the areas disclosed above. Due to financial restrictions at this time, the Company has not taken any action to resolve such weakness. There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 7 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 1A. RISK FACTORS Not applicable. ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS The Company made the following unregistered sales of its securities from July 1, 2011 through September 30, 2011.

Exemption From Registration Claimed All of the above sales by the Company of its unregistered securities were made by the Company in reliance upon Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"). All of the individuals and/or entities that purchased the unregistered securities were known to the Company and its management, through pre-existing business relationships. All purchasers were provided access to all material information, which they requested, and all information necessary to verify such information and were afforded access to management of the Company in connection with their purchases. All purchasers of the unregistered securities acquired such securities for investment and not with a view toward distribution, acknowledging such intent to the Company. All certificates or agreements representing such securities that were issued contained restrictive legends, prohibiting further transfer of the certificates or agreements representing such securities, without such securities either being first registered or otherwise exempt from registration in any further resale or disposition. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. REMOVED AND RESERVED ITEM 5. OTHER INFORMATION None. 8 ITEM 6. EXHIBITS Exhibits. The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K. Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act Exhibit 32.1 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act Exhibit 101.INS XBRL Instance Document Exhibit 101.SCH XBRL Taxonomy Extension Schema Document (1) Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (1) Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (1) Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document (1) Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1) ------------ (1) Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. 9 SIGNATURES Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GULFSTAR ENERGY, CORPORATION (Registrant) Dated: November 14, 2011 By: /s/Robert McCann ---------------- Robert McCann, Chief Executive Officer Dated: November 14, 2011 By: /s/Stephen Warner ----------------- Stephen Warner, Chief Financial Officer (Principal Accounting Officer)

GulfStar Energy Corp 10-Q