10-Q 1 july0810q9-08.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2008 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________. Commission File Number: None PINNACLE ENERGY CORP. --------------------- (Exact name of Registrant as specified in its charter) Nevada 36-4613360 --------------------------- --------------------- State or other jurisdiction (IRS) Employer of incorporation Identification Number Suite 153, 333 River Front Ave., S.E. Calgary, Alberta Canada T2G 5R1 ------------------------------------------ Address of principal executive offices (866) 822-0325 ------------------------------------ Registrant's telephone number, including area code GAS SALVAGE CORP. ------------------------------------------- (Former name, former address and formal fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) had been subject to such filing requirements for the past 90 days. Yes __X__ No ____ - Indicate by check mark whether the Registrant is a large accelerated filer, and 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. (Check One): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ____ No __X__ - Class of Stock No. Shares Outstanding Date -------------- ---------------------- ---- Common 15,840,000 September 8, 2008 GAS SALVAGE CORP. (A Development Stage Company) BALANCE SHEET July 31, October 31, 2008 2007 -------------- -------------- Unaudited ASSETS Current Assets Cash at bank $ 8,905 $ 36,169 Accounts Receivable 3,133 - Subscriptions Receivable - 18,000.00 -------------- -------------- Total Current Assets 12,038.00 54,169.00 -------------- -------------- Property and Equipment Equipment 100,000 100,000 Accumulated Depreciation 3,750 - -------------- -------------- 96,250 100,000 Other Assets Oil & Gas Leasehold Interest 190,000 190,000 -------------- -------------- TOTAL ASSETS $ 298,288 $ 344,169 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Current Liabilities Accounts Payable $ 1,231 $ 1,231 -------------- -------------- TOTAL LIABILITIES 1,231 1,231 -------------- -------------- Shareholders' Equity (Deficit) Common Stock, par value $0.001, authorized 50,000,000 shares; issued and outstanding 5,280,000 shares 5,280 5,280 Additional Paid-In Capital 351,021 351,021 Deficit accumulated during the development stage (59,245) (13,363) -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 297,056 342,938 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 298,287 $ 344,169 ============== ============== 2 GAS SALVAGE CORP. (A Development Stage Company) STATEMENT OF OPERATIONS Unaudited For the Period For the Period of Inception of Inception from June 5, For the three For the nine from June 5, 2007, through months ended months ended through 2007, July 31, 2007 July 31, 2008 July 31, 2008 July 31, 2008 -------------- ------------- ------------- -------------- Revenue Natural Gas Production $ - $ 872 $ 9,798 $ 9,798 Cost of Sales - - - - -------------- ------------- ------------- -------------- Operating Income - 872 9,798 9,798 -------------- ------------- ------------- -------------- General and Administrative Expenses: Professional Fees - 850 16,800 28,300 Consulting Fees - - 14,864 14,864 Occupancy Costs - - 6,000 6,000 Repairs & Maintenance - - - 1,231 Depreciation - 1,250 3,750 3,750 Other General and Administrative Expenses - 4,722 14,266 14,898 -------------- ------------- ------------- -------------- Total General and Administrative Expenses - 6,822 55,680 69,043 -------------- ------------- ------------- -------------- Net Loss $ - $ (5,950) $ (45,882) $ (59,245) ============== ============= ============= ============== Loss Per Common Share: Basic and Diluted $ - $ (0.001) $ (0.009) ============== ============= ============= Weighted Average Shares Outstanding, Basic and Diluted: - 5,280,000 5,280,000 ============== ============= =============
3 GAS SALVAGE CORP. (A Development Stage Company) STATEMENT OF CASH FLOWS Unaudited For the Period For the Period of Inception of Inception from June 5, For the three For the nine from June 5, 2007, through months ended months ended through 2007, July 31, 2007 July 31, 2008 July 31, 2008 July 31, 2008 -------------- ------------- ------------- -------------- Cash flows from operating activities: Net (Loss) $ - $ (5,950) $ (45,882) $ (59,245) Adjustments to reconcile net loss to net cash used by operating activities: Non-cash depreciation - 1,250 3,750 3,750 Change in operating assets and liabilities: (Increase) Decrease in Accts Receivable - 2,780 (3,132) (3,132) Increase (Decrease) in Accounts Payable - - - 1,231 -------------- ------------- ------------- -------------- Net cash (used by) operating activities - (1,920) (45,264) (57,396) -------------- ------------- ------------- -------------- Cash flows from investing activities Acquisition of equipment - - - (100,000) Acquistion of oil & gas working interest - - - (190,000) -------------- ------------- ------------- -------------- Net cash (used by) investing activities - - - (290,000) -------------- ------------- ------------- -------------- Cash flows from financing activities: Decrease Subscriptions Receivable - - 18,000 - Common stock issued for cash - - - 356,301 -------------- ------------- ------------- -------------- Net cash (used) provided by financing activities - - 18,000 356,301 -------------- ------------- ------------- -------------- Net increase (decrease) in cash - (1,920) (27,264) 8,905 Cash, beginning of the period - 10,825 36,169 - -------------- ------------- ------------- -------------- Cash, end of the period $ - $ 8,905 $ 8,905 $ 8,905 ============== ============= ============= ============== Supplemental cash flow disclosure: Interest Paid $ - $ - $ - $ - ============== ============= ============= ============== Taxes Paid $ - $ - $ - $ - ============== ============= ============= ==============
4 GAS SALVAGE CORP. (A Development Stage Company) STATEMENT OF SHARHEOLDERS' EQUITY (Unaudited) Deficit Accumulated Total Common Stock Additional during the Shareholders' Number of Paid-In Development Equity Shares Amount Capital Stage (Deficit) --------- ------ ---------- ----------- ------------- Inception, June 5, 2007 $ - $ - $ - $ - $ - Common stock issued for cash at $0.096 per share September 5, 2007 2,580,000 2,580 245,721 248,301 Common stock issued for cash at $0.01 per share September 5, 2007 1,800,000 1,800 16,200 18,000 Common stock issued for oil and gas working interest at $0.10 per share September 5, 2007 900,000 900 89,100 90,000 Net loss for the period ended Oct. 31, 2007 (13,363) (13,363) ---------- ---------- ---------- ---------- ---------- Balances, September 30, 2007 $5,280,000 $ 5,280 $ 351,021 $ (13,363) $ 342,938 Net loss for the nine months ended July 31, 2008 (45,882) (45,882) ---------- ---------- ---------- ---------- ---------- Balances, July 31, 2008 $5,280,000 $ 5,280 $ 351,021 $ (59,245) $ 297,056 =========== ========== ========== ========== ==========
5 Gas Salvage Corp. (A Developmental Stage Company) NOTES TO FINANCIAL STATEMENTS July 31, 2008 1. Organization Gas Salvage Corp. (the "Company") was incorporated under the laws of the State of Nevada June 5, 2007. The Company was organized for the purpose of engaging in any activity or business not in conflict with the laws of the State of Nevada or of the United States of America. The Company became engaged in the oil and gas industry. Current Business of the Company The Company purchased a 44.5% leasehold interest (35.6% net revenue interest) in a producing gas well on 40 acres in Lincoln County, Oklahoma, known as Holmes #1. The well was initially shut in awaiting repairs to its Nitrogen Rejection Unit. The well was put into production in November, 2007. A geologist's report on December 18, 2007 indicated that the lease is selling between 85 and 100 MCF per day, however volumetric calculations of the Holmes Lease reservoir have not yet been performed. An annual review of the gas well will be performed at the fiscal year end October 31, 2008 to determine whether the well warrants impairment based on expected revenue. Property Acquisition Costs: Unproved Holmes Lease $190,000 2. Summary of Significant Accounting Policies Basis of Presentation --------------------- The financial statements of the Company have been prepared using the accrual basis of accounting in accordance with generally accepted accounting principles in the United States. Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates made by management are, among others, realizability of long-lived assets, deferred taxes and stock option valuation. The financial statements presented include all adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the period presented in accordance with the accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature. 6 Gas Salvage Corp. (A Developmental Stage Company) NOTES TO FINANCIAL STATEMENTS July 31, 2008 Cash and equivalents -------------------- Cash and equivalents include investments with initial maturities of three months or less. Fair Value of Financial Instruments ----------------------------------- The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments." SFAS No. 107 requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company's financial instruments as of July 31, 2008 approximate their respective fair values because of the short-term nature of these instruments. Such instruments consist of cash, accounts payable and accrued expenses. The fair value of related party payables is not determinable. Income Taxes ------------ The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company generated a deferred tax credit through net operating loss carryforward. However, a valuation allowance of 100% has been established, as the realization of the deferred tax credits is not reasonably certain, based on going concern considerations outlined as follows. Going Concern ------------- The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern. The company experienced a loss of $45,882 and a negative cash flow of $45,264 from operations in the nine months ended July 31, 2008. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease development of operations. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish its plans to generate revenue from well head machinery and oil and gas leases. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and 7 Gas Salvage Corp. (A Developmental Stage Company) NOTES TO FINANCIAL STATEMENTS July 31, 2008 classifications or liabilities or other adjustments that might be necessary should the Company be unable to continue as a going concern. Development-Stage Company ------------------------- The Company is considered a development-stage company, with limited operating revenues during the periods presented, as defined by Statement of Financial Accounting Standards ("SFAS") No. 7. SFAS. No. 7 requires companies to report their operations, shareholders deficit and cash flows since inception through the date that revenues are generated from management's intended operations, among other things. Management has defined inception as June 5, 2007. Since inception, the Company has incurred an operating loss of $59,245. The Company's working capital has been generated through the sales of common stock. Management has provided financial data since June 5, 2007, "Inception", in the financial statements, as a means to provide readers of the Company's financial information to make informed investment decisions. Basic and Diluted Net Loss Per Share ------------------------------------ Net loss per share is calculated in accordance with SFAS 128, Earnings Per Share for the period presented. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilative convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby we used to purchase common stock at the average market price during the period. The Company has no potentially dilutive securities outstanding as of April 30, 2008. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations for the nine months ended July 31, 2008 and 2007. 2007 2008 ---- ---- Numerator: ---------- Basic and diluted net loss per share: Net Loss $ (44,632) 0 Denominator ----------- Basic and diluted weighted average number of shares outstanding 5,280,000 0 Basic and Diluted Net Loss Per Share $ (0.009) 0 ------------------------------------ 8 Gas Salvage Corp. (A Developmental Stage Company) NOTES TO FINANCIAL STATEMENTS July 31, 2008 Accounting for Oil and Gas Producing Activities ----------------------------------------------- The company uses the successful efforts method of accounting for oil and gas producing activities. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Acquisition costs are capitalized when incurred pending the determination of whether a well has found proved reserves. A determination of whether a well has found proved reserves is made within a year of acquisition. If after that year has passed, a determination that proved reserves exist cannot be made, the well is assumed to be impaired, and its costs are charged to expense. It's costs can however, continue to be capitalized if a sufficient quantity of reserves are discovered in the well to justify its completion as a producing well and sufficient progress is made assessing the reserves and the well's economic and operating feasibility. The impairment of unamortized capital costs is measured at a lease level and is reduced to fair value if it is determined that the sum of expected future net cash flows is less than the net book value. The company determines if impairment has occurred through either adverse changes or as a result of the annual review of all fields. During 2008 the company did not record any impairment. Development costs of proved oil and gas properties, including estimated dismantlement, restoration and abandonment costs and acquisition costs, are depreciated and depleted on a field basis by the units-of-production method using proved reserves, respectively. The Costs of unproved oil and gas properties are generally combined and impaired over a period that is based on the average holding period for such properties and the company's experience of successful operations. Oil and Gas Revenue Recognition ------------------------------- The company applies the sales method of accounting for natural gas revenue. Under thus method, revenues are recognized based on the actual volume of natural gas sold to purchasers. Revenue from the sale of gas is reported by the gas gathering company monthly and paid two months in arrears. 3. Property and Equipment Equipment $100,000 The Company purchased a 50% interest in a skid mounted Nitrogen Rejection unit. The unit strips out excessive nitrogen and oxygen from gas wells to an acceptable level of contaminants in the gas stream. The unit is intended for use on the Company's gas wells. The unit commenced operations in November, 2007 under the control of the Operator, Southside Oil and Gas, Inc. 9 Gas Salvage Corp. (A Developmental Stage Company) NOTES TO FINANCIAL STATEMENTS July 31, 2008 4. Capital Structure During the period from inception through July 31, the Company entered into the following equity transactions: September 5, 2007: Sold 2,580,000 shares of common stock at $.096 per share realizing $248,301. September 5, 2007: Sold 1,800,000 shares of common stock at $.01 per share realizing $18,000. September 5, 2007: Issued 900,000 shares of common stock at $.10 per share in payment of $90,000 toward 44.5% working interest in an oil and gas lease. As at July 31, 2008, the Company was authorized to issue 50,000,000 shares of $0.001 par common stock, of which 5,280,000 shares were issued and outstanding. The Company was also authorized to issue 5,000,000 shares of preferred stock, of which nil shares were issued and outstanding. 5. Legal Proceedings There were no legal proceedings against the Company with respect to matters arising in the ordinary course of business. Neither the Company nor any of its officers or directors is involved in any other litigation either as plaintiffs or defendants, and have no knowledge of any threatened or pending litigation against them or any of the officers or directors. 6. Subsequent Events In August, 2008 the Company changed its name from Gas Salvage Corporation to Pinnacle Energy Corporation. In August, 2008 the Company's director adopted a resolution approving a three-for-one forward split of the company's common stock. The stock split is subject to the approval of FINRA. On August 27, 2008 the Company acquired working interests in six oil and gas wells located in Pawnee County, Oklahoma for $1,000,000, payable September 1, 2013. Interest at an annual rate of 8% is due monthly. The working interests consist of a 25.5% working interest (20.4% net revenue interest) in two wells, a 20% working interest (16% net revenue interest) in three wells and a 17% working interest (13.6% net revenue interest) in the remaining well. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements, which are included elsewhere in this report. The Company was incorporated in Nevada on June 5, 2007 and is involved in the exploration and development of oil and gas. The Company was incorporated under the name Gas Salvage Corp. In August 2008 the Company approved a 3-for-1 forward split of its common stock and changed its name to Pinnacle Energy Corp. The Company plans to evaluate undeveloped oil and gas prospects and participate in drilling activities on those prospects which, in the opinion of management, are favorable for the production of oil or gas. If, through its review, a geographical area indicates geological and economic potential, the Company will attempt to acquire leases or other interests in the area. The Company may then attempt to sell portions of its leasehold interests in a prospect to third parties, thus sharing the risks and rewards of the exploration and development of the prospect with the other owners. One or more wells may be drilled on a prospect, and if the results indicate the presence of sufficient oil and gas reserves, additional wells may be drilled on the prospect. The Company may also: o acquire a working interest in one or more prospects from others and participate with the other working interest owners in drilling, and if warranted, completing oil or gas wells on a prospect, or o purchase producing oil or gas properties. In September 2007 the Company acquired a 44.5% working interest (35.6% net revenue interest) in an oil and gas lease covering 40 acres in Lincoln County, Oklahoma. The lease was acquired for $100,000 in cash and 2,700,000 shares of the Company's restricted common stock. In November 20007 the gas well drilled on the lease was placed into production. As of August 31, 2008 the well was producing approximately 30 MCF of gas per day, net to the Company's net revenue interest. At the time it acquired its interest in the oil and gas lease, the Company also acquired, for $100,000, a 50% interest in a portable nitrogen rejection unit. The unit removes excessive nitrogen and oxygen from the gas produced from the well and allows the gas to be sold to buyers who will not always purchase gas with a high level of contaminants. On August 27, 2008 the Company acquired working interests in six oil and gas wells located in Pawnee County, Oklahoma. The Company has a 25.5% working interest (20.4% net revenue interest) in two wells, a 20% working interest (16% 11 net revenue interest) in three wells , and a 17% working interest (13.6% net revenue interest) in the remaining well. As of August 31, 2008 five wells were producing 20 barrels of oil and 30 MCF of gas per day, net to the Company's interest. The sixth well is being used as a salt water disposal well. The price for the Company's interest in the six wells was $1,000,000. The purchase price requires monthly interest payments at 8% per year until September 1, 2013, at which time the entire $1,000,000 is due. The Company's future plans will be dependent upon the amount of capital the Company is able to raise. The Company may attempt to raise additional capital through the private sale of its equity securities or borrowings from third party lenders. The Company does not have any commitments or arrangements from any person to provide it with any additional capital. If additional financing is not available when needed, the Company may continue to operate in its present mode or the Company may need to cease operations. The Company does not have any plans, arrangements or agreements to sell its assets or to merge with another entity. The Company plans to generate profits by drilling productive oil or gas wells. However, the Company will need to raise the funds required to drill new wells from third parties willing to pay the Company's share of drilling and completing the wells. The Company may also attempt to raise needed capital through the private sale of its securities or by borrowing from third parties. The Company may not be successful in raising the capital needed to drill oil or gas wells. In addition, any future wells which may be drilled by the Company may not be productive of oil or gas. The inability of the Company to generate profits may force it to curtail or cease operations. Contractual Obligations ----------------------- As of December 31, 2007 and July 31, 2008 the Company did not have any material capital commitments, other than funding its operations and paying for the six wells it acquired in August 2008. It is anticipated that any capital commitments that may occur will be financed principally through the sale of shares of the Company's common stock or other equity securities. However, there can be no assurance that additional capital resources and financings will be available to the Company on a timely basis, or if available, on acceptable terms. Item 4.T. CONTROLS AND PROCEDURES The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as required by Sarbanes-Oxley (SOX) Section 404.A. The Company's internal control over financial reporting is a process designed under the supervision of its Chief Executive and Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its financial statements for external purposes in accordance with Generally Accepted Accounting Principles. 12 There were no changes in the Company's internal controls over financial reporting that occurred during the quarter ended July 31, 2008 that have affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Nolan Weir, the Company's President and Principal Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report; and in his opinion the Company's disclosure controls and procedures were effective. PART II Item 6. (a) Exhibits Number Exhibit ------ ------- 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PINNACLE ENERGY CORP. Date: September 9, 2008 /s/ Nolan Weir ------------------------------ Nolan Weir, President, Principal Financial Officer and Principal Accounting Officer 14