STARSTREAM ENTERTAINMENT, INC. - Quarter Report: 2014 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

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 333-186079

STARSTREAM ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code 203-881-6060

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) has been subject to such filing requirements for the past 90 days. Yes ☒    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, 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.

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐     No ☒

The number of shares of the Common Stock of the registrant outstanding as of August 15, 2014 was 17,924,412.

TABLE OF CONTENTS

EXPLANATORY NOTE

As previously reported in a Current Report on Form 8-K filed by Starstream Entertainment, Inc. (the “Company”) on May 9, 2014, the Company effected a reverse split of its issued and outstanding common stock at a ratio of one-for-three (the “Reverse Stock Split”) effective May 8, 2014 (the “Effective Date”). As a result, every three shares of the Company’s common stock that were issued and outstanding as of the Effective Date were automatically combined into one issued and outstanding share of common stock. Immediately prior to the effectiveness of the Reverse Stock Split, there were 53,712,973 shares of the Company’s common stock issued and outstanding, and immediately after the effectiveness of the Reverse Stock Split, there were 17,904,357 shares of common stock issued and outstanding. Throughout this Quarterly Report on Form 10-Q, share amounts, share prices and other share-related numbers have been adjusted to retroactively give effect to the Reverse Stock Split.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS 

Starstream Entertainment, LLC (“SSE”) was formed on January 10, 2013, in the State of Delaware. SSE was formed to produce, promote, support and/or develop motion pictures and engage in any and all activities necessary or incidental to the foregoing.

SSE originally had three members: Charles Bonan (“Bonan”), Kim Leadford, (“Leadford”) and Daniel McCarney.

Starstream Films, LLC (“SSF”) was formed on April 11, 2012, in the State of Delaware. SSF’s purpose is to have an ownership interest in Butler Films, LLC (“Butler”), a Delaware limited liability company. Butler was formed for the purpose of financing, developing, producing, distributing and exploiting the motion picture currently entitled “The Butler.”

SSF originally had two members: Bonan and Lawrence Ladove (“Ladove”). Bonan originally had a 70% ownership interest in SSF and Ladove originally had a 30% ownership interest in SSF.

In August 2013, Bonan and Ladove assigned their respective membership interests in SSF to SSE. In connection with and in consideration of the assignment by Ladove, SSF initiated a payment direction order for 30% of its film rights with respect to “The Butler” to the Ladove Family Trust. As a result, SSF became a wholly owned subsidiary of SSE entitled to 70% of such rights.

Starstream ELP, LLC (“ELP”) was formed on December 7, 2012, in the State of Delaware. ELP was formed to produce, promote, support and/or develop motion pictures and engage in any and all activities necessary or incidental to the foregoing.

ELP originally had three members: Bonan, NV Productions LLC (“NV”) and Bryan Mansour (“Mansour”). Bonan had a 79.032% ownership interest in ELP, NV had a 14.516% ownership interest in ELP and Mansour had a 6.452% ownership interest in ELP.

In August 2013, Bonan assigned his membership interest in ELP to SSE. In December 2013, Mansour assigned his membership interest in ELP to SSE. As a result, SSE became entitled to 85.484% ownership interest in ELP and NV had a 14.516% ownership interest in ELP.

Since the assignment of the membership interests are between entities under common control, the transfers have been accounted for in a manner similar to a pooling of interests. As a result, the assets and liabilities are recorded at their historical carrying values and the combination has been given retroactive effect in these consolidated financial statements. Non-controlling interest represents the ownership interests in ELP that have not been assigned to SSE.

SSE owns 100% of SUAD Film, LLC (“SUAD”), a Delaware limited liability company formed on August 27, 2013. SUAD was formed to produce, promote, support and/or develop motion pictures and engage in any and all activities necessary or incidental to the foregoing. Under the terms of the SUAD limited liability company agreement, SSE is committed to funding SUAD with $100,000. As of June 30, 2014, SSE has funded $109,038 to SUAD, of which $11,604 were direct expenses paid by SSE on behalf of SUAD.

The Company is committed to funding various entities that are producing certain motion pictures. As such, the Company may need to raise additional funds to meet those funding commitments.

On October 8, 2013, SSE and members of SSE (the “Starstream Members”) entered into a Securities and Exchange Agreement (the “Securities and Exchange Agreement”) with Starstream Entertainment, Inc. (“SSET”). Pursuant to the Securities Exchange Agreement, on October 8, 2013, the Starstream Members assigned 100% of the membership interests of SSE held by them to SSET, in consideration of an aggregate of 12,200,822 newly issued shares of SSET’s Common Stock. The shares of SSET’s Common Stock received by the Starstream Members in such transaction constituted approximately 62.4% of SSET’s issued and outstanding Common Stock, giving effect to the issuance of shares pursuant to the Securities and Exchange Agreement. As a result, SSE became SSET’s wholly owned subsidiary. This transaction is being accounted for as a reverse merger (“Reverse Merger”) and SSE is deemed to be the acquirer. Consequently, the assets and liabilities and the historical operations that will be reflected in the consolidated financial statements prior to the Reverse Merger will be those of SSE.

Effective November 4, 2013, the Company effected a stock dividend of 3.272 shares of common stock for each share of common stock issued and outstanding on that date. On November 4, 2013, the Company initially issued 1,276,087 shares of common stock on account of the dividend. The remaining 12,234,678 shares of common stock related to the stock dividend were issued in February 2014.

On March 24, 2014, SSE entered into an operating agreement by and between SSE, Zoë Worth (“Worth”) and Dylan Harris (“Harris”), collectively its members, as to the formation of Bentley House Productions, LLC (“BHP”), formerly Big Picture Productions, LLC.

On April 23, 2014 and April 24, 2014 the Board of Directors and the stockholders, respectively, of SSET approved a one-for-three reverse stock split of the Company’s common stock to be effected on May 7, 2014. The effect of the November 2013 stock dividend and the May 2014 stock split have been given retroactive treatment in these financial statements.

SSET, its subsidiary SSE, and SSE’s subsidiaries SUAD, SSF, ELP, and BHP are collectively referred to as the “Company”.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Basis of accounting

The Company’s policy is to maintain its books and prepare its consolidated financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

Principles of consolidation

Accounting principles generally accepted in the United States of America address the consolidation of entities where the usual condition (ownership of a majority voting interest) of consolidation does not apply. In the absence of clear control through voting interest, a company’s exposure (variable interest) to the economic risks and potential rewards from the activities of variable interest entities (“VIEs”) is the best evidence of control. If a company holds a majority of the variable interests of another entity, it would be considered the primary beneficiary.

The Company has determined that BHP is a variable interest entity of which the Company is the primary beneficiary since it is the only investor providing financial support. Every reporting period, the Company reassesses whether BHP is a VIE and if the Company remains the primary beneficiary. As such, the conclusion regarding the primary beneficiary status is subject to change and circumstances are continually reevaluated.

The accompanying consolidated financial statements include the activities of SSET, SSE, SSF, ELP, SUAD, and BHP. All intercompany transactions have been eliminated in these consolidated financial statements.

In accordance with Accounting Standards Codification (“ASC”) 810 “Consolidations”, the Company has reported non-controlling interest as a separate component of stockholders’ equity and presents the net loss allocable to non-controlling interest and the net loss attributable to the stockholders of the Company separately in the consolidated statements of operations.

Use of estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior period amounts were reclassified to conform with the current period presentation.

Cash and cash equivalents

The Company considers highly liquid investments with original maturities of three months or less when purchased as cash equivalents. At times throughout the year, the Company might maintain bank balances that exceed Federal Deposit Insurance Corporation insured limits. Periodically, the Company evaluates the credit worthiness of the financial institutions, and has not experienced any losses in such accounts.

Property and equipment, net

Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to expense when incurred, while renewals and betterments that materially extend the life of an asset are capitalized.

The costs of assets sold, retired, or otherwise disposed of, and the related allowance for depreciation, are eliminated from the accounts, and any resulting gain or loss is recognized in the results from operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:

Investments in film productions

The Company accounts for its investments in film productions under the cost method, as the Company does not exercise significant control over such investments. The Company’s investments in film productions are increased by additional capital contributions to such investments and are reduced by distributions received from the investments. Once the Company has recouped its investment, any additional distributions received from the investments will be reflected as income.

Investments in film productions are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the investments may no longer be appropriate. When warranted, the Company assesses recoverability of the investments in film productions by estimating the future net cash flows expected to result from the investments. If the future net cash flows are less than the carrying value of the investments, an impairment loss is recorded equal to the difference between the carrying value and fair value.

As of June 30, 2014 and December 31, 2013, the Company has determined that its investments in film productions were not impaired and, therefore, has not recorded an impairment loss.

Income taxes

For the period prior to October 8, 2013, SSE, and its subsidiaries, are not subject to Federal and State income taxes, as they are all limited liability companies. Each member was responsible for the tax liability, if any, related to its proportionate share of their taxable income. SSE and its subsidiaries are pass-through entities. SSET, along with its consolidated subsidiaries, is deemed a corporation and thus is a taxable entity. No provision for income taxes was reflected in the accompanying consolidated financial statements as the Company did not have income through June 30, 2014. There were no uncertain tax positions that would require recognition in the consolidated financial statements through June 30, 2014.

Generally, federal, state and local authorities may examine the Company’s tax returns for three years from the date of filing, and the current and prior three years remain subject to examination as of June 30, 2014.

The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof as well as other factors.

The Company accounts for income taxes under ASC 740-10-30.  Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

Long-lived assets

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s long-lived assets may be impaired. An asset’s value may be impaired only if management’s estimate of the aggregate future cash flows, on an undiscounted basis, to be generated by the asset are less than the carrying value of the asset.

If impairment has occurred, the loss is measured as the excess of the carrying amount of the asset over its fair value. The Company’s estimates of aggregate future cash flows expected to be generated by each long-lived asset are based on a number of assumptions that are subject to economic and market uncertainties. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in their impairment analyses may not be achieved. No impairment was identified during the six months ended June 30, 2014 and the year ended December 31, 2013.

Fair value measurement

The carrying amounts reported in the Company’s consolidated financial statements for employee advances, prepaid expenses, accounts payable, and accrued expenses approximate their fair value because of the immediate or short-term nature of these financial instruments. The carrying amounts reported in the balance sheet for its notes payable and convertible notes payable approximates fair value as the contractual interest rate and features are consistent with similar instruments of similar risk in the market place.

Film production costs

For films produced by the Company, capitalized costs include all direct production costs and production overhead. As of June 30, 2014, the Company had $109,056 in film production costs.

Bentley House Productions

The classification and carrying amounts of assets and liabilities of BHP in the consolidated balance sheet are as follows for the periods ended June 30, 2014 and December 31, 2013:

As of June 30, 2014, SSE has contributed $35,832, of which, $832 were expenses paid directly by SSE on behalf of BHP.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments that might result from uncertainty about the Company’s ability to continue as a going concern.

The Company incurred a net loss of $1,520,330 and $133,161 for the six months ending June 30, 2014 and 2013, respectively. These matters raise reasonable doubt about the ability of the Company to continue as a going concern.

Management believes that it will be successful in obtaining sufficient financing to execute its operating plan. However, no assurances can be provided that the Company will secure additional financing, or achieve and sustain a profitable level of operations. To the extent that the Company is unsuccessful in its plans, the Company may find it necessary to contemplate the sale of its assets and curtail operations.

Investments in film productions, carried at cost, represent the following as of June 30, 2014 and December 31, 2013:

TUELP Investments, LLC

In January 2013, ELP entered into an agreement with Abbolita Productions, Inc. and the Ladove Family Trust, whereby ELP agreed to obtain 47% equity ownership in TUELP Investments, LLC (“TUELP”) for $1,525,000. TUELP is an entity formed for the sole purpose of financing Switch Productions LLC (“Switch”), an entity formed to develop, produce, promote and sell the motion picture currently entitled “Life of Crime”. In January 2013, TUELP obtained 100% equity ownership in Switch for a commitment amount of $3,250,000, subject to change in accordance with financing requirements for the production of “Life of Crime”, and as approved by TUELP.

As of June 30, 2014 and December 31, 2013, ELP has contributed $1,614,592 to the production of “Life of Crime”, of which $26,991 were expenses paid directly by SSE on behalf of Switch. For its part, ELP has maintained a 47% equity ownership of TUELP, and in turn, Switch.

As of June 30, 2014 and December 31, 2013, SSE has an 85.484% equity ownership in ELP.

Butler Films, LLC

In August 2012, SSF entered into an agreement with Butler Films, LLC, an entity formed to develop, produce, promote and sell the motion picture currently titled “Lee Daniels’ The Butler.” SSF agreed to co-finance the production costs of the motion picture. As of December 31, 2012, SSF had contributed $500,000 in return for 3.57% equity ownership in Butler Films, LLC. SSF did not make any further contributions through June 30, 2014. The film is complete and no further contributions by the Company are anticipated.

On August 2, 2013, Ladove assigned his 30% equity interest in SSF to SSE, making SSF a wholly owned subsidiary of SSE. In exchange for his assignment, SSF assigned 30% of its equity ownership in Butler Films, LLC to the Ladove Family Trust.

Through June 30, 2014, in accordance with its 70% entitlement to monies received by Butler Films, LLC, the Company has received $258,268 in cash proceeds from Butler Films, LLC.

Life After Beth LLC

In May 2013, SSE entered into an agreement with Life After Beth LLC, an entity formed to develop, produce, promote and sell the motion picture currently titled “Life After Beth”, to co-finance the production costs for the motion picture. As of June 30, 2014 and December 31, 2013, the Company has funded $1,030,000 and $1,012,500 in return for 42% equity ownership in Life After Beth LLC.

On January 16, 2014, the Company received $15,000 towards the recoupment of the investment.

As of June 30, 2014, the film is complete and no additional contributions by SSE or the Company are anticipated.

Pigeon The Cat Films, Inc.

In June 2013, SSE entered into an agreement with Pigeon the Cat Films, Inc., (“PTCF”), a New York corporation incorporated to develop, produce, promote and sell the motion picture currently titled “Trouble Dolls”. As of June 30, 2014, SSE has committed $322,109 to the production costs associated with the motion picture. The commitment amount is subject to change as financing needs for the film are adjusted, and as approved by SSE. For their part, SSE is a 50% shareholder in PTCF.

As of June 30, 2014 and December 31, 2013, SSE has contributed $322,109 and $270,735, respectively, of which $78,110 were expenses paid directly by SSE on behalf of PTCF. “Trouble Dolls” is in post-production stage, and further contributions associated with post-production and promotion are anticipated by the Company. 

Property and equipment consisted of the following as of June 30, 2014 and December 31, 2013:

Depreciation expense for the six months ended June 30, 2014 and 2013 was $8,702 and $175, respectively.

On July 19, 2013, SSE entered into a Securities Purchase Agreement with an accredited investor for a financing of up to $200,000 (the “July 2013 Agreement”), whereby it issued to the investor a 10% senior secured convertible note in the principal amount of $100,000 (the “Note”). The Note is secured by all the assets of SSE and ranks senior to any other indebtedness of SSE. The Note is convertible at the option of the note holder into shares of the common stock of SSET at a conversion price equal to 75% of the per share price of the private placement consummated in connection with the Reverse Merger.

On July 24, 2013, SSE and the investors amended and restated the July 2013 Agreement by entering into an Amended and Restated Securities Purchase Agreement, which increased the maximum amount of the financing from $200,000 to $400,000. In connection with the amendment and restatement of the July 2013 Agreement, SSE completed a second closing under the agreement, whereby it issued to certain accredited investors 10% senior secured convertible notes in the aggregate principal amount of $300,000 (the “July Notes”) on the same terms as the Note. Of the total principal issued, $150,000 was issued to Bonan, a related party. On July 24, 2014, SSET and Bonan entered into an extension agreement extending the $150,000 convertible note payable to a due date of July 24, 2015.

In January 2014, $125,000 of a $150,000 10% senior secured convertible note was assigned to a different holder. The new holder of this note has agreed to forbear exercising any rights with respect to the note while the holder and SSET negotiate a restructuring of the note intended to extend the maturity date of the note to October 24, 2014.

On August 6, 2013, SSE and the investors amended and restated the July 2013 Agreement by entering into an Amended and Restated Securities Purchase Agreement, which increased the amount of the financing from $400,000 to $1,000,000. In connection with the amendment and restatement of the July 2013 Agreement, SSE completed a third closing under the July 2013 Agreement, whereby it issued to an accredited investor a 10% senior secured convertible note in the principal amount of $100,000, on the same terms as the Note.

On October 10, 2013, SSET entered into a six year loan agreement to borrow funds for the purchase of a vehicle. The total principal amount of the loan was $74,950. The loan has an annual interest rate of 3.47% and monthly payments are made in the amount of $1,169, ending October 3, 2019. As of June 30th, 2014, the remaining principal balance outstanding is $66,494.

On February 10, 2014, SSET and SSE entered into a one-year loan agreement to borrow funds for exclusive use as working capital and to pay the associated loan fees, lender legal fee, accrued interest and expenses of the lender. These funds or advances are not to exceed $600,000. The loan was advanced to SSET in the full amount of $600,000 on February 14, 2014. From this initial amount, the lender paid the $25,000 lender loan fee and the $15,000 lender legal fee, with the remaining $560,000 balance delivered to SSET. Interest is to accrue at a rate of 1% per month, compounded monthly, beginning on the date of the initial advance until the loan is paid in full. The loan, and all accrued interest, are payable on the first of the following to occur: (a) an event of default; (b) February 10, 2015; or (c) the date the borrowers (or the collection account related to the security agreement described below) receive monies from any mandatory prepayments in connection with the loan collateral or the financial close of a distribution deal for the film “Life After Beth,” until the loan is fully repaid.

The borrowers also entered into a security agreement dated February 10, 2014 with the lender, pursuant to which, as security for the full payment and performance of their obligations under the loan agreement and related documents, the borrowers granted the lender a first priority security interest in their membership interest in Life After Beth, LLC (a limited liability company of which a 42% interest is held directly by SSE and, therefore, indirectly by SSET) and in their right, title and interest in and to the motion picture “Life After Beth” and any and all payments, proceeds or other consideration received by the borrowers arising from such membership interest or motion picture. The full value of the loan is classified as a loan payable on the balance sheet. As of June 30, 2014, the total principal and accrued interest outstanding on the loan is $602,700.

Employee advances

Employee advances include funds advanced on behalf of an employee of the Company, totaling $35,841. Such advances are short-term advances that are non-interest bearing and that are due on demand. The total balance owed is expected to be paid in full in 2014.

Due to related parties

Due to related parties represents funds advanced to the Company to fund working capital needs of the Company. Such advances are short-term advances that are non-interest bearing and that are due on demand. As of June 30, 2014, a total of $668,696 in principal amount is due to Bonan and $38,600 is due to other related parties.

On October 8, 2013, the Company amended its Articles of Incorporation to increase its authorized stock to 110,000,000 shares consisting of 100,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share. Our Board of Directors has the authority, without further action by the stockholders, to issue from time to time the blank check preferred stock in one or more series for such consideration and with such relative rights, privileges, preferences and restrictions that the Board may determine. The preferences, powers, rights and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and purchase funds and other matters.

Preferred Stock

After the Reverse Merger, on October 9, 2013, the Company filed with the Secretary of State of the State of Nevada a Certificate of Designation of Preferences and Rights of Series A Preferred Stock (the “Series A Certificate”). Pursuant to the Series A Certificate, there are two shares of Series A Preferred Stock authorized. Shares of Series A Preferred Stock have no dividend rights. On October 9, 2013, the Company issued two shares of Series A Preferred Stock, one each to Bonan and Leadford.

The holders of the Series A Preferred Stock are entitled to vote together with the holders of the Company’s common stock, with such holders entitled together to 66.7% of the total votes on all such matters, and the holders of common stock and any other shares entitled to vote are entitled to their proportional share of the remaining 33.3% of the total votes based on their respective voting power. The holders of Series A Preferred Stock may only vote unanimously. Each share of Series A Preferred Stock is convertible into one share of the Company’s common stock at the option of the holder. Shares of Series A Preferred Stock are not redeemable and have no liquidation preference.

Common stock

On October 8, 2013, Yulia Marach, shareholder, director and chief executive officer of the Company, and SSE entered into a Stock Purchase Agreement, pursuant to which Ms. Marach sold to SSE an aggregate of 1,333,333 shares of the Company’s common stock representing approximately 77.4% of the then issued and outstanding shares of common stock. SSE agreed to cancel the shares purchased from Ms. Marach following the issuance of common stock in accordance with the Securities Exchange Agreement.

Pursuant to the Securities Exchange Agreement, on October 8, 2013, the Starstream Members assigned 100% of the membership interests of SSE held by them to SSET, in consideration of an aggregate of 12,200,822 newly issued shares of SSET’s common stock.  The shares of SSET’s common stock received by the SSE Members in such transaction constituted approximately 62.4% of SSET’s issued and outstanding common stock after giving effect to the issuance of shares pursuant to the Securities Exchange Agreement.  As a result, SSE became SSET’s wholly owned subsidiary.  This transaction is being accounted for as a reverse acquisition and SSE is deemed to be the acquirer.  Consequently, the assets and liabilities and the historical operations that will be reflected in our consolidated financial statements prior to the Reverse Merger will be those of SSE.

On October 8, 2013, SSET issued 994,742 shares of common stock to a consultant for consulting services rendered valued at $0.5829 per share, or $579,801.

Upon closing of the Reverse Merger, certain 10% convertible promissory notes in the aggregate principal amount of $825,000 previously issued by SSE were automatically converted into 1,864,762 shares of common stock of SSET together with the interest accrued on such notes from the date of issuance to the closing date of the Reverse Merger, October 8, 2013, in the amount of $24,653, which converted into 55,724 shares of common stock of SSET.

On October 8, 2013, SSET entered into and consummated transactions pursuant to a subscription agreement with certain accredited investors whereby SSET issued and sold to the investors for $0.5829 per share an aggregate of 857,833 shares of Common Stock for an aggregate purchase price of $500,000.

On November 15, 2013, SSET entered into and consummated transactions pursuant to a subscription agreement with certain accredited investors whereby SSET issued and sold to the investors for $2.49 per share an aggregate of 160,281 shares of common stock for an aggregate purchase price of $399,100.

On December 26, 2013, SSET issued 52,910 shares of common stock to Mansour for his 6.452% interest in ELP valued at $1.89 per share, or $100,000.

On December 26, 2013, SSET issued 21,164 shares of common stock at a share price of $1.89 per share for $40,000.

On January 6, 2014, the Company issued 20,000 shares of common stock for consulting services, valued at $3.51 per share, or $70,200

On March 11, 2014, the Company issued 10,000 shares of common stock for consulting services, valued at $2.25 per share, or $22,500.

On May 19, 2014, the Company issued 20,000 shares of common stock for consulting services, valued at $1.31 per share or $26,225.

Concentration of credit risk

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents in financial institutions. At times, such deposits and investments may be in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company’s management does not believe the Company is exposed to any significant credit risk on its cash and cash equivalents.

Professional service agreement

In July 2013, the Company entered into a professional service agreement with a consultant, whereby it agreed to pay the consultant a guaranteed fee of $150,000, payable in equal quarterly amounts over a 12-month period. As of December 31, 2013, the Company paid the consultant $75,000. As of December 31, 2013, the remaining balance, totaling $75,000, has been accrued for in accounts payable and accrued expenses in the accompanying December 31, 2013 consolidated balance sheet.

For the six months ended June 30, 2014, the Company has made $112,500 of the remaining payments under the agreement, and $37,500 remains accrued in accounts payable and accrued expenses in the accompanying June 30, 2014 consolidated balance sheet.

Lease agreements

On September 23, 2013, the Company entered into a lease agreement to rent office space in Los Angeles, California. The lease is for one year and begins on October 1, 2013. Monthly payments are for $11,500, and a security deposit of $15,000 was paid in September 2013, along with the first month’s rent.

Overhead Agreement

On February 19, 2014, SSET entered into a two-year overhead operating agreement with Destro Films, LLC. Under the terms of the agreement, SSET will pay Destro Films, LLC a total of $250,000, in six equal installments, for the first year beginning February 24, 2014 when the first payment was made. SSET will pay Destro Films, LLC an additional total of $250,000 over the course of the second year of the agreement in six equal installments, ending February 23, 2016. In exchange for the funding, SSET shall have a right of first negotiation to provide production financing for each motion picture for which Destro Films, LLC or its affiliates owns and/or controls the rights. For the six months ended June 30, 2014, the Company has paid $83,334 to Destro Films, LLC.

Management believes that the carrying values of the Company’s financial instruments approximate their respective fair values as of June 30, 2014 and December 31, 2013.

On July 21, 22 and 29, 2014 and August 5, 2014, the Company entered into short-term loans with Bonan in the amounts of $5,000, $5,000, $60,000 and $40,000, respectively. These loans represent advances to the company, have no stated maturity date and are not interest-bearing loans.

As of July 19, 2014, a $100,000 convertible note payable was due and is now in default. Default interest begins 10 days after the maturity date at a rate of 15% per annum.

On July 24, 2014, the Company received $535,611 from Life After Beth towards the recoupment of the investment. The Company then paid $535,611 toward the principal balance of the $600,000 loan advanced on February 14, 2014.

On July 24, 2014, SSET and Bonan entered into an extension agreement extending the $150,000 convertible note maturity date to July 24, 2015.

As of July 24, 2014, a $100,000 convertible note payable was due and is now in default. Default interest begins 10 days after the maturity date at a rate of 15% per annum.

As of July 24, 2014 the holder of $125,000 of the $150,000 convertible note payable has agreed to forbear exercising any rights with respect to the note while the holder and SSET negotiate a restructuring of the note intended to extend the maturity date of the note to October 24, 2014. The balance of $25,000 is in default. Default interest begins 10 days after the maturity date at a rate of 15% per annum.

On July 28, 2014, the Company entered into two short-term loans with related parties. The company borrowed $32,500 from each of the two related parties for total short-term borrowing of $65,000. These loans have no stated maturity dates and are non-interest-bearing.

On July 31, 2014, the Company entered into a loan agreement for $250,000. The loan bears an interest rate of 1% per annum (term 120 days) to be calculated on the basis of a 360-day year. Additional consideration in the amount of $25,000, minus any interest that was already paid, is due on or before the maturity date of the loan for a total payment due of $275,000. The entirety of the proceeds of the loan are being used to invest in the production of a new film, described below.

In July 2014, the Company formed a new wholly owned subsidiary, YHSSE, LLC, a Delaware limited liability company (“YHSSE”), in connection with the Company’s plans to produce and invest in a new feature-length motion picture to be titled “Yoga Hosers,” which is to star Johnny Depp and be directed by Kevin Smith. Similar to the structure of the Company’s other production and finance transactions, YHSSE will own a partial interest in the underlying production company, Yoga Hosers, LLC, a California limited liability company, which will oversee directly the production of the film. Beginning July 22, 2014, Yoga Hosers, LLC (the production entity) commenced production activities on “Yoga Hosers.”

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “management believes” and similar language. Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Quarterly Report are forward-looking statements that involve risks and uncertainties. The risks discussed, as well as any cautionary language, in this Quarterly Report and in other of our filings with the Securities and Exchange Commission provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this Quarterly Report.

Overview

Reverse Acquisition

On October 8, 2013, Starstream Entertainment, LLC (“SSE”) entered into a Securities Exchange Agreement with Starstream Entertainment, Inc. (formerly Gelia Group Corp., “SSET”). Pursuant to the Securities Exchange Agreement, on October 8, 2013, the members of SSE assigned 100% of the membership interests of SSE held by them to SSET, in consideration of an aggregate of 12,200,822 newly issued shares of SSET’s Common Stock.  The shares of SSET’s Common Stock received by the SSE members in such transaction constituted approximately 62.4% of SSET’s issued and outstanding Common Stock after giving effect to the issuance of shares pursuant to the Securities Exchange Agreement.  As a result, SSE became SSET’s wholly owned subsidiary.  This transaction is being accounted for as a reverse acquisition (“Reverse Acquisition”) and SSE is deemed to be the acquirer.  Consequently, the assets and liabilities and the historical operations that are reflected in our consolidated financial statements prior to the Reverse Acquisition are those of SSE.

Business Overview

The Company is an independent entertainment production company. We develop, produce, market and obtain distribution for feature-length motion pictures and entertainment projects. For the year ended December 31, 2013, the Company received first proceeds from exploitation of its film rights in the amount of $201,413. For the six months ended June 30, 2014, the Company received an additional $71,855 in proceeds from exploitation of its film rights. These proceeds will be applied against the respective investment balance until it exceeds the total amount invested, at which point the excess will be accounted for as revenues on the statement of operations.

The Company’s business is to produce motion pictures and entertainment projects and to fully exploit the projects and their ancillary rights through several avenues, including, but not limited to, theatrical release, video-on-demand, digital distribution, and television outlets. The Company generally acquires ownership in media properties at a late stage when the properties are fully packaged and ready for production, and creates value by providing production and marketing expertise. The Company’s target segment of the entertainment industry is the emerging market of high-quality, low-cost, commercially viable content. To date, the Company has produced and/or financed four feature films and the Company is currently preparing to assist with the financing and production of a new feature film to be called “YOGA HOSERS” to star Johnny Depp and be directed by Kevin Smith. Similar to the structure of the Company’s other production and finance transactions, a newly formed subsidiary of the Company will invest in and support the production entity, which will oversee directly the production of the film. The Company will also perform production activities for the film.

Results of Operations

For the three months ended June 30, 2014 and 2013

For the three months ended June 30, 2014 and 2013, we had total expenses of $599,231 and $133,161, respectively. Total expenses for the six months ended June 30, 2014 primarily included general and administrative expenses of $70,974, professional fees of $215,839, payroll costs of $168,460, travel expense of $38,128, meals and entertainment expenses of $14,228, insurance expense of $28,700, rent and related expenses of $35,824, interest expense of $15,356, and depreciation expenses of $4,375. The increase in expenses was due to the expansion of our operations, which necessitated hiring additional personnel and increased use of professional services.  The Company expects expenses to continue to grow in the future in direct correlation with the future expansion of our business operations.

Net loss for the three months ended June 30, 2014 and 2013 was $599,231 and $133,161, respectively, and is primarily attributable to expenses incurred for several projects to develop, produce, market and plan to distribute feature-length motion pictures, as well as consulting fees paid in common stock and legal fees associated with SEC filings.

For the six months ended June 30, 2014 and 2013

For the six months ended June 30, 2014 and 2013, we had total expenses of $1,520,330 and $133,161, respectively. Total expenses for the six months ended June 30, 2014 primarily included general and administrative expenses of $94,298, professional fees of $757,008, payroll costs of $360,509, travel expense of $89,257, meals and entertainment expenses of $31,724, insurance expense of $55,861, rent and related expenses of $74,613, interest expense of $31,198, and depreciation expenses of $8,702. The increase in expenses was due to the expansion of our operations, which necessitated hiring additional personnel and increased use of professional services.  For the six months ended June 30, 2014, the Company incurred consulting expenses of $88,925 through the issuance of common stock to a consultant. The Company expects expenses to continue to grow in the future in direct correlation with the future expansion of our business operations.

Net loss for the six months ended June 30, 2014 and 2013 was $1,520,330 and $133,161, respectively, and is primarily attributable to expenses incurred for several projects to develop, produce, market and plan to distribute feature-length motion pictures, as well as consulting fees paid in common stock and legal fees associated with SEC filings.

For the period prior to October 8, 2013, SSE, and its subsidiaries, were not subject to Federal and State income taxes, as they were all limited liability companies.  Each member was responsible for the tax liability, if any, related to its proportionate share of its taxable income.  SSE and its subsidiaries are pass-through entities.  SSET, along with its consolidated subsidiaries, is deemed a corporation and thus is a taxable entity.  Accordingly, no provision for income taxes was reflected in the accompanying consolidated financial statements as the Company did not have income through June 30, 2014.

Liquidity, Capital Resources and Going Concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplates continuation of the Company as a going concern.

The Company has experienced recurring losses through June 30, 2014. The Company recognized a net loss of $1,520,330 and $133,161 for the six months ended June 30, 2014 and 2013, respectively.  As of June 30, 2014, the Company had cash on hand of $38,959, and current liabilities of $2,514,199. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to raise capital and/or generate positive cash flows from operations. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets and classifications that might be necessary in the event the Company cannot continue in existence.

The Company is committed to funding various entities that are producing certain motion pictures. As of June 30, 2014, the Company has funded $3,344,100 in such commitments. The Company has met all of its current funding commitments for film productions. The Company will need to raise additional funds to meet any future funding obligations and working capital needs until significant revenues begin to be realized from exploitation of the film rights to the Company’s productions. For the six months ended June 30, 2014 and the year ended December 31, 2013, SSE received cash proceeds from exploitation of its film rights in the amount of $71,855 and $201,413, respectively, and anticipates receiving additional cash proceeds, although such proceeds would be realized in the future, if at all. The Company expects to realize revenues from its additional film projects after the films are released and revenues are allocated per each film's collection account management agreements. In addition, the Company continues to pursue distribution and other monetization avenues for its film projects. The Company is exploring working capital sources including equity and debt issuances to meet the Company’s short and medium term needs including the service or refinancing of existing indebtedness. There is no guarantee that we will be able to raise any additional capital, or that, if such capital is available, it will be available on terms acceptable to us.

The foregoing represents the Company’s best estimates as of the date of this report and may materially vary based upon actual experience. The inability of the Company to obtain funding, either in the near term and/or longer term, or to realize significant revenue from its motion picture projects, will materially affect the ability of the Company to implement its business plan and such failure could jeopardize the viability of the Company.  In that case, the Company may need to suspend its operations and reevaluate and revise its plan of operations.

As of June 30, 2014, the Company had a working capital deficit of $2,381,339.  The Company has liabilities totaling $2,568,808 as of June 30, 2014, which is generally comprised of accounts payable and accrued expenses of $596,509, convertible notes payable of $500,000, accrued interest of $49,308, loans payable totaling $666,494, and amounts due to related parties of $707,296.

Net cash used in operating activities

Net cash used in operating activities was $1,152,031 and $116,937 for the six months ended June 30, 2014 and 2013, respectively. Cash was used primarily to fund our operating losses exclusive of non-cash expenditures such as stock compensation for services. For the six months ended June 30, 2014, operating activities were generally impacted by increases in net loss of $1,387,169, offset by an increase in accounts payable and accrued expenses of $230,350 and an increase in the issuance of common stock of $88,925, all of which were primarily related to expenditures incurred to develop the operations of the Company.

Net cash provided by investing activities

Net cash provided by investing activities was $2,680 for the six months ended June 30, 2014, as compared to net cash used in investing activities of $1,955,882 for the six months ended June 30, 2013. Cash invested in film productions for the six months ended June 30, 2014 and 2013 totaled $68,875 and $1,955,882, respectively.  The Company also received $71,855 in cash proceeds from the exploitation of its film rights during the six months ended June 30, 2014.

Net cash provided by financing activities

Net cash provided by financing activities was $1,088,298 and $2,095,764 for the six months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014, the Company received $560,000 in proceeds from loans payable, and $594,696 in advances from related parties, while making payments towards the principal of notes payable of $60,000, and loans payable of $6,548.

Off-balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to furnish information under this Item 3.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report.

Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during our last fiscal quarter that have materially affected or are reasonably likely to materially affect these controls.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which we or our subsidiaries are a party or of which any of our or their property is the subject, nor, to the knowledge of the executive officers of the Company, are any such proceedings contemplated by any governmental authority.

There are no material proceedings to which any director, officer, or affiliate of the Company, any owner of record or beneficially of more than five percent of any class of voting securities of the Company, or any associate of any such director, officer, affiliate or security holder is a party adverse to the Company or any of our subsidiaries or in which any such person has a material interest adverse to the Company or any of our subsidiaries.

However, from time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in our most recent Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Set forth below are securities we have sold or issued during the quarter ended June 30, 2014 and subsequent thereto through the date of this report that were not registered under the Securities Act, in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act or Regulation D of the Securities Act, and that we have not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K:

On May 19, 2014, the Company issued an aggregate of 20,000 shares of Common Stock to a consultant in payment of consulting services valued at $26,225.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

SSE is in default under certain 10% senior secured convertible notes issued in July and August 2013. The default is a result of not having paid the principal and interest due thereunder within 5 days of the applicable maturity dates in July and August 2014. As of the date of filing this report, an aggregate of $225,000 in principal amount of such notes is unpaid and in default and an aggregate of $20,890 in accrued interest on such notes is unpaid. In addition, SSE is past due on another 10% senior secured convertible note originally issued in July 2013 in the principal amount of $125,000. As of the date of filing this report, accrued but unpaid interest on this note totals $11,680. The holder of this note has agreed to forbear exercising any rights with respect to the note while the holder and SSET negotiate a restructuring of the note intended to extend the maturity date of the note to October 24, 2014. In addition, Bonan, the holder of a 10% senior secured convertible note originally issued in July 2013 in the principal amount of $150,000 has agreed to extend the maturity date of that note to July 2015 and that note is not in default but remains unpaid and outstanding.

ITEM 4. MINE SAFETY DISCLOSURES

We have no disclosure applicable to this item.

ITEM 5. OTHER INFORMATION

The Company entered into short-term loans with Bonan in the following aggregate amounts: $137,221 in April 2014, $250,000 in May 2014, $132,029 in June 2014, $70,000 in July 2014 and $40,000 in August 2014 (through the date of filing this report). These loans represent advances to the Company, have no stated maturity date and are not interest-bearing loans.

ITEM 6. EXHIBITS

The following documents are filed as part of this report:

______________

*   Filed herewith

** Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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, on August 19, 2014.

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