STARSTREAM ENTERTAINMENT, INC.

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.

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.

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.”

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.

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.