UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
———————
FORM 10-Q
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þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
¨ TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 000-52419
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HOLLOMAN ENERGY CORPORATION
(Exact Name of Issuer as Specified in Its Charter)
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| Nevada | 77-0643398 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) |
333 North Sam Houston Parkway East, Suite 600, Houston, Texas 77060
(Address of Issuer's Principal Executive Offices) (Zip Code)
Issuer’s telephone number: (281) 260-0193
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 þ 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 (§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 ¨ 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. (Check One):
| Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer (Do not check if a smaller reporting company) | o | Smaller reporting company | þ |
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 þ
| Class of Stock | No. Shares Outstanding | Date | ||
| Common | 108,795,497 | May 10, 2011 |
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOLLOMAN ENERGY CORPORATION
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2011 | December 31, 2010 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 114,002 | $ | 41,987 | ||||
| Other receivable | 11,830 | 9,662 | ||||||
| Prepaid expenses | 23,124 | 12,904 | ||||||
| 148,956 | 64,553 | |||||||
| Oil and gas properties, full cost method, unproven | 16,630,791 | 16,630,791 | ||||||
| Total Assets | $ | 16,779,747 | $ | 16,695,344 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued liabilities | $ | 145,711 | $ | 183,361 | ||||
| 145,711 | 183,361 | |||||||
| Deferred tax liability | 4,878,220 | 4,804,193 | ||||||
| Total Liabilities | 5,023,931 | 4,987,554 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Authorized: | ||||||||
| 10,000,000 preferred shares, par value $0.001 per share | ||||||||
| 150,000,000 common shares, par value $0.001 per share | ||||||||
| Issued and outstanding : | ||||||||
| 108,795,497 common shares (107,307,265 at December 31, 2010) | 108,796 | 107,307 | ||||||
| Additional paid in capital | 25,190,300 | 24,888,055 | ||||||
| Accumulated other comprehensive loss | (7,330 | ) | (8,659 | ) | ||||
| Deficit accumulated during the exploration stage | (13,535,950 | ) | (13,278,913 | ) | ||||
| Total Stockholders' Equity | 11,755,816 | 11,707,790 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 16,779,747 | $ | 16,695,344 | ||||
The accompanying notes are an integral part of these financial statements.
1
HOLLOMAN ENERGY CORPORATION
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative results from May 5, 2006 (Inception) to March 31, 2011 | ||||||||||||
| Three Months Ended March 31, | ||||||||||||
| 2011 | 2010 | |||||||||||
| CONTINUING OPERATIONS | ||||||||||||
| Consulting | $ | 1,192,439 | $ | 18,320 | $ | 174,605 | ||||||
| Foreign exchange loss | 972,563 | 75,485 | 132,711 | |||||||||
| Gain on settlement of debt | (40,026 | ) | - | - | ||||||||
| Management and directors fees | 1,013,823 | 41,998 | 92,800 | |||||||||
| Stock-based compensation expense | 2,288,237 | 78,734 | 379,210 | |||||||||
| Office, travel and general | 632,545 | 26,533 | 48,312 | |||||||||
| Professional fees | 566,834 | 15,967 | 11,904 | |||||||||
| Salaries, wages, and benefits | 86,666 | - | - | |||||||||
| General and Administrative Expenses | (6,713,081 | ) | (257,037 | ) | (839,542 | ) | ||||||
| Oil and gas property impairment | (7,396,207 | ) | - | - | ||||||||
| Deferred income tax recovery | 2,244,107 | - | - | |||||||||
| Loss from Continuing Operations | (11,865,181 | ) | (257,037 | ) | (839,542 | ) | ||||||
| DISCONTINUED OPERATIONS | ||||||||||||
| Net Loss from Discontinued Operations | (2,454,637 | ) | - | - | ||||||||
| Gain on Disposal of Endeavor | 783,868 | - | - | |||||||||
| Loss from Discontinued Operations | (1,670,769 | ) | - | - | ||||||||
| NET LOSS | $ | (13,535,950 | ) | $ | (257,037 | ) | $ | (839,542 | ) | |||
| BASIC AND DILUTED NET LOSS FROM | ||||||||||||
| CONTINUING OPERATIONS PER COMMON SHARE | $ | (0.00 | ) | $ | (0.01 | ) | ||||||
| BASIC AND DILUTED NET LOSS FROM | ||||||||||||
| DISCONTINUED OPERATIONS PER COMMON SHARE | $ | (0.00 | ) | $ | (0.00 | ) | ||||||
| BASIC AND DILUTED NET LOSS | ||||||||||||
| PER COMMON SHARE | $ | (0.00 | ) | $ | (0.01 | ) | ||||||
| WEIGHTED AVERAGE NUMBER OF BASIC AND | ||||||||||||
| DILUTED COMMON SHARES OUTSTANDING | 107,681,950 | 107,237,820 | ||||||||||
The accompanying notes are an integral part of these financial statements.
2
HOLLOMAN ENERGY CORPORATION
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Cumulative results from May 5, 2006 (Inception) to March 31, 2011 | ||||||||||||
| Three Months Ended March 31, | ||||||||||||
| 2011 | 2010 | |||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | (13,535,950 | ) | $ | (257,037 | ) | $ | (839,542 | ) | |||
| Adjustments to reconcile net loss to net cash | ||||||||||||
| used in operating activities: | ||||||||||||
| Cash used by discontinued operations | 1,729,701 | - | - | |||||||||
| Gain on disposal of Endeavor | (783,868 | ) | - | - | ||||||||
| Gain from settlement of indebtedness | (65,026 | ) | - | - | ||||||||
| Stock-based compensation and fee payments | 2,804,487 | 78,734 | 379,210 | |||||||||
| Unrealized foreign exchange loss | 923,189 | 75,356 | 128,313 | |||||||||
| Impairment of oil and gas properties (net of tax recovery) | 5,152,100 | - | - | |||||||||
| Changes in non-cash working capital items | ||||||||||||
| Other receivable | (11,830 | ) | (2,168 | ) | 2,358 | |||||||
| Prepaid expenses | (23,124 | ) | (10,220 | ) | (56,636 | ) | ||||||
| Accounts payable and accrued liabilities | 368,254 | 7,350 | (17,269 | ) | ||||||||
| Cash used in operating activities | (3,442,067 | ) | (107,985 | ) | (403,566 | ) | ||||||
| INVESTING ACTIVITIES | ||||||||||||
| Investing activities from discontinued operations | (1,447,739 | ) | - | - | ||||||||
| Petroleum and natural gas expenditures | (1,269,061 | ) | - | (26,800 | ) | |||||||
| Cash acquired on acquisition | 12,696 | - | - | |||||||||
| Deposit on acquisition | (639,487 | ) | - | - | ||||||||
| Deposits | - | - | - | |||||||||
| Cash used in investing activities | (3,343,591 | ) | - | (26,800 | ) | |||||||
| FINANCING ACTIVITIES | ||||||||||||
| Financing activities from discontinued operations | 2,000,261 | - | - | |||||||||
| Common stock issued for cash | 3,505,001 | 180,000 | - | |||||||||
| Loans payable | 50,567 | - | - | |||||||||
| Due to related parties | 1,343,831 | - | - | |||||||||
| Cash provided by financing activities | 6,899,660 | 180,000 | - | |||||||||
| CHANGE IN CASH | 114,002 | 72,015 | (430,366 | ) | ||||||||
| CASH, BEGINNING | - | 41,987 | 1,089,456 | |||||||||
| CASH, ENDING | $ | 114,002 | $ | 114,002 | $ | 659,090 | ||||||
| SUPPLEMENTAL DISCLOSURE: | ||||||||||||
| Cash paid for interest | $ | 9,908 | $ | - | $ | - | ||||||
| Cash paid for income taxes | $ | - | $ | - | $ | - | ||||||
| NON-CASH ACTIVITIES: | ||||||||||||
| Shares issued on conversion of management fees | $ | 225,000 | $ | 10,000 | $ | - | ||||||
| Shares issued on conversion of service fees | $ | 15,000 | $ | 15,000 | $ | - | ||||||
| Shares issued on conversion of liabilities | $ | 2,661,879 | $ | 20,000 | $ | - | ||||||
| Shares issued for property acquired | $ | 15,903,000 | $ | - | $ | - | ||||||
The accompanying notes are an integral part of these financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
1. BASIS OF PRESENTATION
Unaudited Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements of Holloman Energy Corporation (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). They do not include all information and footnotes required by GAAP for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K, filed with the SEC. The unaudited interim consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
Recent Accounting Pronouncements
The Company has reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. It does not expect the adoption of these pronouncements to have a material impact on its financial position, results of operations or cash flows.
2. OIL AND GAS PROPERTIES
The Company’s oil and gas properties are located in Australia and are unproven. As such, the costs capitalized in connection with those properties are not currently subject to depletion.
The Company has a 66.67% working interest in two licenses (PEL 112 and PEL 444) located in the Cooper/Eromanga Basin, in the State of South Australia.
On June 11, 2008 the Australian government consolidated two of the Company’s oil and gas licenses (PEL 108 and PEL 109) into one license (PEL 444). In connection with that consolidation, the government also extended the license term and associated work programs for PEL 444 and PEL 112 by five years. During August 2010, the Company applied for, and was granted, an additional seven (7) month extension of these licenses.
3. COMMON STOCK
During March 2011, the Company sold 1,400,002 shares of common stock in a private placement of investment units to Holloman Corporation, and to certain directors, and officers of the Company, and to one non-affiliated consultant. The investment units were priced at $0.15 each and consisted of one share of the Company’s common stock, and one stock purchase warrant. Each stock warrant entitles the holder to purchase one half share of the Company’s common stock at a price of $0.25 per share until February 14, 2012. Proceeds from the private placement totaled $210,000. Of that amount, $180,000 was paid in cash and $30,000 was a conversion of liabilities.
During March 2011, the Company issued 88,230 shares of its common stock, at an average price of $0.17 per share in connection with the conversion of $15,000 in administrative service fees payable to a wholly owned subsidiary of its controlling shareholder.
4. STOCK-BASED COMPENSATION
During the three month periods ended March 31, 2011 and 2010 the Company recognized $78,734 and $379,210, respectively, of non-cash expense related to share-based compensation under its 2009 Non-Qualified Stock Option Plan (the “Option Plan”). As of March 31, 2011, $118,100 of total unrecognized compensation cost remains under the Option Plan, all of which is expected to be recognized during the remainder of 2011.
4
FORWARD LOOKING STATEMENTS
The information contained in this Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, including among other things, statements regarding our capital needs, business strategy and expectations. Any statement which does not contain a historical fact may be deemed to be a forward-looking statement. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. In evaluating forward looking statements, you should consider various factors outlined in our latest Form 10-K, filed with Securities Exchange Commission on March 28, 2011, and, from time to time, in other reports we file with the U.S. Securities and Exchange Commission. These factors may cause our actual results to differ materially from any forward-looking statement. We disclaim any obligation to publicly update these statements, or disclose any difference between our actual results and those reflected in these statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and plan of operations should be read in conjunction with our unaudited financial statements and related notes included as part of this report and our Form 10-K, for the year ended December 31, 2010 filed with Securities Exchange Commission on March 28, 2011.
Holloman Energy Corporation (“we” or the “Company”) was incorporated in Nevada on May 14, 2004. Between May 2004 and May 2007 we were relatively inactive.
Oil and gas properties
In May 2007 we acquired a 62.5% working interest in an offshore Australian oil and gas exploration permit area known as Victoria Permit 60 (“Vic P60”). We paid $639,487 in cash plus a 4.00% overriding royalty participation for this interest.
On November 21, 2007 we acquired Holloman Petroleum Pty. Ltd. (“Holloman Petroleum”) for 18,600,000 shares of our common stock. Holloman Petroleum’s assets consisted of working interests, varying between 37.5% and 100%, in seven oil and gas permits awarded by the Australian government. These permits, one of which included the remaining 37.5% working interest in Vic P60, had remaining terms expiring between October 2010 and June 2013, and covered 8,087 square kilometers (1,998,348 acres) of land in the Cooper/Eromanga Basin and 2,589 square kilometers (639,755 acres) offshore in the Gippsland Basin and the Barrow Sub-Basin. We have subsequently consolidated or relinquished a number of these working interests.
Onshore licenses –Cooper Basin
We currently hold working interests of 66.67% in two onshore Petroleum Exploration Licenses (PELs) in Australia. PEL 112 is comprised of 2,196 square kilometers (542,643 gross acres). PEL 444, which resulted from the consolidation of the PEL 108 and PEL 109 licenses, is comprised of 2,358 square kilometers (582,674 gross acres). Both licenses are located on the southwestern flank of the Cooper Basin in the State of South Australia. The Department of Primary Industries and Resources of South Australia reports that the Cooper Basin has sourced over 4 billion barrels of oil and 5 trillion cubic feet of recoverable gas. It has in excess of 120,000 kilometers of 2-D seismic data and more than 1,200 wells in 65 oil and 20 gas fields. Our management believes that Australia provides a stable regulatory, tax and business environment in the oil and gas sector. We are obligated to pay 4.46% in royalties on our revenues generated by operations on these licenses.
5
On May 12, 2011 we entered into a non-binding letter of intent with a farm-out partner (the "Farmee") which provides that the Farmee may earn a 44% working interest in PEL 112 and PEL 444 (the “Farm-out LOI”). Upon the signing of the letter of intent, the Farmee paid us AUD$100,000 (USD$104,355). To earn its 44% interest, the Farmee will issue us 1,000,000 shares of its common stock and is required to fund exploration and development expenditures including:
| · | up to AUD$3,650,000 (USD$3,933,190) for performance of work area clearance and the acquisition of 125 square kilometres of 3D seismic data on PEL 112; |
| · | up to AUD$4,500,000 (USD$4,849,138) covering the dry hole costs of a three (3) well drilling program on PEL 112; |
| · | up to AUD$3,650,000 (USD$3,933,190) for performance of work area clearance and the acquisition of 125 square kilometres of 3D seismic data on PEL 444; and |
| · | up to AUD$4,500,000 (USD$4,849,138) covering the dry hole costs of a three (3) well drilling program on PEL 444. |
Under the terms of the Farm-out LOI, in the event any well drilled as part of the six (6) well program tests positively for commercially viable production of oil or gas, the Farmee will pay 50% of the total aggregate completion costs of such well(s). Other working interest holders, including us, will pay their portion of the residual 50% of completion costs on a pro-rata basis in accordance with the ratio their working interest percentage bears to the total working interest percentage held by all working interest holders excluding the Farmee.
In connection with the potential Farm-out LOI, we have also entered into a Working Interest Participation Agreement (the “Participation Agreement”) with our current working interest partners in PEL 112 and PEL 444. Under the Participation Agreement, we will convey an undivided 26.67% working interest, and our partners will convey an aggregate undivided 17.33% working interest (total 44% working interest conveyance) to the Farmee upon completion of their agreed earn-in obligations.
Both the Farm-out LOI and the Participation Agreement are subject to a number of conditions including approval of the TSX Venture Exchange, and the execution of definitive agreements by all parties.
In June 2008 the Australian government extended the lease term and associated work programs for PEL 444 and PEL 112 by five years. Under Australian Law, at the end of each five year term, one third of the area covered by a petroleum exploration license must be relinquished. During June 2008, we identified and relinquished one-third of the acreage covered by PEL 112 and PEL 444 to the Australian government.
6
Heavy rains beginning in February 2010 created wide scale flooding in the Cooper Basin. The inaccessibility of roads and facilities partially curtailed Cooper Basin oil production and resulted in a general contraction of exploration activity. As flood waters began to recede, operators of neighboring licenses have restarted drilling programs and are improving or expanding roads, bridges and infrastructure to better deal with possible future flooding. Exploration within substantial areas of the Cooper Basin, however, remains temporarily impractical. To maintain our exploration rights in the Cooper/Eromanga Basin, the Australian Government requires that we fulfill the following minimum work commitments:
| License | Description of Minimum Work Obligation | Date of Required Completion | ||
| PEL 112 | Acquisition of new seismic data: 2D (100km) | January 10, 2012 | ||
| PEL 112 | Geological and geophysical studies | January 10, 2013 | ||
| PEL 112 | Drill one well | January 10, 2014 | ||
| PEL 444 | Acquisition of new seismic data: 2D (200km) | January 10, 2012 | ||
| PEL 444 | Geological and geophysical studies | January 10, 2013 | ||
| PEL 444 | Drill one well | January 10, 2014 |
The farmin agreement through which we hold our working interests in PEL 112 and PEL 444 also obligates us to fulfill the drilling commitment set forth by the Australian Government. Based on technical recommendations, we intend to pursue the acquisition of 3-D seismic data on our licenses. Our current exploration plan also calls for the drilling of six wells, three wells on each of our concessions. Early estimates indicate the costs to perform the work outlined in our Cooper Basin exploration plan would range from $27 million to $30 million.
During 2010, we completed processing more than 666 km (414 miles) of 2D seismic data. This reprocessing fulfilled our June 11, 2010 work program requirements and covered a significant portion of PEL 112 and PEL 444. Our 2D seismic reprocessing was performed by Dayboro Geophysical Pty Ltd (“Dayboro”) under the supervision of Isis Petroleum Consultants Pty Ltd (“Isis”). Both Isis and Dayboro are independent engineers with lengthy geological and geophysical work experience in the Cooper Basin. The processing sequence targeted lines which complimented our technical assessment of likely drilling prospects and future seismic acquisition.
We have also completed a broad range of technical studies relating to PEL 112 and PEL 444. The studies were performed by Isis and included; a) a review of Cooper Basin exploration acreage (including an analysis of the chronostratigraphy, an assessment of neighboring exploration results, an analysis of petroleum systems and a probabilistic volumetric assessment of leads), b) oil migration studies, c) adjacent oil pools studies, and d) economic feasibility studies. In the opinion of management, these studies have increased the value of both licenses.
Offshore permits – Gippsland Basin and Barrow Sub-Basin
In May 2007 we acquired a 62.5% working interest in an offshore Australian oil and gas exploration permit area known as the Vic P60. In connection with our acquisition of Holloman Petroleum we acquired the remaining 37.5% working interest in that permit. The Barrow Sub-Basin permits were also acquired through our acquisition of Holloman Petroleum.
The Vic P60 permit obligated us to drill a deep-sea exploration well by October 28, 2010. The Barrow Sub-Basin permits (WA-372P, WA-373P and WA-395P) required us to drill 12 offshore exploration wells between June 2010 and June 2013. Both the Barrow and Vic P60 permits also required the acquisition of significant amounts of 3D seismic data. Early estimates indicate the costs to perform the required work on the Barrow and Vic P60 permits would be in excess of $220,500,000.
Despite our best efforts, we were unable to identify a joint venture partner willing to undertake the obligations associated with our offshore permits, and felt it unlikely that we could do so in the current economic climate. Our work requirements to hold the permits had fallen behind schedule. Further, we recognized that continued pursuit of these permits would detract from our ability to maximize the value of our Cooper/Eromanga Basin holdings. As a result, we determined that it was in our best interest to relinquish our exploration rights in the Gippsland Basin and Barrow Sub-Basin.
7
On June 18, 2009 we requested procedural advice from the Australian government concerning relinquishment of our Barrow Sub-Basin permits and recognized an impairment of those permits. On August 5, 2009 the government returned a Notice of Intent to Cancel those permits. On October 16, 2009 the permits were cancelled.
On December 28, 2009 we requested procedural advice from the Australian government concerning relinquishment of the Vic P60 permit and recognized an impairment of that permit. On April 16, 2010 the government returned its final Notice of Intent to Cancel that permit. The Vic P60 permit was subsequently cancelled.
The acquisition and disposal of Endeavor Canada
On August 3, 2007 we acquired Endeavor Canada, an Alberta corporation involved in the exploration and development of oil and gas, for 9,000 shares of our Series A Preferred stock and 9,000,000 shares of the Class A Preferred stock of our wholly owned subsidiary, First Endeavor Holdings. Each Series A Preferred share was convertible into one share of our common stock and was entitled to 1,000 votes on any matter submitted to our shareholders for approval. The Class A preferred shares of First Endeavor Holdings were, at the option of the holder of the shares, convertible into 9,000,000 shares of our common stock. Cameron King, one of our former officers and directors, owned a controlling interest in Endeavor Canada at the time of this transaction and received 6,500 Series A Preferred shares and 6,500,000 First Endeavor Holdings Class A Preferred shares in exchange for his shares in Endeavor. For accounting purposes, our acquisition of Endeavor Canada constituted a recapitalization and the acquisition was accounted for similar to a reverse merger whereby we were deemed to have been acquired by Endeavor Canada.
During January 2008, we determined that the oil and gas assets held by Endeavor Canada did not warrant further investment. On February 15, 2008 we sold our interest in Endeavor Canada to Cameron King. As part of the consideration for the purchase, the 6,500 shares of our Series A Preferred stock and the 6,500,000 Class A Preferred shares of First Endeavor Holdings previously issued to Mr. King were returned to us and cancelled. At the time of the sale, the assets of Endeavor Canada included all of our Canadian oil and gas properties.
Results of Operations
Our consulting, management and professional fees for the three months ended March 31, 2011, decreased by approximately $225,000 (68%) from $328,000 to $103,000 when compared to the same period during 2010. In largest part, this decrease resulted from one-time consulting fees paid to the Macquarie Tristone during 2010 in connection with our search for joint venture partners.
The Australian dollar has continued to gain strength against the US dollar. The Australian dollar increased from 1.02 to 1.03 US dollars during the three month period ended March 31, 2011. As a result, we recognized foreign exchange losses of $75,485 during that period. Substantially all of our non-cash foreign exchange losses relate to the measurement of US dollars required to settle deferred taxes payable to the Australian Government.
On August 15, 2009, we established a Non-Qualified Stock Option Plan and a Stock Bonus Plan. In connection with the plans we recognized non-cash, stock-based compensation expense of $78,734 and $379,210 during the three month periods ended March 31, 2011 and 2010, respectively. Stock-based compensation expense has decreased between periods as the unamortized portion of plan expense has diminished as plan options have vested with plan participants.
We have recognized an inception to date net loss of approximately $13,536,000. That loss consists of approximately $8,879,000 in non-cash expense including; stock-based fees and compensation expense of $2,804,000, unrealized foreign exchange loss of $923,000, and a net impairment of oil and gas properties of approximately $5,152,000. In addition, we have incurred $1,671,000 in loss related to the discontinued operations of Endeavor Canada, and approximately $2,986,000 in other cash expenses related to exploration stage operations.
8
Financial Condition, Liquidity and Capital Resources
The oil and gas industry is cyclical in nature and tends to reflect general economic conditions. The US and other world economies are recovering from a recession which continues to inhibit investment liquidity. Though oil prices are trending higher, the pattern of historic price fluctuations has resulted in additional uncertainty in capital markets. Our access to capital, as well as that of our partners and contractors, has been limited due to tightened credit markets. These limitations may inhibit the size and timing of formation of exploration ventures. As a result, the development of our property interests may be delayed due to financial constraints.
Our Cooper Basin exploration plan calls for the expenditure of approximately $10.5 million prior to May 31, 2012. Based upon technical recommendations, we intend to pursue the acquisition of 3-D seismic data on our licenses. Our current exploration plan also calls for the drilling of six wells on our concessions. Early estimates indicate the costs to perform the work outlined in our current Cooper Basin exploration plan would range from $27 million to $30 million.
Our operations to date have been financed from the sale of our securities, loans from unrelated third parties and advances from Holloman Corporation, our current and former officers, directors and their affiliates. We regularly review the market to identify opportunities for capital formation. We have also entered into a non-binding letter of intent with a Farmee which, if completed and successful, will pay a significant portion of the costs required to explore for oil and gas in the area covered by our permits.
During March 2011, we sold 1,400,002 shares of common stock in a private placement of investment units. Proceeds from the private placement totaled $210,000. Of that amount, $180,000 was paid in cash and $30,000 was a conversion of liabilities.
Effective October 1, 2010, we executed an administrative services agreement with our controlling shareholder. Under this agreement, fees of $5,000 per month are payable to Holloman Corporation covering; office and meeting space, supplies, utilities, office equipment, network access and other administrative facilities costs. These fees are payable quarterly in shares of our restricted common stock at the closing price of the stock on the last trading-day of the applicable monthly billing period. This administrative services agreement can be terminated by either party with 30-days notice. During the three months ended March 31, 2011, we recorded $15,000 of office expense and issued 88,230 shares of our common stock as a result of this agreement. Proceeds from this administrative service agreement have been assigned to a wholly owned subsidiary of Holloman Corporation.
Other than the obligations associated with our oil and gas concessions in Australia, we had no material future contractual obligations as of March 31, 2011.
We believe our plan of operations may require up to $11,000,000 for exploration costs and administrative expenses over the twelve-month period ending May 31, 2012. We are attempting to raise investment capital and complete joint venture agreements with third parties who will pay a significant portion of the costs required to explore for oil and gas and otherwise fulfill the obligations required by our Australian licenses.
If we are unable to raise the financing we need, our business plan may fail and our stockholders could lose their investment. If we are unable to perform in accordance with the work programs required by our licenses, the Australian government could cancel our exploration rights. There can be no assurance that we will be successful in raising the capital we require, or that if capital is offered, it will be subject to terms we consider acceptable. Investors should be aware that even in the event we are able to raise the funds we require, there can be no assurance that we will succeed in our drilling or production plans and we may never be profitable.
As of May 10, 2011 we did not have any off balance sheet arrangements.
As of May 10, 2011 we did not have any proven oil or gas reserves and we did not have any revenues.
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Critical Accounting Policies and Estimates
Measurement Uncertainty
The process of preparing financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements; accordingly, actual results may differ from estimated amounts. Our estimates and assumptions are based on current facts, historical experience and various other factors we believe to be reasonable under the circumstances. The most significant estimates with regard to the financial statements included with this report relate to carrying values of oil and gas properties, determination of fair values of stock based transactions, and deferred income tax rates and timing of the reversal of income tax differences.
These estimates and assumptions are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.
Petroleum and Natural Gas Properties
We utilize the full cost method to account for our investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, capitalized interest costs relating to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool. When we commence production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Costs of unproved properties are not amortized until the proved reserves associated with the projects can be determined or until impairment occurs. If an assessment of such properties indicates that properties are impaired, the amount of impairment is added to the capitalized cost base to be amortized.
The capitalized costs included in the full cost pool are subject to a "ceiling test", which limits such costs to the aggregate of the (i) estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions, (ii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, (iii) the cost of properties not being amortized, less (iv) income tax effects related to differences between the book and tax basis of the cost of properties not being amortized and the cost or estimated fair value of unproved properties included in the costs being amortized. At March 31, 2011, all of our oil and gas interests were classified as unproven properties and were not being amortized.
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the statement of operations.
Stock Based Compensation
We record compensation expense for stock based payments using the fair value method. The fair value of stock based compensation to directors and employees is determined using the Black-Scholes option valuation model at the time of grant. Fair value for common shares issued for goods or services rendered by non-employees is measured based on the fair value of the goods and services received. Share-based compensation is expensed with a corresponding increase to share capital. Upon the exercise of the stock options, the consideration paid is recorded as an increase in share capital.
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Foreign Currency Translation
Our functional and reporting currency, and that of our Australian subsidiary, is the United States dollar. The financial statements of our Canadian subsidiary are translated to United States dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income as a component of stockholders’ equity. Foreign currency financial statements of our Australian subsidiary use period end rates for monetary assets and liabilities, historical rates for historical cost balances, and average rates for expenses. If material, translation gains and losses are included in the determination of income. Foreign currency transactions are primarily undertaken in Canadian and Australian dollars. As of March 31, 2011, we have not entered into derivative instruments to offset the impact of foreign currency fluctuations.
Income Taxes
We follow the asset and liability method of accounting for future income taxes. Under this method, future income tax assets and liabilities are recorded based on temporary differences between the carrying amount of balance sheet items and their corresponding tax bases. In addition, the future benefits of income tax assets, including unused tax losses, are recognized, subject to a valuation allowance, to the extent that it is more likely than not that such future benefits will ultimately be realized. Future income tax assets and liabilities are measured using enacted tax rates and laws expected to apply when the tax liabilities or assets are to be either settled or realized.
Earnings per share
We present both basic and diluted earnings (loss) per share (EPS) on the face of the consolidated statements of operations. Basic EPS is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Diluted EPS figures are equal to those of basic EPS for each period since we have no dilutive stock options and warrants.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of our management, including our Principal Financial Officer and Principal Executive Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Disclosure controls and procedures are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Form 10-Q, is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and is communicated to our management, including our Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our management concluded that, as of March 31, 2011, our disclosure controls and procedures were effective.
Change in Internal Control over Financial Reporting
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS.
During March 2011, we sold 1,400,002 shares of our common stock in a private placement of investment units to Holloman Corporation, and to certain of our directors, and officers, and to one non-affiliated consultant. The investment units were priced at $0.15 each and consisted of one share of our common stock, and one stock purchase warrant. Each stock warrant entitles the holder to purchase one half share of our common stock at a price of $0.25 per share until February 14, 2012. Proceeds from the private placement totaled $210,000. Of that amount, $180,000 was paid in cash and $30,000 was a conversion of liabilities.
On March 31, 2011, we issued 88,230 shares of our common stock at a weighted average price of $0.17 per share in settlement of $15,000 in fees payable to a wholly-owned subsidiary of our controlling shareholder under the terms of an administrative service agreement.
We relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 with respect to the sale of these securities. The persons who acquired these securities were sophisticated investors and were provided full information regarding our business and operations. There was no general solicitation in connection with the offer or sale of these securities. The persons who acquired these securities acquired them for their own accounts. The certificates representing the shares of common stock and warrants bear a restricted legend providing that they cannot be sold unless pursuant to an effective registration statement or an exemption from registration.
ITEM 6. EXHIBITS |
Exhibit
| Number | Description of Exhibits | |
| 31.1 | Rule 13a-14(a) Certifications | |
| 31.2 | Rule 13a-14(a) Certifications | |
| 32 | Section 1350 Certifications |
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SIGNATURES
Pursuant to the requirements 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.
| HOLLOMAN ENERGY CORPORATION | |||
| Date: May 13, 2011 | /s/ Mark Stevenson | ||
Mark Stevenson, Principal Executive Officer | |||
| Date: May 13, 2011 | /s/ Robert Wesolek | ||
Robert Wesolek, Principal Financial and Accounting Officer | |||
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