UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2008
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
HOLLOMAN ENERGY CORPORATION
(Exact Name of Issuer as Specified in Its Charter)
Nevada 77-0643398
------------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5257 West Interstate 20, Odessa, Texas 79769-9410
- ---------------------------------------------- -------------
(Address of Issuer's Principal Executive Offices) (Zip Code)
Issuer's telephone number: (432) 381-2050
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) had been subject to such filing
requirements for the past 90 days. Yes ____X_____ No __________
Indicate by check mark whether the Registrant is a large accelerated filer, 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 [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2 of the Exchange Act). Yes ____ No X
-----
Class of Stock No. Shares Outstanding Date
Common 81,219,358 March 10, 2008
HOLLOMAN ENERGY CORPORATION
(formerly Endeavor Energy Corporation)
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2008 December 31, 2007
ASSETS
CURRENT ASSETS
Accounts receivable $ - $ 14,339
Other receivable - 63,386
Prepaid expenses and deposits 21,250 115,147
21,250 192,872
------------- -------------
Equipment, net - 14,019
Oil and gas properties, full cost method,
net of depletion 23,030,925 22,945,468
Deposit on acquisition 639,487 639,487
Refundable deposit - 5,044
------------- -------------
Total Assets $ 23,691,662 $ 23,796,890
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 227,670 $ 821,903
Loans payable 344,860 585,928
Due to related parties 1,367,745 1,158,415
------------- -------------
1,940,274 2,566,246
Deferred tax liability 6,177,000 6,177,000
Asset retirement obligations - 60,692
------------- -------------
Total Liabilities 8,117,274 8,803,938
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Authorized (Holloman):
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 (Holloman):
2,500 (December 31, 2007 - 9,000)
preferred shares 3 9
81,219,358 (December 31, 2007 - 81,219,358)
common shares 81,219 81,219
Authorized (FEH):
10,000,000 preferred shares, par value $0.001
150,000,000 common shares, par value $0.001
Issued and outstanding (FEH):
2,500,000 (December 31, 2007 - 9,000,000)
preferred shares 2,500 9,000
Additional paid in capital 17,903,746 17,903,746
Accumulated other comprehensive
income (loss) - (30,870)
Deficit accumulated during the
exploration stage (2,413,081) (2,970,152)
------------- -------------
Total Stockholders' Equity 15,574,388 14,992,952
------------- -------------
Total Liabilities and
Stockholders' Equity $ 23,691,662 $23,796,890
============ ===========
1
HOLLOMAN ENERGY CORPORATION
(formerly Endeavor Energy Corporation)
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative results Three Three
from May 5, 2006 Months Ended Months Ended
to March 31, 2008 March 31, 2007 March 31, 2008
GENERAL AND ADMINISTRATIVE
EXPENSES
Consulting 322,820 - 78,525
Foreign exchange (gain)/loss 7,183 - (117)
Interest and financing costs 1,233 - 700
Office and general 111,005 - 38,086
Professional fees 213,405 - 53,701
Salaries, wages, and benefits 86,666 - -
---------- --------- ----------
LOSS FROM CONTINUING OPERATIONS (742,312) - (170,895)
NET LOSS FROM DISCONTINUED
OPERATIONS (2,454,637) (211,016) (55,903)
GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS 783,868 - 783,868
---------- --------- ----------
NET LOSS $ (2,413,081) $(211,016) $ 557,071
BASIC AND DILUTED NET LOSS PER
COMMON SHARE (2,110) 0.01
---------- -----------
WEIGHTED AVERAGE NUMBER OF BASIC AND
DILUTED COMMON SHARES OUTSTANDING 100 81,219,358
========= ==========
2
HOLLOMAN ENERGY CORPORATION
(formerly Endeavor Energy Corporation)
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited)
Cumulative results Three Three
from May 5, 2006 Months Ended Months Ended
to March 31, 2008 March 31, 2007 March 31, 2008
OPERATING ACTIVITIES
Net loss from continuing
operations $ 41,556 $ - $ 612,973
Adjustments to reconcile
net loss to net cash used
in operating activities:
Extraordinary gain from
divestiture (783,868) (783,868)
Foreign exchange gain/(loss) (37,441) - 117
Interest accrued and
financing costs 700 - 700
Changes in non-cash working
capital items
Prepaid expenses
and deposits (21,250) - (21,250)
Accounts payable and
accrued liabilities 402,822 - 57,970
----------- --------- ---------
Cash used by continuing
operations (397,482) - (133,358)
----------- --------- ---------
Cash used by discontinued
operations (725,006) (78,247) (26,768)
----------- --------- ---------
FINANCING ACTIVITIES
Common stock issued for
cash 60,001 - -
Convertible debentures
issued 1,500,000 - -
Loans payable 585,928 - -
Due to related parties 1,978,541 10,803 820,126
----------- --------- ---------
Cash provided by financing
activities 4,124,470 10,803 820,126
----------- --------- ---------
INVESTING ACTIVITIES
Equipment acquired (23,490) - -
Petroleum and natural
gas expenditures (2,299,874) (107,312) (660,000)
Cash acquired on
acquisition 12,696 - -
Deposit on acquisition (639,487) - -
Advances to shareholder - - -
Repayment of advances
to shareholder - (23,593) -
Refundable deposit (51,827) - -
----------- --------- ---------
Cash used by investing
activities (3,001,982) (130,905) (660,000)
----------- --------- ---------
CHANGE IN CASH - (198,350) -
CASH, BEGINNING - 198,761 -
----------- --------- ---------
CASH, ENDING $ - $ 411 $ -
=========== ========= ==========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 9,908 $ - $ -
Income taxes paid $ - $ - $ -
NON-CASH ACTIVITIES:
Shares issued on conversion
of debt $ 1,639,722 $ - $ -
Shares issued for
property acquired $15,903,000 $ - $ -
3
HOLLOMAN ENERGY CORPORATION
(formerly Endeavor Energy Corporation)
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(Unaudited)
1. BASIS OF PRESENTATION
Unaudited Interim Consolidated Financial Statements
The unaudited interim 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 has
been no material changes in the information disclosed in the notes to the
financial statements for the year ended December 31, 2007 included in the
Company's Annual Report on From 10-KSB filed with the SEC. The interim
unaudited financial statements should be read in conjunction with those
financial statements included in Form 10-KSB. 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 months ended March 31, 2008 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2008.
2. DISCONTINUED OPERATIONS
On February 1, 2008, the Company entered into an agreement with the Company's
former CEO for an option to exchange the Company's interest in Endeavor
Canada Corporation ("Endeavor") for the Company's Series A preferred shares
and the Class A preferred shares of THE Company's wholly-owned subsidiary
First Endeavor Holdings, Inc ("FEH").
On February 15, 2008, the option was exercised. As a result, the 6,500
shares of the Company's Series A preferred stock and the 6,500,000 Class A
Preferred shares of First Endeavor Holdings, Inc. issued to the Company's
former CEO were returned to the Company and cancelled and all outstanding
shares of Endeavor were transferred to the Company's former CEO. The assets
of Endeavor included all of the Company's Canadian-based oil and gas
interests.
4
The Company recognized an extraordinary gain on its divestiture of Endeavor
as follows:
Net liabilities of Endeavor:
Assets $ (780,467)
Liabilities, including $351,504 in amounts
payable to related parties 3,401,781
Accumulated comprehensive income (31,265)
-----------
2,590,049
Share consideration received 6,507
Intercompany receivables written off (1,812,688)
-----------
Gain on disposal of discontinued operations $ 783,868
===========
3. OIL AND GAS PROPERTIES, unproven
In May 2007, the Company entered into an agreement to acquire a 62.5% working
interest in an Australian oil and gas exploration permit area known as
Victoria Permit 60 ("Vic P60"). In connection with the acquisition of
Holloman Petroleum Pty, Ltd. ("Holloman Petroleum"), the Company also
acquired the remaining 37.5% working interest in the Vic P60 permit. In
connection with the May 2007 agreement, the Company paid $639,487 in the form
of a deposit on the permit awaiting approval of the transfer of the permit by
the Australian government. The Company contracted to pay a broker 800,000
restricted common shares plus a 9% overriding royalty interest in the acreage
covered by the permit to facilitate this transaction. As a result, the
Company has a net revenue interest of 81.625% in the prospect. During
February 2008, a shareholder paid $660,000 on behalf of the Company to
reserve 3-D seismic capacity related to the permit.
On November 21, 2007, the Company purchased seven Australian oil and gas
permits for 18,600,000 shares of the Company's common shares with a fair
market value of $15,903,000. On March 7, 2008, the Company entered into an
agreement with Holloman Oil & Gas Limited ("Holloman O & G") which granted
Holloman O & G its two-thirds working interest in the PEL 112 permit. To
earn this working interest, Holloman Oil & Gas agreed to:
o Fund the costs required to drill, and if warranted, complete three wells on
the PEL 112 by June 10, 2008; and
o Pay the Company a 1.33% overriding royalty on gross revenues generated from
the sale of any oil or gas produced from wells drilled on the PEL 112.
5
The Company has the right to earn up to a one-third working interest in the
PEL 112 concession by paying, prior to the time any well has reached 50% of
the expected total depth, the Company's proportionate share of the cost of
drilling any of the wells involved in the three-well drilling program. The
Company also has the right to earn up to a one-third working interest in any
future wells drilled on the PEL 112 by paying its proportionate share of the
cost of drilling.
Two of the Company's Directors are officers and shareholders in Holloman
Corporation, which holds a 100% interest in Holloman O&G and Mr. Stevenson
acts as the president of Holloman O&G.
6
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 an 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-KSB filed with Securities
Exchange Commission on April 15, 2008, and, from time to time, in other
reports we file with the U.S. Securities and Exchange Commission ("SEC).
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 its 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-KSB for the year ended December 31, 2007 filed with Securities Exchange
Commission on April 15, 2008.
General
Holloman Energy Corporation ("we" or the "Company") was incorporated on May
14, 2004. Between May 2004 and May 2007 we were relatively inactive.
On August 3, 2007 we acquired Endeavor Canada Corporation, 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
preferred stock of our wholly owned subsidiary, First Endeavor Holdings.
For accounting purposes, our acquisition of Endeavor Canada constituted a
recapitalization and the acquisition was accounted for as a reverse merger
whereby Endeavor Canada was deemed to have acquired us. As a result, for the
period from August 3, 2007, the merger date, through February 15, 2008, the
date on which we divested of Endeavor Canada (see below), our financial
statements reflect the historical operations of Endeavor Canada and our
operations.
Endeavor Canada was incorporated in May 2006. Between May 2006 and December
2007 Endeavor Canada acquired its oil and gas properties in Alberta, Canada
but was otherwise relatively inactive. As a result, a comparison of our
operations for the three months ended March 31, 2008 with our operations for
the three months ended March 31, 2007 is not meaningful.
7
Following the acquisition of Endeavor Canada, we paid $1,640,000 in principal
and accrued interest to Endeavor Canada's note holders with 1,093,155 shares
of our restricted common stock.
On February 1, 2008 we entered into an agreement with our former Chief
Executive Officer, Cameron King, which provided us the option of exchanging
all of our interest in Endeavor Canada for the our Series A Preferred shares
and the Class A Preferred shares of First Endeavor Holdings, Inc. previously
issued to Mr. King in connection with our original acquisition of Endeavor.
On February 15, 2008 the option was exercised. As a result, the 6,500 shares
of our Series A Preferred stock and the 6,500,000 Class A Preferred shares of
First Endeavor Holdings issued to Mr. King were returned to us and cancelled
and all outstanding shares of Endeavor Canada were transferred to Mr. King.
The assets of Endeavor Canada included all of the Company's Canadian-based
oil and gas holdings.
We have recognized net losses from the discontinued operations of Endeavor
Canada totaling $2,455,000 and an extraordinary gain upon the divestiture of
Endeavor Canada of $783,868.
Liquidity and Capital Resources
In May 2007 we entered into an agreement to acquire a 62.5% working interest
in an Australian oil and gas exploration permit area known as Victoria Permit
60 ("Vic P60") for $639,487. In connection with the acquisition of Holloman
Petroleum, as described below, we acquired the remaining 37.5% working
interest in the Vic P60 permit. As the holder of the permit we committed to
complete the work program required by the VIC P60 Permit. We project that
seismic work, interpretation of data and related work will require an
investment of $6 to $9 million prior to October 2008. Further, the Permit
requires us to drill at least one well before November 2009. We estimate the
cost of drilling that well will approximate $57 million. We will attempt to
joint venture this prospect with third parties which will pay all, or a
significant portion of the costs required to explore for oil and gas in the
area covered by the Permit.
On November 21, 2007 we acquired Holloman Petroleum Pty. Ltd for 18,600,000
shares of our common stock. Holloman Petroleum's assets consist of working
interests varying between 37.5% and 100% in seven oil and gas permits, including
the remaining 37.5% working interest in the Vic P60 permit. These permits have
remaining terms expiring between December 2008 and February 2013. As the holder
of the permits, we are required to drill wells and complete other work on the
lands covered by the permits. If we elect to drill all the wells and perform all
other work required by the permits, very early estimates suggest that the cost
will be over $15,000,000 during the twelve months ending March 31, 2009 and well
over $200,000,000 over the terms of the permits.
On March 7, 2008 we entered into an agreement with Holloman Oil & Gas Limited
("Holloman O & G") which granted Holloman O & G the right to earn a 66.667%
working interest in the PEL 112 permit, which covers approximately 821,500
acres in the Cooper basin of Australia. To earn this working interest,
Holloman O & G agreed to:
8
1. Fund the costs required to drill, and if warranted, complete three
wells on the PEL 112 by June 10, 2008; and
2. Pay the Company a 1.33% overriding royalty on gross revenues generated
from the sale of any oil or gas produced from wells drilled on the PEL
112.
We have the right to earn up to a one-third working interest in the PEL 112
concession by paying, prior to the time any well has reached 50% of the
expected total depth, our proportionate share of the cost of drilling any of
the wells involved in the three-well drilling program. We also have the
right to earn up to a one-third working interest in any future wells drilled
on the PEL 112 (over and above the initial three-well drilling program) by
paying our proportionate share of the cost of drilling the wells.
In March 2008 Holloman Oil & Gas drilled its first exploratory well on PEL
112. The well was drilled to approximately 6,000 feet and was a dry hole.
The terms of the PEL 112 permit and the two related permits covering lands in
the Cooper basin require us to drill two additional wells prior to December
2008.
Our Chairman of the Board of Directors is the President of Holloman
Corporation and is also the president of Holloman O & G. One of the Company
Directors is the Vice President of Holloman Corporation. Holloman
Corporation owns all of the outstanding shares of Holloman O & G.
During the remainder of 2008 we plan to enter into joint venture agreements
with third parties to explore for oil and gas in the Cooper, Gippsland and
Barrow basins of Australia.
As of March 31, 2008 we did not have any proven oil or gas reserves and we
did not have any revenues. As such, our oil and gas properties are not
subject to depletion. At March 31, 2008, we had advances payable to:
o Unrelated parties in the amount of $344,860;
o Grant Petersen, our current Chief Executive Officer, and an entity
controlled by Mr. Petersen, in the amount of $228,861;
o Other members of our Board of Directors in the amount of $30,000; and
o Holloman Corporation in the amount of $1,108,884.
These advances were used to support our operations in Australia, maintain
fund raising efforts, and pay general and administrative expenses. All
advances are unsecured, non-interest bearing, and are due on demand. Holloman
Corporation is an affiliate. We believe a substantial portion of these
advances will be repaid with restricted common stock under the terms of a
private placement authorized by our Board of Directors on March 3, 2008.
9
Our material future contractual obligations as of March 31, 2008 are shown
below.
Amounts due during twelve months ending
March 31,
----------------------------------------
Description Total 2008 2009 2010
Loans and Advances $1,712,605 $1,712,605 -- --
Our operations have been financed from the sale of our common stock, the sale
of convertible notes, loans from unrelated third parties and advances from
our current and former officers, directors and their affiliates.
As of March 31, 2008 we did not have any off balance sheet arrangements.
We are attempting to raise the capital required to implement our business
plan. If we are unable to complete additional joint venture agreements with
third parties to explore for oil and gas, we believe our plan of
operations would require approximately $25,000,000 in financing over the
twelve-month period ending March 31, 2009.
If we are unable to obtain the financing we need, we could lose drilling
rights, our business plan could fail and our stockholders could lose their
investment. There can be no assurance that we will be successful in raising
the capital we require, or that if the 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.
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. Significant items subject to such
estimates and assumptions include the carrying value of oil and gas
properties, income taxes, and legal and environmental risks and exposure.
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.
10
Petroleum and Natural Gas Properties
We follow the full cost method of accounting for our petroleum properties;
accordingly, all costs incidental to the acquisition, exploration and
development of oil and gas properties, including costs of undeveloped
leasehold, dry holes and leasehold equipment, are capitalized. Internal costs
incurred that are directly identified with acquisition, exploration and
development activities not related to production, general corporate overhead
or similar activities, are also capitalized. Interest costs incurred and
attributable to unproved oil and gas properties under current evaluation and
major development projects of oil and gas properties are also capitalized.
All costs related to production activities, including work over costs
incurred solely to maintain or increase levels of production from an existing
completion interval, are charged to expense as incurred.
Under the full cost method of accounting, the net book value of petroleum and
natural gas properties, less related deferred income taxes, may not exceed a
calculated "ceiling." The ceiling limitation is the estimated after-tax
future net revenues, discounted at 10% per annum, from proved oil and natural
gas reserves plus the cost of properties not subject to amortization.
Estimated future net revenues exclude future cash outflows associated with
settling asset retirement obligations included in the net book value of oil
and gas properties. Such limitations are imposed and are tested quarterly. In
calculating future net revenues, prices and costs used are those as of the
end of the appropriate quarterly period. These prices are not changed except
where different prices are fixed and determinable from applicable contracts
for the remaining term of those contracts, including designated cash flow
hedges in place. We had no material hedges outstanding at December 31, 2007.
Any excess of the net book value, less related deferred taxes, over the
ceiling is written off as an expense. An expense recorded in one period may
not be reversed in a subsequent period even though higher oil and gas prices
may have increased the ceiling applicable to the subsequent period.
Capitalized costs are depleted by an equivalent unit-of-production method,
converting gas to oil at the ratio of six thousand cubic feet of natural gas
to one barrel of oil. Depletion is calculated using the capitalized costs,
including estimated asset retirement costs, plus the estimated future
expenditures (based on current costs) to be incurred in developing proved
reserves, net of estimated salvage values.
Unproved properties are excluded from amortized capitalized costs until it is
determined whether or not proved reserves can be assigned to such properties.
The Company assesses its unproved properties for impairment quarterly.
Significant unproved properties are assessed individually. Costs of
insignificant unproved properties are transferred to amortizable costs over
average holding periods ranging from three years for onshore properties to
seven years for offshore properties.
No gain or loss is recognized upon disposal of oil and gas properties unless
such disposal significantly alters the relationship between capitalized costs
and proved reserves.
11
Joint Venture Activities
Substantially all of our petroleum and natural gas exploration and production
activities are conducted jointly with others, and, accordingly, our financial
statements reflect only our proportionate interest in such activities.
Deferred 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.
Loss per share
We compute basic loss per share by dividing net loss by the weighted average
number of shares outstanding during the period. The weighted average number
of shares is calculated by taking the number of shares outstanding and
weighting them by the amount of time that they were outstanding. Diluted loss
per share is computed after giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common
shares consist of incremental shares issuable upon the exercise of stock
options and warrants, contingent stock, and conversion of preferred shares.
The dilutive effect of potential common shares is not considered in our EPS
calculation as the impact would be anti-dilutive.
ITEM 4T. CONTROLS AND PROCEDURES
Following his appointment as our Chief Executive and Financial Officer on
January 4, 2008 Grant Petersen, our Principal Executive and Financial
Officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report; and in his
opinion our disclosure controls and procedures were not effective to ensure
that material information relating to us, including our consolidated
subsidiaries, is made known to him by others within those entities,
particularly during the period in which this report is being prepared, so as
to allow timely decisions regarding required disclosure. There were no
changes in our internal controls over financial reporting that occurred
during the quarter ended March 31, 2008 that have affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as required by Sarbanes-Oxley (SOX)
Section 404.A. Our internal control over financial reporting is a process
12
designed under the supervision of our Chief Executive and Financial Officer
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements for external
purposes in accordance with Generally Accepted Accounting Principles.
As of the end of the period covered by this report, management assessed the
effectiveness of our internal control over financial reporting based on the
criteria for effective internal control over financial reporting established
in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance
on conducting such assessments. Based on that evaluation, management
concluded that during the period covered by this report our internal controls
and procedures were not effective to detect the incorrect application of GAAP
as more fully described below. This was due to deficiencies that existed in
the design or operation of our internal control over financial reporting that
may be considered to be material weaknesses.
The matters involving internal controls and procedures that our management
considered to be material weaknesses were: (1) the lack of a functioning
audit committee and lack of a majority of outside directors, resulting in
ineffective oversight in the establishment and monitoring of required
internal controls and procedures; (2) inadequate segregation of duties
consistent with control objectives; (3) insufficient written policies and
procedures for accounting and financial reporting with respect to GAAP and
SEC disclosure requirements; and (4) ineffective controls over period end
financial disclosure and reporting processes. These material weaknesses were
identified by our Chief Executive and Financial Officer in connection with
the audit of our financial statements as of December 31, 2007.
Management believes that the material weaknesses described above did not have
an affect on our financial results.
We are committed to improving our organization. As part of this commitment,
we created an audit committee in March 2008 which will oversee the
establishment and monitoring of required internal controls and procedures.
Our Audit Committee is comprised of our two outside directors. We also intend
to: (i) increase our accounting personnel and technical accounting expertise
when funds are available which will also permit the segregation of duties,
(ii) appoint one or more additional outside directors who will also be
appointed to our audit committee; and (iii) prepare and implement sufficient
written policies and procedures pertaining to accounting and financial
reporting in accordance with GAAP and SEC disclosure requirements.
Management believes that the creation of an audit committee and the addition
of a third outside director will remedy the lack of a majority of outside
directors. In addition, management believes that preparing and implementing
improved written policies and checklists will remedy the following material
weaknesses (i) insufficient written policies and procedures pertaining to
accounting and financial reporting in accordance with GAAP and SEC disclosure
requirements; and (ii) ineffective controls over period end financial close
and reporting. Further, management believes that the hiring of personnel who
have accounting expertise and knowledge will result in the proper segregation
of duties and provide more checks and balances.
We will continue to monitor and evaluate the effectiveness of our internal
controls and procedures over financial reporting on an ongoing basis and are
committed to taking further action and implementing additional improvements
as necessary and as funds allow.
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PART II -OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number Description of Exhibits
31 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 14, 2008
By: /s/ Grant Petersen
--------------------------------------
Grant Petersen, Chief Executive
Officer, Principal Financial Officer
and Chief Accounting Officer
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