Hero Technologies Inc. - Quarter Report: 2009 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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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 June 30, 2009

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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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 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):

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

PART I FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

HOLLOMAN ENERGY CORPORATION

(An Exploration Stage Company)

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements

1

HOLLOMAN ENERGY CORPORATION

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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)

The accompanying notes are an integral part of these financial statements

3

HOLLOMAN ENERGY CORPORATION

An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

The accompanying notes are an integral part of these financial statements

4

HOLLOMAN ENERGY CORPORATION

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(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, 2008 included in the Company’s Annual Report on Form 10-K filed with the SEC. The interim unaudited financial statements should be read in conjunction with those financial statements included in 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 and six month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

2.

OIL AND GAS PROPERTIES

In May 2007, the Company entered into an agreement to acquire a 62.5% working interest and contract rights in an offshore oil and gas concession in the Bass Straits in the State of Victoria, Australia, covering 339,769 acre, in an area known as Victoria Permit 60 (“Vic P60”).  In connection with the agreement, the Company paid $639,487 in the form of a deposit on the Vic P60 permit awaiting approval of the transfer of the permit by the Australian government. The Company has also agreed to pay a 4% overriding royalty interest on Vic P60 with an additional contingent back-in working interest of 6.2% effective in the event certain performance criteria are achieved.

On November 21, 2007, the Company purchased seven Australian oil and gas interests. This purchase was facilitated by the acquisition of Holloman Petroleum Pty. Ltd., a privately held Australian-based company, for 18,600,000 shares of the Company's common stock with a fair market value of $15,903,000. The interests are located in the Cooper basin, in the State of South Australia, in the Gippsland basin, in the State of Victoria, and in the Barrow sub-basin, in the State of Western Australia. In connection with the acquisition, the Company acquired the remaining 37.5% working interest in the Vic P60 permit.  During February 2008, a shareholder advanced the Company $660,000 by paying for seismic participation related to the Vic P60 permit on its behalf. On January 22, 2009, the Australian government extended the time frame within which the seismic work on Vic P60 must be completed to January 28, 2009.

On March 7, 2008, the Company entered into a contingent agreement with Holloman Oil & Gas Limited (“HOG”), an Australian corporation, which granted HOG a two-thirds working interest in the PEL 112 permit.  To earn its working interest, HOG agreed to:

·

Fund the costs required to drill, and if warranted, complete three wells on the PEL 112 within the timeframes required  by the permit work programs; and

·

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.

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.

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HOLLOMAN ENERGY CORPORATION

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2009

(Unaudited)

2.

OIL AND GAS PROPERTIES (Continued)

On June 11, 2008 the Australian government consolidated two of the Company’s oil and gas permits (PEL 108 and PEL 109) into one permit (PEL 444). In connection with that consolidation, the government also extended the lease term and associated work programs for that permit and PEL 112 to June 2013. 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. Accordingly, during June 2008, the Company identified and relinquished a third of the acreage covered by PEL 112 and PEL 444 to the government. The remaining acreage covered by PEL 112 and PEL 444 constitute all of the Company’s holdings in the Cooper basin.

On June 16, 2009, the Company’s Board of Directors began deliberations concerning its offshore oil and gas permits in the Barrow sub-basin (WA-372P, WA-373P and WA-395P). The Board recognized that continued pursuit of these concessions would detract from its ability to maximize the value of its Cooper basin holdings. In total, the Barrow sub-basin permits obligate the Company to drill 12 offshore exploration wells and acquire significant amounts of 3D seismic data. Early estimates indicate the total costs to perform this required work will be in excess of $185,000,000.

On June 18, 2009 the Company requested procedural advice from the Australian government concerning a potential relinquishment of its rights in the Barrow sub-basin permits. In that connection, on August 5, 2009 the government returned a Notice of Intent to cancel those permits. As a result, the Company has recognized a loss on the impairment of oil and gas assets of $2,908,009 in the statement of operations. Oil and gas properties have been reduced by $4,154,299 to reflect the impairment of the Barrow concessions together with the $1,246,290 affect on deferred tax liabilities related to those assets.

3.

LOANS PAYABLE

Loans payable consists of the following:

On May 29, 2009, the Company converted all outstanding loans payable to shares of its common stock (see Note 5).

4.

RELATED PARTY TRANSACTIONS

Non-interest bearing unsecured advances, payable upon demand to shareholders and other related parties consist of the following:

During the six months ended June 30, 2009, the Company repaid advances of $840,000 and converted $679,249 in advances to shares of its common stock (Note5).

6

HOLLOMAN ENERGY CORPORATION

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2009

(Unaudited)

4.

RELATED PARTY TRANSACTIONS (Continued)

During January and February 2009, management fees totaling $50,000 (six months ended June 30, 2008 - $25,000) were paid to the Company’s Chief Executive Officer. The fees were incurred as compensation for services rendered in the normal course of operations and were paid at the amount established and agreed to by the related parties.

Beginning September 1, 2008, administrative services fees of $50,000 per month are payable to the Company’s principal shareholder, Holloman Corporation. These fees are paid on a quarterly basis in shares of the Company’s restricted common stock at the average closing price of the stock for the last 10 trading-days of the applicable monthly billing period. The agreement under which these fees are incurred can be terminated by either party with 30-days notice. Due to market conditions, Holloman Corporation’s services were generally suspended beginning in January 2009. As a result, the Company amended its Administrative Services Agreement to cancel fees payable to Holloman Corporation during the eight month period beginning January 1, 2009 and ending August 31, 2009.

5.

COMMON STOCK

On May 29, 2009, the Company issued 9,385,935 restricted shares of its common stock to three persons in settlement of $938,592 in loans and advances payable to these parties. The parties receiving these shares included; Holloman Corporation, a principal shareholder of the Company (6,045,218 shares for debt of $604,520), Open Bay Holdings, a Company controlled by the Company’s President (747,287 shares for debt of $74,729) and an unrelated party (2,593,430 shares for debt of $259,343).

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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-K filed with Securities Exchange Commission on April 15, 2009, 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 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, 2008 filed with Securities Exchange Commission on April 15, 2009.

General

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.

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.  The Class A preferred shares of First Endeavor Holdings were, at the option of the holders 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 as a reverse merger whereby Endeavor Canada was deemed to have acquired us. As a result, our financial statements reflect the historical operations of Endeavor Canada prior to the merger, and our joint operations for the period from August 3, 2007, the merger date, through February 15, 2008, the date on which we divested of Endeavor Canada.

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 15, 2008 we sold Endeavor Canada to Mr. King and transferred all outstanding shares of Endeavor Canada to Mr. King.  In consideration for the transfer of these shares, 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 to Mr. King, the assets of Endeavor Canada included all of our Canadian oil and gas properties. 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.

During June 2008 the holders of the remaining 2,500 shares of our Series A Preferred stock and the remaining 2,500,000 shares of the Class A preferred stock of First Endeavor Holdings converted their shares into 2,502,500 shares of our common stock.

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Oil and gas properties

In May 2007 we acquired a 62.5% working interest in an Australian oil and gas exploration permit area known as Victoria Permit 60 (“Vic P60”) which comprises 1,375 square kilometers (339,769 acres) in the Bass Strait of the Gippsland Basin in Victoria, Australia. We paid a purchase price for the interest of $639,487 plus a 4.00% overriding royalty interest. In addition, we granted a contingent back-in working interest of 6.20% effective in the event certain performance criteria are achieved. The closing of this transaction is subject to the approval of the title transfer on the permit by the Commonwealth of Australia. In connection with our acquisition of Holloman Petroleum Pty, Ltd. (see below), we also acquired the remaining 37.5% working interest in Vic P60. We currently have a net revenue interest of a 96% in the Vic P60 permit.

On November 21, 2007 we acquired Holloman Petroleum Pty. Ltd. 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, including the remaining 37.5% working interest in the Vic P60 permit. These permits, which have remaining terms expiring between October 2010 and June 2013, cover 4,554 square kilometers (1,125,317 acres) of land in the Cooper basin and 2,589 square kilometers (639,755 acres) offshore in the Gippsland basin and the Barrow sub-basin. We are obligated to pay 4.77% in royalties on revenues generated by our operations in the Cooper basin. In the Barrow sub-basin we are obligated to pay 4.43% in royalties on revenues generated by our operations on the WA-372P and Wa-373P permits, and 1.43% in royalties on revenues generated by our operations on the WA-375P permit.

On March 7, 2008 we entered into a contingent agreement with Holloman Oil & Gas Limited (“Holloman Oil & Gas”) which granted Holloman Oil & Gas the right to earn a two-thirds working interest in the PEL 112 permit, which covers approximately 2,196 square kilometers (542,643 acres) in the Cooper basin of Australia. To earn this working interest, Holloman Oil & Gas agreed to:

1.

Fund the costs required to drill, and if warranted, complete three wells on the PEL 112 within the timeframes required by the permit work program; and

2.

Pay us 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 related permit covering lands in the Cooper basin require us to drill two additional wells prior to June 10, 2013.

On June 11, 2008 the Australian government consolidated two of our oil and gas permits (PEL 108 and PEL 109) into one permit (PEL 444). In connection with that consolidation, the government also extended the lease term and associated work programs for that permit 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.

On January 22, 2009, the Australian government extended the time frame within which the seismic work on Vic P60 must be completed to January 28, 2009.  We have received verbal assurance that the Australian government will forebear from any action with respect to our Vic P60 lease rights while we attempt to complete seismic acquisition agreements in late 2009.

On June 16, 2009, our Board of Directors began deliberations concerning our offshore oil and gas permits in the Barrow sub-basin (WA-372P, WA-373P and WA-395P). The Board recognized that continued pursuit of these concessions would detract from the resources required to maximize the value of our Cooper basin holdings. In total,

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the Barrow sub-basin permits obligate us to drill 12 offshore exploration wells and acquire significant amounts of 3D seismic data. Early estimates indicate the total costs to perform this required work will be in excess of $185,000,000. Despite our best efforts, we have not identified a joint venture partner willing to undertake these obligations and we feel it is unlikely that we will do so in the current economic climate. As a result, our Board has agreed it would be in our best interest to voluntarily relinquish our lease rights on the Barrow concessions.

On June 18, 2009 we requested procedural advice from the Australian government concerning a potential relinquishment of our rights on the Barrow sub-basin permits. In that connection, on August 5, 2009 the government returned a Notice of Intent to Cancel those permits. The Notice provides a 30-day period during which we may show cause or provide additional information relating to our continued maintenance of the permits. We do not, however, intend to pursue an extension of our Barrow sub-basin exploration rights.  As a result, we have recognized a loss on the write-off of oil and gas assets of $2,908,009 in the statement of operations for the three and six months ended June 30, 2009 which accompanies this report. Our oil and gas property carrying value has been reduced by $4,154,299 to reflect the write-off of our Barrow concessions together with the $1,246,290 affect on deferred tax liabilities related to those assets.

Encouraged by drilling success on the permits abutting our Copper basin holdings, our Board of Directors has realigned and expanded our executive team. During June and July 2009 we added three new senior executives and appointed one new member to our Board of Directors. In addition, we intend to undertake an arrangement with a globally recognized energy specialist to identify candidates and support bidding to secure joint venture partners for exploration of our Cooper basin concessions. That arrangement is expected to target transactions which involve a partial sale, swap or farm-out of our interests on PEL 112 and PEL 444. We have also expanded independent engineering research on those assets.

During fiscal 2008, we pursued work program obligations and sought consolidation/extension of certain of our permits. During the remainder of 2009 we plan to actively seek joint venture partners for our oil and gas concessions and pursue financing to support seismic acquisition in the Cooper and Gippsland basins of Australia. We are currently engaged in discussions with a number of potential joint venture candidates regarding our Cooper and Gippsland leases.

Results of Operations

Endeavor Canada was incorporated in May 2006. Between May 2006 and February 2008, Endeavor Canada acquired its oil and gas properties in Alberta, Canada but was otherwise relatively inactive. We have recognized inception to date net losses from the discontinued operations of Endeavor Canada totaling $2,454,637. During February 2008, we recognized a gain upon the divestiture of Endeavor Canada of $783,868.

Our general and administrative expenses for the three and six months ended June 30, 2009 decreased when compared to the same periods during 2008. In largest part, this decrease relates to a reduction in international travel expense and professional fees incurred in connection with our wrap-up and divestiture of Endeavor during 2008.

During the three and six months ended June 30, 2009 we recognized a loss on the write-off of oil and gas assets of $2,908,009 related to relinquishment of our Barrow sub-basin concessions.

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 in a recession which continues to inhibit investment liquidity. Though somewhat improved, fluctuating oil and gas prices provide additional uncertainty in capital markets. We expect current economic conditions to result in somewhat decreased exploration costs. Our access to capital however, as well as that of our partners and contractors, could be limited due to tightened credit markets and may inhibit the formation of exploration ventures and consortiums. As a result, the development of our property interests may be delayed due to financial constraints.

Further, our oil and gas leases are highly sensitive to the market price of oil and the availability of capital required to fulfill our lease obligations in a timely manner. In the event the market price of oil declines permanently, or capital remains unavailable for an extended period, the value of our oil and gas leases may be impaired.

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In response to the economic recession, we have undertaken a variety of cost-cutting measures targeted at reducing our administrative expenses. Those measures include reductions in executive compensation as well as the consulting, management and professional fees we incur to support our operations.

We project that seismic acquisition, interpretation of data and related work on our Vic P60 and Cooper basin permits will require an investment of up to $4 to $6 million prior to June 30, 2010. Further, our permits require us to drill one well on the Vic P60 permit before November 2010. We are in the process of requesting extension from the Australian government with respect to that drilling obligation. Our management has no reason to believe that an extension of time to complete that obligation will not be granted.

If we elect to drill all the wells and perform all other work required by all of our permits, very early estimates suggest that the total costs may approximate $11,500,000 during the twelve months ending June 30, 2010 and up to $55,000,000 over the terms of the permits. We intend to joint venture our work program obligations 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 our permits. We are currently engaged in discussions with three potential joint venture candidates regarding the initial drilling obligations on our Cooper and Gippsland leases.

At June 30, 2009, we had advances payable to a former Director in the amount of $53,554 This and past advances were used to support our operations in Australia, maintain fund raising efforts, and pay general and administrative expenses. All advances are unsecured and non-interest bearing.

In September 2008, we entered into an Administrative Services Agreement with our largest shareholder, Holloman Corporation. Beginning September 1, 2008, administrative services fees of $50,000 per month were payable to Holloman Corporation. These fees were paid quarterly in shares of our restricted common stock at the average closing price of the stock for the last ten trading-days of the applicable monthly billing period. In exchange for its fees, Holloman Corporation agreed to provide, among other things; executive consultation, management advice, engineering and geological services, office space, office support, communications, IT support, secretarial services, and the costs of North American travel expenses incurred in connection with the performance its services. The agreement under which these fees are incurred can be terminated by either party with 30-days notice.  

As part of our cost cutting efforts, we amended our Administrative Services Agreement with Holloman Corporation effective January 1, 2009. This amendment suspended and cancelled the services and fees payable to Holloman Corporation under the agreement during the eight month period beginning January 1, 2009 and ending August 31, 2009.

Our material future contractual obligations as of June 30, 2009, other than the obligations associated with our oil and gas concessions in Australia, are shown below.

Our operations 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.

On September 30, 2008, we sold 6,764,706 shares of common stock in a private placement of investment units to our largest shareholder, Holloman Corporation, to Mark Stevenson and Douglas Brown, two of our directors and to an affiliated party.

During the six months ended June 30, 2009, we repaid $840,000 in advances payable to related parties.

On May 29, 2009, we issued 9,385,935 restricted shares of our common stock to three persons in settlement of $938,592 in loans and advances payable to these parties. The parties receiving these shares included; Holloman Corporation, a principal shareholder of the Company (6,045,218 shares for debt of $604,520), Open Bay Holdings, a Company controlled by the Company’s President (747,287 shares for debt of $74,729) and an unrelated party (2,593,430 shares for debt of $259,343).

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We believe our plan of operations may require up to $11,500,000 over the twelve-month period ending June 30, 2010. We are attempting to raise investment capital and enter into joint ventures with third parties who will pay all, or a significant portion of the costs required to explore for oil and gas and otherwise fulfill the obligations required by our Australian permits.

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 set forth in our leases, 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 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.

As of July 31, 2009 we did not have any off balance sheet arrangements.

As of July 31, 2009 we did not have any proven oil or gas reserves and we did not have any revenues.

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. 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, and tangible/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. Investments in unproved properties and major development projects including capitalized interest, if any, are not depleted until proved reserves associated with the projects can be determined. If the future exploration of unproved properties are determined uneconomical the amount of such properties are added to the capitalized cost to be depleted.

The capitalized costs included in the full cost pool are subject to a "ceiling test", which limits such costs to the aggregate of the estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions plus the lower of cost and estimated net realizable value of unproven properties. At June 30, 2009, our interests in Australia are all classified as unproven.

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.

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Environmental

Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a non-capital nature are recorded when an environmental assessment and/or remediation is probable, and the costs can be reasonably estimated.

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.

Foreign Currency Translation

Our functional and reporting currency, and that of our Australian subsidiary, is the United States dollar. The financial statements of our former 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. Gains and losses arising on settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in Canadian and Australian dollars. We have not, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

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.

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 4T.

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 June 30, 2009, our disclosure controls and procedures are effective to satisfy the objectives for which they are intended.  

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

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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. In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.

There were no changes in our internal control over financial reporting identified in connection with the evaluation performed that occurred during the fiscal quarter covered by this report that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II -OTHER INFORMATION

ITEM 6.

EXHIBITS

Exhibit

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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.

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