UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





———————


FORM 10-Q


———————





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





For the quarterly period ended June 30, 2012





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. Employerof 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) has 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 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):





Large accelerated filer
o
Accelerated filer
oNon-accelerated filer
o
Smaller reporting company
þ(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 þ





Class of Stock

No. Shares Outstanding

DateCommon

110,195,696

August 14, 2012














PART I  FINANCIAL INFORMATION





ITEM 1.  FINANCIAL STATEMENTS










HOLLOMAN ENERGY CORPORATION(An Exploration Stage Company)CONSOLIDATED BALANCE SHEETS
 
 June 30, 2012


December 31, 2011(Unaudited)ASSETSASSETSCash

$
73,938


$
11,637Other receivable


4,834



3,886Prepaid expenses


18,618



4,739Current Assets


97,390



20,262Oil and gas properties, full cost method, unproven


16,629,162



16,634,935Total Assets

$
16,726,552


$
16,655,197LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIESAccounts payable and accrued liabilities

$
119,128


$
188,301Contract Advances


-



7,160Current Liabilities


119,128



195,461Deferred tax liability


4,804,192



4,811,396Total Liabilities


4,923,320



5,006,857STOCKHOLDERS' EQUITYAuthorized:10,000,000 preferred shares, par value $0.001 per share150,000,000 common shares, par value $0.001 per shareIssued and outstanding :110,195,696 common shares (108,997,599 at December 31, 2011)


110,196



108,998Additional paid in capital


25,798,625



25,353,199Accumulated other comprehensive loss


(11,026
)


(12,343
)Deficit accumulated during the exploration stage


(14,094,563
)


(13,801,514
)Total Stockholders' Equity


11,803,232



11,648,340Total Liabilities and Stockholders' Equity

$
16,726,552


$
16,655,197
 The accompanying notes are an integral part of these consolidated financial statements.
 
 2
 
 
 
 HOLLOMAN ENERGY CORPORATION(An Exploration Stage Company)CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
 
 Cumulative results from May 5, 2006

(Inception)to June 30,


Three Months Ended June 30,


Six Months Ended June 30,2012


2012


2011


2012


2011CONTINUING OPERATIONSConsulting

$
1,586,829


$
360,216


$
19,174


$
375,216


$
37,494Foreign exchange loss


896,951



(112,890
)


142,128



(6,934
)


217,613Gain on settlement of debt


(40,026
)


-



-



-



-Management and directors fees


1,320,120



194,743



38,025



237,643



80,023Stock-based compensation expense


2,511,212



104,874



78,734



104,874



157,468Office, travel and general


764,592



29,484



26,699



55,111



53,232Professional fees


681,219



20,007



22,822



22,914



38,789Salaries, wages, and benefits


86,666



-



-



-



-General  and Administrative Expenses


(7,807,563
)


(596,434
)


(327,582
)


(788,824
)


(584,619
)Oil and gas property impairment


(7,396,207
)


-



-



-



-Deferred income tax recovery


2,244,107



-



-



-



-Other Income


535,869



388,615



-



495,775



-Loss from Continuing Operations


(12,423,794
)


(207,819
)


(327,582
)


(293,049
)


(584,619
)DISCONTINUED OPERATIONSLoss from discontinued operations


(2,454,637
)


-



-



-



-Gain on disposal of Endeavor


783,868



-



-



-



-Loss from Discontinued Operations


(1,670,769
)


-



-



-



-NET LOSS

$
(14,094,563
)

$
(207,819
)

$
(327,582
)

$
(293,049
)

$
(584,619
)Foreign currency translation


(11,026
)


(713
)


(1,325
)


1,317



4COMPREHENSIVE LOSS

$
(14,105,589
)

$
(208,532
)

$
(328,907
)

$
(291,732
)

$
(584,615
)BASIC AND DILUTED NET LOSS FROMCONTINUING OPERATIONS PER COMMON SHARE





$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.01
)BASIC AND DILUTED NET LOSS FROM DISCONTINUEDOPERATIONS PER COMMON SHARE





$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.00
)BASIC AND DILUTED NET LOSSPER COMMON SHARE





$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.01
)WEIGHTED AVERAGE NUMBER OF BASIC ANDDILUTED COMMON SHARES OUTSTANDING






109,686,371



108,796,063



109,344,261



108,242,084
 The accompanying notes are an integral part of these consolidated financial statements.
 
 3
 
 
 
 
 HOLLOMAN ENERGY CORPORATION(An Exploration Stage Company)CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
 
 Cumulative results fromMay 5, 2006 (Inception)


Six Months Ended June 30,to June 30, 2012


2012


2011OPERATING ACTIVITIESNet loss

$
(14,094,563
)

$
(293,049
)

$
(584,619
)Adjustments to reconcile net loss to net cashused 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
)


-



-Oil and gas expenditures recovered from partners


37,340



37,340



-Stock-based compensation and fee payments


3,369,212



446,624



157,468Unrealized foreign exchange loss (gain)


845,465



(5,887
)


217,021Impairment of oil and gas properties (net of tax recovery)


5,152,100



-



-Changes in non-cash working capital itemsOther receivable


(4,834
)


(948
)


8,825Prepaid expenses


(18,618
)


(13,879
)


(16,734
)Accounts payable and accrued liabilities


357,694



(69,173
)


106,458Contract Advances


131,190



(7,160
)


-Cash provided by (used in) operating activities


(3,344,207
)


93,868



(111,581
)INVESTING ACTIVITIESInvesting activities from discontinued operations


(1,447,739
)


-



-Oil and gas expenditures


(1,406,985
)


(31,567
)


(21,256
)Cash acquired on acquisition


12,696



-



-Deposit on acquisition


(639,487
)


-



-Deposits


-



-



-Cash used in investing activities


(3,481,515
)


(31,567
)


(21,256
)FINANCING ACTIVITIESFinancing activities from discontinued operations


2,000,261



-



-Common stock issued for cash


3,505,001



-



180,000Loans payable


50,567



-



-Related party repayments


(100,000
)


(100,000
)


-Proceeds from related parties


1,443,831



100,000



-Cash provided by financing activities


6,899,660



-



180,000CHANGE IN CASH


73,938



62,301



47,163CASH, BEGINNING


-



11,637



41,987CASH, ENDING

$
73,938


$
73,938


$
89,150SUPPLEMENTAL DISCLOSURE:Cash paid for interest

$
9,908


$
-


$
-Cash paid for income taxes

$
-


$
-


$
-NON-CASH FINANCING ACTIVITIES:Shares issued for management fees

$
231,750


$
21,750


$
10,000Shares issued for services

$
395,000


$
320,000


$
30,000Shares issued on conversion of liabilities

$
2,661,879


$
-


$
20,000Shares issued for property acquired

$
15,903,000


$
-


$
-
 The accompanying notes are an integral part of these consolidated financial statements.
 
 4







NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(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 U.S. 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, 2011 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 and footnotes 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 and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.





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 consolidated financial position, results of operations or cash flows.





2.  OIL AND GAS PROPERTIES





The Company currently holds 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 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 Company’s oil and gas properties are unproven. As such, the costs capitalized in connection with those properties are not currently subject to depletion.





Effective May 11, 2012, the Company entered into a definitive Oil and Gas Farm-In Agreement with Terra Nova and its wholly owned subsidiary Terra Nova Resources Inc. (“Terra Nova”), Australian-Canadian Oil Royalties Ltd. (“ACOR”) and Eli Sakhai (“Sakhai”) on PEL 112 and PEL 444 (the “Agreement”). The Agreement provides terms under which Terra Nova may earn up to a 55% undivided working interest in PEL 112 and PEL 444 (the “Farm-In Interest”).





In connection with the Agreement, Terra Nova paid the Company non-refundable cash fees totaling $350,000, and 666,670 shares of its common stock with a fair market value of $193,334. The Company agreed to provide ACOR and Sakhai a full accounting of its use of the cash fees, and to share with ACOR and Sakhai, any excess of the cash fees over the transaction costs it incurred in connection with the Agreement. As a result of its analysis, the Company identified a total of $54,719 in excess fees to be refunded to ACOR and Sakhai. Of that amount, the Company has withheld $37,340 as a recovery of exploration costs payable to it by ACOR and Sakhai.





5





To earn the entire Farm-In Interest, Terra Nova is required to fund exploration and development expenditures (the “Earning Obligations”) totaling at least AUD$13,700,000 (USD$14,481,000) including:





●
AUD$4,700,000 (USD$4,968,000) which was placed in escrow during May 2012, for use in the completion of a seismic acquisition program sufficient to meet the minimum seismic acquisition requirements, and interpretation of the acquired data for PEL 112 and PEL 444 (earning a 20% working interest in each license); and





●
AUD$4,500,000 (USD$4,757,000) to be placed in escrow on or before November 1, 2012  to secure Terra Nova’s obligation to sole fund  the dry-hole costs of an initial three (3) well drilling program on either PEL 112 or PEL 444, provided that at least one well is drilled on each license (earning a working interest of 5.833% per well in each license, totaling a working interest of 17.5%); and





●
AUD$4,500,000 (USD$4,757,000) to be placed in escrow on or before the later of March 1, 2013 or 45 days following completion or abandonment of the third well in the initial well program, for use in funding the first AUD$4,500,000 in dry-hole costs of an optional three (3) well drilling program on either PEL 112 or PEL 444, provided that at least one well is drilled on each license (earning a working interest of 5.833% per well in each license, totaling a working interest of 17.5%).





Terra Nova will act as contract operator with respect to all seismic acquisition and drilling work contemplated by the Agreement.





Costs incurred in relation to the seismic earning obligations in excess of AUD$4,700,000, if any, shall be borne by Terra Nova, the Company, ACOR and Sakhai in accordance with their Working Interest percentages calculated as though Terra Nova had successfully completed its Earning Obligations and earned the entire Farm-In Interest.





In the event Terra Nova elects to complete either or both of the first two wells drilled in connection with the initial three well drilling program, Terra Nova shall pay 50% of the completion cost and the Company will pay the other 50% of the completion costs. In the event Terra Nova elects to complete the third well drilled in connection with the initial three well drilling program, or any well drilled in connection with the optional three well drilling program, Terra Nova shall pay 50% of the completion cost, and the Company, ACOR and Sakhai shall pay the other 50% of the completion costs in accordance with their working interest at the effective date of the Agreement.





In the event any well drilled in connection with either the initial or optional drilling programs is commercially viable, and Terra Nova elects to complete such well, Terra Nova is entitled to a preferential recovery of one hundred percent of the costs it has paid to drill and test that successful well. Terra Nova is entitled to 80% of production from that successful well until either that successful well has ceased production or Terra Nova has received net revenue equal to the reimbursable costs it has incurred.





Terra Nova will earn the Farm-In Interest in stages based upon successful completion of specific Earning Obligations. In each instance, the Company, ACOR and Sakhai will each contribute a portion of the working interest earned by Terra Nova. In the event Terra Nova earns the entire Farm-In Interest, the Company, ACOR and Sakhai will transfer to Terra Nova the following working interest percentages in both PEL 112 and PEL 444:





(a)
The Company will contribute an undivided 38.556% working interest in both PEL 112 and PEL 444 (resulting in a residual working interest position of 28.112% in each license);(b)
ACOR will contribute an undivided 8.222% working interest in both PEL 112 and PEL 444; and


(c)
Sakhai will contribute an undivided 8.222% working interest in both PEL 112 and PEL 444.





6





The Agreement may be terminated by any party upon the occurrence of an uncured breach of any material term. Terra Nova may terminate the Agreement any time before it has earned the Farm-In Interest upon providing written notice of such termination. In the event Terra Nova terminates the Agreement, it shall not be entitled to any interest in either PEL 112 or PEL 444 unless it has satisfied an Earning Obligation with respect to that license.





On February 27, 2012, the Company terminated its previous farm-in agreement onPEL 112 and PEL 444 with Brandenburg Energy Corp. ("Brandenburg"). Brandenburg’s contract rights were subject to meeting certain milestones including an obligation to pay the Company AUD$7,400,000 (USD$7,822,000) on or before September 20, 2011. Brandenburg was unable to pay this amount.





During January 2012, the Company was granted a variation of license terms on PEL 112 by the Government of South Australia. Under the variation, the minimum work requirements for PEL 112 License Year Three (3) were exchanged for those of PEL 112 License Year Four (4). As a result, the timeframe for acquisition of 100 kilometers of 2D seismic data was moved from January 10, 2012 to January 10, 2013. Likewise, the timeframe for performance of certain geological and geophysical studies was moved from January 10, 2013 to January 10, 2012. The Company believes the scope of work performed during 2011 fulfilled the requirements which were to be satisfied by January 2012.





Local reconnaissance indicates that residual flooding continues to delay access to lands covered by PEL 444. Accordingly, the Company requested an additional extension of time to complete its work program under that license. On June 22, 2012 the Government of South Australia granted a six (6) month extension of license terms for PEL 444. As a result, the timeframe for acquisition of a minimum of 200 kilometer of 2D seismic data was extended from July 11, 2012 to January 11, 2013, and the overall license term for PEL 444 was extended to January 11, 2015.





3.  CONTRACT ADVANCES AND OTHER INCOME





In connection with the Agreement, Terra Nova paid the Company cash fees totaling $350,000, and 666,670 shares of its common stock with a fair market value of $193,334 (see Note 2). All fees paid by Terra Nova were fully earned upon receipt, and were not repayable to Terra Nova under any circumstances. After an offset of $54,719 in excess fees to be refunded to ACOR and Sakhai, the Company recognized other income relating to these fees of $388,615 and $488,615 during the three and six months ended June 30, 2012, respectively.





4.  COMMON STOCK AND STOCK – BASED COMPENSATION





The Company incurs $15,000 in administrative service fees payable to a wholly owned subsidiary of its controlling shareholder on a quarterly basis. During the three and six months ended June 30, 2012, the Company paid administrative fees totaling $15,000 and $30,000, using 50,911 and 123,097 shares of its common stock, at approximate weighted average prices of $0.295 and $0.244 per share, respectively.





On April 2, 2012 the Company granted 1,000,000 shares of its common stock to a consultant whose efforts it judged instrumental in identifying and finalizing the Agreement with Terra Nova. The grant was conditioned upon the execution of the Agreement which occurred on May 11, 2012. The 1,000,000 bonus shares had a fair market value at the date of grant equal to $290,000, or $0.29 per share.





7





Issuance of Options and Bonus Shares





On April 3, 2012, the Company granted stock options to its Chief Executive Officer under the terms shown below. The options were granted pursuant to the 2009 Non-Qualified Stock Option Plan.





Option Type

No. of Shares

Issuable Upon

Exercise of Option


Exercise

Price

First Date

Exercisable

Expiration

DateStock Option A


450,000


$
0.70

4/3/2012

8/15/2012Stock Option B


450,000


$
0.80

4/3/2012

8/15/2012Stock Option C


450,000


$
1.00

4/3/2012

8/15/2014Stock Option D


450,000


$
1.20

4/3/2012

8/15/20141,800,000





The Company applied the Black-Scholes option pricing model to determine the fair market value of the options granted. In applying the model, the Company used the following parameters: contractual lives of .38 to 2.38 years, historical stock price volatility of 103% to 138%, a risk-free rate of 4.5% and an annual dividend rate of 0%. As a result, the Company determined that the total fair market value of the options granted was $104,874 and the weighted-average grant-date fair value per option granted was $0.06.





On April 3, 2012, the Company also authorized the issuance of 75,000 bonus shares of its common stock pursuant to the 2009 Stock Bonus Plan. The fair market value of these bonus shares is the market price of the shares at the date of grant. The 75,000 bonus shares had an aggregate value of $21,750, or $0.29 per share at that date.





In addition, on April 3, 2012, the Company issued its Chief Executive Officer fractional participation in a 2% net revenue interest in wells drilled by the Company on PEL 112 and PEL 444. The participation units granted represent a 0.017% interest in the Company’s Cooper Basin revenues, after all royalties, exploration expenses, operating costs and capital investments associated with the Cooper Basin have been recovered. In management’s opinion no value can be assigned to these revenue interests, as any valuation is non-estimable.





On February 14, 2012, stock warrants providing for the purchase of 700,003 shares of the Company’s common stock, at a price of $0.25 per share, expired without exercise.





8





5.  RELATED PARTY TRANSACTION





On April 2, 2012, the Company’s Board of Directors consented to the distribution of 666,670 shares of the common stock of Terra Nova, to its directors, officers and principal advisors. The Terra Nova shares were received by the Company in connection with the Agreement with Terra Nova, and were distributed as compensation for efforts put forth in securing the Terra Nova opportunity. The fair market value of the Terra Nova shares is the market price of the shares at the date they were earned by the Company. The 666,670 shares had an aggregate value of $193,334, or $0.29 per share at that date.




On March 1, 2012, the Company executed a promissory note in the principal amount of $100,000 with one of its consultants who is also a shareholder. The note was non-interest bearing and payable upon demand. The entire principal amount of the note was repaid on March 23, 2012.





6.  SUBSEQUENT EVENTS





Oil and Gas Properties





Fieldwork supporting the acquisition of seismic data on PEL 112 began July 24, 2012. Geokinetics (Australia) Pty. Ltd. undertook the 3D seismic survey on the northern boundary of PEL 112 under the direction of Terra Nova. As of August 14, 2012, seismic line preparation was complete, and 254 of 904 kilometers (28%) of seismic survey operations have been performed.


9





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 the U.S. Securities Exchange Commission (“SEC”) on March 29, 2012, and, from time to time, in other reports we file with the 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 results 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, 2011 filed with the SEC on March 29, 2012.





Holloman Energy Corporation (“we” or the “Company”) was incorporated in Nevada on May 14, 2004. We focus on oil and gas exploration and development in Australia’s Cooper Basin.





We currently hold working interests of 66.67% in two onshore Petroleum Exploration Licenses (PEL) 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 Manufacturing, Innovation, Trade, Resources and Energy of South Australia reported 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.





Fieldwork supporting the acquisition of seismic data on PEL 112 began July 24, 2012. Geokinetics (Australia) Pty. Ltd. undertook the 3D seismic survey on the northern boundary of PEL 112 under the direction of our farm-in partner Terra Nova Minerals Inc. (“Terra Nova”). As of August 14, 2012, seismic line preparation was complete, and 254 of 904 kilometers (28%) of seismic survey operations have been performed. Seismic acquisition is expected to commence in late August 2012 and will include the acquisition and processing of 127 square kilometers (“sq km”) of 3D data at cost of up to AUD$3.7 million. The survey will identify potential multi-zone drilling targets including the Namur, Hutton and Birkhead shales down to 7,000 feet.


10





Oil and Gas Farm-Ins





Effective May 11, 2012, we entered into a definitive Oil and Gas Farm-In Agreement (the “Terra Nova Farm-In Agreement”) with Terra Nova and its wholly owned subsidiary Terra Nova Resources Inc., Australian-Canadian Oil Royalties Ltd. (“ACOR”) and Eli Sakhai (“Sakhai”) on PELs 112 and 444 (the “Terra Nova Farm-In”). The Terra Nova Farm-In provides terms under which Terra Nova may earn a 55% undivided working interest in PEL 112 and PEL 444 (the “Farm-In Interest”).





To earn the entire Farm-In Interest, Terra Nova is required to fund exploration and development expenditures (the “Earning Obligations”) totaling at least AUD$13,700,000 (USD$14,481,000) including:





●
AUD$4,700,000 (USD$4,968,000) which was placed in escrow during May 2012, for use in the completion of a seismic acquisition program sufficient to meet the minimum seismic acquisition requirements, and interpretation of the acquired data for PEL 112 and PEL 444 (earning a 20% working interest in each license); and





●
AUD$4,500,000 (USD$4,757,000) to be placed in escrow on or before November 1, 2012  to secure Terra Nova’s obligation to sole fund  the dry-hole costs of an initial three (3) well drilling program on either PEL 112 or PEL 444, provided that at least one well is drilled on each license (earning a working interest of 5.833% per well in each license, totaling a working interest of 17.5%); and





●
AUD$4,500,000 (USD$4,757,000) to be placed in escrow on or before the later of March 1, 2013 or 45 days following completion or abandonment of the third well in the initial well program, for use in funding the first AUD$4,500,000 in dry-hole costs of an optional three (3) well drilling program on either PEL 112 or PEL 444, provided that at least one well is drilled on each license (earning a working interest of 5.833% per well in each license, totaling a working interest of 17.5%).





Terra Nova will act as contract operator with respect to all seismic acquisition and drilling work contemplated by the Terra Nova Farm-In Agreement.





Costs incurred in relation to the seismic earning obligations in excess of AUD $4,700,000, if any, shall be borne by Terra Nova, ACOR, Sakhai and us in accordance with our Working Interest percentages calculated as though Terra Nova had successfully completed its Earning Obligations and earned the entire Farm-In Interest.





In the event Terra Nova elects to complete either or both of the first two wells drilled in connection with the initial three well drilling program, Terra Nova shall pay 50% of the completion cost and we will pay the other 50% of the completion costs. In the event Terra Nova elects to complete the third well drilled in connection with the initial three well drilling program, or any well drilled in connection with the optional three well drilling program, Terra Nova shall pay 50% of the completion cost, and we, ACOR and Sakhai shall pay the other 50% of the completion costs in accordance with our working interest at the effective date of the Terra Nova Farm-In Agreement.





In the event any well drilled in connection with either the initial or optional drilling programs is commercially viable, and Terra Nova elects to complete such well, Terra Nova is entitled to a preferential recovery of one hundred percent of the costs it has paid to drill and test that successful well. Terra Nova is entitled to 80% of production from that successful well until either that successful well has ceased production or Terra Nova has received net revenue equal to the reimbursable costs it has incurred.





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Terra Nova will earn the Farm-In Interest in stages based upon successful completion of specific Earning Obligations. In each instance, we, ACOR and Sakhai will each contribute a portion of the working interest earned by Terra Nova. In the event Terra Nova earns the entire Farm-In Interest, we, ACOR and Sakhai will transfer to Terra Nova the following working interest percentages in both PEL 112 and PEL 444:





(a)
We will contribute an undivided 38.556% working interest in both PEL 112 and PEL 444 (resulting in a residual working interest position of 28.112% in each license);(b)
ACOR will contribute an undivided 8.222% working interest in both PEL 112 and PEL 444; and


(c)
Sakhai will contribute an undivided 8.222% working interest in both PEL 112 and PEL 444.





The Terra Nova Farm-In Agreement may be terminated by any party upon the occurrence of an uncured breach of any material term. Terra Nova may terminate the Agreement any time before it has earned the Farm-In Interest upon providing written notice of such termination. In the event Terra Nova terminates the Agreement, it shall not be entitled to any interest in either PEL 112 or PEL 444 unless it has satisfied an Earning Obligation with respect to that license.





Terra Nova will act as operator with respect to all seismic acquisition and drilling work contemplated by the Terra Nova Farm-In Agreement.





On February 27, 2012, we terminated a previous farm-in agreement onPEL 112 and PEL 444 with Brandenburg Energy Corp. ("Brandenburg"). Brandenburg’s contract rights were subject to meeting certain milestones including an obligation to pay us AUD$7,400,000 (USD$7,822,000) on or before September 20, 2011. Brandenburg was unable to pay this amount.





Onshore Licenses – Cooper Basin





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. We are obligated to pay 4.63% in royalties on our revenues generated by operations on these licenses.





Heavy rains beginning in February 2010 created wide scale flooding in the Cooper Basin. For nearly eighteen months, the inaccessibility of roads and facilities partially curtailed Cooper Basin oil production and resulted in a general contraction of exploration activity. In late 2010, we applied for, and were granted an extension of our license terms on PEL 112 and PEL 444. Local reconnaissance indicates that residual flooding continues to delay access to lands covered by PEL 444. Accordingly, the Company requested an additional extension of time to complete its work program under that license. On June 22, 2012 the Government of South Australia granted an additinal six (6) month extension of license terms for PEL 444. As a result, the timeframe for acquisition of a minimum of 200 kilometer of 2D seismic data was extended from July 11, 2012 to January 11, 2013, and the overall license term for PEL 444 was extended to January 11, 2015.





Effective January 9, 2012, we were also granted a variation of license terms on PEL 112. Under the variation, the minimum work requirements for PEL 112 License Year Three (3) were exchanged for those of PEL 112 License Year Four (4). As a result, the timeframe for acquisition of 100 kilometers of 2D seismic data was moved from January 10, 2012 to January 10, 2013. Likewise, the timeframe for performance of certain geological and geophysical studies was moved from January 10, 2013 to January 10, 2012. We believe the scope of work performed during 2011 fulfilled the requirements which were to be satisfied by January 2012.


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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 CompletionPEL 112

Acquisition of new seismic data: 2D (100km)

January 10, 2013PEL 112

Drill one well

January 10, 2014PEL 444

Acquisition of new seismic data: 2D (200km)

January 11, 2013PEL 444

Geological and geophysical studies

January 11, 2014PEL 444

Drill one well

January 11, 2015





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 Government of South Australia. Based on technical recommendations, we intend to pursue the acquisition of 3-D seismic data on our licenses.





Fieldwork supporting the acquisition of seismic data on PEL 112 began July 24, 2012. Geokinetics (Australia) Pty. Ltd. undertook the 3D seismic survey on the northern boundary of PEL 112 under the direction of Terra Nova. As of August 8, 2012 approximately 553 kilometers (59%) of line preparation, and 193 kilometers (21%) of survey operations are complete. Seismic acquisition is expected to commence in late August 2012 and will include the acquisition and processing of 127 square kilometers (“sq km”) of 3D data at cost of up to AUD$3.7 million. The survey will identify potential multi-zone drilling targets including the Namur, Hutton and Birkhead shales down to 7,000 feet.




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.





During 2011, we completed Work Area Clearance (“WAC”) on PEL 112. WAC is the process by which anthropologists and representatives of Australia’s Native Title Holders review proposed seismic sites to study topography and insure the acquisition of data does not harm the cultural integrity of the land to be explored. We have also initiated interpretation of the 666 km of 2D seismic reprocessed during 2010.





In addition, we have 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.





Results of Operations





Our consulting, management and professional fees, increased by approximately $495,000 (619%) and $479,000 (307%) for the three and six months ended June 30, 2012, respectively, when compared to the same periods during the prior fiscal year. These increases relate almost entirely to stock based payments made to our directors, officers and principal advisors in connection with our successful completion of the Terra Nova Farm-In Agreement. More specifically, on April 2, 2012, our Board of Directors consented to the distribution of 666,670 shares of the common stock of Terra Nova, to our directors, officers and principal advisors. We received the Terra Nova shares in connection with the Terra Nova Farm-In Agreement. These shares were distributed as compensation for efforts put forth in securing the Terra Nova opportunity. The 666,670 shares had an aggregate value of $193,334, or $0.29 per share. On April 2, 2012 we also granted 1,000,000 shares of our common stock to a consultant whose efforts we judged instrumental in identifying and finalizing the Terra Nova Farm-In Agreement. The grant was conditioned upon the execution of that agreement which occurred on May 11, 2012. The 1,000,000 bonus shares had a fair market value at the date of grant equal to $290,000, or $0.29 per share.





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The office and travel expenses we incurred during the three and six months ended June 30, 2012 remained relatively unchanged from the prior year.





The Australian dollar decreased from 1.038 to 1.016 US dollars and from 1.02 to 1.016 US dollars during the three and six month periods ended June 30, 2012, respectively. As a result, we recognized foreign exchange gains of $112,890 and $6,934 during the respective periods. 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 April 3, 2012, we granted 1,800,000 stock options to our Chief Executive Officer pursuant to the 2009 Non-Qualified Stock Option Plan (See Note 4 to the financial statements which accompany this report for a more detailed discussion). We determined that the total fair market value of the options granted was $104,874. Since the options were entirely vested at the date of grant, we recognized the entire value of the options as stock-based compensation expense during the three and six months ended June 30, 2012. We recognized no expense in connection with the option plan during the three months ended March 31, 2012, since all compensation expense related to the plans had been previously recognized. During the three and six months ended June 30, 2011, we recognized non-cash, stock-based compensation expense of $78,734 and $157,468, respectively in connection with the plan.


In connection with the Terra Nova Farm-In Agreement, Terra Nova paid us cash fees totaling $350,000, and 666,670 shares of its common stock with a fair market value of $193,334. All fees paid by Terra Nova were fully earned upon receipt, and were not repayable to Terra Nova under any circumstances. After an offset of $54,719 in excess fees to be refunded to ACOR and Sakhai, we recognized other income relating to these fees of $388,615 and $488,615 during the three and six months ended June 30, 2012, respectively. We recognized no other income during the three and six months ended June 30, 2011.





On an inception to date basis, we recognized a net loss of approximately $14,095,000. That loss consisted of approximately $9,366,000 in non-cash expense including: stock-based fees and compensation expense of $3,369,000, unrealized foreign exchange loss of $845,000, and a net impairment of oil and gas properties of approximately $5,152,000. In addition, we have incurred $1,671,000 related to the discontinued operations of Endeavor Canada, and approximately $3,462,000 in other net cash expenses, related to exploration stage operations.





Financial Condition, Liquidity and Capital Resources





The execution of the Terra Nova Farm-In Agreement significantly enhances our exploration capacity. On May 11, 2012, Terra Nova closed an equity financing for gross proceeds equal to CAD$10,652,000 (USD$10,663,000). During May 2012, Terra Nova placed AUD$4,700,000 (USD$4,968,000) in escrow for use in the completion of a seismic acquisition program sufficient to meet the minimum seismic acquisition requirements, and interpretation of the acquired data for PEL 112 and PEL 444.The financing was pursued in connection with its undertaking of the Terra Nova Farm-In. To earn the entire Farm-In Interest, Terra Nova is required to fund exploration and development expenditures totaling at least AUD$13,700,000 (USD$14,481,000).





Based upon technical recommendations, we intend to pursue the acquisition of 3-D seismic data on our licenses. The current Cooper Basin exploration plan also calls for the drilling, abandonment or completion, and possible equipping of six wells. Early estimates indicate the costs to perform the work outlined in our Cooper Basin exploration plan would range from $26 million to $29 million. Under the terms of the Terra Nova Farm-In, we estimate that of that amount, Terra Nova would bear $21 to $22.5 million, we would bear $4.0 to 5.0 million and our other working interest partners would bear $1.0 to $1.5 million, of planned exploration costs.





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.





In connection with the Terra Nova Farm-In Agreement, Terra Nova paid us cash fees totaling $350,000. We determined that $54,719 of the cash fees paid by Terra Nova were refundable to ACOR and Sakhai under the terms of a cost sharing agreement with them. Of that amount, we have withheld $37,340 as a recovery of exploration costs payable to it by ACOR and Sakhai.


14





During fiscal 2011, we received non-refundable contract payments totaling $261,212 in connection with our farm-in agreement with Brandenburg. Of the contract payments received, $221,118 were classified as contract advances, and $40,094, which had been incurred on contract related expenditures during the three months ended June 30, 2011, were recognized as other income. During the six months ended December 31, 2011, contract advances totaling $213,958 were used to offset Brandenburg transaction expenses and the costs associated with work area clearance and the acquisition of seismic data on PEL 112 and PEL 444. We terminated the Brandenburg farm-in agreement on February 27, 2012. As a result, the remaining balance of $7,160 in contract advances was recognized as other income during the six months ended June 30, 2012.





On March 1, 2012, we executed a promissory note in the principal amount of $100,000 with a consultant who is also a shareholder. The note was non-interest bearing and payable upon demand. The entire amount of the note was repaid on March 23, 2012.





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 and six months ended June 30, 2012, we paid administrative fees totaling $15,000 and $30,000, using 50,911 and 123,097 shares of its common stock, at approximate weighted average prices of $0.295 and $0.244 per share, respectively. 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 June 30, 2012.





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, may be limited due to tightened credit markets. In addition, the results of our operations will be significantly impacted by a variety of trends and factors including; (i) our exploration success and the marketability of future production, if any, (ii) increasing competition from larger companies, (iii) future fluctuations in the prices of oil and gas, and (iv) our ability to maintain or increase oil and gas production through exploration and development activities.





We believe our plan of operations may require up to $14 million for exploration costs and administrative expenses over the twelve-month period ending July 31, 2013. We anticipate Terra Nova will bear up to $11.5 million of that amount. We are attempting to raise investment capital to cover our portion of anticipated costs.





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 August 14, 2012 we did not have any off balance sheet arrangements.





As of August 14, 2012 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, the treatment of contract fees paid in connection with our Oil and Gas Farm-In Agreements with Brandenburg and Terra Nova, 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, 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" (based on the average of first-day-of-the-month pricing), 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 June 30, 2012, 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 June 30, 2012, 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 basis. 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 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 are in a net loss position.





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 June 30, 2012, 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.





17





PART II - OTHER INFORMATION





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





On April 2, 2012 we issued 1,000,000 shares of our common stock in payment of services to a consultant whose efforts we judged instrumental in identifying and finalizing the Agreement with Terra Nova. The grant was conditioned upon the execution of the Agreement which occurred on May 11, 2012. The 1,000,000 shares had a fair market value at the date of grant equal to $290,000, or $0.295 per share.





On June 30, 2012, we issued 50,911 shares of our common stock at a weighted average price of approximately $0.29 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 shares. There was no general solicitation in connection with the offer or sale of these shares. The purchasers acquired the shares for their own accounts. The certificates representing the shares will 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 Exhibits10.1

Terra Nova  Oil & Gas Farm-In Agreement, PELs 112 and 444 dated May 11, 2012(1)10.2

Letter Agreement – Transaction Cost Sharing (Terra Nova Farm-Out) dated April 26, 2012(1)31.1

Rule 13a-14(a) Certifications31.2

Rule 13a-14(a) Certifications32

Section 1350 Certifications


____________


(1)
Incorporated by reference to Exhibits 10.1 and 10.2 to the Company’s Form 10-Q filed May 15, 2012.





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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 CORPORATIONDate: August 14, 2012
By:
/s/ Mark StevensonMark Stevenson,

Principal Executive OfficerDate: August 14, 2012
By:
/s/ Robert WesolekRobert Wesolek,

Principal Financial and Accounting Officer