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 September 30, 2010




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) had been subject to such filing requirements for the past 90 days.  Yes þ No  ̈




Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).


Yes  ̈     No  ̈




Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):




Large accelerated filer  ̈
Accelerated filer  ̈Non-accelerated filer  ̈

(Do not check if a smaller reporting company)
Smaller reporting company þ




Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).  Yes  ̈ No þ




Class of Stock

No. Shares Outstanding

DateCommon

107,237,820

November 3, 2010













PART I FINANCIAL INFORMATION




ITEM 1.
FINANCIAL STATEMENTS









HOLLOMAN ENERGY CORPORATION(An Exploration Stage Company)CONSOLIDATED BALANCE SHEETS  September 30, 2010


December 31, 2009(Unaudited)ASSETSCURRENT ASSETSCash

$
244,589


$
1,089,456Other receivable


4,540



3,425Prepaid expenses


22,615



12,037271,744



1,104,918Oil and gas properties, full cost method, unproven


16,624,312



16,456,220Total Assets

$
16,896,056


$
17,561,138LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities

$
298,315


$
270,674298,315



270,674Deferred tax liability


4,573,718



4,191,070Total Liabilities


4,872,033



4,461,744STOCKHOLDERS' EQUITYAuthorized:10,000,000 preferred shares, par value $0.001 per share150,000,000 common shares, par value $0.001 per shareIssued and outstanding :107,237,820 common shares (107,237,820 at December 31, 2009)


107,238



107,238Additional paid in capital


24,794,390



23,806,998Accumulated other comprehensive loss


(11,859
)


(2,926
)Deficit accumulated during the exploration stage


(12,865,746
)


(10,811,916
)Total Stockholders' Equity


12,024,023



13,099,394Total Liabilities and Stockholders' Equity

$
16,896,056


$
17,561,138
   The accompanying notes are an integral part of these financial statements.






1











HOLLOMAN ENERGY CORPORATION(An Exploration Stage Company)CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)  Cumulative resultsfrom May 5, 2006 to


Three Months Ended September 30,


Nine Months Ended September 30,September 30, 2010


2010


2009


2010


2009CONTINUING OPERATIONSConsulting

$
1,204,769


$
37,404


$
54,959


$
276,416


$
207,836Foreign exchange loss


659,832



568,690



1,295,762



388,485



1,298,695Gain on settlement of debt


(40,026
)


-



(1,963
)


-



(1,963
)Management and directors fees


903,725



70,650



159,025



233,650



209,025Stock-based compensation expense


2,130,769



228,971



764,168



987,392



764,168Office, travel and general


576,521



54,745



13,778



119,509



46,772Professional fees


520,621



35,468



44,796



48,378



66,844Salaries, wages, and benefits


86,666



-



-



-



-General  and Administrative Expenses


(6,042,877
)


(995,928
)


(2,330,525
)


(2,053,830
)


(2,591,377
)Oil and gas property impairment


(7,396,207
)


-



-



-



(2,908,010
)Deferred income tax recovery


2,244,107



-



-



-



-Loss from Continuing Operations


(11,194,977
)


(995,928
)


(2,330,525
)


(2,053,830
)


(5,499,387
)DISCONTINUED OPERATIONSNet Loss from Discontinued Operations


(2,454,637
)


-



-



-



-Gain on Disposal of Endeavor


783,868



-



-



-



-Loss from Discontinued Operations


(1,670,769
)


-



-



-



-NET LOSS

$
(12,865,746
)

$
(995,928
)

$
(2,330,525
)

$
(2,053,830
)

$
(5,499,387
)BASIC AND DILUTED NET LOSS FROMCONTINUING OPERATIONS PER COMMON SHARE





$
(0.01
)

$
(0.02
)

$
(0.02
)

$
(0.06
)BASIC AND DILUTED NET LOSS FROMDISCONTINUED OPERATIONS PER COMMON SHARE





$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.00
)BASIC AND DILUTED NET LOSSPER COMMON SHARE





$
(0.01
)

$
(0.02
)

$
(0.02
)

$
(0.06
)WEIGHTED AVERAGE NUMBER OF BASIC ANDDILUTED COMMON SHARES OUTSTANDING






107,237,820



104,645,000



107,237,820



97,225,607
   The accompanying notes are an integral part of these financial statements.






2










HOLLOMAN ENERGY CORPORATION(A Exploration Stage Company)CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited) 
 Cumulative resultsfrom May 5, 2006 to


Nine Months Ended September 30,September 30, 2010


2010


2009OPERATING ACTIVITIESNet loss

$
(12,865,746
)

$
(2,053,830
)

$
(5,499,387
)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
)


-



(1,963
)Stock-based compensation and fee payments


2,647,019



987,392



876,168Unrealized foreign exchange loss


601,550



373,715



1,291,087Impairment of oil and gas properties (net of tax recovery)


5,152,100



-



2,908,010Changes in non-cash working capital itemsOther receivable


(4,540
)


(1,115
)


(529
)Prepaid expenses


(22,615
)


(10,578
)


(2,772
)Accounts payable and accrued liabilities


473,466



27,641



(46,094
)Cash used in operating activities


(3,137,959
)


(676,775
)


(475,480
)FINANCING ACTIVITIESFinancing activities from discontinued operations


2,000,261



-



-Common stock issued for cash


3,325,001



-



-Loans payable


50,567



-



-Due to related parties


1,343,831



-



(840,000
)Cash provided (used in) by financing activities


6,719,660



-



(840,000
)INVESTING ACTIVITIESInvesting activities from discontinued operations


(1,447,739
)


-



-Petroleum and natural gas expenditures


(1,262,582
)


(168,092
)


(49,975
)Cash acquired on acquisition


12,696



-



-Deposit on acquisition


(639,487
)


-



-Deposits


-



-



-Cash used in investing activities


(3,337,112
)


(168,092
)


(49,975
)CHANGE IN CASH


244,589



(844,867
)


(1,365,455
)CASH, BEGINNING


-



1,089,456



1,763,998CASH, ENDING

$
244,589


$
244,589


$
398,543SUPPLEMENTAL DISCLOSURE:Cash paid for Interest

$
9,908


$
-


$
-Cash paid for income taxes

$
-


$
-


$
-NON-CASH ACTIVITIES:Shares issued on conversion of management fees

$
200,000


$
-


$
-Shares issued on conversion of liabilities

$
2,641,879


$
-


$
938,592Shares issued for property acquired

$
15,903,000


$
-


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


3









NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


September 30, 2010


(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 have been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K/A, filed with the SEC. The interim unaudited financial statements should be read in conjunction with those financial statements included in the Form 10-K/A. 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 nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.




Recent Accounting Pronouncements




The Company has reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. It does not expect the adoption of these pronouncements to have a material impact on its financial position, results of operations or cash flows.




2.
OIL AND GAS PROPERTIES




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




The Company has a 66.67% working interest in two licenses (PEL 112 and PEL 444) located in the Cooper/Eromanga Basin, in the State of South Australia.




On June 11, 2008 the Australian government consolidated two of the Company’s oil and gas licenses (PEL 108 and PEL 109) into one license (PEL 444). In connection with that consolidation, the government also extended the license term and associated work programs for PEL 444 and PEL 112 by five years. During August 2010, the Company applied for, and was granted, an additional seven (7) month extension of these licenses.




The Company is currently party to a contingent agreement with Holloman Oil & Gas Limited (“HOG”), an Australian corporation, which potentially grants HOG its working interest in PEL 112. To earn its working interest, HOG agreed to:




●
Fund the costs required to drill, and if warranted, complete three wells on 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.





4






In the event the agreement is pursued, the Company has the right to earn up to a 33.33% working interest in the PEL 112 license 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 officers/directors are officers and/or directors and shareholders in Holloman Corporation, which holds a 100% interest in HOG.




3.        STOCK-BASED COMPENSATION




During the three and nine month periods ended September 30, 2010 the Company recognized $228,971 and $987,392, respectively, of non-cash expense related to share-based compensation under its 2009 Non-Qualified Stock Option Plan (the “Option Plan”). As of September 30, 2010, $275,568 of total unrecognized compensation cost remains under the Option Plan. Of this amount, $78,733 is expected to be recognized during the remainder of 2010, and $196,835 during 2011.


5







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/A, filed with Securities Exchange Commission on April 1, 2010, and, from time to time, in other reports we file with the U.S. Securities and Exchange Commission. These factors may cause our actual results to differ materially from any forward-looking statement. We disclaim any obligation to publicly update these statements, or disclose any difference between our actual results and those reflected in these statements.




ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




The following discussion and analysis of our financial condition and plan of operations should be read in conjunction with our unaudited financial statements and related notes included as part of this report and our Form 10-K/A, for the year ended December 31, 2009 filed with Securities Exchange Commission on April 1, 2010.




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.




The acquisition and disposal of Endeavor Canada




On August 3, 2007 we acquired Endeavor Canada, an Alberta corporation involved in the exploration and development of oil and gas, for 9,000 shares of our Series A Preferred stock and 9,000,000 shares of the Class A Preferred stock of our wholly owned subsidiary, First Endeavor Holdings. Cameron King, one of our former officers and directors, owned a controlling interest in Endeavor Canada at the time of this transaction and received 6,500 Series A Preferred shares and 6,500,000 First Endeavor Holdings Class A Preferred shares in exchange for his shares in Endeavor. For accounting purposes, our acquisition of Endeavor Canada constituted a recapitalization and the acquisition was accounted for similar to a reverse merger whereby we were deemed to have been acquired by Endeavor Canada.




During January 2008, we determined that the oil and gas assets held by Endeavor Canada did not warrant further investment. On February 15, 2008 we sold our interest in Endeavor Canada to Cameron King. As part of the consideration for the purchase, the 6,500 shares of our Series A Preferred stock and the 6,500,000 Class A Preferred shares of First Endeavor Holdings previously issued to Mr. King were returned to us and cancelled. At the time of the sale, the assets of Endeavor Canada included all of our Canadian oil and gas properties.




Oil and gas properties




In May 2007 we acquired a 62.5% working interest in an offshore Australian oil and gas exploration permit area known as Victoria Permit 60 (“Vic P60”). We paid $639,487 in cash plus a 4.00% overriding royalty participation for this interest.




On November 21, 2007 we acquired Holloman Petroleum Pty. Ltd. (“Holloman Petroleum”) for 18,600,000 shares of our common stock with a fair market value of $15,903,000.  At the time of purchase, Holloman Petroleum’s assets consisted of working interests, varying between 37.5% and 100%, in seven oil and gas permits awarded by the Australian government. These permits, which had remaining terms expiring between October 2010 and June 2013, covered 4,554 square kilometers (1,125,317 acres) of land in the Cooper/Eromanga Basin and 2,589 square kilometers (639,755 acres) offshore in the Gippsland Basin and the Barrow Sub-Basin.





6




Onshore licenses –Cooper Basin




We hold working interests of 66.67% in two onshore Petroleum Exploration Licenses (PELs) in Australia. PEL 112 is comprised of 2,196 square kilometers (542,643 gross acres). PEL 444 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. We are obligated to pay 4.46% in royalties on our revenues generated by operations on these licenses.




The Department of Primary Industries and Resources of South Australia reports that the Cooper Basin has sourced over 4 billion barrels of oil and 5 trillion cubic feet of recoverable gas. It has in excess 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.




On March 7, 2008 we entered into a contingent agreement with Holloman Oil & Gas Limited (“Holloman Oil & Gas”). If pursued, the agreement grants Holloman Oil & Gas the right to earn our two-thirds working interest in PEL 112. 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.




Under the contingent agreement, we would 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 would 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 an exploratory well on PEL 112. The well was drilled to approximately 6,000 feet and was a dry hole.




In June 2008 the Australian government extended the license 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.




Heavy rains beginning in February 2010 created wide scale flooding in the Cooper Basin. The inaccessibility of roads and facilities has partially curtailed Cooper Basin oil production and resulted in a general contraction of exploration activity. Flood waters have begun to recede, but exploration within substantial areas of the Basin remains temporarily impractical. As a result of the flooding, we applied for, and were granted a seven (7) month extension to our license terms on PEL 112 and PEL 444. We continue the necessary steps to obtain “Work Area Clearances” and plan for the acquisition of additional targeted 3D and 2D seismic data on these licenses.




We are currently investigating the acquisition of additional Australian-based assets to diversify our onshore exploration efforts and moderate the land-access risks, such as the flooding, we’ve faced in the past.




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, 2012PEL 112

Geological and geophysical studies

January 10, 2013PEL 112

Drill one well

January 10, 2014PEL 444

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

January 10, 2012PEL 444

Geological and geophysical studies

January 10, 2013PEL 444

Drill one well

January 10, 2014





7







The farmin agreement through which we hold our working interests in PEL 112 and PEL 444 also obligates us to fulfill the drilling commitment established by the Australian Government. Based on technical recommendations, we intend to pursue the acquisition of a combination of 3D and 2D seismic data on our licenses. Our current exploration plan also calls for the drilling of more than the two wells required by the minimum work program.




During 2010, we completed processing of 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 geological and geophysical expertise and lengthy work experience in the Cooper Basin. The processing sequence targeted lines which complimented our technical assessment of likely drilling prospects and future seismic acquisition.





We have also completed a broad range of technical studies relating to PEL 112 and PEL 444. The studies were performed by Isis and included; a) a review of Cooper Basin exploration acreage (including an analysis of the chronostratigraphy, an assessment of neighboring exploration results, an analysis of petroleum systems and a probabilistic volumetric assessment of leads), b) oil migration studies, c) adjacent oil pools studies, and d) economic feasibility studies. In the opinion of management, the results of these studies has increased the prospectivity of both licenses.





During the 2010 license year, we retained Macquarie Tristone (“Tristone”) to assist us in finding a joint venture partner to share all, or part, of the costs of exploring and developing our Cooper Basin concessions. We have paid Tristone work fees of $241,615, and have promised to pay additional net fees ranging between CAD$550,000 and CAD$750,000 if Tristone is successful in arranging a transaction acceptable to us. We are under no obligation to complete any transaction proposed as a result of this process.




In connection with that search, Tristone prepared and managed data rooms presenting technical, environmental and economic information related to our Cooper Basin holdings. We received multiple offers or firm expressions of interest from potential joint venture partners as a result of this process. We believe the results and timing of our joint venture negotiations have been negatively affected by the flooding. We are currently finalizing discussions related to the interest generated by Tristone. We are also pursuing discussions with an additional joint venture candidate whose interest has arisen outside the Tristone process.




During 2010, we have actively sought joint venture partners for our oil and gas concessions and pursued financing to support seismic acquisition in the Cooper/Eromanga Basin. During 2011, we anticipate the establishment of one or more joint ventures, obtaining additional capital, and the pursuit of our Cooper Basin exploration plan.





Offshore permits – Gippsland Basin and Barrow Sub-Basin




In May 2007 we acquired a 62.5% working interest in an offshore Australian oil and gas exploration permit area known as Victoria Permit 60 (“Vic P60”). In connection with our acquisition of Holloman Petroleum we acquired the remaining 37.5% working interest in that permit. The Barrow Sub-Basin permits were also acquired through our acquisition of Holloman Petroleum.




The Vic P60 permit obligated us to drill a deep-sea exploration well by October 28, 2010. The Barrow Sub-Basin permits (WA-372P, WA-373P and WA-395P) required us to drill 12 offshore exploration wells between June 2010 and June 2013. Both the Barrow and Vic P60 permits also required the acquisition of significant amounts of 3D seismic data. Early estimates indicated the costs to perform the required work on the Barrow and Vic P60 permits would be in excess of $220,500,000.




Despite our best efforts, we were unable to identify a joint venture partner willing to undertake the obligations associated with those permits, and felt it unlikely that we could do so in the current economic climate. Our work requirements to hold the permits had fallen behind schedule. Further, we recognized that continued pursuit of these permits would detract from our ability to maximize the value of our Cooper/Eromanga Basin holdings. As a result, we determined that it was in our best interest to relinquish our exploration rights in our offshore permits.








8




On June 18, 2009 we requested procedural advice from the Australian government concerning relinquishment of our Barrow Sub-Basin permits. On August 5, 2009 the government returned a Notice of Intent to Cancel those permits. On October 16, 2009 the permits were cancelled.




On December 28, 2009 we requested procedural advice from the Australian government concerning relinquishment of the Vic P60 permit. On April 16, 2010 the government returned its final Notice of Intent to Cancel that permit. The Vic P60 permit was subsequently cancelled.




Results of Operations




Total consulting, management, office, travel and professional expenses for the nine month period ended September 30, 2010 increased by approximately $147,000 (28%), when compared to the same period during the prior year. This increase relates primarily to consulting fees and travel expenses incurred during 2010 in our search for joint venture partners. For the three month period ended September 30, 2010, total consulting, management, office, travel and professional expenses decreased by approximately $74,000 (27%) when compared to the same period during the prior year. This decrease primarily reflects the impact of a one-time grant of $112,000 in stock-based compensation provided to our officers and directors during 2009.




The Australian dollar increased from .85 to .97 US dollars and from .89 to .97 US dollars during the three and nine month periods ended September 30, 2010, respectively. As a result, we recognized foreign exchange losses of $568,690 and $388,485 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 August 15, 2009, we established a Non-Qualified Stock Option Plan. In connection with that plan, we recognized non-cash, stock-based compensation expense of $228,971 and $987,392 during the three and nine month periods ended September 30, 2010, respectively.




We have recognized inception to date net losses of approximately $12,866,000. Those losses include non-cash stock-based compensation expense of $2,131,000, the net impact of the discontinued operations of Endeavor Canada totaling $1,671,000 and a net impairment of oil and gas properties of approximately $5,152,000 related to the relinquishment of our offshore concessions. Residual losses relate to exploration stage operations.




Financial Condition, Liquidity and Capital Resources




The oil and gas industry is cyclical in nature and tends to reflect general economic conditions. The US and other world economies are recovering from a recession which continues to inhibit investment liquidity. Though improved, fluctuating oil and gas prices provide additional uncertainty in capital markets. Our access to capital, 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. 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 capital remains unavailable for an extended period, the value of our oil and gas leases may be impaired.




Our Cooper Basin exploration plan calls for the expenditure of approximately $10 million prior to November 30, 2011. Based upon technical recommendations, we intend to pursue the acquisition of a combination of 2-D and 3-D seismic data on our licenses. During 2010, we substantially completed processing of more than 666 km (414 miles) of 2D seismic data. We expect to pay approximately $150,000 in connection with that effort. Our current exploration plan also calls for the drilling of more than the two wells required by the minimum work program. Early estimates indicate the costs to perform the work outlined in our current Cooper Basin exploration plan would range from $27 million to $30 million.




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.





9




Effective October 1, 2010, we terminated an administrative services agreement with our largest shareholder, Holloman Corporation (the “Old Services Agreement”). Under the Old Services Agreement, fees of $50,000 per month were payable to Holloman Corporation. We had previously amended the Old Services Agreement to suspend contemplated services and fees through September 30, 2010. As a result, no such fees were incurred during 2009 or the three and nine month periods ended September 30, 2010.




Effective October 1, 2010, we executed a new administrative services agreement with Holloman Corporation (the “New Services Agreement”). Under the New Services 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. The New Services Agreement can be terminated by either party with 30-days notice.




Other than the obligations associated with our oil and gas concessions in Australia, we had no material future contractual obligations as of September 30, 2010.




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.




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




We believe our plan of operations may require up to $11,000,000 for exploration costs and administrative expenses over the twelve-month period ending November 30, 2011. 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 licenses.




If we are unable to raise the financing we need, our business plan may fail and our stockholders could lose their investment. If we are unable to perform in accordance with the work programs required by our licenses, the Australian government could cancel our exploration rights. There can be no assurance that we will be successful in raising the capital we require, or that if capital is offered, it will be subject to terms we consider acceptable. Investors should be aware that even in the event we are able to raise the funds we require, there can be no assurance that we will succeed in our drilling or production plans and we may never be profitable.




As of November 3, 2010 we did not have any off balance sheet arrangements.




As of November 3, 2010 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.





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Petroleum and natural gas properties




We utilize the full cost method to account for our investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, capitalized interest costs relating to unproved properties, geological expenditures, tangible and intangible development costs, including direct internal costs are capitalized to the full cost pool. When we commence production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Costs of unproved properties are not amortized until the proved reserves associated with the projects can be determined or until impairment occurs. If an assessment of such properties indicates that properties are impaired, the amount of impairment is added to the capitalized cost base to be amortized.




The capitalized costs included in the full cost pool are subject to a "ceiling test", which limits such costs to the aggregate of the (i) estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on annual average 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 September 30, 2010, 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.




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. Foreign currency transactions recorded on the books of our Australian subsidiary use period end rates to measure monetary assets and liabilities, historical rates for historical cost balances, and average rates for expenses. Transaction gains and losses are included in the determination of income. Foreign currency transactions are primarily undertaken in Canadian and Australian dollars. As of September 30, 2010, we have not 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.





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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 September 30, 2010, our disclosure controls and procedures were not 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 reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.




There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.





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PART II -OTHER INFORMATION




ITEM 6.
EXHIBITS




Exhibit




Number

Description of Exhibits31.1

Rule 13a-14(a) Certifications31.2

Rule 13a-14(a) Certifications32

Section 1350 Certifications








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SIGNATURES




Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




HOLLOMAN ENERGY CORPORATIONDate: November 5, 2010

/s/ Mark StevensonMark Stevenson, Principal Executive OfficerDate: November 5, 2010

/s/ Robert WesolekRobert Wesolek, Principal Financial andAccounting Officer