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
o
Non-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
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 has been no material changes in the information disclosed in the notes to the consolidated financial statements for the year ended December 31, 2015 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 month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
Risks and Uncertainties
In December 2015 one well was drilled on PEL 444 which was not successful. The Company plans to raise additional capital to support the exploration and completion of those additional wells identified if they are anticipated to be productive and economical.
The Company’s activities are subject to significant risks and uncertainties; including failing to secure additional capital to complete the Company’s productive wells.
2. OIL AND GAS PROPERTIES
At March 31, 2016, the Company holds a working interest in two onshore Petroleum Exploration Licenses (PELs) in Australia. A 48.5003% working interest in PEL 112 and a 53.3336% working interest in PEL 444, of which 4.8333% is currently under dispute. PEL 112 is comprised of 1,086 square kilometers (268,356 gross acres, 130,153 net acres), and PEL 444 is comprised of 1,166 square kilometers (288,117 gross acres, 139,739 net acres). Both licenses are located on the southwestern flank of the Cooper Basin in the State of South Australia. All of 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.
3. SUBSEQUENT EVENTS
On May 4th, 2016 the Company filed Form 15 to delist and deregister from the OTCQB Venture Marketplace which immediately suspended Holloman’s obligation to file reports with the SEC.
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, filed with the U.S. Securities Exchange Commission (“SEC”) on March 30, 2016, 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.
6
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 consolidated financial statements and related notes included as part of this report and our Form 10-K, for the year ended December 31, 2015 filed with the SEC on March 30, 2016.
We were incorporated on May 14, 2004 in Nevada. Between May 2004 and May 2007 we were relatively inactive. In May 2007, we directed our focus to the acquisition, exploration, and development of oil and gas properties. We are currently controlled by Holloman Corporation, a Texas corporation involved in the engineering and construction of pipelines and mid-stream gas processing facilities.
All of our exploration and development efforts are concentrated in Australia. We currently hold working interests in two onshore Petroleum Exploration Licenses (PELs) located on the southwestern flank of the Cooper Basin in the State of South Australia.
The South Australian Energy Resources Division of the Department of State Development (DSD) reports that the SA portion of the Cooper/Eromanga Basin has produced over 175 million barrels of oil, 5.2 trillion cubic feet of gas and 160 million equivalent barrels of LPG and condensate. It has in excess of 150,000 line kilometers of 2-D and 3-D seismic data, over 2,300 wells and more than 103 oil and 165 gas fields. From January 2002 through December 2012, 195 exploration wells and 85 appraisal/development wells were drilled in and around the SA Cooper Basin. Most wells have targeted oil, however both oil and gas have been discovered. Hydrocarbons were found in 89 of these wells (46% technical success rate) and 76 of these wells were cased and suspended as future producers (39% commercial success rate). Our management believes that Australia provides a stable regulatory, tax and business environment in the oil and gas sector.
On July 23, 2013, Terra Nova spudded the Wolfman #1 exploration well on PEL 112. No oil shows were observed in the primary and secondary oil objectives, and the well was plugged and abandoned.
On December 9th, 2015 we participated in drilling the Baikal #1exploration well on PEL 444. The Baikal #1 did not encounter any hydrocarbons.
As of May 13, 2016 we did not have any proven oil or gas reserves and we did not have any revenue.
Our Australian assets
Onshore licenses – Cooper Basin
We currently hold working interests in PEL 112 and PEL 444 in Australia. Both licenses are located onshore on the southwestern flank of the Cooper Basin in the State of South Australia. Our oil and gas properties are unproven. We are obligated to pay royalties of 4.53% on our revenues generated by operations on these licenses.
PEL 112 is comprised of 1,086 square kilometers (268,356 gross acres, 130,155 net acres), and PEL 444 is comprised of 1,166 square kilometers (288,117 gross acres, net acres). We originally held a 66.667% working interest in both licenses.
Effective May 11, 2012, we entered into an Oil and Gas Farm-In Agreement with Terra Nova Energy Ltd., and its wholly owned subsidiary Terra Nova Resources Inc. (“Terra Nova”), Chelsea Oil & Gas Ltd., formerly Australian-Canadian Oil Royalties Ltd. (“ACOR”) and Eli Sakhai (“Sakhai”) on PEL 112 and 444. The Farm-In Agreement provided terms by which Terra Nova could earn up to a 55% undivided working interest in our Australian licenses in exchange for undertaking certain exploration obligations.
On May 19, 2015 Terra Nova terminated the Farm-In Agreement and forfeited the right to earn additional interest.
7
During November 2013, we applied for our final five-year renewal of PEL 112. On December 18, 2013, the Government of South Australia accepted our application and offered to renew PEL 112 in accordance with our suggested terms. In connection with that renewal, we identified and relinquished one-third of the original acreage covered by PEL 112. The remaining license acreage contains all areas over which 2D and 3D seismic has been acquired, and all existing leads and prospects. We believe the acreage we relinquished was non-prospective. On March 12, 2014, the Government of South Australia finalized its renewal of PEL 112. As a result, we now hold a 48.5003% working interest in PEL 112 until January 10, 2019.
During December 2015, the Company applied for a five-year renewal of its license on PEL 444. In connection with its application, the Company offered to relinquish 1,192 square kilometers (294,549 acres) of the area covered by that license. The Government of South Australia accepted the Company’s application and finalized its renewal of PEL 444. The Company’s management believes the acreage relinquished in connection with this renewal was non-prospective, and intends to develop the prospects identified on its remaining acreage in that concession.
As a result of the assignments, at December 31, the Company holds 48.5003% working interest in PEL 112 and 53.3336% working interest in PEL 444, of which 4.8333% is currently under dispute. Perseville Investing Inc. holds 30.833% and Terra Nova holds 20.667% in PEL 112 and 31.833% and 14.8334% respectively in PEL 444 of which a total of 5.8333% is currently under dispute.
To maintain our exploration rights in the Cooper/Eromanga Basin, the Australian Government requires that we fulfill the following minimum work commitments:
PEL 112 is comprised of 1,086 square kilometers (268,356 gross acres, 130,153 net acres).
Acquisition of 127 square kilometers of 3D seismic data on PEL 112 (the “Mulka Survey”) was completed in late September 2012. The Mulka Survey fulfilled our minimum work requirements for PEL 112 License Year Four. Geokinetics (Australia) Pty. Ltd. undertook the Mulka Survey on the northern boundary of PEL 112 under the direction of Terra Nova. During February 2013, we received copies of the Mulka Survey data and interpretation from Terra Nova. As a result, Terra Nova completed its seismic earning obligation with respect to PEL 112, and earned an undivided 20% working interest in that license.
Seven drilling targets were identified as a result of the final interpretation of the Mulka Survey data. We believe our primary drilling targets are similar geologically to producing structures observed in existing oil pools (including the Butlers, Perlubie and Parsons fields) located to the north of PEL 112 on the Cooper Basin’s western-flank. Seismic interpretation indicates that all primary targets display 4-way structural closures.
Work Area Clearance (“WAC”) on PEL 112 access roads and drill site locations began April 20, 2013 and was completed on April 22, 2013. WAC is the process by which anthropologists and representatives of Australia’s Native Title Holders review exploration sites to insure planned activity does not harm the cultural integrity of the land to be explored.
8
On July 23, 2013, Terra Nova spudded the Wolfman #1 exploration well on PEL 112. The well’s primary oil objective, the Namur Sandstone, was encountered at approximately 1,197 meters (3,927 feet) on August 6, 2013. Drilling continued to its secondary targets in the Birkhead formation and Hutton sandstones. Wolfman #1 reached Total Depth of 1,703 meters (5,587 feet), on August 7, 2013. No oil shows were observed in the primary and secondary oil objectives, and the well was plugged and abandoned. The entire cost of the well was paid by Terra Nova in accordance with the terms of the Terra Nova Farm-In Agreement.
The drilling of Wolfman #1 fulfilled our minimum work requirement for PEL 112 License Year Five. 3D Sesimic data has been acquired on only 11.7% (31,382 of 268,356 gross acres) of the land comprising PEL 112. We believe significant potential remains for future seismic to identify migration trends and additional prospects on PEL 112 during the next exploration term.
As a result of drilling the Wolfman #1, Terra Nova earned an additional undivided 5.8333% working interest in PEL 112.
On May 19, 2015 Terra Nova terminated the Farm-In Agreement and forfeited its right to earn any additional working interest in the license.
PEL 444
PEL 444 is comprised of 1,166 square kilometers (288,117 gross acres, 153,663 net acres).
Acquisition of 80 square kilometers of 3D seismic data on PEL 444 (the “Wingman Survey”) began May 28, 2013 and was completed July 2, 2013. The Wingman Survey was conducted over a portion of PEL 444 that lies within the "Western Margin" of the Cooper Basin, which is generally considered highly prospective. This trend is being actively drilled by adjacent licensees including Senex Energy and Beach Energy.
During February 2014, Terra Nova finalized its interpretation of the Wingman Survey data and earned a 20% working interest in PEL 444.
On May 19, 2015 Terra Nova terminated the Farm-In Agreement and forfeited its right to earn any additional working interest in the license. We are currently disputing rights to operatorship with Terra Nova. Regardless of the outcome of the dispute, we have moved forward with our drilling program on a cooperative basis with our joint interest partners. In that connection we plan to obtain the financing required to fulfill our drilling obligations on a timely basis.
On December 3, 2015 the Baikal #1 Exploration well on PEL 444 was spudded. The Baikal #1 did not encounter hydrocarbons and was plugged and abandoned.
On December 31, 2015, the Company applied for a further five–year term on PEL 444. The Government of South Australia accepted the application which extends the work obligations under the license to January 11, 2021.
Working Interest Ownership
In 2014, ACOR assigned its 12.8332% working interest in PEL 112 and 444 to Perseville Investing Inc. Perseville Investing Inc. assumed all obligations related to the working interest in PEL 112 and PEL 444 previously held by ACOR.
In February 2015, Terra Nova sold a 5.1666% working interest to Perseville Investing Inc. in PEL 112 and PEL 444 for a total of $3,000,000.
The working interest ownership in our Australian licenses as of March 31, 2016 is shown below:
PEL 112
PEL 444
Holloman
48.5003
%
53.3336
% (1)
Terra Nova
20.6667
%
14.8334
%
Perseville Investing
30.833
%
31.8330
%
(1) The ownership of a 5.83333% working interest is in dispute with Terra Nova. The termination of the Farm-in Agreement prior to Terra Nova drilling a well on PEL 444 resulted in Terra Nova’s obligation to return a 5.8333% working interest that was provisionally transferred to Terra Nova in anticipation of Terra Nova drilling a well on that license.
9
Results of Operations
Our combined consulting, management and professional fees for the three months ended March 31, 2016, increased by approximately $11,000 or 40% (from $26,403 to $36,982) when compared to the same period during the prior fiscal year. This increase relates entirely to professional fees incurred. The change in office, travel and administrative expenses for the three month period ended March 31, 2016 was immaterial ($1K).
During the three months ended March 31, 2016 and 2015, we incurred interest expense of $11,638 and $195, respectively. This increase in interest expense results from our outstanding loans payable in the amount of $1,905,000.
The Australian dollar increased from 0.730 to 0.767, and decreased from 0.816 to 0.769 US dollars during the three month period ended March 31, 2016 and 2015, respectively. As a result, we recognized a foreign exchange loss of approximately $237,000 and a gain of $268,000, respectively, during those periods. Substantially all of our non-cash foreign exchange gains and losses relate to the measurement of US dollars required to settle deferred taxes payable to the Australian Government in connection with our acquisition and ongoing investment in PEL 112 and PEL 444.
The total drilling expenditures impaired for the Baikal #1 for year ended December 2015, have been adjusted to reflect a recovery of USD$267,204 (AUD $348,466) identified as at March 31, 2016.
Financial Condition, Liquidity and Capital Resources
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.
Effective October 1, 2010, we executed an administrative services agreement with our controlling shareholder. Under this agreement, fees of $5,000 per month are payable to Holloman Corporation covering; office and meeting space, supplies, utilities, office equipment, network access and other administrative facilities costs. These fees are payable quarterly in shares of our restricted common stock at the closing price of the stock on the last trading-day of the applicable monthly billing period. This administrative services agreement can be terminated by either party with 30-days’ notice. During the three months ended March 31, 2016, we paid administrative fees totaling $15,000, using 269,655 shares of our common stock at approximate weighted average prices of $0.056 per share. Proceeds from this administrative service agreement
have been assigned to a wholly owned subsidiary of Holloman Corporation.
On December 18, 2014, in order to conserve cash, the Board of Directors consented to pay all outstanding and future management fees incurred by Holloman Corporation using the same basis as the administrative agreement. During the three months ended March 31, 2016, the Company incurred management fees totaling $12,283 and issued 221,771 shares of its common stock at an approximate weighted average price of $0.055.
On April 13, 2015, we sold 462,500 shares of common stock to a wholly-owned subsidiary of Holloman Corporation, to certain of our directors and officers, and to two non-affiliated persons. The shares were sold at a price of $0.20 each. Proceeds from the private placement totaled $92,500. The entire $92,500 was paid in cash.
On August 10, 2015 we sold 250,000 shares of common stock to a wholly-owned subsidiary of Holloman Corporation. The shares were sold at a price of $0.20 each. Proceeds from the private placement totaled $50,000 and was entirely paid in cash.
10
On September 14, 2015, we borrowed USD$100,000 from a wholly owned subsidiary of Holloman Corporation. The loan bears interest at 5.0% per year and is due and payable on September 14, 2017.
On October 19, 2015, we borrowed USD$1,600 000 from Southern Hydrocarbon Resources Pty Ltd., a subsidiary of Holloman Corporation. This debt replaces the loan provided on September 14, 2015. The loan bears interest at 2% per year and is due and payable on October 19, 2017. The borrowed funds were used to fund our share of the cost to drill one well on PEL 444. As collateral for the loan, we gave Southern Hydrocarbon Resources a security interest in a portion of our working interest in PEL 444.
On December 10, 2015 we sold 1,335,500 shares of common stock to a wholly-owned subsidiary of Holloman Corporation. The shares were sold at a price of $0.08 each. Proceeds from the private placement totaled $106,840. The entire $106,840 was paid in cash.
On January 12, 2016, we borrowed USD$250,000 from a wholly owned subsidiary of Holloman Corporation. This loan has been consolidated with prior advances of $55,000 to total $305,000. The loan bears interest at 5.0% per year and is due and payable on January 12, 2018.
Other than the obligations associated with our oil and gas concessions in Australia, which include a formal authorization for expenditure in the amount of $150,000 relating to the potential residual portion of seismic exploration expenditures, we had no material future contractual obligations as of March 31, 2016.
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 have generally stabilized, 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 $250,000 thousand for geological and geophysical costs and administrative expenses over the twelve-month period ending June 30, 2017. 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 May 13, 2016 we did not have any off balance sheet arrangements.
As of May 13, 2016 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. 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 unaudited consolidated 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.
11
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, 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", (based on the average of 12 month, 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 March 31, 2016, 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.
Fair Value Measurements
Our valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of these techniques requires significant judgment and is primarily dependent upon the characteristics of the asset or liability, the principal (or most advantageous) market in which participants would transact for the asset or liability and the quality and availability of inputs. Inputs to valuation techniques are classified as either observable or unobservable within the following hierarchy:
●
Level 1 — quoted prices in active markets for identical assets or liabilities.
●
Level 2 — inputs other than quoted prices that are observable for an asset or liability. These include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).
●
Level 3 — unobservable inputs that reflect our own expectations about the assumptions that market participants would use in measuring the fair value of an asset or liability.
We consider all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents. We are exposed to a concentration of credit risk with respect to our cash deposits. We place cash deposits with highly rated financial institutions in the United States and Australia. At times, cash balances held in financial institutions may be in excess of insured limits. We believe the financial institutions are financially strong and the risk of loss is minimal. We have not experienced any losses with respect to the related risks and do not believe our exposure to such risks is more than normal.
12
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash, other receivables, accounts payable, accrued liabilities and demand notes payable approximates their carrying value due to their short-term nature.
Stock Based Compensation
We record compensation expense for stock based payments using the fair value method. The fair value of stock options granted 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.
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 (which is relatively inactive) are translated to United States dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income as a component of stockholders’ equity. Foreign currency financial statements of our Australian subsidiary use period end rates for monetary assets and liabilities, historical rates for historical cost balances, and average rates for expenses. If material, translation gains and losses are included in the determination of income. Foreign currency transactions are primarily undertaken in Canadian and Australian dollars. As of March 31, 2016,
we have not entered into derivative instruments to offset the impact of foreign currency fluctuations.
Other Comprehensive Income (Loss)
We report and display comprehensive income or loss and its components in our consolidated financial statements. For the three month period ended March 31, 2016, the only components of comprehensive income or loss were foreign currency translation adjustments.
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 potential dilutive common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method. Diluted EPS excludes all potential dilutive shares if their effect is anti-dilutive. Diluted EPS figures are equal to those of basic EPS for each period since we had no securities outstanding during those periods in which we generated net loss that were potentially dilutive.
13
See Note 1 to the accompanying unaudited consolidated financial statements for a discussion of recent accounting pronouncements.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of our management, including our Principal Financial Officer and Principal Executive Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Disclosure controls and procedures are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Form 10-Q, is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and is communicated to our management, including our Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based
on that evaluation, our management concluded that, as of March 31, 2016, 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.
14
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 31, 2016, we issued 269,655 shares of our common stock, at an average price of $0.056 per share, in connection with the conversion of $15,000 in administrative service fees payable and we issued 221,771 shares of our common stock at an average price of $0.055 per share, in connection with the conversion of $12,282 in management fees payable to a wholly owned subsidiary of our controlling shareholder, Holloman Corporation.
We relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 with respect to the issuance and sale of the shares listed above. The persons who acquired these securities were sophisticated investors who were provided full information regarding our business and operations. There was no general solicitation in connection with the offer, sale or issuance of these securities. The persons acquired these shares for their own accounts. The shares cannot be sold unless pursuant to an effective registration statement or an exemption from registration. No commissions were paid to any person in connection with the issuance or sale of these securities.
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.
