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HOLLOMAN ENERGY CORP
0001324736
10-Q
2012-09-30
false
--12-31
No
No
Yes
Smaller Reporting Company
Q3
2012
4865
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<p style="margin: 0pt"></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><u>Oil and Gas Properties</u></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On November 1, 2012, Terra Nova deposited AUD$4,500,000
(USD$4,670,000) in escrow to fund the dry-hole costs of an initial three (3) well drilling program.</p>
<p style="margin: 0pt"> </p>
<p style="margin: 0pt"></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="margin: 0pt"> </p>
<p style="margin: 0pt"></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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 nine
months ended September 30, 2012, the Company paid administrative fees totaling $15,000 and $45,000, using 46,460 and 169,557 shares
of its common stock, at approximate weighted average prices of $0.323 and $0.265 per share, respectively.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><u>Issuance of Options and Bonus Shares</u></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="font-weight: bold">Option Type</td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>No. of Shares</b></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Issuable Upon</b></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise of Option</b></p></td>
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise</b></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Price</b></p></td>
<td> </td>
<td style="border-bottom: black 1.5pt solid">
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>First Date</b></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercisable</b></p></td>
<td style="font-weight: bold"> </td>
<td style="border-bottom: black 1.5pt solid">
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Expiration</b></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Date</b></p></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 57%">  Stock Option A</td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; text-align: right">450,000</td>
<td style="width: 1%"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%">$</td>
<td style="width: 9%; text-align: right">0.70</td>
<td style="width: 1%"> </td>
<td style="width: 9%; text-align: center">4/3/2012</td>
<td style="width: 1%"> </td>
<td style="width: 9%; text-align: center">8/15/2012</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td>  Stock Option B</td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right">450,000</td>
<td> </td>
<td style="text-align: right"> </td>
<td>$</td>
<td style="text-align: right">0.80</td>
<td> </td>
<td style="text-align: center">4/3/2012</td>
<td> </td>
<td style="text-align: center">8/15/2012</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td>  Stock Option C</td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right">450,000</td>
<td> </td>
<td style="text-align: right"> </td>
<td>$</td>
<td style="text-align: right">1.00</td>
<td> </td>
<td style="text-align: center">4/3/2012</td>
<td> </td>
<td style="text-align: center">8/15/2014</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td>  Stock Option D</td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right">450,000</td>
<td> </td>
<td style="text-align: right"> </td>
<td>$</td>
<td style="text-align: right">1.20</td>
<td> </td>
<td style="text-align: center">4/3/2012</td>
<td> </td>
<td style="text-align: center">8/15/2014</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right">1,800,000</td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
</table>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="background-color: white">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.</font></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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. On August 15, 2012, stock options granted in connection with the Company’s 2009
Non-Qualified Stock Option Plan providing for the purchase of  3,3400,000 shares of the Company’s common stock, at a
weighted average price of $0.75 per share, also expired without exercise. At September 30, 2012 the Company had a total of
4,296,412 stock warrants and options outstanding with weighted average exercise prices and lives of $1.03 and 18.63 months,
respectively.</p>
<p style="margin: 0pt"> </p>
<p style="margin: 0pt"></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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 $488,615 during the nine months ended September 30, 2012.</p>
<p style="margin: 0pt"> </p>
<p style="margin: 0pt; text-align: justify"></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="background-color: white">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.</font> 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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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”).</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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$14,308,000) including:</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: top">
<td style="width: 5%; font: 8pt Times New Roman, Times, Serif; text-align: justify">●  </td>
<td style="width: 95%; font: 8pt Times New Roman, Times, Serif; text-align: justify">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</td></tr>
</table>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: top">
<td style="width: 5%; font: 8pt Times New Roman, Times, Serif; text-align: justify">●  </td>
<td style="width: 95%; font: 8pt Times New Roman, Times, Serif; text-align: justify">AUD$4,500,000 (USD$4,670,000) 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</td></tr>
</table>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: top">
<td style="width: 6%; font: 8pt Times New Roman, Times, Serif; text-align: justify">●</td>
<td style="width: 94%; font: 8pt Times New Roman, Times, Serif; text-align: justify">AUD$4,500,000 (USD$4,670,000) 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%).</td></tr>
</table>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Terra Nova will act as contract operator with
respect to all seismic acquisition and drilling work contemplated by the Agreement.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Acquisition of 127 square kilometers of a 3-D
seismic data on PEL 112 began July 24, 2012 and was completed in late September 2012. Geokinetics (Australia) Pty. Ltd. undertook
the 3D seismic survey on the northern boundary of PEL 112 under the direction of Terra Nova.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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 will 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 will pay 50% of the completion costs, 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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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:</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 10%; text-align: justify">(a)   </td>
<td style="width: 90%; text-align: justify">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);</td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify">(b)   </td>
<td style="text-align: justify">ACOR will contribute an undivided 8.222% working interest in both PEL 112 and PEL 444; and</td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify">(c)   </td>
<td style="text-align: justify">Sakhai will contribute an undivided 8.222% working interest in both PEL 112 and PEL 444.</td></tr>
</table>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="background-color: white">On February
27, 2012, the Company terminated its previous farm-in agreement on </font>PEL 112 and PEL 444 <font style="background-color: white">with
Brandenburg</font> Energy Corp. ("Brandenburg"). B<font style="background-color: white">randenburg’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.</font></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="margin: 0pt; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><u>Unaudited Interim Consolidated Financial
Statements</u></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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 nine month periods ended Septmber 30, 2012 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2012.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><u>Recent Accounting Pronouncements</u></p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
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2012-08-15
2014-08-15
2014-08-15
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2012-04-03
2012-04-03
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<p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">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 nine month periods ended Septmber 30, 2012 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2012.</p>
<p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The options were granted pursuant to
the 2009 Non-Qualified Stock Option Plan.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; font-weight: bold">Option Type</td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; padding-bottom: 1.5pt">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>No. of Shares</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Issuable Upon</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise of Option</b></p></td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Price</b></p></td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>First Date</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercisable</b></p></td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Expiration</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Date</b></p></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 57%; line-height: 115%">  Stock Option A</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">450,000</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 9%; line-height: 115%; text-align: right">0.70</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: center">4/3/2012</td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: center">8/15/2012</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">  Stock Option B</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">450,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">0.80</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: center">4/3/2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: center">8/15/2012</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">  Stock Option C</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">450,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">1.00</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: center">4/3/2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: center">8/15/2014</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">  Stock Option D</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">450,000</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">1.20</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: center">4/3/2012</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: center">8/15/2014</td></tr>
<tr style="background-color: #CCEEFF">
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td style="vertical-align: bottom; line-height: 115%; text-align: right"> </td>
<td style="vertical-align: bottom; border-bottom: black 2.25pt double; line-height: 115%"> </td>
<td style="vertical-align: bottom; border-bottom: black 2.25pt double; line-height: 115%; text-align: right">1,800,000</td>
<td style="vertical-align: bottom; line-height: 115%"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
</table>
<p style="font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin: 0 0 10pt"> </p>
4296412
1.03
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0.80
1.00
1.20
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
109629274
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