FORM 10-Q

10-Q 1 d10q.htm FORM 10-Q FORM 10-Q

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

Quarterly Report under Section 13 or 15(D) of the Securities Exchange Act of 1934

For the quarter ended June 30, 2006

Commission file number 000-32669

Heartland Oil and Gas Corp.


Incorporated in Nevada		IRS ID No. 91-1918326

1625 Broadway, Suite 1480

Denver, Colorado 80202

Telephone: (303) 405-8450

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 past 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.

The registrant is a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The registrant is not a shell company (as defined in Rule 12b-2 of the Exchange Act).

Heartland has 46,737,013 shares of common stock outstanding as of August 14, 2006

Item 1.

Financial Statements.

Heartland Oil and Gas Corp.

Balance Sheet


	June 30, 2006 (Unaudited)			December 31, 2005 (Audited)
Assets
Current assets:
Cash and cash equivalents	$	987,522		$	2,126,156
Prepaid expense		93,367			145,658
Other current assets		41,511			3,849

Total current assets		1,122,400			2,275,663
Oil and gas property, full cost method
Unproved		1,715,688			1,776,322
Proved		1,217,468			1,316,102
Pipeline and facilities, net of accumulated depreciation of $132,091 and $73,617, respectively		2,562,421			2,332,155
Equity investment in Arabian Heartland International Corp		4,105,500			4,105,500
Impairment of investment in Arabian Heartland International Corp.		(4,105,500	)		(4,105,500	)
Other property and equipment, net of accumulated depreciation of $93,329 and $85,984, respectively		122,192			160,797

Total Assets	$	6,740,169		$	7,861,039

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	194,161		$	282,297
Note payable to related party (Note 4)		475,000			—

Total current liabilities		669,161			282,297

Long-term liabilities:
Asset retirement obligations (Note 3)		217,391			671,140

Series B Convertible Redeemable Preferred Stock - $0.001 par value, 5,000,000 shares authorized, 3,529,412 and 3,529,412 shares issued and outstanding, respectively (liquidation preference: $6,000,000)		5,599,958			5,599,958

Stockholders’ equity:
Common stock - 0.001 par value, 100,000,000 shares authorized, 46,737,013 shares issued, and outstanding, at June 30, 2006 and December 31, 2006		46,737			46,737
Additional paid-in capital		46,478,825			46,220,873
Accumulated deficit		(46,271,903	)		(44,959,966	)

Total Capital		253,659			1,307,644

Total Liabilities and Stockholders’ Equity	$	6,740,169		$	7,861,039

See accompanying notes.

Heartland Oil and Gas Corp.

Operations Statement

(Unaudited)


	Quarter Ended June 30, 2006			Quarter Ended June 30, 2005			Six Months Ended June 30, 2006			Six Months Ended June 30, 2005
Revenue, natural gas sales	$	112,734		$	—		$	168,450		$	—
Revenue, compression and transportation		31,013			—			68,920			—

Total revenue		143,747						237,370

Expense
Operating costs – gas production		138,697			—			198,873			—
Compression and transportation costs		26,447			—			58,669			—
Production taxes		10,375			—			15,073			—
Impairment on oil and gas property		8,906			467,688			124,365			10,277,215
Depreciation, depletion and accretion		115,157			53,652			201,780			119,309
General and administrative expense		439,812			620,107			962,828			1,239,455

Total operating expense		739,394			1,141447			1,561,588			11,635,979

Loss From Operations		(595,647	)		(1,141,447	)		(1,324,218	)		(11,635,979	)
Interest income		2,830			20,630			12,281			68,438

Net Loss	$	(592,817	)	$	(1,120,817	)	$	(1,311,937	)	$	(11,567,541	)

Basic And Diluted Net Loss Per Common Share	$	(0.01	)	$	(0.02	)	$	(0.03	)	$	(0.25	)

Basic And Diluted Weighted Average Number of Common Shares Outstanding		46,737,000			46,737,000			46,737,000			46,737,000

The accompanying notes are an integral part of these statements

Heartland Oil and Gas Corp.

Cash Flow Statement

(Unaudited)


	Six Months Ended June 30, 2006			Six Months Ended June 30, 2005
Cash Flow From Operating Activity
Net loss	$	(1,311,937	)	$	(11,567,541	)
Adjustments to reconcile net loss to net cash used in operating activity:
Accretion expense		9,177			15,710
Loss on disposal of assets		4,353			—
Stock – based compensation		232,952			394,758
Depreciation and amortization		192,603			103,599
Impairment expense		124,365			10,277,215
Receivable from officer		—			(42,500	)
Increase in other assets		(37,662	)		(15,183	)
Decrease in prepaid expense		52,291			94,911
Decrease in accounts payable and accrued liabilities		(88,136	)		(501,862	)
Decrease in asset retirement obligation		—			(6,575	)
Well plugging cost paid		(462,926	)		—

Net cash used in operating activity		(1,284,920	)		(1,247,468	)

Cash Flow From Investing Activity
Purchase of property and equipment		(298,617	)		(12,985	)
Acquisition and exploration of oil and gas property		(228,412	)		(2,751,456	)
Proceeds from sale of well equipment		173,315			—
Advances to Arabian Heartland Intl. Corp.		—			(4,105,500	)

Net cash used in investing activity		(353,714	)		(6,869,941	)

Cash Flow From Financing Activity
Issuance of conversion right to related party		25,000			—
Increase (decrease) in due to related parties		475,000			(10,520	)

Net cash provided by (used in) financing activity		500,000			(10,520	)

Net decrease in cash		(1,138,634	)		(8,127,929	)
Cash, beginning of period		2,126,156			13,081,221

Cash, end of period	$	987,522		$	4,953,292

The accompanying notes are an integral part of these statements

Heartland Oil and Gas Corp.

Financial Statement Notes

Note 1 - Organization, Operations and Significant Accounting Policies

Organization

Heartland Oil and Gas Corp. was incorporated in Nevada on August 11, 2000. Our principal business is exploration and development of oil and gas property in the United States. Through December 31, 2005, we were in the exploration stage and had not generated significant revenue from operations. We first sold natural gas in February 2006 therefore we are no longer an exploration stage company.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Heartland Oil and Gas Corp. and its wholly owned entities. We have eliminated all significant intercompany balances and transactions in consolidation.

The accompanying financial statements are unaudited and include, in our opinion, all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation. The financial statements should be read in conjunction with our audited financial statements and the related notes included in our December 31, 2005, Form 10-K/A (Amendment No. 2). The accompanying financial statements are interim financial statements prepared in accordance with accounting principles generally accepted in the United States and are stated in U.S. dollars.

Stock-Based Compensation

Effective January 1, 2006, we account for stock-based compensation based on the fair value of the options at the grant date as provided by FASB Statement 123(R), Stock-Based Compensation. We record compensation expense for all share-based awards granted, and for awards modified, repurchased or cancelled. We will recognize compensation expense for outstanding awards for which the requisite service had not been rendered as of January 1, 2006, over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FASB Statement 123, adjusted for expected forfeitures. We have adopted Statement 123(R) using a modified prospective application. Prior to January 1, 2006 we recognized employee compensation expense for our stock options plan using the intrinsic value method of accounting. Under the terms of the intrinsic value method, compensation expense was the excess, if any, of the quoted market price of the stock at the grant date, over the amount an employee must pay to acquire the stock. Under our Amended 2005 Stock Option Plan, we may grant up to a maximum of 4,000,000 shares of common stock to key employees and consultants. The options granted under the plan vest over four years except as stated otherwise in the individual grants, and are for a term not exceeding 10 years.

For the period ended June 30, 2006, we expensed the fair value of options granted to non-employees, employees, officers and directors. For the period ended June 30, 2005 we expensed the fair value of options granted to non-employees and disclosed the pro forma fair value of options granted to employees, officers and directors.

Had we measured compensation cost based on the fair value of the options at the grant date for the quarter ended June 30, 2005, consistent with the method prescribed by Statement 123, our net loss and loss per common share would have been increased to the pro forma amounts indicated below:


	Quarter Ended June 30, 2005			Six Months Ended June 30, 2005
Net loss, as reported	$	(1,120,817	)	$	(11,567,541	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		136,878			394,758
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(312,282	)		(667,206	)

Pro forma net loss	$	(1,296,221	)	$	(11,839,989	)

Loss per share:
Basic and diluted earnings (loss) per common share
As reported	$	(0.02	)	$	(0.25	)

Pro forma	$	(0.03	)	$	(0.25	)

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions, are fully transferable, and are not subject to trading restrictions or blackout periods. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, it is our opinion that the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

Reclassifications

We have reclassified certain data in the financial statements of the prior periods to conform to the current period presentation.

Note 2 - Going Concern

We have incurred significant losses since inception and had no revenue from inception to December 31, 2005. At June 30, 2006, we have limited financial resources. Our continuation is dependent upon our ability to raise additional capital, to exploit our mineral holdings, and to generate sufficient revenue from our planned operations to enable us to attain and maintain profitable operations. We sold natural gas for the first time in February, 2006.

The issuance of additional equity securities by us could result in significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, if those loans would be available, would increase our liabilities and future cash commitments.

We cannot assure that we will be able to obtain further funds required for our continued operations, that additional financing will be available to us when needed or, if available, that we can obtain it on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we may be unable to conduct our operations as planned, and we may not be able to meet our other obligations as they become due. In such event, we would be forced to scale down or perhaps even cease our operations.

Note 3 – Asset Retirement Obligations


	Six Months Ended June 30, 2006			Year Ended December 31, 2005
Beginning asset retirement obligations	$	671,140		$	562,619
Site reclamation costs paid		(462,926	)		—
Liabilities incurred		—			65,758
Accretion		9,177			42,763

Total asset retirement obligations	$	217,391		$	671,140

Note 4 - Related Party Transactions

We borrowed $500,000 on a non-interest bearing note on June 30, 2006, payable to SDS Capital Group SPC, Ltd., one of our two preferred stockholders. The note will mature on August 31, 2006. We collateralized all of our assets as security for the note. SDS may convert the principal into common stock @ $0.20 a share. However, if other parties invest $5,000,000 or more in Heartland by August 31, 2006, the note will automatically convert into the securities acquired by other investors at the price paid by the other investors, except that the conversion will not occur in an amount to cause SDS to own more than 9.99% of our outstanding common stock. We cannot prepay the note. If any of the note payable is not paid when due, a late charge will be paid in an amount equal to an interest charge of 12% per annum for the date such amount was due until the same is paid in full.

The note holder’s conversion right has value. We computed a $25,000 value for the right, using Black-Scholes, a two month life for the right, a June 30, 2006, risk-free interest rate of 4.905% (based on the 13 week U.S. Treasury Bill auction on June 26, 2006), and volatility of 100%. We recorded a note discount of $25,000 for the conversion right, crediting additional paid-in capital. Accordingly, our balance sheet reports the note at $475,000 at June 30, 2006. We will impute $25,000 of interest expense to the note over the period July 1 through August 31, 2006.

We entered into management consulting agreements dated October 1, 2004, as amended, with a director for the payment of management fees of $7,500CAD per month, and with our former President for the payment of $16,666 per month, respectively. The contract with our former President was terminated on December 31, 2005. We entered into a consulting agreement for services on an hourly basis with our contract CFO. For the six months ending June 30, 2006, he was paid $57,782 for services rendered.

Effective January 1, 2006, we approved the payment of director’s fees for non-employee directors at the rate of $200 per hour. During the six months ended June 30, 2006 and June 30, 2005, we incurred $97,139 and $152,664, respectively, in management and consulting fees to our directors and officers. We incurred $13,310 in director’s fees for the six months ended June 30, 2006.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion reports material changes from December 31, 2005, through June 30, 2006, as well as other information. We encourage the reader to also read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2005 Amended Form 10-K.

Forward-Looking Statements

This quarterly report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or to our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks enumerated in the section entitled “Risk Factors” in this report and in our 2005 annual report on Form 10-K, that may cause our actual results or the actual results in our industry, of our levels of activity, performance or achievement to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Changes in Business

Heartland Oil and Gas Corp. is an oil and gas company primarily engaged in exploration, development, and sale of Coal Bed Methane (“CBM”) in the Bourbon Arch of northeast Kansas. We incorporated in Nevada in 1998. Heartland Gas Gathering LLC, our wholly-owned affiliate, is responsible for gas sales and operation of our pipeline and associated facilities. Heartland Oil and Gas, Inc., our wholly-owned subsidiary, holds our interest in nearly 1 million acres and operates our project areas in eastern Kansas.

By the end of 2005 we contracted to sell our gas and committed funds to construct a 5.5 mile gas gathering line and processing plant to initiate gas sales from Lancaster, our largest battery on the Bourbon Arch. We initiated continuous gas sales in February 2006. Gas from the other three batteries is being vented while awaiting pipeline hook-up. A battery is a well or group of wells and associated production facilities in one general area.

Lancaster is currently producing approximately 330 thousand cubic feet of gas per day (“mcfgpd”). Sales average approximately 250 mcfgpd net of fuel gas, shrinkage, and carbon dioxide extraction. After processing, the gas delivered to the sales line averages 1008 million British thermal units per thousand cubic feet. The system and facilities are sized to support production growth from Lancaster, the adjacent batteries currently venting gas, and future development drilling between existing project areas. The adjacent batteries are currently venting approximately 150 mcfgpd.

Natural Gas Sales Data:


	MCF Volume	Average Price		Total Revenue
Quarter ended March 31, 2006	10,440	$	5.34	$	55,716
Quarter ended June 30, 2006	18,295	$	6.16	$	112,734

Year to Date at June 30, 2006	28,735	$	5.86	$	168,450

On June 30, 2006, we borrowed $500,000 for two months from one of our preferred stockholders. See “Liquidity and Capital Resources”, below.

We require additional capital to execute our growth strategies. We are in the process of seeking new capital, but we cannot assure that we will be able to obtain such funding. Should we be unable to obtain additional funding we may have to reduce or cease operations.

Liquidity and Capital Resources

We require additional funds to implement our growth strategy in our gas exploration operations. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. We may not be able to obtain such funds. If we are not able to do so we will have to significantly reduce the scope of our operations or cease operations entirely. This would result in substantial losses for our investors.

As of June 30, 2006 we had working capital of $428,240. Over the next twelve months we intend to use all available funds to produce our Lancaster Prospect as shown below:

Estimated Expenditures During the Next Twelve Months


General and Administrative	$	1,350,000
Oil and Gas
New leases		50,000
New drilling		13,000,000
Gathering and Pipelines		2,000,000
Lease Operating Expense		1,350,000

Total	$	17,750,000

The activity described above requires additional capital. We may not be able to raise adequate capital. Should we not be able to do so, we will reduce the scope of our activities.

SDS may convert the principal into common stock @ $0.20 a share. However, if other parties invest $5,000,000 or more in Heartland by August 31, 2006, the note will automatically convert into the securities acquired by other investors at the price paid by the other investors, except that the conversion will not occur in an amount to cause SDS to own more than 9.99% of our outstanding common stock. We cannot prepay the note. If any of the note payable is not paid when due, a late charge will be paid in an amount equal to an interest charge of 12% per annum from the date such amount was due until the same is paid in full.

Our total liabilities at June 30, 2006 were $886,552, compared to $953,437 at December 31, 2005.

We have no significant off-balance sheet arrangements.

We have incurred recurring losses from operations. Our continuation is dependent upon a successful program of acquisition and exploration, and achieving a profitable level of operations. It is likely we will need additional financing for ongoing operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining loans, assuming those loans would be available, would increase our liabilities and future cash commitments. We cannot assure that we will be able to obtain further funds we desire for our continuing operations or, if available, that funds can be obtained on commercially reasonable terms. If we are not able to obtain additional financing on a timely basis, we may be unable to conduct our operations as planned. In such event, we would have to scale down or perhaps even cease our operations.

Results of Operations

We had no revenue, production tax, transportation expense or lease operating expense prior to February 2006. During the quarter ended June 30, 2006 we recorded revenue from natural gas sales in the amount of $112,734 and from gas gathering fees in the amount of $31,012. Production tax and transportation expense for the same period totalled $36,822. The total volume for the quarter ending June 30, 2006 was 18,295 mcf at an average price of $6.16. Lease operating expense for the same period was $138,697. During the six months ended June 30, 2006, we received revenue from natural gas sales in the amount of $168,450 and from gas gathering fees in the amount of $68,920. Production taxes and transportation expense totalled $73,742. We sold approximately 28,735 mcf of gas at an average price of $5.86. We recorded lease operating expense for our wells and gas gathering facilities in the amount of $198,873.

During the quarter ended June 30, 2005 and June 30, 2006, we recorded $620,107 and $439,812, respectively for general and administrative expense. The reduction in costs is the result of lower rental expense for the Kansas field office and

lower rental expense in the Vancouver office. For the six months ended June 30, 2006 and 2005, we recorded $962,828 and $1,239,455 respectively for general and administrative expense. Stock based compensation was reduced by 41% for the six month period ended June 30, 2006 compared to June 30, 2005. Office rent for the six months ended June 30, 2006 and 2005 was $44,798 and $117,813, respectively. This reduction in expense was due to relocating the Kansas field office to a more economic location. We incurred $49,524 in travel expense for the six months ended June 30, 2006 as compared to $137,430 for the six months ended June 30, 2005. This higher expense incurred in 2005 was due to travel associated with the Arabian Heartland joint venture.

For the quarters ended June 30, 2005 and June 30, 2006, we recorded depreciation and depletion expense of $53,652 and $115,157, respectively. This increase in expense is due to the $60,000 of depletion recorded in the second 2006 quarter. Depreciation, depletion and accretion for the six months ended June 30, 2005 and 2006 was $201,780 and $119,309, respectively. This increase is mainly due to $100,000 of depletion recorded for the first six months of 2006 resulting from commencement of natural gas sales. There was no depletion recorded at June 30, 2005, because we sold no natural gas prior to February 2006.

Impairment Expense:

For the quarter ended June 30, 2006, we recorded impairment expense of $8,906 for leases expiring in the southern Bourbon Arch area and for the quarter ended June 30, 2005, we recorded impairment expense of $467,688 for expiring leases in the Forest City Basin.

For the six months ended June 30, 2006, and June 30, 2005, we recorded impairment expense of $124,365 and $10,277,215, respectively. The June 30, 2006 expense resulted from leases expiring in our southern acreage. The June 20, 2005, impairment occurred primarily from the Engleke/Soldier Creek pilots and the BTA pilot projects located on our northern acreage. We implemented a completion program in these pilot projects and the completions did not result in any sustainable or commercial production from the wells tested. Accordingly we shut in these wells in June 2005 and plugged and abandoned them during the first 2006 quarter.

Capital Expenditures

We plan to spend approximately $15 million in capital expenditures in the year ended June 30, 2007. These expenditures will be directed toward developing existing proved and probable reserves on the Bourbon Arch, constructing additional pipelines, and evaluating new project areas. In the next 12 months, we plan to invest approximately $15 million, or 100% of the budget, in our Bourbon Arch assets. Approximately 90% of the capital budget is focused on attempting to convert probable and possible reserves into proved reserves.

We project that our capital program for the year ended June 30, 2007, will allow us to create value by drilling 100 net wells and installing 14.5 miles of transportation lines and associated facilities necessary to support the drilling program and to hook up currently stranded gas, compared to the 2005 program in which we drilled 11 wells and installed 5.5 miles of pipeline and associated gas processing facilities. If successful, we believe we can achieve a 2006 exit rate of 3 to 4 gross MMcfgpd per day from the Bourbon Arch project. We have currently secured the necessary pipeline right of ways to achieve this program. We expect production to be 100% natural gas and anticipate funding our capital program from outside financing sources and internally generated cash flow. Successes may also encourage the initiation of additional discretionary projects.

We are trying to obtain adequate financing so we can develop our Bourbon Arch project into a nucleus for future growth. We cannot assure that we will be able to obtain such financing. Without it, we will have to significantly reduce the scope of our operations or cease operations.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We conduct no hedging activity. We have no derivative contracts.

Item 4.

Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures as of the end of the period covered by this quarterly

report, being June 30, 2006. This evaluation was carried out under the supervision and with the participation of our company’s management, including our company’s chief executive officer and chief financial officer. Based upon that evaluation, our company’s chief executive officer and chief financial officer concluded that our company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is accumulated and communicated to management, including our company’s president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure.

Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

There have been no changes in internal control over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

Part II - Other Information

Item 1.

Legal Proceedings

One of our wholly-owned subsidiaries entered into a joint venture agreement with the Far East International Petroleum Company (“FEIPCO”) on April 20, 2005, to establish a joint venture to drill, case and complete oil wells in the area known to the parties as West Qurnah and North Rumailia fields, Republic of Iraq. As part of the joint venture agreement, we provided approximately $4.1 million to FEIPCO and our then current Chief Executive Officer provided approximately $585,000 from his personal holding company, Fort Scott Energy Co. to the joint venture for initial construction cost. In September 2005 we received a notice from FEIPCO terminating the joint venture agreement and claiming that $1,600,000 is owed as part of the joint venture. We have conducted a due diligence investigation of FEIPCO and the merits of these claims. We sent correspondence denying any liability to FEIPCO with respect to the claims asserted and will vigorously defend any arbitration or other legal action based upon such claims. To our knowledge, FEIPCO has not commenced a legal action; accordingly, we have concluded that the likelihood of a further loss on this matter is remote.

We are not involved as a plaintiff in any other material proceedings or pending litigation. We know of no material, active or pending legal proceedings against us. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 1A.

Risk Factors.

Much of the information included in this registration statement includes or is based upon estimates, projections or other “forward looking statements”. Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

Those forward-looking statements also involve certain risks and uncertainties. Factors, risks and uncertainties that could cause or contribute to such differences include those specific risks and uncertainties discussed below and those discussed in our Amended Form 10-K Annual Report for the year ended December 31, 2005. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document.

Our common shares are considered speculative during the development of our new business operations. Prospective investors should consider carefully the risk factors set out below.

Risks Related To Our Business

We have had negative cash flow from operations and if we are not able to continue to obtain further financing our business operations may fail.

To date we have had negative cash flow from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements and have incurred net losses totalling $44,959,966 from inception to December 31, 2005. We have cumulative net losses of $46,271,903 from inception to June 30, 2006. As of June 30, 2006 we had working capital of $428,239. Additional capital will be required to maintain ongoing operations.

We will depend almost exclusively on new capital to pay for the continued exploration and development of our properties. Such outside capital may include the sale of additional stock and/or commercial borrowing. Capital may not continue to be available if necessary to meet these continuing development costs or, if the capital is available, it may not be on terms acceptable to us. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment.

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been primarily financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

If we issue additional shares in the future this may result in dilution to our existing stockholders.

Our Certificate of Incorporation authorizes the issuance of 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. Our board of directors have the authority to issue additional shares up to the authorized capital stated in the certificate of incorporation. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders.

We have a limited operating history and if we are not successful in continuing to grow our business, we may have to scale back or even cease our ongoing business operations.

We have no history of revenues from operations and have no significant tangible assets. We have yet to generate positive earnings and there can be no assurance that we will ever operate profitably. Our company has a limited operating history and must be considered in the development stage. Our success is significantly dependent on a successful acquisition, drilling, completion and production program. Our company’s operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to locate recoverable reserves or operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.

Actual quantities of recoverable oil and gas reserves and future cash flow from those reserves, future production, oil and gas prices, revenue, taxes, development expenditures and operating expenses most likely will vary from estimates.

Estimating accumulations of oil and gas is complex. The process relies on interpretations of available geologic, geophysical, engineering and production data. The extent, quality and reliability of this data can vary. The process also requires certain economic assumptions, such as oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds, some of which are mandated by the SEC. The accuracy of a reserve estimate is a function of:

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quality and quantity of available data;

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interpretation of that data; and

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accuracy of various mandated economic assumptions.

Any significant variance could materially affect the quantities and present value of our reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of development and exploration and prevailing oil and gas prices.

In accordance with SEC requirements, we base the estimated discounted future net cash flows from proved reserves on prices and costs on the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate.

The loss of key personnel could adversely affect our business. We depend to a large extent on the efforts and continued employment of our executive Management team and other key personnel.

The loss of the services of these or other key personnel could adversely affect our business, and we do not maintain key man insurance on the lives of any of these persons. Our drilling success and the success of other activities integral to our operations will depend, in part, on our ability to attract and retain experienced geologists, engineers, landmen and other professionals. Competition for many of these professionals is intense. If we cannot retain our technical personnel or attract additional experienced technical personnel, our ability to compete could be harmed.

As many of our properties are in the exploration and development stage we cannot assure that we will establish commercial discoveries on those properties.

Exploration for economic reserves of oil and gas is subject to a number of risk factors. Many properties that are explored are ultimately not developed into producing oil and/or gas wells. Many of our properties are in the exploration and development stage and are without proved reserves of oil and gas.

The potential profitability of oil and gas ventures depends upon factors beyond our control.

The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance.

Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in our company not receiving an adequate return on invested capital.

Competition in the oil and gas industry is high. We cannot assure that we will be successful in acquiring leases we wish to acquire.

The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staffs. Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations and necessary drilling equipment, as well as for access to funds. We cannot predict if the necessary funds can be raised or

that any projected work will be completed. Our budget anticipates our acquisition of additional acreage in the Forest City basin. This acreage may not become available or if it is available for leasing, that we may not be successful in acquiring the leases. There are other competitors that have operations in the Forest City basin and the presence of these competitors could adversely affect our ability to acquire additional leases.

Acquisitions are subject to the uncertainties of evaluating recoverable reserves and potential liabilities.

We expect that our future growth will be dependent in part on acquisitions. Successful acquisitions require an assessment of a number of factors, many of which are beyond our control. These factors include recoverable reserves, exploration potential, future oil and natural gas prices, operating costs, production taxes and potential environmental and other liabilities. Such assessments are inexact and their accuracy is inherently uncertain. In connection with our assessments, we perform a review of properties which we believe is generally consistent with industry practices. However, such a review will not reveal all existing or potential problems. In addition, our review may not allow us to become sufficiently familiar with the properties, and we do not always discover structural, subsurface and environmental problems that may exist or arise. Our review prior to signing a definitive purchase agreement may be even more limited.

We generally are not entitled to contractual indemnification for preclosing liabilities, including environmental liabilities, on acquisitions. Often, we acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties. If material breaches are discovered by us prior to closing, we could require adjustments to the purchase price or if the claims are significant, we or the seller may have a right to terminate the agreement. We could, however, fail to discover breaches or defects prior to closing and incur significant unknown liabilities, including environmental liabilities, or experience losses due to title defects, for which we would have limited or no contractual remedies or insurance coverage.

There are risks in acquiring producing properties, including difficulties in integrating acquired properties into our business, additional liabilities and expenses associated with acquired properties, diversion of Management attention, and costs of increased scope, geographic diversity and complexity of our operations.

Increasing our reserve base through acquisitions is an important part of our business strategy. Our failure to integrate acquired businesses successfully into our existing business, or the expense incurred in consummating future acquisitions, could result in our incurring unanticipated expenses and losses. In addition, we may have to assume cleanup or reclamation obligations or other unanticipated liabilities in connection with these acquisitions. The scope and cost of these obligations may ultimately be materially greater than estimated at the time of the acquisition.

In connection with future acquisitions, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant Management attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Possible future acquisitions could result in our incurring additional debt, contingent liabilities and expenses, all of which could have a material adverse effect on our financial condition and operating results.

Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on us.

Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend any material amount on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations.

Exploration and production activity is subject to certain environmental regulations which may prevent or delay our operations.

In general, our exploration and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry.

We believe that our operations comply, in all material respects, with all applicable environmental regulations. However, we are not fully insured against all possible environmental risks.

Exploratory drilling involves many risks. We may become liable for pollution or other liabilities which may have an adverse effect on our financial position.

Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labor, and other risks are involved. We may become subject to liability for pollution or hazards against which we cannot adequately insure or which we may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations.

Two of our directors and our former CEO reside outside the United States. As a result it may be difficult for investors to enforce within the United States any judgments obtained against those directors or the officer

Two of our directors and our former CEO are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on those directors or officer, or enforce within the United States or Canada any judgments obtained against those directors or officer, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States.

Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.

Our stock is a penny stock. The U.S. Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors” as defined in Regulation D promulgated under the Securities Act of 1933, as amended. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

NASD sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

In June 2006, we issued a convertible promissory note to our of our preferred stockholders, an accredited investor, for $500,000. The holder may convert the principal into common stock @ $0.20 a share. However, if other parties invest $5,000,000 or more in Heartland by August 31, 2006, the note will automatically convert into the securities acquired by other investors at the price paid by the other investors, except that the conversion will not occur in an amount to cause the holder to own more than 9.99% of our outstanding common stock. We relied on Section 4(2) of the Securities Act of 1933, as amended, in issuing the note.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information.

None

Item 6.

Exhibits.


Exhibit Number		Description

31.1		Certification of Chief Executive Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended) *

31.2		Certification of Chief Financial Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended) *

32.1#		Certification of Chief Executive Officer (pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)) *

32.2#		Certification of Chief Financial Officer (pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)) *

*	Filed herewith

This certification “accompanies” the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

Signatures

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


				HEARTLAND OIL AND GAS CORP. (Registrant)

Date: August 16, 2006				/s/ Philip S. Winner
				Philip S. Winner Chairman of the Board, Chief Executive Officer and President