-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JrnUVdqwrg5GE7Q6O4BFyKkjjctOuEI7ucLIhgmeUaeJFIDkt83NsI4nwZneut7V CMGWuglU3m6slN2TfITpmw== 0001193125-07-115600.txt : 20070515 0001193125-07-115600.hdr.sgml : 20070515 20070515160159 ACCESSION NUMBER: 0001193125-07-115600 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070515 DATE AS OF CHANGE: 20070515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEARTLAND OIL & GAS CORP CENTRAL INDEX KEY: 0001075636 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE SURFACE MINING [1221] IRS NUMBER: 911918326 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-32669 FILM NUMBER: 07853162 BUSINESS ADDRESS: STREET 1: 1625 BROADWAY STREET 2: SUITE 1480 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 303-405-8452 MAIL ADDRESS: STREET 1: 1625 BROADWAY STREET 2: SUITE 1480 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: HEARTLAND OIL & GAS LTD DATE OF NAME CHANGE: 20030226 FORMER COMPANY: FORMER CONFORMED NAME: ADRIATIC HOLDINGS LTD DATE OF NAME CHANGE: 19981221 10QSB 1 d10qsb.htm FORM 10-QSB Form 10-QSB

United States

Securities and Exchange Commission

Washington, D.C. 20549

 


Form 10-QSB

 


Quarterly Report pursuant to Section 13 or 15(D)

of the Securities Exchange Act of 1934

For the quarter ended March 31, 2007

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 had 97,702,110 shares of common stock outstanding as of May 7, 2007.

 



Item 1. Financial Statements

Heartland Oil and Gas Corp.

Balance Sheet

 

     March 31, 2007
Unaudited
    Dec 31, 2006
Audited
 

Assets

    

Current assets:

    

Cash

   $ 59,291     $ 75,724  

Gas sales receivable

     41,509       43,952  

Deferred offering cost

     10,000       10,000  

Prepaid expense and other current assets

     91,479       129,423  
                

Total current assets

     202,279       259,099  
                

Oil and gas property and equipment:

    

Unproved, undeveloped

     1,665,730       1,688,889  

Proved, developed properties, full cost method, net of accumulated depletion of $219,592 and $175,842, respectively

     778,772       792,504  

Pipeline and facilities, net of accumulated depreciation of $234,795 and $200,697, respectively

     2,493,060       2,521,670  

Other property and equipment, net of accumulated depreciation of $137,813 and $122,715, respectively

     79,169       94,271  
                

Total Assets

   $ 5,219,010     $ 5,356,433  
                

Liabilities and Stockholders’ (Deficit) Equity

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 147,216     $ 214,180  

Notes payable to related parties (Note 4)

    

Convertible notes

     6,300,000       —    

Other notes

     185,000       68,554  

Advance received from buyer on sale of majority interest in Company (Note 9)

     80,000       —    
                

Total current liabilities

     6,712,216       282,734  

Long-term asset retirement obligation (Note 5)

     232,014       227,040  
                

Total liabilities

     6,944,230       509,774  
                

Stockholders’ (deficit) equity:

    

Common stock—$0.001 par value, 100,000,000 shares authorized, 46,737,013 shares issued, and outstanding at March 31, 2007 and December 31, 2006 (Note 9)

     46,737       46,737  

Additional paid-in capital

     51,224,295       51,215,858  

Accumulated deficit

     (52,996,252 )     (46,415,936 )
                

Total stockholders’ (deficit) equity

     (1,725,220 )     4,846,659  
                

Total liabilities and stockholders’ (deficit) equity

   $ 5,219,010     $ 5,356,433  
                

See accompanying notes.

 

2


Heartland Oil and Gas Corp.

Operations Statement

(Unaudited)

 

    

Three Months
Ended

Mar 31, 2007

   

Three Months
Ended

Mar 31, 2006

 

Natural gas sales

   $ 110,520     $ 55,716  

Compression & transportation revenue

     5,824       5,687  
                

Total revenue

     116,344       61,403  
                

Operating expenses

    

Lease operating expense and production tax

     74,522       55,875  

Exploration expense, expired leases

     23,159       115,459  

Depreciation, depletion & accretion

     97,923       86,623  

Share based compensation

     8,437       131,569  

General and administrative

     196,176       400,448  
                

Total operating expenses

     400,217       789,974  
                

Operating loss

     (283,873 )     (728,571 )
                

Other (expense) income

    

Interest expense resulting from discount on notes arising from exchange of preferred stock for convertible debt (Note 4)

     (6,296,446 )     —    

Interest income

     3       9,451  
                

Total other (expense) income

     (6,296,443 )     9,451  
                

Net loss

   $ (6,580,316 )   $ (719,120 )
                

Basic & diluted net loss per common share

   $ (0.14 )   $ (0.02 )

Basic & diluted weighted average common shares outstanding

     46,737,013       46,737,013  

See accompanying notes.

 

3


Heartland Oil and Gas Corp.

Stockholders’ (Deficit) Equity Statement

 

    

Common

Shares

  

Common

Stock

  

Additional

Paid-In
Capital

   Accumulated
deficit
    Total  

Balance, December 31, 2005

   46,737,013    $ 46,737    $ 46,220,873    $ (44,959,966 )   $ 1,307,644  
                                   

Gain on preferred stock extinguishment

   —        —        4,067,986      —         4,067,986  

Shareholder loan discount

   —        —        532,013      —         532,013  

Issuance of stock options as compensation

   —        —        394,986      —         394,986  

Net loss

   —        —        —        (1,455,970 )     (1,455,970 )
                                   

Balance, December 31, 2006

   46,737,013    $ 46,737    $ 51,215,858    $ (46,415,936 )     4,846,659  
                                   

Issuance of stock options as compensation

   —        —        8,437      —         8,437  

Net loss

   —        —        —        (6,580,316 )     (6,580,316 )
                                   

Balance, March 31, 2007

   46,737,013    $ 46,737    $ 51,224,295    $ (52,996,252 )   $ (1,725,220 )
                                   

See accompanying notes.

 

4


Heartland Oil & Gas Corp.

Cash Flow Statement

(Unaudited)

 

    

Three Months
Ended

Mar 31, 2007

   

Three Months
Ended

Mar 31, 2006

 

Cash Flow Used In Operating Activities

    

Net loss

   $ (6,580,316 )   $ (719,120 )

Adjustments to reconcile net loss to net cash used in operating activities:

    

Asset retirement obligation

     4,974       4,539  

Interest expense resulting from discount on notes arising from the exchange of preferred stock for convertible debt (Note 4)

     6,416,446       —    

Share-based compensation

     8,437       131,569  

Depreciation, depletion and amortization

     92,949       82,084  

Exploration expense, abandoned leases

     23,159       115,459  

Changes in operating asset and liabilities

    

Decrease (increase) gas sales receivable

     2,443       (47,533 )

Decrease (increase) in prepaid expense and other current assets

     37,944       (64,398 )

Decrease in accounts payable and accrued liabilities

     (66,963 )     (12,499 )

Well plugging cost paid

     —         (502,109 )
                

Net cash used in operating activity

     (60,927 )     (1,012,008 )
                

Cash Flow Used In Investing Activities

    

Purchase of other property and equipment

     —         (6,898 )

Acquisition and exploration of oil and gas property

     (30,018 )     (391,343 )

Purchase of pipeline and facilities

     (5,488 )  
    

Proceeds from sale of equipment

     —         139,166  
                

Net cash used in investing activities

     (35,506 )     (259,075 )
                

Cash Flow From Financing Activity

    

Advance received from buyer on sale of majority interest in Company (Note 9)

     80,000       —    
                

Net cash provided by financing activities

     80,000       —    
                

Net Decrease in Cash

     (16,433 )     (1,271,083 )

Cash, beginning of period

     75,724       2,126,156  
                

Cash, end of period

   $ 59,291     $ 855,073  
                

See accompanying notes.

 

5


Heartland Oil & Gas Corp.

Financial Statement Notes

Note 1—Organization, Operations and Significant Accounting Policies

Organization

Heartland Oil and Gas Corp. was incorporated in Nevada on July 9, 1998. 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.

We have incurred recurring losses from operations and have accumulated a deficit of $52,996,252 since inception. At March 31, 2007, we had negative working capital. Since inception, we have funded operations through the issuance of capital stock and debt. We plan to continue raising additional funds through future equity or debt financing until we achieve profitable operations.

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 Form 10KSB for the year ended December 31, 2006. 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.

Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the financial position and operating activities of Heartland Oil and Gas Corp. (HOCG) and its 100% owned subsidiaries Heartland Oil and Gas, Inc., Heartland Gas Gathering, LLC and Heartland International. All inter-company balances have been eliminated in consolidation.

Foreign Currency Translation

Our functional currency is the U.S. dollar. In those instances where we have foreign currency transactions, we translate the financial statements to U.S. dollars in accordance with Statement 52 of the Financial Accounting Standards Board (FASB), Foreign Currency Translation. We translate monetary assets and liabilities denominated in foreign currencies using the exchange rate prevailing at the balance sheet date. We include gains and losses arising on translation or settlement of foreign-currency-denominated transactions or balances in the determination of income. Our primary foreign currency transactions are in Canadian dollars. We have not entered into derivative instruments to offset the impact of foreign currency fluctuations.

Basic and Diluted Net Income (Loss) Per Share

We compute net income (loss) per share in accordance with FASB Statement 128, Earnings per Share. Statement 128 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. We compute basic EPS by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing Diluted EPS, we use the average stock price for the period in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is antidilutive.

 

6


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

Oil and Gas Property

We utilize the full cost method to account for our oil and gas property. Accordingly, we capitalize all cost associated with acquisition, exploration and development of oil and gas reserves, including such cost as leasehold acquisition cost, capitalized interest cost relating to unproved property, geological expenditures, tangible and intangible development cost including direct internal cost to the full cost pool.

We have depleted the capitalized cost, including estimated future cost to develop the reserves and estimated abandonment cost, net of salvage, on the units-of-production method using estimates of proved reserves. We do not amortize cost of unproved property and major development projects including capitalized interest, if any, until the property begins to produce. If we determine the future exploration of unproved property to be uneconomical, we add the amount of such property to the capitalized cost to be amortized.

We apply a ceiling test to the capitalized cost in the full cost pool, in accordance with the provisions of SEC Regulation S-X, Rule 4-10 (c) (4), Limitation on capitalized costs. The ceiling test limits such cost to the estimated present value, using a ten percent discount rate, of the future net revenue from proved reserves, based on current economic and operating conditions. Specifically, we compute the ceiling test so that capitalized cost, less accumulated depletion and related deferred income tax, do not exceed an amount (the ceiling) equal to the sum of: (A) The present value of estimated future net revenue computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current cost) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus (B) the cost of property not being amortized; plus (C) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the property.

For unproved property, we exclude from capitalized cost subject to depletion all cost directly associated with the acquisition and evaluation of unproved property until we determine whether or not proved reserves can be assigned to the property. Until we make such a determination, we assess the property at least annually to ascertain whether impairment has occurred, in accordance with FASB Statement 144, Accounting for Impairment of Long-Lived Assets. In assessing impairment we consider factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, geographic and geologic data, and market values of comparable unproved property being bought and sold by other parties. We recognize an impairment loss only if the carrying amount of an unproved property is not recoverable from its undiscounted cash flow. We measure an impairment loss as the difference between the carrying amount and the fair value of the asset. We add the amount of impairment assessed to the cost to be amortized subject to the ceiling test.

We account for sales of proved and unproved property as adjustments of capitalized cost with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized cost and proved reserves of oil and gas, in which case we record the gain or loss in the operations statement.

Property and Equipment

Property and equipment includes office furniture & equipment and gathering and surface facilities. We record property and equipment at cost. We provide depreciation for office furniture & equipment on a straight line basis at annual rates ranging from 20 percent to 50 percent per annum, and for gathering and surface facilities on a straight-line basis over 20 years.

Long-Lived Assets

In accordance with FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review the carrying value of intangible assets and other long-lived assets, such as other properties and equipment, on a regular basis for the existence of facts or circumstances that may suggest impairment. We recognize impairment when the sum of the expected undiscounted future cash flow is less than the carrying amount of the asset. We measure impairment losses, if any, as the excess of the carrying amount of the asset over its estimated fair value.

 

7


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

Income Tax

We account for income tax in accordance with FASB Statement 109, Accounting for Income Taxes. Under the asset and liability method of Statement 109, we record deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe that the estimates we utilize in preparing the financial statements are prudent and reasonable. Actual results may differ from these estimates.

Financial Instruments and Concentration of Credit Risk

We carry substantially all of our assets and liabilities at fair value or contracted amounts that approximate fair value. We make estimates of fair value at a specific point in time, based on relative market information and information about the financial instrument, specifically, the value of the underlying financial instrument. Assets that we record at fair value are primarily cash and other assets, which we carry at contracted amounts that approximate fair value. Our liabilities consist of short term liabilities we record at contracted amounts that approximate fair value. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash in excess of the federally insured amount of $100,000. To date, we have not incurred a loss relating to this concentration of credit risk.

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 three month periods ended March 31, 2007 and 2006, we expensed the fair value of options granted to non-employees, employees, officers and directors.

Major Customers

For the three months ended March 31, 2007, one customer, Enbridge Marketing (U.S.) LP, was responsible for purchasing 100% of our natural gas sales.

Asset Retirement Obligations

We account for asset retirement obligations in accordance with the provisions of Statement 143 “Accounting for Asset Retirement Obligations”. Statement 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. We recognize asset retirement obligations related to our oil and gas property.

 

8


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

Reclassifications

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

Recent Accounting Pronouncements:

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,” that applies to all voluntary changes in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. SFAS 154 will be effective for the Company for fiscal year ended December 31, 2007. The Company does not anticipate that the adoption of SFAS No. 154 will have an impact on the Company’s overall results of operations or financial position.

In February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” that allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. It also eliminates the exemption from applying Statement 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not anticipate that the adoption of SFAS No. 155 will have an impact on the Company’s overall results of operations or financial position.

In March 2006, the FASB issued SFAS 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140,” that applies to the accounting for separately recognized servicing assets and servicing liabilities. This Statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not anticipate that the adoption of SFAS No. 156 will have an impact on the Company’s overall results of operations or financial position.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. The Interpretation clarifies the way companies are to account for uncertainty in income tax reporting and filing and prescribes a consistent recognition threshold and measurement attribute for recognizing, derecognizing, and measuring the tax benefits of a tax position taken, or expected to be taken, on a tax return. The Interpretation is effective for fiscal years beginning after December 15, 2006, although early adoption is possible. The Company does not plan to adopt early and the Company is currently in the process of evaluating the impact, if any, the adoption of the Interpretation will have on the 2007 financial statements.

 

9


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

Recent Accounting Pronouncements (continued):

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. The adoption of SFAS No. 157 will not have an impact on the Company’s overall results of operations or financial position.

In September 2006, the Financial Accounting Standards Board (“FASB”) the issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires companies to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets as a net liability or asset as of December 31, 2006. The new standard does not address the accounting treatment for pension and postretirement benefits in the income statement. This will have no impact on the Company’s results of operations or financial position.

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No.115”. SFAS No.159 permits entities to choose to measure eligible financial instruments and other items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument but only upon the entire instrument—not portions of the instrument. SFAS No.159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not anticipate that the adoption of SFAS No. 159 will have an impact on the Company’s overall results of operations or financial position.

Note 2—Going Concern

We have incurred significant losses since inception and had no revenue from inception to December 31, 2005. We sold natural gas for the first time in February 2006. As of March 31, 2007 we have an accumulated deficit of $52,996,252 and a net loss for the three months of $6,580,316. At March 31, 2007, we had 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.

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—Oil and Gas Properties

Undeveloped Properties

We own and operate nearly 775,000 acres in two areas in northeast Kansas: the south block, located on the Cherokee basin, where we have established reserves and production; and the north block, located in the Forest City basin, where we hold significant leases which expire between 2007 and 2012.

 

10


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

Undeveloped Acreage

   Three Months
Ended
March 31, 2007
   

Year Ended

December 31,

2006

 

Beginning Balance

   $ 1,688,889     $ 1,776,322  

Acquisition of undeveloped acreage

     —         63,732  

Less expired leases

     (23,159 )     (151,165 )
                

Total undeveloped properties

   $ 1,665,730     $ 1,688,889  
                

Developed Properties, Cherokee basin

Our developed properties focus on approximately 100,000 acre leasehold position located in the Cherokee basin, primarily in Linn and Miami counties. We have 24 wells in four batteries producing gas across a 12 mile area. From east to west, these areas are named Jake (1 well), Lancaster (16 wells), Osawatomie (4 wells), and Beagle (3 wells). We have a dominant acreage position and are negotiating pipeline rights of way in and between these producing areas.

 

Developed Properties

   Three Months
Ended
March 31, 2007
   

Year Ended

December 31,
2006

 

Beginning Balance

   $ 792,504     $ 1,316,102  

Acquisition, exploration, drilling and lease and well equipment

     30,018       322,595  

Less accumulated depletion

     (43,750 )     (175,842 )

Less plugging and abandonment costs

     —         (228,064 )

Less impairment costs

     —         (442,287 )
                

Total developed properties

   $ 778,772     $ 792,504  
                

Pipeline and Marketing

In July 2005 we signed contracts with a subsidiary of Enbridge Energy Partners, L.P. to initiate gas sales from our Lancaster coalbed methane battery located near Paola, Kansas. While the gas price is variable, we expect to realize a wellhead price approximating 75 percent of NYMEX price or mid-continent gas posting. We have competed construction of the pipeline. We began selling methane from our Lancaster battery in February, 2006.

Cost associated with our pipeline and facilities:

 

Pipeline and facilities

   Three Months
Ended
March 31, 2007
   

Year Ended

December 31,
2006

 

Beginning Balance

   $ 2,521,670     $ 2,332,155  

Acquisition of equipment

     5,488       316,595  

Less depreciation

     (34,098 )     (127,080 )
                

Total pipeline and facilities

   $ 2,493,060     $ 2,521,670  
                

 

11


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

Note 4– Notes payable to related parties

Convertible notes

On September 29, 2006, we completed (i) a $300,000 (the “Bridge Amount”) bridge financing from SDS Capital Group, Ltd. and Baystar Capital II, L.P. (collectively, the “Payees”) and (ii) the repurchase of all outstanding Series B Preferred Stock with a principal amount of $6,000,000 (the “Series B Amount” and collectively with the Bridge Amount, the “Note Principal Amount”) from the Payees in consideration of the issuance of convertible senior secured promissory notes (the “Notes”). The Notes mature on the earlier of March 28, 2007 or the date of any subsequent financing in which we issue equity securities or other securities that could result in the issuance of equity securities (the “Maturity Date”), have no interest rate and reflect the full Note Principal Amount. The Notes are secured by all of our assets, except that the Payees have agreed to release security interests in assets located in the following Kansas counties in the event of a sale of those assets: Atchison, Brown, Doniphan, Jackson, Jefferson, Leavenworth, Nemaha and Pottawatomie. We may prepay the Note Principal Amount in full and in cash at any time prior to the Maturity Date. On March 28, 2007, we and the Payees extended the due date of the Notes to April 4, 2007. On April 4, 2007 the Notes were again extended to April 16, 2007. (See Note 9.—Subsequent Events below)

Except in the case of a Qualified Financing, the Notes are convertible into common stock on the Maturity Date. At the Maturity Date, the Payees have the option to convert the Note Principal Amount into common stock at a conversion price of $0.04 per share. In a Qualified Financing, the Payees will convert approximately 81% of the Note Principal Amount into the additional securities issued in the Qualified Financing on the same price and terms as the other investors in the Qualified Financing with the remaining balance of the Note Principle Amount being cancelled; provided, however, that if the Payees do not invest a total of at least $2,000,000 in the Qualified Financing, then the Payees will not have the right to convert the Note Principal Amount into the Qualified Financing. In this event, the Bridge Amount will be converted into the securities issued in the Qualified Financing on the same price and terms as the other investors in the Qualified Financing and the Series B Amount will automatically be converted into a new preferred stock having substantially similar terms as our Series B Preferred Stock, except that the rights contained in Article XIII of our Certificate of Designation, Preferences and Rights relating to the Series B Preferred Stock (the “Certificate”) will be deleted. A Qualified Financing is defined in the Notes as our issuance of new securities in an amount of at least $15,000,000.

In addition, pursuant to the Notes, the Payees agreed to forbear collection of any liquidated damages or other amounts we owe under the Registration Rights Agreement dated October 1, 2004, if any, and to waive payment of any such amounts if we complete a Qualified Financing, regardless of whether the Payees participate in the Qualified Financing. Also, the Payees waived their right to declare a Redemption Event under the Certificate, if any, through September 29, 2006.

Because of the preferred stock, exchanged for the Notes, SDS Capital Group Ltd. and BayStar Capital II L.P. are related parties to us. The Notes contain customary negative covenants, including a covenant that we are not to incur additional indebtedness, and the Notes contain customary events of default.

In issuing the Notes and underlying Common Stock to the Payees, we relied on the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

Generally accepted accounting principles (GAAP), as described in Issue 96-19 of the Emerging Issues Task Force (EITF) of the FASB, characterize the above exchange of redeemable preferred stock for the convertible Notes as an extinguishment of the redeemable preferred stock. The Notes are to be recorded at fair value. The fair value of the Notes is to be used to record an extraordinary gain or loss on the extinguishment of the preferred stock. We engaged a qualified valuation firm, which determined that the fair value of the Notes was $4,600,000 on September 29, 2006. This value resulted in a gain of $1,299,958, which we recorded during the year ended December 31, 2006.

 

12


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

GAAP, as described in EITF Issue 00-27, paragraph 7, and EITF 98-5, paragraph 6, provides that if the conversion feature of the Notes is beneficial to the holder (has intrinsic value), which it is, the intrinsic value is recorded as a reduction of the carrying amount of the Notes and an addition to paid-in capital. The Notes are convertible into common stock at a rate of four cents per share. The common stock traded for nine cents per share on September 29, 2006, the closing date of the exchange. Therefore the conversion has an intrinsic value of five cents per share. The Notes are convertible into 157,500,000 common shares. Therefore the conversion feature has an intrinsic value of $7,875,000, which is in excess of the total proceeds received in exchange for the Notes. Therefore the full fair value of the Notes was credited to additional paid-in capital during the year December 31, 2006 in conjunction with recognition of the 1,299,958 gain on the conversion. We assigned an initial carrying value to the Notes of $1. We accreted interest on the Notes up to their $6,300,000 face value over the 180 day life of the Notes. Interest expense of $6,296,446 resulting from accreting the notes from a $1 value has been recorded for the three months ended March 31, 2007 related to these notes.

The accounting described above is summarized as:

 

Initial Series B Preferred Stock

   $ 6,000,000  

Classification adjustment prior to 12/31/06

     (400,042 )
        

Book value, Series B Preferred, 12/31/06 and 9/28/06

     5,599,958  

September 29, 2006 Bridge Financing

     300,000  
        

Preliminary book value of notes at 9-29-06 conversion

     5,899,958  

Fair value of notes determined by independent valuation firm, 9-29-06, classified as an addition to additional paid-in capital on the conversion

     (4,600,000 )
        

Gain on conversion

   $ 1,299,958  
        

Initial carrying value of the Notes at 9/29/06

   $ 1  

Interest accreted @ 9.08728% per day:

  

Through 12-31-06

     3,553  

Balance, 12-31-06

     3,554  

Interest accreted @ 9.088728% per day for the quarter ended 3-31-2007

     6,296,446  
        

Total interest accretion over 180 day life of the notes

   $ 6,300,000  
        

Pursuant to the sale of a 52% interest in the Company’s common stock to Universal Property Development and Acquisition Corporation on April 19, 2007, these notes are now held by UPDA and have been extended to December 31, 2007. (See Note 9—Subsequent Events)

Other notes

On December 7, 2006 we also borrowed $65,000 on a note bearing 18% interest, payable to SDS Capital Group SPC, Ltd., one of our two preferred stockholders. The maturity date of the note is March 28, 2007 and the note was subsequently repaid on January 31, 2007.

 

13


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

On January 31, 2007 we borrowed $185,000 on non-interest bearing notes, of which $127,500 was received from SDS Capital Group, SPC Ltd. and $57,500 was received from Baystar Capital II, L.P. $65,000 of these funds, plus interest of $1,820 was used to pay off the December 7, 2006 note to SDS Capital Group SPC, Ltd. The maturity date of the new notes was March 28, 2007; however on March 27, 2007 both lenders extended the notes to April 4, 2007. On April 4, 2007 the notes were again extended to April 16, 2007. Pursuant to the sale of a 52% interest in the Company’s common stock to Universal Property Development and Acquisition Corporation on April 19, 2007, these notes are now held by UPDA and have been extended to December 31, 2007. (See Note 9—Subsequent Events)

Note 5—Asset Retirement Obligations

We account for asset retirement obligations in accordance with the provisions of Statement 143 “Accounting for Asset Retirement Obligations”. Statement 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. We recognize asset retirement obligations related to our oil and gas property.

 

     Three Months
Ended
March 31, 2007
  

Year Ended

December 31,
2006

 

Beginning asset retirement obligations

   $ 227,040    $ 671,140  

Additions related to new property

     —        —    

Plugging and well-site restoration of 64 wells

     —        (462,926 )

Liabilities incurred

     —        —    
     4,974      18,826  
               

Total asset retirement obligations

   $ 232,014    $ 227,040  
               

Note 6—Stock Options and Warrants

Options

A summary of the changes in our common share purchase options is below:

 

     March 31, 2007     December 31, 2006  
     Number    

Weighted

Average

Exercise

Price

    Number    

Weighted

Average

Exercise

Price

 

Balance, beginning of year

   3,725,000     $ .61     4,805,000     $ .84  

Granted

   —         —      

Exercised

        

Forfeited / Expired

   (1,420,000 )     (.55 )   (1,080,000 )   $ (1.34 )

Balance, end of period

   2,305,000     $ .64     3,725,000     $ .61  

 

14


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

Additional information regarding options outstanding at March 31, 2007 is:

 

     Outstanding    Exercisable
    

Number of

shares

  

Weighted

average

remaining

contractual
life (years)

  

Weighted

average

exercise
price

  

Vested
Number

of

shares

   Exercise
prices

$ 0.00 - $ 1.00

   1,875,000    6.43    $ 0.40    1,875,000    $ 0.42

$ 1.01 - $ 2.00

   430,000    7.50    $ 1.60    430,000    $ 1.60
   2,305,000    6.61    $ 0.61    2,305,000    $ 0.64

Warrants

Below is a summary of our warrant activity:

 

     Warrants    

Exercise

Price

   

Expiration

Dates

Outstanding at December 31, 2006

   497,653     $ 3.84     2007

Expired during the quarter ended March 31, 2007

   (497,653 )   $ (3.84 )  

Outstanding at March 31, 2007

   —       $      

Note 7—Income Tax

At March 31, 2007, we had approximately $39,600,000 in pretax US federal and state net operating loss carryforwards, expiring through 2026. We incurred portions of such net operating loss carryforwards prior to September 17, 2002, our reverse acquisition date. As such, we anticipate limitations to the use of these carryforwards under Internal Revenue Code Section 382. We provide for deferred tax arising from temporary differences in the book and tax carrying amounts of assets and liabilities. Temporary differences arise primarily from differences in reporting stock-based compensation, intangible drilling and completion cost and oil and gas impairment expense. We have fully reserved the deferred tax assets that arise from such operating loss carryforwards and temporary differences of approximately $(15,246,000) at March 31, 2007, in the accompanying financial statements as follows.

 

     March 31,2007  

Net operating loss deduction

   $ 15,246,000  

Valuation Allowance

     (15,246,000 )

Net Deferred Tax Asset

   $ —    

Reconciliation of the differences between the statutory tax rate and the effective tax rate is:

 

     March 31,
2007
 

Federal statutory tax rate

   34.0 %

State Tax Rate

   4.5 %

Effective Tax Rate

   38.5 %

Valuation Allowance

   (38.5 )%

Net Effective Tax Rate

   —    

Note 8—Other Related Party Transactions

Consulting Agreements

We entered into management consulting agreements dated October 1, 2004, as amended, with a director for the payment of management fees of $7,500 CAD per month, for the three months ended March 31, 2006, he was paid $19,465 USD for management services under the terms of that agreement. The management consulting agreement was terminated on September 30, 2006.

 

15


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

We entered into a consulting agreement for services on an hourly basis with our contract CFO. For the three months ended March 31, 2007 and March 31, 2006, he was paid $6,100 and $31,935, respectively, for services rendered under this agreement. He resigned his position on April 23, 2007.

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 three months ended March 31, 2007 we incurred $2,120 in director’s fees and December 31, 2005 we incurred $183,418, including the amounts discussed in the preceding two paragraphs and $391,203, respectively, in management and consulting fees to our directors and officers. The $391,203 included $100,000 paid to our former CEO as part of a termination package.

Note 9—Subsequent Events

Acquisition of Our Securities by Universal Property Development and Acquisition Corporation (“UPDA”)

Acquisition of Our Common Stock by UPDA

Pursuant to the terms of a Stock Purchase Agreement dated April 19, 2007, by and between us and Universal Property Development and Acquisition Corporation, a Nevada corporation (“UPDA”), UPDA agreed to purchase a total of 50,631,764 shares (the “Shares”) of our common stock in a private transaction with the company for an aggregate purchase price of $1,000,000 in cash (the “Stock Sale”). The Stock Sale closed on April 20, 2007 (the “Closing Date”), through the payment by UPDA of the aggregate purchase price and the transfer of the Shares by us to UPDA.

As of April 10, 2007, and prior to the closing of the Stock Sale, we had 46,737,013 shares of common stock issued and outstanding. As a result of the closing of the Stock Sale on April 20, 2007, UPDA owned 50,631,764 of the 97,368,777 shares of our common stock that were outstanding after such closing. Therefore, as of April 20, 2007, UPDA owned 52% of our issued and outstanding common stock.

On April 23, 2007, subsequent to the closing of the Stock Sale, 333,333 shares of common stock were issued to Energy Capital Solutions. The company entered into a letter agreement with Energy Capital Solutions (ECS) on May 31, 2006, with a document date of May 30, 2006. The company extended this agreement with a First Amendment dated January 29, 2007. Under the terms of these agreements, ECS was eligible to receive 4% of the transaction proceeds in cash and 3% of the transactions proceeds in equity or Heartland stock according to the terms and timeline of the Potential Investor.

The Stock Sale constitutes a change of control transaction for us as UPDA now owns a majority of our outstanding voting securities. Therefore, UPDA has the voting power to pass actions requiring shareholder approval and has the voting power to control the election of directors to our board of directors.

The Company is obligated under a series of employment offering letters, issued well prior to the UPDA Company common stock acquisition described above, to provide severance pay to certain key employees for a six month period after a change in the control of the Company and a material change in position has occurred. These employment obligations total approximately $60,000.

Acquisition of Our Promissory Notes By UPDA

On April 20, 2007, UPDA also closed a note purchase transaction (the “Note Purchase”) pursuant to the terms and conditions of a Note Purchase Agreement, dated April 19, 2007, between UPDA as the buyer and SDS Capital Group SPC, Ltd. and Baystar Capital II, L.P. (together the “Sellers”) whereby UPDA purchased four million seven hundred fifty-six thousand dollars ($4,756,000) in face amount of our outstanding Convertible Senior Secured Promissory Notes (the “Notes”) for an aggregate purchase price of $1,500,000 in cash and 26,260,504 restricted shares of the common stock of UPDA. Note 3 to these financial statements above describes our issuance of the Notes (therein also defined as the Notes) to the Sellers on September 29, 2006.

 

16


Heartland Oil & Gas Corp.

Financial Statement Notes—(Continued)

 

The Notes do not pay interest but are convertible into shares of our common stock based on a conversion price of $0.04 per share. Under the terms of this conversion provision, the Notes acquired by UPDA are convertible into 118,900,000 shares of our common stock. In the event of a full conversion of the Notes to shares of our common stock, UPDA would hold an aggregate of 169,531,764 shares of our common stock.

As a condition to the closing of the Note Purchase, and in exchange for UPDA’s agreement to extend the maturity date of the Notes from April 16, 2007 to December 31, 2007, we executed consents to the transfer of the Notes to UPDA and the assignment by the Sellers of their security interests under an existing security agreement covering the Notes to UPDA.

Changes to the Our Board of Directors

As a condition to the closing of the Stock Sale, Messrs. Robert Poley, John Martin and Todd Mackintosh resigned as members of our board of directors on April 20, 2007. Mr. Philip Winner remained as the sole member of our board of directors. Mr. Winner, as the remaining board member, has appointed Messrs. Kamal Abdallah and Christopher McCauley to fill two of the vacancies on the board of directors, effective no earlier than ten (10) days after the date on which our Information Statement on Schedule 14f-1 was filed with the Commission and mailed to all holders of record of our common stock. The appointment of Messrs. Abdallah and McCauley to our board of directors became effective on May 13, 2007.

Issuance of Options by Our Board of Directors

On April 17, 2007, the board of directors of the Company authorized 1,300,000 options to be granted to certain directors and key employees. The options have an exercise price of $.14 per share and a three-year term. The options vested on the date of issuance. Mr. Philip Winner was granted 500,000 options and Mr. Robert Poley, Mr. Todd Mackintosh and Mr. John Martin were granted 166,667, 166,667, and 166,666 options respectively. The remaining 300,000 options were granted to key employees.

 

17


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion reports material changes from December 31, 2006 through March 31, 2007, 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 Annual Report on Form 10-KSB for the period ended December 31, 2006.

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”, 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.

Overview and Outlook

Heartland Oil and Gas Corporation is an oil and gas company primarily engaged in exploration, development, and sale of Coal Bed Methane (“CBM”) in the Cherokee basin and Forest City basin of northeast Kansas. Heartland Oil and Gas Corporation holds our interest in nearly 1 million acres in eastern 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, operates our project areas in eastern Kansas.

Our website is located at http://heartlandoilandgas.com. The website can be used to access recent news releases and Securities and Exchange Commission (SEC) filings, our Annual Report, Proxy Statement, Board committee charters, code of business conduct and ethics, and other items of interest. SEC filings, including supplemental schedules and exhibits, can also be accessed free of charge through the SEC website at http://www.sec.gov. The information on our website, other links contained in our website and our website are not incorporated into this Report.

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. 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 300 thousand cubic feet of gas per day (“Mcfgpd”). Sales average approximately 225 Mcfgpd net of fuel gas, shrinkage, dehydration, and carbon dioxide extraction necessary to get the gas to sales quality. After processing, the gas delivered to the sales line averages 1006 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 200 Mcfgpd.

Liquidity and Capital Resources

At March 31, 2007, we owed $6,485,000 to two lenders. The original maturity date of the notes of March 28, 2007 was extended to April 16, 2007. On April 23, 2007 these notes were sold by the two lenders to UPDA and a shareholder of UPDA. As a condition to the closing of the Note Purchase, and in exchange for the extension of the maturity date of the Heartland Notes to December 31, 2007, the Registrant executed consents to the transfer of the Heartland Notes to UPDA and Five Star and the assignment by the Sellers of their security interests under an existing security agreement covering the Heartland Notes to UPDA.

 

18


On April 20, 2007, the Registrant completed the sale of 50,631,764 shares of its common stock to Universal Property Development and Acquisition Corporation, a Nevada Corporation (“UPDA”), in a private transaction with gross proceeds to the Registrant from the sale equaling $1,000,000 (the “Stock Sale”). The Stock Sale was pursuant to the terms and conditions of a Stock Purchase Agreement, dated April 19, 2007, between the Registrant and UPDA.

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. We will need to raise approximately $10 million additional financing to execute our business plan. The issuance of additional equity securities by us would 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 would cease our operations.

Results of Operations for the Three Months Ended March 31, 2007 and 2006.

The following table summarized selected items from the state of operations at March 31, 2007 compared to March 31, 2006.

Revenue:

Natural Gas Sales

Natural gas sales for the three months ended March 31, 2007 were $110,520 compared to sales of $55,716 for the three months ended March 31, 2006. This increase of $54,804 was the result of higher prices and additional days of production. We had our first production on February 18, 2006 therefore, the three months ended March 31, 2006 represents only 41 days of production, versus 90 days of production for 2007.

 

     Three Months Ended

Natural Gas Sales Data (Lancaster):

   March 31,
2007
   March 31,
2006
   Increase

MCF Volume

     17,161      10,440      6,721

Average Price

   $ 6.44    $ 5.34    $ 1.10

Total Revenue

   $ 110,520    $ 55,716    $ 54,804

Compression and transportation revenue:

Compression and transportation revenue represents the fees charged to our royalty owners for their proportionate share of these costs; the revenue and fees associated with Heartland Oil and Gas Corp. have been eliminated on consolidation. Compression and transportation revenue for three months ended March 31, 2007 and March 31, 2006 was $5,824 and $5,687, respectively.

 

19


Operating expense:

 

      Three Months Ended  
     March 31,
2007
   March 31,
2006
  

Increase/

(Decrease)

$

   

Increase/

(Decrease)

%

 

Direct expense

   $ 74,522    $ 55,875    $ 18,647     33 %

Exploration expense, expired leases

     23,159      115,459      (92,300 )   (80 %)

Depreciation, depletion & accretion

     97,923      86,623      11,300     13 %

Share based compensation

     8,437      131,569      (123,132 )   (94 %)

General and administrative

     196,176      400,448      (204,272 )   (51 %)
                            

Total operating expense

   $ 400,217    $ 789,974    $ (389,757 )   (49 %)
                            

Direct costs are the costs associated with operating producing wells and production taxes associated with the gas sales. Direct cost for the three months ended March 31, 2007 was $74,522, an increase of $18,647 or 33%, from $55,875 for the three months ended March 31, 2006. This increase was attributable to the increased days of production for the first quarter of 2007. The three months ended March 31, 2006 represented only 41 days of costs.

Exploration expense represents the cost of expired leases. The cost of expired leases for the three months ended March 31, 2007 was $23,159, a decrease of $92,300 or 80%, from $115,459 for the three months ended March 31, 2006. The higher costs in 2006 were the result of more leases expiring in that three month period.

Depreciation, depletion and accretion expense for 2007 and 2006 was $97,923 and $86,623, respectively, an increase of $11,300 or 13%. This increase is primarily due to the depreciation expense for the pipeline and facilities, which was for a three month period for the three months ended March 31, 2007 and for only a one and one-half month period for the three months ended March 31, 2006.

Share based compensation for the three months ended March 31, 2007 was $8,437, a decrease of $123,132 or 94%, from $131,569 for the three months ended March 31, 2006. The decrease occurred because no new shares have been issued since June 10, 2005.

General and administrative expenses for the three months ended March 31, 2007 was $196,176, a decrease of $204,272 or 51%, from $400,448 for the three months ended March 31, 2006. The decrease was a result of reduced professional and consulting fees in the amount of $130,440 and overall streamlining and reduction of expenses in the amount of $73,832.

Interest Income

Interest income for the three months ended March 31, 2007 was $3, a decrease of $9,448 from the $9,451 for three months ended March 31, 2006. This decrease was the result of the drop in our cash position during the same time period.

Interest expense

Interest expense for the three months ended March 31, 2007 was $6,296,446 as compared to no interest expense for the three months ended March 31, 2006. This interest expense resulted from the effect of the conversion of $6.3 million of Preferred stock to convertible debt. The value of the debt on the date of conversion was $1 with the balance being accreted up to the face value of $6.3 million over 180 days, principally during the three months ended March 31, 2007.

 

20


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 March 31, 2007. 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.

Part II—Other Information

 

Item 1. Legal Proceedings

We are not involved as a plaintiff in any material proceedings or pending litigations. We know of no active, pending or threatened legal proceedings against us which would be material to our operations or financial condition. 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 Form 10-KSB Annual Report for the year ended December 31, 2006. 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

Our debt matures on December 31, 2007, if we are not able to repay or restructure our debt on the maturity date or shortly thereafter, our lenders will foreclose on our assets and we will cease all operations.

 

21


At March 31, 2007, we owed $6,485,000 principal amount of promissory notes to two lenders. The original maturity date of the notes of March 28, 2007 has been extended to December 31, 2007. On April 20, 2007 these notes were purchased by UPDA and Five Star Partners who are the current note holders. If the current note holders do not convert the Notes to shares of common stock prior to maturity, and if we are unable to reach a definitive agreement on any alternative transaction, we will need to repay this debt, or the lenders will foreclose on our assets and we will cease operations. We currently do not have the funds to repay this debt.

We have had negative cash flow from operations and if we are not able to obtain further financing our business operations will 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 totaling $6,580,316 for the three months ended March 31, 2007 and $1,455,970 for the year ended December 31, 2006. We have cumulative net losses of $52,996,252 from inception to March 31, 2007. As of March 31, 2007 we had negative working capital. To continue our operations, we need additional financing. We will also need 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 will be unable to continue 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 will 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 has 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. Given our current stock price and our capital requirements, 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 a limited history of revenues from operations and have limited 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 are 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. 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.

Acreage expirations

Typical of an oil and gas lease, our leases have an expiration date. If our leases are not drilled prior to expiration, our leases will terminate. We have the option to renew much of our acreage, but that will require additional capital.

 

22


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:

 

   

quality and quantity of available data;

 

   

interpretation of that data; and

 

   

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 flow 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.

 

23


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 Cherokee 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 Cherokee 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 pre-closing 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.

 

24


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.

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

 

25


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.

On January 31, 2007 we borrowed $185,000 on non-interest bearing notes, of which $127,500 was received from SDS Capital Group, SPC Ltd. and $57,500 was received from Baystar Capital II, L.P. $65,000 of these funds, plus interest of $1,820 was used to pay off the December 7, 2006 note to SDS Capital Group SPC, Ltd. The maturity date of the new notes was March 28, 2007; however on March 27, 2007 both lenders extended the notes to April 4, 2007. On April 4, 2007 the notes were again extended to April 16, 2007. Pursuant to the sale of a 52% interest in the Company’s common stock to Universal Property Development and Acquisition Corporation on April 19, 2007, these notes are now held by UPDA and have been extended to December 31, 2007. (See Note 9—Subsequent Events)

Sale of Our Common Stock to UPDA

On April 20, 2007, we completed the sale of 50,631,764 shares of our common stock to Universal Property Development and Acquisition Corporation, a Nevada Corporation (“UPDA”), in a private transaction with gross proceeds to us from the sale equaling $1,000,000 (the “Stock Sale”). The Stock Sale was pursuant to the terms and conditions of a Stock Purchase Agreement, dated April 19, 2007, between us and UPDA. UPDA is an accredited investor (as defined in Rule 501 of Regulation D). The purchase price of the Stock Sale was paid in cash.

The shares of common stock issued in the Stock Sale are restricted shares and were issued in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(2) of the Securities Act. The shares issued in the Stock Sale are subject to Rule 144 under the Securities Act and therefore generally cannot be resold for a period of twelve months from the date of purchase. No general solicitations were made in connection with the Stock Sale, and prior to making any offer or sale, the Registrant had reasonable grounds to believe and believed that UPDA was capable of evaluating the merits and risks of the investment and was able to bear the economic risk of the investment.

 

26


As of April 10, 2007, and prior to the closing of the Stock Sale, we had 46,737,013 shares of common stock issued and outstanding. As a result of the closing of the Stock Sale on April 20, 2007, UPDA owned 50,631,764 of the 97,368,777 shares of our common stock that were outstanding after such closing. Therefore, as of April 20, 2007, UPDA owned 52% of our issued and outstanding common stock. The Stock Sale constitutes a change of control transaction for us as UPDA now owns a majority of our outstanding voting securities. Therefore, UPDA has the voting power to pass actions requiring shareholder approval and has the voting power to control the election of directors to our board of directors.

Use of Proceeds

The net proceeds from the Stock Sale was $1,000,000 in cash. We will use the net proceeds from the Stock Sale to fund our general operations, pay our transaction expenses, pay for our 2006 audit and pay for a “roll-off” director and executive officer insurance policy.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Submission of Matters to a Vote of Security Holders.

None.

 

Item 5. Other Information.

Acquisition of Our Promissory Notes by UPDA

On April 20, 2007, UPDA closed a note purchase transaction (the “Note Purchase”) pursuant to the terms and conditions of a Note Purchase Agreement, dated April 19, 2007, between UPDA as the buyer and SDS Capital Group SPC, Ltd. and Baystar Capital II, L.P. (together the “Sellers”) whereby UPDA purchased four million seven hundred fifty-six thousand dollars ($4,756,000) in face amount of our outstanding Convertible Senior Secured Promissory Notes (the “Heartland Notes”) for an aggregate purchase price of $1,500,000 in cash and 26,260,504 restricted shares of the common stock of UPDA.

The Heartland Notes do not pay interest but are convertible into shares of our common stock based on a conversion price of $0.04 per share. Under the terms of this conversion provision, the Heartland Notes acquired by UPDA are convertible into 118,900,000 shares of our common stock. In the event of a full conversion of the Heartland Notes to shares of our common stock, UPDA would hold an aggregate of 169,531,764 shares of our common stock.

As a condition to the closing of the Note Purchase, and in exchange for UPDA’s agreement to extend the maturity date of the Heartland Notes from April 16, 2007 to December 31, 2007, we executed consents to the transfer of the Heartland Notes to UPDA and the assignment by the Sellers of their security interests under an existing security agreement covering the Heartland Notes to UPDA.

The Company is obligated under a series of employment offering letters, issued well prior to the UPDA Company common stock acquisition described above, to provide severance pay to certain key employees for a six month period after a change in the control of the Company and a material change in position has occurred. These employment obligations total approximately $60,000.

 

27


Changes to the Our Board of Directors

As a condition to the closing of the Stock Sale, Messrs. Robert Poley, John Martin and Todd Mackintosh resigned as members of our board of directors on April 20, 2007. Mr. Philip Winner remained as the sole member of our board of directors. Mr. Winner, as the remaining board member, has appointed Messrs. Kamal Abdallah and Christopher McCauley to fill two of the vacancies on the board of directors, effective no earlier than ten (10) days after the date on which our Information Statement on Schedule 14f-1 was filed with the Commission and mailed to all holders of record of our common stock. The appointment of Messrs. Abdallah and McCauley to our board of directors became effective on May 13, 2007.

Issuance of Options by Our Board of Directors

On April 17, 2007, the board of directors of the Company authorized 1,300,000 options to be granted to certain directors and key employees. The options have an exercise price of $.14 per share and a three-year term. The options vested on the date of issuance. Mr. Philip Winner was granted 500,000 options and Mr. Robert Poley, Mr. Todd Mackintosh and Mr. John Martin were granted 166,667, 166,667, and 166,666 options respectively. The remaining 300,000 options were granted to key employees.

 

Item 6. Exhibits.

 

Exhibit
Number
  

Description

3.1    Articles of Incorporation. Incorporated by reference to our Form SB-2 Registration Statement filed with the Securities and Exchange Commission on October 23, 2001.
3.2    Bylaws of Adriatic Holdings Ltd. Incorporated by reference to our Form SB-2 Registration Statement filed with the Securities and Exchange Commission on October 23, 2001.
3.3    Certificate of Amendment to Articles of Incorporation effective November 4, 2002. Incorporated by reference to our Form 10-QSB filed with the Securities and Exchange Commission on November 14, 2002.
3.4    Certificate of Amendment to Articles of Incorporation effective December 10, 2003. Incorporated by reference to our Form SB-2 Registration Statement filed with the Securities and Exchange Commission on November 15, 2004.
3.5    Certificate of Designation for shares of Series A Convertible Preferred Stock, effective December 18, 2003. Incorporated by reference to our Form SB-2 Registration Statement filed with the Securities and Exchange Commission on February 17, 2004.
3.6    Certificate of Designation for shares of Series B Convertible Preferred Stock, effective October 1, 2004. Incorporated by reference to our Form SB-2 Registration Statement filed with the Securities and Exchange Commission on November 15, 2004.
4.1    2005 Stock Option Plan. Incorporated by reference to our Form 10-KSB filed with the Securities and Exchange Commission on April 15, 2005.
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.

 

28


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: May 15, 2007

  /S/    PHILIP S. WINNER        
  Philip S. Winner
  Chief Executive Officer and President

 

29

EX-31.1 2 dex311.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER Certification of Chief Executive Officer

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of Sarbanes Oxley Act of 2002

I, Philip S. Winner, President, Chief Executive Officer, and Director certify that:

 

1. I have reviewed this March 31, 2007 report on Form 10-QSB of Heartland Oil and Gas Corp.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designated under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions abut the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

 

   /S/    PHILIP S. WINNER        

May 15, 2007

   Philip S. Winner
   President, Chief Executive Officer, and Director

 

EX-31.2 3 dex312.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER Certification of Chief Financial Officer

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of Sarbanes Oxley Act of 2002

I, Philip S. Winner, Chief Financial Officer, and Director certify that:

 

1. I have reviewed this March 31, 2007 report on Form 10-QSB of Heartland Oil and Gas Corp.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designated under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions abut the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

 

   /S/    PHILIP S. WINNER        

May 15, 2007

   Philip S. Winner
   Chief Financial Officer

 

EX-32.1 4 dex321.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER Certification of Chief Executive Officer

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to Section 906 of Sarbanes Oxley Act of 2002

In Connection with the Quarterly Report of Heartland Oil and Gas Corp. on Form 10-QSB for the period ending March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip S. Winner, President, Chief Executive Officer and Director of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

 

May 15, 2007       /S/    PHILIP S. WINNER        
     

Philip S. Winner

President, Chief Executive Officer and Director

EX-32.2 5 dex322.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER Certification of Chief Financial Officer

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to Section 906 of Sarbanes Oxley Act of 2002

In Connection with the Quarterly Report of Heartland Oil and Gas Corp. on Form 10-QSB for the period ending March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip S. Winner, Chief Financial Officer and Director of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

 

May 15, 2007       /S/    PHILIP S. WINNER        
     

Philip S. Winner

Chief Financial Officer

-----END PRIVACY-ENHANCED MESSAGE-----