Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion reports material changes from December 31, 2007 through March 31, 2008, 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, 2007. Factors that could cause or contribute to such difference include, but are not limited to; those discussed below and elsewhere in this quarterly report, particularly in the section entitled "Risks Related To Our Business". 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 Corp. is engaged in the exploration, development, production and sales of coal bed methane from its approximately 645,000 acre eastern Kansas leasehold position. The acreage is located in two areas in northeast Kansas, primarily in Linn and Miami Counties, located on the northern edge of the Cherokee basin, and the Forest City basin. Capital Expenditures Subject to obtaining financing, we plan to spend approximately $15 million in capital expenditures in the next twelve months. See Liquidity and Capital Resources, below. These expenditures will be directed toward developing existing proved and probable reserves on the Cherokee basin, constructing additional pipelines, and evaluating new project areas. Approximately 90% of the capital budget is focused on attempting to convert probable and possible reserves into proved reserves. We project that our capital program for the this year will allow us to create value by drilling 100 wells and installing 14.5 miles of transportation lines and associated facilities necessary to support the drilling program and to hook up currently stranded gas, compared to the 2007 program in which we drilled 21 wells. We have currently secured the necessary pipeline rights of way to achieve this program. Successes may also encourage the initiation of additional discretionary projects.
We are trying to obtain adequate financing so we can develop our Cherokee basin project into a nucleus for future growth. We cannot assure that we will be able to obtain such financing. Without it, we will have to cease operations. Appraisal, Evaluation and Exploitation Activity Since 2003, we have been active in assembling significant acreage positions which we believe are prospective for finding and developing commercial quantities of hydrocarbons. Heartland Energy Development Activity Cherokee basin Lancaster battery The Lancaster battery includes 25 producing wells, one shut in well awaiting connection, one disposal well, and associated production and water disposal facilities. The wells are drilled on 40 and 80 acre spacing. With the completion of the 5.5 mile gas gathering and processing plant in late 2006, we established production, proved reserves, and cash flow from our Lancaster battery. Lancaster is currently producing 500 Mcfgpd. Currently sales is approximately 380 Mcfgpd net of fuel gas, shrinkage, and carbon dioxide extraction. Beagle, Jake and Osawatomie batteries We are currently venting approximately 17 gross Mcfgpd from three other multi-well production batteries on the Cherokee basin. Including Lancaster, each battery is separated by approximately three miles, and thus defines a potential project covering at least 12 miles along the Cherokee basin. In August 2005 we drilled and completed two wells at Beagle and one well at Jake. In the second half of 2007 we have drilled 11 more wells in the Jake battery. We intend to put these fourteen wells, along with five wells originally drilled and completed by Evergreen Resources (one at Beagle and four at Osawatomie) into production if we are able to access financing necessary to do so. We plan to invest approximately $15 million on the Cherokee basin. Of the $15 million, we expect $13 million will be directed toward a 100 well, 160 acre development drilling program targeting shallow (600 to 800 foot drill depth) Pennsylvanian reservoirs of the Cherokee and Marmaton Groups and $2 million will be invested in pipelines and infrastructure necessary to support development drilling and to hook up stranded gas from Jake, Beagle, and Osawatomie batteries. Results of Operations for the Three Months Ended March 31, 2008 and 2007.
Revenue and operating expense During the three months ended March 31, 2008 and 2007, we sold $521,982 and $110,520 of natural gas, earned $25,292 and $5,824 in compression and transportation revenue, respectively. The increase in revenues was the result of the acquisition of Jack and Palo Pinto leases and increased production from our leases. The total volume for the three months ended March 31, 2008 and 2007 was 53,670 and 17,161 Mcf at an average price of $9.24 and $6.44, respectively. Lease operating expenses and production tax were $319,669 and $74,522, respectively. Exploration expense, expired leases for the three months ended March 31, 2008 and 2007 was $429,806 and $23,159, respectively, an increase of $406,647.
Depreciation, depletion and accretion expense for the three months ended March 31, 2008 and 2007 was $167,110 and $97,923, respectively, an increase of $69,187. The increase in depreciation, depletion and accretion was a result of the acquisition of Jack and Palo Pinto leases and increased production from our leases. Share based compensation was none and $8,437 for the three months ended March 31, 2008 and 2007, respectively. The decrease of $8,437 occurred because no shares were issued for compensation in 2008. Salaries and related benefits was $173,343 and $134,379 for the three months ended March 31, 2008 and 2007, respectively.
Other general and administrative expense for the three months ended March 31, 2008 and 2007 was $237,391 and $61,797, respectively, an increase of $175,594 . This change was due in part to an increase in our legal and accounting fees. Legal and accounting fees were $96,598 for the three months ended March 31, 2008. Interest expense for the three months ended March 31, 2008 and 2007 was $92,577 and $6,296,446, respectively, a decrease of $6,203,869. This change was due to the effect of the conversion of $6,300,000 of Preferred stock to convertible debt in the first quarter of 2007. Interest income for the three months ended March 31, 2008 and 2007 was $4,986 and $3, respectively. The increase of $4,983 was due to interest on notes receivable outstanding in 2008 that were not outstanding in 2007. Gain on sale of leases for the three months ended March 31, 2008 and 2007 was $27,200 and none, respectively. The increase was due to the sale of interest in leases to Noble Petroleum, Inc in 2008. Loss on abandonment of fixed assets for the three months ended March 31, 2008 and 2007 was $6,816 and none, respectively. Net loss for the three months ended March 31, 2008 and 2007 was $847,252 and $6,580,316, respectively. The decrease of $5,733,064 was mainly due to the interest expense that resulted from the effect of the conversion of $6,300,000 of Preferred stock to convertible debt in the first quarter of 2007. Operation Plan Assuming additional financing and the repayment or restructuring of our debt, for the next 12 months, we plan to sell gas from Lancaster, and seek financing necessary to initiate drilling operations and hook up currently venting wells at Jake, Beagle, and Osawatomie. Based on geological mapping, pipelines, and leasehold position, we have defined a 100 well drilling program on our acreage and have obtained substantially all of the pipeline right of ways required to build the gathering system to tie in both the 100 well programs and the currently venting gas to existing sales lines and processing facilities. We have no drilling obligations or commitments, and, except for regulatory requirements, all activity is discretionary. Liquidity and Capital Resources Cash Requirements The Company has incurred recurring operating losses since its inception, and as of March 31, 2008 had an accumulated deficit of approximately $61,140,095 and had insufficient capital to fund all of its obligations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effect of the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. Three months ended March 31, 2008 compared to the three months ended March 31, 2007. Operating Activities As shown in the consolidated financial statements, at March 31, 2008, the Company had cash on hand of $1,315, compared to $59,291 at March 31, 2007. Net cash provided by operating activities was $212,515 for the three months ended March 31, 2008. We had a net loss of $847,252. We had non-cash charges that included $10,971 due to accretion of the asset retirement obligation, $6,816 loss on abandonment of fixed assets, $429,806 of exploration expense for expired leases, $156,139 of depreciation, depletion or amortization, $4,986 of interest income related to the note receivable from Catlin, and $92,363 of interest expense resulting from various notes and loans payable. In addition, changes in operating assets and liabilities totaled $395,858 for the three months ended March 31, 2008. Net cash used in operating activities was $60,927 for the three months ended March 31, 2007. We had a net loss of $6,580,316. We had non-cash charges that included $6,416,446 of interest expense resulting from discount on notes arising from the exchange of preferred stock for convertible debt, $92,949 of depreciation, depletion and amortization, $8,437 related to share based compensation, $23,159 of exploration expense for expired leases and $4,974 of accretion of asset retirement obligation. In addition, changes in operating assets and liabilities totaled $26,576 for the three months ended March 31, 2007. Investing Activities Cash flows used in investing activities was $283,801 during the three months ended March 31, 2008. It primarily consisted of $92,217 for purchase of pipeline and facilities, $177,179 of acquisition and exploration of oil and gas property, and $27,200 from proceeds from sale of oil and gas leases; less $41,605 advances made to parent entity and its UPDA-O subsidiary. Cash flows used in investing activities was $35,506 during the three months ended March 31, 2007. It primarily consisted of $30,018 of cash proceeds from the acquisition and exploration of oil and gas property and $5,488 for purchase of pipeline and facilities. Financing Activities The cash flows provided by financing activities of $71,282 during the three months ended March 31, 2008, consisted of $37,218 decrease in cash overdraft, $108,500 from proceeds of loans from parent entity/company officer/shareholder. The cash flows provided by financing activities of $80,000 during the three months ended March 31, 2007, consisted of an $80,000 advance received from buyer on the sale of the majority interest in the Company. We had losses of $847,252 for the three months ended March 31, 2008. While we expect to raise the additional financing in the future, there can be no guarantee that we will be successful. We have no significant off-balance sheet arrangements.
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