Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10Q
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(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from __________ to ___________
Commission file number: 000-26317
HINTO ENERGY, INC.
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(Exact name of registrant as specified in its charter)
Wyoming 84-1384961
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(State of Incorporation) (IRS Employer ID Number)
7609 Ralston Road, Arvada, CO 80002
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(Address of principal executive offices)
303-647-4850
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(Registrant's Telephone number)
(Former Address and phone of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 for Regulation S-T (ss.232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [X ] No []
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X] (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 17, 2012, there were 13,925,931 shares of the registrant's common
stock issued and outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
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Balance Sheets - March 31, 2012 and December 31, 2011 1
Statements of Operations -
Three months ended March 31, 2012 and the period of March 8,
2011 (inception) through March 31, 2012 and the period from
from March 8, 2011 (Inception) through March 31, 2012 2
Statements of Changes in Shareholders' Deficit -
From March 8, 2011 (Inception) to March 31, 2012 3
Statements of Cash Flows -
Three months ended March 31, 2012 and the period of March 8,
2011 (inception) through March 31, 2012 and the period from
March 8, 2011 (Inception) through March 31, 2012 4
Notes to the Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- Not Applicable 3
Item 4. Controls and Procedures 3
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 4
Item 1A. Risk Factors - Not Applicable 4
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 4
-Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable 5
Item 4. Mine Safety Disclosure - Not Applicable 5
Item 5. Other Information - Not Applicable 5
Item 6. Exhibits 5
SIGNATURES 6
PART I
ITEM 1. FINANCIAL STATEMENTS
HINTO ENERGY, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2012 2011
--------------- ---------------
Assets
Current Assets:
Cash $ 286,645 $ 487,501
Deposits 111,250 25,000
--------------- ---------------
Total Current Assets 397,895 512,501
--------------- ---------------
Other assets:
Oil and Gas Leases 676,700 478,200
--------------- ---------------
Total Other Assets 676,700 478,200
--------------- ---------------
Total Assets $ 1,074,595 $ 990,701
=============== ===============
Liabilities and Stockholders' (Deficit) Equity
Current liabilities
Accounts payable $ 106,403 $ 71,315
Accrued liabilities 47,493 47,510
Convertible notes payable - 500,000
Subscription received - 40,000
Notes payable, other 375,000 375,000
--------------- ---------------
Total Current Liabilities 528,896 1,033,825
Long term note payable 500,000 500,000
--------------- ---------------
Total liabilities $ 1,028,896 $ 1,533,825
--------------- ---------------
Stockholders' (Deficit) Equity
Preferred stock, $0.001 par value; 25,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $0.001 par value; 50,000,000 shares authorized,
13,925,931 and 9,375,000 shares issued and outstanding
at March 31, 2012 and December 31, 2011, respectively 13,926 938
Additional paid-in capital 991,988 210,030
Deficit accumulated during the development stage (960,215) (795,873)
--------------- ---------------
Total Stockholders' (Deficit) Equity 45,699 (584,905)
--------------- ---------------
Non-controlling interest - 41,781
--------------- ---------------
Total liabilities and stockholders' (deficit) equity $ 1,074,595 $ 990,701
=============== ===============
See the notes to these financial statements.
1
HINTO ENERGY, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND
THE PERIOD FROM MARCH 8, 2011 (Inception) THROUGH MARCH 31, 2012
(UNAUDITED)
For The Three From March 8, March 8, 2011,
Months Ended 2011 (Incpeiton) (Inception) to
March 31, Through March 31,
2012 March 31, 2011 2012
---------------------- ------------------- -------------------
Revenue: $ - $ - $ -
---------------------- ------------------- -------------------
Operational expenses:
Office expenses 156,570 - 401,892
Goodwill write off - - 339,195
Consulting fees 63,230 - 272,433
---------------------- ------------------- -------------------
Total operational expenses 219,800 - 1,013,520
---------------------- ------------------- -------------------
Other Income (Expenses)
Interest expense (17,859) - (51,434)
---------------------- ------------------- -------------------
Total other income (expense) (17,859) - (51,434)
---------------------- ------------------- -------------------
Net loss $ (237,659) $ - $ (1,064,954)
---------------------- ------------------- -------------------
Less: Loss contributable to non-controlling interest - - -
---------------------- ------------------- -------------------
Net loss attibutable to South Uintah Gas Properties $ (237,659) $ - $ (1,064,954)
====================== =================== ===================
Per share information
Net loss per common share
Basic $ (0.02) $ -
Fully diluted * *
====================== ===================
Weighted average number of common
stock outstanding 11,773,206 -
====================== ===================
* Not provided as it is anti-dilutive
See the notes to these financial statements.
2
HINTO ENERGY, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY
FOR THE PERIOD FROM MARCH 8, 2011 (Inception) THROUGHMARCH 31, 2012
(UNAUDITED)
Deficit Stockholders'
accumulated Equity South
Additional During Uintah Gas Non- Total
Common Stock paid-in Development Properties controlling Stockholders'
Number of Shares Amount Capital Stage Inc. Interest Equity
--------------- ---------- ------------- ------------- ------------- ------------ ---------
Issuance of Founder Shares for cash 1,000,000 $ 1,000 $ (900) $ - $ 100 - $ 100
Issuance of Founder Shares for cash 1,000,000 1,000 (900) - 100 - 100
Issuance of Founder Shares for services 5,500,000 5,500 (4,950) - 550 - 550
Issuance of Common Stock 2,000,000 2,000 (1,800) - 200 - 200
for oil and gas leases
Shares cancelled in exchange for Hinto
shares held by South Uintah (300,000) (300) 300 - - - -
Issuance of shares for consulting 175,000 175 (157) - 18 - 18
Issuance of stock for cash by Hinto - - 147,000 - 147,000 63,000 210,000
Shareholder capital contribution - - 63,000 - 63,000 27,000 90,000
Minority interest at purchase
of majority interest in subsidiary - - - - - (16,797) (16,797)
Net Loss - - - (795,873) (795,873) (31,422) (827,295)
Recapitalization, due to reverse merger 2,000,000 2,000 71,203 (31,422) 41,781 (41,781) -
--------------- ---------- ------------- ------------- ------------- ------------ --------
Balance - December 31, 2011 11,375,000 11,375 272,796 (827,295) (543,124) - (543,124)
--------------- ---------- ------------- ------------- ------------- ------------ --------
Issuance of Shares for cash 410,000 410 204,590 - 205,000 - 205,000
Conversion of notes to common stock 2,071,931 2,072 515,910 - 517,982 - 517,982
Issuance of shares for services 69,000 69 103,431 - 103,500 - 103,500
Net Loss - - - (237,659) (237,659) - (237,659)
--------------- ---------- ------------- ------------- ------------- ------------ --------
Balance - March 31, 2012 13,925,931 $ 13,926 $ 1,096,727 $(1,064,954) $ 45,699 $ - $ 45,699
=============== ========== ============= ============= ============= ============ ========
See the notes to these financial statements.
3
HINTO ENERGY, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND
THE PERIOD FROM MARCH 8, 2011 (Inception) THROUGH MARCH 31, 2012
(UNAUDITED)
For The Three From March 8, March 8, 2011
Months Ended 2011 (Inception) (Inception) to
March 31, Through March 31,
2012 March 31, 2011 2012
-------------------- ----------------- --------------------
Cash Flows from Operating Activities:
Net Loss $ (237,659) $ - $ (1,064,954)
Adjustments to net loss for non-cash items:
Accrued interest converted to stock 17,982 - 17,982
Write down of goodwill in subsidiary - - 339,195
Compensatory stock issuances 17,250 - 17,800
Adjustments to reconcile net loss to net cash used
in operating activities:
Increase in deposits - - (25,000)
Increase in accounts payable 35,088 - 50,529
Increase in accrued liabilities (17) - 47,493
Increase in stock subscription payable - - 40,000
-------------------- ----------------- --------------------
Net Cash Used by Operating Activities (167,356) - (576,955)
-------------------- ----------------- --------------------
Cash Flows from Investing Activities
Investment to acquire 70% interest in subsidiary - - (300,000)
Investment in well (198,500) - (198,500)
Purchase of Oil and Gas leases - - (303,000)
-------------------- ----------------- --------------------
Net Cash Used in Investing Activities (198,500) - (801,500)
-------------------- ----------------- --------------------
Cash Flows from Financing Activities:
Proceeds from convertible promissory notes - - 1,000,000
Proceeds from other notes payable - - 400,000
Payments on other notes payable - - (200,000)
Proceeds from shareholder contribution - - 90,000
Proceeds from stock sales 165,000 - 375,100
-------------------- ----------------- --------------------
Net Cash Provided by Financing Activities 165,000 - 1,665,100
-------------------- ----------------- --------------------
Net Increase (decrease) in Cash (200,856) - 286,645
Cash and Cash Equivalents - Beginning of Period 487,501 - -
-------------------- ----------------- --------------------
Cash and Cash Equivalents - End of Period $ 286,645 $ - $ 286,645
==================== ================= ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense $ - $ - $ -
==================== ================= ====================
Cash paid for income taxes $ - $ - $ -
==================== ================= ====================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Net deficit of subsidiary on purchase $ - $ - $ (55,992)
==================== ================= ====================
Issuance of notes payable for assets $ - $ - $ 175,000
==================== ================= ====================
Issuance of common stock for accounts payable $ 17,250 $ - $ 100
==================== ================= ====================
Issuance of common stock for oil leases $ - $ - $ 200
==================== ================= ====================
See the notes to these financial statements.
4
HINTO ENERGY, INC.
(A Development Stage Company)
Notes to the Financial Statements
For the Periods Ended March 31, 2012 and December 31, 2011
(Unaudited)
NOTE 1 - BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Hinto Energy, Inc. ("the Company") was incorporated in February 13, 1997 in the
state of Wyoming. The Company was originally incorporated for the purpose of
general investing. Due to an inability to raise adequate financing the Company
was forced to cease operations in 2001. On October 12, 2004, the Company filed a
Form 15-12G, with the Securities and Exchange Commission ("SEC") to cease its
filing obligations under the Securities Act of 1934. On November 14, 2007, the
Company filed a Registration Statement on Form S-1 in order to register its
outstanding shares of common stock and resume its SEC filing status.
The Company's fiscal year end is December 31st. The Company's financial
statements are presented on the accrual basis of accounting.
Share Exchange Agreement
On July 27, 2011, the Company entered into a Share Exchange and Acquisition
Agreement with South Uintah Gas Properties, Inc. ("South Uintah") and the South
Uintah shareholders. Pursuant to the Share Exchange and Acquisition Agreement
("the Agreement"), the Company has agreed to issue shares of its restricted
common stock for 100% of the issued and outstanding common stock of South
Uintah. The shares are to be exchanged on a one for one basis.
The closing of the transaction is dependent upon the delivery of audited
financial statements by South Uintah.
Prior to the signing of the Agreement, South Uintah had purchased 3,000,000
shares of the Company's common stock from its then majority shareholder Ms.
Sharon Fowler. After such purchase, South Uintah holds approximately 70% of the
issued and outstanding common stock of the Company. As part of the Agreement,
South Uintah has agreed to return the 3,000,000 shares of common stock to the
Company. On December 22, 2011 the Company and South Uintah modified the purchase
agreement and reduced the number of shares to be returned by South Uintah by
300,000, to 2,700,000. The Company plans to retire such shares to treasury at
that time.
On January 23, 2012 the Company completed the Share Exchange and Acquisition
Agreement ("the Agreement") and the shareholders of South Uintah became the
majority shareholders of Hinto Energy, Inc. Hinto issued 11,446,931 shares of
stock in a one for one share exchange, assumed $175,000 in notes payable and
issued 6,700,000 of warrants in a one for one exchange with South Uintah warrant
holders. South Uintah returned 2,700,000 shares of Hinto stock to the Company,
such stock being cancelled. The Company accounted for the Share Exchange and
Acquisition as a reverse capitalization, with South Uintah being the accounting
acquirer.
5
Basis of Presentation
Development Stage Company
The Company has not earned significant revenues from planned operations.
Accordingly, the Company's activities have been accounted for as those of a
"Development Stage Company." Therefore, the Company's financial statements of
operations, stockholders' equity and cash flows disclose activity since the date
of the Company's inception, in this case, South Uintah Gas Properties, Inc., for
the period March 8, 2011 through December 31, 2011 and the combined companies,
Hinto and South Uintah from January 1, 2012 forward.
Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management 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 revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less and money market instruments to be cash equivalents.
Oil and Gas Properties, Full Cost Method
The Company uses the full cost method of accounting for oil and gas producing
activities. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells used to find proved reserves, and to drill and
equip development wells including directly related overhead costs and related
asset retirement costs are capitalized.
Under this method, all costs, including internal costs directly related to
acquisition, exploration and development activities are capitalized as oil and
gas property costs. Properties not subject to amortization consist of
exploration and development costs which are evaluated on a property-by-property
basis. Amortization of these unproved property costs begins when the properties
become proved or their values become impaired. The Company assesses the
realization of unproved properties, taken as a whole, if any, on at least an
annual basis or when there has been an indication that impairment in value may
have occurred. Impairment of unproved properties is assessed based on
management's intention with regard to future exploration and development of
individually significant properties and the ability of the Company to obtain
funds to finance such exploration and development. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized.
Costs of oil and gas properties will be amortized using the units of production
method.
6
In applying the full cost method, the Company will perform an impairment test
(ceiling test) at each reporting date, whereby the carrying value of property
and equipment is compared to the "estimated present value," of its proved
reserves discounted at a 10-percent interest rate of future net revenues, based
on current economic and operating conditions, plus the cost of properties not
being amortized, plus the lower of cost or fair market value of unproved
properties included in costs being amortized, less the income tax effects
related to book and tax basis differences of the properties. If capitalized
costs exceed this limit, the excess is charged as an impairment expense.
Revenue Recognition
The Company recognizes revenue when it is earned and expenses are recognized
when they occur.
Net Loss per Share
Basic net loss per common share is calculated by dividing the net loss
applicable to common shares by the weighted average number of common and common
equivalent shares outstanding during the period. For the periods ended March 31,
2012 and December 31, 2011, there were no potential common equivalent shares
used in the calculation of weighted average common shares outstanding as the
effect would be anti-dilutive because of the net loss.
Stock-Based Compensation
The Company adopted the provisions of and accounts for stock-based compensation
using an estimate of value in accordance with the fair value method. Under the
fair value recognition provisions of this statement, stock-based compensation
cost is measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service
period, which generally is the vesting period. The Company elected the
modified-prospective method, under which prior periods are not revised for
comparative purposes. The valuation method applies to new grants and to grants
that were outstanding as of the effective date and are subsequently modified.
Fair Value of Financial Instruments
The carrying amount of accounts payable is considered to be representative of
respective fair values because of the short-term nature of these financial
instruments.
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss) and
accordingly, net loss is equal to comprehensive loss in all periods.
Income Taxes
Provision for income taxes represents actual or estimated amounts payable on tax
return filings each year. Deferred tax assets and liabilities are recorded for
the estimated future tax effects of temporary differences between the tax basis
of assets and liabilities and amounts reported in the accompanying balance
sheets, and for operating loss and tax credit carry forwards. The change in
deferred tax assets and liabilities for the period measures the deferred tax
provision or benefit for the period. Effects of changes in enacted tax laws on
deferred tax assets and liabilities are reflected as adjustment to the tax
provision or benefit in the period of enactment.
7
Recent Accounting Pronouncements
There were accounting standards and interpretations issued during the period
ended March 31, 2012, none of which are expected to have a material impact on
the Company's financial position, operations or cash flows.
NOTE 2 - GOING CONCERN AND MANAGEMENTS' PLAN
The Company's financial statements for the three months ended March 31, 2012 and
the period of March 3, 2011 through December 31, 2011 have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. The
Company reported a net loss of $237,659 for the three months ended March 31,
2012, and an accumulated deficit of $960,215 as of March 31, 2012. At March 31,
2012, the Company had a working capital deficit of $131,001.
The future success of the Company is likely dependent on its ability to attain
additional capital, or to find an acquisition to add value to its present
shareholders and ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be successful in
obtaining such financing, or that it will attain positive cash flow from
operations. Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity for the
Company to continue as a going concern.
NOTE 3 - OIL AND GAS LEASES
The Company purchased a farmout of deep right interests in approximately 5,000
net acres in the Uintah Basin in Utah in July 2011, amended in December 2011.
The purchase price of the farmout interest was $478,200, made up of $303,000 in
cash, $175,000 in notes payable and $200 in common stock (2,000,000 shares.) The
Company has subsequently expended an additional $198,500 in cash for the
completion of a gas pipeline connection, surface equipment and initial well
rework.
NOTE 4 - CURRENT LIABILITIES
The Company has $375,000 in other notes payable that it expects to be paid in
the next twelve months. Of this amount, $200,000 is to be returned to a former
investor. Further information regarding the $200,000 amount payable is found in
Note 7.
NOTE 5- LONG TERM NOTE PAYABLE
The Company placed a $500,000 secured convertible note payable with a single
investor. The note has a term of 3 years, an interest rate of 10%, is
convertible into the Company's common stock at $1 per share and is secured by
oil and gas leases held by South Uintah Gas Properties, Inc.
NOTE 6 - STOCKHOLDERS' EQUITY
Common Stock
The authorized common stock of the Company is 50,000,000 shares of common stock
with a $0.001 par value. At March 31, 2012, the Company had 13,925,931 shares of
its common stock issued and outstanding.
8
During the three months ended March 31, 2012, the Company issued 410,000 shares
of its common stock to investors that purchased $205,000 of the securities at a
price of $.50 per common share and 69,000 shares for services to be provided
over a six month period beginning in February 2012, valued at $1.50 per share.
The Company also issued 11,375,000 of its restricted common shares to acquire
South Uintah Gas Properties, Inc.
Preferred Stock
On August 18, 2011, the Company filed an amendment to the Articles of
Incorporation with the Secretary of State of Wyoming to authorize 25,000,000
shares of Preferred Shares to be designated in any series or classes and with
those rights, privileges and preferences to be determined at the discretion of
the Company's Board of Directors. At this time, the Company has not designated
any series of preferred stock or issued any shares of preferred stock.
Stock Option Plan
On August 17, 2011, the Company's shareholders approved the 2011 Hinto Energy,
Inc. Stock Option and Award Incentive Plan ("Plan"). The Plan provides for the
grant of stock options to directors, officers, employees, consultants, and
advisors of the Company. The Plan is administered by a committee consisting of
members of the Board of Directors (the "Stock Option Committee"), or in its
absence, the Board of Directors.
The Plan provides for a total of 2,000,000 shares of common stock to be reserved
for issuance subject to options. As of the date of this Proxy Statement, the
Board has not approved the grant of any options to purchase shares of common
stock, nor the conditions, performance or vesting requirements.
Warrants
The Company had the following warrants outstanding at March 31, 2012:
Warrants Term in years Vesting in years Exercise Price
-------- ------------- ---------------- --------------
3,000,000 3 to 5 Variable $2.00
1,700,000 3 1 $1 and $3
2,000,000 2 Vested $0.50
Each warrant gives the holder the right to purchase one share of the Company's
common stock at the exercise price. The 3,000,000 unvested warrants, issued in
connection with consulting services, vest at various dates from May 2012 through
June 2014 and expire at various dates from May 2014 through June 2016. The
1,700,000 unvested warrants, issued in connection with consulting services, vest
at various dates from June 2012 through November 2012, with 1,100,000 warrants
being exercisable at $1 and 600,000 being exercisable at $3. The 2,000,000
warrants currently exercisable were issued in connection with notes payable and
expire at dates from May 2013 through July 2013. These 2,000,000 warrants are
callable at the option of the Company in the first year from the grant dates of
May through July 2011 at the exercise price under various conditions, generally
if the Company completes a $4,500,000 private placement of common stock. No
expense was recorded by the Company on the issuance of any of the 6,700,000
warrants, as the Company's common stock has no trading market and no material
common stock cash sales have been made, and thus none of the warrants were in
the money.
9
NOTE 7 - LEGAL MATTERS
In March 2012 a note holder of South Uintah Gas Properties, Inc., Bridge
Industries, LLC filed a complaint against the Company in the Circuit Court of
the Eighteenth Judicial Circuit, Seminole County, Florida, alleging in general
breach of contract and seeking return of all monies lent to South Uintah Gas
Properties, Inc. of $400,000, the value of 1,000,000 shares of the Company's
common stock and other equity appreciation, and compensation for services and
costs. The Company is evaluating the action and its response, and the outcome of
the case is currently unknown.
NOTE 8 - SUBSEQUENT EVENTS
The Company has evaluated it activities subsequent to the period ended March 31,
2012, through May 17, 2012 and found no reportable subsequent events.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward-looking statements.
The independent registered public accounting firm's report on the Company's
financial statements as of December 31, 2011, and for each of the years in the
two-year period then ended, includes a "going concern" explanatory paragraph,
that describes substantial doubt about the Company's ability to continue as a
going concern.
PLAN OF OPERATIONS
------------------
We had no operations prior to 2011 and we did not have any revenues during the
fiscal years ended December 31, 2011, 2010 and 2009. We did not recognize any
income in the years ended December 31, 2011 and 2010. We have minimal capital,
moderate cash and only our intangible assets which consist of our business plan,
relationships and contacts. We are illiquid and need cash infusions from
investors or shareholders to provide capital, or loans from any sources, none of
which have been arranged nor assured.
Share Acquisition and Exchange Agreement
On July 27, 2011, we entered into a Share Exchange and Acquisition Agreement
with South Uintah and the South Uintah shareholders. On January 23, 2012, we
entered into an Amended Share Exchange and Acquisition Agreement ("the Amended
Share Exchange Agreement"). Pursuant to the Amended Share Exchange Agreement, we
agreed to issue shares of the Company's restricted common stock for 100% of the
issued and outstanding common stock of South Uintah. The shares are to be
exchanged on a one for one basis. As a result, South Uintah became a
wholly-owned subsidiary of the Company.
In addition to the exchange of common stock, we have agreed to exchange on a one
for one basis the following outstanding debt and equity instruments with those
of our own. The table below sets forth the equity that is being exchanged.
Type of Equity South Uintah Balance To Be Issued By Hinto
----------------------------------- ------------------------ ---- -------------------------
Common Stock 11,446,931 shares 11,446,931 shares
Warrants (1) 6,700,000 6,700,000
Debt Instruments(2) $375,000 $375,000
(1) The warrants have exercise prices ranging from $0.50 to $3.00 per share
and terms ranging from 2 to 3 years.
(2) The debt instrument has a term of two years.
11
South Uintah Gas Properties, Inc. was incorporated in the state of Colorado on
March 8, 2011. South Uintah was organized to operate as an independent oil and
gas company which would engage in the acquisition, exploration, development,
production and sale of natural gas and crude oil. Selected managed risk
exploration ventures would also be considered from time to time. The core area
of operation is the Rocky Mountain region, which contains all of our areas of
interest.
With the acquisition of South Uintah, the Company intends to strive to be a low
cost and effective producer of hydrocarbons and intends to develop the business
model and corporate strategy as discussed herein.
During the quarter ended March 31, 2012, we made progress on our business plan
by completing the hookup of our 22-1 gas well in the Uintah Basin of Utah to a
pipeline. During the remaining part of 2012 our plan of operations includes:
2nd Quarter 2012 Development of South Uintah properties;
Commencement of Recompletion Operations;
Identification of possible oil and gas prospect
candidates; and
Seeking Additional Capital for Company.
3rd Quarter 2012 Continuation of Recompletion Operations;
Dependant upon receipt of additional capital,
the acquisition of additional oil and gas
prospects.
4th Quarter 2012 Continuation of Recompletion Operations and
development of any new oil
Expected 2012 Budget - 12 months (January 2012 through December 2012)
---------------------------------------------------------------------
Development of connection, rework, recompletion, 3 well program $1,500,000
Working Capital $1,300,000
Acquisitions $1,000,000
Payment of Debt $375,000
General and Administrative Expenses:
Legal and Accounting/Auditing $157,000
Consulting $495,000
Filing Fees (State, SEC, etc.) $7,500
Travel $60,000
Interest $66,000
Miscellaneous $405,000
--------------------
TOTAL $5,000,000
The Company may change any or all of the budget categories in the execution of
its business model. None of the line items are to be considered fixed or
unchangeable. The Company may need substantial additional capital to support its
budget. The Company has no revenues to date in the oil and gas exploration,
development and production business.
12
We have conducted a Private Offering of shares of our restricted Common Stock
for capital. We intend to raise up to $5,000,000 in the next twelve months with
a structure not yet determined in debt or equity. As of May 15, 2012, the
Company had sold approximately 880,000 shares, raising a total of $440,000. We
cannot give any assurances that we will be able to raise the full $5,000,000 to
fund the budget. Further, we will need to raise additional funds to support not
only our expected budget, but our continued operations. We cannot make any
assurances that we will be able to raise such funds or whether we would be able
to raise such funds with terms that are favorable to us.
We will need substantial additional capital to support our proposed future
energy operations. We have no revenues. We have no committed source for any
funds as of date here. No representation is made that any funds will be
available when needed. In the event funds cannot be raised when needed, we may
not be able to carry out our business plan, may never achieve sales or royalty
income, and could fail in business as a result of these uncertainties.
Decisions regarding future participation in exploration wells or geophysical
studies or other activities will be made on a case-by-case basis. We may, in any
particular case, decide to participate or decline participation. If
participating, we may pay our proportionate share of costs to maintain our
proportionate interest through cash flow or debt or equity financing. If
participation is declined, we may elect to farmout, non-consent, sell or
otherwise negotiate a method of cost sharing in order to maintain some
continuing interest in the prospect.
Since Hinto is a public company, which had nominal activity, the acquisition has
been treated as a recapitalization of South Uintah. Though Hinto was the legal
acquirer in the merger, South Uintah was the accounting acquirer since its
shareholders gained control of Hinto. Therefore at the date of the merger the
historical financial statements of South Uintah became those of Hinto. As a
result, for the financial statements as of March 31, 2012, the merger date will
reflect historical financial statements of South Uintah and supersede any prior
financial statements of Hinto.
RESULTS OF OPERATIONS
---------------------
For the Three Months Ended March 31, 2012 Compared to the Period of March 8,
2011 (Inception) through March 31, 2011
During the period of March 8, 2011 (Inception) through March 31, 2011, the
Company did not recognize any revenue, expenses, and losses, as it was newly
incorporated.
During the three months ended March 31, 2012, the Company did not recognize and
revenues from its operational activities. Since the 22-1 gas well has been
attached to a pipeline, and the Company believes that it should begin to
recognize at least minimal revenues during the year ended December 31, 2012.
During the three months ended March 31, 2012, we incurred total operational
expenses of $219,800. Operational expenses during the three months ended March
31, 2012 included $156,570 in general and administrative expenses and consulting
fees of $63,230. We expect operational expenses to increase as we continue to
pursue our operational plan.
During the three months ended March 31, 2012, we recognized a net loss of
$237,659.
LIQUIDITY
---------
At March 31, 2012, the Company had total current assets of $397,895, consisting
of cash of $286,645 and deposits of $111,250. At March 31, 2012, the Company had
total current liabilities of $528,896, consisting of accounts payable of
$106,403, accrued liabilities of $47,493 and notes payables of $375,000. At
March 31, 2012, we have a working capital deficit of $131,001.
13
During the three months ended March 31, 2012, we used cash of $167,356 in
operations. During the three months ended March 31, 2012, we recognized a net
loss of $237,659, which was adjusted for the non-cash item of accrued interest
of $18,083 paid in stock and $17,250 in compensatory stock issuances.
During the three months ended March 31, 2012, we used $198,500 in our investing
activities, solely in the development of our 22-1 well.
During the three months ended March 31, 2012, we received $165,000 from our
financing activities from the sale of shares of our common stock.
The Company placed a $500,000 secured convertible note payable with a single
investor. The note has a term of 3 years, an interest rate of 10%, is
convertible into the Company's common stock at $1 per share and is secured by
oil and gas leases held by South Uintah Gas Properties, Inc.
In March 2012 a note holder of South Uintah Gas Properties, Inc., Bridge
Industries, LLC filed a complaint against the Company in the Circuit Court of
the Eighteenth Judicial Circuit, Seminole County, Florida, alleging in general
breach of contract and seeking return of all monies lent to South Uintah Gas
Properties, Inc. of $400,000, the value of 1,000,000 shares of the Company's
common stock and other equity appreciation, and compensation for services and
costs. The Company is evaluating the action and its response, and the outcome of
the case is currently unknown.
During the three months ended March 31, 2012, the Company issued 410,000 shares
of its common stock to investors that purchased $205,000 of the securities at a
price of $.50 per common share and 69,000 shares for services to be provided
over a six month period beginning in February 2012, valued at $1.50 per share.
The Company also issued 11,375,000 of its restricted common shares to acquire
South Uintah Gas Properties, Inc.
Short Term.
On a short-term basis, we do not generate any revenue or revenues sufficient to
cover operations. Based on prior history, we will continue to have insufficient
revenue to satisfy current and recurring liabilities as it seeks explore. For
short term needs we will be dependent on receipt, if any, of offering proceeds.
Capital Resources
We have only common stock as our capital resource.
We have no material commitments for capital expenditures within the next year,
however if operations are commenced, substantial capital will be needed to pay
for participation, investigation, exploration, acquisition and working capital.
Need for Additional Financing
We do not have capital sufficient to meet our cash needs. We will have to seek
loans or equity placements to cover such cash needs. Once exploration commences,
our needs for additional financing is likely to increase substantially.
No commitments to provide additional funds have been made by our management or
other stockholders. Accordingly, there can be no assurance that any additional
funds will be available to us to allow it to cover our expenses as they may be
incurred.
14
Critical Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less and money market instruments to be cash equivalents.
Oil and Gas Properties, Full Cost Method
The Company uses the full cost method of accounting for oil and gas producing
activities. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells used to find proved reserves, and to drill and
equip development wells including directly related overhead costs and related
asset retirement costs are capitalized.
Under this method, all costs, including internal costs directly related to
acquisition, exploration and development activities are capitalized as oil and
gas property costs. Properties not subject to amortization consist of
exploration and development costs which are evaluated on a property-by-property
basis. Amortization of these unproved property costs begins when the properties
become proved or their values become impaired. The Company assesses the
realization of unproved properties, taken as a whole, if any, on at least an
annual basis or when there has been an indication that impairment in value may
have occurred. Impairment of unproved properties is assessed based on
management's intention with regard to future exploration and development of
individually significant properties and the ability of the Company to obtain
funds to finance such exploration and development. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized.
Costs of oil and gas properties will be amortized using the units of production
method.
In applying the full cost method, the Company will perform an impairment test
(ceiling test) at each reporting date, whereby the carrying value of property
and equipment is compared to the "estimated present value," of its proved
reserves discounted at a 10-percent interest rate of future net revenues, based
on current economic and operating conditions, plus the cost of properties not
being amortized, plus the lower of cost or fair market value of unproved
properties included in costs being amortized, less the income tax effects
related to book and tax basis differences of the properties. If capitalized
costs exceed this limit, the excess is charged as an impairment expense.
Revenue Recognition
The Company recognizes revenue when it is earned and expenses are recognized
when they occur.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
15
ITEM 4. CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) and that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Financial Officer (Principal
Executive Officer and Principal Financial Officer), as appropriate, to allow for
timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), our Chief Financial Officer carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation and the evaluation
conducted at December 31, 2011, our Chief Financial Officer has concluded that
our disclosure controls and procedures are not effective in timely alerting them
to material information required to be included in our periodic SEC filings and
to ensure that information required to be disclosed in our periodic SEC filings
is accumulated and communicated to our management, including our Chief Financial
Officer, to allow timely decisions regarding required disclosure.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
Hinto's management is responsible for establishing and maintaining adequate
internal control over financial reporting for the company in accordance with as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's
internal control over financial reporting is designed 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. The Company's internal control over financial
reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
Company's assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that the Company's receipts and
expenditures are being made only in accordance with authorizations of
Hinto's management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on Hinto's financial statements.
16
We have identified certain material weaknesses in internal control over
financial reporting relating to a shortage of accounting and reporting personnel
due to limited financial resources and the size of our Company, as detailed
below:
(1) The Company currently does not have, but is in the process of developing
formally documented accounting policies and procedures, which includes
establishing a well-defined process for financial reporting.
(2) Due to the limited size of our accounting department, we currently lack the
resources to handle complex accounting transaction. We believe this
deficiency could lead to errors in the presentation and disclosure of
financial information in our annual, quarterly, and other filings.
(3) As is the case with many companies of similar size, we currently a lack of
segregation of duties in the accounting department. Until our operations
expand and additional cash flow is generated from operations, a complete
segregation of duties within our accounting function will not be possible.
Considering the nature and extent of our current operations and any risks or
errors in financial reporting under current operations and the fact that we have
been a small business with limited employees, such items caused a weakness in
internal controls involving the areas disclosed above.
We have concluded that our internal controls over financial reporting were
ineffective as of March 31, 2012, due to the existence of the material
weaknesses noted above that we have yet to fully remediate.
There was no change in our internal control over financial reporting that
occurred during the fiscal quarter ended March 31, 2012, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2012 a note holder of South Uintah Gas Properties, Inc., Bridge
Industries, LLC filed a complaint against the Company in the Circuit Court of
the Eighteenth Judicial Circuit, Seminole County, Florida, alleging in general
breach of contract and seeking return of all monies lent to South Uintah Gas
Properties, Inc. of $400,000, the value of 1,000,000 shares of the Company's
common stock and other equity appreciation, and compensation for services and
costs. The Company is evaluating the action and its response, and the outcome of
the case is currently unknown.
ITEM 1A. RISK FACTORS
Not Applicable to Smaller Reporting Companies.
17
ITEM 2. CHANGES IN SECURITIES
During the period of January 1, 2012 through March 31, 2012, the Company has
made the following unregistered issuances of its securities.
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
------------------ ------------------------ ---------------- ------------------------------ ----------------------
Shares of South Uintah
pursuant to the Amended Shareholders of
1/23/12 Share Exchange and South Uintah Gas
Common Shares 11,446,931 Acquisition Agreement Properties
Warrants of South Uintah
pursuant to the Amended Warrant holders of
1/23/12 Share Exchange and South Uintah Gas
Warrants 2,000,000 Acquisition Agreement Properties
Warrant holders of
Warrants of South Uintah South Uintah Gas
1/23/12 pursuant to the Amended Properties
Warrants 4,700,000 Share Exchange and (Directors and
Acquisition Agreement Officers)
3/30/12 Common Shares 69,000 Services Business Associate
3/31/12 Common Shares 410,000 $205,000 Business Associate
Exemption From Registration Claimed
All of the above sales by the Company of its unregistered securities were made
by the Company in reliance upon Rule 506 of Regulation D of the Securities Act
of 1933, as amended (the "1933 Act"). All of the individuals and/or entities
that purchased the unregistered securities were primarily existing shareholders,
known to the Company and its management, through pre-existing business
relationships, as long standing business associates and employees. All
purchasers were provided access to all material information, which they
requested, and all information necessary to verify such information and were
afforded access to management of the Company in connection with their purchases.
All purchasers of the unregistered securities acquired such securities for
investment and not with a view toward distribution, acknowledging such intent to
the Company. All certificates or agreements representing such securities that
were issued contained restrictive legends, prohibiting further transfer of the
certificates or agreements representing such securities, without such securities
either being first registered or otherwise exempt from registration in any
further resale or disposition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. MINE SAFETY DISCLOSURE.
Not Applicable.
18
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS
Exhibits. The following is a complete list of exhibits filed as part of this
Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 31.1 Certification of Chief Financial Officer and Principal Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Principal Executive and Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HINTO ENERGY, INC.
(Registrant)
Dated: May __, 2012 By:/s/George Harris
----------------
George Harris (Principal Executive Officer,
Chief Financial Officer and Principal Accounting
Officer)