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 June 30, 2014
[ ] 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)
5350 South Roslyn Street, Suite 400, Greenwood Village, CO 80111
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(Address of principal executive offices)
303-647-4850
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(Registrant's Telephone number)
7609 Ralston Road, Arvada, CO 80002
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(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 August 12, 2014, there were 21,424,893 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 - June 30, 2014 and December 31, 2013 1
Statements of Operations -
For Three and Six Months Ended June 30, 2014 and 2013 2
Statements of Changes in Shareholders' Equity -
For the Six Months Ended June 30, 2014 3-4
Statements of Cash Flows -
For the Six Months Ended June 30, 2014 and 2013 5
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- Not Applicable 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable 25
Item 1A. Risk Factors - Not Applicable 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities - Not Applicable 25
Item 4. Mine Safety Disclosure - Not Applicable 25
Item 5. Other Information - Not Applicable 26
Item 6. Exhibits 26
SIGNATURES 27
PART I
ITEM 1. FINANCIAL STATEMENTS
HINTO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2014 2013
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(Unaudited) (Audited)
Assets
Current Assets:
Cash $ 1,015,565 $ 97,716
Accounts Receivable 64,705 29,886
Deposits 26,970 2,013
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Total Current Assets 1,107,240 129,615
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Property and Equipment:
Machinery, net of accumulated depreciation
of $14,342 and $7,754, respectively 114,658 51,313
Development of Technological Process 148,268 74,445
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Total Property and Equipment 262,926 125,758
Oil and Natural Gas Properties:
Proved Properties 1,008,300 1,004,300
Unproved Properties - -
Other Property and Equipment 622,596 437,109
Less Accumulated Depreciation and Depletion (96,418) (58,624)
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Total Oil and Natural Gas Properties 1,534,478 1,382,785
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Other Assets:
Deposits 162,500 135,500
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Total Assets $ 3,067,144 $ 1,773,658
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Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 192,102 $ 127,602
Accrued liabilities 102,548 44,136
Subscriptions received - 425,000
Notes payable, other - 115,000
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Total Current Liabilities 294,650 711,738
Asset recovery obligations 110,759 110,759
Long term note payable 2,575,000 575,000
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Total liabilities $ 2,980,409 $ 1,397,497
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Stockholders' 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,
21,424,893 and 20,151,769 shares issued and outstanding
at June 30, 2014 and December 31, 2013, respectively 21,425 20,152
Additional paid-in capital 4,953,027 4,292,143
Subscription receivable (60,000) (30,000)
Common stock, subscribed - 30,000
Accumulated deficit (4,827,716) (3,936,134)
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Total Stockholders' Equity 86,736 376,161
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Total liabilities and stockholders' equity $ 3,067,145 $ 1,773,658
============== ===============
See the notes to these consolidated financial statements.
1
HINTO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2014 2013 2014 2013
---------------- ----------------- ----------------- ---------------
Revenue: $ 163,339 $ 10,091 $ 191,339 $ 21,722
Direct Cost of Revenue 51,306 51,101 175,537 90,213
Depreciation and depletion (4,684) 1,522 8,006 9,938
---------------- ----------------- ----------------- ---------------
116,717 (42,532) 7,796 (78,429)
Operational expenses:
Operating Lease expense 309,931 49,446 325,747 53,301
General and Administrative expense 172,660 183,747 296,597 252,793
Consulting fees 126,881 82,500 228,160 148,000
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Total operational expenses 609,472 315,693 850,504 454,094
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Other Income (Expenses)
Gain on write off of accrued debt - - 50,000 -
Litigation Settlement Expense - - - (570)
Finance Expense - - - -
Interest expense (148,085) (23,258) (98,874) (38,556)
---------------- ----------------- ----------------- ---------------
Total other income (expense) (148,085) (23,258) (48,874) (39,126)
---------------- ----------------- ----------------- ---------------
Net loss $ (640,840) $ (381,483) $ (891,582) $ (571,649)
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Per share information
Net loss per common share
Basic $ (0.03) $ (0.02) $ (0.04) $ (0.03)
Fully diluted * * * *
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Weighted average number of common
stock outstanding 21,111,977 17,229,910 21,214,689 17,376,108
================ ================= ================= ===============
* Not provided as it is anti-dilutive
See the notes to these consolidated financial statements.
2
HINTO ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2014
(UNAUDITED)
Common Additional
Common Stock Subscription Stock paid-in
Number of Shares Amount Receivable Subscribed For Capital
------------------- ------------ ---------------- --------------- ----------------
Balance - January 1, 2014 20,151,769 $20,152 $ (30,000) $ 30,000 $4,292,143
Issuance of Shares for cash 910,000 910 - - 454,090
Issuance of shares for services 160,000 160 - - 79,840
Issuance of shares for interest 83,124 83 - - 41,274
Common stock subscribed for - - 30,000 (30,000) -
Common stock issued in exchange for bond cash 120,000 120 (60,000) - 59,880
Warrant issued for services - - - - 25,800
Net Loss - - - - -
------------------- ------------ ---------------- --------------- ----------------
Balance - June 30, 2014 21,424,893 $21,425 $ (60,000) $ - $4,953,027
=================== ============ ================ =============== ================
See the notes to these consolidated financial statements.
3
HINTO ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2014
(UNAUDITED)
(continued)
Total
Accumulated Stockholders'
Deficit Equity
-------------- ---------------
Balance - January 1, 2014 $(3,936,134) $ 376,161
Issuance of Shares for cash - 455,000
Issuance of shares for services - 80,000
Issuance of shares for interest - 41,357
Common stock subscribed for - -
Common stock issued in exchange for bond cash - -
Warrant issued for services - 25,800
Net Loss (891,582) (891,582)
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Balance - June 30, 2014 $(4,827,716) $ 86,736
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See the notes to these consolidated financial statements.
4
HINTO ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(UNAUDITED)
Six Months Ended
June 30,
2014 2013
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Cash Flows from Operating Activities:
Net Loss $ (891,582) $ (571,649)
Adjustments to net loss for non-cash items:
Accrued interest converted to stock 41,357 25,000
Stock issued for services 80,000 17,500
Amortization, Depreciation and Depletion 44,382 11,887
Asset remediation expenses - 38,637
Gain on discount of promissory note (50,000) -
Adjustments to reconcile net loss to net cash used in operating activities:
(Increase) in accounts receivable (34,819) (10,091)
(Increase) decrease in deposits and advances (26,157) (7,230)
Decrease in accounts payable 64,500 165,144
Increase in accrued liabilities 58,410 (5,986)
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Net Cash Used by Operating Activities (713,909) (336,788)
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Cash Flows from Investing Activities
Purchase of leases (4,000) (140,000)
Purchase of machinery and equipment (69,932) (34,543)
Development of technological process (73,823) -
Well rework (185,487) (100,243)
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Net Cash Used in Investing Activities (333,242) (274,786)
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Cash Flows from Financing Activities:
Proceeds from convertible promissory notes 2,000,000 75,000
Payments on other notes payable (65,000) (265,000)
Proceeds from sale of common stock 30,000 433,500
Increase in stock subscriptions payable - 136,500
Stock to be issued for services - 17,500
Proceeds from the exercise of warrants - 584,500
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Net Cash Provided by Financing Activities 1,965,000 982,000
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Net Increase in Cash 917,849 370,426
Cash and Cash Equivalents - Beginning of Period 97,716 57,709
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Cash and Cash Equivalents - End of Period $ 1,015,565 $ 428,135
====================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense $ - $ -
====================== ===================
Cash paid for income taxes $ - $ -
====================== ===================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Issuance of promissory note for services $ - $ 10,000
====================== ===================
Issuance of common stock for deposits and
accounts payable $ - $ 199,309
====================== ===================
Subscription Receivable $ (90,000) $ -
====================== ===================
Warrant issued for services $ 28,500 $ -
====================== ===================
Amortization of Warrant issued for services $ 3,182 $ -
====================== ===================
See the notes to these consolidated financial statements.
5
HINTO ENERGY, INC.
Notes to the Consolidated Financial Statements
For the Six Months Ended June 30, 2014 and 2013
(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 and its wholly-owned subsidiary, South Uintah Gas
Properties, Inc. are involved in the acquisition and development of oil and gas
prospects in the rocky mountain region. The Company has oil and gas leases,
wells and new drilling prospects in both Utah and Montana.
The Company's fiscal year end is December 31st. The Company's financial
statements are presented on the accrual basis of accounting under GAAP
(Generally Accepted Accounting Principles).
Basis of Presentation
Consolidation
The accompanying audited consolidated financial statements include the accounts
of Hinto Energy, Inc. and its wholly owned subsidiary, South Uintah Gas
Properties, Inc. (collectively the "Company"). All intercompany balances and
transactions have been eliminated in consolidation.
Interim Presentation
In the opinion of the management of the Company, the accompanying unaudited
consolidated financial statements include all material adjustments, including
all normal and recurring adjustments, considered necessary to present fairly the
financial position and operating results of the Company for the periods
presented. The financial statements and notes do not contain certain information
included in the Company's financial statements for the year ended December 31,
2013. It is the Company's opinion that when the interim financial statements are
read in conjunction with the December 31, 2013 Audited Financial Statements, the
disclosures are adequate to make the information presented not misleading.
Interim results are not necessarily indicative of results for a full year or any
future period.
NOTE 2 - 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.
6
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed principally on the straight-line method
over the estimated useful life of each type of asset which ranges from five to
seven years. Maintenance and repairs are charged to expense as incurred;
improvements and betterments are capitalized. Upon retirement or disposition,
the related costs and accumulated depreciation are removed from the accounts,
and any resulting gains or losses are credited or charged to income.
Life in June 30, December 31,
Asset Type Years 2014 2013
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Machinery 5 - 7 $128,999 $ 59,067
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Subtotal 128,999 59,067
Less Accumulated Depreciation (14,432) (7,754)
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Net Book Value $ 114,658 $ 51,313
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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.
The Company performs a quarterly "ceiling test" calculation to test its oil and
gas properties for possible impairment. The primary components impacting this
calculation are commodity prices, reserve quantities added and produced, overall
development costs, depletion expense, and tax effects. If the net capitalized
cost of the Company's oil and gas properties subject to amortization (the
carrying value) exceeds the ceiling limitation, the excess would be charged to
expense. The ceiling limitation is equal to the sum of the present value
discounted at 10% of estimated future net cash flows from proved reserves, the
cost of properties not being amortized, the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, and all
related tax effects. At June 30, 2014, the calculated value of the ceiling
limitation exceeded the carrying value of the Company's oil and gas properties
subject to the test, and no impairment was necessary.
7
Impairment
The Company reviews long-lived assets held for use, principally oil and gas
leases, for impairment when events or circumstances indicate that their carrying
value may not be recoverable. Impairment exists if the carrying amount of the
long-lived asset is not recoverable from the undiscounted cash flows expected
from its use and eventual disposition. We determine the amount of the impairment
loss by comparing the carrying value of the long-lived asset to its estimated
fair value. In the absence of quoted market prices, we determine estimated fair
value generally based on the present value of future probability weighted cash
flows expected from the continued use and value at sale of the long-lived asset.
Revenue and Accounts Receivable
The Company recognizes revenue for its production when the quantities are
delivered to, or collected by, the purchaser. Prices for such production are
generally defined in sales contracts and are readily determinable based on
certain publicly available indices. All transportation costs are included in
lease operating expenses.
Accounts receivable -- oil and natural gas sales consist of uncollateralized
accrued revenues due under normal trade terms, generally requiring payment
within 30 to 60 days of production. The Company reviews accounts receivable
periodically and reduces the carrying amount by a valuation allowance that
reflects its best estimate of the amount that may not be collectible. No
valuation allowance was recognized as of June 30, 2014 and December 31, 2013.
Dependence on Major Customers
During the six months ended June 30, 2014, the Company's revenues were
attributable to sales of oil to two customers. During the year ended December
31, 2013, the Company's revenues were attributable to sales of oil to one
customer. The Company believes that there are potential alternative purchasers
and that it may be necessary to establish relationships with new purchasers.
However, there can be no assurance that the Company can establish such
relationships and that those relationships will result in an increased number of
purchasers. Although the Company is exposed to a concentration of credit risk,
the Company believes that all of its purchasers are credit worthy. The Company
had no bad debt at June 30, 2014 and December 31, 2013.
Asset Retirement Obligations
Asset retirement obligations ("AROs") associated with the retirement of tangible
long-lived assets are recognized as liabilities with an increase to the carrying
amounts of the related long-lived assets in the period incurred. The cost of the
tangible asset, including the asset retirement cost, is depreciated over the
useful life of the asset. AROs are recorded at estimated fair value, measured by
reference to the expected future cash outflows required to satisfy the
retirement obligations discounted at the Company's credit-adjusted risk-free
interest rate. Accretion expense is recognized over time as the discounted
liabilities are accreted to their expected settlement value. If estimated future
costs of AROs change, an adjustment is recorded to both the ARO and the
long-lived asset. Revisions to estimated AROs can result from changes in
retirement cost estimates, revisions to estimated inflation rates and changes in
the estimated timing of abandonment.
8
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 six and three months
ended June 30, 2014 and 2013, 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 Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and notes payable are carried at cost,
which approximates fair value due to the short-term maturity of these
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.
Recent Accounting Pronouncements
There were accounting standards and interpretations issued during the six months
ended June 30, 2014, none of which are expected to have a material impact on the
Company's financial position, operations or cash flows.
9
NOTE 3 - GOING CONCERN AND MANAGEMENTS' PLAN
The Company's unaudited consolidated financial statements for the six months
ended June 30, 2014 and 2013 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
$891,582 for the six months ended June 30, 2014 ($334,164 for the three months
ended June 30, 2014), and an accumulated deficit of $4,827,716 as of June 30,
2014.
The future success of the Company is dependent on its ability to attract
additional capital, or to find an acquisition to add value to its present
shareholders and ultimately, upon its ability to develop 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 4 - OIL AND GAS LEASES
Oil and gas properties consisted of the following as of:
June 30, December 31,
2014 2013
------------------- ------------------
Proved properties $ 1,008,300 $1,004,300
Unproved properties - -
------------------- ------------------
$ 1,008,300 $ 1,004,300
Accumulated depletion (13,948) (5,942)
------------------- ------------------
$994,352 $998,358
=================== ==================
During the six months ended June 30, 2014 and 2013, the Company recognized
depletion expense of $8,006 and $2,347, respectively.
Natural Buttes
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The Company purchased a farmout of deep right interests in approximately 5,366
gross and 4,887 net acres in the central part of the Uintah Basin at Natural
Buttes in Utah during July 2011 such purchase agreement was amended in December
2011. The final 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 upper zones above approximately 9,800 feet are precluded in the
farmout and the overall targets will be zones from 9,800 feet to 16,000 feet.
During the six months ended June 30, 2014, the Company did not expend any
development costs in connection with the re-working of this well. The Company
has not abandoned the well, rather management refocused it re-work efforts on
those properties that are oil producing and closer to revenue production. The
well is connected to a pipeline and produces gas, thereby holding the lease by
production. The Company intends to focus efforts on the well during 2014.
10
Cisco, Utah
-----------
On May 9, 2012, the Company and Pacific Energy and Mining Company ("Pacific")
entered into an Asset Purchase and Sale Agreement ("The Pacific Agreement"). On
May 30, 2012, the Company closed the transaction. As part of the Pacific
Agreement, the Company acquired certain oil and gas wells and related assets in
the Greater Cisco area of the Uintah Basin in Grand County, Utah.
The assets acquired include 4,783 gross acres in the Cisco Fields with an 80%
Net Revenue Interest (NRI) and approximately 3,827 net acres. The property
includes 27 wells that need to be re-worked, connected to a gas pipeline, or
offset drilled.
In exchange for such oil and gas wells and related assets, the Company paid
$325,000 in a combination of cash and a convertible promissory note, as follows:
$175,000 cash; and a $150,000 convertible promissory note. The convertible
promissory note was paid in full on May 20, 2013.
On June 4, 2013, the Company and Pride Ventures, LLC and James Woolsey entered
into a Purchase and Sale Agreement, whereby, the Company acquired all right and
title to certain mineral estates in Grand County, Utah. The transaction had a
closing date of June 17, 2013.
The mineral estates include 4,435 acres, 9 well bores and space to drill
additional wells. In addition, the Company acquired Pride's natural gas
gathering system, which interconnects with the Company's existing gathering
system, thereby reducing new pipe gathering system construction by several
miles. The Company has acquired 100% of the working interests in the estates.
In exchange for such mineral estates, the Company paid a total of $100,000 in a
combination of cash and stock, $75,000 in cash; and $25,000 in the form of
50,000 shares of the Company's restricted common stock.
The properties are located in Grand County, Utah in the Greater Cisco area of
the Uintah Basin and are located in the vicinity of the Company's existing
properties in the Greater Cisco area.
During the six months ended June 30, 2014, the Company expended $25,100 in
connection with the re-work on the wells of this property. During the year ended
December 31, 2013, the Company expended $100,243 in connection with the re-work
of the wells on this property.
Musselshell County, Montana
---------------------------
On June 14, 2013, the Company and Jake Oil, LLC ("Jake") entered into a Purchase
and Sale Agreement, whereby, the Company acquired all right and title to oil and
gas leases for a total of 559 gross acres in the Unit for the 1st Cat Creek
formation in Musselshell County, Montana. In exchange for such oil and gas
leases, the Company paid $25,000 in cash and a 5% carried working interest.
The property includes 6 wells in a field to be water flooded, with 2 wells
placed on production. With an additional 2 wells that need to be re-worked.
Additional drilling may be performed to maximize the oil recovery from the
formation.
11
In addition, the Company and S&L Energy, Inc. ("S&L") entered into a Purchase
and Sale Agreement, whereby the Company acquired all right and title to oil and
gas leases for a total of 722 gross acres in the Musselshell County, Montana.
The property includes 120 acres for all zones other than the 1st Cat Creek. The
1st Cat Creek formation on the 120 acres was previously acquired from Jake Oil
LLC.
In exchange for such oil and gas leases, the Company paid $101,100 in a
combination of cash and stock, as follows: $65,000 in cash; and $36,100 payable
in restricted common stock valued at $0.58 per share (2/3 of the June 4, 2013
closing price of $0.87) for a total of 62,242 shares.
The properties are located in the Mason Lake field in Central Montana in the
Amsden (Alaska Bench) Formation which is late Mississippian to Early
Pennsylvanian in age. The Amsden formation is a combination of sandstone, shale
and limestone, which was deposited under marine conditions in the Paleozoic Era.
The Amsden Formation overlays the Tensleep Formation and is above the Heath
Formation, traditionally known as the Pennsylvanian Tyler Sand Play area. The
1st Cat Creek is at a depth of approximately 4,200 feet and is above the Amsden
formation.
During the six months ended June 30, 2014, the Company spent $160,387 in
connection with the re-working of this field. During the six months ended
December 31, 2013, the Company spent $116,447 for development costs in
connection with the re-working of this field.
NOTE 5 - SUBSCRIPTIONS RECEIVED
During the three months ended March 31, 2014, the Company had outstanding
subscriptions receivable of $30,000 to purchase 60,000 shares of the Company's
restricted common stock at $0.50 per share. The funds for such shares was
received and the shares were issued during the three months ended June 30, 2014.
During the year ended December 31, 2013, the Company had outstanding
subscriptions receivable of $425,000 to purchase 850,000 shares of the Company's
restricted common stock at $0.50 per share. The Company issued the 850,000
shares in February 2014.
NOTE 6 - NOTES PAYABLES, OTHER
On July 15, 2011, as part of the purchase of the Natural Buttes properties,
South Uintah entered into two promissory notes. The first was for $100,000 had a
term of the earlier of July 5, 2013 or the completion of a $2 Million stock
offering. The second note was for $250,000, had a due date of July 5, 2013 and a
conversion rate of $5 per share. Both notes were non-interesting bearing.
In December 2011, as part of the amendment of the purchase agreement for the
Natural Buttes, the terms and the amounts of the notes were modified. The amount
of the $100,000 note was reduced to $75,000 and the due date changed to July 5,
2013. The $250,000 note was reduced to $100,000, the conversion rate of $5
removed and the due date of the note remained at July 5, 2013. At December 31,
2013, the Company owed $100,000 under the note. In January 2014, the Company
negotiated a discharge of the $100,000 note for $50,000 and paid the note in
full.
In July 2012, the Company re-negotiated the terms of the original $75,000 note
in exchange for $5,000 principal payment on the note. As a result, the Company
re-issued the note for a principal of $70,000, a new due date of July 5, 2013
and for payments of $5,000 to be made on a monthly basis. As of December 31,
2013, the Company had made total principal payments of $55,000 leaving a
principal balance of $15,000 on the note. The Holder of the note has verbally
agreed to the extension of the term of the note and final payment was made in
May 2014.
12
NOTE 7 - LONG TERM NOTE PAYABLES, CONVERTIBLE
$2 Million Convertible Promissory Note
--------------------------------------
On January 22, 2014, the Company issued a Secured Convertible Promissory Note in
exchange for cash of $2,000,000 in order to support continuing operations and
the Company's re-completion and drilling plans in its oil and gas fields in Utah
and Montana.
The Secured Convertible Promissory Note has a term of 3 years and accrues
interest at a rate of 10% per annum with quarterly interest payments starting in
July 2014. The Note is convertible into shares of the Company's common stock at
a rate of $1.25 per share. Since the stock price was below this at the time of
signing the note was issued at a premium so no value is apportioned to the
conversion feature when recording the issuance per ASC 470-20-05. The debt and
its interest are reported as if it were a nonconvertible debt. Upon Conversion,
the stock may be valued at either the book value or the market value. The Note
has provisions for issuance of up to 480,000 warrants exercisable for shares of
the Company's common stock, such warrants to be issued to the Note holder based
on the amount of note principal converted into common stock, if any. The
warrants, if issued, would have a term of 3 years from the issuance of the
promissory note and an exercise price of $2.00 per share.
The Note is secured by the assets consisting of the Company's leases and wells
in Musselshell County, Montana.
During the six months ended June 30, 2014, the Company accrued interest of
$64,658 in connection with the note.
Class A Convertible Promissory Notes
------------------------------------
During the year ended December 31, 2013, the Company issued its Class A Secured
Convertible Promissory Notes ("Class A Promissory Notes") in exchange for
$75,000, used to support ongoing operations. The Class A Promissory Notes have a
term of 3 years an accrue interest at a rate of 12% per annum. The Class A
Promissory Notes are convertible into shares of the Company's common stock at a
rate of $1.00 per share. In addition, for every $5.00 in principal converted,
the note holder will receive a warrant to purchase one (1) common share with a
purchase price of $2.00 per share. The Warrant would have a term of 3 years from
the issuance date of the Class A Promissory Note.
In December 2011, the Company, in exchange for cash, issued a $500,000, secured
three-year note payable, convertible at a $1 per share and bearing interest at
10% per annum, with interest payable quarterly. The note is secured by a well
bore held by South Uintah in the Natural Buttes area. During the quarter ended
June 30, 2013, the Company issued the holder a Class A Promissory Note, as a
replacement of the original note, with the terms described above, plus 100,000
warrants to purchase common shares with a purchase price of $2.00 per share. The
Warrant would have a term of 3 years from the issuance date of the Class A
Promissory Note.
At June 30, 2014, the Company had $575,000 in outstanding Class A Promissory
Notes and has accrued $22,190 in interest in connection with the Class A
Promissory Notes.
13
NOTE 8 - COMMITMENTS & CONTINGENCIES
Leases
The Company sub-lets furnished office space from a third party on a month to
month basis. The Company has approximately 400 square feet and pays $1,000 per
month for the space.
General
There have been significant changes in the U.S. economy, oil and gas prices and
the finance industry which have adversely affected and may continue to adversely
affect the Company in its attempt to obtain financing or in its process to
produce commercially feasible oil and gas production.
Federal, state and local authorities regulate the oil and gas industry. In
particular, gas and oil production operations and economics are affected by
environmental protection statutes, tax statutes and other laws and regulations
relating to the petroleum industry, as well as changes in such laws, changing
administrative regulations and the interpretations and application of such laws,
rules and regulations. The Company believes it is in compliance with all
federal, state and local laws, regulations, and orders applicable to the Company
and its properties and operations, the violation of which would have a material
adverse effect on the Company or its financial condition.
Operating Hazards and Insurance
The gas and oil business involves a variety of operating risks, including the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formation, and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.
The Company to date has not acquired its own insurance coverage over its
interests in the properties, instead the Company has relied on the third party
operators for its properties to maintain insurance to cover its operations;
however, the Company may purchase additional insurance coverage when necessary.
There can be no assurance that insurance, if any, will be adequate to cover any
losses or exposure to liability. Although the Company believes that the policies
obtained by the third party operators provide coverage in scope and in amounts
customary in the industry, they do not provide complete coverage against all
operating risks. An uninsured or partially insured claim, if successful and of
significant magnitude, could have a material adverse effect on the Company and
its financial condition via its contractual liability to the prospect.
14
Title to Properties
The Company's practice has been to acquire ownership or leasehold rights to oil
and natural gas properties from third parties. Most of the Company's current
operations are conducted on properties acquired from third parties. Our existing
rights are dependent on those previous third parties having obtained valid title
to the properties. Prior to the commencement of gas drilling operations on those
properties, the third parties customarily conduct a title examination. The
Company generally does not conduct examinations of title prior to obtaining its
interests in its operations, but rely on representations from the third parties
that they have good, valid and enforceable title to the oil and gas properties.
Based upon the foregoing, we believe that we have satisfactory title to our
producing properties in accordance with customary practices in the gas industry.
The Company is not aware of any title deficiencies as of the date of these
financial statements.
NOTE 9 - 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 June 30, 2014, the Company had 21,424,893 shares of
its common stock issued and outstanding.
During the six months ended, the Company issued 910,000 shares of its restricted
common stock as payment for an outstanding subscription agreement of $455,000.
During the six months ended June 30, 2014, the Company issued 160,000 shares of
its restricted common stock for services valued at $80,000.
During the six months ended June 30, 2014, the Company issued 83,124 shares of
its restricted stock as a payment of $41,357 in interest on its outstanding long
term $500,000 convertible note payable.
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. During the six months ended June 30, 2014 and
the year ended December 31, 2013, the Board did not approve the grant of any
options to purchase shares of common stock, nor the conditions, performance or
vesting requirements.
15
Warrants
A summary of warrant activity for the three months ended June 30, 2014 is
presented below:
Weighted Average
------------------- ------------------
Remaining
Shares Under Contractual
Warrant Exercise Price Life
------------------ ------------------- ------------------
Outstanding at December 31, 2013 5,600,000 $1.54 2.29
Granted 60,000 0.65 2.88
Exercised - - -
Expired - - -
------------------ ------------------- ------------------
Outstanding at June 30, 2014 5,660,000 $1.52 1.73
================== =================== ==================
Issuance
In May 2014, as part of a Consulting Agreement for one-year, the Company issued
a warrant exercisable for 60,000 shares of the Company's restricted common
stock. The warrant has a term of 3 years and an exercise price of $0.65 per
share. The Warrant has a vesting rate of 5,000 shares per month. Using
Black-Scholes, the Company valued the warrant at $25,800 and is amortizing the
value of the warrant over the year period of the Consulting Agreement.
The fair value of the warrant granted was estimated as of the grant date using
the Black-Scholes option pricing model with the following assumptions:
Volatility 156%
Expected Warrant Term 1.5 years
Risk-free interest rate 0.09%
Expected dividend yield 0.00%
The expected term of the options and warrants granted and sold were estimated to
be the contractual term. The expected volatility was based on an average of the
volatility disclosed based upon comparable companies who had similar expected
option terms. The risk-free rate was based on the one-year U.S. Treasury bond
rate.
Expiration
On July 1, 2014, warrants exercisable for a total of 3,900,000 shares at prices
ranging from $3.00 to $1.00 and held by officers and directors of the Company
expired.
NOTE 10 - INCOME TAXES
The Company is subject to domestic income taxes. The Company has recognized
minimal income during the six months ended June 30, 2014, and therefore has paid
no income tax.
16
Deferred income taxes arise from temporary timing differences in the recognition
of income and expenses for financial reporting and tax purposes. The Company's
deferred tax assets consist entirely of the benefit from net operating loss
(NOL) carry-forwards. The NOL carry forwards expire in various years through
2034. The Company's deferred tax assets are offset by a valuation allowance due
to the uncertainty of the realization of the NOL carry-forwards. NOL
carry-forwards may be further limited by a change in company ownership and other
provisions of the tax laws.
The Company's deferred tax assets, valuation allowance, and change in valuation
allowance are as follows:
Estimated NOL Valuation Net Tax
Carry-forward benefit Allowance Benefit
=========================================================
June 30, 2014 $962,697 $(962,697) -
December 31, 2013 $784,380 $(784,380) -
NOTE 11 - SUBSEQUENT EVENTS
The Company has evaluated it activities subsequent to June 30, 2014 and through
the issuance of the financial statements and found no other reportable
subsequent events.
17
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, 2013, 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
------------------
While we have generated revenues from our operational activities, these revenues
have been minimal and are not sufficient to support our operational activities,
which are focused on re-working our existing properties in order to reach
production goals. We have minimal capital and moderate cash. We will continue to
need cash infusions from investors or shareholders to provide capital, or loans
from any sources, none of which have been arranged nor assured.
During the six months ended June 30, 2014, we continued our re-work efforts with
our Mason Lakes, Montana property, suffering slight delays during the first
quarter due to the severe winter conditions. During the second quarter, we saw
progress from our re-work and production enhancement efforts and are now
producing between 25 to 50 barrels of oil per day from the field. In addition,
during the last part of the quarter and during third quarter we have begun
efforts to bring one of two shut-in wells back into production and are starting
to see limited production from this well.
We continue our re-work efforts on our Cisco, Utah properties and have focused
our efforts on specific wells in the property in order to increase production on
existing producing wells.
Financing Efforts
On January 22, 2014, the Company issued a Secured Convertible Promissory Note in
exchange for cash of $2,000,000 in order to support continuing operations and
the Company's re-completion and drilling plans in its oil and gas fields in Utah
and Montana.
18
The Secured Convertible Promissory Note has a term of 3 years and accrues
interest at a rate of 10% per annum with quarterly interest payments starting in
July 2014. The Note is convertible into shares of the Company's common stock at
a rate of $1.25 per share. Since the stock price was below this at the time of
signing the note was issued at a premium so no value is apportioned to the
conversion feature when recording the issuance per ASC 470-20-05. The debt and
its interest are reported as if it were a nonconvertible debt. Upon Conversion,
the stock may be valued at either the book value or the market value. The Note
has provisions for issuance of up to 480,000 warrants exercisable for shares of
the Company's common stock, such warrants to be issued to the Note holder based
on the amount of note principal converted into common stock, if any. The
warrants, if issued, would have a term of 3 years from the issuance of the
promissory note and an exercise price of $2.00 per share.
The Note is secured by the assets consisting of the Company's leases and wells
in Musselshell County, Montana.
We will require substantial additional capital to support our existing and
proposed future energy operations. We have only recognized minimal and sporadic
revenues. We have no committed source for any additional funds as of the date
hereof. 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 prospect acquisitions or other participation
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.
RESULTS OF OPERATIONS
---------------------
For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June
30, 2014
During the three months ended June 30, 2014, the Company recognized revenues of
$163,339 from its operational activities compared to $10,091 during the three
months ended June 30, 2013. Revenues increased by $153,248, as result of
increased production due primarily to re-work efforts at our Mason Lakes Field
in Montana. Management expects that revenues will continue to increase in the
next six months, as the field in Montana is brought into full production and
re-work on properties in Utah, is continued. Management does not expect revenue
to be sufficient to cover the full costs of operations and administrative
expenses in the near future.
During the Three Months Ended
June 30,
2014 2013
------------------ ------------------
Revenues $163,339 $10,091
Number of Barrels 1,875 bbls 159 bbls
Average Price Per Barrel $87.11 $63.09
During the three months ended June 30, 2014 and 2013, the Company recognized a
direct cost of revenue of $51,306 and $51,101, respectively. An increase of
$205, which is direct result of the costs incurred with our acquisition and work
on our Mason Lakes Field in Musselshell County, Montana.
19
During the three months ended June 30, 2014, we recognized total operational
expenses of $609,472 compared to $315,693 during the three months ended June 30,
2013, an increase of $293,779. The increase was a result of increases of $44,381
in consulting fees, $11,087 increase in general and administrative expenses and
a $260,485 increase in operating lease expenses.
During the three months ended June 30, 2014, we recognized a net loss of
$640,840 compared to $381,483 during the three months ended June 30, 2013. The
increase of $259,357 was primarily a result of the $153,248 increase in revenue
offset by the increase of $315,693 in operational expenses.
For the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30,
2013
During the six months ended June 30, 2014, the Company recognized revenues of
$191,339 from its operational activities compared to $21,722 during the six
months ended June 30, 2013. Revenues increased by $169,617, as result of
increased production due to re-work efforts at our Mason Lakes Field in Montana.
Management expects that revenues will continue to increase in the next six
months, as the field in Montana is brought into full production and re-work on
properties in Utah, is continued. Management does not expect revenue to be
sufficient enough to cover the full costs of operations and administrative
expenses in the near future.
During the Six Months Ended
June 30,
2014 2013
------------------ ------------------
Revenues $191,339 $21,722
Number of Barrels 2,109 bbls 346 bbls
Average Price Per Barrel $90.72 $62.78
During the six months ended June 30, 2014 and 2013, the Company recognized a
direct cost of revenue of $183,543 and $100,151, respectively. An increase of
$83,392, which is direct result of the costs incurred with our acquisition and
work on our Mason Lakes Field in Musselshell County, Montana. Direct costs of
revenues are listed below.
Increase /
2014 2013 (Decrease)
---- ---- ----------
Field Expenses $98,830 $ 68,843 29,987
Well Repair and Maintenance 31,951 15,902 16,049
Field utilities 37,918 4,533 33,385
Taxes 6,838 935 5,903
Depletion 8,006 2,347 5,659
Amortization and depreciation 7,591 (7,591)
------------------ ------------------ -------------------
TOTAL $ 183,543 $ 100,151 $83,392
During the six months ended June 30, 2014, we recognized total operational
expenses of $850,504 compared to $454,094 during the six months ended June 30,
2013, an increase of $396,410. The increase was a result of increases of $80,160
in consulting fees, $43,804 increase in general and administrative expenses and
a $272,446 increase in operating lease expenses. The $80,160 increase in
consulting fees is a result of contracting with a petroleum engineer and an
investor relation firm for services. The $272,446 increase in operating lease
expenses, is a result of the increased re-work efforts at the Mason Lake field
which had been acquired in June 2013.
During the six months ended June 30, 2014, we recognized a net loss of $891,582
compared to a net loss of $571,649 during the six months ended June 30, 2013.
The increase of $319,933 was a result of the $396,410 increase in operating
expenses offset by the $169,617 increase in revenues during the period as
discussed above.
20
LIQUIDITY
---------
At June 30, 2014, the Company had total current assets of $1,107,240, consisting
of cash of $1,015,565, accounts receivable of $64,705 and deposits of $26,970.
At June 30, 2014, the Company had total current liabilities of $294,650,
consisting of, accounts payable of $192,102 and accrued liabilities of $102,548.
At June 30, 2014, we have a working capital surplus of $812,590.
During the six months ended June 30 2014, we used cash of $713,909 in
operations. During the six months ended June 30, 2014, we recognized a net loss
of $891,582, which was adjusted for the non-cash items of interest paid in stock
of $41,357, services of $80,00 paid in common stock and depletion and
depreciation of $44,384 and a gain on the discount of promissory note of
$50,000.
During the six months ended June 30, 2013, we used cash of $336,788 in
operations. During the six months ended June 30, 2013, the Company recognized a
net loss of $571,649, which was adjusted for the non-cash items of $25,000 in
interest paid for using stock, $17,500 in services paid for with stock, $11,887
in depletion and depreciation and $38,687 asset remediation expense.
During the six months ended June 30, 2014, we used $333,242 in our investing
activities, $185,487 in the re-work efforts of our wells, $4,000 in the
acquisition of additional oil and gas leases, $69,932 in equipment and $73,823
in connection with the development of a technological process. During the six
months ended June 30, 2013, we used $274,786 in our investing activities
including $100,243 re-work efforts on our wells, $140,000 in the acquisition of
oil and gas leases, and $34,543 in equipment.
During the six months ended June 30, 2014, we received $1,965,000 from our
financing activities compared to $982,000 during the six months ended June 30,
2013.
On January 22, 2014, the Company issued a Secured Convertible Promissory Note in
exchange for cash of $2,000,000 in order to support continuing operations and
the Company's re-completion and drilling plans in its oil and gas fields in Utah
and Montana.
The Secured Convertible Promissory Note has a term of 3 years and accrues
interest at a rate of 10% per annum with quarterly interest payments starting in
July 2014. The Note is convertible into shares of the Company's common stock at
a rate of $1.25 per share. Since the stock price was below this at the time of
signing the note was issued at a premium so no value is apportioned to the
conversion feature when recording the issuance per ASC 470-20-05. The debt and
its interest are reported as if it were a nonconvertible debt. Upon Conversion,
the stock may be valued at either the book value or the market value. The Note
has provisions for issuance of up to 480,000 warrants exercisable for shares of
the Company's common stock, such warrants to be issued to the Note holder based
on the amount of note principal converted into common stock, if any. The
warrants, if issued, would have a term of 3 years from the issuance of the
promissory note and an exercise price of $2.00 per share.
The Note is secured by the assets consisting of the Company's leases and wells
in Musselshell County, Montana.
Short Term.
On a short-term basis, we do not generate any revenue sufficient to cover
operations. Based on prior history, we will continue to have insufficient
revenue to satisfy current and recurring expenses and liabilities. For short
term needs we will be dependent on receipt, if any, of offering proceeds.
21
Capital Resources
We have only common and preferred stock as our capital resources.
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.
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.
22
Revenue and Accounts Receivable
The Company recognizes revenue for its production when the quantities are
delivered to, or collected by, the purchaser. Prices for such production are
generally defined in sales contracts and are readily determinable based on
certain publicly available indices. All transportation costs are included in
lease operating expenses.
Accounts receivable -- oil and natural gas sales consist of uncollateralized
accrued revenues due under normal trade terms, generally requiring payment
within 30 to 60 days of production. The Company reviews accounts receivable
periodically and reduces the carrying amount by a valuation allowance that
reflects its best estimate of the amount that may not be collectible. No
valuation allowance was recognized as of June 30, 2014 and December 31, 2013.
Dependence on Major Customers
During the six months ended June 30, 2014, the Company's revenues were
attributable to sales of oil to two customers. During the year ended December
31, 2013, the Company's revenues were attributable to sales of oil to one
customer. The Company believes that there are potential alternative purchasers
and that it may be necessary to establish relationships with new purchasers.
However, there can be no assurance that the Company can establish such
relationships and that those relationships will result in an increased number of
purchasers. Although the Company is exposed to a concentration of credit risk,
the Company believes that all of its purchasers are credit worthy. The Company
had no bad debt at June 30, 2014 and December 31, 2013.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
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 June 30, 2014, our Chief Financial Officer has concluded that our
disclosure controls and procedures are not effective in timely alerting
management 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.
23
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.
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 transactions. 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 lack
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 June 30, 2014, 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 June 30, 2014, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Not Applicable to Smaller Reporting Companies.
ITEM 2. CHANGES IN SECURITIES
During the period of April 1, 2014 through June 30, 2014, the Company has made
the following unregistered issuances of its securities.
DATE OF TITLE OF NO. OF CLASS OF
ISSUANCE SECURITIES SHARES CONSIDERATION PURCHASER
------------------------------ ----------------------- ----------------- ------------------------- ------------------------
June 2014 Common Shares 150,000 IR Services Business Associate
June 2014 Common Shares 5,000 Services Business Associate
June 2014 Common Shares 180,000 $90,000 Business Associates
June 2014 Common Shares 29,590 Interest Business Associate
May 2014 Warrant 60,000 Services 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 and Section 4(2) 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.
25
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 Executiveand Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS XBRL Instance Document (1)
101.SCH XBRL Taxonomy Extension Schema Document (1)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1)
------------
(1) Pursuant to Rule 406T of Regulation S-T, this interactive data file is
deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed
not filed for purposes of Section 18 of the Securities Exchange Act of
1934, and otherwise is not subject to liability under these sections.
26
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: August 14, 2014 By: /s/ George Harris
----------------
George Harris (Chief Executive Officer,
Chief Financial Officer and Principal Accounting
Officer)
2
