ITEM 1. BUSINESS -----------------
General
The following is a summary of some of the information contained in this document. Unless the context requires otherwise, references in this document to "Hinto" or the "Company" are to Hinto Energy, Inc.
DESCRIPTION OF BUSINESS -----------------------
Hinto Energy, Inc. ("We," "Us," "Our") was organized under the laws of the State of Wyoming on February 13, 1997, as Garner Investments, Inc. On August 18, 2012, we amended our Articles of Incorporation to change our name to Hinto Energy, Inc. and to authorize 25,000,000 shares of preferred stock. We were organized to engage in the acquisition, exploration, and if warranted, development of oil and gas prospects in the rocky mountain region.
Prior to January 2012, we had minimal operations that were focused mainly on administrative activities and the identification of potential oil and gas prospects. On January 23, 2012, we acquired 100% of the issued and outstanding common stock of South Uintah Gas Properties, Inc. ("South Uintah") pursuant to the Share Purchase and Exchange Agreement ("the Share Exchange Agreement") entered into on July 27, 2011, at the time South Uintah was our majority shareholder, as discussed below.
On July 11, 2011, prior to entering into the Share Exchange Agreement, South Uintah had purchased 3,000,000 shares of the Company from its then majority shareholder Ms. Sharon Fowler. After such purchase, South Uintah held approximately 70% of the issued and outstanding common stock of the Company. Prior to closing of the acquisition of South Uintah, South Uintah transferred 300,000 shares to an unrelated third party as partial consideration for the acquisition of the gas prospect in Utah. As part of the Share Exchange Agreement, South Uintah returned the remaining 2,700,000 shares of common stock to the Company. We have retired such shares to treasury, concurrent with the transaction.
COMPANY OVERVIEW ----------------
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 our 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.
South Uintah
South Uintah was incorporated in the State of Colorado in March 2011 and is headquartered in Denver, Colorado. South Uintah has interests in oil and gas properties in Utah. South Uintah acquired interests in approximately 5,366 gross acres in the Central part of the Uintah Basin, at Natural Buttes, Utah from a farmout. The acreage is located in a prolific gas production area from multiple hydrocarbon reservoirs such as: Castlegate, Mancos, Dakota, Buck Tongue, Emery, Frontier and Prairie Canyon. The upper zones above 9,800 feet (approximately) are precluded in the farmout and the overall targets will be zones from 9,800 feet to 16,000 feet.
Hinto Energy
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.
The Company's approach to lease acquisition, development and production is founded on the discipline of only acquiring leases in areas of proven production. In most cases the leases that are under consideration have at one time contained producing oil or gas wells and currently have production or shut-in wells that are viable for work over and or re-completion. In addition, the Company attempts to seek our leases and producing properties that generate oil and gas at a depth of 6,500 feet or less, where rework and drilling costs are typically less. There are hundreds of wells in our area of interest that meet these criteria. In many instances, the wells were shut-in during a period of declining oil and gas prices and in most cases are ideal for our business model. Our business model is simple; strict adherence to lease acquisition surrounded by proven production, offering well workovers, re-completion, and enhanced oil recovery opportunities in the known producing formations, with long term production potential at a low cost of development, maintenance, and operation. The Company is not an exploration company, per se; rather it seeks leases with discovered oil and gas with current or prior production.
One strategy that is quickly growing in prominence and application with respect to petroleum is to use a development program approach. We describe our development plan approach as a set of techniques utilizing the injection of specific fluids such as: water, steam, natural gas, carbon dioxide, nitrogen, and various chemicals and surfactants intended to increase the amount of oil that can ultimately be extracted from any oil field. In addition, we intend to utilize some non-traditional techniques to gain better access to oil and gas, such as short drilling radius laterals and near well bore fracturing that does not use chemicals. Many oil exploration and production companies are using development program approaches to maximize the potential of old oil fields.
Our business operations are in the development, production, and low risk exploration of oil and gas including unconventional natural gas, in the Rocky Mountain region of the continental United States; specifically, in the Rocky Mountain area of Utah, Colorado, Montana and Wyoming.
Corporate Strategy
Our corporate strategy in developing our operations and evaluating potential acquisitions is as follows.
Pursue concurrent development of our core area of the Rocky Mountains.
We plan to spend up to $10,000,000 on acquisition, drilling, re-completion, and development programs, some of which were started in late 2011and will continue in 2014. We plan to raise these funds in Private Placements of Common Stock, Preferred Stock and/or convertible debt. All drilling capital expenditures in 2012 were incurred in Utah and we split between Utah and Montana in 2013. Many of our targeted prospects are in reservoirs that have demonstrated predictable geologic attributes and consistent reservoir characteristics, which typically lead to more repeatable drilling and re-completion results than those achieved through wildcats.
Achieve consistent reserve growth through repeatable development
We intend to achieve consistent reserve growth over the next five years through a combination of acquisitions, rework and drilling. In 2013, we focused our efforts achieving production increases as a result of our re-work and re-completion activities on our Natural Buttes, Cisco and Mason Lakes projects. In 2014, we intend to continue to focus on our acquisition, re-completion, initial drilling and development programs. We anticipate that the majority of future reserve and production growth will come through the acquisition of production, the execution of our drilling and re-completion program, and on development activities on prospects of which we are aware, which include proved and unproved locations. Our targets generally will consist of locations in fields that demonstrate low variance in well performance, which leads to predictable and repeatable field development.
Our reserve estimates, if any, may change continuously and we intend to evaluate such reserve estimates internally on a frequent basis -- quarterly if warranted -- with independent engineering evaluation on an annual basis. Deviations in the market prices of both crude oil and natural gas and the effects of acquisitions, dispositions, development and any successful exploration activities may have a significant effect on the quantities and future values of our reserves, if any.
Maintain high percentage ownership and operational control over our asset base
We intend to retain a high degree of operational control over our asset base, through a high average Working Interest or acting as the operator in our areas of significant activity. This is designed to provide us with controlling interests in a multi-year inventory of drilling locations, positioning us for reserve and production growth through our drilling operations. We plan to control the timing, level and allocation of our drilling capital expenditures and the technology and methods utilized in the planning, drilling and completion process on related targets. We believe this flexibility to opportunistically pursue low risk exploration and development projects relating to selected prospects may provide us with a meaningful competitive advantage.
Acquire and maintain acreage positions in high potential resource plays
We believe that our intended acquisition and development in known production prospects in the Rockies should be supplemented with exploratory efforts that may lead to new discoveries in the future. We intend to continually evaluate our opportunities and pursue potential opportunities that take advantage of our strengths. We are examining potential prospects in such areas as Utah, Wyoming and Montana, which have gained substantial interest within the exploration and production sector due to their relatively under-explored nature and the potential for meaningful hydrocarbon recoveries. There are other mid-size and large independent exploration and production companies conducting drilling activities in these plays.
Develop improved techniques to obtain greater daily production and higher ultimate oil and gas recovery
The Company implemented a plan of action to develop its own proprietary equipment design for boring lateral holes that extend into productive formations from the bores of existing wells. The engineering design provides for the potential to bore holes up to 300 feet out from the well bore with a diameter of from 1 to 2 inches at depths up to 2,000 feet. The Company believes based on its research that this process will bypass near well bore plugging and damage and open significant surface area from which low pressure shallow oil reserves can be recovered. To date the Company has expended approximately $200,000 in time and materials on the project, capitalizing approximately $74,000 of such expenses, and expects initial field trials in the second quarter or 2014. Ultimately, the engineering design will provide for drilling of small laterals at depths up to 8,000 feet.
Pursue a disciplined acquisition strategy in our core areas of operation
We intend to also focus on growing through targeted acquisitions. Although drilling prospects may provide us with the opportunity to grow reserves and production without acquisitions, we continue to evaluate acquisition opportunities, primarily in our core areas of operation.
Experienced management and operational team with advanced exploration and development technology
Our senior management team has over 75 years of experience in the oil and gas industry, and has a proven track record of creating value both organically and through strategic acquisitions. Our management intends to utilize the best available and fit-for-purpose technology, sophisticated geologic and 3-D seismic models to enhance predictability and reproducibility over significantly larger areas than historically possible. We also intend to utilize state-of-the art drilling and completion technology, as well as multi-zone, multi-stage artificial stimulation ("frac") technology in completing wells to substantially increase near-term production, resulting in faster payback periods and higher rates of return and present values. Our team has successfully applied these techniques, normally associated with completions in the most advanced Rocky Mountain crude oil and natural gas fields, to improve initial and ultimate production and returns, in other companies.
OIL AND GAS PROJECTS
Our initial projects are centered on the Uintah Basin of Utah and in Musselshell County, Montana.
The Uintah Basin has long been known to contain petroleum and natural gas and has established itself as a petroleum production hub in the United States. The Utah Division of Oil, Gas, and Mining have recently approved a significant density increase for the Altamont Bluebell Cedar Rim Oil Field, opening up expanded opportunities for development drilling. This recent increased density allotment, may allow extended access to some of the richest petroleum reserves in the United States, that until now have remained unavailable for drilling.
Ever since the discoveries of large reserves in the late 1940s, the Uintah Basin has proven to be a rich petroleum area for companies. From the time that the initial boom of the region commenced, it has been in a state of growth. From the late 1960's through the mid 1980's companies such as Exxon, Chevron Gulf, and Shell Oil achieved remarkable success in the basin by drilling into over-pressurized geological formations. Historically, these deep pay zones known as the Wasatch and Wasatch Transition Formations have led to some of the most productive onshore "flowing" oil wells in the continental U.S.
The Musselshell County area has been a producer of oil for many years. The area has produced from several pay zones such as the Muddy, Cat Creek and Amsden. There is also considerable interest in developing the Heath shale formation. Amsden oil wells in the area have flowed in excess of 300 barrels of oil per day, but the presence of water has often reduced the amount of oil ultimately recovered. There are opportunities for secondary recovery in fields that have reduced formation pressure as a result of primary production. Current higher oil prices often make these secondary recovery projects attractive.
Natural Buttes --------------
South Uintah, in July 2011, acquired deep rights interests via farmout in approximately 5,366 gross and 4,887 net acres within the Central part of the Uintah Basin, at Natural Buttes, a prolific gas production area from multiple hydrocarbon reservoirs such as: Castlegate, Mancos, Dakota, Buck Tongue, Emery, Frontier and Prairie Canyon. The agreement was subsequently amended on December 31, 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 of South Uintah.
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.
In 2012, we began the re-work of Federal Conoco 22-1, a well which was drilled in 1972 to a depth of 20,053 feet. We believe that the well was shut in, primarily due to low gas prices at the time, mechanical production issues and a lack of proximity to a gas pipe line. We completed a lateral pipeline connection that is approximately 2,000 foot long to the Anadarko pipeline in late 2011, the early part of 2012.
We have reviewed the drilling, geological and engineering files for the Conoco Federal No. 22-1 Well. Our evaluation indicates that the well has significant hydrocarbon potential in both the Frontier and the Upper Mancos Formations, and that by utilizing best available completion and stimulation techniques, commercial production, may be possible.
Well History: This well was drilled in 1972 to a total depth of 20,053, tested in the Frontier Formation from 14,666 to 14,803 at a rate of 1.15 MMCFD declining in 8 hours to 0.250 MMCFD, and temporarily abandoned. The well was re-entered by Gilman A. Hill in 1980. In a Well Completion or Recompletion Report filed with the USGS in 1981, the well had been cleaned out from the original plug back depth of 14,108 feet to a new plugged back depth of 14,750 feet. It had been perforated from 14, 580 feet to 14,800 feet and tested at a rate estimated to be 500 MCFD. In a Sundry Notices and Reports on Wells filed with the State of Utah, Department of Natural Resources, Division of Oil, Gas, and Mining in 1985, it was reported that the well had been placed in indefinite suspended activity.
Planned Re-working: Our review of the available data indicates that with the application of best available completion and stimulation practices, the well could contain commercial reserves in both the Frontier and Upper Mancos Formations. We plan to re-work the well and individually test these formations, when gas prices justify the expense.
Generally, adjacent to the farmout acreage that includes the Conoco Federal No. 22-1 Well is our adjacent acreage, which contains approximately 5,336 gross and 4,887 net acres. If we drill this acreage on 160 acre spacing - a maximum of 27 wells -- and if consistent and similar results are obtained, we believe there is potential for significant gas resources. No results can be guaranteed or assured, and the financing is not in place for a drilling program of this magnitude.
Available Infrastructure and Multi-well Drill Sites: The 22-1 well location is a flat developed drill site with close highway access and an access road. This infrastructure provides the Company with the ability to develop a significant portion of its acreage from one drill site through slant drilling with accompanying laterals. A pipeline connection has been installed at the time of this filing. This environmentally responsible development plan is designed to minimize surface impacts and is designed to provide a core platform for up to twelve wells without additional roads, pipelines, rights of way, etc. Assuming any initial success, the Company plans to drill continuously from this concrete pad, using drilling technology developed and proved on Alaska's North Slope which utilizes a moveable drilling rig, allowing efficient and low cost movement of the rig for a short distance to subsequent wells, without dismantling the rig and incurring all the downtime and mobilization costs.
Total Field Development Costs are estimated to be $150 million to drill and complete up to 27 wells over a 7.5 year development period. None of this financing for drilling has been obtained and there is no assurance that such financing could be obtained.
Cisco Spring Field Properties -----------------------------
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 June 7, 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 Cisco Springs Field is known to produce from the channel sands in the Mancos, Dakota and Morrison formations, with natural gas production from the Mancos and Dakota formations. Target formations often have stacked pay zones at depths from 500 to 2,200 feet.
The assets acquired include 4,783 gross acres in the Cisco Spring Fields with an 80% Net Revenue Interest (NRI) and approximately 3,827 net acres. The property includes 27 wells, some on production, some that need to be re-worked, connected to a gas pipeline, or offset drilled. The Company is beginning a rework program in early 2014 that will continue throughout the year. The Company also plans to apply for permits to drill several offset wells in 2013 and 2015.
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 has an interest rate of 8% and is due May 30, 2013. The convertible promissory note and accrued interest may be converted into shares of the Company's restricted common stock. In May 2013, the note was paid in full.
On June 17, 2013, the Company expanded its holdings in the Cisco Springs area when it acquired a 100 percent Working Interest in Pride Ventures interest in approximately 4,400 acres. The property included 9 gas wells that need to be re-worked or offset drilled. The leases acquired also included a natural gas gathering system connected to a local pipeline that greatly simplifies collection and sale of natural gas from existing Company gas wells in the area.
In exchange for such mineral estates, the Company paid a total of $100,000 in a combination of cash and stock as follows:
-$75,000 in cash; and
-$25,000 in the form of 50,000 shares of the Company's restricted common stock.
Musselshell County, Montana - Mason Lakes Field -----------------------------------------------
On June 14, 2013, the Company entered into a Purchase and Sale agreement with Jake Oil, LLC and Mr. Eric Olsen and acquired all right and title to oil and gas leases in the Federal Unit for the 1st Cat Creek formation for 559 gross acres in the Musselshell County, Montana. The property included 6 wells in a field to be water flooded that needed the wells and field gathering system to be re-worked. During the second half of 2013 the Company worked to bring field production back online. As of the end of 2013, new production lines had been installed, existing lines repaired along with installation of oil/water separators and tank relocation. The injection well received State approval for use and the field began its initial trial production, with the water source well, water injection well and two production wells operating. The Company plans to rework the two production wells with larger pumping systems and increase fluids production in the first half of 2014. The Company believes it currently has sufficient capital to complete this project. After evaluation the increased production, the current field development plan, which calls for the drilling of several production and injection wells, will be re-evaluated for implementation.
In exchange for such mineral estates, the Company paid a total of $25,000 in a combination of cash and Carried Working Interest as follows:
-$25,000 in cash; and -5 percent Carried Working Interest
On June 14, 2013, the Company acquired all right and title to additional oil and gas leases for 722 gross acres in the Mason Lakes Field area from S & L Energy, Inc. Approximately 120 gross acres are for formations other than the 1st Cat Creek formation Federal Unit mentioned previously. The other 602 gross acres are held by production by the production from the Mason Lakes Federal Unit. The Company plans to create a drilling development plan for this acreage in the next 12 to 24 months.
Initial target production zones are from 4,000 to 5,000 feet deep and include the 1St Cat Creek and Amsden formations. Deeper drilling prospects such as the Heath shale will also be evaluated for future opportunity.
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.
COMPETITION, MARKETS, REGULATION AND TAXATION
Competition. ------------
There are a large number of companies and individuals engaged in the exploration for minerals and oil and gas; accordingly, there is a high degree of competition for desirable properties. Almost all of the companies and individuals so engaged have substantially greater technical and financial resources than we do.
Markets. --------
The availability of a ready market for oil and gas discovered, if any, will depend on numerous factors beyond our control, including the proximity and capacity of refineries, pipelines, and the effect of state regulation of production and of federal regulations of products sold in interstate commerce, and recent intrastate sales. The market price of oil and gas are volatile and beyond our control. The market for natural gas is also unsettled, and gas prices have increased dramatically in the past four years with substantial fluctuation, seasonally and annually.
There generally are only a limited number of gas transmission companies with existing pipelines in the vicinity of a gas well or wells. In the event that producing gas properties are not subject to purchase contracts or that any such contracts terminate and other parties do not purchase our gas production, there is no assurance that we will be able to enter into purchase contracts with any transmission companies or other purchasers of natural gas and there can be no assurance regarding the price which such purchasers would be willing to pay for such gas. There presently exists an oversupply of gas in the certain areas of the marketplace due to pipeline capacity, the extent and duration of which is not known. Such oversupply may result in restrictions of purchases by principal gas pipeline purchasers.
Effect of Changing Industry Conditions on Drilling Activity. ------------------------------------------------------------
Lower oil and gas prices have caused a decline in drilling activity in the U.S. from time to time. However, such reduced activity has also resulted in a decline in drilling costs, lease acquisition costs and equipment costs, and an improvement in the terms under which drilling prospects are generally available. We cannot predict what oil and gas prices will be in the future and what effect those prices may have on drilling activity in general, or on our ability to generate economic drilling prospects and to raise the necessary funds with which to drill them.
Federal Regulations. --------------------
Governmental Regulation and Environmental Consideration. --------------------------------------------------------
Oil and Gas: The oil and gas business in the United States is subject to regulation by both federal and state authorities, particularly with respect to pricing, allowable rates of production, marketing and environmental matters.
The production of crude oil and gas has, in recent years, been the subject of increasing state and federal controls. No assurance can be given that newly imposed or changed federal laws will not adversely affect the economic viability of any oil and gas properties we may acquire in the future. Federal income and "windfall profit" taxes have in the past affected the economic viability of such properties.
The above paragraphs only give a brief overview of potential state and federal regulations. Because we have only acquired specific properties, and because of the wide range of activities in which we may participate, it is impossible to set forth in detail the potential impact federal and state regulations may have on us.
Compliance with Environmental Laws and Regulations. --------------------------------------------------
Our operations are subject to local, state and federal laws and regulations governing environmental quality and pollution control. To date our compliance with these regulations has had no material effect on our operations, capital, earnings, or competitive position, and the cost of such compliance has not been material. We are unable to assess or predict at this time what effect additional regulations or legislation could have on our activities.
The Department of Energy. -------------------------
The Department of Energy Organization Act (Pub. L. No. 95-91) became effective October 1, 1977. Under this Act various agencies, including the Federal Energy Administration (FEA) and the Federal Power Commission (FPC), have been consolidated to constitute the cabinet-level Department of Energy (DOE). The Economic Regulatory Administration (ERA), a semi-independent administration within the DOE, now administers most of the regulatory programs formerly managed by the FEA, including oil pricing and allocation. The Federal Energy Regulatory Commission (FERC), an independent agency within the DOE, has assumed the FPC's responsibility for natural gas regulation.
Regulation and Pricing of Natural Gas. -------------------------------------
Our operations may be subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC) with respect to the sale of natural gas for resale in interstate and intrastate commerce. State regulatory agencies may exercise or attempt to exercise similar powers with respect to intrastate sales of gas. Because of its complexity and broad scope, the price impact of future legislation on the operation of us cannot be determined at this time.
Crude Oil and Natural Gas Liquids Price and Allocation Regulation. ------------------------------------------------------------------
Pursuant to Executive Order Number 12287, issued January 28, 1981, President Reagan lifted all existing federal price and allocation controls over the sale and distribution of crude oil and natural gas liquids. Executive Order Number 12287 was made effective as of January 28, 1981, and consequently, sales of crude oil and natural gas liquids after January 27, 1981 are free from federal regulation. The price for such sales and the supplier-purchaser relationship will be determined by private contract and prevailing market conditions. As a result of this action, oil which may be sold by us will be sold at deregulated or free market prices. At various times, certain groups have advocated the reestablishment of regulations and control on the sale of domestic oil and gas.
State Regulations. -----------------
Our production of oil and gas, if any, will be subject to regulation by state regulatory authorities in the states in which we may produce oil and gas. In general, these regulatory authorities are empowered to make and enforce regulations to prevent waste of oil and gas and to protect correlative rights and opportunities to produce oil and gas as between owners of a common reservoir. Some regulatory authorities may also regulate the amount of oil and gas produced by assigning allowable rates of production.
Proposed Legislation. ---------------------
A number of legislative proposals have been and probably will continue to be introduced in Congress and in the legislatures of various states, which, if enacted, would significantly affect the petroleum industries. Such proposals and executive actions involve, among other things, the imposition of land use controls such as prohibiting drilling activities on certain federal and state lands in roadless wilderness areas. At present, it is impossible to predict what proposals, if any, will actually be enacted by Congress or the various state legislatures and what effect, if any, such proposals will have. However, President Clinton's establishment of numerous National Monuments by executive order has had the effect of precluding drilling across vast areas of the Rocky Mountain West.
Environmental Laws. -------------------
Oil and gas exploration and development are specifically subject to existing federal and state laws and regulations governing environmental quality and pollution control. Such laws and regulations may substantially increase the costs of exploring for, developing, or producing oil and gas and may prevent or delay the commencement or continuation of a given operation.
All of our operations involving the exploration for or the production of any minerals are subject to existing laws and regulations relating to exploration procedures, safety precautions, employee health and safety, air quality standards, pollution of stream and fresh water sources, odor, noise, dust, and other environmental protection controls adopted by federal, state and local governmental authorities as well as the right of adjoining property owners. We may be required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed exploration for or production of minerals may have upon the environment. All requirements imposed by any such authorities may be costly, time consuming, and may delay commencement or continuation of exploration or production operations.
It may be anticipated that future legislation will significantly emphasize the protection of the environment, and that, as a consequence, our activities may be more closely regulated to further the cause of environmental protection. Such legislation, as well as future interpretation of existing laws, may require substantial increases in equipment and operating costs to us and delays, interruptions, or a termination of operations, the extent to which cannot now be predicted.
Title to Properties. --------------------
We are not the record owner of our interest in our properties and rely instead on contracts with the owner or operator of the property, pursuant to which, among other things, we have the right to have our interest placed of record. As is customary in the oil and gas industry, a preliminary title examination will be conducted at the time unproved properties or interests are acquired by us. Prior to commencement of drilling operations on such acreage and prior to the acquisition of proved properties, we will conduct a title examination and attempt extremely significant defects before proceeding with operations or the acquisition of proved properties, as we may deem appropriate.
Our properties are subject to royalty, overriding royalty and other interests customary in the industry, liens incident to agreements, current taxes and other burdens, minor encumbrances, easements and restrictions. Although we are not aware of any material title defects or disputes with respect to its undeveloped acreage, to the extent such defects or disputes exist, we would suffer title failures.
Backlog of Orders. -----------------
We currently have no orders for sales at this time.
Government Contracts. --------------------
We have no government contracts.
Company Sponsored Research and Development. ------------------------------------------
We are not conducting any research.
Number of Persons Employed. --------------------------
As of December 31, 2013, Hinto had no full-time employees. George Harris, Gary Herick, David Keller, Kevin Blair and Max Sommer, officers and directors of Hinto, have Consulting and/or Corporate Advisor Agreements with our subsidiary South Uintah, which are on a month - to month basis. George Harris works up to 40 hours per week pursuant to his Consulting Agreement. The other Officers and Directors work on an as needed part-time basis up to 25 hours per week.
ITEM 1A.
ITEM 1A. RISK FACTORS ----------------------
FORWARD LOOKING STATEMENTS
This document includes forward-looking statements, including, without limitation, statements relating to Hinto's plans, strategies, objectives, expectations, intentions and adequacy of resources. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the Company's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors include, among others, the following: our ability of to implement our business strategy; ability to obtain additional financing; Hinto limited operating history; unknown liabilities associated with future acquisitions; ability to manage growth; significant competition; ability to attract and retain talented employees; and future government regulations; and other factors described in this filing or in other of Hinto's filings with the Securities and Exchange Commission. Hinto is under no obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
RISK FACTORS RELATED TO OUR COMPANY
Our business has an operating history of only a year and a half and is unproven and therefore risky.
We have only very recently begun operations under the business plan discussed herein. Potential investors should be made aware of the risk and difficulties encountered by a new enterprise in the oil and gas industry, especially in view of the intense competition from existing businesses in the industry.
We have a lack of revenue history and have a short history of operations. ------------------------------------------------------------------------
We were formed on February 13, 1997 for the purpose of engaging in any lawful business and have adopted a plan to engage the acquisition, exploration, and if warranted, development of natural resource properties. Prior to the year ended December 31, 2012, we had no revenues in the last five years. During the year ended December 31, 2013, we did recognize revenues of $65,615 compared to $29,908 during the year ended December 31, 2012. We are not profitable and the business effort is considered to be in an early stage of operations. We must be regarded as a new or development venture with all of the unforeseen costs, expenses, problems, risks and difficulties to which such ventures are subject.
We are not diversified and we will be dependent on only one business. ---------------------------------------------------------------------
Because of the limited financial resources that we have, it is unlikely that we will be able to diversify our operations. Our probable inability to diversify our activities into more than one area will subject us to economic fluctuations within the energy industry and therefore increase the risks associated with our operations due to lack of diversification.
We can give no assurance of success or profitability to our investors. ---------------------------------------------------------------------
There is no assurance that we will ever operate profitably. There is no assurance that we will generate revenues or profits, or that the market price of our common stock will be increased thereby.
We may have a shortage of working capital in the future which could jeopardize -------------------------------------------------------------------------------- our ability to carry out our business plan. ------------------------------------------
Our capital needs consist primarily of expenses related to geological evaluation, general and administrative and potential exploration participation and could exceed $750,000 in the next twelve months. Such funds are not currently committed.
We have issued a total of 5,600,000 shares of common stock underlying Warrants exercisable at exercise prices ranging from $0.25 to $3.00 per share, which if exercised; we would receive proceeds totaling $7,700,000 from the exercise of the Warrants. We cannot provide any assurances that such warrants will be exercised or when they will be exercised.
If we find oil and gas reserves to exist on a prospect we will need substantial additional financing to fund the necessary exploration and development work. Furthermore, if the results of that exploration and development work are successful, we will need substantial additional funds for continued development. We will not receive proceeds from this offering to conduct such work and, therefore, we will need to obtain the necessary funds either through debt or equity financing, some form of cost-sharing arrangement with others, or the sale of all or part of the property. There is no assurance that we will be successful in obtaining any financing. These various financing alternatives may dilute the interest of our shareholders and/or reduce our interest in the properties.
We will need additional financing for which we have no commitments, and this may -------------------------------------------------------------------------------- jeopardize execution of our business plan. ------------------------------------------
We have limited funds, and such funds may not be adequate to carry out the business plan in the oil and gas industry. Our ultimate success depends upon our ability to raise additional capital. We have not investigated the availability, source, or terms that might govern the acquisition of additional capital and will not do so until it determines a need for additional financing. If we need additional capital, we have no assurance that funds will be available from any source or, if available, that they can be obtained on terms acceptable to us. If not available, our operations will be limited to those that can be financed with our modest capital.
We may in the future issue more shares which could cause a loss of control by -------------------------------------------------------------------------------- our present management and current stockholders. -----------------------------------------------
We may issue further shares as consideration for the cash or assets or services out of our authorized but unissued common stock that would, upon issuance, represent a majority of the voting power and equity of our Company. The result of such an issuance would be those new stockholders and management would control our Company, and persons unknown could replace our management at this time. Such an occurrence would result in a greatly reduced percentage of ownership of our Company by our current shareholders, which could present significant risks to investors.
We have warrants issued and outstanding which are convertible into our common -------------------------------------------------------------------------------- stock. A conversion of such equity instruments could have a dilutive effect to -------------------------------------------------------------------------------- existing shareholders. ---------------------
At December 31, 2013, we have warrants issued and outstanding exercisable into 5,600,000 shares of our common stock at ranges from $0.50 to $3.00 per share. The warrants are exercisable in whole or in part. The exercise of the warrants into shares of our common stock could have a dilutive effect to the holdings of our existing shareholders.
We will depend upon management but we will have limited participation of -------------------------------------------------------------------------------- management. ----------
Our directors are also acting as our officers. We will be heavily dependent upon their skills, talents, and abilities, as well as several consultants to us, to implement our business plan, and may, from time to time, find that the inability of the officers, directors and consultants to devote their full-time attention to our business results in a delay in progress toward implementing our business plan. Consultants may be employed on a part-time basis under a contract to be determined.
Our directors and officers are, or may become, in their individual capacities, officers, directors, controlling shareholder and/or partners of other entities engaged in a variety of businesses. Thus, our officers and directors may have potential conflicts including their time and efforts involved in participation with other business entities. Each officer and director of our business is engaged in business activities outside of our business, and the amount of time they devote as Officers and Directors, with the exception of George Harris, Chief Executive Officer and Chief Financial Officer, to our business will be up to 25 hours per week. Mr. Harris devotes up to 40 hours per week. (See "Executive Team") Because investors will not be able to manage our business, they should critically assess all of the information concerning our officers and directors.
We do not know of any reason other than outside business interests that would prevent them from devoting full-time to our Company, when the business may demand such full-time participation.
Our officers and directors may have conflicts of interests as to corporate -------------------------------------------------------------------------------- opportunities which we may not be able or allowed to participate in. -------------------------------------------------------------------
Presently there is no requirement contained in our Articles of Incorporation, Bylaws, or minutes which requires officers and directors of our business to disclose to us business opportunities which come to their attention. Our officers and directors do, however, have a fiduciary duty of loyalty to us to disclose to us any business opportunities which come to their attention, in their capacity as an officer and/or director or otherwise. Excluded from this duty would be opportunities which the person learns about through his involvement as an officer and director of another company. We have no intention of merging with or acquiring business opportunity from any affiliate or officer or director.
We have agreed to indemnification of officers and directors as is provided by -------------------------------------------------------------------------------- Wyoming Statute. ---------------
Wyoming Statutes provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities our behalf. We will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person's promise to repay us therefore if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us that we will be unable to recoup.
Our directors' liability to us and shareholders is limited ----------------------------------------------------------
Wyoming Revised Statutes exclude personal liability of our directors and our stockholders for monetary damages for breach of fiduciary duty except in certain specified circumstances. Accordingly, we will have a much more limited right of action against our directors that otherwise would be the case. This provision does not affect the liability of any director under federal or applicable state securities laws.
RISK FACTORS RELATING TO OUR BUSINESS
Our business, the oil and gas business has numerous risks which could render us -------------------------------------------------------------------------------- unsuccessful. ------------
The search for new oil and gas reserves frequently results in unprofitable efforts, not only from dry holes, but also from wells which, though productive, will not produce oil or gas in sufficient quantities to return a profit on the costs incurred. There is no assurance we will find or produce oil or gas from any of the wells we have acquired or which may be acquired by us, nor are there any assurances that if we ever obtain any production it will be profitable. (See "Business and Properties")
We have substantial competitors who have an advantage over us in resources and -------------------------------------------------------------------------------- management. ----------
We are and will continue to be an insignificant participant in the oil and gas business. Most of our competitors have significantly greater financial resources, technical expertise and managerial capabilities than us and, consequently, we will be at a competitive disadvantage in identifying and developing or exploring suitable prospects. Competitor's resources could overwhelm our restricted efforts to acquire and explore oil and gas prospects and cause failure of our business plan.
We will be subject to all of the market forces in the energy business, many of -------------------------------------------------------------------------------- which could pose a significant risk to our operations. -----------------------------------------------------
The marketing of natural gas and oil which may be produced by our prospects will be affected by a number of factors beyond our control. These factors include the extent of the supply of oil or gas in the market, the availability of competitive fuels, crude oil imports, the world-wide political situation, price regulation, and other factors. Current economic and market conditions have created dramatic fluctuations in oil prices. Any significant decrease in the market prices of oil and gas could materially affect our profitability of oil and gas activities.
There generally are only a limited number of gas transmission companies with existing pipelines in the vicinity of a gas well or wells. In the event that producing gas properties are not subject to purchase contracts or that any such contracts terminate and other parties do not purchase our gas production, there is assurance that we will be able to enter into purchase contracts with any transmission companies or other purchasers of natural gas and there can be no assurance regarding the price which such purchasers would be willing to pay for such gas. There may, on occasion, be an oversupply of gas in the marketplace or in pipelines; the extent and duration may affect prices adversely. Such oversupply may result in reductions of purchases and prices paid to producers by principal gas pipeline purchasers. (See "Our Business and Competition, Markets, Regulation and Taxation.")
We believe investors should consider certain negative aspects of our operations. --------------------------------------------------------------------------------
Dry Holes: We may expend substantial funds acquiring and potentially participating in exploring properties which we later determine not to be productive. All funds so expended will be a total loss to us.
Technical Assistance: We will find it necessary to employ technical assistance in the operation of our business. As of the date of this Prospectus, we have not contracted for any technical assistance. When we need it such assistance is likely to be available at compensation levels we would be able to pay.
Uncertainty of Title: We will attempt to acquire leases or interests in leases by option, lease, farmout or by purchase. The validity of title to oil and gas property depends upon numerous circumstances and factual matters (many of which are not discoverable of record or by other readily available means) and is subject to many uncertainties of existing law and our application.
Government Regulations: The area of exploration of natural resources has become significantly regulated by state and federal governmental agencies, and such regulation could have an adverse effect on our operations. Compliance with statutes and regulations governing the oil and gas industry could significantly increase the capital expenditures necessary to develop our prospects.
Nature of our Business: Our business is highly speculative, involves the commitment of high-risk capital, and exposes us to potentially substantial losses. In addition, we will be in direct competition with other organizations which are significantly better financed and staffed than we are.
General Economic and Other Conditions: Our business may be adversely affected from time to time by such matters as changes in general economic, industrial and international conditions; changes in taxes; oil and gas prices and costs; excess supplies and other factors of a general nature.
Our business is subject to significant weather interruptions. ------------------------------------------------------------
Our activities may be subject to periodic interruptions due to weather conditions. Weather-imposed restrictions during certain times of the year on roads accessing properties could adversely affect our ability to benefit from production on such properties or could increase the costs of drilling new wells because of delays.
We are subject to significant operating hazards and uninsured risk in the energy -------------------------------------------------------------------------------- industry. --------
Our proposed operations will be subject to all of the operating hazards and risks normally incident to exploring, drilling for and producing oil and gas, such as encountering unusual or unexpected formations and pressures, blowouts, environmental pollution and personal injury. We will maintain general liability insurance but we have not obtained insurance against such things as blowouts and pollution risks because of the prohibitive expense. Should we sustain an uninsured loss or liability, or a loss in excess of policy limits, our ability to operate may be materially adversely affected.
We are subject to Federal Income Tax laws and changes therein which could -------------------------------------------------------------------------------- adversely impact us. --------------------
Federal income tax laws are of particular significance to the oil and gas industry in which we engage. Legislation has eroded various benefits of oil and gas producers and subsequent legislation could continue this trend. Congress is continually considering proposals with respect to Federal income taxation which could have a material adverse effect on our future operations and on our ability to obtain risk capital which our industry has traditionally attracted from taxpayers in high tax brackets.
We are subject to substantial government regulation in the energy industry which -------------------------------------------------------------------------------- could adversely impact us. -------------------------
The production and sale of oil and gas are subject to regulation by state and federal authorities, the spacing of wells and the prevention of waste. There are both federal and state laws regarding environmental controls which may necessitate significant capital outlays, resulting in extended delays, materially affect our earnings potential and cause material changes in the in our proposed business. We cannot predict what legislation, if any, may be passed by Congress or state legislatures in the future, or the effect of such legislation, if any, on us. Such regulations may have a significant affect on our operating results.
RISK FACTORS RELATED TO OUR STOCK
The regulation of penny stocks by SEC and FINRA may discourage the tradability -------------------------------------------------------------------------------- of our securities. ------------------
We are a "penny stock" company. Our securities are subject to a Securities and Exchange Commission rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. For purposes of the rule, the phrase "accredited investors" means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse's income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Effectively, this discourages broker-dealers from executing trades in penny stocks. Consequently, the rule will affect the ability of purchasers in this offering to sell their securities in any market that might develop therefore because it imposes additional regulatory burdens on penny stock transactions.
In addition, the Securities and Exchange Commission has adopted a number of rules to regulate "penny stocks". Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange Act of 1934, as amended. Because our securities constitute "penny stocks" within the meaning of the rules, the rules would apply to us and to our securities. The rules will further affect the ability of owners of shares to sell our securities in any market that might develop for them because it imposes additional regulatory burdens on penny stock transactions.
Shareholders should be aware that, according to Securities and Exchange Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) "boiler room" practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
We will pay no foreseeable dividends in the future. ----------------------------------------------------
We have not paid dividends on our common stock and do not ever anticipate paying such dividends in the foreseeable future.
Our investors may suffer future dilution due to issuances of shares for various -------------------------------------------------------------------------------- considerations in the future. ----------------------------
There may be substantial dilution to our shareholders purchasing in this Offering as a result of future decisions of the Board to issue shares without shareholder approval for cash, services, or acquisitions.
At December 31, 2012, we have warrants issued and outstanding exercisable into 7,500,000 shares of our common stock at ranges from $0.25 to $3.00 per share. We have registered 2,000,000 shares underlying our $0.50 Warrants in an effective registration statement. We do not intend to register the warrants held by our officers and directors. The warrants are exercisable in whole or in part. The exercise of the warrants into shares of our common stock could have a dilutive effect to the holdings of our existing shareholders.
Rule 144 sales in the future may have a depressive effect on our stock price. -----------------------------------------------------------------------------
All of the outstanding shares of common stock held by our present officers, directors, and affiliate stockholders are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted Shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. We are registering all of our outstanding shares so officers, directors and affiliates will be able to sell their shares if this Registration Statement becomes effective. Rule 144 provides in essence that a person who has held restricted securities for six months, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1.0% of a company's outstanding common stock or the average weekly trading volume during the four calendar weeks prior to the sale. There is no limit on the amount of restricted securities that may be sold by a nonaffiliate after the owner has held the restricted securities for a period of six month. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to subsequent registration of shares of common stock of present stockholders, may have a depressive effect upon the price of the common stock in any market that may develop.
Our common stock may be volatile, which substantially increases the risk that -------------------------------------------------------------------------------- you may not be able to sell your shares at or above the price that you may pay -------------------------------------------------------------------------------- for the shares. --------------
Because of the limited trading market for our common stock and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss because of such illiquidity and because the price for our Securities may suffer greater declines because of our price volatility.
The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you may pay. Certain factors, some of which are beyond our control, that may cause our share price to fluctuate significantly include, but are not limited to the following:
o Variations in our quarterly operating results;
o Loss of a key relationship or failure to complete significant transactions;
o Additions or departures of key personnel; and
o Fluctuations in stock market price and volume.
Additionally, in recent years the stock market in general, and the over-the-counter markets in particular, have experienced extreme price and volume fluctuations. In some cases, these fluctuations are unrelated or disproportionate to the operating performance of the underlying company. These market and industry factors may materially and adversely affect our stock price, regardless of our operating performance. In the past, class action litigation often has been brought against companies following periods of volatility in the market price of those companies common stock. If we become involved in this type of litigation in the future, it could result in substantial costs and diversion of management attention and resources, which could have a further negative effect on your investment in our stock.
Any new potential investors will suffer a disproportionate risk and there will -------------------------------------------------------------------------------- be immediate dilution of existing investor's investments. --------------------------------------------------------
Our present shareholders have acquired their securities at a cost significantly less than that which the investors purchasing pursuant to shares will pay for their stock holdings or at which future purchasers in the market may pay. Therefore, any new potential investors will bear most of the risk of loss.
Our business is highly speculative and the investment is therefore risky.
Due to the speculative nature of our business, it is probable that the investment in shares offered hereby will result in a total loss to the investor. Investors should be able to financially bear the loss of their entire investment. Investment should, therefore, be limited to that portion of discretionary funds not needed for normal living purposes or for reserves for disability and retirement.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS ----------------------------------
Not Applicable.
ITEM 2.
ITEM 2. PROPERTIES -------------------
REAL ESTATE. ------------
None.
PATENTS AND PATENT APPLICATIONS. --------------------------------
None.
OIL AND GAS PROPERTIES. -----------------------
Our oil and natural gas properties are located in the Uintah Basin, Utah in two fields, the Natural Buttes Field in Uintah County and the Greater Cisco Springs Field in Grand County and the Mason Lakes Field in Musselshell County, Montana.
The following is a description of our properties in the Uintah Basin.
Natural Buttes ---------------
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 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 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.
In 2013, the Company expended $223,554 to further evaluate the best method to apply to enhance well production. During the year ended December 31, 2012, the Company subsequently expended an additional $198,500 in cash for the completion of a gas pipeline connection, surface equipment and initial well rework on the 22-1 Well. Since the leases are Held By Production and given low gas prices, the Company had placed expenditures for additional production enhancements on hold. The Company does plan to further evaluate methods to increase production in 2014.
Cisco Pacific -------------
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 has an interest rate of 8% and is due May 30, 2013. The convertible promissory note and accrued interest could have been converted into shares of the Company's restricted common stock at $1.00 per share, but the note was instead repaid on June 1, 2013.
During 2013, the Company did expend some development costs to assess the potential for additional production enhancement from existing wells. During the year ended December 31, 2012, the Company did not expend any development costs in connection with the re-working of these wells. This included pulling pumps, rods and tubing, cleaning casing, logging and clearing lower well bores. Much of this work was done in anticipation of establishing wells on which to test the Company's lateral drilling technology in the first half of 2014. The Company anticipates expending from $250,000 to $500,000 on these activities and currently believes it has sufficient funds to complete these activities.
On June 17, 2013, the Company expanded its holdings in the Cisco Springs area when it acquired a 100 percent Working Interest in Pride Ventures interest in approximately 4,400 acres. The property included 9 gas wells that need to be re-worked or offset drilled. The leases acquired also included a natural gas gathering system connected to a local pipeline that greatly simplifies collection and sale of natural gas from existing Company gas wells in the area.
In exchange for such mineral estates, the Company paid a total of $100,000 in a combination of cash and stock as follows:
-$75,000 in cash; and -$25,000 in the form of 50,000 shares of the Company's restricted common stock.
Musselshell County, Montana - Mason Lakes Field -----------------------------------------------
On June 14, 2013, the Company entered into a Purchase and Sale agreement with Jake Oil, LLC and Mr. Eric Olsen and acquired all right and title to oil and gas leases in the Federal Unit for the 1st Cat Creek formation for 559 gross acres in the Musselshell County, Montana. The property included 6 wells in a field to be water flooded that needed the wells and field gathering system to be re-worked. During the second half of 2013 the Company worked to bring field production back online. As of the end of 2013, new production lines had been installed, existing lines repaired along with installation of oil/water separators and tank relocation. The injection well received State approval for use and the field began its initial trial production, with the water source well, water injection well and two production wells operating. The Company plans to rework the two production wells with larger pumping systems and increase fluids production in the first half of 2014. The Company believes it currently has sufficient capital to complete this project. After evaluation the increased production, the current field development plan, which calls for the drilling of several production and injection wells, will be re-evaluated for implementation.
In exchange for such mineral estates, the Company paid a total of $25,000 in a combination of cash and Carried Working Interest as follows:
-$25,000 in cash; and -5 percent Carried Working Interest
On June 14, 2013, the Company acquired all right and title to additional oil and gas leases for 722 gross acres in the Mason Lakes Field area from S & L Energy, Inc. Approximately 120 gross acres are for formations other than the 1st Cat Creek formation Federal Unit mentioned previously. The other 602 gross acres are Held By Production by production from the Mason Lakes Federal Unit. The Company plans to create a drilling development plan for this acreage in the next 12 to 24 months.
Initial target production zones are from 4,000 to 5,000 feet deep and include the 1St Cat Creek and Amsden formations. Deeper drilling prospects such as the Heath shale will also be evaluated for future opportunity.
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.
Title to Properties -------------------
As is customary in the oil and natural gas industry, we generally conduct a preliminary title examination prior to the acquisition of properties or leasehold interests. Prior to commencement of operations on such acreage, a thorough title examination will usually be conducted and any significant defects will be remedied before proceeding with operations. We believe the title to our leasehold properties is good, defensible and customary with practices in the oil and natural gas industry, subject to such exceptions that we believe do not materially detract from the use of such properties. With respect to our properties of which we are not the record owner, we rely instead on contracts with the owner or operator of the property or assignment of leases, pursuant to which, among other things, we generally have the right to have our interest placed on record.
Our properties are generally subject to royalty, overriding royalty and other interests customary in the industry, liens incident to agreements, current taxes and other burdens, minor encumbrances, easements and restrictions. We do not believe any of these burdens will materially interfere with our use of these properties.
Summary of Oil and Natural Gas Reserves ---------------------------------------
The following disclosure does not include any reserves attributable to our interests in the Natural Buttes or Musselshell County, Montana areas.
Proved Reserves
The following table sets forth our estimated net proved reserves as of December 31, 2013 and 2012.
Estimates of proved developed and undeveloped reserves are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development, price changes and other factors. See "-- Qualifications of Technical Persons and Internal Controls Over Reserves Estimation Process."
Proved Undeveloped Reserves
Our proved undeveloped reserves at December 31, 2013 and 2012 were 336 MBbls of oil and 302 MMScf of natural gas. Our proved undeveloped reserves at December 31, 2012, were 267 MBbls of oil and 147 MMScf of natural gas.
Qualifications of Technical Persons and Internal Controls Over Reserves Estimation Process
Our reserve report for the year ended December 31, 2013 was prepared by RSM Resources, LLC, an independent petroleum engineer ("RSM"). RSM estimated, in accordance with petroleum engineering and evaluation principles set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information promulgated by the Society of Petroleum Engineers ("SPE Standards") and definitions and guidelines established by the SEC, 100% of the proved reserve information for our onshore properties as of December 31, 2013.
Our reserve report for the year ended December 31, 2012 was prepared by Tariq Ahmed, an independent petroleum engineer ("Ahmed"). Ahmed estimated, in accordance with petroleum engineering and evaluation principles set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information promulgated by the Society of Petroleum Engineers ("SPE Standards") and definitions and guidelines established by the SEC, 100% of the proved reserve information for our onshore properties as of December 31, 2012.
The principal person at RSM who prepared the reserve report is Mr. Richard K. Dembowski. Mr. Dembowski is the principal engineer at RSM Resources, LLC. RSM has over 25 years in the oil and gas industry in such areas as technical consulting, litigation support and reserve reporting.
Mr. George Harris, the Company's Chief Executive Officer and Chief Financial Officer, is primarily responsible for the determination of and the presentation of the reserves presented by the Company.
The technical persons responsible for preparing the reserves estimates presented herein meet the requirements regarding qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Natural Gas Reserves Information promulgated by the Society of Petroleum Engineers.
Our internal staff of geoscience professionals who work closely with our independent petroleum engineer to ensure the integrity, accuracy and timeliness of data furnished to them in their reserves estimation process. We review with them our properties and discuss methods and assumptions used in their preparation of our fiscal year-end reserves estimates. While we have no formal committee specifically designated to review reserves reporting and the reserves estimation process, a copy of each of the RSM reserve report is reviewed with representatives of RSM and our internal technical staff before we disseminate any of the information. Additionally, our senior management reviews and approves the Ahmed reserve report and any internally estimated significant changes to our proved reserves on an annual basis.
Estimates of oil and natural gas reserves are projections based on a process involving an independent third party engineering firm's collection of all required geologic, geophysical, engineering and economic data, and such firm's complete external preparation of all required estimates and are forward-looking in nature. These reports rely upon various assumptions, including assumptions required by the SEC, such as constant oil and natural gas prices, operating expenses and future capital costs. The process also requires assumptions relating to availability of funds and timing of capital expenditures for development of our proved undeveloped reserves. These reports should not be construed as the current market value of our reserves. The process of estimating oil and natural gas reserves is also dependent on geological, engineering and economic data for each reservoir. Because of the uncertainties inherent in the interpretation of this data, we cannot be certain that the reserves will ultimately be realized. Our actual results could differ materially. See "Note 14 -- Supplemental Information Relating to Oil and Natural Gas Producing Activities (Unaudited)" to our audited consolidated financial statements for additional information regarding our oil and natural gas reserves.
Under SEC rules, proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. The term "reasonable certainty" implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. To achieve reasonable certainty, RSM employs technologies consistent with the standards established by the Society of Petroleum Engineers. The technologies and economic data used in the estimation of our proved reserves include, but are not limited to, well logs, geologic maps and available downhole and production data, seismic data and well test data.
Summary of Oil and Natural Gas Properties and Projects -----------------------------------------------------
Production, Price and Cost History
The following table presents net production sold, average sales prices and production costs and expenses for the year ended December 31, 2013 and 2012. During the year ended December 31, 2013 and 2012, the Company did not have any production of or sales of natural gas.
The following table presents our total gross and net developed and undeveloped acreage by region as of December 31, 2013 and 2012:
Productive Wells
The following table presents the total gross and net productive wells by area and by oil or natural gas completion as of December 31, 2013 and 2012:
Drilling Activity
The Company's operational activities are focused on re-work of existing wells for production purposes.
During the year ended December 31, 2012, the Company has subsequently expended an additional $213,555 in cash for the completion of a gas pipeline connection, surface equipment and initial well rework on the 22-1 Well in the Natural Buttes field. During 2013, Company has expended $223,554 in cash for re-work on wells not only in the Natural Buttes field, but also in the Mason Lakes field.
At December 31, 2013, the Company had no wells being drilled.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS --------------------------
Hinto anticipates that it (including current and any future subsidiaries) will from time to time become subject to claims and legal proceedings arising in the ordinary course of business. It is not feasible to predict the outcome of any such proceedings and we cannot assure that their ultimate disposition will not have a materially adverse effect on the Company's business, financial condition, cash flows or results of operations. The Company is not a party to any pending legal proceedings, nor is the Company aware of any civil proceeding or government authority contemplating any legal proceeding as of the date of this filing.
ITEM 4.
ITEM 4. MINING AND SAFETY DISCLOSURE. -------------------------------------
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND -------------------------------------------------------------------------------- ISSUER PURCHASES OF EQUITY SECURITIES -------------------------------------
Market Information
There is a limited public trading market for the common stock. The Company's common stock is listed for trading on the OTCBB and the Over The Counter Markets OTCQB and has the symbol "HENI."
HIGH LOW ---- --- Quarter Ended: December 31, 2013 $0.89 $0.69 September 30, 2013 $1.03 $0.75 June 30, 2013 $1.01 $0.79 March 31, 2013 $0.99 $0.30
Quarter Ended: December 31, 2012 $ 1.60 $ 0.30 September 30, 2012 $ 1.01 $ 0.65 June 30, 2012 $ 1.50 $ 0.65 March 31, 2012 $ 1.75 $ 0.75
Holders
There are approximately 137 holders of record of Hinto's common stock as of December 31, 2013.
Dividend Policy
Holders of the Company's common stock are entitled to receive such dividends as may be declared by Hinto's board of directors. The Company has not declared or paid any dividends on Hinto's common shares and it does not plan on declaring any dividends in the near future. The Company currently intends to use all available funds to finance the operation and expansion of its business.
Recent Sales of Unregistered Securities
During the years ended December 31, 2012 and 2013, the Company made the following sales of its unregistered shares.
Issuer Purchases of Equity Securities
Hinto did not repurchase any shares of its common stock during the years ended December 31, 2012 and 2011.
On July 11, 2011, prior to entering into the Share Exchange Agreement, South Uintah had purchased 3,000,000 common shares of the Company from its then majority shareholder Ms. Sharon Fowler. After such purchase, South Uintah held approximately 70% of the issued and outstanding common stock of the Company. Prior to closing of the acquisition of South Uintah, South Uintah transferred 300,000 shares to an unrelated third party as partial consideration for the acquisition of the gas prospect in Utah. As part of the Share Exchange Agreement, South Uintah returned the remaining 2,700,000 shares of common stock to the Company. We retired such shares to treasury, after the closing of the with the transaction
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA --------------------------------
Not applicable.
ITEM 7.
ITEM 7. 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 ------------------
We only began to recognize minimal revenues from our operations during the last half of 2012. We have minimal capital and, moderate cash. 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.
During the year ended December 31, 2013, we continued our re-work efforts on our properties in the Cisco Springs oil and gas field in the Uintah Basin of Grand County, Utah; performance of geological analysis of existing properties and the identification of potential properties for acquisition. Re-work efforts in the Cisco Springs field focused on the Company's 5A well and the well is now being tested and results of the testing are being evaluated.
Property Acquisitions
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, as follows: (a) $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.
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 the Musselshell County, Montana. In exchange for such oil and gas leases, the Company paid $25,000 in cash and a 5% working interest.
The property includes 6 wells in a field to be water flooded and the wells need to be re-worked. Additional drilling may be performed to maximize the oil recovery from the formation.
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 also containing in the Amsden (Alaska Bench) Formation which is late Mississippian to Early Pennsylvanian in age. The Amsden formation is a series 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 second half of 2013, we focused our efforts in the Mason Lake Field on re-work activities including the laying of new pipeline and the rework of the water injection well.
Financing Efforts
During the year ended December 31, 2013, the Company issued 1,163,000 shares of its restricted common stock for $581,500 at a price of $0.50 to $0.58 per share.
During the year ended December 31, 2013, the Company issued $75,000 in Class A Secured Convertible Promissory Notes in exchange for $75,000 in cash 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.
During the year ended December 31, 2013, the Company received funds of $1,000,000 in the connection with the exercise of warrants for 2,000,000 shares of its common stock at an exercise price of $0.50 per share.
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 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. 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 Noteholder 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 need 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 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 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.
RESULTS OF OPERATIONS ---------------------
For the Year Ended December 31, 2013 Compared to the Year Ended December 31,
During the years ended December 31, 2013, the Company recognized revenues of $65,615 from its operational activities compared to $29,908 during the year ended December 31, 2012. Revenues increased by $35,707, as result of not only increased production at our Utah properties, but also as a result of oil produced in the testing of our field in Montana. Management expects that revenues will continue to increase in the next twelve months, as the field in Montana is brought into full production and re-work on properties in Utah, is continued. Management, though does not expect revenue to be sufficient enough to cover the full costs of operations and administrative expenses in the near future.
During the year ended December 31, 2013 and 2012, the Company recognized a direct cost of revenue of $389,866 and $204,387, respectively. An increase of $185,479, which is direct result of the costs incurred with our acquisition and work on our Mason Lakes Field in Musselshell County, Montana. Direct cost of revenue consists of the following items:
During the years ended December 31, 2013, we recognized total operational expenses of $932,764 compared to $810,836 during the year ended December 31, 2012, an increase of $121,928. The increase was a result of increases of $50,766 in professional fees, $24,777 in travel and entertainment expenses and a $20,134 increase in insurance expense offset by a $28,774 decrease in advertising.
During the year ended December 31, 2013, we recognized a net loss of $1,332,312 compared to $1,776,527 during the year ended December 31, 2012. The decrease of $444,215 was a result of the $185,479 increase in direct revenue costs combined with the $121,928 increase in operational expenses offset by the increase of $35,707 in costs of revenue and a one-time gain on the write off of accrued liabilities along with a $17,815 finance cost associated with the issuance of a warrant with convertible debt and a decrease in the one-time litigation settlement expense of $704,247.
LIQUIDITY ---------
At December 31, 2013, the Company had total current assets of $129,615, consisting of $97,716 in cash, $29,886 in accounts receivable and $2,103 in deposits. At December 31, 2013, the Company had total current liabilities of $717,409, consisting of accounts payable of $127,601, accrued liabilities of $44,136, a stock subscription payable of $425,000 and notes payable of $115,000. At December 31, 2013, the Company had working capital deficit of $582,123.
During the year ended December 31, 2013, the Company used $1,270,927 in its operations. During the year ended December 31, 2013, we recognized a net loss of $1,314,497, which was reconciled for the non-cash items consisting of a $40,123 in interest converted to common stock, $30,000 in stock issued for services, $$40,006 in amortization, depreciation and depletion expense and $38,637 in asset remediation expense.
During the year ended December 31, 2012, the Company used $535,651 in its operations. During the year ended December 31, 2012, we recognized a net loss of $1,776,527, which was reconciled for the non-cash items consisting of a $37,418 in accrued interest converted to common stock, $174,435 in stock issued for services, $24,283 in depreciation and depletion and $72,122 in asset remediation expense.
During the year ended December 31, 2013, we used $480,566 in our investing activities. $140,000 of which was used to purchase properties, $42,567 to purchase machinery and equipment, $223,554 in the re-work of wells and $74,445 in the development of our technological process.
During the year ended December 31, 2012, we used $405,050 in our investing activities, $213,550 solely in the development of our 22-1 well, $175,000 on the purchase of certain oil and gas properties and related assets in the Greater Cisco area of the Uintah Basin in Grand County, Utah, and $16,500 in the purchase of machinery.
During the year ended December 31, 2013, we received $1,791,500 from our financing activities compared to $497,500 during the year ended December 31, 2012.
During the year ended December 31, 2013, the Company issued 1,163,000 shares of its restricted common stock for $581,500 at a price of $0.50 to $0.58 per share.
During the year ended December 31, 2013, the Company issued $75,000 in Class A Secured Convertible Promissory Notes in exchange for $75,000 in cash 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.
During the year ended December 31, 2013, the Company received funds of $1,000,000 in the connection with the exercise of warrants for 2,000,000 shares of its common stock at an exercise price of $0.50 per share.
Short Term.
On a short-term basis, we have not generated 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 the Company continues exploration activities.
Capital Resources
The Company has only common stock as its 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 its cash needs. The Company will have to seek loans or equity placements to cover such cash needs. Once exploration commences, its needs for additional financing is likely to increase substantially.
No commitments to provide additional funds have been made by the Company's management or other stockholders. Accordingly, there can be no assurance that any additional funds will be available to us to allow us to cover the Company's expenses as they may be incurred.
The Company will need substantial additional capital to support its proposed future energy operations. We have no revenues. The Company has no committed source for any 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 participation in exploration wells or geophysical studies or other activities will be made on a case-by-case basis. The Company may, in any particular case, decide to participate or decline participation. If participating, we may pay its proportionate share of costs to maintain the Company's proportionate interest through cash flow or debt or equity financing. If participation is declined, the Company 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.
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.
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 December 31, 2013, 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.
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 December 31, 2013 and 2012.
Dependence on Major Customers
For the fiscal year ended December 31, 2013, the Company's revenues were attributable to sales of oil to two customers. For the fiscal year ended December 31, 2012, 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 for the fiscal years ended December 31, 2013 and 2012.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -------------------------------------------------------------------
Our operations do not employ financial instruments or derivatives which are market sensitive. Short term funds are held in non-interest bearing accounts and funds held for longer periods are placed in interest bearing accounts. Large amounts of funds, if available, will be distributed among multiple financial institutions to reduce risk of loss. The Company's cash holdings do not generate interest income.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ----------------------------------------------------
The audited financial statements of Hinto Energy, Inc. for the years ended December 31, 2013 and 2012 for the, appear as pages 53 through 73 at the end of the document.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES --------------------------------
The Company maintains a system of disclosure controls and procedures that are designed for the purposes of ensuring that information required to be disclosed in the Company's SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.
Management, consisting of the Company's Chief Executive Officer and Chief Financial Officer (the same individual) after evaluating the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rules 13a-14(c) as of December 31, 2013 (the "Evaluation Date") concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were not effective to ensure that material information relating to the Company would be made known to them by individuals within those entities, particularly during the period in which this annual report was being prepared and that information required to be disclosed in the Company's SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, as discussed further below.
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 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 December 31, 2013, due to the existence of the material weaknesses noted above that we have yet to fully remediate.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to permanent rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
There was no change in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION ---------------------------
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ----------------------------------------------------------------
The following table sets forth information as to persons who currently serve as Hinto Energy, Inc. directors or executive officers, including their ages as of December 31, 2013.
All current directors of the Company were elected by the shareholders on August 18, 2011. The Company's officers were appointed by the Board of Directors on August 18, 2011. With the exception of Mr. Keller, the above officers and directors hold the same positions with South Uintah, Hinto's wholly-owned subsidiary.
The officers are elected by the board of directors at the first meeting after each annual meeting of the Company's shareholders and hold office until their successors are duly elected and qualified under Hinto's bylaws.
The directors named above will serve until the next annual meeting of Hinto's stockholders. Thereafter, directors will be elected for one-year terms at the annual stockholders' meeting. Officers will hold their positions at the pleasure of the board of directors absent any employment agreement. There is no arrangement or understanding between the directors and officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer.
Biographical Information
GEORGE HARRIS, CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER & DIRECTOR.
Mr. Harris was appointed the Chief Executive Officer of the Company on June 29, 2012. Mr. Harris also serves as the Chief Financial Officer of South Uintah Gas Properties, Inc. From January 2008 to April 2009, Mr. Harris served as the President and Chief Financial Officer for China Wi-Max Communications, Inc. Mr. Harris served as a Senior Vice President at Falkenberg Capital Corporation, a boutique investment bank to the telecommunications community from March 2006 to January 2008. Mr. Harris' experience includes active roles in several technology startups and in his role at Falkenberg, he worked closely with companies that deliver telecommunications and data services utilizing wired and wireless technologies. Mr. Harris is also the President of Harris Products, Inc. and Integrated Components, Inc., where he developed and managed component manufacturing facilities based in the United States and Southern China. Mr. Harris was formerly the Chief Financial Officer at Farm Credit Banks of St. Louis, Missouri and managed a large financial organization with Lucent Technologies.
Mr. Harris has been a Certified Public Accountant since 1977 in the state of California, where he worked for Arthur Young and Company, and earned a Bachelor of Science degree in Accounting and an MBA from Pepperdine University.
Mr. Harris enhances the Company's Board of Directors, with not only for his management experience, but also with his accounting and public company experience.
GARY HERICK, VICE PRESIDENT OF FINANCE, SECRETARY & DIRECTOR.
Mr. Herick has been a licensed Securities Representative since 1985, involved in different aspects of the business including: IPO's, Retail Accounts, Investment Advisory Accounts, Commodities, Alternative Investments and Venture Capital Funding. From 2001 to 2005, he handled accounts as a Registered Investment Advisor specializing in Alternative Investments and Stock Analysis for managed accounts with Herick Asset Management.
Mr. Herick is currently licensed with Capwest Securities, a FINRA member firm. He holds a Series 7 and 63 Licenses and is also a Registered Investment Advisor Representative.
He attended the University of Florida from 1981-1985 and holds a Bachelor of Science in marketing.
Mr. Herick enhances the Board of Directors with not only his securities background, but also provides the Board with his knowledge and experience in venture capital.
J. DAVID KELLER, VICE PRESIDENT OF EXPLORATION & DEVELOPMENT & DIRECTOR.
Mr. Keller has been the Managing Partner and Exploration and Development Manager of Powderhorn Energy of Boulder, Colorado. Mr. Keller founded Powderhorn Energy in 2009. Powderhorn Energy focuses on oil and gas opportunities in the Rocky Mountain Basins. Mr. Keller is responsible for structuring projects to achieve and surpass industry average profitability, cash flow and, especially, upside potential. From 2006 through May 2009, Mr. Keller was the Chief Geophysicist for TTI Exploration in Boulder, Colorado. While there he was responsible for all geoscience technology for project evaluation, exploration, development and exploitation.
Mr. Keller received his Bachelor of Science in Geoscience from the University of Texas, Dallas in 1980 and his Master of Science in Geophysics from the Colorado School of Mines in 1987.
Mr. Keller provides the Board of Directors with both geology experience and oil and gas industry experience.
MAX P. SOMMER, DIRECTOR.
Since 1997, Mr. Sommer has served as the President, Rose Run Energy Company, Inc., providing Consulting and Oil and Gas Production activities mostly in the Appalachian Region. Mr. Sommer provided prospects to Oil and Gas Partnership which drilled and participated in 140 wells. Rose Run Energy sold its production in 2009. Mr. Sommer served as a director of Intercontinental Energy Corporation from 1976-1977 and as a director of Gerber Energy Corporation from 1977-1980, both public reporting companies. Starting in 2013, Mr. Sommer has provided Hinto Energy with consulting services in connection with its oil and gas production activities.
Mr. Sommer's received his doctorate degree in Geology-Paleontology in 1955 from the University of Basel, Switzerland.
Mr. Sommer's brings to the Board of Directors fifty-five years of experience in operations and management of geological and geophysical exploration activities for oil, gas and minerals in various countries.
Mr. Sommer provides the Board of Directors with his experience and knowledge of not only geology, but also oil and gas production.
KEVIN BLAIR, DIRECTOR.
Mr. Blair has been the Principal and Attorney for General Capital Partners, LLC of Denver, Colorado, since January 2010. There he has complete business development responsibilities including strategic planning, negotiation of agreements, acquisition of properties, supervision of subcontractors, supervision of personnel, and financial reporting. He was a Private Equity Broker at Capwest Securities, Inc. (Denver, Colorado, from January 2007 to 2010), a federally licensed broker dealer specializing in syndications of private debt and equity securities marketed exclusively to high net worth clients for the purpose of acquiring real estate and energy properties. He is an Attorney and Mergers & Acquisitions Intermediary at Merchant Banking Associates, LLC (Denver, Colorado, from January 2000 to December 2006).
Mr. Blair's education is as follows: LLM, University of Denver College of Law, In Progress, Juris Doctorate, University of Denver College of Law, May 1994, Bachelor of Science, Colorado School of Mines, Civil Engineering, May 1989.
His Skills, Licenses and Associations include: Admitted to the Colorado Bar, Series 7 Federal Securities License, Series 63 Federal Securities License, Completed Landman Training Course, Real Estate Broker in Colorado, Minnesota, Alabama, and Louisiana, Member of the International Business Brokers Association, Certified Business Intermediary and a Member of the Association for Corporate Growth.
Mr. Blair provides the Board of Directors with not only legal experience but also securities and investment experience.
Committees of the Board of Directors
The Company is managed under the direction of its board of directors.
Executive Committee
The Company does not have an executive committee, at this time.
Audit Committee
The Company does not have an audit committee at this time.
Conflicts of Interest - General.
The Company's directors and officers are, or may become, in their individual capacities, officers, directors, controlling shareholder and/or partners of other entities engaged in a variety of businesses. Thus, there exist potential conflicts of interest including, among other things, time, efforts and corporation opportunity, involved in participation with such other business entities. While each officer and director of the Company's business is engaged in business activities outside of its business, the amount of time they devote to our business will be up to approximately 25 hours per week. Mr. Harris, the Company's Chief Executive Officer and Chief Financial Officer, devotes up to 40 hours per week to the Company's business.
Conflicts of Interest - Corporate Opportunities
Presently no requirement contained in the Company's Articles of Incorporation, Bylaws, or minutes which requires officers and directors of the Company's business to disclose to Hinto business opportunities which come to their attention. The Company's officers and directors do, however, have a fiduciary duty of loyalty to Hinto to disclose to it any business opportunities which come to their attention, in their capacity as an officer and/or director or otherwise. Excluded from this duty would be opportunities which the person learns about through his involvement as an officer and director of another company. The Company has no intention of merging with or acquiring an affiliate, associate person or business opportunity from any affiliate or any client of any such person.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION --------------------------------
The following table sets forth the compensation paid to officers and board members during the fiscal years ended December 31, 2013, 2012 and 2011. The table sets forth this information for Hinto Energy, Inc. including salary, bonus, and certain other compensation to the Board members and named executive officers for the past three fiscal years.
The compensation paid to Mr. Harris, Herick and Keller in 2011 was paid by South Uintah, the Company's majority shareholder, at the time.
(1) Mr. Harris was appointed the Chief Financial Officer on August 18, 2011 and the Chief Executive Officer on June 29, 2012. He serves in the same capacity for South Uintah. Mr. Harris salary was paid pursuant to a consulting agreement with and by South Uintah. During the year ended December 31, 2011, Mr. Harris was issued 550,000 shares of the common stock of South Uintah, prior to the merger for his services as an officer and director of South Uintah. The shares had a value of $55, or $0.0001 (par value) as part of the merger, the shares were exchanged for an equal number of shares of Hinto's common stock. Mr. Harris was also issued warrants to purchase 550,000 shares of common stock of South Uintah prior to the merger, which have been exchanged for warrants to purchase Hinto's common stock at the same terms. The warrants are subject to vesting terms and have a term of 3 years. Warrants for 350,000 shares have an exercise price of $1.00 per share and warrants for 200,000 shares have an exercise price of $3.00 per share.
(2) Mr. Herick was appointed the Vice President of Finance and the Secretary of the Company on August 2011. He serves in the same capacity for South Uintah. Mr. Herick salary was paid pursuant to a consulting agreement with and by South Uintah. During the year ended December 31, 2011, Mr. Herick was issued 2,000,000 shares of common stock of South Uintah, prior to the merger for his services and as founder of South Uintah. The shares had a value of $200, or $0.0001 (par value) as part of the merger, the shares were exchanged for an equal number of shares of Hinto. During the year ended December 31, 2011, Arrowhead Consulting, LLC, which Mr. Herick has control of, was issued a warrant to purchase an additional 1,000,000 shares of common stock, which have been exchanged for warrants to purchase Hinto's common stock at the same terms. The warrant is subject to vesting terms and has a term of 3 years. The Warrant has an exercise price of $2.00 per share. (3) Mr. J. David Keller was appointed the Vice President of Exploration and Development on August 18, 2011. Mr. Keller holds the same position with South Uintah. During the year ended December 31, 2011, Mr. Keller was issued 525,000 shares of the common stock of South Uintah, prior to the merger for his services as an officer and director of South Uintah. The shares had a value of $52.50, or $0.0001 (par value) as part of the merger, the shares were exchanged for an equal number of shares of Hinto's common stock. During the year ended December 31, 2011, Mr. Keller was also issued warrants to purchase 525,000 shares of common stock of South Uintah prior to the merger, which have been exchanged for warrants to purchase Hinto's common stock at the same terms. The warrants are subject to vesting terms and have a term of 3 years. Warrants for 325,000 shares have an exercise price of $1.00 per share and warrants for 200,000 shares have an exercise price of $3.00 per share.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table sets forth certain information concerning outstanding equity awards held by the Chief Executive and Financial Officer and the Company's most highly compensated executive officers for the fiscal year ended December 31, 2013 (the "Named Executive Officers"):
(1) During the year ended December 31, 2011, Mr. Harris was issued warrants to purchase 550,000 shares of common stock of South Uintah prior to the merger, which have been exchanged for warrants to purchase Hinto's common stock at the same terms. The warrants have a term of 3 years. Warrants for 350,000 shares have an exercise price of $1.00 per share and warrants for 200,000 shares have an exercise price of $3.00 per share. At December 31, 2013, all of the shares underlying the warrants have vested. (2) During the year ended December 31, 2011, Arrowhead Consulting, LLC, which Mr. Herick has control of, was issued a warrant to purchase an additional 1,000,000 shares of common stock, which have been exchanged for warrants to purchase Hinto's common stock at the same terms. The warrant is subject to vesting terms and has a term of 3 years. The Warrant has an exercise price of $2.00 per share. During the year ended December 31, 2013, 666,667 shares under the warrant were vested. The market value of the shares underlying the warrant is based upon a closing market price of $0.73 per share. (3) During the year ended December 31, 2011, Mr. Keller was issued warrants to purchase 525,000 shares of common stock of South Uintah prior to the merger, which have been exchanged for warrants to purchase Hinto's common stock at the same terms. The warrants have a term of 3 years. Warrants for 325,000 shares have an exercise price of $1.00 per share and warrants for 200,000 shares have an exercise price of $3.00 per share. During the year ended December 31, 2012, the warrants vested in full.
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
In August, 2011, the Board of Directors and the stockholders of Hinto approved the 2011 Hinto Energy, Inc.'s Stock Option Award and Incentive Plan ("the 2011 Plan.") There are 2,000,000 shares of the Company's common stock reserved under the 2011 Plan. During the years ended December 31, 2013 and 2012, no options were issued under the 2011 Plan.
Consulting Agreements with Officers and Directors of South Uintah
Messrs. George Harris, Gary Herick, Kevin Blair, J. David Keller and Max Sommer have entered into Consulting Agreements with South Uintah for their services. They do not have any such Agreements with Hinto.
Mr. Harris has entered into a Consulting Agreement on June 1, 2011 with South Uintah to provide services to South Uintah as a director and Chief Financial Officer. The Consulting Agreement has a term of 1 year unless terminated with a 30 days notice by either party. The Consulting Agreement provides for Mr. Harris to receive a minimum $5,000 per month beginning April 15, 2011 to perform such services. In July 2011, the amount was increased to $10,000 per month and in May 2013 it was increased to $15,000 per month. In addition, Mr. Harris was issued 300,000 shares of South Uintah common stock and a warrant exercisable for 300,000 shares of South Uintah common stock, which pursuant to the Amended Share Exchange Agreement were exchanged for shares and warrants of Hinto. During the year ended December 31, 2012, the Consulting Agreement's term ran out, the Consulting Agreement has not been terminated and rather runs on a month to month basis.
Mr. Herick has entered into a Consulting Agreement on April 15, 2011 with South Uintah to provide services to South Uintah as a director and secretary. The Consulting Agreement has a term of 1 year unless terminated with a 30 days notice by either party. The Consulting Agreement provides for Mr. Herick to receive $10,000 per month beginning July 1, 2011 to perform such services. In addition, Mr. Herick was issued a warrant exercisable for 1,000,000 shares of South Uintah common stock, which pursuant to the Amended Share Exchange Agreement were exchanged for shares and warrants of Hinto. During the year ended December 31, 2012, the Consulting Agreement's term ran out, the Consulting Agreement has not been terminated and rather runs on a month to month basis.
Mr. J. David Keller has entered into a Corporate Advisor/Consulting Agreement on August 4, 2011 with South Uintah to provide services as a director and the Vice President Exploration and Development to South Uintah. The Agreement has a term of 1 year unless terminated with a 30 days notice by either party. The Agreement provides for a cash retainer of $5,000 for the month of July 2011 and then $10,000 for each month thereafter. The Agreement provides for Mr. Keller to be issued 300,000 shares of South Uintah common stock and a warrant exercisable for 300,000 shares of South Uintah common stock for such services, which pursuant to the Amended Share Exchange Agreement were exchanged for shares and warrants of Hinto. Mr. Keller became an employee of South Uintah on December 16, 2011, with a monthly base salary of $10,000. In 2012, Mr. Keller took a full time job elsewhere, though he has agreed to consult on an as needed basis with the Company.
Mr. Max Sommer has entered into a Corporate Advisor/Director Agreement on July 12, 2011 with South Uintah to provide services as a director to South Uintah. The Agreement has a term of 1 year unless terminated with a 30 days notice by either party. The Agreement provides for Mr. Blair to be issued 100,000 shares of South Uintah common stock and a warrant exercisable for 200,000 shares of South Uintah common stock for such services, which pursuant to the Amended Share Exchange Agreement were exchanged for shares and warrants of Hinto. In July 2012, Mr. Sommer started to receive $5,000 per month for his services. During the year ended December 31, 2012, the Consulting Agreement's term ran out, the Consulting Agreement has not been terminated and rather runs on a month to month basis.
All of our officers and/or directors will continue to be active in other companies. All officers and directors have retained the right to conduct their own independent business interests.
It is possible that situations may arise in the future where the personal interests of the officers and directors may conflict with our interests. Such conflicts could include determining what portion of their working time will be spent on our business and what portion on other business interest. To the best ability and in the best judgment of our officers and directors, any conflicts of interest between us and the personal interests of our officers and directors will be resolved in a fair manner which will protect our interests. Any transactions between us and entities affiliated with our officers and directors will be on terms which are fair and equitable to us. Our Board of Directors intends to continually review all corporate opportunities to further attempt to safeguard against conflicts of interest between their business interests and our interests.
We have no intention of merging with or acquiring an affiliate, associated person or business opportunity from any affiliate or any client of any such person.
DIRECTOR COMPENSATION
All of the Company's officers and/or directors will continue to be active in other companies. All officers and directors have retained the right to conduct their own independent business interests.
The Company does not pay any Directors fees for meeting attendance.
The following table sets forth certain information concerning compensation paid to the Company's directors during the year ended December 31, 2013:
(1) Mr. Harris, Herick, and Keller's compensation discussed in the table above and in this footnote were paid for their services as officers of the Company as discussed in the Executive Compensation table.
(2) Mr. Sommer receives a monthly fee of $5,000 for providing geological and oil and gas production consulting services to the Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Hinto's officers and directors are indemnified as provided by the Wyoming Revised Statutes and the bylaws.
Under the Wyoming Revised Statutes, director immunity from liability to a company or its shareholders for monetary liabilities applies automatically unless it is specifically limited by a company's Articles of Incorporation. The Company's Articles of Incorporation do not specifically limit the directors' immunity. Excepted from that immunity are: (a) a willful failure to deal fairly with Hinto or its shareholders in connection with a matter in which the director has a material conflict of interest; (b) a violation of criminal law, unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful; (c) a transaction from which the director derived an improper personal profit; and (d) willful misconduct.
The Company's bylaws provide that it will indemnify the directors to the fullest extent not prohibited by Wyoming law; provided, however, that it may modify the extent of such indemnification by individual contracts with the directors and officers; and, provided, further, that the Company shall not be required to indemnify any director or officer in connection with any proceeding, or part thereof, initiated by such person unless such indemnification: (a) is expressly required to be made by law, (b) the proceeding was authorized by the board of directors, (c) is provided by the Company, in sole discretion, pursuant to the powers vested under Wyoming law or (d) is required to be made pursuant to the bylaws.
The Company's bylaws provide that it will advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Company, or is or was serving at the request of Hinto as a director or executive officer of another company, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefore, all expenses incurred by any director or officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under the bylaws or otherwise.
The Company's bylaws provide that no advance shall be made by Hinto to an officer except by reason of the fact that such officer is or was the Company's director in which event this paragraph shall not apply, in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made: (a) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (b) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of Hinto.
EQUITY COMPENSATION PLAN INFORMATION
In August 2011, the Board of Directors and the stockholders of Hinto approved the 2011 Hinto Energy, Inc.'s Stock Option Award and Incentive Plan ("the 2011 Plan.") There are 2,000,000 shares of the Company's common stock reserved under the 2011 Plan. During the years ended December 31, 2013 and 2012, no options were issued under the 2011 Plan. Any options issued under the 2011 Plan are done at the determination of and the approval of the Board of Directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND -------------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS. ---------------------------
The following table sets forth information with respect to the beneficial ownership of Hinto's outstanding common stock by:
o each person who is known by Hinto to be the beneficial owner of five percent (5%) or more of Hinto common stock;
o Hinto chief financial officer, its other executive officers, and each director as identified in the "Management -- Executive Compensation" section; and
o all of the Company's directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock and options, warrants and convertible securities that are currently exercisable or convertible within 60 days of the date of this document into shares of the Company's common stock are deemed to be outstanding and to be beneficially owned by the person holding the options, warrants or convertible securities for the purpose of computing the percentage ownership of the person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
The information below is based on the number of shares of Hinto`s common stock that we believe was beneficially owned by each person or entity as of December 31, 2013.
*The Address for the above individuals and entities is c/o 7609 Ralston Road, Arvada, Colorado 80002.
(1) Based upon 20,181,769 shares of issued and outstanding common stock at December 31, 2013.
(2) Mr. Harris holds 537,500 shares of common stock and warrants to purchase an additional 550,000 shares of common stock. The warrants are subject to vesting terms and have a term of 3 years, 350,000 shares have an exercise price of $1.00 per share and the remaining 200,000 shares have an exercise price of $3.00 per share.
(3) Mr. Herick has direct ownership of 50,000 shares and indirect ownership of 1,160,000 shares of common stock. Arrowhead Consulting, LLC, which Mr. Herick has voting control of holds 660,000 shares of common stock and a warrant to purchase an additional 1,000,000 shares of common stock. The warrant has an exercise price of $2.00 per share and will expire in July 2016. The warrant vests at a rate of 1/3 per year throughout the term of the warrant and will expire 2 years after vesting. Mr. Herick has beneficial ownership of 500,000 shares of common stock through his wife's ownership of Whitemoon Energy, LLC which holds the shares.
(4) Mr. Keller holds 525,000 shares of common stock and warrants to purchase an additional 525,000 shares of common stock. The warrants are subject to vesting terms and have a term of 3 years, 325,000 shares have an exercise price $1.00 per share and the remaining 200,000 shares have a $3.00 per share.
(5) Mr. Blair holds 325,000 shares of common stock and warrants to purchase an additional 325,000 shares of common stock. The warrants are subject to vesting terms and have a term of 3 years, 225,000 shares have an exercise price of $1.00 per share and the remaining 100,000 shares have an exercise price of $3.00 per share.
(6) Mr. Sommer holds 200,000 shares of common stock and warrants to purchase an additional 200,000 shares of common stock. The warrants are subject to vesting terms and have a term of 3 years, 100,000 shares have an exercise price of $1.00 per share and the remaining 100,000 shares have an exercise price of $3.00 per share.
(7) Bridge Industries, LLC holds 1,400,000 shares of common stock and warrants exercisable into 800,000 shares of common stock. The warrants have exercise prices of 200,000 shares at $0.25 per share, 200,000 shares at $0.50 per share, 200,000 shares at $1.00 per share and 200,000 shares at $1.25 per share. The warrants have a term of 5 years.
(8) Mr. Littman holds 191,618 shares of common stock directly and 493,500 shares of common stock indirectly through his wife. Mr. Littman holds a warrant exercisable for 1,000,000 shares of common stock. The warrant is subject to vesting terms. Mr. Littman has the ability to vote the 900,000 shares held by the M.A. Littman Pension Plan.
Rule 13d-3 under the Securities Exchange Act of 1934 governs the determination of beneficial ownership of securities. That rule provides that a beneficial owner of a security includes any person who directly or indirectly has or shares voting power and/or investment power with respect to such security. Rule 13d-3 also provides that a beneficial owner of a security includes any person who has the right to acquire beneficial ownership of such security within sixty days, including through the exercise of any option, warrant or conversion of a security. Any securities not outstanding which are subject to such options, warrants or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person. Those securities are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------------
Other than the stock transactions discussed below, the Company has not entered into any transaction nor is there any proposed transactions in which any of the founders, directors, executive officers, shareholders or any members of the immediate family of any of the foregoing had or is to have a direct or indirect material interest.
Consulting Agreements with Officers and Directors --------------------------------------------------
Messrs. George Harris, Gary Herick, Kevin Blair, David Keller and Max Sommer have entered into Consulting Agreements with South Uintah for their services.
Mr. Herick has entered into a Consulting Agreement on April 15, 2011 with South Uintah to provide services to South Uintah as a director and secretary. The Consulting Agreement has a term of 1 year unless terminated with a 30 days notice by either party. The Consulting Agreement provides for Mr. Herick to receive $10,000 per month beginning April 15, 2011 to perform such services. In addition, Mr. Herick was issued a warrant exercisable for 1,000,000 shares of South Uintah common stock, which pursuant to the Amended Share Exchange Agreement were exchanged for shares and warrants of Hinto. During the year ended December 31, 2012, the Consulting Agreement's term ran out, the Consulting Agreement has not been terminated and rather runs on a month to month basis.
Mr. Harris has entered into a Consulting Agreement on June 1, 2011 with South Uintah to provide services to South Uintah as a director and Chief Financial Officer. The Consulting Agreement has a term of 1 year unless terminated with a 30 days notice by either party. The Consulting Agreement provides for Mr. Harris to receive a minimum $5,000 per month beginning July 1, 2011 to perform such services. In July 2011, the amount was increased to $10,000 per month and in May 2013 it was increased to $15,000 per month. In addition, Mr. Harris was issued 300,000 shares of South Uintah common stock and a warrant exercisable for 300,000 shares of South Uintah common stock, which pursuant to the Amended Share Exchange Agreement were exchanged for shares and warrants of Hinto. During the year ended December 31, 2012, the Consulting Agreement's term ran out, the Consulting Agreement has not been terminated and rather runs on a month to month basis.
Mr. Kevin Blair has entered into a Corporate Advisor/Director Agreement on July 12, 2011 with South Uintah to provide services as a director to South Uintah. The Agreement has a term of 1 year unless terminated with a 30 days notice by either party. The Agreement provides for Mr. Blair to be issued 100,000 shares of South Uintah common stock and a warrant exercisable for 100,000 shares of South Uintah common stock for such services, which pursuant to the Amended Share Exchange Agreement were exchanged for shares and warrants of Hinto. During the year ended December 31, 2012, the Consulting Agreement's term ran out, the Consulting Agreement has not been terminated and rather runs on a month to month basis.
Mr. Max Sommer has entered into a Corporate Advisor/Director Agreement on July 12, 2011 with South Uintah to provide services as a director to South Uintah. The Agreement has a term of 1 year unless terminated with a 30 days notice by either party. The Agreement provides for Mr. Blair to be issued 100,000 shares of South Uintah common stock and a warrant exercisable for 200,000 shares of South Uintah common stock for such services, which pursuant to the Amended Share Exchange Agreement were exchanged for shares and warrants of Hinto. In July 2012, Mr. Sommer started to receive $5,000 per month for his services. During the year ended December 31, 2012, the Consulting Agreement's term ran out, the Consulting Agreement has not been terminated and rather runs on a month to month basis.
Equity Issuances to Officers and Directors ------------------------------------------
Mr. George Harris, Gary Herick, Max Sommer and Kevin Blair, officers and directors of Hinto, were and are officers, directors and shareholders of South Uintah, as such they were issued common shares of South Uintah and warrants exercisable into common shares of South Uintah. Mr. David Keller, a director of Hinto was issued shares of South Uintah in connection with services offered to South Uintah. As a result, they were issued shares of Hinto pursuant to the Amended Share Exchange Agreement, after the January 23, 2012 merger of South Uintah and Hinto.
The tables below show the number of common shares and/or warrants issued by the companies to these individuals.
(1) Mr. Harris holds warrants to purchase 550,000 shares of common stock. The warrants are subject to vesting terms and have a term of 3 years, 350,000 shares have an exercise price of $1.00 per share and the remaining 200,000 shares have an exercise price of $3.00 per share.
(2) Mr. Herick has direct ownership of 250,000 shares and indirect ownership of 1,390,000 shares of common stock. Arrowhead Consulting, LLC, which Mr. Herick has voting control of holds 700,000 shares of common stock and a warrant to purchase an additional 1,000,000 shares of common stock. The warrant has an exercise price of $2.00 per share and will expire in July 2016. The warrant vests at a rate of 1/3 per year throughout the term of the warrant and will expire 2 years after vesting. .Mr. Herick has beneficial ownership of 690,000 shares of common stock through his wife's ownership of Whitemoon Energy, LLC which holds the shares. (3) Mr. Sommer holds warrants to purchase 200,000 shares of common stock. The warrants are subject to vesting terms and have a term of 3 years, 100,000 shares have an exercise price of $1.00 per share and the remaining 100,000 shares have an exercise price of $3.00 per share. (4) Mr. Blair holds warrants to purchase 325,000 shares of common stock. The warrants are subject to vesting terms and have a term of 3 years, 225,000 shares have an exercise price of $1.00 per share and the remaining 100,000 shares have an exercise price of $3.00 per share. (5) Mr. Keller holds warrants to purchase 525,000 shares of common stock. The warrants are subject to vesting terms and have a term of 3 years, 325,000 shares have an exercise price $1.00 per share and the remaining 200,000 shares have a $3.00 per share.
Other -----
During the year ended December 31, 2012, Mr. Littman, an affiliate of the Company was issued 191,618 shares of the Company's restricted common stock in settlement of outstanding legal fees of $95,617. Mr. Littman has an Engagement Agreement with South Uintah to provide legal services.
Director Independence ---------------------
Our board of directors undertook its annual review of the independence of the directors and considered whether any director had a material relationship with us or our management that could compromise his ability to exercise independent judgment in carrying out his responsibilities. As a result of this review, the board of directors affirmatively determined that Mr. Blair is "independent" as such term is used under the rules and regulations of the Securities and Exchange Commission. Messrs. Harris, Herick and David Keller as Officers of the Company and Mr. Sommer as a paid consultant, are not considered to be "independent."
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ------------------------------------------------
GENERAL. BF Borger's CPA LLC ("Borgers") is the Company's principal auditing accountant firm. The Company's Board of Directors has considered whether the provisions of audit services are compatible with maintaining Chadwick's independence.
The following table represents aggregate fees billed to the Company for the years ended December 31, 2013 and 2012.
*Fees paid during the year ended December 31, 2012, were paid to Company's prior auditor Ronald Chadwick, PC.
All audit work was performed by the auditors' full time employees.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES --------------------------------------------------
The following is a complete list of exhibits filed as part of this Form 10K. Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of Regulation S-K.
(1)Incorporated by reference from the exhibits included in the Company's SB-2 Registration Statement filed with the Securities and Exchange Commission (www.sec.gov), dated November 13, 2007.
(2)Incorporated by reference from the exhibits included in the Company's second Amended Registration Statement filed on Form S-1/A with the Securities and Exchange Commission (www.sec.gov), dated April 23, 2008.
(3)Incorporated by reference from the exhibits included in the Company's fifth Amended Registration Statement filed on Form S-1/A with the Securities and Exchange Commission (www.sec.gov), dated December 2, 2009.
(4)Incorporated by reference from the exhibits included in the Company's sixth Amended Registration Statement filed on Form S-1/A with the Securities and Exchange Commission (www.sec.gov), dated April 27, 2011.
(5)Incorporated by reference from the exhibits included in the Company's Form 8K filed with the Securities and Exchange Commission (www.sec.gov), dated July 12, 2011.
(6)Incorporated by reference from the exhibits included in the Company's Form 8K filed with the Securities and Exchange Commission (www.sec.gov), dated August 5, 2011.
(7)Incorporated by reference from the exhibits included in the Company's Form 8K filed with the Securities and Exchange Commission (www.sec.gov), dated August 17, 2011.
(8)Incorporated by reference from the exhibits included in the Company's Form 8K filed with the Securities and Exchange Commission (www.sec.gov), dated January 23, 2012.
(9)Incorporated by reference from the exhibits included in the Company's Form 8K filed with the Securities and Exchange Commission (www.sec.gov), dated June 1, 2012.
(10)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.
HINTO ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Hinto Energy, Inc.:
We have audited the accompanying balance sheets of Hinto Energy, Inc. ("the Company") as of December 31, 2013 and 2012, and the related statement of operations, stockholders' equity (deficit) and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hinto Energy, Inc., as of December 31, 2013and 2012 and the results of its operations and its cash flow for the year then ended, in conformity with generally accepted accounting principles in the United States of America.
The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company's internal control over financial reporting. Accordingly, we express no such opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ B F Borgers CPA PC
B F Borgers CPA PC Denver, CO April 14, 2013
HINTO ENERGY, INC. CONSOLIDATED STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(continued)
HINTO ENERGY, INC. Notes to the Consolidated Financial Statements For the Years Ended December 31, 2013 and 2012
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
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. ("South Uintah") 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.
Basis of Presentation
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).
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.
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.
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.
In the latter half of the year ended December 31, 2013, the Company
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 December 31, 2013, 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.
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 December 31, 2013 and 2012.
Dependence on Major Customers
For the fiscal year ended December 31, 2013, the Company's revenues were attributable to sales of oil to two customers. For the fiscal year ended December 31, 2012, 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 for the fiscal years ended December 31, 2013 and 2012.
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.
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 years ended December 31, 2013 and 2012, 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 year ended December 31, 2013, none of which are expected to have a material impact on the Company's financial position, operations or cash flows.
NOTE 3 - GOING CONCERN AND MANAGEMENTS' PLAN
The Company's consolidated financial statements for the years ended December 31, 2013 and 2012 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 $1,332,312 and $1,776,527 for the years ended December 31, 2013 and 2012, respectively, and an accumulated deficit of $3,936,134 as of December 31, 2013. At December 31, 2013, the Company had a working capital deficit of $582,123.
The future success of the Company is dependent on its ability to attract additional capital 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 December 31, 2013 and 2012:
During the years ended December 31, 2013 and 2012, the Company recognized a depletion expense of $5,942 and $2,047, respectively.
Natural Buttes
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 year ended December 31, 2013, 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. During the year ended December 31, 2012, the Company expended $198,500 in cash for the completion of a gas pipeline connection, surface equipment and initial well rework on the 22-1 Well.
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 had an interest rate of 8% and was paid in full on May 20, 2013.
During the year ended December 31, 2013, the Company expended $100,243 in connection with the re-work of the wells on this property.
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, as follows: (a) $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 December 31, 2013, the Company spent $6,863 development costs in connection with the re-working of this field.
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.
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 December 31, 2103, the Company spent $116,447 for development costs in connection with the re-working of this field.
NOTE 5 - CONVERTIBLE PROMISSORY NOTE, SHORT TERM
In May 2012, the Company, as part of the purchase of Cisco Pacific, issued the seller a $150,000 convertible promissory note. On May 31, 2013, the outstanding principal and accrued interest was paid in full for cash of $162,000.
NOTE 6 - SUBSCRIPTIONS RECEIVED
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.
During the year ended December 31, 2012, the Company had outstanding subscriptions receivable of $250,000 to purchase 500,000 shares of the Company's restricted common stock at $0.50 per share. The Company issued the 500,000 shares in March 2013.
NOTE 7 - 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.
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 March 2014.
As part of the Settlement with Bridge Industries, discussed in Note 11, the Company agreed to pay Bridge Industries a total of $100,000 in two tranches of $50,000 due on March 31, 2013 and June 30, 2013. In June 2013, the amount was paid in full.
NOTE 8 - LONG TERM NOTE PAYABLES, CONVERTIBLE
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 year ended December 31, 2013, the Company paid accrued interest through the issuance of 80,000 shares of its restricted common stock valued at $0.50 per share. 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 December 31, 2013, the Company had $575,000 in outstanding Class A Promissory Notes and has accrued $39,963 in interest in connection with the Class A Promissory Notes.
NOTE 9 - 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.
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 10 - STOCKHOLDERS' EQUITY
Preferred Stock
The authorized preferred stock of the Company is 25,000,000 shares. Preferred stock can 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 December 31, 2013, the Company has not designated any series of preferred stock or issued any shares of preferred stock.
Common Stock
The authorized common stock of the Company is 50,000,000 shares of common stock with a $0.001 par value. At December 31, 2013, the Company had 20,151,769shares of its common stock issued and outstanding.
During the year ended December 31, 2013, the Company issued 1,163,000 shares of its restricted common stock for $581,500 at a price of $0.50 per share.
During the year ended December 31, 2013, the Company issued 500,000 shares of its restricted common stock as payment for an outstanding subscription agreement of $250,000.
During the year ended December 31, 2013, the Company issued 2,000,000 shares of its restricted common stock upon the exercise of warrants at $0.50 per share.
During the year ended December 31, 2013, the Company issued 60,000 shares of its restricted common stock for investor relation services valued at $30,000.
During the year ended December 31, 2013, the Company issued 80,000 shares of its restricted stock as a payment of $40,123 in interest on its outstanding long term $500,000 convertible note payable.
During the year ended December 31, 2013, the Company issued 50,000 shares of its restricted common stock as part of the purchase price of oil and gas leases in Cisco, Utah as described in Note 3. The shares were valued at $0.50 per share for a total value of $25,000.
During the year ended December 31, 2013, the Company issued 62,242 shares of its restricted common stock as part of the purchase price of oil and gas leases in Montana, as described in Note 3. The shares were valued at $0.58 per share for a total value of $36,100.
Issuances - 2012
During the year ended December 31, 2012, the Company issued 1,400,000 shares of its restricted common stock with a value of $0.50 per share, or $700,000 in connection with the settlement of the litigation with Bridge Industries, LLC as further described in Note 11.
During the year ended December 31, 2012, the Company issued 915,000 shares of its common stock to investors that purchased $457,500 of securities at a price of $0.50 per common share and 348,868 shares for services valued at $243,435. This included issuance of 191,618 shares of common stock as a payment for outstanding accounts payable of $95,809 owed for legal services to an affiliate of the Company.
During the year ended December 31, 2012, the Company issued 75,000 shares of its common stock to pay accrued interest of $37,500.
During the year ended December 31, 2012, the Company issued 50,728 shares of its common stock upon the conversion of an outstanding convertible promissory note with a principal value of $25,000 and accrued interest of $364.
During the year ended December 31, 2012, the Company also issued 11,375,000 of its restricted common shares as part of the one for one share exchange with the shareholders of South Uintah as part of the acquisition of South Uintah by the Company.
Subscription Receivable
In December 2013, the Company received a subscription for 110,000 shares of its restricted common stock for $55,000. Prior to December 31, 2013, the Company received $25,000 of the funds and is owed the remaining $30,000. During March 2013, the Company received the remaining $30,000 and has issued the shares of common 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 years ended December 31, 2013 and 2012, the Board did not approve the grant of any options to purchase shares of common stock, nor the conditions, performance or vesting requirements.
Warrants
Issuances
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 year ended December 31, 2013, the Company paid accrued interest through the issuance of 80,000 shares of its restricted common stock valued at $0.50 per share. 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.
The total fair value of the warrant at the date of grant was $17,815 and was recorded as a finance cost. The Company used the following assumptions to determine the fair value of warrant grant:
Expected life 3 year Volatility 103% Risk-free interest rate 0.13% Dividend yield 0
During the year ended December 31, 2012, as part of the settlement of litigation with Bridge Industries, LLC (See Note 12), the Company issued warrants exercisable for a total of 800,000 shares of its common stock. The warrants have a term of 5 years and expire on December 18, 2017. The warrants have exercise prices as set forth below:
Number of Shares Exercise Price ---------------- -------------- 200,000 $0.25 200,000 $0.50 200,000 $1.00 200,000 $1.50
The total fair value of the options at the date of grant was $134,800 and was recorded as a litigation settlement expense. The Company used the following assumptions to determine the fair value of warrant grant on December 17, 2012:
Expected life 1 year Volatility 103% Risk-free interest rate 3.125% Dividend yield 0
The expected term of the warrants represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of the Company's common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related warrants. The dividend yield represents our anticipated cash dividend over the expected life of the warrants.
Exercises
During the year ended December 31, 2013, the Company received exercise notices and funds of $1,000,000 for the exercise of 2,000,000 shares.
A summary of warrant activity for the years ended December 31, 2013 and 2012 is presented below:
NOTE 11 - LITIGATION SETTLEMENT
In March 2012, a note holder of South Uintah, Bridge Industries, LLC ("Bridge") 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 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 had return $200,000 of the $400,000 lent in 2011, leaving a balance of $200,000 as of December 31, 2011.
In June 2011, Bridge entered into a subscription agreement with South Uintah, the now wholly-owned subsidiary of the Company. The Subscription Agreement provided for the purchase of a Secured Convertible Promissory Note in the amount of $500,000, 1,000,000 shares of South Uintah's restricted common stock and warrants exercisable for 2,000,000 shares of South Uintah's common stock.
On December 18, 2012, the Company entered into a Settlement Agreement with Bridge that provided for the dismissal of the lawsuit and terms of final payment of the outstanding amounts owed to Bridge. Pursuant to the Settlement Agreement, the Company agreed to the following:
1. A $100,000 cash payment to Bridge in two tranches of $50,000, which were paid in March and June 2013.
2. The issuance of 1,400,000 shares of the Company's common stock, which were registered in a Registration Statement on Form S-1.
3. The issuance of warrants exercisable for a total of 800,000 shares of the Company's common stock. The warrants have a term of 5 years from December 18, 2012 and have a callable provision.
As a result of the settlement, the Company has recognized a one-time litigation settlement expense of $704,247 in connection with the settlement of the litigation. The 1,400,000 shares of common stock were assigned a value of $700,000 and the warrants were determined to have a value of $134,800, see Note 11. Of the $704,247 of settlement expense, $634,800 was the result of the change in value of the Company's stock from the date of the original Bridge Industries investment of June 2011 and December 18, 2012. The Company issued the same number of common shares and warrants as would have been issued if the original Bridge Industries investment had gone forward on a pro-rata basis of $200,000 versus $500,000, plus an additional $100,000 cash payment from the Company to Bridge Industries, less accrued interest owed on funds loaned by Bridge Industries of $30,447.
NOTE 12 - INCOME TAXES
The Company is subject to domestic income taxes. The Company has recognized minimal income during the years ended December 31, 2013 and 2012, and therefore has paid no income tax.
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 2031. 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:
NOTE 13 - SUBSEQUENT EVENTS
Convertible Promissory Note Financing
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 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. 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 Noteholder 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.
The Company has evaluated it activities subsequent to December 31, 2013 and through the issuance of the financial statements and found no other reportable subsequent events.
NOTE 14 - SUPPLEMENTAL OIL AND GAS DISCLOSURE (unaudited)
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES (unaudited)
Users of this information should be aware that the process of estimating quantities of "proved" and "proved developed" natural gas and crude oil reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions to existing reserve estimates occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statements.
Proved reserves are estimated quantities of natural gas, crude oil and condensate that geological and engineering data demonstrate, with reasonable certainty, to be recovered in future years from known reservoirs with existing equipment under existing economic and operating conditions.
Proved developed reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and under existing economic and operating conditions.
OIL AND GAS RESERVES
The following tables set forth our net proved oil and gas reserves, including the changes therein, and net proved developed reserves at December 31, 2013 and 2012.
Net Proved Developed And Undeveloped Reserves - (In thousands of barrels "MBbls") of oil:
December 31, 2013 2012 --------------- ----------- (unaudited) (unaudited)
Balance January 1st 267 - Purchase of properties 69 267 Revisions of previous estimates - - Extension, discoveries, other estimates - - Production (1) - - Disposition of properties - - --------------- -----------
Balance, December 31st 336 267 =============== ===========
(1) During the year ended December 31, 2013, the Company produced 878 barrels, which is the equivalent of .878 MBbls.
Net Proved Developed And Undeveloped Reserves of Natural Gas - (In millions of standard cubic feet "MMcf"):
Net Proved Oil And Gas Reserves Consisted Of The Following At December 31, 2013 And 2012:
Results Of Operations For Oil And Gas Producing Activities For The Year Ended December 31, 2013 And 2012
Cost Incurred For Oil And Gas Property Acquisition, Exploration And Development Activities
Capitalized costs relating to oil and gas activities for the years ended December 31, 2013 and 2012 are as follows:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
Dated: April 15, 2014 By: /s/ George Harris ----------------------------------------- George Harris, Chief Financial Officer (Principal Executive Officer & Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: April 15, 2014 HINTO ENERGY, INC.
/s/ George Harris -------------------------------------- George Harris, Director
/s/ Gary Herick -------------------------------------- Gary Herick, Director
/s/ Kevin Blair -------------------------------------- Kevin Blair, Director