Notes to the Consolidated Financial Statements
For the Three Months Ended March 31, 2013 and 2012
(Unaudited)
NOTE 1 - BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Hinto Energy, Inc. ("the Company") was incorporated in February 13, 1997 in the
state of Wyoming. The Company and its wholly-owned subsidiary, South Uintah Gas
Properties, Inc. are involved in the acquisition and development of oil and gas
prospects in the rocky mountain region. The Company has oil and gas leases,
wells and new drilling prospects in both Utah and Montana.
The Company's fiscal year end is December 31st. The Company's financial
statements are presented on the accrual basis of accounting under GAAP
(Generally Accepted Accounting Principles).
Basis of Presentation
Consolidation
The accompanying audited consolidated financial statements include the accounts
of Hinto Energy, Inc. and its wholly owned subsidiary, South Uintah Gas
Properties, Inc. (collectively the "Company"). All intercompany balances and
transactions have been eliminated in consolidation.
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.
6
Life in March 31, 2013 December 31, 2012
Asset Type Years
--------------------------------- ------------ ------------------ ------------------
Machinery 5 - 7 $16,500 $ 16,500
------------ ------------------ ------------------
Subtotal 16,500 16,500
Less Accumulated Depreciation (825) -
------------ ------------------ ------------------
Net Book Value $15,675 $ 16,500
============ ================== ==================
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Oil and Gas Properties, Full Cost Method
The Company uses the full cost method of accounting for oil and gas producing
activities. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells used to find proved reserves, and to drill and
equip development wells including directly related overhead costs and related
asset retirement costs are capitalized.
Under this method, all costs, including internal costs directly related to
acquisition, exploration and development activities are capitalized as oil and
gas property costs. Properties not subject to amortization consist of
exploration and development costs which are evaluated on a property-by-property
basis. Amortization of these unproved property costs begins when the properties
become proved or their values become impaired. The Company assesses the
realization of unproved properties, taken as a whole, if any, on at least an
annual basis or when there has been an indication that impairment in value may
have occurred. Impairment of unproved properties is assessed based on
management's intention with regard to future exploration and development of
individually significant properties and the ability of the Company to obtain
funds to finance such exploration and development. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized.
Costs of oil and gas properties will be amortized using the units of production
method.
In applying the full cost method, the Company will perform an impairment test
(ceiling test) at each reporting date, whereby the carrying value of property
and equipment is compared to the "estimated present value," of its proved
reserves discounted at a 10-percent interest rate of future net revenues, based
on current economic and operating conditions, plus the cost of properties not
being amortized, plus the lower of cost or fair market value of unproved
properties included in costs being amortized, less the income tax effects
related to book and tax basis differences of the properties. If capitalized
costs exceed this limit, the excess is charged as an impairment expense.
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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 Recognition
The Company recognizes revenue when it is earned and expenses are recognized
when they occur.
Net Loss per Share
Basic net loss per common share is calculated by dividing the net loss
applicable to common shares by the weighted average number of common and common
equivalent shares outstanding during the period. For the three months ended
March 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.
8
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 three
months ended March 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 financial statements for the three months ended March 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 $180,164 for the
three months ended March 31, 2013, and an accumulated deficit of $2,783,986 as
of March 31, 2013. At March 31, 2013, the Company had a working capital deficit
of $474,482.
The future success of the Company is dependent on its ability to attract
additional capital, or to find an acquisition to add value to its present
shareholders and ultimately, upon its ability to develop future profitable
operations. There can be no assurance that the Company will be successful in
obtaining such financing, or that it will attain positive cash flow from
operations. Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity for the
Company to continue as a going concern.
NOTE 4 - OIL AND GAS LEASES
Oil and gas properties consisted of the following as of March 31, 2013:
March 31, December 31,
2013 2012
------------------- ------------------
Proved properties $803,200 $803,200
Unproved properties - -
------------------- ------------------
$ 803,200 $803,200
Accumulated depletion
2,873 2,047
------------------- ------------------
$800,327 $801,153
=================== ==================
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During the months ended March 31, 2013 and 2012, the Company recognized a
depletion expense of $827 and $-0-, respectively.
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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, 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 three months ended March 31, 2013, the Company did not expend any
development costs in connection with the re-working of this well. 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 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 at $1.00 per share.
During the three months ended March 31, 2013, the Company expended $50,000 in
connection with the re-work of the wells on this property.
NOTE 5 - CONVERTIBLE PROMISSORY NOTE
In May 2012, the Company, as part of the purchase of Cisco Pacific, issued the
seller 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 at $1.00 per share. At March 31, 2013, the note had
accrued interest of $10,041. Subsequent to the three months ended March 31,
2013, the outstanding principal and accrued interest was paid in full for cash
of $162,000.
NOTE 6 - SUBSCRIPTIONS RECEIVED
During the three months ended March 31, 2013, the Company had outstanding
subscriptions receivables of $90,000 to purchase 180,000 shares of the Company's
restricted common stock at $0.50 per share. The Company issued the shares in
April 2013.
10
During the year ended December 31, 2012, the Company had outstanding
subscription receivables 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 did not accrue interest.
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 March 31,
2013, the Company owed $100,000 under the note.
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 March 31, 2013,
the Company had made total payments principal payments of $25,000 and still owed
$45,000 on the note.
As part of the Settlement with Bridge Industries, discussed in Note 11, the
Company has 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. On March 31, 2013, the
Company made a payment of $50,000.
NOTE 8 - LONG TERM NOTE PAYABLE
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 oil and
gas leases held by South Uintah in the Natural Buttes area. In June 2012 an
interest payment of $12,500 was made in cash. At March 31, 2012, the note had
accrued interest of $0. During the three months ended March 31, 2013, the
Company paid accrued interest through the issuance of 50,000 shares of its
restricted common stock valued at $0.50 per share. At March 31, 2013, the note
was still outstanding.
NOTE 9 - COMMITMENTS & CONTINGENCIES
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.
11
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
Common Stock
The authorized common stock of the Company is 50,000,000 shares of common stock
with a $0.001 par value. At March 31, 2013, the Company had 17,146,527 shares of
its common stock issued and outstanding.
12
During the three months ended March 31, 2013, the Company issued 350,000 shares
of its restricted common stock for $175,000 at a price of $0.50 per share.
During the three months ended March 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 three months ended March 31, 2013, the Company issued 10,000 shares
of its restricted common stock for investor relation services valued at $5,000.
During the three months ended March 31, 2013, the Company issued 50,000 shares
of its restricted stock as a payment of $25,000 in interest on its outstanding
long term $500,000 note payable.
Preferred Stock
On August 18, 2011, the Company filed an amendment to the Articles of
Incorporation with the Secretary of State of Wyoming to authorize 25,000,000
shares of Preferred Shares to be designated in any series or classes and with
those rights, privileges and preferences to be determined at the discretion of
the Company's Board of Directors. At this time, the Company has not designated
any series of preferred stock or issued any shares of preferred stock.
Stock Option Plan
On August 17, 2011, the Company's shareholders approved the 2011 Hinto Energy,
Inc. Stock Option and Award Incentive Plan ("Plan"). The Plan provides for the
grant of stock options to directors, officers, employees, consultants, and
advisors of the Company. The Plan is administered by a committee consisting of
members of the Board of Directors (the "Stock Option Committee"), or in its
absence, the Board of Directors.
The Plan provides for a total of 2,000,000 shares of common stock to be reserved
for issuance subject to options. During the years ended December 31, 2012 and
2011, the Board did not approve the grant of any options to purchase shares of
common stock, nor the conditions, performance or vesting requirements.
Warrants
During the three months ended March 31, 2013, the Company did not issue any
warrants for its common stock.
13
A summary of warrant activity for the three months ended March 31, 2013 is
presented below:
Weighted Average
--------------------------------------
Shares Under Remaining
Warrant Exercise Price Contractual Life
------------------ ------------------- ------------------
Outstanding at December 31, 2012 7,500,000 $1.25 2.44
Granted - - -
Exercised - - -
Expired - - -
------------------ ------------------- ------------------
Outstanding at March 31, 2013 7,500,000 $1.25 2.23
================== =================== ==================
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NOTE 11 - INCOME TAXES
The Company is subject to domestic income taxes. The Company has recognized
minimal income during the three months ended March 31, 2013, 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:
Estimated NOL Valuation Net Tax
Carry-forward benefit Allowance Benefit
=========================================================
March 31, 2013 $556,797 $(556,797) -
December 31, 2012 $520,764 $(520,764) -
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NOTE 12 - SUBSEQUENT EVENTS
On June 14, 2013, 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. The property includes 6 wells in a field to be
water flooded that needs the wells to be re-worked. The Company acquires such
leases in exchange for $25,000 cash and a 5% working interest.
On June 14, 2013, the Company acquired all right and title to oil and gas leases
for a total of 722 gross acres in the Musselshell County, Montana. In exchange
for such oil and gas leases, the Company paid $101,100 in a combination of cash
and stock, as follows: (a) $65,000 in cash; and (b) $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.
14
In addition, the Company has a thirty day option to purchase other oil and gas
leases in the Musselshell Field from S & L Energy for a price of $60 per acre.
On June 17, 2012, the Company closed on the acquisition of all right and title
to certain mineral estates in Grand County, Utah. The mineral estates include
4,435 acres, 9 well bores and space to drill additional wells. In addition, the
Company acquired the owner'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, (a) $75,000 in cash; and (b) $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.
The Company has evaluated it activities subsequent to March 31, 2013 and through
the issuance of the financial statements and found no other reportable
subsequent events.
15
