Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: January 23, 2012
HINTO ENERGY, INC.
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(Exact name of registrant as specified in its charter)
Wyoming 000-26317 84-1384961
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(State or other jurisdiction of (Commission File (IRS Employer Identification
incorporation) Number) Number)
7609 Ralston Road, Arvada, CO 80002
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(Address of Principal Executive Offices) (Zip Code)
(303-422-8127
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Registrant's telephone number, including area code
Garner Investments, Inc.
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(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
SECTION 2 - FINANCIAL INFORMATION
Item 2.01 - Completion of Acquisition or Disposition of Assets
Completion of Acquisition of South Uintah Gas Properties, Inc.
On January 23, 2012, Hinto Energy, Inc. ("the Company") entered into an Amended
Share Exchange and Acquisition Agreement with South Uintah Gas Properties, Inc.
("South Uintah") and the South Uintah shareholders. Pursuant to the Amended
Share Exchange and Acquisition Agreement ("the Agreement"), the Company agreed
to issue shares of its restricted common stock for 100% of the issued and
outstanding common stock of South Uintah. The shares are to be exchanged on a
one for one basis. As a result, South Uintah will become a wholly-owned
subsidiary of the Company.
In addition to the exchange of common stock, the Company has agreed to exchange
on a one for one basis the following outstanding equity documents with those of
its own. The table below sets forth the equity that is being exchanged.
Type of Equity South Uintah Balance To Be Issued By Hinto
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Common Stock 11,446,931 shares 11,446,931 shares
Warrants (1) 6,700,000 6,700,000
Promissory Note (2) $375,000 $375,000
(1) The warrants have exercise prices ranging from $0.25 to $3.00 per share and
terms of 2 to 3 years.
(2) The promissory note has an provision to convert into shares of common stock
at $0.20 per share.
Prior to the signing of the 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 Agreement, South Uintah has agreed to return the remaining
2,700,000 shares of common stock to the Company. The Company has retire such
shares to treasury, concurrent with this transaction
At the time of the acquisition, Mr. George Harris, Gary Herick, Max Sommer and
Kevin Blair, officers and directors of the Company, were and are officers,
directors and shareholders of South Uintah. Mr. David Keller, an officer and
director of the Company is a shareholder of South Uintah.
BUSINESS DESCRIPTION
South Uintah Gas Properties, Inc. was incorporated in the state of Colorado on
March 8, 2011. South Uintah was organized to operate as an independent oil and
gas company which would engage in the acquisition, exploration, development,
production and sale of natural gas and crude oil. Selected managed risk
exploration ventures would also be considered from time to time. The core area
of operation is the Rocky Mountain region, which contains all of our areas of
interest.
With the acquisition of South Uintah, the Company intends to strive to be a low
cost and effective producer of hydrocarbons and intends to develop the business
model and corporate strategy as discussed herein.
1
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. This managed
risk approach greatly reduces the risk normally associated with oil and gas
development. 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. 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.
At this time, we are in the early stage of operational activities and do not
have production. We are currently evaluating numerous development and
exploration projects and potential production acquisitions through our
experienced management.
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 which were started in late 2011
and will continue in 2013. We plan to raise these funds in Private
Placements of Common Stock, Preferred Stock and/or convertible debt. We
expect that all of the 2012 and 2013 drilling capital expenditures will
be incurred in Utah, Colorado, Wyoming and Montana property and
development prospects. 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.
2
Achieve consistent reserve growth through repeatable development
We intend to achieve consistent reserve growth over the next four years
through a combination of acquisitions and drilling. In 2012, we intend
to achieve reserve and production increases as a result of our
acquisition, drilling, re-completion 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. We anticipate that meaningful
drilling and completion results will become known in our acquired Utah
properties during late 2012.
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.
3
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.
PROPOSED OIL AND GAS PROJECTS
Our initial project will center on the Uintah Basin of Utah. 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 lead to some of the most
productive onshore "flowing" oil wells in the continental U.S.
First Proposed Project - Natural Buttes
South Uintah, in July 2011, acquired deep rights interests via farmout in
approximately 5,656 gross and 5,143 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. The well is
currently holding approximately 3,000 PSI in a 9" casing.
We intend to rework the existing well, Federal Conoco 22-1, 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 lack of
proximity to a gas pipe line. We completed a lateral pipeline connection that is
approximately 2,000 foot long to the Andarko pipeline for production to commence
in the first quarter of 2012.
4
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 Procedure: 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.
Our planned re-working procedure calls for the well to be connected to
Anadarko's gathering system, and the pressure to be reduced in increments over
time, until the well can be safely and effectively killed. This "unconventional
completion" will be closely monitored and controlled. Gas will be sold into the
Anadarko system during the time pressure is being reduced until the well can no
longer buck the back pressure of the pipeline system. This process of pressure
reduction could be completed within several days, or it could take several
months. Once the well is killed, a Workover Unit will be rigged-up, the casing
flange removed, and American Petroleum Institute ("API") approved wellhead and
tubing string will be installed. The well will be cleaned out and a testing
program of the Frontier and Upper Mancos Formations will be undertaken. The
process of pressure reduction and subsequent installation of a wellhead and
tubing, and the cleanout and initial testing is estimated to cost $300,000. Gas
sales should cover at least a portion of these costs.
Generally, adjacent to the farmout acreage that includes the Conoco Federal No.
22-1 Well is our adjacent acreage, which contains approximately 5,656 gross and
5,143 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 of 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.
5
Further, the Company intends to eventually have a liquids and gas processing
facility on site to provide all of its fuels for drilling (a major expense of
development) and an environmentally responsible program to diminish transport
traffic for fuels. Here, the concentrated platform for a 12 well development per
drill site will allow best available practices to be followed for the management
of the drilling, completion, and production operations.
Management believes that based on existing seismic data and nearby well control,
that a series of wells drilled in the Sections 22, 18, and 7 of T 9S R20E to a
depth of 16,000 feet would have a high probability of encountering multi-pay
zones containing commercial oil and gas reserves. The substantial variation in
reserves recovered per unit of pore volume in this area is due in large part to
the degree of formation damage induced by drilling and stimulation fluids, and
by problems associated with the inclusion of excessive perforations in borehole
resulting in co-mingling, both of which are preventable occurrences and, to a
lesser extent by lateral discontinuity of individual sand units. Management is
considering drilling the initial well in a state of significant under-balance to
prevent formation damage caused by invasion of mud and mud filtrate. Please keep
in mind that all zones above 9,800 feet are precluded from the farmout and our
overall targets will be zones from depths beginning at 9,800 feet down to depths
of 16,000 feet.
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.
Subsequent to the date of the audit report of South Uintah, the Company
obtained an updated report as to its interests in the Uintah Basin property.
Oil and Gas properties, wells, operations and acreage*
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Gas Wells Productive Acreage Undeveloped Acreage
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Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
1 0.8 80 64 5,575 5,079
* Note - The one well has been shut in due to no available pipeline for gas
carriage. During January 2012, a lateral connection to a pipline was completed.
The well is expected to begin gas production in the first quarter of 2012.
COMPETITION, MARKETS, REGULATION AND TAXATION
Competition
There are a large number of companies and individuals engaged in the
exploration, development and production of oil and gas projects; accordingly,
there is a high degree of competition for desirable properties. Many of the
companies and individuals so engaged have substantially greater technical and
financial resources than we have. Such resources could overwhelm our efforts to
acquire oil and gas exploration, development and production opportunities and
could cause our failure.
Markets
The availability of a ready market for oil and gas may depend on factors beyond
the control of the Company. The marketing of natural gas and oil which may be
produced saved and sold from the Company's projects will be affected by a number
of factors beyond the ability of the Company to control. These factors include
the extent of the supply of oil or gas in the market, the demand for oil and gas
in the markets, the availability of infrastructure, the availability of
competitively priced quality goods and services, the proximity to and capacity
of refineries, the availability of competitive fuels, crude oil imports, the
world-wide political situation, price regulation, and other factors. The market
prices of oil and gas are volatile, and beyond the control of the Company.
Recently, there have been fluctuations in oil and gas prices. Any significant
decrease in the market prices of oil and gas could materially affect the
profitability of the Company's oil and gas activities.
6
With respect to natural gas, there generally are only a limited number of gas
transmission companies with existing capacity in 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 the Company's gas production, there is no assurance that the Company
will be able to enter into purchase and sales 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 marketplace, the extent and
duration of which is not known. Such oversupply may result in reductions of
purchases by principal gas pipeline purchasers.
Effect of Changing Industry Conditions on Drilling and Rework Completion
Activity
Lower oil and gas prices have caused a decline in drilling activity in the U.S.
from time-to-time. Currently there is a high demand for drilling and workover
and costs are very high compared to historical periods. The Company 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 its ability to generate
economic drilling prospects and to raise the necessary funds with which to drill
them.
Title to Properties
The Company is not the record owner of its interest in its properties and relies
instead on contracts with the owner or operator of the property or assignment of
leases, pursuant to which, among other things, the Company has the right to have
its interest placed of record. As is customary in the oil and gas industry, a
preliminary title examination will be conducted at the time properties or
interests are acquired by us. Prior to commencement of operations on such
acreage and prior to the acquisition of proved properties, a title examination
will usually be conducted and significant defects remedied before proceeding
with operations or the acquisition of proved properties, as appropriate.
The 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.
Governmental Regulation and Environmental Consideration
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 following paragraphs only give a brief overview of potential state and
federal regulations. Because of the wide range of areas in which we may
participate, it is impossible to set forth in detail the potential impact
federal and state regulations may have on us.
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).
7
Regulation and Pricing of Natural Gas
The Company's 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 the Company 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, crude oil, natural gas, and natural gas liquids which may
be sold by the Company 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
The Company's production of oil and gas, if any, will be subject to regulation
by state regulatory authorities in the states in which the Company 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.
Environmental Laws
Oil and gas exploration and development is 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.
8
All operations by the Company involving the exploration for, development of, or
the production of any minerals are subject to existing laws and regulations
relating to development, production, and 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. The Company 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, the activities of the
Company 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 the
Company and delays, interruptions or a termination of operations, the extent to
which cannot now be predicted.
Title to Properties
The Company is not the record owner of its interest in its properties and relies
instead on contracts with the owner or operator of the property or assignment of
leases, pursuant to which, among other things, the Company has the right to have
its interest placed of record. As is customary in the oil and gas industry, a
preliminary title examination will be conducted at the time properties or
interests are acquired by us. Prior to commencement of operations on such
acreage and prior to the acquisition of proved properties, a title examination
will usually be conducted and significant defects remedied before proceeding
with operations or the acquisition of proved properties, as appropriate.
The 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
There are no orders for sales of energy products at this time.
Government Contracts.
None at this time.
Company Sponsored Research and Development
No research is being conducted.
9
PLAN OF OPERATIONS
During the 2012 fiscal year, the Company intends to continue its efforts to
acquire, either by lease, farmout, or purchase, an interest in oil or gas
prospects or properties for development, production, and low risk exploration,
when available, by itself, or with third parties. The Company intends to
continue to raise funds to support the efforts through the sale of its equity
securities.
Expected 2012 Budget - 12 months
Development of connection, rework, recompletion, 3 well program $1,500,000
Working Capital $1,300,000
Acquisitions $1,000,000
Payment of Debt $375,000
General and Administrative Expenses:
Legal and Accounting/Auditing $157,000
Consulting $495,000
Filing Fees (State, SEC, etc.) $7,500
Travel $60,000
Interest $66,000
Miscellaneous $120,000
--------------------
TOTAL $4,715,000
The Company may change any or all of the budget categories in the execution of
its business model. None of the line items are to be considered fixed or
unchangeable. The Company may need substantial additional capital to support its
budget. The Company has no revenues to date in the oil and gas exploration,
development and production business.
We are conducting a Private Offering of shares of our restricted Common Stock
and intend to raise up to $3,000,000. As of January 23, 2012, the Company has
sold approximately 730,000 shares, raising a total of $365,000. We cannot give
any assurances that we will be able to raise the full $3,000,000. Further, we
will need to raise additional funds to support not only our expected budget, but
our continued operations. We cannot make any assurances that we will be able to
raise such funds or whether we would be able to raise such funds with terms that
are favorable to us.
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.
10
On July 12, 2011, South Uintah Gas Properties, Inc. purchased 3,000,000 shares
of Hinto's common stock, approximately 70 percent of the issued and outstanding
shares of Hinto, prior to the merger. On July 27, 2011, Hinto and South Uintah
entered into a binding agreement, whereby all of the issued and outstanding
common stock, debt and warrants of South Uintah would be exchanged for an
equivalent notes and securities of Hinto.
The two entities merged on January 23, 2012, with an effective merger date of
December 31, 2011, with Hinto being the legal acquirer. However, since Hinto is
a public company, which had nominal activity, the merger has been treated as a
recapitalization of South Uintah and an acquisition of the assets and
liabilities of Hinto by South Uintah. Though Hinto was the legal acquirer in the
merger, South Uintah Gas Properties was the accounting acquirer since its
shareholders ended up with control of Hinto. Therefore at the date of the merger
the historical financial statements of South Uintah became those of Hinto.
The following is a discussion of the results of operations and liquidity of
South Uintah Gas Properties at September 30, 2011 and for the Period of
Inception (March 8, 2011) through September 30, 2011.
Results of Operations for the Period of Inception (March 8, 2011) through
September 30, 2011
During the period of inception (March 8, 2011) through September 30, 2011, South
Uintah did not recognize any revenues from its operational activities in the oil
and gas industries. During the period, South Uintah did acquire deep rights
interests through a farmout in approximately 5,656 gross and 5,143 net acres in
the central part of the Uintah Basin at Natural Buttes in Utah, South Uintah
expects to be able to generate revenues in the first quarter of 2012 from these
interests, subsequent to the completion of a lateral attachment to a pipeline,
as discussed earlier in this document. Footnote 3 of the Company's September 30,
2011 audited financial statements indicate approximately 4,000 acres, but
finalization of all leases in January 2012 for submission to the Bureau of Land
Management for, TRANSFER OF OPERATING RIGHTS (SUBLEASE) IN A LEASE FOR OIL AND
GAS OR GEOTHERMAL RESOURCES. Exhibit A, reflects the final 5,656 gross and 5,143
net acre purchased farmout rights interest
During the period of inception (March 8, 2011) through September 30, 2011, South
Uintah did recognize total operational expenses of $599,799. Operational
expenses during the period included $146,404 of general and administrative
expenses, $114,180 in consulting expenses and a $339,195 write-off of goodwill.
General and Administrative expenses includes such items as $113,226 in legal
expenses connected to acquisition of the farmout interests by South Uintah,
holding of an annual shareholder meeting of Hinto Energy and the maintenance of
the SEC filing requirements at Hinto Energy. Consulting expense are those
expenses are for the services of individuals and firms used in connection with
geological analysis and identification of acquisition prospects. Management of
South Uintah expects that as it continues with it proposed activities with the
22-1 Well and as it continues to identify possible property acquisitions that
operational expenses will most likely increase during the 2012 fiscal year.
On July 12, 2011, South Uintah purchased 3,000,000 shares of the common stock of
Hinto Energy, Inc. for cash of $300,000. South Uintah entered into a Share
Purchase and Exchange Agreement with Hinto, on July 27, 2011. Upon the
completion of a proposed merger with Hinto, South Uintah has agreed to return
2,700,000 shares to Hinto, prior to the close of the merger, South Uintah
transferred 300,000 Hinto shares to a third party, as part of the consideration
for the acquisition of the Uintah Basin prospect. The purchase resulted in South
Uintah recording goodwill of approximately $339,000, negative net worth in Hinto
of approximately ($56,000) and noncontrolling interest of approximately negative
($17,000.)
During the period of inception (March 8, 2011) through September 30, 2011, South
Uintah incurred a net loss of $599,275.
11
Liquidity of South Uintah at September 30, 2011
At September 30, 2011, South Uintah had total current assets of $103,255,
consisting solely of cash. At September 30, 2011, South Uintah had total current
liabilities of $1,123,974, consisting of $25,581 in accounts payables, $23,393
in accrued liabilities, $500,000 in convertible promissory notes and $575,000 in
promissory notes. At September 30, 2011, South Uintah had a working capital
deficit of $1,020,719.
The independent registered public accounting firm's report on South Uintah's
financial statements as of September 30, 2011, and for the Period of Inception
(March 8, 2011) through September 30, 2011, includes a "going concern"
explanatory paragraph, that describes substantial doubt about South Uintah's
ability to continue as a going concern.
During the period of inception (March 8, 2011) through September 30, 2011, South
Uintah used $193,845 in its operating activities. Net Losses of $616,672 were
adjusted for such non-cash expenses as the $339,195 write off of goodwill and
$550 in compensatory stock expenses.
During the period of inception (March 8, 2011) through September 30, 2011, South
Uintah used $603,000 in its investing activities. In July 2011, South Uintah
purchased 3,000,000 shares (70%) of Hinto Energy for $300,000.
In July 2011, the Company purchased a farmout of deep right interests in
approximately 5,656 gross and 5,143 net acres in the Uintah Basin in Utah in
July 2011, amended in December 2011. The purchase price of the farmout interest
was $478,200, made up of $303,000 in cash, $175,000 in notes payable and $200 in
common stock.
During the period of inception (March 8, 2011) through September 30, 2011, South
Uintah received $900,100 from its financing activities.
During the period of inception (March 8, 2011) through September 30, 2011, South
Uintah issued $500,000 of convertible promissory notes. The notes earn interest
at 6% per annum, are unsecured, with principal and interest convertible in whole
or in part by the holder into common shares of South Uintah at $.25 per share
any time prior to repayment. The notes are due at various dates from April
through July 2012. As part of the financing, 2,000,000 common stock purchase
warrants exercisable at $.50 were issued in connection with these notes. South
Uintah has recognized no beneficial conversion expense on the convertible notes
as the South Uintah's common stock currently does not have a trading market or
established cash market price. In January 2012, holders of the convertible
promissory notes converted principal of $500,000 and accrued interest of $17,983
for 2,071,931 shares of the restricted common stock of South Uintah.
In May 2011, South Uintah accepted a Subscription Agreement for $500,000 in
exchange for a $500,000 Secured Convertible Promissory Note in the amount of
$500,000, 1,000,000 shares of South Uintah's common stock and warrants
exercisable for a total of 2,000,000 shares of South Uintah's common stock with
prices ranging from $0.25 per share to $1.50 per share. At the time of the
closing, South Uintah received $400,000 of the $500,000. On September 6, 2011,
after a failure to receive the remaining $100,000 from the subscriber, South
Uintah Gas gave notice to the subscriber of its termination of the Subscription
Agreement and associated agreements due to a failure of the subscriber to
perform its obligations. As a result, South Uintah Gas has cancelled the shares
and the warrants issued to the subscriber. At the time of this filing, South
Uintah has repaid a total of $200,000 of the promissory note, leaving an
outstanding balance of $200,000.
12
Short Term
On a short-term basis, we do not generate any revenue or revenues sufficient to
cover operations. Based on prior history, we will continue to have insufficient
revenue to satisfy current and recurring liabilities as South Uintah completes
attachment to the pipeline of Well 22-1 and explores additional acquisition
possibilities. For short term needs we will be dependent on receipt, if any, of
offering proceeds.
We are conducting a Private Offering of shares of our restricted Common Stock
and intend to raise up to $3,000,000. As of January 23, 2012, the Company has
sold approximately 730,000 shares, raising a total of $365,000. We cannot give
any assurances that we will be able to raise the full $3,000,000. Further, we
will need to raise additional funds to support not only our expected budget, but
our continued operations. We cannot make any assurances that we will be able to
raise such funds or whether we would be able to raise such funds with terms that
are favorable to us.
Need for Additional Financing
We do not have capital sufficient to meet our cash needs. We will have to seek
loans or equity placements to cover such cash needs. Once production commences,
our needs for additional financing is likely to increase substantially.
No commitments to provide additional funds have been made by our management or
other stockholders. Accordingly, there can be no assurance that any additional
funds will be available to us to allow it to cover our expenses as they may be
incurred.
South Uintah Critical Accounting Policies
Oil and Gas Properties, Full Cost Method
South Uintah 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. South Uintah 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 South Uintah 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.
13
In applying the full cost method, South Uintah 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.
Stock-Based Compensation
South Uintah 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. South Uintah 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.
Noncontrolling interest
A subsidiary of the South Uintah has minority members, representing ownership
interests of 30% at September 30, 2011. South Uintah accounts for these
minority, or noncontolling interests pursuant to ASC 810-10-65 whereby gains or
losses in a subsidiary with a noncontrolling interest are allocated to the
noncontrolling interest based on the ownership percentage of the noncontrolling
interest, even if that allocation results in a deficit noncontrolling interest
balance.
SECTION 3 - SECURITIES AND TRADING MARKET
Item 3.02 Unregistered Sales of Equity Securities.
On January 23, 2012, the Company issued the unregistered securities listed below
to the shareholders of South Uintah under the Amended Share Exchange and
Acquisition Agreement, the shares are exempt from registration under Section
4(6) of the Securities Act of 1933 as amended (the "1933 Act").
Type of Equity
-------------------------------------------- -------------------------
Common Stock 11,446,931 shares
Warrants (1) 6,700,000
(1) The warrants have exercise prices ranging from $0.25 to $1.50 per share and
terms of 2 to 3 years.
From November 2011 through January 2012, the Company through a private offering
of its restricted common stock entered into approximately $365,000 in
subscription agreements for 730,000 shares of common stock at $0.50 per share.
The shares were issued pursuant to Rule 506 of Regulation D of the 1933 Act, as
amended.
14
Exemption from Registration Claimed
All of the above sales by the Company of its unregistered securities were made
by the Company in reliance upon Section 4(6) and Rule 506 of Regulation D of the
Securities Act of 1933, as amended. All of the individuals and/or entities that
purchased the unregistered securities were primarily either existing
shareholders or individuals or entities known to the Company and its management,
through pre-existing business relationships, or as long standing business
associates. All purchasers were provided access to all material information,
which they requested, and all information necessary to verify such information
and were afforded access to management of the Company in connection with their
purchases. All purchasers of the unregistered securities acquired such
securities for investment and not with a view toward distribution, acknowledging
such intent to the Company. All certificates or agreements representing such
securities that were issued contained restrictive legends, prohibiting further
transfer of the certificates or agreements representing such securities, without
such securities either being first registered or otherwise exempt from
registration in any further resale or disposition.
Related Party Issuances
As part of the Acquisition Agreements, our officers and directors, who are
officers, directors and shareholders of South Uintah, were issued shares and
warrants exercisable for shares of our common stock, as set forth below:
Number of Common
Name of Beneficial Owner Shares Warrants (1)
--------------------------------------------- ------------------- --------------
George Harris, Chief Financial Officer and 550,000 550,000
Director
Kevin Blair, Director 325,000 352,000
Max Sommer, Director 200,000 200,000
Gary Herick, Director (2) 1,640,000 1,000,000
J. David Keller, Director 525,000 525,000
(1) The warrants held by Harris, Blair, Sommer and Keller have a term of 3
years, are fully vested after a period of one year and have exercise
prices ranging from $1.00 to $3.00. The Warrants held by Mr. Herick
have an exercise price of $2.00 and have a term of 2 years, with a
vesting rate of 1/3 of the shares every year.
(2) Mr. Herick has direct ownership of 2,500,000 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 warant is subject to vesting terms. 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.
15
SECTION 5 - CORPORATE GOVERNANCE AND MANAGEMENT
Item 5.01 Changes in Control of Registrant.
As a result of the acquisition of South Uintah, discussed in Item 2.01, there
was a resulting change in the ownership structure of the Company. As a result of
the transaction, South Uintah, our majority shareholder, is returning 2,700,000
shares of our common stock to the Company to be cancelled and returned to
treasury. After such cancelation, South Uintah is no longer a shareholder in the
Company.
The beneficial owners of 5% or more of our stock and the holdings of our
officers and directors are as listed in the following tables.
The following sets forth information with respect to ownership by holders of
more than five percent (5%) of the Company's Common Stock known by the Company
as of January 23, 2012:
Amount and
Nature of Percent of
Name of Beneficial Owner Beneficial Owner Class (1)
------------------------------------------------- ----------------- ------------
Gary Herick (2) 1,640,000 11.947%
Craig Phillips (3) 1,000,000 7.28%
Michael A. Littman (4) 1,100,000 8.01%
M.A. Littman Pension Plan (5) 900,000 6.55%
Paul Dickstein (6) 718,851 5.23%
Natural Buttes Gas Corp. 750,000 5.46%
Uinta Oil and Gas Properties, Inc. 750,000 5.46%
(1) Based upon 13,726,931 shares issued and outstanding on a fully diluted
basis. This number includes 11,446,931 shares being issued to the
shareholders of South Uintah Gas Properties, Inc., 2,700,000 shares
being canceled as a result of the merger. Warrants exercisable for
6,700,000 shares of common stock are not included in this number as
they are not considered to be exercisable in the next 60 days.
(2) Mr. Herick has direct ownership of 2500,000 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 is subject ot vesting terms. Mr. Herick
has beneficial ownership of 690,000 shares of common stock through
his wife is ownership of Whitemoon
Energy, LLC which holds the shares.
(3) Mr. Phillips owns 1,000,000 shares of common stock and warrant to
purchase an additional 1,000,000 shares of common stock. The warrant
is subject to vesting terms.
(4) Mr. Littman holds 600,000 shares of common stock directly and 500,000
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.
(5) Mr. Littman has the ability to vote the 900,000 shares held by the M.A.
Littman Pension Plan.
(6) Mr. Dickstein holds 468,851 shares of common stock directly and has
beneficial ownership of 250,000 shares through JBPD, LLC.
16
The following sets forth information with respect to the Company's Common Stock
beneficially owned by each Officer and Director, and by all Directors and
Officers as a group as of January 23, 2012.
Amount and Nature
of Beneficial
Name of Beneficial Owner Owner* Percent of
Class (1)
--------------------------------------------- ------------------- --------------
George Harris, Chief Financial Officer and 550,000 4.00%
Director (2)
Kevin Blair, Director (3) 325,000 2.36%
Max Sommer, Director (4) 200,000 1.45%
Gary Herick, Director (5) 1,640,,000 11.94%
J. David Keller, Director (6) 525,000 3.82%
--------------------------------------------- ------------------- --------------
All Proposed Directors and Executive 3,240,000 23.60%
Officers as a Group (5 persons)
------------------- --------------
(1) Based upon 13,726,931 shares issued and outstanding on a fully diluted
basis. This number includes 11,446,931 shares being issued to the
shareholders of South Uintah and 2,700,000 shares being canceled as a
result of the merger. Warrants exercisable for 6,700,000 shares of
common stock are not included in this number as they are not considered
to be exercisable in the next 60 days.
(2) Mr. Harris holds 550,000 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. 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.
(4) 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.
(5) 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 warrants to purchase an additional 1,000,000 shares of
common stock. Mr. Herick has beneficial ownership of 690,000 shares of
common stock through his wife is ownership of Whitemoon Energy,
LLC which holds the shares. In addition the warrant is subject to
vesting terms.
(6) 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.
17
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. Included in
this table are only those derivative securities with exercise prices that the
Company believes have a reasonable likelihood of being "in the money" within the
next sixty days.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
There were no changes to the Company's officers or Board of Directors as a
result of this transaction.
SECTION 9 FINANCIAL STATEMENTS AND EXHIBITS
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Business Acquired. The following is a complete list
of financial statements filed at the end of this Report.
South Uintah Gas Properties, Financial Statements for the Period from March 8,
2011 (Inception) through September 30, 2011, which includes:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of September 30, 2011
Consolidated Statement of Operations for the period from March 8, 2011
(Inception) through September 30, 2011
Consolidated Statement of Changes in Stockholders' Equity for the
period of from March 8, 2011 (Inception) through September 30, 2011
Consolidated Statement of Cash Flows for the period from March 8, 2011
(Inception) through September 30, 2011
Notes to the Consolidated Financial Statements
18
(b) Pro Forma Financial Information. The following is a complete list of the
pro forma financial statements filed as a part of this Report.
Unaudited Pro Forma Condensed Consolidated Balance Sheet at
September 30, 2011.
Unaudited Pro Forma Condensed Earnings Per Shares for the period
from March 8, 2011 (inception) through September 30, 2011.
Notes to the Unaudited Pro Forma Condensed Consolidated Balance
Sheet and Statement Earnings Per Shares for the period from March
8, 2011 (inception) through September 30, 2011.
(d) Exhibits. The following is a complete list of exhibits filed as part of
this Report. Exhibit numbers correspond to the numbers in the exhibit table
of Item 601 of Regulation S-K.
Exhibit No. Description
----------- -----------
2.1 Amended Share Exchange and Acquisition Agreement, dated
January 23, 2012*
3.1(i).1 Articles of Incorporation of South Uintah Gas
Properties, Inc.*
3.1(i).2 Amendment to the Articles of Incorporation of South
Uintah Gas Properties, Inc.*
3.1(ii) Bylaws of South Uintah Gas Properties, Inc.*
4.1 Form of Vesting Warrants*
4.2 Form of $0.50 Warrants*
--------------------
*Filed herewith
19
SOUTH UINTAH GAS PROPERTIES, INC.
FINANCIAL STATEMENTS
FOR THE PERIOD FROM
MARCH 8, 2011 (INCEPTION) THROUGH SEPTEMBER 30, 2011
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm 20
Consolidated Balance Sheet as of September 30, 2011 21
Consolidated Statement of Operations for the period from
March 8, 2011 (Inception) through September 30, 2011 22
Consolidated Statement of Changes in Stockholders' Equity for the period of from
March 8, 2011 (Inception) through September 30, 2011 23-24
Consolidated Statement of Cash Flows for the period from
March 8, 2011 (Inception) through September 30, 2011 25
Notes to the Consolidated Financial Statements 26
RONALD R. CHADWICK, P.C.
Certified Public Accountant
2851 South Parker Road, Suite 720
Aurora, Colorado 80014
Telephone (303)306-1967
Fax (303)306-1944
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
South Uintah Gas Properties, Inc.
Arvada, Colorado
I have audited the accompanying consolidated balance sheet of South Uintah Gas
Properties, Inc. (a development stage company) as of September 30, 2011 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period from March 8, 2011 (inception) through September 30, 2011.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a reasonable
basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of South
Uintah Gas Properties, Inc. as of September 30, 2011 and the consolidated
results of its operations and its cash flows for the period from March 8, 2011
(inception) through September 30, 2011 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements the Company has suffered a loss from operations and has a
working capital deficit that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Aurora, Colorado /s/Ronald R. Chadwick, P.C.
January 23, 2012 RONALD R. CHADWICK, P.C.
20
SOUTH UINTAH GAS PROPERTIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30,
2011
------------------
Assets
Current Assets:
Cash $ 103,255
------------------
Total Current Assets 103,255
------------------
Other assets:
Oil and Gas Leases 478,200
------------------
Total Other Assets 478,200
------------------
Total Assets $ 581,455
==================
Liabilities and Stockholders' (Deficit) Equity
Current liabilities
Accounts payable $ 25,581
Accrued liabilities 23,393
Convertible notes payable 500,000
Notes payable, other 575,000
------------------
Total Current Liabilities 1,123,974
------------------
Stockholders' (Deficit) Equity
Common stock, $0.0001 par value; 100,000,000 shares
authorized, 9,500,000 shares issued and outstanding 950
Additional paid-in capital 63,000
Deficit accumulated during the development stage (599,275)
------------------
Total South Uintah Gas Properties, Inc. Stockholders' (Deficit) Equity (535,325)
Noncontrolling interest (7,194)
------------------
Total stockholders' equity (542,519)
------------------
Total liabilities and stockholders' (deficit) equity $ 581,455
==================
See the notes to these financial statements.
21
SOUTH UINTAH GAS PROPERTIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 8, 2011 (INCEPTION) THROUGH SEPTEMBER 30, 2011
Period March 8 through September 30, 2011
-----------------------------------------
Revenue: $ -
-----------------------------------------
Operational expenses:
General and Administrative 146,404
Goodwill write off 339,195
Consulting fees 114,180
-----------------------------------------
Total operational expenses 599,779
-----------------------------------------
Other Income (Expenses)
Interest expense (16,893)
-----------------------------------------
Total other income (expense) (16,893)
-----------------------------------------
Net loss (616,672)
Less: Net loss attributable to
a non-controlling interest 17,397
-----------------------------------------
Net loss attributable to South
Uintah Gas Properties, Inc. $ (599,275)
=========================================
Per share information
---------------------------
Net loss per common share (South
Uintah Gas Properties, Inc.)
Basic $ (0.15)
Fully diluted *
=========================================
Weighted average number of common
stock outstanding 4,207,729
=========================================
* Not provided as it is anti-dilutive
See the notes to these financial statements.
22
SOUTH UINTAH GAS PROPERTIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY
FOR THE PERIOD FROM MARCH 8, 2011 (INCEPTION) THROUGH SEPTEMBER 30, 2011
Deficit Stockholders'
Accumulated Equity South
Additional During Uintah Gas
Common Stock paid-in Development Properties
Number of Shares Amount Capital Stage Inc.
-------------------------------- ------------ ---------------- ----------------
Balance - March 8, 2011 - $ - $ - $ - $ -
Issuance of Founder Shares for cash 1,000,000 100 - 100
Issuance of Founder Shares for debt relief 1,000,000 100 - 100
Issuance of Founder Shares for services 5,500,000 550 - 550
Issuance of Common Stock
for oil and gas leases 1,500,000 150 - - 150
Issuance of Common Stock
for oil and gas leases 500,000 50 - - 50
Donated legal services 63,000 63,000
Minority interest at purchase
of majority interest in subsidiary - - - - -
Net Loss - - - (599,275) (599,275)
------------------ ----------- ------------ ---------------- ----------------
Balance - September 30, 2011 9,500,000 $ 950 $63,000 $ (599,275) $ (535,325)
================== =========== ============ ================ ================
See the notes to these financial statements.
23
SOUTH UINTAH GAS PROPERTIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY
FOR THE PERIOD FROM MARCH 8, 2011 (INCEPTION) THROUGH SEPTEMBER 30, 2011
(continued)
Total
Noncontrolling Stockholders'
Interest Equity
---------------- ---------------
Balance - March 8, 2011 $ - $ -
Issuance of Founder Shares for cash - 100
Issuance of Founder Shares for debt relief - 100
Issuance of Founder Shares for services - 550
Issuance of Common Stock
for oil and gas leases - 150
Issuance of Common Stock
for oil and gas leases - 50
Donated legal services 27,000 90,000
Minority interest at purchase
of majority interest in subsidiary (16,797) (16,797)
Net Loss (17,397) (616,672)
---------------- ---------------
Balance - September 30, 2011 $ (7,194) $ (542,519)
================ ===============
See the notes to these financial statements.
24
SOUTH UINTAH GAS PROPERTIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 8, 2011 (INCEPTION) THROUGH SEPTEMBER 30, 2011
Period March 8
through
September 30, 2011
------------------
Cash Flows from Operating Activities:
Net Loss $ (616,672)
Adjustments to reconcile net loss to net cash used
in operating activities:
Write down of goodwill in subsidiary 339,195
Compensatory stock issuances 550
Increase in accounts payable 59,689
Increase in accrued liabilities 23,393
------------------
Net Cash Used by Operating Activities (193,845)
------------------
Cash Flows from Investing Activities:
Investment to acquire 70% interest in subsidiary (300,000)
Purchase of Oil and Gas leases (303,000)
------------------
Net Cash Used in Investing Activities (603,000)
------------------
Cash Flows from Financing Activities:
Proceeds from convertible promissory notes 500,000
Proceeds from other notes payable 400,000
Proceeds from stock issuance 100
------------------
Net Cash Provided by Financing Activities 900,100
------------------
Net Increase in Cash 103,255
Cash and Cash Equivalents - Beginning of Period -
------------------
Cash and Cash Equivalents - End of Period $ 103,255
==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense $ -
==================
Cash paid for income taxes $ -
==================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Net deficit of subsidiary on purchase $ (55,992)
Donated legal services $ 90,000
Issuance of notes payable for assets $ 175,000
Issuance of common stock for accounts payable $ 100
Issuance of common stock for oil leases $ 200
==================
See the notes to these financial statements.
25
SOUTH UINTAH PROPERTIES, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
For the Period From March 8, 2011 (Inception) through September 30, 2011
NOTE 1 - BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
South Uintah Gas Properties, Inc. ("the Company") was incorporated on March 8,
2011 in the state of Colorado. The Company intends to become an independent
energy company that intends to acquire and develop oil and gas properties.
The Company's fiscal year end is December 31st. The Company's financial
statements are presented on the accrual basis of accounting.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its majority (approximately 70 percent) owned subsidiary, Hinto
Energy, Inc. All intercompany accounts and transactions have been eliminated in
consolidation.
Basis of Presentation
Development Stage Company
The Company has not earned significant revenues from planned operations.
Accordingly, the Company's activities have been accounted for as those of a
"Development Stage Company." Therefore, the Company's financial statements of
operations, stockholders' equity and cash flows disclose activity since the date
of the Company's inception.
Going Concern
The Company's financial statements for the period of March 8, 2011 (Inception)
through September 30, 2011 have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company reported an
accumulated total shareholders' deficit of $542,438 as of September 30, 2011.
The Company has not recognized any revenues from its activities since inception.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
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.
26
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less and money market instruments to be cash equivalents.
Oil and Gas Properties, Full Cost Method
The Company uses the full cost method of accounting for oil and gas producing
activities. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells used to find proved reserves, and to drill and
equip development wells including directly related overhead costs and related
asset retirement costs are capitalized.
Under this method, all costs, including internal costs directly related to
acquisition, exploration and development activities are capitalized as oil and
gas property costs. Properties not subject to amortization consist of
exploration and development costs which are evaluated on a property-by-property
basis. Amortization of these unproved property costs begins when the properties
become proved or their values become impaired. The Company assesses the
realization of unproved properties, taken as a whole, if any, on at least an
annual basis or when there has been an indication that impairment in value may
have occurred. Impairment of unproved properties is assessed based on
management's intention with regard to future exploration and development of
individually significant properties and the ability of the Company to obtain
funds to finance such exploration and development. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized.
Costs of oil and gas properties will be amortized using the units of production
method.
In applying the full cost method, the Company will perform an impairment test
(ceiling test) at each reporting date, whereby the carrying value of property
and equipment is compared to the "estimated present value," of its proved
reserves discounted at a 10-percent interest rate of future net revenues, based
on current economic and operating conditions, plus the cost of properties not
being amortized, plus the lower of cost or fair market value of unproved
properties included in costs being amortized, less the income tax effects
related to book and tax basis differences of the properties. If capitalized
costs exceed this limit, the excess is charged as an impairment expense.
Revenue Recognition
The Company recognizes revenue when it is earned and expenses are recognized
when they occur.
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 and
cumulative period from March 8, 2011 ended September 30, 2011, there were no
potential common equivalent shares used in the calculation of weighted average
common shares outstanding as the effect would be anti-dilutive because of the
net loss.
27
Stock-Based Compensation
The Company adopted the provisions of and accounts for stock-based compensation
using an estimate of value in accordance with the fair value method. Under the
fair value recognition provisions of this statement, stock-based compensation
cost is measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service
period, which generally is the vesting period. The Company elected the
modified-prospective method, under which prior periods are not revised for
comparative purposes. The valuation method applies to new grants and to grants
that were outstanding as of the effective date and are subsequently modified.
Fair Value of Financial Instruments
The carrying amount of accounts payable is considered to be representative of
respective fair values because of the short-term nature of these financial
instruments.
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss) and
accordingly, net loss is equal to comprehensive loss in all periods.
Income Taxes
Provision for income taxes represents actual or estimated amounts payable on tax
return filings each year. Deferred tax assets and liabilities are recorded for
the estimated future tax effects of temporary differences between the tax basis
of assets and liabilities and amounts reported in the accompanying balance
sheets, and for operating loss and tax credit carry forwards. The change in
deferred tax assets and liabilities for the period measures the deferred tax
provision or benefit for the period. Effects of changes in enacted tax laws on
deferred tax assets and liabilities are reflected as adjustment to the tax
provision or benefit in the period of enactment.
Noncontrolling interest
A subsidiary of the Company has minority members, representing ownership
interests of 30% at September 30, 2011. The Company accounts for these minority,
or noncontolling interests pursuant to ASC 810-10-65 whereby gains or losses in
a subsidiary with a noncontrolling interest are allocated to the noncontrolling
interest based on the ownership percentage of the noncontrolling interest, even
if that allocation results in a deficit noncontrolling interest balance.
Recent Accounting Pronouncements
There were accounting standards and interpretations issued during the period of
March 8, 2011 (Inception) through September 30, 2011, none of which are expected
to have a material impact on the Company's financial position, operations or
cash flows.
NOTE 2 - OIL AND GAS LEASES
The Company purchased a farmout of deep right interests in approximately 4,000
acres in the Uintah Basin in Utah in July 2011, amended in December 2011. The
purchase price of the farmout interest was $478,200, made up of $303,000 in
cash, $175,000 in notes payable and $200 in common stock.
28
NOTE 3 - INVESTMENT IN HINTO ENERGY, INC.
On July 12, 2011, the Company purchased 3,000,000 shares of the common stock of
Hinto Energy, Inc. (Hinto), formerly Garner Investments, Inc., for cash of
$300,000. The Company entered into a Share Purchase and Exchange Agreement with
Hinto, on July 27, 2011 as discussed in Note 8. Upon the completion of a
proposed merger with Hinto, the Company has agreed to return the 3,000,000
shares to Hinto. The purchase resulted in the Company recording goodwill of
approximately $339,000, negative net worth in the subsidiary of approximately
$56,000 and noncontrolling interest of approximately negative $17,000.
NOTE 4 - CONVERTIBLE PROMISSORY NOTES
The Company has issued $500,000 of convertible promissory notes. The notes earn
interest at 6% per annum, are unsecured, with principal and interest convertible
in whole or in part by the holder into common shares of the Company at $.25 per
share any time prior to repayment. Conversion of the entire principal amount of
$500,000 would result in an additional 2,000,000 outstanding common shares. The
notes are due at various dates from April through July 2012. 2,000,000 common
stock purchase warrants exercisable at $.50 were issued in connection with these
notes. The Company has recognized no beneficial conversion expense on the
convertible notes as the Company's common stock currently has no trading market
or established cash market price.
NOTE 5 - NOTES PAYABLE, OTHER
The Company issued two non-interest bearing, unsecured notes payable for a total
of $175,000 as part of the purchase price of the lease interest described in
Note 2. One note for $75,000 is due in July 2012, and the second note for
$100,000 is due in July 2013.
In May 2011 the Company accepted a Subscription Agreement for $500,000 in
exchange for a $500,000 Secured Convertible Promissory Note in the amount of
$500,000, 1,000,000 shares of Company's common stock and warrants exercisable
for a total of 2,000,000 shares of the Company's common stock with prices
ranging from $0.25 per share to $1.50 per share. At the time of the closing, the
Company received $400,000 of the $500,000. On September 6, 2011, after a failure
to receive the remaining $100,000 from the subscriber, South Uintah Gas gave
notice to the subscriber of its termination of the Subscription Agreement and
associated agreements due to a failure of the subscriber to perform its
obligations. As a result, South Uintah Gas has cancelled the shares and the
warrants issued to the subscriber, remaining indebted to the former subscriber
for $400,000.
NOTE 6- STOCKHOLDERS' EQUITY (DEFICIT)
The authorized capital stock of the Company is 100,000,000 shares of common
stock and 25,000,000 of preferred stock, both with a $0.0001 par value. At
September 30, 2011, Company had 9,500,000 shares of its common stock issued and
outstanding.
29
NOTE 7 - WARRANTS
The Company had the following warrants outstanding at September 30, 2011:
------------------------ ------------------- ---------------------- -------------------
Warrants Term in years Vesting in years Exercise Price
------------------------ ------------------- ---------------------- -------------------
3,000,000 3 to 5 Variable $2.00
------------------------ ------------------- ---------------------- -------------------
1,000,000 3 1 $1 and $3
------------------------ ------------------- ---------------------- -------------------
2,000,000 2 Vested $0.50
------------------------ ------------------- ---------------------- -------------------
Each warrant gives the holder the right to purchase one share of the Company's
common stock at the exercise price. The 3,000,000 vested warrants, issued in
connection with consulting services, vest at various dates from May 2012 through
June 2014 and expire at various dates from May 2014 through June 2016. The
1,000,000 vested warrants, issued in connection with consulting services, vest
at various dates from June 2012 through August 2012, with 400,000 warrants being
exercisable at $1 and 600,000 being exercisable at $3. The 2,000,000 warrants
currently exercisable were issued in connection with notes payable and expire at
dates from May 2013 through July 2013. These 2,000,000 warrants are callable at
the option of the Company in the first year from the grant dates of May through
July 2011 at the exercise price under various conditions, generally if the
Company completes a $4,500,000 private placement of common stock. No expense was
recorded by the Company on the issuance of any of the 6,000,000 warrants, as the
Company's common stock has no trading market and no material common stock cash
sales have been made, and thus none of the warrants were in the money.
NOTE 8 - SHARE PURCHASE AND EXCHANGE AGREEMENT
The Company on July 27, 2011, as subsequently amended December 22, 2011, entered
into a Share Exchange and Acquisition Agreement (Agreement) with Hinto Energy,
Inc., formerly Garner Investments, Inc., and its Shareholders whereby Hinto will
acquire the Company for approximately 9,500,000 common shares, up to $875,000 in
convertible and non-convertible promissory notes and 6,700,000 warrants in
varying increments and exercise prices, subject to receipt of audited financial
statements in accordance with SEC Rules and Regulations and further subject to
any final closing terms and conditions. The Company will return approximately
3,000,000 shares of Hinto stock currently held by the Company.
NOTE 9 - RELATED PARTY TRANSACTIONS
Of the $25,581 in outstanding Company accounts payable at September 30, 2011,
$23,000 are to a related party shareholder for legal services. A related party
shareholder donated $84,000 in legal fees to the capital of the Company in 2011,
and an additional $6,000 was paid on behalf of the Company by an outside
individual, for a total of $90,000 donated.
NOTE 10 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of the issuance of
these financial statements.
30
HINTO ENERGY, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet is based
on the historical balance sheets of Hinto Energy, Inc. ("Hinto") and South
Uintah Gas Properties, Inc. ("SUGP") as of September 30, 2011.
The following unaudited pro forma condensed earning per share is based on the
historical statement of income of South Uintah Gas Properties, Inc. ("SUGP") for
the nine-months ending September 30, 2011 as if the transactions below had taken
place as of the beginning of the period and with the equity structure of Hinto
Energy, Inc.
On July 12, 2011, SUGP purchased 3,000,000 shares of the common stock of Hinto
from its then majority shareholder, representing approximately 70% of the then
outstanding shares of Hinto for cash of $300,000. The purchase resulted in SUGP
recording goodwill of approximately $339,000, negative net worth in the
subsidiary of approximately $56,000 and noncontrolling interest of approximately
negative $17,000.
SUGP entered into a Share Purchase and Exchange Agreement with Hinto, on July
27, 2011 and subsequently amended on January 20, 2012, whereby Hinto will
acquire SUGP for approximately 11,536,424 common shares, $375,000 in
non-convertible promissory notes and 6,700,000 warrants in varying increments
and exercise prices, subject to receipt of audited financial statements in
accordance with SEC Rules and Regulations and further subject to any final
closing terms and conditions.
The two entities merged on January 23, 2012, with an effective date of December
31, 2011 and Hinto Energy, Inc. being the legal acquirer. However, since Hinto
was a public company, which had nominal activity, the merger has been treated as
a recapitalization of SUGP. Though Hinto was the legal acquirer in the merger,
SUGP was the accounting acquirer since its shareholders ended up with control of
Hinto. Therefore at the date of the merger the historical financial statements
of SUGP became those of Hinto. Since the historical financial statements of SUGP
supersede any prior financial statements of Hinto and are presented elsewhere in
this Form 8K there is no specific pro forma statement of operations presented,
only a pro forma earnings per share for SUGP based on the new capital structure.
As of the merger, Hinto has an authorized capitalization consisting of
25,000,000 shares of preferred stock, of which no shares are issued or
outstanding and 50,000,000 shares of Common Stock, of which, 4,280,000 shares of
Common Stock were currently issued and outstanding as of September 30, 2011. At
September 30, 2011, SUGP had 9,500,000 shares of Common Stock issued and
outstanding.
Prior to closing of the proposed merger, SUGP transferred 300,000 shares of the
3,000,000 Hinto shares it holds to an unrelated third party and therefor is not
reflected in the pro forma financial statements as of September 30, 2011.
Concurrent to closing, SUGP has agreed to return the remaining 2,700,000 shares
of common stock to Hinto. Hinto will retire such shares to treasury.
Prior to the merger, Hinto advanced funds of approximately $271,000 to SUGP in
the form of an intercompany advance. Such funds were used by SUGP, prior to
closing of the acquisition, for production and general and administrative
activities.
31
Prior to the merger, Hinto commenced a private offering to accredited investors
of up to $3,000,000, which will close in January 2011. Prior to the acquisition,
Hinto raised $365,000, all after September 30, 2011 and therefore not reflected
in the pro forma financial statements of Hinto as of September 30, 2011. The
offering is for shares of Hinto's restricted common stock at $.50 per share. At
this time, there is no committed source of additional funds and we cannot give
any assurances of being able to raise additional funds. We can assure that we
will require additional funds to carry out our business plan. The availability
and terms of any future financing will depend on market and other conditions.
Prior to the merger, SUGP issued 175,000 shares of its common stock to certain
parties for services and therefore these shares are not reflected in the pro
forma financial statements as of September 30, 2011.
Concurrent with the closing of the transaction, all current officers and Board
members of the Registrant retained their positions with the Registrant.
The following unaudited pro forma condensed consolidated balance sheet is
presented for illustrative purposes only and is not necessarily indicative of
the financial position that would have been achieved, nor is it necessarily
indicative of future operating results. The unaudited pro forma balance sheet
should be read in conjunction with SUGP's historical financial statements (and
related notes thereto) included elsewhere in this Form 8-K and Hinto's
historical financial statements (and related notes thereto). Hinto historical
financial statements (and related notes thereto) can be found in the Hinto
Annual Report on Form 10-Q for year ended December 31, 2010 and Form 10-Q
Quarterly Report for the quarter ended September 30, 2011. A copy of the 10-K,
as well as other documents filed by Hinto with the Securities and Exchange
Commissions, are available to the public.
HINTO ENERGY, INC.
PRO FORMA ENTRIES
(a) To reflect the adjustments for Hinto liabilities and adjustments
already included in the SUGP consolidated balance sheet.
(b) Exchange of 9,500,000 common shares for shares of SUGP common shares
for common shares of Hinto and to reflect a change in par value from
$0.0001 to $0.001.
(c) Return and cancel 3,000,000 common shares of Hinto held by South Uintah
Gas Properties.
(d) Conversion of $500,000 in SUGP convertible promissory notes and $17,983
in accrued interest as of September 30, 2011 at $0.25 per share into
2,071,931 shares of SUGP and exchanged for Hinto common shares.
(e) Recapitalization entry.
(f) To reflect the nine months ended September 30, 2011 pro-forma income
per share as if the recapitalization of SUGP and all note conversions
and share cancellations related to the assets and liabilities for the
period ended September 30, 201l had occurred on September 30, 2011.
32
HINTO ENERGY, INC. and SUBSIDIARY
PRO FORMA CONDENSED BALANCE SHEET
September 30, 2011
(Unaudited)
Pro Forma
Adjustments
for Pro Forma
SUGP Hinto combined combined Pro Forma Pro Forma
(Audited) (Unaudited) balances balances Adjustments Merger
9/30/11 9/30/11 9/30/11 9/30/11 9/30/11 9/30/11
--------------------------- ---------------------------- --------------------------
Current Assets:
Cash $ 103,255 $ - $ - $ - $ - $103,255
--------------------------- ---------------------------- --------------------------
Total Current Assets 103,255 - - - - 103,255
--------------------------- ---------------------------- --------------------------
Other assets:
Oil and Gas Leases 478,200 - - - - 478,200
--------------------------- ---------------------------- --------------------------
Total Other Assets 478,200 - - - - 478,200
--------------------------- ---------------------------- --------------------------
Total Assets $ 581,455 $ - $ - $ - $ - $581,455
=========================== ============================ ==========================
Liabilities and
Stockholders'(Deficit)Equity
Current liabilities
Accounts payable $ 25,581 $ - $ - $ 25,581 $ - $25,581
Payable to SUGP 18,982 (a) (18,982) - - -
Accrued liabilities 23,393 5,000 (a) (5,000) 23,393 (d) (9,106) 14,287
Conv notes payable 500,000 - - 500,000 (d) (500,000) -
Notes payable, other 575,000 - - 575,000 - 575,000
--------------------------- ---------------------------- --------------------------
Total Current Liabilities 1,123,974 23,982 (23,982) 1,123,974 (509,106) 614,868
--------------------------- ---------------------------- --------------------------
Stockholders' (Deficit) Equity
Common stock 950 4,280 - 5,230 (b) 8,550 12,816
(c) (3,000)
(d) 2,036
Additional paid-in capital 63,000 98,710 (a) (23,805) 137,905 (e) (126,972) 512,453
(b) (8,550)
(c) 3,000
(d) 507,070
Accumulated deficit (599,275) (126,972) (a) 40,593 (685,654) (e) 126,972 (558,682)
--------------------------- ---------------------------- --------------------------
Total SUGP
Stockholders' (deficit) equity (535,325) (23,982) 16,788 (542,519) 501,520 (33,413)
Noncontrolling interest (7,194) - (a) 7,194 - -
--------------------------- ---------------------------- --------------------------
Total stockholders' equity (542,519) (23,982) 23,982 (542,519) 501,520 (33,413)
--------------------------- ---------------------------- --------------------------
Total liabilities and
stockholders' (deficit) equity $ 581,455 $ - $ - $ 581,455 $ (7,586) $581,455
=========================== ============================ ==========================
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
33
Hinto Energy, Inc. and Subsidiary
Pro Forma Condensed Earnings per Share
Period from March 8,
2011(Inception) through
September 30, 2011
--------------------------
Pro Forma
South Uintah Gas
Properties, Inc.
--------------------------
Net Loss $ 558,682
Basic and diluted income per common share (f) $ (.13)
=== ======================
Weighted average basic and diluted shares of common
outstanding - basic 4,207,729
=== ======================
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
34
Hinto Energy, Inc. and Subsidiary
Unaudited Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information
Note 1. Basis of Pro Forma Presentation
The unaudited pro forma condensed consolidated financial information included
herein has been prepared pursuant to the rules and regulations of the United
States Securities and Exchange Commission.
The unaudited pro forma condensed consolidated financial information of Hinto
Energy, Inc. is based on the historical balance sheets of South Uintah Gas
Properties, Inc. and Hinto Energy, Inc. as of September 30, 2011 and have been
prepared after giving effect to the adjustments and assumptions described below.
The unaudited pro forma condensed earning per share is based on the historical
statement of income of South Uintah Gas Properties, Inc. ("SUGP") for the period
beginning March 8, 2011 (inception) and ending September 30, 2011, as if the
transactions below had taken place as of the end of the period and with the
equity structure of Hinto Energy, Inc. ("Hinto.")
Hinto employs accounting policies that are in accordance with accounting
principles generally accepted in the United States of America. In management's
opinion, all material adjustments necessary to reflect fairly the pro forma
financial position of Hinto have been made.
The outstanding shares used in the earning per share calculation are as follows
and is as if the merger and cancelled shares were issued and outstanding at the
end of the period:
Number shares:
Hinto Shares Issued and Outstanding at 9-30-11 per balance sheet 4,280,000
Shares Issuance:
For Merger 11,536,424
Shares Cancellation:
Hinto shares held and returned by SUGP
(3,000,000)
-----------
Pro Forma Issued and Outstanding Shares at 9-30-11 per balance 12,816,424
Note 2. Acquisition of South Uintah Gas Properties, Inc.
On July 27, 2011, Hinto Energy, Inc. and South Uintah Gas Properties, Inc.
entered into a binding agreement, whereby all of the issued and outstanding
common stock, debt and warrants of South Uintah Gas Properties, Inc. would be
exchanged for an equivalent notes and securities of Hinto Energy, Inc. On July
12, 2011, South Uintah Gas Properties, Inc. purchased 3,000,000 shares of Hinto
Energy's common stock, approximately 70 percent of the issued and outstanding
shares of Hinto Energy, prior to the merger.
35
The two entities merged on January 23, 2012, with an effective merger date of
December 31, 2011, with Hinto Energy being the legal acquirer. However, since
Hinto Energy was a public company, which had nominal activity, the merger has
been treated as a recapitalization of South Uintah Gas Properties and an
acquisition of the assets and liabilities of Hinto Energy by South Uintah Gas
Properties. Though Hinto Energy was the legal acquirer in the merger, South
Uintah Gas Properties was the accounting acquirer since its shareholders ended
up with control of Hinto Energy. Therefore at the date of the merger the
historical financial statements of South Uintah Gas Properties became those of
Hinto Energy. Since the historical financial statements of South Uintah Gas
Properties supersede any prior financial statements of Hinto Energy and are
presented elsewhere in this Form 8K there is no specific pro forma statement of
operations presented.
Concurrent to the closing, Hinto Energy will cancel 3,000,000 shares as of
September 30, 2011 (2,700,000 shares at the time of closing) of common stock
held by South Uintah Gas Properties, Inc.
Prior to the merger, Hinto Energy commenced a private offering to accredited
investors of up to $3,000,000 of common stock, which will close in January 2012.
Prior to the merger date of January 23, 2012, Hinto Energy raised $365,000, of
which $0 is recorded in the historical financial statements of Hinto Energy as
of September 30, 2011. The offering is for shares of Hinto Energy restricted
common stock at $.50 per share. In addition, Hinto Energy placed a three year
secured convertible note for $500,000 in December 2011, prior to the acquisition
and with $0 reflected in the September 30, 2011 historical financial statements.
At this time there is no committed source of additional funds and we cannot give
any assurances of being able to raise the additional funds. We can assure that
we will require additional funds to carry out our business plan. The
availability and terms of any future financing will depend on market and other
conditions.
Prior to the acquisition, on January 23, 2012, with an effective date of
December 31, 2011, Hinto Energy had advanced funds of approximately $271,000 and
$241,000, respectively to South Uintah Gas Properties. Such funds were used by
South Uintah Gas Properties to purchase assets and operate the business.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
HINTO ENERGY, INC.
By: /s/George Harris
-------------
George Harris,
Chief Financial Officer
Date: January 25, 2012
3
