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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
|
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ______________.
Commission
File Number
(Exact name of registrant as specified in its charter)
|
|
|
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|
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
|
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| (Address of principal executive offices)(Zip Code) |
|
|
| (Registrant’s telephone number, including area code) |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
|
|
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
|
☒ |
| Smaller reporting company |
|
Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes
☐
As of November 14, 2022, we had shares of $0.001 par value common stock outstanding.
HOUSTON AMERICAN ENERGY CORP.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
| ITEM 1 | Financial Statements |
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ |
|
$ |
|
||||
| Accounts receivable – oil and gas sales |
|
|
||||||
| Prepaid expenses and other current assets |
|
|
||||||
| TOTAL CURRENT ASSETS |
|
|
||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Oil and gas properties, full cost method | ||||||||
| Costs subject to amortization |
|
|
||||||
| Costs not being amortized |
|
|
||||||
| Office equipment |
|
|
||||||
| Total |
|
|
||||||
| Accumulated depletion, depreciation, amortization, and impairment |
(
|
) |
(
|
) | ||||
| PROPERTY AND EQUIPMENT, NET |
|
|
||||||
| Cost method investment |
|
|
||||||
| Right of use asset |
|
|
||||||
| Other assets |
|
|
||||||
| TOTAL ASSETS | $ |
|
$ |
|
||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ |
|
$ |
|
||||
| Accrued expenses |
|
|
||||||
| Current portion of lease liability |
|
|
||||||
| TOTAL CURRENT LIABILITIES |
|
|
||||||
| LONG-TERM LIABILITIES | ||||||||
| Lease liability, net of current portion |
|
|
||||||
| Reserve for plugging and abandonment costs |
|
|
||||||
| TOTAL LONG-TERM LIABILITIES |
|
|
||||||
| TOTAL LIABILITIES |
|
|
||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value $ ; shares authorized, | ||||||||
| Series A Convertible Preferred Stock, par value $ ; shares authorized; shares issued and outstanding | ||||||||
| Series B Convertible Preferred Stock, par value $ ; shares authorized; shares issued and outstanding | ||||||||
| Common stock, par value $0.001; 12,000,000 shares authorized; 9,928,338 shares issued and outstanding |
|
|
||||||
| Additional paid-in capital |
|
|
||||||
| Accumulated deficit |
(
|
) |
(
|
) | ||||
| TOTAL SHAREHOLDERS’ EQUITY |
|
|
||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ |
|
$ |
|
||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| OIL AND GAS REVENUE | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| EXPENSES OF OPERATIONS | ||||||||||||||||
| Lease operating expense and severance tax |
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|
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||||||||||||
| General and administrative expense |
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||||||||||||
| Depreciation and depletion |
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||||||||||||
| Total operating expense |
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|
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|
||||||||||||
| Loss from operations |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| OTHER INCOME | ||||||||||||||||
| Interest income |
|
|
|
|
||||||||||||
| Interest expense |
(
|
) | ||||||||||||||
| Total other income |
|
|
|
|
||||||||||||
| Net loss before taxes |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Income tax expense | ||||||||||||||||
| Net loss |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Dividends to Series A and B preferred stockholders |
(
|
) | ||||||||||||||
| Net loss attributable to common shareholders | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
| Loss per common share: | ||||||||||||||||
| Basic | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
| Diluted | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic |
|
|
|
|
||||||||||||
| Diluted |
|
|
|
|
||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance – December 31, 2021 | $ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||||||||||||
| Stock-based compensation | — | — |
|
|
||||||||||||||||||||||||
| Net loss | — | — |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Balance – March 31, 2022 |
|
|
|
(
|
) |
|
||||||||||||||||||||||
| Stock-based compensation | — | — |
|
|
||||||||||||||||||||||||
| Net income | — | — |
|
|
||||||||||||||||||||||||
| Balance – June 30, 2022 |
|
|
|
(
|
) |
|
||||||||||||||||||||||
| Stock-based compensation | — | — |
|
|
||||||||||||||||||||||||
| Net loss | — | — |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Balance – September 30, 2022 | $ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance – December 31, 2020 |
|
$ |
|
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||||||||||
| Issuance of common stock for cash, net | — |
|
|
|
|
|||||||||||||||||||||||
| Stock-based compensation | — | — |
|
|
||||||||||||||||||||||||
| Conversion of Series A Preferred Stock to common stock |
(
|
) |
|
|
(
|
) | ||||||||||||||||||||||
| Redemption of Series A and Series B Preferred Stock |
(
|
) |
(
|
) | — |
(
|
) |
(
|
) | |||||||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — |
(
|
) |
(
|
) | |||||||||||||||||||||||
| Net loss | — | — |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Balance – March 31, 2021 |
|
|
|
(
|
) |
|
||||||||||||||||||||||
| Net loss | — | — |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Balance – June 30, 2021 |
|
|
|
(
|
) |
|
||||||||||||||||||||||
| Stock-based compensation | — |
|
|
|
|
|||||||||||||||||||||||
| Net loss | — | — |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Balance – September 30, 2021 | $ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
|
For the Nine Months Ended September 30, |
||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ |
(
|
) | $ |
(
|
) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Depreciation and depletion |
|
|
||||||
| Accretion of asset retirement obligation |
|
|
||||||
| Stock-based compensation |
|
|
||||||
| Amortization of right of use asset |
|
|
||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable |
(
|
) |
(
|
) | ||||
| Increase in prepaid expenses and other current assets |
(
|
) |
(
|
) | ||||
| Increase (decrease) in accounts payable and accrued expenses |
|
(
|
) | |||||
| Decrease in operating lease liability |
(
|
) |
(
|
) | ||||
| Net cash used in operating activities |
(
|
) |
(
|
) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments for the acquisition and development of oil and gas properties |
(
|
) |
(
|
) | ||||
| Payments for capital contribution for cost method investment |
(
|
) |
(
|
) | ||||
| Net cash used in investing activities |
(
|
) |
(
|
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from the issuance of common stock, net of expenses |
|
|||||||
| Redemption of Series A and Series B Preferred Stock |
(
|
) | ||||||
| Payment of preferred stock dividends |
(
|
) | ||||||
| Net cash provided by financing activities |
|
|||||||
| (Decrease) increase in cash |
(
|
) |
|
|||||
| Cash, beginning of period |
|
|
||||||
| Cash, end of period | $ |
|
$ |
|
||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Conversion of Series A preferred stock to common stock | $ | $ |
|
|||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 7 |
HOUSTON AMERICAN ENERGY CORP.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Houston American Energy Corp., a Delaware corporation (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete financial presentation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included in the accompanying unaudited consolidated financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.
These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes, which are included as part of the Company’s Form 10-K for the year ended December 31, 2021.
Consolidation
The accompanying consolidated financial statements include all accounts of the Company and its subsidiaries (HAEC Louisiana E&P, Inc., HAEC Oklahoma E&P, Inc., and HAEC Caddo Lake E&P, Inc.). All significant inter-company balances and transactions have been eliminated in consolidation.
Liquidity and Capital Requirements
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following
the issuance date of these consolidated financial statements. The Company has incurred continuing losses since 2011, including a loss
of $
The Company believes that it has the ability to fund, from cash on hand, its operating costs and anticipated drilling operations for at least the next twelve months following the issuance of these financial statements.
The actual timing and number of wells drilled during 2022 and beyond will be principally controlled by the operators of the Company’s acreage, based on a number of factors, including but not limited to availability of financing, performance of existing wells on the subject acreage, energy prices and industry condition and outlook, costs of drilling and completion services and equipment and other factors beyond the Company’s control or that of its operators.
In the event that the Company pursues additional acreage acquisitions or expands its drilling plans, the Company may be required to secure additional funding beyond our resources on hand. While the Company may, among other efforts, seek additional funding from “at-the-market” sales of common stock, and private sales of equity and debt securities, it presently does not have any commitments to provide additional funding, has less than million shares of common stock available to support capital raising efforts and there can be no assurance that the Company can secure the necessary capital to fund its share of drilling, acquisition or other costs on acceptable terms or at all. If, for any reason, the Company is unable to fund its share of drilling and completion costs, it would forego participation in one or more of such wells. In such event, the Company may be subject to penalties or to the possible loss of some of its rights and interests in prospects with respect to which it fails to satisfy funding obligations and it may be required to curtail operations and forego opportunities.
Accounting Principles and Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews its estimates, including those related to such potential matters as litigation, environmental liabilities, income taxes and the related valuation allowance, determination of proved reserves of oil and gas and asset retirement obligations. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.
| 8 |
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to a concentration of credit risk include cash, cash equivalents and any marketable
securities (if any). The Company had cash deposits of $
Basic earnings (loss) per share is computed by dividing net loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted in common shares that then shared in the earnings of the Company. In periods in which the Company reports a net loss, dilutive securities are excluded from the calculation of diluted net loss per share amounts as the effect would be anti-dilutive.
Recently Issued Accounting Pronouncements
The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its financial position, results of operations, or cash flows.
Subsequent Events
The Company has evaluated all transactions from September 30, 2022 through the financial statement issuance date for subsequent event disclosure consideration.
NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates revenue by significant product type for the three and nine-month periods ended September 30, 2022 and 2021:
|
Three Months Ended
September
30,
|
Three
Months
September
30,
|
Nine
Months
September
30,
|
Nine
Months
September
30,
|
|||||||||||||
| Oil sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Natural gas sales |
|
|
|
|
||||||||||||
| Natural gas liquids sales |
|
|
|
|
||||||||||||
| Total revenue from customers | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
There
were
NOTE 3 – OIL AND GAS PROPERTIES
During
the nine months ended September 30, 2022, the Company invested $
The
Company also invested $
During
the three and nine months ended September 30, 2022, the Company recorded depletion expense of $
| 9 |
Geographical Information
The Company currently has properties in two geographical areas, the United States and Colombia. Revenues for the nine months ended September 30, 2022 and long lived assets (net of depletion, amortization, and impairments) as of September 30, 2022 attributable to each geographical area are presented below:
| Nine Months Ended September 30, 2022 | As of September 30, 2022 | |||||||
| Revenues | Long Lived Assets, Net | |||||||
| United States | $ |
|
$ |
|
||||
| Colombia |
|
|||||||
| Total | $ |
|
$ |
|
||||
In 2008, the Company adopted the Houston American Energy Corp. 2008 Equity Incentive Plan (the “2008 Plan”). The terms of the 2008 Plan, as amended in 2012 and 2013, allow for the issuance of up to shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.
In 2017, the Company adopted the Houston American Energy Corp. 2017 Equity Incentive Plan (the “2017 Plan”). The terms of the 2017 Plan, allow for the issuance of up to shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.
In 2021, the Company adopted the Houston American Energy 2021 Equity Incentive Plan (the “2021 Plan” and, together with the 2008 Plan and the 2017 Plan, the “Plans”). The terms of the 2021 Plan allow for the issuance of up to shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.
Persons eligible to participate in the Plans are key employees, consultants and directors of the Company.
The Company periodically grants options to employees, directors and consultants under the Plans and is required to make estimates of the fair value of the related instruments and recognize expense over the period benefited, usually the vesting period.
Stock Option Activity
| Options |
Weighted-
Average Exercise Price |
Aggregate
Intrinsic Value |
||||||||||
| Outstanding at January 1, 2022 |
|
$ |
|
|||||||||
| Granted |
|
|
||||||||||
| Exercised | ||||||||||||
| Forfeited / expired |
(
|
) |
|
|||||||||
| Outstanding at September 30, 2022 |
|
$ |
|
$ |
|
|||||||
| Exercisable at September 30, 2022 |
|
$ |
|
$ |
|
|||||||
During
the nine months ended September 30, 2022, options to purchase an aggregate of
shares of the Company’s common stock were
granted to the Company’s directors. The options have a
-year life, are exercisable at $
per share,
. The grant date fair value of these stock options was $
based on the Black-Scholes
Option Pricing model based on the following assumptions: market value of common stock on grant date – $
During the three and nine months ended September 30, 2022 and 2021, the Company recognized $ and $ , and $ and $ respectively, of stock-based compensation expense attributable to the amortization of stock options all included in general and administrative expenses. As of September 30, 2022, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $ . The unrecognized expense is expected to be recognized over a weighted average period of years and the weighted average remaining contractual term of the outstanding options and exercisable options at September 30, 2022 is years and years, respectively.
| 10 |
As of September 30, 2022, there were shares of common stock available for issuance pursuant to future stock or option grants under the Plans.
NOTE 5 – CAPITAL STOCK
Warrants
A summary of warrant activity and related information for 2022 is presented below:
| Warrants |
Weighted-Average Exercise Price |
Aggregate Intrinsic Value |
||||||||||
| Outstanding at January 1, 2022 |
|
$ |
|
|||||||||
| Issued | ||||||||||||
| Exercised | ||||||||||||
| Expired |
(
|
) |
|
|||||||||
| Outstanding at September 30, 2022 |
|
$ |
|
$ |
|
|||||||
| Exercisable at September 30, 2022 |
|
$ |
|
$ |
|
|||||||
Earnings (loss) per common share-basic is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Net income (loss) per common share-diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing net (loss) income by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net (loss) income per common share-diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Stock warrants |
|
|
|
|
||||||||||||
| Stock options |
|
|
|
|
||||||||||||
| Total |
|
|
|
|
||||||||||||
| 11 |
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Lease Commitment
The
Company leases office facilities under an operating lease agreement that expires
| Year | Amount | |||
| 2022 |
|
|||
| 2023 |
|
|||
| 2024 |
|
|||
| 2025 |
|
|||
| Total future lease payments |
|
|||
| Less: imputed interest |
|
|||
| Present value of future operating lease payments |
|
|||
| Less: current portion of operating lease liabilities |
|
|||
| Operating lease liabilities, net of current portion | $ |
|
||
| Right of use assets | $ |
|
||
Total
base rental expense was $
| 12 |
| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Information
This Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the nine months ended September 30, 2022, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.
The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual results or events to differ from those anticipated in the forward-looking statements included herein include the Risk Factors described in Item 1A herein and in our Form 10-K for the year ended December 31, 2021.
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this Form 10-Q to be accurate as of the date hereof. Changes may occur after that date, and we will not update that information except as required by law in the normal course of our public disclosure practices.
Additionally, the following discussion regarding our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part 1 of this Form 10-Q, as well as the Risk Factors in Item 1A and the financial statements in Item 7 of Part II of our Form 10-K for the fiscal year ended December 31, 2021.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. A description of our critical accounting policies is set forth in our Form 10-K for the year ended December 31, 2021. As of, and for the nine months ended, September 30, 2022, there have been no material changes or updates to our critical accounting policies.
Unevaluated Oil and Gas Properties
Unevaluated oil and gas properties not subject to amortization, include the following at September 30, 2022:
| September 30, 2022 | ||||
| Acquisition costs | $ | 143,847 | ||
| Development and evaluation costs | 2,199,279 | |||
| Total | $ | 2,343,126 | ||
The carrying value of unevaluated oil and gas prospects above was primarily attributable to properties in the South American country of Colombia. We are maintaining our interest in these properties.
Recent Developments
Equity Investment
In 2019, we acquired a 2% interest in Hupecol Meta, LLC (“Hupecol Meta”) (the “Hupecol Meta Acquisition”), which interest was subsequently increased on multiple occasions, including the acquisition, during the nine months ended September 30, 2022, of an additional interest (1%) in Hupecol Meta for $100,000.
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Hupecol Meta holds a working interest in the 639,405 gross acre CPO-11 block in the Llanos Basin in Colombia, comprised of the 69,128 acre Venus Exploration Area and 570,277 acres, which was 50% farmed out by Hupecol Meta. As of September 30, 2022, through our ownership interest in Hupecol Meta, we held an approximately 11% interest in the Venus Exploration Area and approximately 5.5% interest in the remainder of the block.
Drilling Activity
During the nine months ended September 30, 2022, Hupecol Meta drilled and completed two wells, the Bugalu 1 and the Saturno ST1, in the Venus Exploration Area of the CPO-11 block in Colombia. A third well, the Caonabo, commenced drilling in late September 2022.
The Saturno ST1, was briefly put on production and then shut-in pending receipt of a permit to inject produced water in an old well. A water injection permit was issued in November 2022. With the permit issued, we anticipate bringing the Saturno ST1 well, and the legacy Venus 2A well, on production during November 2022. The Bugalu 1 is awaiting testing. The Caonabo was determined to be a dry hole.
No drilling operations were conducted on our U.S. properties during the nine months ended September 30, 2022.
During the nine months ended September, 30, 2022, our capital investment expenditures totaled $795,311, principally relating to final expenses associated with the plugging and abandonment of the Lou Brock well ($14,160) and investments in our cost method investment in Hupecol Meta ($681,155) (excluding $100,000 investment to increase our equity interest in Hupecol Meta).
Colombian Elections
In June 2022, Colombia elected as its President, leftist candidate, Gustavo Petro. President-elect Petro has publicly vowed to wind down fossil fuel production in Colombia and end fracking in Colombia as part of a plan to transition to renewable green energy. While the President-elect’s proclamations are openly hostile to the oil and gas industry and appear to bar grants of future oil and gas contracts, those proclamations appear to honor existing oil and gas contracts. Moreover, the President-elect’s proclamations do not appear to be supported by the Colombian lawmakers which may make it difficult for the President-elect to effectively carry out his proclamations. Nonetheless, hostility from the executive branch may make the climate for drilling wells on existing acreage more challenging than is already the case.
Results of Operations
Oil and Gas Revenues. Total oil and gas revenues increased 47% in the three months ended September 30, 2022, compared to $290,375 in the three months ended September 30, 2021. Oil and gas revenues increased 42% in the nine months ended September 30, 2022, compared to $922,862 in the nine months ended September 30, 2021.
The increase in revenue was due to (i) increased natural gas production volumes, up 150% and 34% for the three and nine-month periods, respectively, partially offset by a change in oil production, increased by 84% and decreased 29% for the three and nine-month periods, respectively, and (ii) improved commodity pricing, including 33% and 47% increases in crude oil prices and natural gas prices, respectively, realized during the three-month period and 60% and 53% increases in crude oil prices and natural gas prices, respectively, realized during the nine-month period.
The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for the quarter and nine months ended September 30, 2022 and 2021:
|
Nine Months Ended September 30 |
Three Months Ended September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Gross producing wells | 4 | 4 | 4 | 4 | ||||||||||||
| Net producing wells | 0.68 | 0.68 | 0.68 | 0.68 | ||||||||||||
| Net oil production (Bbl) | 8,140 | 11,391 | 5,702 | 3,096 | ||||||||||||
| Net gas production (Mcf) | 53,339 | 39,765 | 35,089 | 14,027 | ||||||||||||
| Average sales price – oil (per barrel) | $ | 96.88 | $ | 60.51 | $ | 91,97 | $ | 68.96 | ||||||||
| Average sales price – natural gas (per Mcf) | $ | 5.83 | $ | 3.82 | $ | 5.44 | $ | 3.71 | ||||||||
The change in production volumes was primarily due to natural declines in production, partially offset by our Reeves County wells being put on gas lift in late 2021. With the issuance of a water injection permit relating to the CPO-11 block, well counts and production are anticipated to increase with the resumption of production of the Saturno ST1 and Venus 2A wells in Colombia.
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The change in average oil sales price realized reflects a spike in global energy prices attributable to global supply uncertainty arising from the Russian invasion of Ukraine.
Oil and gas sales revenues by region for the nine months ended September 30, 2022 were as follows:
| Colombia | U.S. | Total | ||||||||||
| 2022 First Nine Months | ||||||||||||
| Oil sales | $ | — | $ | 788,619 | $ | 788,619 | ||||||
| Natural gas sales | — | 310,850 | 310,850 | |||||||||
| Natural gas liquid sales | — | 214,596 | 214,596 | |||||||||
| 2021 First Nine Months | ||||||||||||
| Oil sales | $ | — | $ | 689,296 | $ | 689,296 | ||||||
| Natural gas sales | — | 151,808 | 151,808 | |||||||||
| Natural gas liquid sales | — | 81,758 | 81,758 | |||||||||
Lease Operating Expenses. Lease operating expenses increased 0% to $184,488 during the three months ended September 30, 2022, from $184,869 during the three months ended September 30, 2021. Lease operating expenses increased 12% to $496,245 during the nine months ended September 30, 2022, from $443,614 during the nine months ended September 30, 2021.
The change in lease operating expenses was principally attributable to increased severance taxes associated with the increase in revenues, non-recurring water disposal and operating costs incurred on the Lou Brock well during.
Depreciation and Depletion Expense. Depreciation and depletion expense was $50,755 and $21,045 for the three months ended September 30, 2022 and 2021, respectively, and $160,495 and $79,680 for the nine months ended September, 30, 2022 and 2021, respectively. The change in depreciation and depletion was due to an increase in the depletable base during 2022.
General and Administrative Expenses (excluding stock-based compensation). General and administrative expense increased by 85% to $498,876 during the three months ended September 30, 2022 from $269,264 during the three months ended September 30, 2021, and increased by 14% to $1,016,867 during the nine months ended September 30, 2022 from $894,243 during the nine months ended September 30, 2021. The increase in general and administrative expense for the three and nine-month periods was primarily attributable to payment of a bonus to our CEO in the amount of $200,000 during the 2022 three-month period. Future general and administrative expenses are expected to increase to reflect an increase in the base salary of our CEO from $120,000 to $180,000 annually.
Stock-Based Compensation. Stock-based compensation decreased to $95,205 during the three months ended September 30, 2022 from $167,040 during the three months ended September 30, 2021, and increased 13% to $206,210 during the nine months ended September 30, 2022 from $182,149 during the nine months ended September 30, 2021. The change was attributable to the amortization of stock options granted during 2022 and 2021.
Other Income (Expense) . Other income/expense, net, totaled $10,788 of income during the three months ended September 30, 2022, compared to $968 of income during the three months ended September 30, 2021, and totaled $13,277 of income during the nine months ended September 30, 2022, compared to $12,129 of income during the nine months ended September 30, 2021. Other income for all periods consisted of interest earned on cash balances.
Financial Condition
Liquidity and Capital Resources. At September 30, 2022, we had a cash balance of $3,896,362 and working capital of $4,072,422, compared to a cash balance of $4,894,577 and working capital of $5,052,685 at December 31, 2021.
Cash Flows. Operating activities used $202,900 during the nine months ended September 30, 2022, compared to $648,816 used during the nine months ended September 30, 2021. The change in operating cash flow was primarily attributable to increased revenues and a resulting decrease in net loss during the nine-months ended September 30, 2022 .
Investing activities used $795,315 during the nine months ended September 30, 2022, compared to $221,451 used during the nine months ended September 30, 2021. The change in funds used by investing activities is principally attributable to higher investments in Hupecol Meta LLC and investments in plugging and abandonment of our Lou Brock well .
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Financing activities provided $0 during the nine months ended September 30, 2022, compared to $4,570,888 provided during the nine months ended September 30, 2021. Cash provided by financing activities during the nine months ended September 30, 2021 was attributable to funds received from two at-the-market common stock offerings ($6,575,889), partially offset by cash used to pay dividends on preferred stock ($37,201) and to redeem all remaining outstanding shares of preferred stock ($1,967,800)
Long-Term Liabilities . At September 30, 2022, we had long-term liabilities of $235,538, compared to $279,953 at December 31, 2021. Long-term liabilities at September 30, 2022 and December 31, 2021, consisted of a reserve for plugging costs and the long-term lease liability.
Capital and Exploration Expenditures and Commitments. Our principal capital and exploration expenditures relate to ongoing efforts to acquire, drill and complete prospects, in particular our Permian Basin acreage and our CPO-11 Colombian acreage. Hupecol Meta drilled two vertical wells in the Venus Exploration Area on the CPO-11 block, and commenced drilling on a non-Venus CPO-11 well, during the nine months ended September 30, 2022. The actual timing and number of well operations undertaken during 2022, in Colombia and the Permian Basin, will be principally controlled by the operators of our acreage, based on a number of factors, including but not limited to availability of financing, performance of existing wells on the subject acreage, energy prices and industry condition and outlook, costs of drilling and completion services and equipment, ability to secure necessary permits and other factors beyond our control or that of our operators.
In addition to possible operations on our existing acreage holdings, we continue to evaluate drilling prospects in which may acquire an interest and participate.
During the nine months ended September 30, 2022, we invested $795,315 for the acquisition and development of oil and gas properties, consisting of drilling and development operations in the U.S ($14,160), principally relating to final expenses related to the plugging and abandonment of the Lou Brock well, and investments in Hupecol Meta ($781,155), including $100,000 paid to increase our ownership interest in Hupecol Meta. The $14,160 invested in U.S. operations was capitalized to oil and gas properties subject to amortization. The $781,155 invested in Hupecol Meta was capitalized to our investment in Hupecol Meta.
As our allocable share of well costs will vary depending on the timing and number of wells drilled as well as our working interest in each such well and the level of participation of other interest owners, we have not established a drilling budget but will budget on a well-by-well basis as our operators propose wells.
We believe that we have the ability, through our cash on-hand, to fund operations and our cost for all planned wells expected to be drilled during the twelve months following this report.
In the event that we pursue additional acreage acquisitions or expand our drilling plans, we may be required to secure additional funding beyond our resources on hand. While we may, among other efforts, seek additional funding from “at-the-market” sales of common stock, and private sales of equity and debt securities, we presently have less than 1 million authorized shares of common stock available for issuance to support equity capital raises and we have no commitments to provide additional funding, and there can be no assurance that we can secure the necessary capital to fund our share of drilling, acquisition or other costs on acceptable terms or at all. If, for any reason, we are unable to fund our share of drilling and completion costs and fail to satisfy commitments relative to our interest in our acreage, we may be subject to penalties or to the possible loss of some of our rights and interests in prospects with respect to which we fail to satisfy funding commitments and we may be required to curtail operations and forego opportunities.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or guarantees of third party obligations at September 30, 2022.
Inflation
We believe that inflation has not had a significant impact on operations since inception.
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| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Commodity Price Risk
The price we receive for our oil and gas production heavily influences our revenue, profitability, access to capital and future rate of growth. Crude oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and gas have been volatile, and these markets will likely continue to be volatile in the future. The price we receive for production depends on numerous factors beyond our control.
We have not historically entered into any hedges or other transactions designed to manage, or limit, exposure to oil and gas price volatility.
| ITEM 4 | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of September 30, 2022 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2022. Such conclusion reflects the 2013 departure of our chief financial officer and assumption of duties of principal financial officer by our chief executive officer and the resulting lack of segregation of duties. Until we are able to remedy these material weaknesses, we are relying on third party consultants and our SEC consultant to assist with financial reporting.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
| ITEM 6 | EXHIBITS |
|
Exhibit
Number |
Description | ||
| 31.1 | Certification of CEO and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32.1 | Certification of CEO and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 101.INS | Inline XBRL Instance Document | ||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.
| HOUSTON AMERICAN ENERGY CORP. | ||
| Date: November 14, 2022 | ||
| By: | /s/ John Terwilliger | |
| John Terwilliger | ||
| CEO and President (Principal Executive Officer and Principal Financial Officer) | ||
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