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, 2018.
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 approximately $239,620
for the three months ended March 31, 2019. However, during 2018, the Company raised, net of offering costs, approximately
$747,000 in its ATM offering, and substantially reduced its general and administrative costs, increased revenues, and generated
approximately $361,000 from its operating activities, thereby mitigating going concern considerations. Further, as of March
31, 2019, the Company had a cash balance of approximately $446,000 and working capital of approximately $566,000.
The
Company’s principal capital and exploration expenditures during 2019 are expected to relate to drilling an additional well
on its Yoakum County lease and, possibly, on its Reeves County acreage. The operator in Yoakum County has committed to drill a
second well during 2019 at an approximate cost to the Company of $325,000. The Company believes that it has the ability to fund
its cost for such a well from cash on hand. The new operator of the Company’s Reeves County wells has not yet communicated
definitive plans to drill an additional well on that acreage in 2019. If they proceed with drilling plan for an additional well,
the Company may require additional capital to participate in the drilling of that well. The Company believes that it has sufficient
cash on hand to fund its expected drilling operations and its operations for the twelve months following the issuance of these
financial statements.
In
the event that the Company requires additional capital to fund its share of costs for drilling wells during 2019, the
Company expects that it would seek additional capital from one or more sources of additional sales of shares in its 2019
ATM Offering and private sales of equity and debt securities. However, 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.
Reclassifications
Certain
amounts for prior periods have been reclassified to conform to the current presentation.
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 $0 in excess of the FDIC’s current insured limit on interest bearing
accounts of $250,000 as of March 31, 2019. The Company also had cash deposits of $11,195 in Colombian banks at March 31, 2019
that are not insured by the FDIC. The Company has not experienced any losses on its deposits of cash and cash equivalents.
Loss
per Share
Basic
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.
For
the three months ended March 31, 2019 and 2018, the following convertible preferred stock and warrants and options to purchase
shares of common stock were excluded from the computation of diluted net loss per share, as the inclusion of such shares would
be anti-dilutive:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Series A Convertible Preferred Stock
|
|
|
5,425,000
|
|
|
|
5,625,000
|
|
Series B Convertible Preferred Stock
|
|
|
2,320,556
|
|
|
|
2,487,222
|
|
Stock warrants
|
|
|
50,000
|
|
|
|
650,000
|
|
Stock options
|
|
|
4,978,832
|
|
|
|
7,512,165
|
|
Total
|
|
|
12,774,388
|
|
|
|
16,274,387
|
|
Recently
Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842) (“ASU 2016-02”). Under this new guidance, lessees will be required to recognize assets and
liabilities on the balance sheet for the rights and obligations created by all leases with terms of greater than twelve months.
The guidance requires qualitative disclosures along with certain specific quantitative disclosures for both lessees and lessors.
The ASU and its related amendments are effective for fiscal years beginning after December 15, 2018, with early adoption permitted,
and are effective for interim periods in the year of adoption. The Company has adopted the new lease standard using the new
transition option issued under the amendments in ASU 2018-11, Leases, which allowed the Company to continue to apply the legacy
guidance in Accounting Standards Codification (ASC) 840, Leases, in the comparative periods presented in the year of adoption.
The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which
among other things, allowed the Company to carry forward the historical lease classification. The Company evaluated the impact
of this new guidance and reviewed lease or possible lease contracts and evaluated contract related processes. The Company
adopted ASU 2016-02 effective January 1, 2019 and recorded an initial right-of-use asset and liability for
its operating leases of approximately $357,985.
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 March 31, 2019 through the financial statement issuance date for subsequent event
disclosure consideration.
NOTE
2 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Change
in Accounting Policy
The
Company adopted ASU 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
, on January 1, 2018, using
the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Refer to Note 1 –
Basis of Presentation and Significant Accounting Policies for additional information.
Exploration
and Production
There
were no significant changes to the timing or valuation of revenue recognized for sales of production from exploration and production
activities.
Disaggregation
of Revenue from Contracts with Customers
The following table disaggregates revenue
by significant product type for the three-month periods ended March 31, 2019 and 2018:
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Oil
sales
|
|
$
|
173,777
|
|
|
$
|
485,532
|
|
Natural
gas sales
|
|
|
27,788
|
|
|
|
268,625
|
|
Natural
gas liquids sales
|
|
|
49,155
|
|
|
|
—
|
|
Total
revenue from customers
|
|
$
|
250,720
|
|
|
$
|
754,157
|
|
There
were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of March
31, 2018 or 2019.
NOTE
3 – OIL AND GAS PROPERTIES
During the three months ended March 31,
2019, the Company invested $49,651, net, for the acquisition and development of oil and gas properties, consisting of cost
of development of U.S. properties of $47,258, net, principally attributable to acreage in Reeves County, Texas. Of the
amount invested, the Company capitalized $2,393 to oil and gas properties not subject to amortization and capitalized $47,258
to oil and gas properties subject to amortization.
Geographical
Information
The
Company currently has properties in two geographical areas, the United States and Colombia. Revenues for the three months ended
March 31, 2019 and long lived assets (net of depletion, amortization, and impairments) as of March 31, 2019 attributable to each
geographical area are presented below:
|
|
Three Months Ended
March 31, 2019
|
|
|
As of March 31, 2019
|
|
|
|
Revenues
|
|
|
Long Lived Assets, Net
|
|
United States
|
|
$
|
250,720
|
|
|
$
|
4,495,038
|
|
Colombia
|
|
|
—
|
|
|
|
2,323,563
|
|
Total
|
|
$
|
250,720
|
|
|
$
|
6,818,601
|
|
NOTE
4 – STOCK-BASED COMPENSATION EXPENSE
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 6,000,000 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” and, together
with the 2008 Plan, the “Plans”). The terms of the 2017 Plan, allow for the issuance of up to 5,000,000 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
A
summary of stock option activity and related information for the three months ended March 31, 2019 is presented below:
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2019
|
|
|
4,978,832
|
|
|
$
|
0.77
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
4,978,832
|
|
|
$
|
0.77
|
|
|
$
|
4,750
|
|
Exercisable at March 31, 2019
|
|
|
4,645,499
|
|
|
$
|
0.81
|
|
|
$
|
4,750
|
|
During the three months ended March 31, 2019,
the Company recognized $12,449 of stock-based compensation expense attributable to the amortization of stock options. As
of March 31, 2019, total unrecognized stock-based compensation expense related to non-vested stock options was approximately
$59,000. The unrecognized expense is expected to be recognized over a weighted average period of 1.97 years and the weighted
average remaining contractual term of the outstanding options and exercisable options at March 31, 2019 is 5.99 years and
5.78 years, respectively.
Shares
available for issuance under the 2008 Plan as of March 31, 2019 totaled 0. Shares available for issuance under the 2017 Plan,
as of March 31, 2019, totaled 4,291,667.
Stock-Based
Compensation Expense
The
following table reflects total stock-based compensation recorded by the Company for the three months ended March 31, 2019 and
2018:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in general and administrative expense
|
|
$
|
14,219
|
|
|
$
|
25,349
|
|
Earnings per share effect of share-based compensation expense – basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
NOTE
5 – CAPITAL STOCK
Series
A Convertible Preferred Stock
During
the three months ended March 31, 2019, the Company paid dividends on Series A Convertible Preferred Stock in the amount of $32,550.
At March 31, 2019, there were 1,085 shares of Series A Convertible Preferred Stock issued and outstanding.
Series
B Convertible Preferred Stock
During
the three months ended March 31, 2019, the Company paid dividends on Series B Convertible Preferred Stock in the amount of $25,050.
At March 31, 2019, there were 835 shares of Series B Convertible Preferred Stock issued and outstanding.
Warrants
A
summary of warrant activity and related information for 2019 is presented below:
|
|
Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2019
|
|
|
50,000
|
|
|
$
|
0.55
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding
at March 31, 2019
|
|
|
50,000
|
|
|
$
|
0.55
|
|
|
$
|
—
|
|
Exercisable
at March 31, 2019
|
|
|
25,000
|
|
|
$
|
0.55
|
|
|
$
|
—
|
|
During
the three months ended March 31, 2019, the Company recognized $1,770 of stock-based compensation expense attributable to the amortization
of warrants. As of March 31, 2019, total unrecognized stock-based compensation expense related to non-vested stock warrants was
approximately $8,000. The unrecognized expense is expected to be recognized over a weighted average period of 2.76 years and the
weighted average remaining contractual term of the outstanding warrants and exercisable warrants at March 31, 2019 is 2.76 years
and 2.76 years, respectively.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
Lease
Commitment
The Company leases office facilities under
an operating lease agreement that expires October 31, 2022. The implementation of ASU 842 resulted in a right of use asset
of $339,795 and related lease liability of $381,820 as of March 31, 2019. During the three months ended March
31, 2019, the operating cash outflows related to operating lease liabilities of $20,130 and the expense for the right of use asset
for operating leases was $18,190. As of March 31, 2019, the Company’s operating lease had a weighted-average remaining term
of 3.5 years and a weighted average discount rate of 12%. As of March 31, 2019, the lease agreement requires future payments
as follows:
Year
|
|
Amount
|
|
2019
|
|
$
|
96,360
|
|
2020
|
|
|
130,717
|
|
2021
|
|
|
133,087
|
|
2022
|
|
|
112,551
|
|
2023
|
|
|
—
|
|
Total future lease payments
|
|
|
471,910
|
|
Less: imputed interest
|
|
|
(90,090
|
)
|
Present value of future operating lease payments
|
|
|
381,820
|
|
Less: current portion of operating lease liabilities
|
|
|
(87,812
|
)
|
Operating lease liabilities, net of current portion
|
|
$
|
294,008
|
|
Right of use assets
|
|
$
|
339,795
|
|
Total base rental expense was $32,175,
and $30,150 for the three months ended March 31, 2019 and March 31, 2018, respectively. The Company does not have any capital
leases or other operating lease commitments.
NOTE
7 – SUBSEQUENT EVENTS
2019
At-the-Market Offering
In
May 2019, the Company entered into an At-the-Market Issuance Sales Agreement (the “Sales Agreement”) with WestPark
Capital pursuant to which the Company may sell, at its option, up to an aggregate of $5.2 million in shares of common stock through
WestPark Capital, as sales agent. Sales of shares under the Sales Agreement (the “2019 ATM Offering”) will be made,
in accordance with one or more placement notices delivered by the Company to WestPark Capital, which notices shall set parameters
under which shares may be sold. The 2019 ATM Offering was made pursuant to a shelf registration statement by methods deemed to
be “at the market,” as defined in Rule 415 promulgated under the Securities Act of 1933. The Company will pay WestPark
a commission in cash equal to 3% of the gross proceeds from the sale of shares in the 2019 ATM Offering. Additionally, the Company
reimbursed WestPark Capital for $18,000 of expenses incurred in connection with the 2019 ATM Offering.
In
May 2019, through the date hereof, the Company sold an aggregate of 100,000 shares in the 2019 ATM Offering and received proceeds,
net of commissions, of $24,356.