ITEM 2
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking
Information
This
Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the six months ended June 30, 2020,
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, 2019.
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, 2019.
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, 2019.
As of, and for the six months ended, June 30, 2020, 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 June 30, 2020:
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June 30, 2020
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Acquisition costs
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$
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279,177
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Development and evaluation costs
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2,199,279
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Total
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$
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2,478,456
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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
COVID-19
In
early 2020, global health care systems and economies began to experience strain from the spread of the COVID-19 Coronavirus. As
the virus spread, global economic activity began to slow and future economic activity was forecast to slow with a resulting forecast
of a decline in oil and gas demand. In response, OPEC initiated discussions with Russia to lower production to support energy
prices. By March 2020, with OPEC and Russia unable to agree on cuts, crude oil prices declined to less than $25 per barrel. Despite
a subsequent agreement among major oil producers to cut global oil and gas production and a partial recovery in prices, energy
prices remain at depressed levels.
The
decline in economic activity and energy demand accompanying the COVID-19 pandemic adversely affected our revenues during the three
and six months ended June 30, 2020, contributed to an impairment charge during the six months ended June 30, 2020 and, if price
declines persist, will adversely affect the economics of our existing wells and planned future wells, possibly resulting in further
impairment charges to existing properties and delaying or abandoning planned drilling operations as uneconomical.
In
response to the COVID-19 pandemic, our staff began working remotely and many of our key vendors, service suppliers and partners
have similarly begun to work remotely. As a result of such remote work arrangements, we anticipate that certain operational, reporting,
accounting and other processes will slow which may result in longer time to execute critical business functions, higher operating
costs and uncertainties regarding the quality of services and supplies, any of which could substantially adversely affect our
operating results for as long as the current pandemic persists and potentially for some time after the pandemic subsides.
Drilling
Activity
During
the six months ended June 30, 2020, (1) we drilled the Frost #2H well in Yoakum County, Texas, and (2) Hupecol Meta drilled the
Montuno-1 well on the CPO-11 block in the Llanos Basin in Colombia. The Frost #2H well reached a total depth of approximately
10,230 feet, including an approximately 5,116-foot horizontal leg. Hydraulic fracturing and completion of the well were pending
at June 30, 2020. The Montuno-1 well was a dry hole.
No
drilling operations were ongoing at June 30, 2020. Fracturing operations on the Frost #2H well are scheduled to commence during
the third quarter of 2020 and initial drilling operations on our San Andres acreage is expected to commence during the third quarter
of 2020.
During
the six months ended June 30, 2020, our capital investment expenditures totaled $576,062, principally relating to Yoakum County,
Texas drilling operations ($533,271) and investments in our cost method investment in Hupecol Meta ($42,791).
Oil
and Gas Properties – Hockley County
In
July 2020, we acquired, for $33,228, a 20% working interest in a 466-acre (gross) block within the 20,367-acre (gross) area of
mutual interest associated with our existing Northern Shelf of the Permian Basin acreage in Hockley County, Texas.
Reverse
Stock Split
In
July 2020, we amended our Certificate of Incorporation to effect a 1-for-12.5 reverse split (the “Reverse Split”)
of our common stock. All references to shares of common stock and per share data for all periods in this Management Discussion
and Analysis of Financial Condition and Results of Operations have been adjusted to reflect the Reverse Split on a retroactive
basis.
Financing
Activities
2019
At-the-Market Offering. In May 2019, we entered into an At-the-Market Issuance Sales Agreement (the “Sales Agreement”)
with WestPark Capital pursuant to which we may sell, at our 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”) were
made, in accordance with one or more placement notices delivered to WestPark Capital, which notices 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. We paid WestPark a commission in cash
equal to 3% of the gross proceeds from the sale of shares in the 2019 ATM Offering. Additionally, we reimbursed WestPark Capital
for $18,000 of expenses incurred in connection with the 2019 ATM Offering. During the six months ended June 30, 2020, we (1) sold
an aggregate of 1,684,760 shares in the 2019 ATM Offering and received proceeds,
net of commissions, of $4,375,594, and (2) collected $58,575 of subscriptions receivable
attributable to shares sold under the 2019 ATM Offering during 2019.
Bridge
Loan Financing. In September 2019, we issued promissory notes (the “Bridge Loan Notes”) with a total principal
amount of $621,052, an original issue discount of 5%, warrants (the “Bridge Loan Warrants”) to purchase 1,180,000
shares of common stock, and a term of 120 days. Net proceeds received for the Bridge Loan Notes and Warrants totaled $590,000.
The
Bridge Loan Notes were unsecured obligations bearing interest at 12.0% per annum and payable interest only on the last day of
each calendar month with any unpaid principal and accrued interest being payable in full on January 16, 2020.
The
Bridge Loan Notes were subject to mandatory prepayment from and to the extent of (i) 100% of net proceeds we receive from any
sales, for cash, of equity or debt securities (other than Bridge Loan Notes), (ii) 100% of net proceeds we receive from the sale
of assets (other than sales in the ordinary course of business); and (iii) 75% of net proceeds we receive from the sale of oil
and gas produced from our Hockley County, Texas properties. Additionally, we had the option to prepay the Bridge Loan Notes, at
our sole election, without penalty. The holders of the Bridge Loan Notes waived mandatory prepayment at the end of each month
during 2019.
The
Bridge Loan Notes were recorded net of debt discount that consists of (i) $31,052 of original issue discount on the Bridge Loan
Notes and (ii) the relative fair value of the Bridge Loan Warrants of $144,948. The debt discount is amortized over the life of
the Bridge Loan Notes as additional interest expense.
During
the three months ended March 31, 2020, interest expense paid in cash totaled $3,350. The Bridge Loan Notes were repaid in full
in January 2020.
The
holders of the Bridge Loan Notes were our Chief Executive Officer and a 10% shareholder.
Results
of Operations
Oil
and Gas Revenues. Total oil and gas revenues decreased 63% to $77,928 in the three months ended June 30, 2020,
compared to $209,193 in the three months ended June 30, 2019. Oil and gas revenues decreased 51% to $225,064 in
the six months ended June 30, 2020, compared to $459,913 in the six months ended June 30, 2019. The decrease in revenue was due
to decreased production volumes and an adverse change in commodity pricing, including 32% and 8% decreases in crude
oil prices and natural gas prices, respectively, realized during the three-month period and 18% and 71% decreases
in crude oil prices and natural gas prices, respectively, realized during the six-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 six months ended June 30, 2020 and 2019:
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Six Months Ended
June 30
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Three Months Ended
June 30,
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2020
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2019
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2020
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2019
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Gross producing wells
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4
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5
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4
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5
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Net producing wells
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0.49
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0.52
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0.49
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0.52
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Net oil production (Bbl)
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4,502
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5,621
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1,686
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3,478
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Net gas production (Mcf)
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39,526
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49,155
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14,037
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27,278
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Average sales price – oil (per barrel)
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$
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38.19
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50.76
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$
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33.87
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$
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47.14
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Average sales price – natural gas (per Mcf)
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$
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0.57
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3.08
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$
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0.90
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$
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3.08
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The
decrease in gross/net producing wells resulted from cessation of operation of two uneconomical wells in Louisiana during 2019,
partially offset by the commencement of operations of a well in Yoakum County, Texas. The decrease in production was principally
attributable to natural decline in production from our Reeves County, Texas wells, partially offset by production from our Yoakum
County well commencing in 2019.
The
change in average sales prices realized reflects the steep decline in global commodity prices associated with a decline in energy
demand associated with the COVID-19 pandemic.
All
oil and gas sales revenues are attributable to U.S. operations.
Lease
Operating Expenses. Lease operating expenses decreased 49% to $98,916 during the three months ended June 30, 2020 from
$194,866 during the three months ended June 30, 2019. Lease operating expenses decreased 48% to $180,150 during
the six months ended June 30, 2020 from $344,096 during the six months ended June 30, 2019.
The
decrease in lease operating expenses was principally attributable to a reduction in wells operated, lower variable costs due to
a natural decline in production and reduced severance taxes due to lower sales.
All
lease operating expenses are attributable to U.S. operations.
Depreciation
and Depletion Expense. Depreciation and depletion expense was $51,323 and $91,617 for the three months ended June 20, 2020
and 2019, respectively, and $142,145 and $184,146 for the six months ended June 30, 2020 and 2019, respectively. The change in
depreciation and depletion was due to the decline in production volumes.
Impairment
of Oil and Gas Properties. Impairment of oil and gas properties was $0 for the three months ended June 30, 2020 and
2019, and $429,116 and $0 for the six months ended June 30, 2020 and 2019, respectively. The change in impairment of
oil and gas properties was due to a full cost ceiling test write-down in the current period primarily relating to a decline in
energy prices. Depending on the timing of a recovery in energy prices, we may experience further impairments in future periods.
General
and Administrative Expenses (excluding stock-based compensation). General and administrative expense decreased by 43%
to $230,220 during the three months ended June 30, 2020 from $405,650 during the three months ended June 30, 2019 and decreased
by 17% to $546,840 during the six months ended June 30, 2020 from $655,601 during the six months ended June 30,
2019. The decrease in general and administrative expense for the three and six-month periods was primarily attributable to decreased
insurance expenses, partially offset by increased exchange listing fees and professional fees for the six-month period.
Stock-Based
Compensation. Stock-based compensation increased by 44% to $39,323 during the three months ended June 30, 2020 from $27,325
during the three months ended June 30, 2019 and increased 133% to $96,765 during the six months ended June 30, 2020 from
$41,544 during the six months ended June 30, 2019. The increase was attributable to the amortization of stock options granted
during 2019.
Other
Income (Expense). Other income/expense, net, totaled $5,352 of income during the three months ended June 30, 2020, compared
to $520 of income during the three months ended June 30, 2019, and totaled $17,540 of expense during the six months ended June
30, 2020, compared to $1,887 of income during the six months ended June 30, 2019. Other income for all periods consisted on interest
earned on cash balances which, during the six months ended June 30, 2020, was offset by interest expense relating to Bridge Loan
Notes. Interest income during the 2020 periods increased as a result of higher cash balances. The Bridge Loan Notes were repaid
in full in January 2020 and no interest expense will be paid relating to those notes after the quarter ended March 31, 2020.
Financial
Condition
Liquidity
and Capital Resources. At June 30, 2020, we had a cash balance of $2,664,331 and working capital of $2,499,466, compared to
a cash balance of $97,915 and a working capital deficit of $748,426 at December 31, 2019.
Cash
Flows. Operating activities used cash of $567,439 during the six months ended June 30, 2020, compared to $399,852 used during
the six months ended June 30, 2019. The change in operating cash flow was primarily attributable to the increased loss during
2020 which reflected the decline in oil and gas revenues.
Investing
activities used cash of $576,062 during the six months ended June 30, 2020, compared to $51,967 used during the six months ended
June 30, 2019. Cash used in investing activities were primarily attributed to drilling operations on the Frost #2H well during
the 2020 period and investments in infrastructure/security upgrades in Reeves County during the 2019 period.
Financing
activities provided cash of $3,709,917 during the six months ended June 30, 2020, compared to $59,130 used during the six
months ended June 30, 2019. Cash provided by financing activities during the six months ended June 30, 2020 was attributable to
funds received from the sale of common stock ($4,434,169, including $58,575 of subscriptions receivable relating to shares sold
at year-end 2019) under our 2019 ATM Offering, partially offset by repayment of our Bride Loan Notes ($621,052) and payment of
dividends on our preferred stock ($103,200).
Long-Term
Liabilities. At June 30, 2020, we had long-term liabilities of $233,820, compared to $263,596 at December 31, 2019. Long-term
liabilities at June 30, 2020 and December 31, 2019, 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 newly acquired Colombian acreage. Given
the current economic environment and the current COVID-19 pandemic, all planned additional acquisition, drilling and development
operations were deferred through June 30, 2020 pending improved conditions. We are selectively resuming acquisition, drilling
and development operations during the third quarter of 2020 with the acquisition in July 2020, for $33,228, of a 20% working interest
in additional acreage in Hockley County, the scheduled fracking operations on our Frost #2H well, and the planned commencement
of drilling operations on our San Andres acreage. The actual timing and number of well operations undertaken during 2020 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 and other factors beyond our control or that of our operators.
During
the six months ended June 30, 2020, we invested $533,271 for the acquisition and development of oil and gas properties, consisting
of drilling and development operations in the U.S. Of the amount invested, we capitalized none to oil and gas properties not subject
to amortization and capitalized $533,271 to oil and gas properties subject to amortization. During the period, we also invested
$42,791 in Hupecol Meta relating to drilling operations in Colombia.
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.
With
our receipt, during 2020, of $4.4 million from sales of common stock under our 2019 ATM Offering, 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 2020.
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 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. Unless and until the depressing economic effects of the coronavirus recede, we
expect that new capital to fund projects will be difficult, if not impossible, to secure.
Off-Balance
Sheet Arrangements
We
had no off-balance sheet arrangements or guarantees of third party obligations at June 30, 2020.
Inflation
We
believe that inflation has not had a significant impact on operations since inception.