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 three months ended March 31, 2021, 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, 2020.
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, 2020.
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, 2020. As of, and for the three months
ended, March 31, 2021, 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 March 31, 2021:
|
|
|
March
31, 2021
|
|
Acquisition
costs
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$
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1,647,196
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Development
and evaluation costs
|
|
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2,334,609
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Total
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$
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3,981,805
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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
Leasing
Activity
—
Colombia. In 2019, we acquired a 2% interest in Hupecol Meta, LLC (“Hupecol Meta”) (the “Hupecol Meta Acquisition”).
During
the three months ended March 31, 2021, we agreed to contribute an additional $99,716 to Hupecol Meta, increasing our ownership interest
to 7.85%.
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 a result of Hupecol Meta’s 2021 purchase of additional
interest in the CPO-11 block and our agreement to increase our ownership interest in Hupecol Meta, through our membership interest in
Hupecol Meta, we hold a 6.99% interest in the Venus Exploration Area and a 3.495% interest in the remainder of the block.
Drilling
Activity
During
the three months ended March 31, 2021, no drilling activities were conducted.
During
the quarter ended March 31, 2021, our capital investment expenditures totaled $177,028, principally relating to our Lou Brock operations
($62,995) and investments in our cost method investment in Hupecol Meta ($114,036, including $99,716 to increase our ownership interest
to 7.85%).
Financing
Activities
—
2021 At-the-Market Offering. In January 2021, we entered into a Sales Agreement with Univest Securities, LLC (“Univest”)
pursuant to which we could sell, at our option, up to an aggregate of $4,768,428 in shares of common stock through Univest, as sales
agent. Sales of shares under the Sales Agreement (the “2021 ATM Offering”) were made, in accordance with placement notices
delivered to Univest, which notices set parameters under which shares could be sold. The 2021 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 Univest a commission in cash equal to 3% of the gross proceeds from the sale of shares in the 2021 ATM Offering. Additionally,
we reimbursed Univest for $18,000 of expenses incurred in connection with the 2021 ATM Offering.
During
January 2021, we sold an aggregate of 2,108,520 shares in the 2021 ATM Offering and received proceeds, net of commissions, of $4.6 million.
—
2021 Supplemental At-the-Market Offering. In February 2021, we entered into a second Sales Agreement with Univest pursuant to
which we could sell, at our option, up to an aggregate of $2,030,000 in shares of common stock through Univest, as sales agent. Sales
of shares under the Sales Agreement (the “2021 Supplemental ATM Offering”) were made, in accordance with placement notices
delivered to Univest, which notices set parameters under which shares could be sold. The 2021 Supplemental 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 Univest a commission in cash equal to 3% of the gross proceeds from the sale of shares in the 2021 Supplemental
ATM Offering. Additionally, we reimbursed Univest for $18,000 of expenses incurred in connection with the 2021 Supplemental ATM Offering.
During
February 2021, we sold an aggregate of 813,100 shares in the 2021 Supplemental ATM Offering and received proceeds, net of commissions,
of $2.0 million.
—
Conversion and Redemption of Preferred Stock. In February 2021, 60 shares of our 12% Series A Convertible Preferred Stock were
converted into 24,000 shares of our common stock, and we redeemed all remaining outstanding shares of our 12% Series A Convertible Preferred
Stock and 12% Series B Convertible Preferred Stock for $1.97 million plus accrued dividends totaling $32,700.
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 decline in oil and
gas demand and prices. Such decline in prices adversely affected our revenues and profitability in 2020 and, if price declines persist,
will adversely affect the economics of our existing wells and planned future wells, possibly resulting in impairment charges to existing
properties and delaying or abandoning planned drilling operations as uneconomical.
In
response to the COVID-19 pandemic, our staff has begun 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.
Results
of Operations
Oil
and Gas Revenues. Total oil and gas revenues increased 123% to $328,488 in the three months ended March 31, 2021, compared
to $147,136 in the three months ended March 31, 2020. The increase in revenue was due to increases in average sales price of oil
(up 28%) and natural gas (up 286%), and an increase in oil production (up 56%).
The
following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices
for the quarters ended March 31, 2021 and 2020:
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Three
Months Ended March 31,
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2021
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2020
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Gross
producing wells
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4
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4
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Net
producing wells
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0.68
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|
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0.49
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Net
oil production (Bbl)
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4,394
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2,816
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Net
gas production (Mcf)
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14,291
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25,489
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Average
sales price – oil (per barrel)
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$
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52.08
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$
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40.79
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Average
sales price – natural gas (per Mcf)
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$
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4.90
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$
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1.27
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The
gross/net producing wells reflects cessation of operation, and ultimate sale, of two uneconomical wells in Louisiana, offset by the
commencement of operations of two wells in Yoakum County, Texas. The change in production volumes was primarily
attributable to the increase in production at our Frost #1 and Frost #2 wells, partially offset by the shut-in of our
O’Brien #3-H well for repair and natural decline in production from our other Reeves County well.
The
change in average sales prices realized reflects a spike in natural gas prices attributable to increased demand accompanying the February
freezing weather in Texas and a broad recovery in energy prices following the steep decline in global commodity prices in early 2020
associated with a decline in energy demand associated with the COVID-19 pandemic.
Oil
and gas sales revenues by region were as follows:
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Colombia
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U.S.
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Total
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2021 First Quarter
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Oil sales
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$
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—
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$
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228,843
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$
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228,843
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Gas sales
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$
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—
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$
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70,086
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$
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70,086
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NGL sales
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$
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—
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$
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29,559
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$
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29,559
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2020 First Quarter
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|
|
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|
|
|
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Oil sales
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$
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—
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$
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114,851
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$
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114,851
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Gas sales
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$
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—
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$
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10,058
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$
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10,058
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NGL ales
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$
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$
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22,227
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$
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22,227
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Lease
Operating Expenses. Lease operating expenses increased 105% to $166,214 during the three months ended March 31, 2021 from $81,234
during the three months ended March 31, 2020. Lease operating expenses, by region were as follows:
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Colombia
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U.S.
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Total
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2021 First Quarter
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$
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—
|
|
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$
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166,214
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|
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$
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166,214
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2020 First Quarter
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$
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—
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$
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81,234
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|
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$
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81,234
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The
change in lease operating expenses was principally attributable to an increase in severance tax resulting from higher sales.
Depreciation
and Depletion Expense. Depreciation and depletion expense was $32,365 and $90,822 for the three months ended March 31, 2021 and 2020,
respectively. The change in depreciation and depletion was due to a decrease in gas production and prior impairment charges.
Impairment
of Oil and Gas Properties. Impairment of oil and gas properties was none and $429,116 for the three months ended March 31, 2021 and
2020, respectively. The change in impairment of oil and gas properties was due to a full cost ceiling test write-down in the 2020 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 increased by 24% to $393,651
during the three months ended March 31, 2021 from $316,620 during the three months ended March 31, 2020. The change in general and administrative
expense was primarily attributable to professional fees related to the two ATM offerings and redemption of preferred stock.
Stock-Based
Compensation. Stock-based compensation increased to $15,109 during the three months ended March 31, 2021 from $57,442 during the
three months ended March 31, 2020. The change was attributable to the full amortization of the fair value of stock options during 2020.
Other
Income (Expense). Other income/expense, net, totaled $10,374 of income during the three months ended March 31, 2021, compared to
$22,892 of expense during the three months ended March 31, 2020. Other income during the three months ended March 31, 2021 consisted
of interest income and income arising from the recovery of escrowed funds previously written-off. Other expense during the three months
ended March 31, 2020 consisted of $3,925 of interest income, offset by interest expense of $26,817 relating to the bridge loan notes,
consisting of $3,350 interest paid in cash and $23,467 of interest attributable to amortization of the value of warrants issued in connection
with the bridge loan notes.
Financial
Condition
Liquidity
and Capital Resources. At March 31, 2021, we had a cash balance of $5,271,226 and working capital of $5,312,505, compared
to a cash balance of $1,242,560 and working capital of $1,142,513 at December 31, 2020.
Cash
Flows. Operating activities used cash of $365,191 during the three months ended March 31, 2021, compared to $378,402 used
during the three months ended March 31, 2020. The change in operating cash flow was attributable to a lower loss incurred during
the 2021 period and a decrease in cash used attributable to changes in operating assets and liabilities, offset by higher non-cash
expenses reflected in the 2020 period.
Investing
activities used $177,031 during the three months ended March 31, 2021, compared to $552,681 during the three months ended March 31, 2020.
The change in funds used by investing activities is principally attributable to reduced investing activities in 2021.
Financing
activities provided $4,570,888 during the three months ended March 31, 2021, compared to $3,755,517 provided during the three months
ended March 31, 2020. Cash provided by financing activities during the three months ended March 31, 2021 was attributable to funds received
from two ATM 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). Cash provided by financing activities during the three months ended March 31, 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 ($57,600).
Long-Term
Liabilities. At March 31, 2021, we had long-term liabilities of $145,197, compared to $171,791 at December 31, 2020. Long-term liabilities
at March 31, 2021 and December 31, 2020, 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. Based
on discussions with our Colombian operator, we anticipate that drilling operations on our CPO-11 block in Colombia will commence in mid- to late-2021. The actual timing and number of well
operations undertaken during 2021, 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 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 three months ended March 31, 2021, we invested $177,031 for the acquisition and development of oil and gas properties, consisting
of drilling and development operations in the U.S ($62,995), principally relating to Lou Brock acreage, and our acquisition of an additional
interest in Hupecol Meta ($114,036). Of the amount invested, we capitalized none to oil and gas properties not subject to amortization
and capitalized $62,995 to oil and gas properties subject to amortization. During the period, we also capitalized $114,036 to our interest
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 the three months ended March 31, 2021, of $6,575,889 million from sales of common stock under our ATM offerings,
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 2021.
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 March 31, 2021.
Inflation
We
believe that inflation has not had a significant impact on operations since inception.