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, 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 six months
ended, June 30, 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 June 30, 2021:
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June 30, 2021
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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
Equity
Investment
In
2019, we acquired a 2% interest in Hupecol Meta, LLC (“Hupecol Meta”) (the “Hupecol Meta Acquisition”), reflected
as a cost method investment on our balance sheet.
During
the six months ended June 30, 2021, we contributed an additional $136,001 to Hupecol Meta, including $99,716 to increase 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 six months ended June 30, 2021, no drilling activities were conducted.
During
the six months ended June 30, 2021, our capital investment expenditures totaled $30,948, principally relating to our Lou Brock operations.
Financing
Activities
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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.
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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.
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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 slowed with a resulting decline in oil and gas demand and
prices. Such decline in prices adversely affected our revenues and profitability in 2020. As the COVID-19 pandemic began to recede, oil
and gas prices have risen during 2021. If a resurgence of COVID-19 occurs and results in price declines as occurred during 2020, the
economics of our existing wells and planned future wells, will be adversely affected, 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 and certain of our vendors, service suppliers and partners began working remotely. As a
result of such remote work arrangements, certain operational, reporting, accounting and other processes were slowed resulting in longer
time to execute critical business functions, higher operating costs and uncertainties regarding the quality of services and supplies.
While remote work risks have receded as the COVID-19 pandemic has begun to wane, we might experience future operating challenges in the
event of a resurgence of COVID-19.
Results
of Operations
Oil
and Gas Revenues. Total oil and gas revenues increased 290% to $303,999 in the three months ended June 30, 2021, compared
to $77,928 in the three months ended June 30, 2020. Oil and gas revenues increased 181% to $632,487 in the six months ended
June 30, 2021, compared to $225,064 in the six months ended June 30, 2020. The increase in revenue was due to (i) increased oil production
volumes, up 131% and 84% for the three and six-month periods, respectively, partially offset by a decline in natural gas
production, down 18% and 35% for the three and six-month periods, respectively, and (ii) improved commodity pricing, including
87% and 189% increases in crude oil prices and natural gas prices, respectively, realized during the three-month period
and 50% and 576% increases 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, 2021 and 2020:
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Six Months Ended
June 30
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Three Months Ended
June 30,
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2021
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2020
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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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4
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4
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Net producing wells
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0.68
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0.49
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0.68
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0.49
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Net oil production (Bbl)
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8,295
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4,502
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3,901
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1,686
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Net gas production (Mcf)
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25,738
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39,526
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11,447
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14,037
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Average sales price – oil (per barrel)
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$
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57,36
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38.19
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$
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63.30
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$
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33.87
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Average sales price – natural gas (per Mcf)
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$
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3.88
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0.57
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$
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2.60
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$
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0.90
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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.
All
oil and gas sales revenues are attributable to U.S. operations.
Lease
Operating Expenses. Lease operating expenses decreased 6% to $92,531 during the three months ended June 30, 2021, from
$98,916 during the three months ended June 30, 2020. Lease operating expenses increased 44% to $258,745 during the six
months ended June 30, 2021 from $180,150 during the six months ended June 30, 2020.
The
decrease in lease operating expenses during the three-month period was attributable to reduced costs associated with the O’Brien
#3 well that was shut-in during the quarter. The increase in lease operating expenses during the six-month period was principally attributable
to rework costs on the Frost #1H well during the first quarter of 2021 and an increase in severance taxes resulting from higher sales.
All
lease operating expenses are attributable to U.S. operations.
Depreciation
and Depletion Expense. Depreciation and depletion expense was $26,271 and $51,323 for the three months ended June 20,
2021 and 2020, respectively, and $58,635 and $142,145 for the six months ended June 30, 2021 and 2020, respectively. The change
in depreciation and depletion was due to the decrease in gas production.
Impairment
of Oil and Gas Properties. Impairment of oil and gas properties was $0 and $0 for the three months ended June 30, 2021 and 2020,
and $0 and $429,116 for the six months ended June 30, 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.
General
and Administrative Expenses (excluding stock-based compensation). General and administrative expense increased slightly to $231,328
during the three months ended June 30, 2021 from $230,220 during the three months ended June 30, 2020 and increased by 14% to $624,979
during the six months ended June 30, 2021 from $546,840 during the six months ended June 30, 2020. The increase in general and administrative
expenses for the six-month period was primarily attributable to professional fees related to the two ATM offerings and redemption of
preferred stock during the first quarter of 2021.
Stock-Based
Compensation. Stock-based compensation decreased to $0 during the three months ended June 30, 2021 from $39,323 during the three
months ended June 30, 2020 and decreased 84% to $15,109 during the six months ended June 30, 2021 from $96,765 during the six months
ended June 30, 2020. The decrease was attributable to the timing of annual grants which were deferred during 2021 along with the deferral
of our annual meeting.
Other
Income (Expense). Other income/expense, net, totaled $787 of income during the three months ended June 30, 2021, compared to $5,352
of income during the three months ended June 30, 2020, and totaled $11,161 of income during the six months ended June 30, 2021, compared
to $17,540 of expense during the six months ended June 30, 2020. Other income during the six months ended June 30, 2021 consisted of
interest income and income arising from the recovery of escrowed funds previously written-off. Other expense during the six months ended
June 30, 2020 consisted of $9,277 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 June 30, 2021, we had a cash balance of $5,118,740 and working capital of $5,354,159, 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 $527,759 during the six months ended June 30, 2021, compared to $567,439 used during the
six months ended June 30, 2020. The change in operating cash flow was attributable to a lower loss incurred during the 2021 period, offset
by an increase in cash used attributable to changes in operating assets and liabilities in the 2021 period and higher non-cash expenses
reflected in the 2020 period.
Investing
activities used $166,949 during the six months ended June 30, 2021, compared to $576,062 during the six months ended June 30, 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 six months ended June 30, 2021, compared to $3,709,917 provided during the six months ended
June 30, 2020. Cash provided by financing activities during the six months ended June 30, 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 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, 2021, we had long-term liabilities of $323,717, compared to $171,791 at December 31, 2020. Long-term liabilities
at June 30, 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 six months ended June 30, 2021, we invested $166,949 for the acquisition and development of oil and gas properties, including additional
contributions to our cost method investment in Hupecol Meta. $30,948 of the investments related to Lou Brock acreage in the U.S. Permian
Basin. $136,001 of the investments consisted of contributions to our cost method investment in Hupecol Meta, including $99,716 paid to
increase our ownership interest in Hupecol Meta. Of the amount invested, we capitalized $30,948 to oil and gas properties subject to
amortization and capitalized $136,001 to our interest 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.
With
our receipt, during the first quarter of 2021, of $6,575,889 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 over the
next twelve months.
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, 2021.
Inflation
We
believe that inflation has not had a significant impact on operations since inception.