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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

 

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 1-32955

 

HOUSTON AMERICAN ENERGY CORP.

(Exact name of registrant as specified in its charter)

 

Delaware   76-0675953
(State or other jurisdiction
of incorporation or organization)
 

(IRS Employer

Identification No.)

 

801 Travis Street, Suite 1425, Houston, Texas 77002

 

(Address of principal executive offices)(Zip Code)

 

(713) 222-6966

 

(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

Common Stock,

$0.001 par value per share

  HUSA   NYSE American

 

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. Yes No

 

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). Yes No

 

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 Non-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 No

 

As of May 16, 2022, we had 9,928,338 shares of $0.001 par value common stock outstanding.

 

 

 

 

 

 

HOUSTON AMERICAN ENERGY CORP.

 

FORM 10-Q

 

INDEX

 

      Page No.
PART I.   FINANCIAL INFORMATION  
       
Item 1.   Financial Statements (Unaudited) 3
       
    Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021 3
       
    Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 (Unaudited) 4
       
    Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (Unaudited) 5
       
    Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (Unaudited) 6
       
    Notes to Consolidated Financial Statements (Unaudited) 7
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 15
       
Item 4.   Controls and Procedures 15
       
PART II   OTHER INFORMATION  
       
Item 6.   Exhibits 16

 

2

 

 

PART I - FINANCIAL INFORMATION

ITEM 1 Financial Statements

 

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

    March 31, 2022     December 31, 2021  
ASSETS            
CURRENT ASSETS                
Cash   $ 4,766,877     $ 4,894,577  
Accounts receivable – oil and gas sales     279,198       214,662  
Prepaid expenses and other current assets     165,024       85,403  
TOTAL CURRENT ASSETS     5,211,099       5,194,642  
                 
PROPERTY AND EQUIPMENT                
Oil and gas properties, full cost method                
Costs subject to amortization     62,785,383       62,771,222  
Costs not being amortized     2,343,126       2,343,126  
Office equipment     90,004       90,004  
                 
Total     65,218,513       65,204,352  
Accumulated depletion, depreciation, amortization, and impairment     (60,454,833 )     (60,396,594 )
                 
PROPERTY AND EQUIPMENT, NET     4,763,680       4,807,758  
                 
Cost method investment     472,511       455,779  
Right of use asset     258,278       272,507  
Other assets     3,166       3,167  
                 
TOTAL ASSETS   $ 10,708,734     $ 10,733,853  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
CURRENT LIABILITIES                
Accounts payable   $ 156,685     $ 69,607  
Accrued expenses     16,405       15,176  
Short-term lease liability     49,946       57,174  
                 
TOTAL CURRENT LIABILITIES     223,036       141,957  
                 
LONG-TERM LIABILITIES                
Lease liability, net of current portion     181,924       211,744  
Reserve for plugging and abandonment costs     71,906       68,209  
                 
TOTAL LONG-TERM LIABILITIES     253,830       279,953  
                 
TOTAL LIABILITIES     476,866       421,910  
                 
COMMITMENTS AND CONTINGENCIES                
SHAREHOLDERS’ EQUITY                
Preferred stock, par value $0.001; 10,000,000 shares authorized                
Series A Convertible Redeemable Preferred stock, par value $0.001; 2,000 shares authorized; 0 shares issued and outstanding            
Series B Convertible Redeemable Preferred stock, par value $0.001; 1,000 shares authorized; 0 shares issued and outstanding            
Common stock, par value $0.001; 12,000,000 shares authorized 9,928,338 and 9,928,338 shares issued and outstanding, respectively     9,928       9,928  
Additional paid-in capital     83,430,941       83,345,456  
Accumulated deficit     (73,209,001 )     (73,043,441 )
TOTAL SHAREHOLDERS’ EQUITY     10,231,868       10,311,943  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 10,708,734     $ 10,733,853  
                 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3

 

 

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

 

    2022     2021  
    Three Months Ended March 31,  
    2022     2021  
             
OIL AND GAS REVENUE   $ 423,820     $ 328,488  
                 
EXPENSES OF OPERATIONS                
Lease operating expense and severance tax     161,272       166,214  
General and administrative expense     370,100       408,760  
Depreciation and depletion     58,239       32,364  
Total operating expenses     589,611       607,338  
                 
Loss from operations     (165,791 )     (278,850 )
                 
OTHER INCOME, NET                
Interest income     231       795  
Other income           9,875  
Interest expense           (296 )
Total other income     231       10,374  
                 
Net loss before taxes     (165,560 )     (268,476 )
                 
Income tax expense            
                 
Net loss     (165,560 )     (268,476 )
                 
Dividends to Series A and B preferred shareholders           (37,201 )
                 
Net loss attributable to common shareholders   $ (165,560 )   $ (305,677 )
                 
Basic and diluted loss per common share   $ (0.02 )   $ (0.03 )
                 
Based and diluted weighted average number of common shares outstanding     9,928,338       8,896,432  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4

 

 

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

 

                            Additional              
    Preferred Stock     Common Stock     Paid-in     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Deficit     Total  
                                           
Balance at December 31, 2021         $       9,928,338     $ 9,928     $ 83,345,456     $ (73,043,441 )   $ 10,311,943  
                                                         
Stock-based compensation                             85,485             85,485  
Net loss                                   (165,560 )     (165,560 )
                                                         
Balance at March 31, 2022         $       9,928,338     $ 9,928     $ 83,430,941     $ (73,209,001 )     10,231,868  

 

                            Additional              
    Preferred Stock     Common Stock     Paid-in     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Deficit     Total  
                                           
Balance at December 31, 2020     1,920     $ 2       6,977,718     $ 6,977     $ 78,453,906     $ (72,021,911 )   $ 6,438,974  
                                                         
Stock-based compensation                             15,109             15,109  
Conversion of Series A Preferred Stock to common stock     (60 )           24,000       24       (24 )            
Redemption of Series A and Series B Preferred Stock     (1,860 )     (2 )                 (1,967,798)             (1,967,800 )
Issuance of common stock for cash, net                 2,921,620       2,922       6,572,967             6,575,889  
Series A and Series B Preferred Stock dividends paid                             (37,201 )           (37,201 )
Net loss                                   (268,476 )     (268,476 )
                                                         
Balance at March 31, 2021         $       9,923,338     $ 9,923     $ 83,036,959     $ (72,290,387 )   $ 10,756,495  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5

 

 

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

 

    2022     2021  
    For the Three Months Ended March 31,  
    2022     2021  
                 
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (165,560 )   $ (268,476 )
Adjustments to reconcile net loss to net cash used in operations:                
Depreciation and depletion     58,239       32,364  
Accretion of asset retirement obligation     3,697       4,280  
Stock-based compensation     85,485       15,109  
Amortization of right of use asset     14,229       23,733  
Changes in operating assets and liabilities:                
(Increase) decrease in accounts receivable     (64,536 )     (77,423 )
Increase in prepaid expenses and other current assets     (79,620 )     (120,305 )
Increase in accounts payable and accrued expenses     81,079       56,401  
Decrease in operating lease liability     (29,820 )     (30,874 )
                 
Net cash used in operating activities     (96,807 )     (365,191 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Payments for the acquisition and development of oil and gas properties     (14,161 )     (62,995 )
Payments for capital contribution for cost method investment     (16,732 )     (114,036 )
                 
Net cash used in investing activities     (30,893 )     (177,031 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from issuance of common stock for cash, net of offering costs           6,575,889  
Redemption of Series A and Series B preferred stock           (1,967,800 )
Payment of preferred stock dividends           (37,201 )
                 
Net cash provided by financing activities           4,570,888  
                 
(Decrease)/increase in cash     (127,700 )     4,028,666  
Cash, beginning of period     4,894,577       1,242,560  
Cash, end of period   $ 4,766,877     $ 5,271,226  
                 
SUPPLEMENTAL CASH FLOW INFORMATION                
Interest paid   $     $  
Taxes paid   $     $  
                 
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES                
Conversion of Series A preferred stock to common stock   $     $ 24  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6

 

 

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 $165,560 for the three months ended March 31, 2022.

 

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 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 1 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.

 

7

 

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to a concentration of credit risk include cash, cash equivalents (if any) and any marketable securities (if any). The Company had cash deposits of $4,409,969 in excess of the FDIC’s current insured limit on interest bearing accounts of $250,000 as of March 31, 2022. The Company also had cash deposits of $4,741 in Colombian banks at March 31, 2022 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, 2022 and 2021, the following 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:

 

    2022     2021  
    Three Months Ended March 31,  
    2022     2021  
Stock warrants     94,400       98,400  
Stock options     990,177       730,177  
Total     1,084,577       828,577  

 

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, 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-month periods ended March 31, 2022 and 2021:

 

    Three Months Ended March 31,  
    2022     2021  
Oil sales   $ 279,478     $ 228,843  
Natural gas sales     71,382       70,086  
Natural gas liquids sales     72,960       29,559  
Total revenue from customers   $ 423,820     $ 328,488  

 

There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of March 31, 2022 or 2021.

 

NOTE 3 – OIL AND GAS PROPERTIES

 

During the three months ended March 31, 2022, the Company invested $14,161, net, for the acquisition and development of oil and gas properties, consisting of cost of development of U.S. properties of $14,161, net, principally attributable to final expenses related to the plugging and abandonment of the Lou Brock well. The full amount invested was capitalized to oil and gas properties subject to amortization.

 

8

 

 

The Company also invested $16,732 in Hupecol Meta relating to drilling operations in Colombia, reflected in the cost method investment asset.

 

Geographical Information

 

The Company currently has properties in two geographical areas, the United States and Colombia. Revenues for the three months ended March 31, 2022 and long lived assets (net of depletion, amortization, and impairments) as of March 31, 2022 attributable to each geographical area are presented below:

 

    Three Months Ended March 31, 2022     As of March 31, 2022  
    Revenues     Long Lived Assets, Net  
United States   $ 423,820     $ 2,420,554  
Colombia           2,343,126  
Total   $ 423,820     $ 4,763,680  

 

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 480,000 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”). The terms of the 2017 Plan, allow for the issuance of up to 400,000 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 500,000 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, 2022 is presented below:

 

    Options     Weighted-Average Exercise Price     Aggregate Intrinsic Value  
                   
Outstanding at January 1, 2022     990,173     $ 3.38          
Granted                    
Exercised                    
Forfeited                      
Outstanding at March 31, 2022     990,173     $          3.38     $ 1,922,695  
Exercisable at March 31, 2022     792,177     $ 3.79     $ 1,394,035  

 

During the three months ended March 31, 2022, the Company recognized $85,485 of stock-based compensation expense attributable to the amortization of stock options. As of March 31, 2022, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $54,461. The unrecognized expense is expected to be recognized over a weighted average period of 0.25 years and the weighted average remaining contractual term of the outstanding options and exercisable options at March 31, 2022 is 6.50 years and 5.79 years, respectively.

 

As of March 31, 2022, there were 236,000 shares of common stock available for issuance pursuant to future stock or option grants under the Plans.

 

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Stock-Based Compensation Expense

 

The following table reflects total stock-based compensation recorded by the Company for the three months ended March 31, 2022 and 2021:

 

    2022     2021  
   

Three Months Ended

March 31,

 
    2022     2021  
             
Stock-based compensation expense included in general and administrative expense   $ 85,485     $ 15,109  
Earnings per share effect of share-based compensation expense – basic and diluted   $ (0.01 )   $ (0.00 )

 

NOTE 5 – CAPITAL STOCK

 

Series A Convertible Preferred Stock

 

During the three months ended March 31, 2021, the Company paid dividends on Series A Convertible Preferred Stock in the amount of $20,501.

 

In February 2021, 60 shares of Series A Preferred Stock were converted into 24,000 shares of common stock, and the Company redeemed all remaining shares of Series A Preferred Stock for cash paid of $1.07 million plus accrued dividends.

 

Series B Convertible Preferred Stock

 

During the three months ended March 31, 2021, the Company paid dividends on Series B Convertible Preferred Stock in the amount of $16,700.

 

In February 2021, the Company redeemed all remaining shares of Series B Preferred Stock for cash paid of $0.9 million plus accrued dividends.

 

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     98,400     $ 2.63          
Issued                    
Exercised                    
Expired     (4,000 )             6.88        
Outstanding at March 31, 2022     94,400     $ 2.46     $ 186,912  
Exercisable at March 31, 2022     94,400     $ 2.46     $

186,912

 

 

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NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

Lease Commitment

 

The Company leases office facilities under an operating lease agreement that expires October 31, 2025. During the three months ended March 31, 2022, the operating cash outflows related to operating lease liabilities of $22,161 and the expense for the right of use asset for operating leases was $14,229. As of March 31, 2022, 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, 2022, the lease agreement requires future payments as follows:

 

Year   Amount  
2022     64,212  
2023     87,288  
2024     88,801  
2025     75,051  
Total future lease payments     315,352  
Less: imputed interest     (83,482 )
Present value of future operating lease payments     231,870  
Less: current portion of operating lease liabilities     49,946  
Operating lease liabilities, net of current portion   $ 181,924  
Right of use assets   $ 258,278  

 

Total base rental expense was $22,161 and $30,048 for the three months ended March 31, 2022 and March 31, 2021, respectively. The Company does not have any capital leases or other operating lease commitments.

 

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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, 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 three months ended, March 31, 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 March 31, 2022:

 

    March 31, 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

 

Leasing Activity

 

Colombia. 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.

 

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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 March 31, 2022, through our ownership interest in Hupecol Meta, we held 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, 2022, no drilling activities were conducted.

 

During the quarter ended March 31, 2022, our capital investment expenditures totaled $30,893, principally relating to _ final expenses related to the plugging and abandonment of the Lou Brock well. ($14,161) and investments in our cost method investment in Hupecol Meta ($16,732).

 

Results of Operations

 

Oil and Gas Revenues. Total oil and gas revenues increased 29% to $423,820 in the three months ended March 31, 2022, compared to $328,488 in the three months ended March 31, 2021. The increase in revenue was due to increases in average sales price of oil (up 76%) and an increase in natural gas production (up 21%), partially offset by a decline in oil production (down 31%) and a decline in average sales price of natural gas (down 16%).

 

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, 2022 and 2021:

 

   

Three Months Ended

March 31,

 
    2022     2021  
Gross producing wells     4       4  
Net producing wells     0.68       0.69  
Net oil production (Bbl)     3,040       4,394  
Net gas production (Mcf)     17,292       14,291  
Average sales price – oil (per barrel)   $ 91.67     $ 52.08  
Average sales price – natural gas (per Mcf)   $ 4.13     $ 4.90  

 

The change in production volumes was primarily attributable to our Reeves County wells being put on gas lift during the second half of 2021 partially offset by natural declines in production.

 

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 were as follows:

 

    Colombia     U.S.     Total  
2022 First Quarter                        
Oil sales   $     $ 279,478     $ 279,478  
Gas sales   $     $ 71,382     $ 71,382  
NGL sales   $     $ 72,960     $ 72,960  
2021 First Quarter                        
Oil sales   $     $ 228,843     $ 228,843  
Gas sales   $     $ 70,086     $ 70,086  
NGL ales   $       $ 29,559   $ 29,559  

 

Lease Operating Expenses. Lease operating expenses decreased 3% to $161,272 during the three months ended March 31, 2022 from $166,214 during the three months ended March 31, 2021. Lease operating expenses, by region were as follows:

 

    Colombia     U.S.     Total  
2022 First Quarter   $     $ 161,272     $ 161,272  
2021 First Quarter   $     $ 166,214     $ 166,214  

 

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Depreciation and Depletion Expense. Depreciation and depletion expense was $58,239 and $32,365 for the three months ended March 31, 2022 and 2021, respectively. The change in depreciation and depletion was due to the increase in the depletable base.

 

General and Administrative Expenses (excluding stock-based compensation). General and administrative expense decreased by 28% to $284,615 during the three months ended March 31, 2022 from $393,651 during the three months ended March 31, 2021. The change in general and administrative expense was primarily attributable to higher professional fees during the 2021 period related to the two ATM offerings and redemption of preferred stock.

 

Stock-Based Compensation. Stock-based compensation increased to $85,485 during the three months ended March 31, 2022 from $15,109 during the three months ended March 31, 2021. The change was attributable to the timing of option vesting.

 

Other Income (Expense). Other income/expense, net, totaled $231 of income during the three months ended March 31, 2022, compared to $10,374 of income during the three months ended March 31, 2021. Other income consisted of interest income on cash balances during the three months ended March 31, 2021 and March 31, 2022 and, during the three months ended March 31, 2021, recovery of escrowed funds previously written off.

 

Financial Condition

 

Liquidity and Capital Resources. At March 31, 2022, we had a cash balance of $4,766,877 and working capital of $4,988,063, compared to a cash balance of $4,894,577 and working capital of $4,988,062 at December 31, 2021.

 

Cash Flows. Operating activities used cash of $96,807 during the three months ended March 31, 2022, compared to $365,191 used during the three months ended March 31, 2021. The change in operating cash flow was attributable to a lower loss incurred during the three months ended March 31, 2022 and a change in operating assets and liabilities that increased cash during the three months ended March 31, 2022, compared to decreasing cash during the three months ended March 31, 2021.

 

Investing activities used $30,893 during the three months ended March 31, 2022, compared to $177,031 during the three months ended March 31, 2021. The change in funds used by investing activities is principally attributable to higher investments in Hupecol Meta LLC during the three months ended March 31, 2021 (up $97,304 compared to the three months ended March 31, 2022) and investments in our Lou Brock well during the three months ended March 31, 2021.

 

Financing activities provided $0 during the three months ended March 31, 2022, compared to $4,570,888 provided during the three months ended March 31, 2021. 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).

 

Long-Term Liabilities. At March 31, 2022, we had long-term liabilities of $253,830, compared to $279,953 at December 31, 2021. Long-term liabilities at March 31, 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 newly acquired Colombian acreage. Based on discussions with Hupecol, we anticipate that drilling operations on our CPO-11 block in Colombia will commence in mid-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 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, 2022, we invested $30,893 for the acquisition and development of oil and gas properties, consisting of drilling and development operations in the U.S ($14,161), principally relating to final expenses related to the plugging and abandonment of the Lou Brock well., and investments in Hupecol Meta ($16,732). The $14,161 invested in U.S. operations was capitalized to oil and gas properties subject to amortization. The $16,732 invested in Hupecol Metal was capitalized to our interest in Hupecol Meta.

 

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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 2022.

 

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 March 31, 2022.

 

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 March 31, 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 March 31, 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 accounting firm 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 March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

15

 

 

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)

 

16

 

 

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: May 16, 2022
  By: /s/ John Terwilliger
    John Terwilliger
    CEO and President (Principal Executive Officer and Principal Financial Officer)

 

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