UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices)(Zip Code)
(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 | ||
$0.001 par value per share |
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.
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).
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 | ☐ | ☒ | |
| 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 ☐
As of August 11, 2021, we had shares of $0.001 par value common stock outstanding.
HOUSTON AMERICAN ENERGY CORP.
FORM 10-Q
INDEX
| 2 |
PART I - FINANCIAL INFORMATION
| ITEM 1 | Financial Statements |
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable – oil and gas sales | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Oil and gas properties, full cost method | ||||||||
| Costs subject to amortization | ||||||||
| Costs not being amortized | ||||||||
| Office equipment | ||||||||
| Total | ||||||||
| Accumulated depletion, depreciation, amortization, and impairment | ( | ) | ( | ) | ||||
| PROPERTY AND EQUIPMENT, NET | ||||||||
| Cost method investment | ||||||||
| Right of use asset | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of lease liability | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Lease liability, net of current portion | ||||||||
| Reserve for plugging and abandonment costs | ||||||||
| TOTAL LONG-TERM LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value $; shares authorized, | ||||||||
| Series A Convertible Preferred Stock, par value $; shares authorized; and shares issued and outstanding, respectively; liquidation preference of $ | ||||||||
| Series B Convertible Preferred Stock, par value $; shares authorized; and shares issued and outstanding, respectively; liquidation preference of $ | ||||||||
| Common stock, par value $; shares authorized and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
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 AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(Unaudited)
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| OIL AND GAS REVENUE | $ | $ | $ | $ | ||||||||||||
| EXPENSES OF OPERATIONS | ||||||||||||||||
| Lease operating expense and severance tax | ||||||||||||||||
| General and administrative expense | ||||||||||||||||
| Depreciation and depletion | ||||||||||||||||
| Impairment of oil and gas properties | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ||||||||||||||
| Net loss before taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Dividends to Series A and B preferred stockholders | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Based and diluted weighted average number of common shares outstanding | ||||||||||||||||
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 AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(Unaudited)
| Additional | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Subscription | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Total | |||||||||||||||||||||||||
| Balance – December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Issuance of common stock for cash, net | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Conversion of Series A Preferred Stock to common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Redemption of Series A and Series B Preferred Stock | ( | ) | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance – March 31, 2021 | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance – June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Subscription | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Total | |||||||||||||||||||||||||
| Balance – December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Issuance of common stock for cash, net | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance – March 31, 2020 | ( | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance – June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
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 SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(Unaudited)
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Depreciation and depletion | ||||||||
| Impairment of oil and gas properties | ||||||||
| Accretion of asset retirement obligation | ||||||||
| Stock-based compensation | ||||||||
| Amortization of right of use asset | ||||||||
| Amortization of debt discount | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase)/decrease in accounts receivable | ( | ) | ||||||
| Increase in prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Decrease in accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Decrease in operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments for the acquisition and development of oil and gas properties | ( | ) | ( | ) | ||||
| Payments for capital contribution for cost method investment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayments of notes payable – related party | ( | ) | ||||||
| Proceeds from the issuance of common stock, net of expenses | ||||||||
| Redemption of Series A and Series B Preferred Stock | ( | ) | ||||||
| Payment of preferred stock dividends | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Increase in cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Conversion of Series A preferred stock to common stock | $ | $ | ||||||
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, 2020.
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 $
During
January and February 2021, the Company raised $
With those funds, 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 2021 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, 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.
| 7 |
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.
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to a concentration of credit risk include cash, cash equivalents and any marketable
securities (if any). The Company had cash deposits of $
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.
| Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Series A Convertible Preferred Stock | ||||||||||||||||
| Series B Convertible Preferred Stock | ||||||||||||||||
| Stock warrants | ||||||||||||||||
| Stock options | ||||||||||||||||
| Total | ||||||||||||||||
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 June 30, 2021 through the financial statement issuance date for subsequent event disclosure consideration.
| 8 |
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 and six-month periods ended June 30, 2021 and 2020:
Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |||||||||||||
| Oil sales | $ | $ | $ | $ | ||||||||||||
| Natural gas sales | ||||||||||||||||
| Natural gas liquids sales | ||||||||||||||||
| Total revenue from customers | $ | $ | $ | $ | ||||||||||||
There
were
NOTE 3 – OIL AND GAS PROPERTIES
During
the six months ended June 30, 2021, the Company invested $
During
the three and six months ended June 30, 2021, the Company recorded depletion expense of $
During
the three and six months ended June 30, 2020, the Company recorded an impairment of oil and gas properties of $ and $
Geographical Information
The Company currently has properties in two geographical areas, the United States and Colombia. Revenues for the six months ended June 30, 2021 and long lived assets (net of depletion, amortization, and impairments) as of June 30, 2021 attributable to each geographical area are presented below:
| Six Months Ended June 30, 2021 | As of June 30, 2021 | |||||||
| Revenues | Long Lived Assets, Net | |||||||
| United States | $ | $ | ||||||
| Colombia | ||||||||
| Total | $ | $ | ||||||
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 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 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 shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.
| 9 |
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
| Options | Weighted- Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 1, 2021(1) | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited | ( | ) | ||||||||||
| Outstanding at June 30, 2021 | $ | $ | ||||||||||
| Exercisable at June 30, 2021 | $ | $ | ||||||||||
| (1) |
During the six months ended June 30, 2021, the Company recognized $ of stock-based compensation expense attributable to the amortization of stock options. As of June 30, 2021, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $. The unrecognized expense is expected to be recognized over a weighted average period of years and the weighted average remaining contractual term of the outstanding options and exercisable options at June 30, 2021 is years.
As of June 30, 2021, there were shares of common stock available for issuance pursuant to future stock or option grants under the Plans, including shares issuable under the 2021 Plan subject to shareholder approval of the 2021 Plan, which approval was received in July 2021.
Stock-Based Compensation Expense
Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Stock-based compensation expense included in general and administrative expense | $ | $ | ||||||
| Earnings per share effect of share-based compensation expense – basic and diluted | $ | ( | ) | $ | ( | ) | ||
NOTE 5 – CAPITAL STOCK
Common Stock - At-the-Market Offerings
In
January 2021, the Company entered into a Sales Agreement with Univest Securities, LLC (“Univest”) pursuant to which the Company
could sell (the “2021 ATM Offering”), at its option, up to an aggregate of $
| 10 |
In
January 2021, the Company sold an aggregate of shares in connection with the 2021 ATM Offering and received proceeds, net of
commissions and expenses, of $
In
February 2021, the Company entered into another Sales Agreement with Univest pursuant to which the Company could sell (the “2021
Supplemental ATM Offering”), at its option, up to an aggregate of $
In
February 2021, the Company sold an aggregate of shares in connection with the 2021 Supplemental ATM Offering and received proceeds,
net of commissions and expenses, of $
Series A Convertible Preferred Stock
During
the six months ended June 30, 2021 and 2020, the Company paid dividends on Series A Convertible Preferred Stock in the amount of $
In
February 2021, shares of Series A Preferred Stock were converted into shares of common stock, and the Company redeemed all
remaining shares of Series A Preferred Stock for cash paid of $
Series B Convertible Preferred Stock
During
the six months ended June 30, 2021 and 2020, the Company paid dividends on Series B Convertible Preferred Stock in the amount of $
In
February 2021, the Company redeemed all remaining shares of Series B Preferred Stock for cash paid of $
Warrants
A summary of warrant activity and related information for 2021 is presented below:
| Warrants | Weighted-Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 1, 2021 | $ | |||||||||||
| Issued | ||||||||||||
| Exercised | ||||||||||||
| Expired | ||||||||||||
| Outstanding at June 30, 2021 | $ | $ | ||||||||||
| Exercisable at June 30, 2021 | $ | $ | ||||||||||
NOTE 6 – NOTES PAYABLE – RELATED PARTY
During
the six months ended June 30, 2020, interest expense paid in cash totaled $
The holders of the Bridge Loan Notes were the CEO and a % shareholder of the Company.
| 11 |
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Lease Commitment
The
Company leases office facilities under an operating lease agreement, which lease agreement was renegotiated in July 2021. The new agreement
began
| Year | Amount | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total future lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of future operating lease payments | ||||
| Less: current portion of operating lease liabilities | ( | ) | ||
| Operating lease liabilities, net of current portion | $ | |||
| Right of use assets | $ | |||
The Company does not have any capital leases or other operating lease commitments.
NOTE 8 – SUBSEQUENT EVENTS
In July 2021, the Company granted stock options to purchase an aggregate of shares of common stock. of the stock options were granted to the Company’s sole officer and an aggregate of of the stock options were granted to the Company’s non-employee directors. The options have a and are exercisable at $ per common share. The options granted to the officer vest 1/3 on each of the first three anniversaries of grant. The options granted to the non-employee directors vest % on the date of grant and % nine months from the date of grant.
In July 2021, the Company approved a grant of shares of common stock to a non-officer employee with a grant date fair value of $ based on the market price of the Company’s common stock on the grant date.
| 12 |
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 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:
| June 30, 2021 | ||||
| Acquisition costs | $ | 1,647,196 | ||
| Development and evaluation costs | 2,334,609 | |||
| Total | $ | 3,981,805 | ||
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%.
| 13 |
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
— 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 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.
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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:
Six Months Ended June 30 | Three Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Gross producing wells | 4 | 4 | 4 | 4 | ||||||||||||
| Net producing wells | 0.68 | 0.49 | 0.68 | 0.49 | ||||||||||||
| Net oil production (Bbl) | 8,295 | 4,502 | 3,901 | 1,686 | ||||||||||||
| Net gas production (Mcf) | 25,738 | 39,526 | 11,447 | 14,037 | ||||||||||||
| Average sales price – oil (per barrel) | $ | 57,36 | 38.19 | $ | 63.30 | $ | 33.87 | |||||||||
| Average sales price – natural gas (per Mcf) | $ | 3.88 | 0.57 | $ | 2.60 | $ | 0.90 | |||||||||
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.
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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.
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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.
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.
| 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 June 30, 2021 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 June 30, 2021. 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.
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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 June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 |
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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: August 13, 2021 | ||
| By: | /s/ John Terwilliger | |
| John Terwilliger | ||
| CEO and President (Principal Executive Officer and Principal Financial Officer) | ||
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