10-K 1 form10k.htm HOUSTON AMERICAN ENERGY CORP 10-K 12-31-2012 form10k.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-K

 
(Mark One)
x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2012
 
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to
Commission File No. 1-32955
 

 
HOUSTON AMERICAN ENERGY CORP.
(Exact name of registrant specified in its charter)
 

 
Delaware
 
76-0675953
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
801 Travis Street, Suite 1425, Houston, Texas 77002
(Address of principal executive offices)(Zip code)
 
Issuer’s telephone number, including area code: (713) 222-6966
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which each is registered
Common Stock, $0.001 par value
 
NYSE MKT
 
Securities registered pursuant to Section 12(g) of the Act:
 
None
(Title of Class)

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨    No   x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   Yes  ¨  No x
 
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  x     No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x     No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer  ¨ Accelerated filer   ¨ Non-accelerated filer  ¨ Smaller reporting company  x
             
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨    No   x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2012, based on the closing sales price of the registrant’s common stock on that date, was approximately $26.5 million. Shares of common stock held by each current executive officer and director and by each person known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates.
 
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of March 18, 2013 was 52,180,045.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Company’s Proxy Statement for its 2013 Annual Meeting are incorporated by reference into Part III of this Report.



 
 

 
 
 
 
 
Page
PART I
 
 
 
Item 1.
3
 
Item 1A.
13
 
Item 1B.
23
 
Item 2.
23
 
Item 3.
24
 
Item 4.
24
     
PART II
   
 
Item 5.
25
 
Item 6.
25
 
Item 7.
26
 
Item 7A.
34
 
Item 8.
34
 
Item 9.
34
 
Item 9A.
35
 
Item 9B.
35
     
PART III
   
 
Item 10.
36
 
Item 11.
36
 
Item 12.
36
 
Item 13.
36
 
Item 14.
36
     
PART IV
   
 
Item 15.
37
   
38
 
 
FORWARD-LOOKING STATEMENTS
 
This annual report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These forwarding-looking statements include without limitation statements regarding our expectations and beliefs about the market and industry, our goals, plans, and expectations regarding our properties and drilling activities and results, our intentions and strategies regarding future acquisitions and sales of properties, our intentions and strategies regarding the formation of strategic relationships, our beliefs regarding the future success of our properties, our expectations and beliefs regarding competition, competitors, the basis of competition and our ability to compete, our beliefs and expectations regarding our ability to hire and retain personnel, our beliefs regarding period to period results of operations, our expectations regarding revenues, our expectations regarding future growth and financial performance, our beliefs and expectations regarding the adequacy of our facilities, and our beliefs and expectations regarding our financial position, ability to finance operations and growth and the amount of financing necessary to support operations. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. See “Item 1A. Risk Factors” for a discussion of certain risk factors. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this annual report on Form 10-K.
 
As used in this annual report on Form 10-K, unless the context otherwise requires, the terms “we,” “us,” “the Company,” and “Houston American” refer to Houston American Energy Corp., a Delaware corporation.
 
PART I
 
Item 1.
 
General
 
Houston American Energy Corp is an independent oil and gas company focused on the development, exploration, exploitation, acquisition, and production of natural gas and crude oil properties in the U.S. Gulf Coast region and in South America.  Our oil and gas reserves and operations are concentrated primarily in the South American country of Colombia and in the onshore Gulf Coast region, particularly Texas and Louisiana.
 
Our mission is to deliver outstanding net asset value per share growth to our investors via attractive oil and gas investments.  Our strategy is to focus on early identification of, and entrance into, existing and emerging resource plays, particularly in South America and the U.S. Gulf Coast.  We typically seek to partner with larger operators in the development of resources or retain interests, with or without contribution on our part, in prospects identified, packaged and promoted to larger operators.  By entering these plays earlier and partnering with, or promoting to, larger operators, we believe we can capture larger resource potential at lower cost and minimize our exposure to drilling risks and costs and ongoing operating costs.
 
We, along with our partners, actively manage our resources through opportunistic acquisitions and divestitures where reserves can be identified, developed, monetized and financial resources redeployed with the objective of growing reserves, production and shareholder value.
 
Properties
 
Our exploration and development projects are focused on existing property interests, and future acquisition of additional property interests, in South America, particularly Colombia, and in the onshore Texas Gulf Coast region and Louisiana.
 
Each of our properties differs in scope and character and consists of one or more types of assets, such as 3-D seismic data, leasehold positions, lease options, working interests in leases, partnership or limited liability company interests or other mineral rights. Our percentage interest in each property represents the portion of the interest in the property we share with other partners in the property. Because each property consists of a bundle of assets that may or may not include a working interest in the project, our stated interest in a property simply represents our proportional ownership in the bundle of assets that constitute the property. Therefore, our interest in a property should not be confused with the working interest that we will own when a given well is drilled. Each of our exploration and development projects represents a negotiated transaction between the project partners relating to one or more properties. Our working interest may be higher or lower than our stated interest.
 
 
Consistent with our strategy of opportunistically divesting holdings and redeploying financial resources to grow our reserve positions, in early 2012, our indirect interests in two concessions in Colombia were sold for net proceeds, before escrow holdbacks, of $1.2 million.  The interests sold accounted for 82% of our estimated proved oil and natural gas reserves at December 31, 2011 and 7% of our oil and natural gas revenues in 2011.  During 2012, proceeds from that sale were redeployed principally to exploration costs associated with our CPO 4 prospect in Colombia.
 
The following table sets forth information relating to our principal properties as of December 31, 2012:
 
   
Net
acreage
   
Average
working
interest %
   
Gross
producing
wells
   
Net proved
reserves
(boe)
   
2012 Net Production
 
 
Oil
(bbls)
   
Natural Gas
(mcf)
 
Oklahoma
    4       2.36 %     1       997       5       744  
Louisiana
    1,646       35.30 %     3       18,726       806       10,484  
Texas
    36       3.40 %     2       660       221       838  
Total U.S.
    1,686       34.57 %     6       20,383       1,032       12,066  
Colombia
    178,570       30.64 %     0       0       1,755        
Total
    180,256       30.67 %     6       20,383       2,787       12,066  
 
In March 2013, we entered into a settlement agreement with SK Innovation, operator of the 345,452 acre CPO 4 prospect in Colombia, pursuant to which we assigned to SK Innovation our 37.5% interest in the prospect and each party provided mutual releases of all rights and obligations relating to the prospect, including any obligation on our part relating to past and future funding obligations.
 
- United States Properties:
 
In the United States, our properties and operations are principally located in the on-shore Gulf Coast region of Louisiana and Texas.
 
Louisiana Properties
 
Our principal producing and exploration properties in Louisiana consist of the following:
 
 
East Baton Rouge Parish— we hold a 37.5% working interest in the Profit Island and North Profit Island prospects, covering 3,632 gross acres in East Baton Rouge Parish, Louisiana. In addition, we hold a 7.29% royalty interest in 2,485 royalty acres, as well as a 5.675% royalty interest in the Crown Paper #01 well.
 
 
Plaquemines Parish — we hold a 1.8% working interest in the SL 180771 well and prospect which covers 300 gross acres.  We have no present plans to drill additional wells on the South Sibley Prospect.
 
 
Vermilion Parish — we hold a 27.0% working interest in the Emerald and North Jade prospects, covering 963 gross acres in Vermilion Parish, Louisiana operated by Clayton Williams Energy.  We also hold a 2.25% working interest in the 830 acre La Furs, Inc. F-16 well and prospect.
 
Texas Properties
 
Our principal exploration properties in Texas consist of the following:
 
 
Jim Hogg County — we hold a 4.375% working interest in the 340 acre Hog Heaven Prospect in Jim Hogg County, Texas. At December 31, 2012, the Hog Heaven Prospect produced gas from a single 6,200-foot well. We have no present plans to drill additional wells on the Hog Heaven Prospect.
 
 
Matagorda Country — we hold a 2.71% working interest in the 779 acre Harrison Prospect in Matagorda County, Texas. We have no present plans to drill on the Harrison Prospect.
 
 
- Colombian Properties:
 
At December 31, 2012, we held interests in multiple prospects in Colombia covering 737,657 gross acres. As noted, during the first quarter of 2013, we terminated our interest in the 345,452 acre CPO 4 prospect.  Giving effect to the termination of our interest in the CPO 4 prospect, our holdings in Colombia are located entirely within the Caguan Putumayo Basin. We identify our Colombian prospects by the concessions operated.
 
The following table sets forth information relating to our interests in prospects in Colombia at December 31, 2012, giving effect to the subsequent termination of our interest in the CPO 4 prospect:
 
Property
 
Operator
 
Ownership
Interest
   
Total Gross
Acres
   
Total Gross
Developed
Acres
   
Gross
Productive
Wells
 
Los Picachos
 
Hupecol
    12.5 %     86,235              
Macaya
 
Hupecol
    12.5 %     195,201              
Serrania
 
Hupecol
    12.5 %     110,769              
Total
 
 
            392,205              
 
At December 31, 2012 we held interests in three concessions operated by Hupecol Operating Co. in Colombia. The Loc Picachos, Macaya and Serrania concessions are located in the Caguan Putumayo Basin of Colombia. The concessions cover an aggregate area of 392,205 acres. Our interest in each of the concessions is subject to an escalating royalty ranging from 8% to 20% depending upon production volumes and pricing and an additional 6% to 10% per concession when 5,000,000 barrels of oil have been produced on a field in a concession.
 
During the first quarter of 2012, we sold our interest in the 48,000 La Cuerva concession and the 40,000 acre LLA 62 concession, both of which were operated by Hupecol.  Included in our interest sold in the La Cuerva concession was our entire interest in 16 gross (0.256 net) wells which accounted for approximately 51 barrels of oil per day to our interest at the time of sale. As of December 31, 2012, no production had taken place on any of the fields in our then existing concessions in Colombia.
 
As operator of our various prospects, Hupecol has substantial control over the timing of drilling and selection of prospects to be drilled and we have limited ability to influence the selection of prospects to be drilled or the timing of such drilling operations and have no effective means of controlling the costs of such drilling operations.  Accordingly, our drilling budget is subject to fluctuation based on the prospects selected to be drilled by Hupecol, the decisions of Hupecol regarding timing of such drilling operations and the ability of Hupecol to drill and operate wells within estimated budgets.
 
For 2013, Hupecol has advised us that they plan to drill the first two wells on the Serrania concession as well as begin seismic on the Los Picachos and Macaya concessions.  Hupecol’s drilling and seismic plans for 2013 may change based on field conditions and other factors beyond our control or the control of Hupecol.  Our estimated net cost associated with drilling the first two wells on the Serrania concession as well as our portion of the seismic expenses related to the Los Picachos and Macaya concessions is approximately $2.5 million.
 
Serrania Block
 
Our interest in the Serrania concession was acquired through a Farmout Agreement with the original operator of the block pursuant to which we will pay 25% of designated Phase 1 geological and seismic costs in return for a 12.5% interest in the Contract for Exploration and Production covering the concession.
 
Seismic work on the Serrania Block was completed in 2010.  Drilling preparation and seismic processing work was performed in 2011 and 2012 in connection with the planned drilling of initial test wells on the concession. The National Hydrocarbon Agency of Colombia (the “ANH”) has granted extensions of required development commitments, including drilling of a first test well on the Serrania concession, until security conditions allow operations.
 
Los Picachos and Macaya Prospects
 
Our Los Picachos and Macaya prospects adjoin our Serrania concession.  Hupecol has advised us that they plan to begin seismic on the Los Picachos and Macaya concessions during 2013.
 
 
Drilling Activity
 
During 2012, we participated in the drilling of a total of 5 gross wells, all of which were in Colombia.  Of the 5 wells drilled, 3 were classified as exploratory and 2 were classified as development. Our 2012 drilling program achieved a 40% success rate. The following table summarizes the number of wells drilled during 2012, 2011, and 2010, excluding any wells drilled under farmout agreements, royalty interest ownership, or any other wells in which we do not have a working interest.
 
   
Year Ended December 31,
 
   
2012
   
2011
   
2010
 
   
Gross
   
Net
   
Gross
   
Net
   
Gross
   
Net
 
Development wells, completed as:
 
 
   
 
   
 
   
 
   
 
   
 
 
Productive
    2 (1)     .032       2       0.032       2       0.032  
Non-productive
                                   
Total development wells
    2       .032       2       0.032       2       0.032  
Exploratory wells, completed as:
                                               
Productive
                5       0.080       7       0.439  
Non-productive
    3       1.125       6       0.096       3       0.204  
Total exploratory wells
    3       1.125       11       0.176       10       0.643  
 
 
(1)
Consists of wells drilled on the La Cuerva prospect, which were sold along with the prospect during 2012.
 
Productive wells are wells that are found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.
 
As of December 31, 2012, we had no wells in progress or awaiting completion.
 
 Productive Wells
 
Productive wells consist of producing wells and wells capable of production, including shut-in wells. A well bore with multiple completions is counted as only one well. As of December 31, 2012, we owned interests in 6 gross wells. As of December 31, 2012, we had ownership interests in productive wells, categorized by geographic area, as follows:
 
   
Oil Wells
   
Gas Wells
 
United States
 
 
   
 
 
Gross
          6  
Net
          0.19  
Colombia
               
Gross
           
Net
           
Total
               
Gross
          6  
Net
          0.19  
 
 
Volume, Prices and Production Costs
 
The following table sets forth certain information regarding the production volumes, average prices received and average production costs associated with our sales of gas and oil, categorized by geographic area, for each of the three years ended December 31, 2012:
 
   
Year Ended December 31,
 
   
2012
   
2011
   
2010
 
Net Production:
 
 
   
 
   
 
 
Gas (Mcf):
 
 
   
 
   
 
 
United States
    12,066       10,838       17,798  
Colombia
                 
Total
    12,066       10,838       17,798  
Oil (Bbls):
                       
United States
    1,032       1,092       1,540  
Colombia
    1,755       9,924       260,239  
Total
    2,787       11,016       261,779  
Average sales price:
                       
Gas ($ per Mcf)
                       
United States
  $ 3.22     $ 3.90     $ 5.01  
Colombia
                 
Total
    3.22       3.90       5.01  
Oil ($ per Bbl)
                       
United States
    105.91       97.10       76.21  
Colombia
    110.36       101.56       74.17  
Total
    108.71       101.12       74.18  
Average production costs ($ per BOE):
                       
United States
    25.00       16.05       8.50  
Colombia
    68.00       80.13 (1)     31.08  
Total
  $ 40.72     $ 65.65     $ 30.70  
 
 
(1)
The increase in production costs per BOE in Colombia during 2011 reflect reduced production volumes in 2011 following the sale of our principal producing properties in 2010 and disproportionately high fixed production costs in Colombia.

Natural Gas and Oil Reserves
 
Reserve Estimates
 
The following tables sets forth, by country and as of December 31, 2012, our estimated net proved oil and natural gas reserves, and the estimated present value (discounted at an annual rate of 10%) of estimated future net revenues before future income taxes (PV-10) and after future income taxes (Standardized Measure) of our proved reserves, each prepared in accordance with assumptions prescribed by the Securities and Exchange Commission (SEC).
 
The PV-10 value is a widely used measure of value of oil and natural gas assets and represents a pre-tax present value of estimated cash flows discounted at ten percent. PV-10 is considered a non-GAAP financial measure as defined by the SEC.  We believe that our PV-10 presentation is relevant and useful to our investors because it presents the discounted future net cash flows attributable to our proved reserves before taking into account the related future income taxes, as such taxes may differ among various companies because of differences in the amounts and timing of deductible basis, net operating loss carry forwards and other factors.  We believe investors and creditors use our PV-10 as a basis for comparison of the relative size and value of our proved reserves to the reserve estimates of other companies.  PV-10 is not a measure of financial or operating performance under GAAP and is not intended to represent the current market value of our estimated oil and natural gas reserves. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows as defined under GAAP.
 
 
These calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with SEC financial accounting and reporting standards.
 
   
Reserves (1)
 
   
Oil
   
Natural Gas
   
Total (2)
 
   
(bbls)
   
(mcf)
   
(boe)
 
Reserve category
                 
Proved Developed
                 
United States
    6,170       85,280       20,383  
Colombia
                 
Total Proved Developed Reserves
    6,170       85,280       20,383  
Proved Undeveloped
                       
United States
                 
Colombia
                 
Total Proved Undeveloped Reserves
                 
Total Proved Reserves
    6,170       85,280       20,383  
 
   
Proved Developed
   
Proved Undeveloped
   
Total Proved
 
                   
PV-10 (1)
  $ 298,070     $     $ 298,070  
Standardized measure (3)
  $ 298,070     $     $ 298,070  
 
 
(1)
In accordance with applicable financial accounting and reporting standards of the SEC, the estimates of our proved reserves and the PV-10 set forth herein reflect estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions at December 31, 2012.  For purposes of determining prices, we used the unweighted arithmetical average of the prices on the first day of each month within the 12-month period ended December 31, 2012.  The average prices utilized for purposes of estimating our proved reserves were $95.05 per barrel of oil and $2.86 per mcf of natural gas for our US properties, adjusted by property for energy content, quality, transportation fees and regional price differentials.  The prices should not be interpreted as a prediction of future prices.  The amounts shown do not give effect to non-property related expenses, such as corporate general administrative expenses and debt service, future income taxes or to depreciation, depletion and amortization.
 
 
(2)
Natural gas is converted on the basis of six Mcf of gas per one barrel of oil equivalent.
 
 
(3)
The Standard Measure differs from PV-10 only in that the Standard Measure reflects estimated future income taxes.
 
Due to the inherent uncertainties and the limited nature of reservoir data, proved reserves are subject to change as additional information becomes available. The estimates of reserves, future cash flows and present value are based on various assumptions, including those prescribed by the SEC, and are inherently imprecise. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates.
 
Reserve Estimation Process, Controls and Technologies
 
The reserve estimates, including PV-10 and Standard Measure estimates, set forth above were prepared by Lonquist & Co., LLC.
 
These calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with SEC financial accounting and reporting standards.
 
 
Our year-end reserve report is prepared by Lonquist & Co. based upon a review of property interests being appraised, production from such properties, current costs of operation and development, current prices for production, agreements relating to current and future operations and sale of production, geosciences and engineering data, and other information provided to them by our management team.  Lonquist & Co. also prepares reserve estimates for the various Hupecol entities. Upon analysis and evaluation of data provided, Lonquist & Co. issues a preliminary appraisal report of our reserves. The preliminary appraisal report and changes in our reserves are reviewed by our President for reasonableness of the results obtained.  Once any questions have been addressed, Lonquist & Co. issues the final appraisal report, reflecting their conclusions.
 
Lonquist & Co. is an independent professional engineering firm specializing in the technical and financial evaluation of oil and gas assets. Lonquist & Co’s report was conducted under the direction of Don E. Charbula, P.E., Vice President of Lonquist & Co. Mr. Charbula holds a BS in Petroleum Engineering from The University of Texas at Austin and is a registered professional engineer with more than 30 years of experience in production engineering, reservoir engineering, acquisitions and divestments, field operations and management. Lonquist & Co., and its employees, have no interest in our Company and were objective in determining our reserves.
 
The SEC’s rules with respect to technologies that a company can use to establish reserves allows use of techniques that have been proved effective by actual production from projects in the same reservoir or an analogous reservoir or by other evidence using reliable technology that establishes reasonable certainty.  Reliable technology is a grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.
 
Lonquist & Co. used a combination of production and pressure performance, simulation studies, offset analogies, seismic data and interpretation, geophysical logs and core data to calculate our reserves estimates.
 
Proved Undeveloped Reserves
 
As of December 31, 2012, our proved undeveloped reserves totaled 0 mbbls of oil and 0 mcf of natural gas, for a total of 0 mbbls compared to 63.8 mbbls of oil and 0.0 mcf of natural gas, for a total of 63.8 mbbls as of December 31, 2011.
 
Changes in Proved Undeveloped (“PUD”) Reserves
 
Changes in PUD Reserves that occurred during 2012 were due to the sale of our interest in the La Cuerva prospect which contained all of our PUD Reserves at December 31, 2011.
 
Developed and Undeveloped Acreage
 
The following table sets forth the gross and net developed and undeveloped acreage (including both leases and concessions), categorized by geographical area, which we held as of December 31, 2012:
 
   
Developed
   
Undeveloped
 
   
Gross
   
Net
   
Gross
   
Net
 
United States
    2,409       64       4,595       1,622  
Colombia
                737,657       178,570  
Total
    2,409       64       742,252       180,192  
 
As noted above, subsequent to December 31, 2012, we agreed to transfer to SK Innovation our entire 37.5% interest in the 345,452 acre CPO 4 prospect in Colombia.
 
Developed acreage is comprised of leased acres that are within an area spaced by or assignable to a productive well. Undeveloped acreage is comprised of leased acres with defined remaining terms and not within an area spaced by or assignable to a productive well.
 
As is customary in the oil and natural gas industry, we can generally retain our interest in undeveloped acreage by drilling activity that establishes commercial production sufficient to maintain the leases or by paying delay rentals during the remaining primary term of leases. The oil and natural gas leases in which we have an interest are for varying primary terms and, if production under a lease continues from our developed lease acreage beyond the primary term, we are entitled to hold the lease for as long as oil or natural gas is produced.
 
 
Many of the leases and concessions comprising the undeveloped acreage set forth in the table above will expire at the end of their respective primary terms unless production from the acreage has been established prior to such date, in which event the lease or concession will remain in effect until the cessation of production. The following table sets forth, as of December 31, 2012, the expiration periods of the gross and net acres that are subject to leases or concessions summarized in the above table of undeveloped acreage.
 
   
Undeveloped
Acres
Expiring
 
Twelve Months Ending:
 
Gross
   
Net
 
December 31, 2014
    854       313  
December 31, 2015
    211       58  
December 31, 2016
    3,024       1,061  
December 31, 2017 and later
    738,163       178,760  
Total
    742,252       180,192  
 
Title to Properties
 
Title to properties is subject to royalty, overriding royalty, carried working, net profits, working and other similar interests and contractual arrangements customary in the gas and oil industry, liens for current taxes not yet due and other encumbrances. As is customary in the industry in the case of undeveloped properties, little investigation of record title is made at the time of acquisition (other than preliminary review of local records).
 
Investigation, including a title opinion of local counsel, generally is made before commencement of drilling operations.
 
Marketing
 
At December 31, 2012, we had no contractual agreements to sell our gas and oil production and all production was sold on spot markets.
 
Employees
 
As of December 31, 2012, we had 4 full-time employees and no part time employees. The employees are not covered by a collective bargaining agreement, and we do not anticipate that any of our future employees will be covered by such agreements.
 
Competition
 
We encounter intense competition from other oil and gas companies in all areas of our operations, including the acquisition of producing properties and undeveloped acreage. Our competitors include major integrated oil and gas companies, numerous independent oil and gas companies and individuals. Many of our competitors are large, well-established companies with substantially larger operating staffs and greater capital resources and have been engaged in the oil and gas business for a much longer time than our Company. These companies may be able to pay more for productive oil and gas properties, exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in this highly competitive environment.
 
Regulatory Matters
 
Regulation of Oil and Gas Production, Sales and Transportation
 
The oil and gas industry is subject to regulation by numerous national, state and local governmental agencies and departments. Compliance with these regulations is often difficult and costly and noncompliance could result in substantial penalties and risks. Most jurisdictions in which we operate also have statutes, rules, regulations or guidelines governing the conservation of natural resources, including the unitization or pooling of oil and gas properties, minimum well spacing, plugging and abandonment of wells and the establishment of maximum rates of production from oil and gas wells. Some jurisdictions also require the filing of drilling and operating permits, bonds and reports. The failure to comply with these statutes, rules and regulations could result in the imposition of fines and penalties and the suspension or cessation of operations in affected areas.
 
 
Environmental Regulation
 
Various federal, state and local laws and regulations relating to the protection of the environment, including the discharge of materials into the environment, may affect our exploration, development and production operations and the costs of those operations. These laws and regulations, among other things, govern the amounts and types of substances that may be released into the environment, the issuance of permits to conduct exploration, drilling and production operations, the discharge and disposition of generated waste materials and waste management, the reclamation and abandonment of wells, sites and facilities, financial assurance and the remediation of contaminated sites. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas.
 
The environmental laws and regulations applicable to our U.S. operations include, among others, the following United States federal laws and regulations:
 
 
Clean Air Act, and its amendments, which govern air emissions;
 
 
Clean Water Act, which governs discharges into waters of the United States;
 
 
Comprehensive Environmental Response, Compensation and Liability Act, which imposes liability where hazardous releases have occurred or are threatened to occur (commonly known as “Superfund”);
 
 
Resource Conservation and Recovery Act, which governs the management of solid waste;
 
 
Oil Pollution Act of 1990, which imposes liabilities resulting from discharges of oil into navigable waters of the United States;
 
 
Emergency Planning and Community Right-to-Know Act, which requires reporting of toxic chemical inventories;
 
 
Safe Drinking Water Act, which governs the underground injection and disposal of wastewater; and
 
 
U.S. Department of Interior regulations, which impose liability for pollution cleanup and damages.
 
Colombia has similar laws and regulations designed to protect the environment.
 
We routinely obtain permits for our facilities and operations in accordance with these applicable laws and regulations on an ongoing basis. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations.
 
The ultimate financial impact of these environmental laws and regulations is neither clearly known nor easily determined as new standards are enacted and new interpretations of existing standards are rendered. Environmental laws and regulations are expected to have an increasing impact on our operations. In addition, any non-compliance with such laws could subject us to material administrative, civil or criminal penalties, or other liabilities. Potential permitting costs are variable and directly associated with the type of facility and its geographic location. Costs, for example, may be incurred for air emission permits, spill contingency requirements, and discharge or injection permits. These costs are considered a normal, recurring cost of our ongoing operations and not an extraordinary cost of compliance with government regulations.
 
Although we do not operate the properties in which we hold interests, noncompliance with applicable environmental laws and regulations by the operators of our oil and gas properties could expose us, and our properties, to potential costs and liabilities associated with such environmental laws. While we exercise no oversight with respect to any of our operators, we believe that each of our operators is committed to environmental protection and compliance. However, since environmental costs and liabilities are inherent in our operations and in the operations of companies engaged in similar businesses and since regulatory requirements frequently change and may become more stringent, there can be no assurance that material costs and liabilities will not be incurred in the future. Such costs may result in increased costs of operations and acquisitions and decreased production.
 
 
Climate Change Legislation and Greenhouse Gas Regulation
 
Federal, state and local laws and regulations are increasingly being enacted to address concerns about the effects the emission of “greenhouse gases” may have on the environment and climate worldwide. These effects are widely referred to as “climate change.” Since its December 2009 endangerment finding regarding the emission of greenhouse gases, the EPA has begun regulating sources of greenhouse gas emissions under the federal Clean Air Act. Among several regulations requiring reporting or permitting for greenhouse gas sources, the EPA finalized its “tailoring rule” in May 2010 that determines which stationary sources of greenhouse gases are required to obtain permits to construct, modify or operate on account of, and to implement the best available control technology for, their greenhouse gases. In November 2010, the EPA also finalized its greenhouse gas reporting requirements, beginning in March 2012, for certain oil and gas production facilities.
 
Moreover, in recent past the U.S. Congress has considered establishing a cap-and-trade program to reduce U.S. emissions of greenhouse gases. Under past proposals, the EPA would issue or sell a capped and steadily declining number of tradable emissions allowances to certain major sources of greenhouse gas emissions so that such sources could continue to emit greenhouse gases into the atmosphere. These allowances would be expected to escalate significantly in cost over time. The net effect of such legislation, if ever adopted, would be to impose increasing costs on the combustion of carbon-based fuels such as crude oil, refined petroleum products, and natural gas. In addition, while the prospect for such cap-and-trade legislation by the U.S. Congress remains uncertain, several states have adopted, or are in the process of adopting, similar cap-and-trade programs.
 
As a crude oil and natural gas company, the debate on climate change is relevant to our operations because the equipment we use to explore for, develop and produce crude oil and natural gas emits greenhouse gases. Additionally, the combustion of carbon-based fuels, such as the crude oil and natural gas we sell, emits carbon dioxide and other greenhouse gases. Thus, any current or future federal, state or local climate change initiatives could adversely affect demand for the crude oil and natural gas we produce by stimulating demand for alternative forms of energy that do not rely on the combustion of fossil fuels, and therefore could have a material adverse effect on our business. Although our compliance with any greenhouse gas regulations may result in increased compliance and operating costs, we do not expect the compliance costs for currently applicable regulations to be material. Moreover, while it is not possible at this time to estimate the compliance costs or operational impacts for any new legislative or regulatory developments in this area, we do not anticipate being impacted to any greater degree than other similarly situated competitors.
 
Web Site Access to Reports
 
Our Web site address is www.houstonamericanenergy.com. We make available, free of charge on or through our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the United States Securities and Exchange Commission. Information contained on our website is not incorporated by reference into this report and you should not consider information contained on our website as part of this report.
 
 
Item 1A.
 
Our business activities and the value of our securities are subject to significant hazards and risks, including those described below. If any of such events should occur, our business, financial condition, liquidity and/or results of operations could be materially harmed, and holders and purchasers of our securities could lose part or all of their investments.
 
Our cash flows and profitability may fluctuate by large amounts as a result of our strategy of investment in drilling and exploration of unproven properties and opportunistic asset divestitures.
 
We have historically experienced large fluctuations in our cash flows and profitability associated with our drilling and development of properties, divestitures of interests in select properties and reinvestment in drilling and development of unproven properties.  Our strategy has historically focused on early identification of, and entrance into, existing and emerging resource plays.  As part of that strategy, we and our partners have participated in accumulating positions and drilling unproven acreage, that may be perceived to be higher risk, where acquisition, drilling and operation costs may be lower with a view to proving reserves, divesting selected assets on an opportunistic basis to operators willing to pay higher prices for proven prospects without early stage drilling risk and reinvesting operating cash flow and sales proceeds in accumulating, drilling and developing additional, and larger, acreage positions.  As a result of such strategy, we sold acreage positions in 2008, 2010 and 2012 that provided one-time profits and cash proceeds and substantially reduced our proved reserves, production and operating cash flows immediately following such sales and after which we invested substantial portions of sales proceeds in the accumulation and exploratory drilling of larger acreage positions.  While our reserves, production, operating cash flows and operating profitability have historically grown as properties have been drilled and developed and have fallen following strategic asset divestitures when we are incurring costs to drill and develop properties, there is no assurance that our strategy will produce such results in the future and, in fact, that strategy did not produce new reserves, production, cash flow or profitability when deployed on our CPO 4 prospect.  As a result of drilling and other risks, there can be no assurance that our reserve and production growth strategy will allow us to grow, and replace, our acreage position, reserves, production and profitability following divestitures and we may continue to experience large fluctuations in such positions.
 
Our divestiture strategy exposes us to risks associated with a lack of diversification and a concentration of properties, increased dependence on a small number of properties and disproportionate risk of loss associated with drilling results and operations of one or a small number of properties.
 
Because a significant element of our strategy has been the opportunistic divestiture of properties and redeployment of resources to new properties, we have historically been focused on development of a small number of geographically concentrated prospects.  Accordingly, we lack diversification with respect to the nature and geographic location of our holdings.  As a result, we are exposed to higher dependence on individual resource plays and may experience substantial losses should a single individual prospect prove unsuccessful. Absent other operating properties, the failure or underperformance of a single prospect could materially adversely affect our financial resources, reserve and production outlook and profitability.  In particular, during 2011 and 2012 we committed a substantial portion of the proceeds received from our 2010 divestiture of Hupecol properties to a drilling program on our CPO 4 prospect. Between 2011 and 2012, we participated in the drilling of three test wells on our CPO 4 prospect, each of which was determined to be noncommercial and, ultimately, plugged and abandoned.  Given our focus on development of the CPO 4 prospect, including the commitment of substantial financial resources and the lack of current production from our other prospects, the failure to complete a commercial well on the prospect materially adversely affected our financial position and operating outlook.
 
Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our cash flows and income.
 
Unless we conduct successful development, exploitation and exploration activities or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and natural gas reserves and production, and, therefore our cash flow and income, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. If we are unable to develop, exploit, find or acquire additional reserves to replace our current and future production, our cash flow and income will decline as production declines, until our existing properties would be incapable of sustaining commercial production.
 
 
A substantial percentage of our properties are unproven and undeveloped; therefore the cost of proving and developing our properties and risk associated with our success is greater than would be the case if the majority of our properties were categorized as proved developed producing.
 
Because a substantial percentage of our properties are unproven and undeveloped, we require significant capital to prove and develop such properties before they may become productive. Following the sale of our principal producing property in Colombia in March 2012, substantially all of our net acreage was unproven and undeveloped. Because of the inherent uncertainties associated with drilling for oil and gas, some of these properties may never be successfully drilled and developed to the extent that they result in positive cash flow. Even if we are successful in our drilling and development efforts, it could take several years for a significant portion of our unproven properties to be converted to positive cash flow.
 
Prospects that we decide to drill may not yield oil or natural gas in commercially viable quantities.
 
Our prospects are properties on which we have identified what we believe, based on available seismic and geological information, to be indications of oil or natural gas potential. Our prospects are in various stages of evaluation, ranging from a prospect that is ready to drill to a prospect that will require substantial seismic data processing and interpretation. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities. We cannot assure that the analogies we draw from available data from other wells, more fully explored prospects or producing fields will be applicable to our drilling prospects.
 
Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our business, financial condition or results of operations.
 
Our future success will depend on the success of our exploitation, exploration, development and production activities. Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil or natural gas production. Our decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. Please read “Reserve estimates depend on many assumptions that may turn out to be inaccurate” (below) for a discussion of the uncertainty involved in these processes. Our cost of drilling, completing and operating wells is often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail, delay or cancel drilling, including the following:
 
 
delays imposed by or resulting from compliance with regulatory requirements;
 
 
pressure or irregularities in geological formations;
 
 
shortages of or delays in obtaining equipment and qualified personnel;
 
 
equipment failures or accidents;
 
 
adverse weather conditions;
 
 
reductions in oil and natural gas prices;
 
 
title problems; and
 
 
limitations in the market for oil and natural gas.
 
Cost overruns, curtailments, delays and cancellations of operations as a result of the above factors and other factors common in our industry may materially adversely affect our operating results and financial position and our ability to maintain our interests in prospects.
 
 
We may incur substantial uninsured losses and be subject to substantial liability claims as a result of our oil and natural gas operations.
 
 We are not insured against all risks. Losses and liabilities arising from uninsured and underinsured events could materially and adversely affect our business, financial condition or results of operations. Our oil and natural gas exploration and production activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of:
 
 
environmental hazards, such as uncontrollable flows of oil, natural gas, brine, well fluids, toxic gas or other pollution into the environment, including groundwater and shoreline contamination;
 
 
abnormally pressured formations;
 
 
mechanical difficulties, such as stuck oil field drilling and service tools and casing collapse;
 
 
fires and explosions;
 
 
personal injuries and death; and
 
 
natural disasters.
 
Any of these risks could adversely affect our ability to conduct operations or result in substantial losses to our company. We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of a significant accident or other event that is not fully covered by insurance could have a material adverse effect on our business, results of operations or financial condition.
 
We are dependent upon third party operators of our oil and gas properties.
 
Under the terms of the operating agreements related to our oil and gas properties, third parties act as the operator of each of our oil and gas wells and control the drilling and operating activities to be conducted on our properties. Therefore, we have limited control over certain decisions related to activities on our properties, which could affect our results of operations. Decisions over which we have limited control include:
 
 
the timing and amount of capital expenditures;
 
 
the timing of initiating the drilling and recompleting of wells;
 
 
the extent of operating costs; and
 
 
the level of ongoing production.
 
Decisions made by our operators may be different than those we would make reflecting priorities different than our priorities and may materially adversely affect our operating results and financial position.
 
The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute on a timely basis our exploration and development plans within our budget.
 
Shortages or the high cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our development and exploration operations. As the price of oil and natural gas increases, the demand for production equipment and personnel will likely also increase, potentially resulting, at least in the near-term, in shortages of equipment and personnel. In addition, larger producers may be more likely to secure access to such equipment by virtue of offering drilling companies more lucrative terms. If we are unable to acquire access to such resources, or can obtain access only at higher prices, not only would this potentially delay our ability to convert our reserves into cash flow, but could also significantly increase the cost of producing those reserves, thereby negatively impacting anticipated net income.
 

We may need additional financing to support operations and future capital commitments.
 
At December 31, 2012, our estimated drilling budget for 2013 was approximately $2.5 million, principally relating to the drilling of two test wells on the Serrania prospect as well as shooting seismic on the Los Picachos and Macaya Concessions.  While we believe that our cash on hand at December 31, 2012, together with funds expected to be received from federal tax refunds and the release of certain restricted funds, will support or drilling budget and overhead during 2013, there is no assurance that we will not require additional financing to support drilling operations and other cash requirements during 2013 or in future years.  Our drilling budget can vary substantially based on the timing and results of drilling operations as well as determinations to participate in the drilling and development of new prospects. We have no commitments to provide any additional financing and there is no guarantee that we will be able to secure additional financing on acceptable terms, or at all, if needed to fully fund our 2013 drilling budget and to support future acquisitions and development activities.
 
If our access to markets is restricted, it could negatively impact our production, our income and ultimately our ability to retain our leases.
 
Market conditions or the unavailability of satisfactory transportation arrangements may hinder our access to oil and natural gas markets or delay our production. The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and terminal facilities. Our ability to market our production depends in substantial part on the availability and capacity of gathering systems, pipelines and processing facilities owned and operated by third parties. Our failure to obtain such services on acceptable terms could materially harm our business.
 
We may operate in areas with limited or no access to pipelines, thereby necessitating delivery by other means, such as trucking, or requiring compression facilities. Such restrictions on our ability to sell our oil or natural gas could have several adverse effects, including higher transportation costs, fewer potential purchasers (thereby potentially resulting in a lower selling price) or, in the event we were unable to market and sustain production from a particular lease for an extended time, possibly causing us to lose a lease due to lack of production.
 
A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.
 
The price we receive for our oil and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth. 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 natural gas have been volatile. These markets will likely continue to be volatile in the future. The prices we receive for our production, and the levels of our production, depend on numerous factors beyond our control. These factors include, but are not limited to, the following:
 
 
changes in global supply and demand for oil and natural gas;
 
 
the actions of the Organization of Petroleum Exporting Countries, or OPEC;
 
 
the price and quantity of imports of foreign oil and natural gas;
 
 
political conditions, including embargoes, in or affecting other oil-producing activity;
 
 
the level of global oil and natural gas exploration and production activity;
 
 
the level of global oil and natural gas inventories;
 
 
weather conditions;
 
 
technological advances affecting energy consumption; and
 
 
the price and availability of alternative fuels.
 
 
Lower oil and natural gas prices may not only decrease our revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically. Lower prices will also negatively impact the value of our proved reserves. A substantial or extended decline in oil or natural gas prices may materially and adversely affect our future business, financial condition, results of operations, liquidity or ability to finance planned capital expenditures.
 
Global economic growth drives demand for energy from all sources, including fossil fuels.  Should the U.S. and global economies experience weakness, such as that experienced during the global financial crisis of 2008-2009, demand for energy and accompanying commodity prices may decline and our financial position may deteriorate along with our ability to operate profitably and our ability to obtain financing to support operations and the cost and terms of the same, is unclear. With respect to our business, the crisis experienced during the 2008-2009 period resulted in a steep decline in the price of oil and natural gas, a marked decline in the value of our reserves, a determination in March 2009 to temporarily shut-in production from our Colombian wells and reduced revenues and profitability.
 
If oil and natural gas prices decrease, we may be required to take write-downs of the carrying values of our oil and natural gas properties, potentially negatively impacting the trading value of our securities.
 
Accounting rules require that we review periodically the carrying value of our oil and natural gas properties for possible impairment. Based on specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development plans, production data, economics and other factors, we have and may be required to further write down the carrying value of our oil and natural gas properties. A write-down would constitute a non-cash charge to earnings. It is likely the cumulative effect of a write-down could also negatively impact the trading price of our securities.
 
Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
 
The process of estimating oil and natural gas reserves is complex, requiring interpretations of available technical data and many assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves reported.
 
In order to prepare our estimates, we must project production rates and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of oil and natural gas reserves are inherently imprecise.
 
Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of our reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development activities, prevailing oil and natural gas prices and other factors, many of which are beyond our control.
 
The present value of future net revenues from our proved reserves, as reported from time to time, should not be assumed to be the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, we generally base the estimated discounted future net cash flows from our proved reserves on costs on the date of the estimate and average prices over the preceding twelve months. Actual future prices and costs may differ materially from those used in the present value estimate. If future prices decline or costs increase it could negatively impact our ability to finance operations, and individual properties could cease being commercially viable, affecting our decision to continue operations on producing properties or to attempt to develop properties. All of these factors would have a negative impact on earnings and net income, and most likely the trading price of our securities.
 

Our operations in Colombia are subject to risks relating to political and economic instability.
 
We currently have interests in multiple oil and gas concessions in Colombia and anticipate that operations in Colombia will constitute a substantial element of our strategy going forward. The political climate in Colombia is unstable and could be subject to radical change over a very short period of time. In the event of a significant negative change in the political or economic climate in Colombia, we may be forced to abandon or suspend our operations in Colombia.
 
A 40-year armed conflict between government forces and anti-government insurgent groups and illegal paramilitary groups—both funded by the drug trade—continues in Colombia. Insurgents continue to attack civilians and violent guerilla activity continues in many parts of the country. While our operators take measures to protect our assets, operations and personnel from guerilla activity, continuing attempts to reduce or prevent guerilla activity may not be successful and guerilla activity may disrupt our operations in the future. There can also be no assurance that we can maintain the safety of our operations and personnel in Colombia or that this violence will not affect our operations in the future. Continued or heightened security concerns in Colombia could also result in a significant loss to us.
 
Additionally, Colombia is among several nations whose eligibility to receive foreign aid from the United States is dependent on its progress in stemming the production and transit of illegal drugs, which is subject to an annual review by the President of the United States. Although Colombia is currently eligible for such aid, Colombia may not remain eligible in the future. A finding by the President that Colombia has failed demonstrably to meet its obligations under international counternarcotics agreements may result in any of the following:
 
 
all bilateral aid, except anti-narcotics and humanitarian aid, would be suspended;
 
 
the Export-Import Bank of the United States and the Overseas Private Investment Corporation would not approve financing for new projects in Colombia;
 
 
United States representatives at multilateral lending institutions would be required to vote against all loan requests from Colombia, although such votes would not constitute vetoes; and
 
 
the President of the United States and Congress would retain the right to apply future trade sanctions.
 
Each of these consequences could result in adverse economic consequences in Colombia and could further heighten the political and economic risks associated with our operations there. Any changes in the holders of significant government offices could have adverse consequences on our relationship with key governmental agencies and the Colombian government’s ability to control guerrilla activities and could exacerbate the factors relating to our foreign operations. Any sanctions imposed on Colombia by the United States government could threaten our ability to obtain necessary financing to develop the Colombian properties or cause Colombia to retaliate against us, including by nationalizing our Colombian assets. Accordingly, the imposition of the foregoing economic and trade sanctions on Colombia would likely result in a substantial loss and a decrease in the price of our common stock. The United States may impose sanctions on Colombia in the future, and we cannot predict the effect in Colombia that these sanctions might cause.
 
Our operations in Colombia are controlled by operators which may carry out transactions affecting our Colombian assets and operations without our consent.
 
Our operations in Colombia are subject to a substantial degree of control by the operators of the properties in which we hold interests in Colombia. We are an investor in a number of properties operated by Hupecol and our interest in the assets and operations of Hupecol related entities and ventures represent a substantial portion of our current assets in Colombia. During 2008, 2010 and 2012, respectively, Hupecol sold its interest in multiple concessions and entities holding multiple concessions each representing, at the time, the largest prospect(s) in terms of reserves and revenues in which we then held an interest. In early March 2009, Hupecol determined to temporarily shut-in production from our Colombian properties. It is possible that Hupecol will carry out similar sales or acquisitions of prospects or make similar decisions in the future. Our management intends to closely monitor the nature and progress of future transactions by Hupecol in order to protect our interests. However, we have no effective ability to alter or prevent a transaction and are unable to predict whether or not any such transactions will in fact occur or the nature or timing of any such transaction.
 
 
In addition to the control exercised by Hupecol with respect to the properties it operates, as minority owners, we are, or may be, subject to substantial control of other properties in Colombia in which we hold interests that are operated by third party operators, other than Hupecol. Our Colombian assets presently consist, and in the future are expected to continue to consist, exclusively of minority, non-operator project interests in certain Colombian assets owned and operated by third party operators. Our passive investments in such Colombian assets constitute our principal assets, and as a result, our financial results are directly affected by the independent strategies and decisions of the operators of those properties.
 
We may be exposed to additional expenses and losses arising from the financial position of our joint interest partners in Colombia.
 
Our Colombian properties are developed under financial arrangements with various joint interest partners. If other joint interest partners are unable, or unwilling, to satisfy their various obligations relating to prospects, we may be required to pay a proportionately higher share of development costs on those prospects or the prospect may be inadequately capitalized to achieve optimal results.
 
We may be exposed to substantial fines and penalties if we or our partners fail to comply with laws and regulations associated with our activities in foreign countries, including Colombia, regarding  U.S. laws such as the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments to governmental officials and other corrupt practices.
 
Our Colombian assets constitute our principal assets and consist exclusively of minority, non-operator project interests.  Third parties act as the operator of each of our oil and gas wells and control all drilling and operating activities conducted with respect to our Colombian properties. Therefore, we have limited control over decisions related to activities on our properties, and we cannot provide assurance that our partners or their employees, contractors or agents will not take actions in violation of applicable anti-corruption laws and regulations. In the course of conducting business in Colombia, we have relied primarily on the representations and warranties made by our operating and non-operating partners in the farmout and joint operating agreements which govern our respective project interests to the effect that:
 
 
each party has not and will not offer or make payments to any person, including a government official, that would violate the laws of the country of operations, the country of formation of any of the partners or the principals described in the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions; and
 
 
each party will maintain adequate internal controls, properly record and report all transactions and comply with the laws applicable to the transaction.
 
While we periodically inquire as to the continuing accuracy of these representations, as a minority non-operator, we are limited in our ability to assure compliance.  Consequently, we cannot provide assurance that the procedural safeguards, if any, adopted by our partners or the representations and warranties contained in these agreements and our reliance on them will protect us from liability should a violation occur. Any violations of the anti-bribery, accounting controls or books and records provisions of the Foreign Corrupt Practices Act by us or our partners could subject us and, where deemed appropriate, individuals, in certain cases, to a broad range of  civil and criminal penalties, including but not limited to, imprisonment, injunctive relief, disgorgement, substantial fines or penalties, prohibitions on our ability to offer our products in one or more countries, imposed modifications to business practices and compliance programs, including retention of an independent monitor to oversee compliance, and could also materially damage our reputation, our business and our operating results.
 
Our operations will be subject to environmental and other government laws and regulations that are costly and could potentially subject us to substantial liabilities.
 
Crude oil and natural gas exploration and production operations in the United States and in Colombia are subject to extensive federal, state and local laws and regulations. Oil and gas companies are subject to laws and regulations addressing, among others, land use and lease permit restrictions, bonding and other financial assurance related to drilling and production activities, spacing of wells, unitization and pooling of properties, environmental and safety matters, plugging and abandonment of wells and associated infrastructure after production has ceased, operational reporting and taxation. Failure to comply with such laws and regulations can subject us to governmental sanctions, such as fines and penalties, as well as potential liability for personal injuries and property and natural resources damages. We may be required to make significant expenditures to comply with the requirements of these laws and regulations, and future laws or regulations, or any adverse change in the interpretation of existing laws and regulations, could increase such compliance costs. Regulatory requirements and restrictions could also delay or curtail our operations and could have a significant impact on our financial condition or results of operations.
 
 
Our oil and gas operations are subject to stringent laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations:
 
 
require the acquisition of a permit before drilling commences;
 
 
restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities;
 
 
limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and
 
 
impose substantial liabilities for pollution resulting from operations.
 
Failure to comply with these laws and regulations may result in:
 
 
the imposition of administrative, civil and/or criminal penalties;
 
 
incurring investigatory or remedial obligations; and
 
 
the imposition of injunctive relief.
 
Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our industry in general and on our own results of operations, competitive position or financial condition. Although we intend to be in compliance in all material respects with all applicable environmental laws and regulations, we cannot assure you that we will be able to comply with existing or new regulations. In addition, the risk of accidental spills, leakages or other circumstances could expose us to extensive liability.
 
We are unable to predict the effect of additional environmental laws and regulations that may be adopted in the future, including whether any such laws or regulations would materially adversely increase our cost of doing business or affect operations in any area.
 
Under certain environmental laws that impose strict, joint and several liability, we may be required to remediate our contaminated properties regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were or were not in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property may result from environmental and other impacts of our operations. Moreover, new or modified environmental, health or safety laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. Therefore, the costs to comply with environmental, health or safety laws or regulations or the liabilities incurred in connection with them could significantly and adversely affect our business, financial condition or results of operations. In addition, many countries as well as several states and regions of the U.S. have agreed to regulate emissions of “greenhouse gases.” Methane, a primary component of natural gas, and carbon dioxide, a byproduct of burning of natural gas and oil, are greenhouse gases. Regulation of greenhouse gases could adversely impact some of our operations and demand for some of our services or products in the future.
 
Certain U.S. federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation.
 
The Obama Administration has proposed legislation that would, if enacted into law, make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for certain domestic production activities, and (iv) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear whether any such changes will be enacted or how soon any such changes could become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could eliminate certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could negatively affect our financial condition and results of operations.
 
 
Competition in the oil and natural gas industry is intense, which may adversely affect our ability to compete.
 
We operate in a highly competitive environment for acquiring properties, marketing oil and natural gas and securing trained personnel. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours, which can be particularly important in the areas in which we operate. Those companies may be able to pay more for productive oil and natural gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Also, there is substantial competition for capital available for investment in the oil and natural gas industry. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital.
 
Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.
 
Our success will depend on our ability to attract and retain our management and non-management employees, including engineers, geoscientists and other technical and professional staff and, in particular, our President, John Terwilliger, who is principally responsible for sourcing our resource plays. We will depend, to a large extent, on the efforts, technical expertise and continued employment of such personnel and members of our management team. If members of our management team should resign or we are unable to attract the necessary personnel, our business operations could be adversely affected.
 
The price of our common stock may fluctuate significantly, and this may make it difficult to resell common stock when, or at prices, desired.
 
The price of our common stock constantly changes. We expect that the market price of our common stock will continue to fluctuate.
 
Our stock price may fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include:
 
 
quarterly variations in our operating results;
 
 
operating results that vary from the expectations of management, securities analysts and investors;
 
 
changes in expectations as to our future financial performance;
 
 
announcements by us, our partners or our competitors of leasing and drilling activities;
 
 
the operating and securities price performance of other companies that investors believe are comparable to us;
 
 
future sales of our equity or equity-related securities;
 
 
changes in general conditions in our industry and in the economy, the financial markets and the domestic or international political situation;
 
 
fluctuations in oil and gas prices;
 
 
departures of key personnel; and
 
 
regulatory considerations.
 
 
Our stock has suffered significant declines over the past year mirroring, among other things, the delays in drilling and ultimate determination to cease completion efforts on test wells on the CPO 4 prospect and the announcement that the SEC is conducting an investigation of our company.
 
In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons often unrelated to their operating performance. These broad market fluctuations may adversely affect our stock price, regardless of our operating results.
 
The sale of a substantial number of shares of our common stock may affect our stock price.
 
Future sales of substantial amounts of our common stock or equity-related securities in the public market or privately, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of common stock or the availability of shares of common stock for future sale will have on the trading price of our common stock.
 
Our charter and bylaws, as well as provisions of Delaware law, could make it difficult for a third party to acquire our company and also could limit the price that investors are willing to pay in the future for shares of our common stock.
 
Delaware corporate law and our charter and bylaws contain provisions that could delay, deter or prevent a change in control of our Company or our management. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions without the concurrence of our management or board of directors. These provisions:
 
 
authorize our board of directors to issue “blank check” preferred stock, which is preferred stock that can be created and issued by our board of directors, without stockholder approval, with rights senior to those of our common stock;
 
 
provide for a staggered board of directors and three-year terms for directors, so that no more than one-third of our directors could be replaced at any annual meeting;
 
 
provide that directors may be removed only for cause; and
 
 
establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting.
 
We are also subject to anti-takeover provisions under Delaware law, which could also delay or prevent a change of control. Taken together, these provisions of our charter, bylaws, and Delaware law may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices of our common stock and also could limit the price that investors are willing to pay in the future for shares of our common stock.
 
Our management owns a significant amount of our common stock, giving them influence or control in corporate transactions and other matters, and their interests could differ from those of other shareholders.
 
At December 31, 2012, our directors and executive officers owned approximately 21.4% of our outstanding common stock. As a result, our current directors and executive officers are in a position to significantly influence or control the outcome of matters requiring a shareholder vote, including the election of directors, the adoption of any amendment to our certificate of incorporation or bylaws, and the approval of mergers and other significant corporate transactions. Such level of control of the Company may delay or prevent a change of control on terms favorable to the other shareholders and may adversely affect the voting and other rights of other shareholders.
 

We may incur costs and be subject to sanctions and uncertainties relating to the ongoing investigation of our company by the SEC.
 
We are the subject of an ongoing formal investigation by the SEC.  Pursuant to the investigation, we received subpoenas issued by the SEC calling for the testimony of our principal officers and the delivery of certain documents.  The subpoenas were issued pursuant to a nonpublic formal order of private investigation issued by the SEC on March 1, 2011, which followed a nonpublic informal inquiry commenced by the SEC in October 2010.  We received a copy of the nonpublic formal order of private investigation on February 10, 2012 in connection with a February 2012 subpoena issued by the SEC.  The SEC has indicated that it is trying to determine whether there have been any violations of the federal securities laws and appears to have narrowed the focus of their investigation to matters relating to disclosure of reserve potential on the CPO 4 prospect.  A determination by the SEC that we have violated the U.S. securities laws would likely have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
We could be negatively impacted by securities class action complaints.
 
On April 27, 2012, a purported class action lawsuit was filed in the U.S. District Court for the Southern District of Texas against us and certain of our executive officers, which we refer to as the Silverman litigation.  The complaint generally alleges that, between March 29, 2010 and April 18, 2012, all of the defendants violated Sections 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and the individual defendants violated Section 20(a) of the Exchange Act in making materially false and misleading statements including certain statements related to the status and viability of the first test well on the CPO 4 prospect. The complaint seeks unspecified damages, interest, attorneys’ fees, and other costs. It will take time and money to defend against this suit and may distract us from more productive activities. We may not be successful in defending this litigation, and insurance proceeds may not be sufficient to cover any liability under such claims.  Additional class actions have since been filed against us, and may in the future be filed against us, as a result of, or based on, the same factual allegations set out in the Silverman litigation and all such actions would also take time and corporate resources to defend against.  If the plaintiffs in the Silverman litigation, or the plaintiffs in any other class action litigation, are successful in their litigation, the payment by us of damages, interest, attorneys’ fees and costs would have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
 
We are subject to uncertainty with respect to the calculation of certain tax obligations in Colombia and may incur additional tax liability in Colombia.
 
At December 31, 2012, we had engaged our tax advisors in Colombia to evaluate certain tax and other filings made in Colombia by them and other advisors for 2009, 2010 and 2011.  Our advisors identified inconsistencies between tax and non-tax filings with respect to equity investments made in Colombia.  Based on guidance from our advisors, we estimated and recorded a foreign tax liability related to these matters of approximately $1.9 million in 2012.  It is possible that we may be subject to additional tax obligations in Colombia related to these matters; if based upon a review of the work performed by our advisors, the Colombian tax authority and regulatory agencies disagree with our advisors assessment.
 
 
Not applicable.
 
Item 2.
 
We currently lease approximately 4,739 square feet of office space in Houston, Texas as our executive offices. Management anticipates that our space will be sufficient for the foreseeable future. The average monthly rental under the lease, which expires on May 31, 2017, is $7,701. A description of our interests in oil and gas properties is included in “Item 1. Business.”
 
 
 
On April 27, 2012, a purported class action lawsuit was filed in the U.S. District Court for the Southern District of Texas against us and certain of our executive officers: Steve Silverman v. Houston American Energy Corp. et al., Case No. 4:12-CV-1332.  The complaint generally alleges that, between March 29, 2010 and April 18, 2012, all of the defendants violated Sections 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and the individual defendants violated Section 20(a) of the Exchange Act in making materially false and misleading statements including certain statements related to the status and viability of the Tamandua #1 well. Two additional class action lawsuits were filed against us in May 2012. The complaints seek unspecified damages, interest, attorneys’ fees, and other costs. On September 20, 2012, the court consolidated the class action lawsuits and appointed a lead plaintiff and on November 15, 2012 the lead plaintiffs filed an amended complaint.  On January 14, 2013, we filed a motion to dismiss which remains pending before the court. We believe all of the claims in the consolidated class action lawsuits are without merit and intend to vigorously defend against these claims. It is not possible at this time to predict the timing or outcome of the class action lawsuits that have or may be filed.
 
On July 19, 2012, a purported derivative cause of action was filed in the U.S. District Court for the Southern District of Texas against certain of our directors and officers and Houston American Energy, as nominal defendant:  E. Howard King, Jr., derivatively, on behalf of Houston American Energy Corp., v. John F. Terwilliger, John P. Boylan, Orrie Lee Tawes III, Stephen Hartzell, James J. Jacobs, Kenneth A. Jeffers, defendants, and Houston American Energy Corp., as nominal defendant, Case No. 4:12-CV-02182.  The complaint asserts a cause of action by a shareholder on behalf of Houston American against certain of our directors and senior executive officers in connection with the June 11, 2012 approval of payment of certain bonuses, increases in salary, grant of certain stock options and entry into certain Change in Control Agreements.  The complaint alleges that the approval of such matters constituted breach of fiduciary duty and corporate waste and seeks injunctive relief to bar each of the actions in question and seeks restitution.  No damages have been or, by the nature of the derivative cause of action, are expected to be alleged against us.   On February 26, 2013, an order was entered granting a motion by the Company to dismiss the lawsuit and providing leave to the plaintiff to amend its complaint to cure pleading deficiencies. The Plaintiff’s allotted time to amend its complaint by the Court expired on March 26, 2013, and no amendment was made by the Plaintiff, effectively ending the lawsuit.
 
At December 31, 2012, the Company was the subject of a formal investigation being conducted by the Securities and Exchange Commission (the “SEC”). Pursuant to the investigation, the Company received subpoenas issued by the SEC. The subpoenas called for the testimony of certain of the Company’s officers and the delivery of certain documents. The subpoenas were issued pursuant to a nonpublic formal order of private investigation issued by the SEC on March 1, 2011, which followed a nonpublic informal inquiry commenced by the SEC in October 2010. The Company received a copy of the nonpublic formal order of private investigation on February 10, 2012 in connection with a subpoena issued by the SEC. The SEC is investigating whether there have been any violations of the federal securities laws and appears to have narrowed the focus of their investigation to matters relating to disclosures in the late 2009 and early 2010 time period regarding resource potential for the CPO 4 prospect.  The Company has presented information supporting its disclosure relative to resource potential on the CPO 4 prospect.  The investigation does not represent a conclusion by the staff that there have been any violations of the federal securities laws nor whether the staff would conclude that any enforcement action is appropriate. At this time, the Company has not been made aware of a finding by the SEC of any securities violations. Also, as stated in the subpoenas issued by the SEC, the investigation does not mean that the SEC has a negative opinion of any person, entity or security. The Company has cooperated fully, and is committed to continuing to cooperate fully, with the SEC in this matter. It is not possible at this time to predict the timing or outcome of the SEC investigation, including whether or when any proceedings might be initiated, when these matters may be resolved or what, if any, penalties or other remedies may be imposed, and whether any such penalties or remedies would have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
 
 
Not applicable.
 
 
24

 
PART II
 
 
Market Information
 
Our common stock is listed on the NYSE MKT (“NYSE”) under the symbol “HUSA.” Prior to July 27, 2010, our common stock traded on the Nasdaq Global Market also under the symbol “HUSA”. The following table sets forth the range of high and low sale prices of our common stock for each quarter during the past two fiscal years.
 
     
High
   
Low
 
Calendar Year 2012
Fourth Quarter
  $ 1.06     $ 0.19  
 
Third Quarter
    1.65       0.78  
 
Second Quarter
    5.35       0.75  
 
First Quarter
    14.73       5.02  
                   
Calendar Year 2011
Fourth Quarter
  $ 17.05     $ 10.06  
 
Third Quarter
    20.90       12.50  
 
Second Quarter
    18.45       13.55  
 
First Quarter
    19.14       13.06  
 
At March 18, 2013, the closing price of the common stock on NYSE was $0.21 per share.
 
Holders
 
As of March 18, 2013, there were approximately 882 shareholders of record of our common stock.
 
Dividends
 
No dividends were paid during calendar years 2011 or 2012. The payment of future cash dividends will depend upon, among other things, our financial condition, funds from operations, the level of our capital and development expenditures, our future business prospects, contractual restrictions and any other factors considered relevant by the Board of Directors.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table provides information as of December 31, 2012 with respect to the shares of our common stock that may be issued under our existing equity compensation plans.
 
Plan Category
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and
rights (a)
   
Weighted-average
exercise price of
outstanding options,
warrants and
rights (b)
   
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
 
Equity compensation plans approved by security holders (1)
    2,443,057     $ 5.68       125,277  
Equity compensation plans not approved by security holders
                 
Total
    2,443,057     $ 5.68       125,277  
 

(1)
Consists of 500,000 shares reserved for issuance under the Houston American Energy Corp. 2005 Stock Option Plan and 2,200,000 shares reserved for issuance under the Houston American Energy 2008 Equity Incentive Plan.  Excludes 3,800,000 shares to be added to the reserve by amendment to the 2008 Equity Incentive Plan, which amendment is subject to shareholder approval, of which 915,525 shares are issuable at $1.65 per share upon exercise of options granted subject to such shareholder approval and 3,009,752 shares of which will be available for future issuance.
 

Not applicable.
 
 
General
 
We are an independent energy company focused on the development, exploration, exploitation, acquisition, and production of natural gas and crude oil properties in the U.S. Gulf Coast region and in South America.  Our oil and gas reserves and operations are concentrated primarily in the South American country of Colombia and in the onshore Gulf Coast region, particularly Texas and Louisiana.
 
Our mission is to deliver outstanding net asset value per share growth to our investors via attractive oil and gas investments.  Our strategy is to focus on early identification of, and entrance into, existing and emerging resource plays, particularly in South America and the U.S. Gulf Coast.  We typically seek to partner with larger operators in development of resources or retain interests, with or without contribution on our part, in prospects identified, packaged and promoted to larger operators.  By entering these plays earlier and partnering with, or promoting to, larger operators, we believe we can capture larger resource potential at lower cost and minimize our exposure to drilling risks and costs and ongoing operating costs.
 
We, along with our partners, actively manage our resources through opportunistic acquisitions and divestitures where reserves can be identified, developed, monetized and financial resources redeployed with the objective of growing reserves, production and shareholder value.
 
Generally, we generate nearly all our revenues and cash flows from the sale of produced natural gas and crude oil, whether through royalty interests, working interests or other arrangements.  We may also realize gains and additional cash flows from the periodic divestiture of assets.
 
Recent Developments
 
Drilling Activity
 
During 2012, we drilled 5 international wells in Colombia, as follows:
 
 
2 wells were drilled on the La Cuerva concession in which we hold a 1.6% working interest, of which 2 were completed and brought onto production (both wells were sold in connection with the sale of our interest in HC, LLC. See “Sale of La Cuerva and LLA 62 Blocks”).
 
 
3 wells were drilled on the CPO 4 block in Colombia, each of which was determined to be non-commercial.
 
At December 31, 2012, no wells were being drilled.
 
During 2012, no domestic wells were drilled.
 
Sale of La Cuerva and LLA 62 Blocks
 
During the first quarter of 2012, we sold all of our interest in Hupecol Cuerva, LLC (“HC, LLC”), which holds interests in the La Cuerva block and, pending approval of the Colombian authorities, the LLA 62 block, together covering approximately 90,000 acres in the Llanos Basin in Colombia.
 
 HC, LLC sold for $75 million, adjusted for working capital.  13.3% of the sales price of HC, LLC will be held in escrow to fund potential claims arising from the sale.  Pursuant to our 1.6% ownership interest in HC, LLC, we received 1.6% in the net sale proceeds after deduction of commissions, overriding royalty interest, and transaction expenses; subject to the escrow holdback and a further contingency holdback by Hupecol of 1.3% of the sales price.  Following completion of the sale of HC, LLC, we have no continuing interest in the La Cuerva and LLA 62 blocks.
 
At December 31, 2011, our estimated proved reserves associated with the La Cuerva and LLA 62 blocks totaled 94,619 barrels of oil, which represented 82% of our estimated proved oil and natural gas reserves. Sales of oil and gas properties under the full cost method of accounting are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and reserves. Since the sale of these oil and gas properties would significantly alter the relationship, we recognized a gain on the sale of $315,119 during 2012, computed as follows:
 
 
Sales price
  $ 1,224,393  
Add: Transfer of asset retirement and other obligations
    34,471  
Less: Transaction costs
    (30,330 )
Less: Prepaid deposits
    (54,857 )
Less: Carrying value of oil and gas properties, net
    (858,558 )
Net gain on sale
  $ 315,119  
 
The following table presents pro forma data that reflects revenue, income from continuing operations, net loss and loss per common share for 2011 and 2012 as if the HC, LLC sale had occurred at the beginning of each period and excludes the gain on sale.
 
Pro-Forma Information:
 
2012
   
2011
 
                 
Oil and gas revenue
 
$
148,163
   
$
148,266
 
Loss from operations
 
$
(56,566,181)
   
$
(5,943,911)
 
Net loss
 
$
(56,847,211)
   
$
(4,366,837)
 
                 
Basic and diluted loss per common share
 
$
(1.47)
   
$
(0.14)
 
 
2012 Capital Expenditure Program
 
During 2012, we invested $26,033,065 for the development of oil and gas properties, consisting of (1) drilling and drilling preparation costs on 5 wells in Colombia of $25,915,741 and leasehold costs on U.S. properties of $117,324.
 
CPO 4 Developments
 
During 2012, we completed operations on three test wells on our CPO 4 block in Colombia.  Each of the test wells was determined to be noncommercial and was plugged and abandoned.  As a result of the determinations to plug and abandon each of those test wells, we included the costs related to those wells in the full cost pool for inclusion in the ceiling test.  We recorded an impairment charge of $46,235,574 during 2012 to write off costs not being amortized that were attributable to the drilling of the test wells on the CPO 4 block as well as to write off seismic exploration and evaluation cost, general and administrative cost and environmental and governmental cost that were attributable to the test wells through December 31, 2012.
 
Following drilling of the unsuccessful test wells on the CPO 4 prospect, in March 2013, we entered into a settlement agreement with SK Innovation, operator of the CPO 4 prospect, and terminated our interest in the prospect and were released from past and future funding and other obligations relating to the prospect, including our accrued cash call commitments of $3,219,128.
 
Serrania Developments
 
With respect to development of our Serrania Block, the National Hydrocarbon Agency of Colombia (the “ANH”) has granted extensions of required development commitments, including drilling of a first test well, until security conditions allow operations.  Based on those conditions, we anticipate that drilling of a first test well on the Serrania Block will occur in 2013.
 
Gulf United Note Receivable
 
As a result of Gulf United Energy’s delinquency in satisfying its financial obligations with respect to the CPO 4 prospect, during 2012, we wrote-off our receivable from Gulf United for $3,951,370.
 
 
Financing Activities
 
On May 8, 2012, we sold to institutional investors 6,200,000 units, with each unit consisting of one of our common shares and one warrant to purchase one common share, for gross proceeds of approximately $13.14 million, before deducting placement agent fees and estimated offering expenses of $527,000 recorded as cost of capital, in a "registered direct" offering.  The investors purchased the units at a purchase price of $2.12 per unit. The warrants, which represent the right to acquire an aggregate of up to 6,200,000 common shares, are exercisable at any time on or after November 9, 2012 and prior to November 9, 2015 at an exercise price of $2.68 per share, which was 120% of the closing price of our common shares on the NYSE MKT on May 2, 2012.
 
On October 4, 2012, we sold 14,814,815 units, with each unit consisting of one of our common shares, one Class A Warrant and one Class B Warrant, for gross proceeds of approximately $10.0 million, before deducting placement agent fees and estimated offering expenses of $828,000 recorded as cost of capital, in a "registered direct" public offering.  The investors purchased the units at a purchase price of $0.675 per unit. The Class A Warrants represent the right to acquire one-half common share per warrant, or an aggregate of up to 7,407,407 common shares for a period of six months at an exercise price of $0.81 per share.  The Class B Warrants represent the right to acquire one-half common share per warrant, or an aggregate of up to 7,407,407 common shares for a period of three years at an exercise price of $0.90 per share.
 
Legal Proceedings
 
At December 31, 2012, we were the subject of a formal investigation being conducted by the Securities and Exchange Commission (the “SEC”). Pursuant to the investigation, we received subpoenas issued by the SEC. The subpoenas called for the testimony of certain of our officers and the delivery of certain documents. The subpoenas were issued pursuant to a nonpublic formal order of private investigation issued by the SEC on March 1, 2011, which followed a nonpublic informal inquiry commenced by the SEC in October 2010. We received a copy of the nonpublic formal order of private investigation on February 10, 2012 in connection with a subpoena issued by the SEC. The SEC is investigating whether there have been any violations of the federal securities laws and appears to have narrowed the focus of their investigation to matters relating to disclosures in the late 2009 and early 2010 time period regarding resource potential for the CPO 4 prospect.  We have presented information supporting our disclosure relative to resource potential on the CPO 4 prospect.  The investigation does not represent a conclusion by the staff that there have been any violations of the federal securities laws nor whether the staff would conclude that any enforcement action is appropriate. At this time, we have not been made aware of a finding by the SEC of any securities violations. Also, as stated in the subpoenas issued by the SEC, the investigation does not mean that the SEC has a negative opinion of any person, entity or security. We have cooperated fully, and are committed to continuing to cooperate fully, with the SEC in this matter. It is not possible at this time to predict the timing or outcome of the SEC investigation, including whether or when any proceedings might be initiated, when these matters may be resolved or what, if any, penalties or other remedies may be imposed, and whether any such penalties or remedies would have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
 
In connection with the ongoing investigation being conducted by the SEC and indemnification provisions contained in an engagement agreement with Global Hunter Securities, LLC relating to our 2009 equity offering, in July 2012, we entered into an agreement with Global Hunter to settle any and all claims by Global Hunter related to reimbursement of attorney’s fees under the indemnity provision.  During 2012, we paid a total of $490,850 to Global Hunter and in exchange for the payments, we were granted a full release by Global Hunter Securities of any future claims or liabilities asserted by Global Hunter in connection with the offering.  The payment to Global Hunter Securities was recorded as a charge to additional paid in capital and is listed under the Cash Flow from Financing Activities in the statement of cash flows as Cost of capital.
 
On April 27, 2012, a purported class action lawsuit was filed in the U.S. District Court for the Southern District of Texas against us and certain of our executive officers: Steve Silverman v. Houston American Energy Corp. et al., Case No. 4:12-CV-1332.  The complaint generally alleges that, between March 29, 2010 and April 18, 2012, all of the defendants violated Sections 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and the individual defendants violated Section 20(a) of the Exchange Act in making materially false and misleading statements including certain statements related to the status and viability of the Tamandua #1 well. Two additional class action lawsuits were filed against us in May 2012. The complaints seek unspecified damages, interest, attorneys’ fees, and other costs. On September 20, 2012, the court consolidated the class action lawsuits and appointed a lead plaintiff. We believe all of the claims in the consolidated class action lawsuits are without merit and intend to vigorously defend against these claims. It is not possible at this time to predict the timing or outcome of the class action lawsuits that have or may be filed. We expect to incur costs and to devote management time and resources to defending such lawsuits.
 
 
On July 19, 2012, a purported derivative cause of action was filed in the U.S. District Court for the Southern District of Texas against certain of our directors and officers and Houston American Energy, as nominal defendant:  E. Howard King, Jr., derivatively, on behalf of Houston American Energy Corp., v. John F. Terwilliger, John P. Boylan, Orrie Lee Tawes III, Stephen Hartzell, James J. Jacobs, Kenneth A. Jeffers, defendants, and Houston American Energy Corp., as nominal defendant, Case No. 4:12-CV-02182.  The complaint asserts a cause of action by a shareholder on behalf of Houston American against certain of our directors and senior executive officers in connection with the June 11, 2012 approval of payment of certain bonuses, increases in salary, grant of certain stock options and entry into certain Change in Control Agreements.  The complaint alleges that the approval of such matters constituted breach of fiduciary duty and corporate waste and seeks injunctive relief to bar each of the actions in question and seeks restitution.  No damages have been or, by the nature of the derivative cause of action, are expected to be alleged against us.  We may, however, incur certain costs and demands on management time and resources in connection with the lawsuit.  On February 26, 2013, an order was entered granting a motion by the company to dismiss the lawsuit and providing leave to the plaintiff to amend its complaint to cure pleading deficiencies.
 
Compensation Expense
 
In June 2012, our board of directors approved, and we paid, cash bonuses to our senior management team totaling $403,199 and grants of stock options to acquire an aggregate of 1,200,000 shares of common stock and, effective July 1, 2012, we increased the base salary of members of our senior management team by amounts ranging from 5% to 15%.
 
The options granted vested on the grant date, have a ten year life and have an exercise price of $1.65 per share. Of those options, 429,000 are exercisable commencing 6 months from the date of grant and 771,000 are exercisable on and after shareholder approval of an amendment to our 2008 Equity Incentive Plan to increase the shares reserved under the plan to facilitate exercise. The option grants to employees, excluding grants that are subject to shareholder approval of amendment to the 2008 Equity Incentive Plan, were valued on the date of grant at $354,098 using the Black-Scholes option-pricing model.  Of that value, all were recognized as compensation expense at the date of grant.  Option grants that remain subject to shareholder approval of amendment to the 2008 Equity Incentive Plan will be valued and accounted for at the time of shareholder approval of the amendment.
 
In June 2012, our board of directors approved grants of stock options to purchase 25,000 shares of common stock, consistent with our existing director compensation program, to each of our non-employee directors and one-time extraordinary grants of stock options to purchase 75,000 shares of common stock to each of our non-employee directors. Each of the options vest 20% on the grant date and 80% nine months from the grant date and is exercisable for a term of 10 years at an exercise price of $1.65 per share; provided, however, that 48,175 of the options granted to each of the directors shall not be exercisable, in part or in whole, until such time as our shareholders shall have approved an amendment to our 2008 Equity Incentive Plan increasing the shares reserved for issuance under the plan to an amount sufficient to permit issuance of such shares. The option grants to non-employee directors, excluding grants that are subject to shareholder approval of amendment to the 2008 Equity Incentive Plan, were valued on the date of grant at $128,328 using the Black-Scholes option-pricing model.  Of that value, $25,665 was recognized as compensation expense at the date of grant and $102,663 will be recognized upon vesting.
 
In June 2012, our board of directors amended our cash compensation arrangements for non-employee directors, effective June 30, 2012, to increase all amounts payable thereunder by 50% to: annual retainer of $9,000; annual retainer for service on each committee of $3,000; annual retainer for service as chairman of the audit committee of $3,750; and annual retainer for service as chairman of the compensation committee of $2,250.
 
In June 2012, our board of directors approved the entry into Change in Control Agreements (the “Change in Control Agreements”) with our President and Chief Executive Officer, John Terwilliger, Chief Financial Officer, James J. Jacobs, and Senior Vice President – Exploration, Kenneth Jeffers. Pursuant to the Change in Control Agreements, if we undergo a change in control and a covered officer is terminated without cause or resigns for good reason within 90 days prior to or within 12 months following a change in control, the subject officer is entitled to (i) a lump sum cash severance payment equal to 250% of his average annual cash compensation (including salary and bonuses) during the three years ending on the termination date, and (ii) acceleration of vesting of all unvested time-based stock options.
 
 
In July 2012, we appointed a new non-employee director following the resignation of a non-employee director.  In connection with the appointment, we granted stock options to purchase 25,000 shares of common stock at $1.18 per share with a fair value of $19,375 using the Black-Scholes option-pricing model.  Of that value, $5,572 was recognized as compensation expense at the date of grant and $13,803 will be recognized upon vesting.
 
During 2012, we recognized non-cash compensation expense associated with grants of restricted stock totaling $226,440.
 
As of December 31, 2012, excluding grants that remain subject to shareholder approval of amendment to the 2008 Equity Incentive Plan, there was $358,055 of total unrecognized compensation cost related to unvested restricted stock and $1,300,747 of total unrecognized compensation cost related to unvested, or un-exercisable, stock options.  The cost is expected to be recognized over a weighted average period of approximately 1.45 years for restricted stock and 1.27 years for stock options.  Option grants that remain subject to shareholder approval of amendment to the 2008 Equity Incentive Plan will be valued and accounted for at the time of shareholder approval of the amendment.
 
Strategic Alternative Review
 
In July 2012, our board authorized the engagement of an investment banking firm, and we engaged Canaccord Genuity, Inc., to assist in the evaluation of a broad range of financial and strategic alternatives, including, but not limited to, seeking additional financing to support the long-term development of our oil and gas properties, seeking financial and/or industry partners to participate in the development of our properties, selling some of or all of our assets or interests in those assets, and the possible sale of our company, among other alternatives.  Our board concluded the review of strategic alternatives determining that satisfactory alternatives were not available and that we should seek additional financing to support the ongoing development of our assets.  Following that determination, we consummated the October 1, 2012 financing described above.
 
Colombian Tax
 
During 2012, we engaged our tax advisors in Colombia to evaluate certain tax and other filings made in Colombia by them and other advisors for 2009, 2010 and 2011.  Our advisors identified inconsistencies between tax and non-tax filings with respect to equity investments made by us in Colombia.  Based on guidance from our advisors, during 2012 we recorded a current foreign tax liability of $1,689,868, which we expect to pay during 2013, and a non-current foreign tax liability of $193,398, which we expect to pay during 2014, relating primarily to a newly enacted Colombian equity tax measure based on the equity of our Colombian branch as of January 1, 2011.
 
Critical Accounting Policies
 
The following describes the critical accounting policies used in reporting our financial condition and results of operations. In some cases, accounting standards allow more than one alternative accounting method for reporting. Such is the case with accounting for oil and gas activities described below. In those cases, our reported results of operations would be different should we employ an alternative accounting method.
 
Full Cost Method of Accounting for Oil and Gas Activities. We follow the full cost method of accounting for oil and gas property acquisition, exploration and development activities. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Capitalized costs include lease acquisition, geological and geophysical work, delay rentals, costs of drilling, completing and equipping successful and unsuccessful oil and gas wells and related internal costs that can be directly identified with acquisition, exploration and development activities, but does not include any cost related to production, general corporate overhead or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized unless significant amounts of oil and gas reserves are involved. No corporate overhead has been capitalized as of December 31, 2012. The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves, are amortized on a units-of-production method over the estimated productive life of the reserves. Unevaluated oil and gas properties are excluded from this calculation. The capitalized oil and gas property costs, less accumulated amortization, are limited to an amount (the ceiling limitation) equal to the sum of: (a) the present value of estimated future net revenues from the projected production of proved oil and gas reserves, calculated using the average oil and natural gas sales price received by the Company as of the first trading day of each month over the preceding twelve months (such prices are held constant throughout the life of the properties) and a discount factor of 10%; (b) the cost of unproved and unevaluated properties excluded from the costs being amortized; (c) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; and (d) related income tax effects. Costs in excess of this ceiling are charged to proved properties impairment expense.
 
 
Unevaluated Oil and Gas Properties. Unevaluated oil and gas properties consist principally of our cost of acquiring and evaluating undeveloped leases, net of an allowance for impairment and transfers to depletable oil and gas properties. When leases are developed, expire or are abandoned, the related costs are transferred from unevaluated oil and gas properties to oil and gas properties subject to amortization. Additionally, we review the carrying costs of unevaluated oil and gas properties for the purpose of determining probable future lease expirations and abandonments, and prospective discounted future economic benefit attributable to the leases.
 
Unevaluated oil and gas properties not subject to amortization include the following at December 31, 2012 and 2011:
 
   
At
December 31,
2012
   
At
December 31,
2011
 
Acquisition costs
  $ 972,885     $ 5,325,369  
Evaluation costs
    4,836,412       17,565,575  
Total
  $ 5,809,297     $ 22,890,944  
 
The carrying value of unevaluated oil and gas prospects includes $4,836,412 and $22,028,895 expended for properties in South America at December 31, 2012 and December 31, 2011, respectively. We are maintaining our interest in these properties and development has or is anticipated to commence within the next twelve months.
 
Stock-Based Compensation. We use the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions. These assumptions include estimating the volatility of our common stock price over the expected life of the options, dividend yield, an appropriate risk-free interest rate and the number of options that will ultimately not complete their vesting requirements. Changes in the subjective assumptions can materially affect the estimated fair value of stock-based compensation and consequently, the related amount recognized on the Statements of Operations.
 
Results of Operations
 
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
 
Oil and Gas Revenues. Total oil and gas revenues decreased 64.4%, to $411,349, in 2012 from $1,156,178 in 2011.
 
The decrease in revenue was due to the 2012 sale of our interest in the La Cuerva block.
 
The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for 2012 and 2011:
 
   
2012
   
2011
 
Gross producing wells
    6       20  
Net producing wells
    0.19       0.42  
Net oil production (Bbls)
    2,787       11,016  
Net gas production (Mcf)
    12,066       10,838  
Oil—Average sales price per barrel
  $ 108.71     $ 101.12  
Gas—Average sales price per mcf
  $ 3.22     $ 3.90  
 
The change in gross and net producing wells and production reflects the sale, during the first quarter of 2012, of our interest in wells associated with the La Cuerva block.
 
The change in average sales prices realized reflects fluctuations in global commodity prices.
 
 
Oil and gas sales revenues for 2012 and 2011 by region were as follows:
 
   
Colombia
   
U.S.
   
Total
 
2012
 
 
   
 
   
 
 
Oil sales
  $ 263,185     $ 109,298     $ 372,484  
Gas sales
  $     $ 38,865     $ 38,865  
2011
                       
Oil sales
  $ 1,007,912     $ 106,037     $ 1,113,949  
Gas sales
  $     $ 42,229     $ 42,229  
 
 Lease Operating Expenses. Lease operating expenses, excluding joint venture expenses relating to our Colombian operations discussed below, decreased 77.1% to $195,381 in 2012 from $854,319 in 2011.
 
The decrease in total lease operating expenses was attributable to the 2012 sale of our interest in the La Cuerva block.
 
Following is a summary comparison of lease operating expenses for the periods.
 
   
Colombia
   
U.S.
   
Total
 
2012
  $ 118,788     $ 76,593     $ 195,381  
2011
  $ 795,247     $ 59,072     $ 854,319  
 
Consistent with our business model and operating history, we experience steep declines in lease operating expenses following strategic divestitures and anticipate lease operating expenses to ramp up to levels consistent with regional costs as new wells are brought on line.
 
Joint Venture Expenses. Joint venture expenses totaled $3,244 in 2012 compared to $13,930 in 2011. The joint venture expenses represent our allocable share of the indirect field operating and region administrative expenses billed by Hupecol.  The decrease in joint venture expenses was attributable to reduced allocated administrative costs following the March 2012 divestiture of assets operated by Hupecol.
 
Depreciation and Depletion Expense. Depreciation and depletion expense decreased by 64% to $66,971 in 2012 from $185,931 in 2011. The decrease in depreciation and depletion was due to the 2012 sale of assets discussed above.
 
Gain (Loss) on Sale of Oil and Gas Properties. The sale of our indirect interests in Hupecol Cuerva, LLC and post-closing price adjustments related to the sale resulted in a gain of $387,314 during 2012.  Post-closing purchase price adjustments relating to our 2010 sale of Colombian assets and our prior 2008 sale of Colombian assets resulted in a loss on sale of oil and gas properties of $1,026,608 in 2011.
 
Impairment Expense.  Termination of our testing and completion efforts on, and abandonment of, three test wells on our CPO 4 block resulted in impairment expense of $46,235,574 during 2012.
 
General and Administrative Expenses. General and administrative expense increased by 1.5% to $5,027,024 in 2012 from $4,952,560 in 2011. The change in general and administrative expense reflects a combination of (1) an increase in legal fees and professional fees (up $426,636) relating to litigation commenced during 2012 and the ongoing SEC investigation, (2) a decrease in non-cash stock based compensation (down $319,719) reflecting lower stock price and a resulting lower value of equity grants, and (3) decreased cash compensation (down $66,093) attributable to reduced bonuses paid during 2012.
 
Bad Debt Expense.   As a result of Gulf United Energy’s delinquency in satisfying its financial obligations with respect to the CPO 4 prospect, during 2012, we wrote-down our receivable from Gulf United for $3,951,370.
 
Foreign Equity Tax.  During 2012, we recorded an foreign equity tax expense of $1,689,039 relating to a newly enacted Colombian equity tax measure based on the equity of our Colombian branch as of January 1, 2011.
 
Other Income (Expense). Other income (expense) consists of interest earned on cash balances net of other bank fees. Net other expense totaled $73,319 in 2012 as compared to net other expense of $29,020 in 2011. The change was attributable to reduced interest income during 2012 reflecting lower interest rates and lower cash holdings.
 
 
Income Tax Expense/BenefitWe reported income tax expense of approximately $216,923 in 2012 as compared to an income tax benefit of approximately $1.6 million in 2011.  During 2012, we generated net operating losses, from which a current benefit in the amount of $3.4 million was realized as a result of carrying back the respective net operating losses to 2010.   The current tax benefit was entirely offset by the release in the valuation allowance.  We expect a refund of U.S. income taxes in the amount of approximately $3.4 million as a result of such net operating loss carryback.  Except for this tax benefit, we believe that it is more likely than not that the deferred tax assets at the end of 2012 will not be realized.  As such, we fully reserved all of the net deferred tax assets at December 31, 2012.
 
Financial Condition
 
Liquidity and Capital Resources. At December 31, 2012, we had a cash balance of $5,626,345 and working capital of $9,144,869 compared to a cash balance of $9,930,284 and working capital of $19,636,540 at December 31, 2011. The decrease in cash and working capital during 2012 was primarily attributable to the operating losses incurred during 2012, including the costs of drilling operations on the CPO 4 block which were written off during 2012, partially offset by the receipt of approximately $23,144,000 from capital raising transactions during 2012.  As a result of our settlement with SK Innovation, subsequent to year-end, we received a release from our accrued capital call commitments on CPO 4 which totaled $3,219,128 at December 31, 2012.  As adjusted to reflect the release of such commitments, our pro forma working capital at December 31, 2012 totaled $12,363,997.
 
Cash Flows. Operating activities used $2,620,837 of cash during 2012 compared to $4,633,032 of cash used during 2011. The decrease in cash used in operations was primarily attributable to changes in operating assets and liabilities and various non-cash expenses which more than offset the increase in net loss.
 
Investing activities used $23,041,556 of cash during 2012 as compared to $11,930,534 of cash used during 2011. Funds used in investing activities during 2012 principally reflect investments in oil and gas properties and assets of $26,033,065 and purchases of marketable securities of $156,817 partially offset by proceeds from sale of securities of $660,625, escrow receivable of $1,460,633 and proceeds from the sale of our interest in Hupecol Cuerva, LLC of $1,027,068.
 
Financing activities provided $21,358,454 of cash during 2012 from our May 2012 and October 2012 offerings of common stock and warrants.
 
Long-Term Liabilities. At December 31, 2012, we had long-term liabilities of $201,270 as compared to $45,039 at December 31, 2011. Long-term liabilities at December 31, 2012 consisted of reserve for plugging costs $7,872 and foreign income taxes of $193,398. Long-term liabilities at December 31, 2011 consisted of a reserve for plugging costs and deferred rent liability.
 
Capital and Exploration Expenditures and Commitments. Our principal capital and exploration expenditures relate to our ongoing efforts to acquire, drill and complete prospects.
 
During 2012, we invested $26,033,065 for the acquisition and development of oil and gas properties, which included expenses related to (1) drilling of 5 wells in Colombia ($25,915,741), including the drilling costs on two wells on the La Cuerva block sold during 2012, as well as leasehold costs on U.S. properties ($117,324).
 
At December 31, 2012, our only material contractual obligation requiring determinable future payments on our part was our lease relating to our executive offices.
 
The following table details our contractual obligations as of December 31, 2012:
 
   
Payments due by period
 
   
Total
   
< 1 year
   
1-3 years
   
3-5 years
   
> 5 years
 
Operating leases
  $ 410,920     $ 89,054     $ 185,225     $ 136,641     $ 0  
Total
  $ 410,920     $ 89,054     $ 185,225     $ 136,641     $ 0  
 
In addition to the contractual obligations requiring that we make fixed payments, in conjunction with our efforts to secure oil and gas prospects, financing and services, we have, from time to time, granted overriding royalty interests (ORRI) in various properties, and may grant ORRIs in the future, pursuant to which we will be obligated to pay a portion of our interest in revenues from various prospects to third parties. All present and future prospects in Colombia are subject to a 1.5% ORRI in favor of each of John Terwilliger and O. Lee Tawes, III.
 
Planned Drilling, Leasehold and Other Activities. As of December 31, 2012, our acquisition and drilling budget for 2013 totaled approximately $2.5 million and related principally to (1) drilling 2 wells on the Serrania Block; and (2) shooting seismic on the Los Picachos and Macaya Concessions.  Additional wells may be drilled at locations to be determined based on the results of the planned drilling projects. Our acquisition and drilling budget has historically been subject to substantial fluctuation over the course of a year based upon successes and failures in drilling and completion of prospects and the identification of additional prospects during the course of a year.
 
 
We intend to fund our 2013 drilling budget from a combination of cash on hand and the anticipated receipt of funds from (1) income tax refunds of approximately $3.344 million and (2) release of restricted cash backing a letter of credit expiring in April 2013 of approximately $3.056 million. We have no commitments to provide any additional financing should we require and seek such financing and there is no guarantee that we will be able to secure additional financing on acceptable terms, or at all, if necessary to fully fund our 2013 drilling budget and to support future acquisitions and development activities.
 
Off-Balance Sheet Arrangements
 
We had no off-balance sheet arrangements or guarantees of third party obligations at December 31, 2012.
 
Inflation
 
We believe that inflation has not had a significant impact on our operations since inception.
 
 
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 prices we receive for production depends on numerous factors beyond our control.
 
We have not historically entered into any hedges or other derivative commodity instruments or transactions designed to manage, or limit exposure to oil and gas price volatility.
 
 
Our financial statements appear immediately after the signature page of this report. See “Index to Financial Statements” on page 39 of this report.
 
 
Not applicable.
 
 

Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we conducted an evaluation as of December 31, 2012 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 effective as of December 31, 2012.
 
Management’s Annual Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of management, including our principal executive and principal financial officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on this evaluation under the COSO Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2012.
 
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit smaller reporting companies to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting
 
There was no change in our internal control over financial reporting during the fourth quarter of 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item  9B.
 
Not applicable
 
 
PART III
 
 
The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.
 
Executive Officers
 
Our executive officers as of December 31, 2012, and their ages and positions as of that date, are as follows:
 
Name
 
Age
 
Position
John F. Terwilliger
 
65
 
President, Chief Executive Officer and Chairman
James J. Jacobs
 
35
 
Chief Financial Officer
Kenneth Jeffers
 
52
 
Senior Vice President of Exploration
 
John F. Terwilliger has served as our President, CEO and Chairman since our inception in April 2001.
 
James J. Jacobs has served as our Chief Financial Officer since July 2006. From April 2003 until joining the Company, Mr. Jacobs served as an Associate and as Vice President—Energy Investment Banking at Sanders Morris Harris, Inc., an investment banking firm, where he specialized in energy sector financing and transactions. Previously, Mr. Jacobs was an Energy Finance Analyst at Duke Capital Partners, LLC from June 2001 to April 2003 and a Tax Consultant at Deloitte & Touché, LLP. Mr. Jacobs holds a Masters of Professional Accounting and a Bachelor of Business Administration from the University of Texas.
 
Kenneth Jeffers has served as our Senior Vice President of Exploration since August 2010.  Prior to his appointment as an officer, Mr. Jeffers served as a consultant to Houston American for six months focused on identification of prospects on the Company’s Colombian acreage.  Previously, Mr. Jeffers served as a Senior Geophysicist at Dune Energy from 2007 to 2010.  Mr. Jeffers’ experience includes serving as an exploration geophysicist with Mobil Oil and later serving as a staff geophysicist and senior geophysicist with Anadarko Petroleum, Pennzoil and Hunt Oil and Vice President, Geophysics at Goodrich Petroleum.
 
There are no family relationships among the executive officers and directors. Except as otherwise provided in employment agreements, each of the executive officers serves at the discretion of the Board.
 
 
The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.
 
 
The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.
 
Equity compensation plan information is set forth in Part II, Item 5 of this Form 10-K.
 
 
The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.
 
 
The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.
 
 
PART IV
 
 
 
1.
Financial statements. See “Index to Financial Statements” on page 39 of this report.
 
 
2.
Exhibits
 
   
 
 
Incorporated by Reference
 
 
Exhibit                   Filed
Number
 
Exhibit Description
 
Form
 
Date
 
Number
 
Herewith
3.1
 
Certificate of Incorporation of Houston American Energy Corp. filed April 2, 2001
 
SB-2
 
08/03/01
 
3.1
   
                     
3.2
 
Amended and Restated Bylaws of Houston American Energy Corp. adopted November 26, 2007
 
8-K
 
11/29/07
 
3.1
   
                     
3.3
 
Certificate of Amendment to the Certificate of Incorporation of Houston American Energy Corp. filed September 25, 2001
 
SB-2
 
10/01/01
 
3.4
   
                     
4.1
 
Text of Common Stock Certificate of Houston American Energy Corp.
 
SB-2
 
08/03/01
 
4.1
   
                     
4.2
 
Form of Common Stock Purchase Warrant, dated May 8, 2012
 
8-K
 
05/03/12
 
4.1
   
                     
4.3
 
Form of Class A Common Stock Purchase Warrant, dated October 4, 2012
 
8-K
 
10/03/12
 
4.1
   
                     
4.4
 
Form of Class B Common Stock Purchase Warrant, dated October 4, 2012
 
8-K
 
10/03/12
 
4.2
   
                     
10.1
 
Houston American Energy Corp. 2005 Stock Option Plan*
 
8-K
 
08/16/05
 
10.1
   
                     
10.2
 
Form of Director Stock Option Agreement*
 
8-K
 
08/16/05
 
10.2
   
                     
10.3
 
Houston American Energy Corp. 2008 Equity Incentive Plan*
 
Sch 14A
 
04/28/08
 
Ex A
   
                     
10.4
 
Form of Subscription Agreement, dated November 2009 relating to the sale of shares of common stock
 
8-K
 
12/03/09
 
10.1
   
                     
10.5
 
Employment Agreement of Kenneth Jeffers*
 
10-K
 
03/15/11
 
10.6
   
                     
10.6
 
Form of Change in Control Agreement, dated June 11, 2012*
 
8-K
 
06/14/12
 
10.1
   
                     
14.1
 
Code of Ethics for CEO and Senior Financial Officers
 
10-KSB
 
03/26/04
 
14.1
   
                     
 
Consent of GBH CPAs, PC
             
X
                     
 
Consent of Lonquist & Co., LLC
             
X
                     
 
Section 302 Certification of CEO
             
X
                     
 
Section 302 Certification of CFO
             
X
                     
 
Section 906 Certification of CEO
             
X
                     
 
Section 906 Certification of CFO
             
X
                     
99.1
 
Code of Business Ethics
 
8-K
 
07/07/06
 
99.1
   
                     
 
Report of Lonquist & Co., LLC
             
X
 

*
Compensatory plan or arrangement.
 
 
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
HOUSTON AMERICAN ENERGY CORP.
Dated: March 26, 2012    
 
By:
/s/ John F. Terwilliger
    John F. Terwilliger
    President
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
/s/ John F. Terwilliger
 
Chairman, Chief Executive Officer,
 
March 26, 2012
John F. Terwilliger
 
President and Director (Principal Executive Officer)
   
         
/s/ O. Lee Tawes, III
 
Director
 
March 26, 2012
O. Lee Tawes, III
       
         
/s/ Stephen Hartzell
 
Director
 
March 26, 2012
Stephen Hartzell
       
         
/s/ John P. Boylan
 
Director
 
March 26, 2012
John P. Boylan
       
         
/s/ Keith Grimes
 
Director
 
March 26, 2012
Keith Grimes
       
         
/s/ James J. Jacobs
 
Chief Financial Officer
 
March 26, 2012
James J. Jacobs
 
(Principal Accounting and Financial Officer)
   
 
 
HOUSTON AMERICAN ENERGY CORP.
INDEX TO FINANCIAL STATEMENTS
 
   
Report of Independent Registered Public Accounting Firm
F-2
   
Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011
F-3
   
Consolidated Statements of Operations and Comprehensive Income For the Years Ended December 31, 2012 and 2011
F-4
   
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2012 and 2011
F-5
   
Consolidated Statements of Cash Flows For the Years Ended December 31, 2012 and 2011
F-6
   
Notes to Consolidated Financial Statements
F-7
 
 
 
To the Board of Directors and Shareholders
Houston American Energy Corp.
Houston, Texas
 
We have audited the accompanying consolidated balance sheets of Houston American Energy Corp. (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the years ended December 31, 2012 and 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Houston American Energy Corp. as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years ended December 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America.

GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
 
April 1, 2013
 
 
HOUSTON AMERICAN ENERGY CORP.
 
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
CURRENT ASSETS
           
Cash
  $ 5,626,345     $ 9,930,284  
Restricted cash – letter of credit
    3,056,250       3,056,250  
Accounts receivable – oil and gas sales
          40,502  
Accounts receivable – other
    3,436,305       4,322,063  
Escrow receivable – current
    2,095,228       1,863,332  
Marketable securities – available for sale
    -       707,445  
Prepaid expenses and other current assets
    36,539       13,635  
TOTAL CURRENT ASSETS
    14,250,667       19,933,511  
PROPERTY AND EQUIPMENT
               
Oil and gas properties, full cost method
               
Costs subject to amortization
    47,093,419       2,490,164  
Costs not being amortized
    5,809,297       22,890,944  
Office equipment
    90,004       90,004  
Total
    52,992,720       25,471,112  
Accumulated depletion, depreciation, amortization, and impairment
    (47,105,751 )     (1,675,232 )
PROPERTY AND EQUIPMENT, NET
    5,886,969       23,795,880  
                 
Deferred tax asset
          3,195,583  
Escrow receivable
          1,664,581  
Other assets
    3,167       68,381  
TOTAL ASSETS
  $ 20,140,803     $ 48,657,936  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 84,740     $ 84,300  
Accrued cash call due to operator
    3,219,128        
Accrued expenses
    90,923       185,597  
Taxes payable
    1,711,007       27,074  
TOTAL CURRENT LIABILITIES
    5,105,798       296,971  
LONG-TERM LIABILITIES
               
Reserve for plugging and abandonment costs
    7,872       41,419  
Deferred rent obligation
          3,620  
Taxes Payable long-term
    193,398       0  
TOTAL LONG-TERM LIABILITIES
    201,270       45,039  
                 
COMMITMENTS AND CONTINGENCIES
           
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock, par value $0.001;
10,000,000 shares authorized, 0 shares issued and outstanding, respectively
           
Common stock, par value $0.001;
100,000,000 shares authorized, 52,180,045 and 31,165,230 shares issued and outstanding, respectively
    52,180        31,165  
Additional paid-in capital
    63,963,257       40,602,643  
Retained earnings (deficit)
    (49,181,702 )     7,575,747  
Accumulated other comprehensive income
          106,371  
TOTAL SHAREHOLDERS’ EQUITY
    14,833,735       48,315,926  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 20,140,803     $ 48,657,936  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
HOUSTON AMERICAN ENERGY CORP.
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
 
   
2012
   
2011
 
             
OIL AND GAS REVENUE
  $ 411,349     $ 1,156,178  
                 
EXPENSES OF OPERATIONS
               
Lease operating expense and severance tax
    195,381       854,319  
Joint venture expense
    3,244       13,930  
Depreciation and depletion
    66,971       185,931  
Impairment of oil and gas properties
    46,235,574        
Bad debt expense
    3,951,370        
Foreign Equity Tax
    1,689,039        —  
Loss on sale of securities
    97,267        
General and administrative expense
    5,027,024       4,952,560  
Total operating expenses
   
57,265,870
      6,006,740  
                 
(Gain) loss on sale of oil and gas properties
    (387,314 )     1,026,608  
                 
Loss from operations
   
(56,467,207
)     (5,877,170 )
                 
OTHER INCOME (EXPENSE)
               
Interest income
    10,844       66,852  
Other income (expense)
    (84,163 )     (95,872 )
Total other income (expense)
    (73,319 )     (29,020 )
                 
Net loss before taxes
   
(56,540,526
)     (5,906,190 )
                 
Income tax expense (benefit)
   
216,923
      (1,570,816 )
Net loss
  $
(56,757,449
)   $ (4,335,374 )
Basic and diluted net loss per share
  $
(1.46
)   $ (0.14 )
Basic and diluted weighted average shares
    38,799,434       31,138,470  
             
COMPREHENSIVE LOSS
 
 
   
 
 
Net loss
  $
(56,757,449
)   $ (4,335,374 )
Unrealized gain on marketable securities
    (106,371 )     106,371  
Net comprehensive loss
  $
(56,863,820
)   $ (4,229,003 )

The accompanying notes are an integral part of these consolidated financial statements.
 
 
HOUSTON AMERICAN ENERGY CORP.
 
FOR THE YEARS ENDED DECEMBER 31, 2012 and 2011
 
                           
Accumulated
       
               
Additional
   
Retained
   
Other
       
   
Common Stock
   
Paid-in
   
Earnings
   
Comprehensive
       
   
Shares
   
Amount
   
Capital
   
(Deficit)
   
Income
   
Total
 
                                     
Balance at December 31, 2010
    31,080,772     $ 31,081     $ 38,422,435     $ 11,911,121     $     $ 50,364,637  
Stock issued for -
                                               
Employees
    45,000       190       135,630                   135,675  
Option exercise
    39,458       39       (39 )                    
Options issued to directors
                965,551                   965,551  
Options issued to employees
                1,241,666                   1,241,666  
Offering costs
                (162,600 )                 (162,600 )
Other comprehensive income
                            106,371        
Net loss
                      (4,335,374 )           (4,335,374 )
Balance at December 31, 2011
    31,165,230       31,165       40,602,643       7,575,747       106,371       48,315,926  
                                                 
Stock issued for -
                                               
May 2012 offering
    6,200,000       6,200       13,137,800                   13,144,000  
October 2012 offering
    14,814,815       14,815       9,985,185                   10,000,000  
Offering costs
                (1,785,546 )                 (1,785,546 )
Options issued to directors
                312,286                     312,286  
Options issued to employees
                1,463,467                   1,463,467  
Restricted stock issued to employees