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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2022

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ______________.

 

Commission File Number 1-32955

 

HOUSTON AMERICAN ENERGY CORP.

(Exact name of registrant as specified in its charter)

 

Delaware   76-0675953

(State or other jurisdiction

of incorporation or organization)

  

(IRS Employer

Identification No.)

 

801 Travis Street, Suite 1425, Houston, Texas 77002
(Address of principal executive offices)(Zip Code)

 

(713) 222-6966
(Registrant’s telephone number, including area code)

 

 
(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.001 par value per share   HUSA   NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒
Smaller reporting company ☒ Emerging growth company ☐    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒

 

As of November 14, 2022, we had 9,928,338 shares of $0.001 par value common stock outstanding.

 

 

 

 

 

 

HOUSTON AMERICAN ENERGY CORP.

 

FORM 10-Q

 

INDEX

 

    Page No.
PART I. FINANCIAL INFORMATION 4
     
Item 1. Financial Statements (Unaudited) 4
     
  Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 4
     
  Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited) 5
     
  Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited) 6
     
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited) 7
     
  Notes to Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
     
Item 4. Controls and Procedures 17
     
PART II OTHER INFORMATION 17
     
Item 6. Exhibits 17

 

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 Financial Statements

 

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   September 30, 2022   December 31, 2021 
ASSETS          
CURRENT ASSETS          
Cash  $3,896,362   $4,894,577 
Accounts receivable – oil and gas sales   218,532    214,662 
Prepaid expenses and other current assets   107,400    85,403 
TOTAL CURRENT ASSETS   4,222,294    5,194,642 
           
PROPERTY AND EQUIPMENT          
Oil and gas properties, full cost method          
Costs subject to amortization   62,785,382    62,771,222 
Costs not being amortized   2,343,126    2,343,126 
Office equipment   90,004    90,004 
Total   65,218,512    65,204,352 
Accumulated depletion, depreciation, amortization, and impairment   (60,557,089)   (60,396,594)
PROPERTY AND EQUIPMENT, NET   4,661,423    4,807,758 
           
Cost method investment   1,236,934    455,779 
Right of use asset   227,270    272,507 
Other assets   3,167    3,167 
TOTAL ASSETS  $10,351,088   $10,733,853 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable  $70,667   $69,607 
Accrued expenses   16,055    15,176 
Current portion of lease liability   63,150    57,174 
TOTAL CURRENT LIABILITIES   149,872    141,957 
           
LONG-TERM LIABILITIES          
Lease liability, net of current portion   163,632    211,744 
Reserve for plugging and abandonment costs   71,906    68,209 
TOTAL LONG-TERM LIABILITIES   235,538    279,953 
           
TOTAL LIABILITIES   385,410    421,910 
           
COMMITMENTS AND CONTINGENCIES        -  
           
SHAREHOLDERS’ EQUITY          
Preferred stock, par value $0.001; 10,000,000 shares authorized,          
Series A Convertible Preferred Stock, par value $0.001; 2,000 shares authorized; 0 shares issued and outstanding   —    — 
Series B Convertible Preferred Stock, par value $0.001; 1,000 shares authorized; 0 shares issued and outstanding   —    — 
Common stock, par value $0.001; 12,000,000 shares authorized; 9,928,338 shares issued and outstanding   9,928    9,928 
Additional paid-in capital   83,551,666    83,345,456 
Accumulated deficit   (73,595,916)   (73,043,441)
TOTAL SHAREHOLDERS’ EQUITY   9,965,678    10,311,943 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $10,351,088   $10,733,853 

 

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

 

4

 

 

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

 

   2022   2021   2022   2021 
  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
   2022   2021   2022   2021 
                 
OIL AND GAS REVENUE  $427,256   $290,375   $1,314,065   $922,862 
                     
EXPENSES OF OPERATIONS                    
Lease operating expense and severance tax   184,488    184,869    496,245    443,614 
General and administrative expense   594,081    436,304    1,223,077    1,076,392 
Depreciation and depletion   50,755    21,045    160,495    79,680 
Total operating expense   829,324    642,218    1,879,817    1,599,686 
                     
Loss from operations   (402,068)   (351,843)   (565,752)   (676,824)
                     
OTHER INCOME                    
Interest income   10,788    968    13,277    12,425 
Interest expense   —    —    —    (296)
Total other income   10,788    968    13,277    12,129 
                     
Net loss before taxes   (391,280)   (350,875)   (552,475)   (664,695)
                     
Income tax expense   —    —    —    — 
                     
Net loss   (391,280)   (350,875)   (552,475)   (664,695)
                     
Dividends to Series A and B preferred stockholders   —    —    —    (37,201)
                     
Net loss attributable to common shareholders  $(391,280)  $(350,875)  $(552,475)  $(701,896)
                     
Loss per common share:                    
Basic  $(0.04)  $(0.04)  $(0.06)  $(0.07)
Diluted  $(0.04)  $(0.04)  $(0.06)  $(0.07)
                     
Weighted average number of common shares outstanding:                    
Basic   9,928,338    9,928,338    9,928,338    9,585,493 
Diluted   9,928,338    9,928,338    9,928,338    9,585,493 

 

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

 

5

 

 

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

 

                   Additional         
   Preferred Stock   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                             
Balance – December 31, 2021   —   $—    9,928,338   $9,928   $83,345,456   $(73,043,441)  $10,311,943 
                                    
Stock-based compensation   —    —    —    —    85,485    —    85,485 
Net loss   —    —    —    —    —    (165,560)   (165,560)
                                    
Balance – March 31, 2022   —    —    9,928,338    9,928    83,430,941    (73,209,001)   10,231,868 
                                    
Stock-based compensation   —    —    —    —    25,520    —    25,520 
Net income   —    —    —    —    —    4,365    4,365 
                                    
Balance – June 30, 2022   —    —    9,928,338    9,928    83,456,461    (73,204,636)   10,261,753 
                                    
Stock-based compensation   —    —    —    —    95,205    —    95,205 
Net loss   —    —    —    —    —    (391,280)   (391,280)
                                    
Balance – September 30, 2022   —   $—    9,928,338   $9,928   $83,551,666   $(73,595,916)  $9,965,678 

 

                Additional              
    Preferred Stock     Common Stock     Paid-in     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Deficit     Total  
                                     
Balance – December 31, 2020     1920     $ 2       6,977,718     $ 6,977     $ 78,453,906     $ (72,021,911 )   $ 6,438,974  
                                                         
Issuance of common stock for cash, net     —       —       2,921,620       2,922       6,572,967       —       6,575,889  
Stock-based compensation     —       —       —       —       15,109       —       15,109  
Conversion of Series A Preferred Stock to common stock     (60 )     —       24,000       24       (24 )     —       —  
Redemption of Series A and Series B Preferred Stock     (1,860 )     (2 )     —       —       (1,967,798 )     —       (1,967,800 )
Series A and Series B Preferred Stock dividends paid                     —       —       (37,201 )     —       (37,201 )
Net loss     —       —       —       —       —       (268,476 )     (268,476 )
                                                         
Balance – March 31, 2021     —       —       9,923,338       9,923       83,036,959       (72,290,387 )     10,756,495  
                                                         
Net loss     —       —       —       —       —       (45,344 )     (45,344 )
                                                         
Balance – June 30, 2021     —       —       9,923,338       9,923       83,036,959       (72,335,731 )     10,711,151  
                                                         
Stock-based compensation     —       —       5,000       5       167,035       —       167,040  
Net loss     —       —       —       —       —       (350,875 )     (350,875 )
                                                         
Balance – September 30, 2021     —     $ —       9,928,338     $ 9,928     $ 83,203,994     $ (72,686,606 )   $ 10,527,316  

 

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

 

6

 

 

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

 

   2022   2021 
  

For the Nine Months Ended

September 30,

 
   2022   2021 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(552,475)  $(664,695)
Adjustments to reconcile net loss to net cash used in operations:          
Depreciation and depletion   160,495    79,680 
Accretion of asset retirement obligation   3,697    4,280 
Stock-based compensation   206,210    182,149 
Amortization of right of use asset   45,237    60,208 
Changes in operating assets and liabilities:          
Increase in accounts receivable   (3,870)   (30,167)
Increase in prepaid expenses and other current assets   (21,997)   (130,175)
Increase (decrease) in accounts payable and accrued expenses   1,939    (116,595)
Decrease in operating lease liability   (42,136)   (33,501)
           
Net cash used in operating activities   (202,900)   (648,816)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Payments for the acquisition and development of oil and gas properties   (14,160)   (30,237)
Payments for capital contribution for cost method investment   (781,155)   (191,214)
           
Net cash used in investing activities   (795,315)   (221,451)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from the issuance of common stock, net of expenses   —    6,575,889 
Redemption of Series A and Series B Preferred Stock   —    (1,967,800)
Payment of preferred stock dividends   —    (37,201)
           
Net cash provided by financing activities   —    4,570,888 
           
(Decrease) increase in cash   (998,215)   3,700,621 
Cash, beginning of period   4,894,578    1,242,560 
Cash, end of period  $3,896,362   $4,943,181 
           
SUPPLEMENTAL CASH FLOW INFORMATION          
Interest paid  $—   $— 
Taxes paid  $—   $— 
           
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES          
Conversion of Series A preferred stock to common stock  $—   $24 

 

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

 

7

 

 

HOUSTON AMERICAN ENERGY CORP.

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited consolidated financial statements of Houston American Energy Corp., a Delaware corporation (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete financial presentation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included in the accompanying unaudited consolidated financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.

 

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes, which are included as part of the Company’s Form 10-K for the year ended December 31, 2021.

 

Consolidation

 

The accompanying consolidated financial statements include all accounts of the Company and its subsidiaries (HAEC Louisiana E&P, Inc., HAEC Oklahoma E&P, Inc., and HAEC Caddo Lake E&P, Inc.). All significant inter-company balances and transactions have been eliminated in consolidation.

 

Liquidity and Capital Requirements

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the issuance date of these consolidated financial statements. The Company has incurred continuing losses since 2011, including a loss of $552,475 for the nine months ended September 30, 2022.

 

The Company believes that it has the ability to fund, from cash on hand, its operating costs and anticipated drilling operations for at least the next twelve months following the issuance of these financial statements.

 

The actual timing and number of wells drilled during 2022 and beyond will be principally controlled by the operators of the Company’s acreage, based on a number of factors, including but not limited to availability of financing, performance of existing wells on the subject acreage, energy prices and industry condition and outlook, costs of drilling and completion services and equipment and other factors beyond the Company’s control or that of its operators.

 

In the event that the Company pursues additional acreage acquisitions or expands its drilling plans, the Company may be required to secure additional funding beyond our resources on hand. While the Company may, among other efforts, seek additional funding from “at-the-market” sales of common stock, and private sales of equity and debt securities, it presently does not have any commitments to provide additional funding, has less than 1 million shares of common stock available to support capital raising efforts and there can be no assurance that the Company can secure the necessary capital to fund its share of drilling, acquisition or other costs on acceptable terms or at all. If, for any reason, the Company is unable to fund its share of drilling and completion costs, it would forego participation in one or more of such wells. In such event, the Company may be subject to penalties or to the possible loss of some of its rights and interests in prospects with respect to which it fails to satisfy funding obligations and it may be required to curtail operations and forego opportunities.

 

Accounting Principles and Use of Estimates

 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews its estimates, including those related to such potential matters as litigation, environmental liabilities, income taxes and the related valuation allowance, determination of proved reserves of oil and gas and asset retirement obligations. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

 

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Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to a concentration of credit risk include cash, cash equivalents and any marketable securities (if any). The Company had cash deposits of $3,603,319 in excess of the FDIC’s current insured limit on interest bearing accounts of $250,000 as of September 30, 2022. The Company also had cash deposits of $3,722 in Colombian banks at September 30, 2022 that are not insured by the FDIC. The Company has not experienced any losses on its deposits of cash and cash equivalents.

 

Earnings (Loss) per Share

 

Basic earnings (loss) per share is computed by dividing net loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted in common shares that then shared in the earnings of the Company. In periods in which the Company reports a net loss, dilutive securities are excluded from the calculation of diluted net loss per share amounts as the effect would be anti-dilutive.

 

Recently Issued Accounting Pronouncements

 

The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its financial position, results of operations, or cash flows.

 

Subsequent Events

 

The Company has evaluated all transactions from September 30, 2022 through the financial statement issuance date for subsequent event disclosure consideration.

 

NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Disaggregation of Revenue from Contracts with Customers

 

The following table disaggregates revenue by significant product type for the three and nine-month periods ended September 30, 2022 and 2021:

 

                 
  

Three Months

Ended

September 30,
2022

  

Three Months
Ended

September 30,
2021

  

Nine Months
Ended

September 30,
2022

  

Nine Months
Ended

September 30,
2021

 
Oil sales  $245,714   $213,503   $788,619   $689,296 
Natural gas sales   119,644    51,984    310,850    151,808 
Natural gas liquids sales   61,898    24,888    214,596    81,758 
Total revenue from customers  $427,256   $290,375   $1,314,065   $922,862 

 

There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of September 30, 2022 or 2021.

 

NOTE 3 – OIL AND GAS PROPERTIES

 

During the nine months ended September 30, 2022, the Company invested $14,160, net, for the acquisition and development of oil and gas properties, consisting of cost of development of U.S. properties, net, principally attributable to final expenses related to the plugging and abandonment of the Lou Brock well. The full amount invested was capitalized to oil and gas properties subject to amortization.

 

The Company also invested $781,155 in Hupecol Meta relating to capital contributions for drilling operations in Colombia and acquisition of additional interest in Hupecol Meta, reflected in the cost method investment asset.

 

During the three and nine months ended September 30, 2022, the Company recorded depletion expense of $50,755 and $160,495, respectively. During the three and nine months ended September 30, 2021, the Company recorded depletion expense of $21,045 and $79,680, respectively.

 

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Geographical Information

 

The Company currently has properties in two geographical areas, the United States and Colombia. Revenues for the nine months ended September 30, 2022 and long lived assets (net of depletion, amortization, and impairments) as of September 30, 2022 attributable to each geographical area are presented below:

 

   Nine Months Ended September 30, 2022   As of September 30, 2022 
    Revenues    Long Lived Assets, Net 
United States  $1,314,065   $2,318,297 
Colombia   —    2,343,126 
Total  $1,314,065   $4,661,423 

 

NOTE 4 – STOCK-BASED COMPENSATION EXPENSE

 

In 2008, the Company adopted the Houston American Energy Corp. 2008 Equity Incentive Plan (the “2008 Plan”). The terms of the 2008 Plan, as amended in 2012 and 2013, allow for the issuance of up to 480,000 shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.

 

In 2017, the Company adopted the Houston American Energy Corp. 2017 Equity Incentive Plan (the “2017 Plan”). The terms of the 2017 Plan, allow for the issuance of up to 400,000 shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.

 

In 2021, the Company adopted the Houston American Energy 2021 Equity Incentive Plan (the “2021 Plan” and, together with the 2008 Plan and the 2017 Plan, the “Plans”). The terms of the 2021 Plan allow for the issuance of up to 500,000 shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.

 

Persons eligible to participate in the Plans are key employees, consultants and directors of the Company.

 

The Company periodically grants options to employees, directors and consultants under the Plans and is required to make estimates of the fair value of the related instruments and recognize expense over the period benefited, usually the vesting period.

 

Stock Option Activity

 

A summary of stock option activity and related information for the nine months ended September 30, 2022 is presented below:

 

 

   Options   Weighted-
Average
Exercise
Price		   Aggregate
Intrinsic Value		 
             
Outstanding at January 1, 2022   990,173   $3.38      
Granted   60,000    3.91      
Exercised   —    —      
Forfeited / expired   (50,696)   20.63      
Outstanding at September 30, 2022   999,477   $2.55   $2,052,817 
Exercisable at September 30, 2022   939,481   $2.47   $1,629,817 

 

During the nine months ended September 30, 2022, options to purchase an aggregate of 60,000 shares of the Company’s common stock were granted to the Company’s directors. The options have a ten-year life, are exercisable at $3.91 per share, vest 20% on the date of grant and 80% nine months from the date of grant. The grant date fair value of these stock options was $216,326 based on the Black-Scholes Option Pricing model based on the following assumptions: market value of common stock on grant date – $3.82; risk free interest rate based on the applicable US Treasury bill rate – 0%; dividend yield – 0%; volatility factor based on the trading history of the Company – 121%; weighted average expected life in years – 10; and expected forfeiture rate – 0%.

 

During the three and nine months ended September 30, 2022 and 2021, the Company recognized $95,205 and $206,210, and $167,040 and $182,149 respectively, of stock-based compensation expense attributable to the amortization of stock options all included in general and administrative expenses. As of September 30, 2022, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $163,735. The unrecognized expense is expected to be recognized over a weighted average period of 0.61 years and the weighted average remaining contractual term of the outstanding options and exercisable options at September 30, 2022 is 6.32 years and 0 years, respectively.

 

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As of September 30, 2022, there were 181,333 shares of common stock available for issuance pursuant to future stock or option grants under the Plans.

 

NOTE 5 – CAPITAL STOCK

 

Warrants

 

A summary of warrant activity and related information for 2022 is presented below:

 

   Warrants  

Weighted-Average

Exercise Price

  

Aggregate

Intrinsic Value

 
             
Outstanding at January 1, 2022   98,400   $2.63      
Issued   —    —      
Exercised   —    —      
Expired   (4,000)   6.88      
Outstanding at September 30, 2022   94,400   $2.46   $94,400 
Exercisable at September 30, 2022   94,400   $2.46   $94,400 

 

NOTE 6 – EARNINGS PER COMMON SHARE

 

Earnings (loss) per common share-basic is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Net income (loss) per common share-diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing net (loss) income by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net (loss) income per common share-diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.

 

For the three and nine months ended September 30, 2022 and 2021, the following and warrants and options to purchase shares of common stock were excluded from the computation of diluted net loss per share, as the inclusion of such shares would be anti-dilutive:

 

   2022   2021   2022   2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Stock warrants   94,400    98,400    94,400    98,400 
Stock options   999,477    990,173    999,477    990,173 
Total   1,093,877    1,088,573    1,093,877    1,088,573 

 

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NOTE 7 - COMMITMENTS AND CONTINGENCIES

 

Lease Commitment

 

The Company leases office facilities under an operating lease agreement that expires October 31, 2025. During the three and nine months ended September 30, 2022, the operating cash outflows related to operating lease liabilities totaled $21,560 and $42,136, respectively, and the expense for the right of use asset for operating leases totaled $13,769 and $43,938, respectively. As of September 30, 2022, the Company’s operating lease had a weighted-average remaining term of 3 years and a weighted average discount rate of 12%. As of September 30, 2022, the lease agreement requires future payments as follows:

Year  Amount 
2022   21,693 
2023   87,288 
2024   88,801 
2025   75,051 
Total future lease payments   272,833 
Less: imputed interest   46,051 
Present value of future operating lease payments   226,782 
Less: current portion of operating lease liabilities   63,150 
Operating lease liabilities, net of current portion  $163,632 
Right of use assets  $227,270 

 

Total base rental expense was $19,647 and $22,161 for the three months ended September 30, 2022 and 2021, respectively, and $66,483 and $58,837 for the nine months ended September 30, 2022 and 2021, respectively. The Company does not have any capital leases or other operating lease commitments.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Information

 

This Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the nine months ended September 30, 2022, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.

 

The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual results or events to differ from those anticipated in the forward-looking statements included herein include the Risk Factors described in Item 1A herein and in our Form 10-K for the year ended December 31, 2021.

 

Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this Form 10-Q to be accurate as of the date hereof. Changes may occur after that date, and we will not update that information except as required by law in the normal course of our public disclosure practices.

 

Additionally, the following discussion regarding our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part 1 of this Form 10-Q, as well as the Risk Factors in Item 1A and the financial statements in Item 7 of Part II of our Form 10-K for the fiscal year ended December 31, 2021.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. A description of our critical accounting policies is set forth in our Form 10-K for the year ended December 31, 2021. As of, and for the nine months ended, September 30, 2022, there have been no material changes or updates to our critical accounting policies.

 

Unevaluated Oil and Gas Properties

 

Unevaluated oil and gas properties not subject to amortization, include the following at September 30, 2022:

 

   September 30, 2022 
Acquisition costs  $143,847 
Development and evaluation costs   2,199,279 
Total  $2,343,126 

 

The carrying value of unevaluated oil and gas prospects above was primarily attributable to properties in the South American country of Colombia. We are maintaining our interest in these properties.

 

Recent Developments

 

Equity Investment

 

In 2019, we acquired a 2% interest in Hupecol Meta, LLC (“Hupecol Meta”) (the “Hupecol Meta Acquisition”), which interest was subsequently increased on multiple occasions, including the acquisition, during the nine months ended September 30, 2022, of an additional interest (1%) in Hupecol Meta for $100,000.

 

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Hupecol Meta holds a working interest in the 639,405 gross acre CPO-11 block in the Llanos Basin in Colombia, comprised of the 69,128 acre Venus Exploration Area and 570,277 acres, which was 50% farmed out by Hupecol Meta. As of September 30, 2022, through our ownership interest in Hupecol Meta, we held an approximately 11% interest in the Venus Exploration Area and approximately 5.5% interest in the remainder of the block.

 

Drilling Activity

 

During the nine months ended September 30, 2022, Hupecol Meta drilled and completed two wells, the Bugalu 1 and the Saturno ST1, in the Venus Exploration Area of the CPO-11 block in Colombia. A third well, the Caonabo, commenced drilling in late September 2022.

 

The Saturno ST1, was briefly put on production and then shut-in pending receipt of a permit to inject produced water in an old well. A water injection permit was issued in November 2022. With the permit issued, we anticipate bringing the Saturno ST1 well, and the legacy Venus 2A well, on production during November 2022. The Bugalu 1 is awaiting testing. The Caonabo was determined to be a dry hole.

 

No drilling operations were conducted on our U.S. properties during the nine months ended September 30, 2022.

 

During the nine months ended September, 30, 2022, our capital investment expenditures totaled $795,311, principally relating to final expenses associated with the plugging and abandonment of the Lou Brock well ($14,160) and investments in our cost method investment in Hupecol Meta ($681,155) (excluding $100,000 investment to increase our equity interest in Hupecol Meta).

 

Colombian Elections

 

In June 2022, Colombia elected as its President, leftist candidate, Gustavo Petro. President-elect Petro has publicly vowed to wind down fossil fuel production in Colombia and end fracking in Colombia as part of a plan to transition to renewable green energy. While the President-elect’s proclamations are openly hostile to the oil and gas industry and appear to bar grants of future oil and gas contracts, those proclamations appear to honor existing oil and gas contracts. Moreover, the President-elect’s proclamations do not appear to be supported by the Colombian lawmakers which may make it difficult for the President-elect to effectively carry out his proclamations. Nonetheless, hostility from the executive branch may make the climate for drilling wells on existing acreage more challenging than is already the case.

 

Results of Operations

 

Oil and Gas Revenues. Total oil and gas revenues increased 47% in the three months ended September 30, 2022, compared to $290,375 in the three months ended September 30, 2021. Oil and gas revenues increased 42% in the nine months ended September 30, 2022, compared to $922,862 in the nine months ended September 30, 2021.

 

The increase in revenue was due to (i) increased natural gas production volumes, up 150% and 34% for the three and nine-month periods, respectively, partially offset by a change in oil production, increased by 84% and decreased 29% for the three and nine-month periods, respectively, and (ii) improved commodity pricing, including 33% and 47% increases in crude oil prices and natural gas prices, respectively, realized during the three-month period and 60% and 53% increases in crude oil prices and natural gas prices, respectively, realized during the nine-month period.

 

The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for the quarter and nine months ended September 30, 2022 and 2021:

 

  

Nine Months Ended

September 30

  

Three Months Ended

September 30,

 
   2022   2021   2022   2021 
Gross producing wells   4    4    4    4 
Net producing wells   0.68    0.68    0.68    0.68 
Net oil production (Bbl)   8,140    11,391    5,702    3,096 
Net gas production (Mcf)   53,339    39,765    35,089    14,027 
Average sales price – oil (per barrel)  $96.88   $60.51   $91,97   $68.96 
Average sales price – natural gas (per Mcf)  $5.83   $3.82   $5.44   $3.71 

 

The change in production volumes was primarily due to natural declines in production, partially offset by our Reeves County wells being put on gas lift in late 2021. With the issuance of a water injection permit relating to the CPO-11 block, well counts and production are anticipated to increase with the resumption of production of the Saturno ST1 and Venus 2A wells in Colombia.

 

14

 

 

The change in average oil sales price realized reflects a spike in global energy prices attributable to global supply uncertainty arising from the Russian invasion of Ukraine.

 

Oil and gas sales revenues by region for the nine months ended September 30, 2022 were as follows:

 

   Colombia   U.S.   Total 
2022 First Nine Months               
Oil sales  $—   $788,619   $788,619 
Natural gas sales   —    310,850    310,850 
Natural gas liquid sales   —    214,596    214,596 
2021 First Nine Months               
Oil sales  $—   $689,296   $689,296 
Natural gas sales   —    151,808    151,808 
Natural gas liquid sales   —    81,758    81,758 

 

Lease Operating Expenses. Lease operating expenses increased 0% to $184,488 during the three months ended September 30, 2022, from $184,869 during the three months ended September 30, 2021. Lease operating expenses increased 12% to $496,245 during the nine months ended September 30, 2022, from $443,614 during the nine months ended September 30, 2021.

 

The change in lease operating expenses was principally attributable to increased severance taxes associated with the increase in revenues, non-recurring water disposal and operating costs incurred on the Lou Brock well during.

 

Depreciation and Depletion Expense. Depreciation and depletion expense was $50,755 and $21,045 for the three months ended September 30, 2022 and 2021, respectively, and $160,495 and $79,680 for the nine months ended September, 30, 2022 and 2021, respectively. The change in depreciation and depletion was due to an increase in the depletable base during 2022.

 

General and Administrative Expenses (excluding stock-based compensation). General and administrative expense increased by 85% to $498,876 during the three months ended September 30, 2022 from $269,264 during the three months ended September 30, 2021, and increased by 14% to $1,016,867 during the nine months ended September 30, 2022 from $894,243 during the nine months ended September 30, 2021. The increase in general and administrative expense for the three and nine-month periods was primarily attributable to payment of a bonus to our CEO in the amount of $200,000 during the 2022 three-month period. Future general and administrative expenses are expected to increase to reflect an increase in the base salary of our CEO from $120,000 to $180,000 annually.

 

Stock-Based Compensation. Stock-based compensation decreased to $95,205 during the three months ended September 30, 2022 from $167,040 during the three months ended September 30, 2021, and increased 13% to $206,210 during the nine months ended September 30, 2022 from $182,149 during the nine months ended September 30, 2021. The change was attributable to the amortization of stock options granted during 2022 and 2021.

 

Other Income (Expense). Other income/expense, net, totaled $10,788 of income during the three months ended September 30, 2022, compared to $968 of income during the three months ended September 30, 2021, and totaled $13,277 of income during the nine months ended September 30, 2022, compared to $12,129 of income during the nine months ended September 30, 2021. Other income for all periods consisted of interest earned on cash balances.

 

Financial Condition

 

Liquidity and Capital Resources. At September 30, 2022, we had a cash balance of $3,896,362 and working capital of $4,072,422, compared to a cash balance of $4,894,577 and working capital of $5,052,685 at December 31, 2021.

 

Cash Flows. Operating activities used $202,900 during the nine months ended September 30, 2022, compared to $648,816 used during the nine months ended September 30, 2021. The change in operating cash flow was primarily attributable to increased revenues and a resulting decrease in net loss during the nine-months ended September 30, 2022.

 

Investing activities used $795,315 during the nine months ended September 30, 2022, compared to $221,451 used during the nine months ended September 30, 2021. The change in funds used by investing activities is principally attributable to higher investments in Hupecol Meta LLC and investments in plugging and abandonment of our Lou Brock well.

 

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Financing activities provided $0 during the nine months ended September 30, 2022, compared to $4,570,888 provided during the nine months ended September 30, 2021. Cash provided by financing activities during the nine months ended September 30, 2021 was attributable to funds received from two at-the-market common stock offerings ($6,575,889), partially offset by cash used to pay dividends on preferred stock ($37,201) and to redeem all remaining outstanding shares of preferred stock ($1,967,800)

 

Long-Term Liabilities. At September 30, 2022, we had long-term liabilities of $235,538, compared to $279,953 at December 31, 2021. Long-term liabilities at September 30, 2022 and December 31, 2021, consisted of a reserve for plugging costs and the long-term lease liability.

 

Capital and Exploration Expenditures and Commitments. Our principal capital and exploration expenditures relate to ongoing efforts to acquire, drill and complete prospects, in particular our Permian Basin acreage and our CPO-11 Colombian acreage. Hupecol Meta drilled two vertical wells in the Venus Exploration Area on the CPO-11 block, and commenced drilling on a non-Venus CPO-11 well, during the nine months ended September 30, 2022. The actual timing and number of well operations undertaken during 2022, in Colombia and the Permian Basin, will be principally controlled by the operators of our acreage, based on a number of factors, including but not limited to availability of financing, performance of existing wells on the subject acreage, energy prices and industry condition and outlook, costs of drilling and completion services and equipment, ability to secure necessary permits and other factors beyond our control or that of our operators.

 

In addition to possible operations on our existing acreage holdings, we continue to evaluate drilling prospects in which may acquire an interest and participate.

 

During the nine months ended September 30, 2022, we invested $795,315 for the acquisition and development of oil and gas properties, consisting of drilling and development operations in the U.S ($14,160), principally relating to final expenses related to the plugging and abandonment of the Lou Brock well, and investments in Hupecol Meta ($781,155), including $100,000 paid to increase our ownership interest in Hupecol Meta. The $14,160 invested in U.S. operations was capitalized to oil and gas properties subject to amortization. The $781,155 invested in Hupecol Meta was capitalized to our investment in Hupecol Meta.

 

As our allocable share of well costs will vary depending on the timing and number of wells drilled as well as our working interest in each such well and the level of participation of other interest owners, we have not established a drilling budget but will budget on a well-by-well basis as our operators propose wells.

 

We believe that we have the ability, through our cash on-hand, to fund operations and our cost for all planned wells expected to be drilled during the twelve months following this report.

 

In the event that we pursue additional acreage acquisitions or expand our drilling plans, we may be required to secure additional funding beyond our resources on hand. While we may, among other efforts, seek additional funding from “at-the-market” sales of common stock, and private sales of equity and debt securities, we presently have less than 1 million authorized shares of common stock available for issuance to support equity capital raises and we have no commitments to provide additional funding, and there can be no assurance that we can secure the necessary capital to fund our share of drilling, acquisition or other costs on acceptable terms or at all. If, for any reason, we are unable to fund our share of drilling and completion costs and fail to satisfy commitments relative to our interest in our acreage, we may be subject to penalties or to the possible loss of some of our rights and interests in prospects with respect to which we fail to satisfy funding commitments and we may be required to curtail operations and forego opportunities.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements or guarantees of third party obligations at September 30, 2022.

 

Inflation

 

We believe that inflation has not had a significant impact on operations since inception.

 

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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Commodity Price Risk

 

The price we receive for our oil and gas production heavily influences our revenue, profitability, access to capital and future rate of growth. Crude oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and gas have been volatile, and these markets will likely continue to be volatile in the future. The price we receive for production depends on numerous factors beyond our control.

 

We have not historically entered into any hedges or other transactions designed to manage, or limit, exposure to oil and gas price volatility.

 

ITEM 4 CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of September 30, 2022 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2022. Such conclusion reflects the 2013 departure of our chief financial officer and assumption of duties of principal financial officer by our chief executive officer and the resulting lack of segregation of duties. Until we are able to remedy these material weaknesses, we are relying on third party consultants and our SEC consultant to assist with financial reporting.

 

Changes in Internal Control over Financial Reporting

 

No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

 

ITEM 6 EXHIBITS

 

  Exhibit
Number		   Description
       
  31.1   Certification of CEO and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
  32.1   Certification of CEO and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
  101.INS   Inline XBRL Instance Document
       
  101.SCH   Inline XBRL Taxonomy Extension Schema Document
       
  101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
       
  101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
       
  101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
       
  101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
       
  104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

17

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.

 

  HOUSTON AMERICAN ENERGY CORP.
Date: November 14, 2022    
  By: /s/ John Terwilliger
    John Terwilliger
    CEO and President (Principal Executive Officer and Principal Financial Officer)

 

18

 

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