UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ______________.
Commission
File Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| (Address of principal executive offices)(Zip Code) |
| (Registrant’s telephone number, including area code) |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ☒ | |
| Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐
As of August 14, 2023, we had shares of $0.001 par value common stock outstanding.
HOUSTON AMERICAN ENERGY CORP.
FORM 10-Q
INDEX
| 2 |
PART I - FINANCIAL INFORMATION
| ITEM 1 | Financial Statements |
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
June 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable – oil and gas sales | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Oil and gas properties, full cost method | ||||||||
| Costs subject to amortization | ||||||||
| Costs not being amortized | ||||||||
| Office equipment | ||||||||
| Total | ||||||||
| Accumulated depletion, depreciation, amortization, and impairment | ( | ) | ( | ) | ||||
| PROPERTY AND EQUIPMENT, NET | ||||||||
| Equity investment – Hupecol Meta LLC | ||||||||
| Right of use asset | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of lease liability | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Lease liability, net of current portion | ||||||||
| Reserve for plugging and abandonment costs | ||||||||
| TOTAL LONG-TERM LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, par value $; shares authorized and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 3 |
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Unaudited)
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| OIL AND GAS REVENUE | $ | $ | $ | $ | ||||||||||||
| EXPENSES OF OPERATIONS | ||||||||||||||||
| Lease operating expense and severance tax | ||||||||||||||||
| General and administrative expense | ||||||||||||||||
| Depreciation and depletion | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| OTHER INCOME | ||||||||||||||||
| Interest income | ||||||||||||||||
| Other income | ||||||||||||||||
| Total other income | ||||||||||||||||
| Net income (loss) before taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Basic income (loss) per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Basic weighted average number of common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Unaudited)
| Additional | ||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance – December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||
| Net income | — | |||||||||||||||||||
| Balance – March 31, 2023 | ( | ) | ||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance – June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance – December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance – March 31, 2022 | ( | ) | ||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Net income | — | |||||||||||||||||||
| Balance – June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Unaudited)
| For the Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Depreciation and depletion | ||||||||
| Accretion of asset retirement obligation | ||||||||
| Stock-based compensation | ||||||||
| Amortization of right of use asset | ||||||||
Earnings distribution from Hupecol Meta LLC | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | ( | ) | ( | ) | ||||
| Increase in prepaid expenses and other current assets | ( | ) | ||||||
| Decrease in accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Decrease in operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments for the acquisition and development of oil and gas properties | ( | ) | ||||||
| Payments for capital contribution for equity investment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of common stock for cash, net of offering costs | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Changes in estimate of asset retirement obligations, net | $ | $ | ||||||
| Changes in accrued equity investment contributions and distributions | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
HOUSTON AMERICAN ENERGY CORP.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Houston American Energy Corp., a Delaware corporation (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete financial presentation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included in the accompanying unaudited consolidated financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.
These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes, which are included as part of the Company’s Form 10-K for the year ended December 31, 2022.
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. With limited exceptions, the Company has incurred continuing losses since
2011, with an accumulated deficit of $
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 2023 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 limited shares of common stock available to support capital raising efforts and there can be no assurance that the Company can secure the necessary capital to fund its share of drilling, acquisition or other costs on acceptable terms or at all. If, for any reason, the Company is unable to fund its share of drilling and completion costs, it would forego participation in one or more of such wells. In such event, the Company may be subject to penalties or to the possible loss of some of its rights and interests in prospects with respect to which it fails to satisfy funding obligations and it may be required to curtail operations and forego opportunities.
Accounting Principles and Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews its estimates, including those related to such potential matters as litigation, environmental liabilities, income taxes and the related valuation allowance, determination of proved reserves of oil and gas and asset retirement obligations. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.
| 7 |
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to a concentration of credit risk include cash, cash equivalents (if any) and any marketable
securities (if any). The Company had cash deposits of $
Basic earnings (loss) per share is computed by dividing net earnings (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
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which was codified in Accounting Standards Codification (“ASC”) 326, Financial Instruments — Credit Losses (“ASC 326”). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Because the Company is a smaller reporting company based on the most recent determination as of November 15, 2019, ASC 326 became effective for the Company for fiscal years beginning after December 15, 2022. As such, the Company adopted ASC 326 effective January 1, 2023, utilizing the modified retrospective transition method. Upon adoption, the Company updated its impairment model to utilize a forward-looking current expected credit losses (“CECL”) model in place of the incurred loss methodology for financial instruments measured at amortized cost, primarily including its accounts receivable and contract asset. In relation to available-for-sale (“AFS”) debt securities, the guidance eliminates the concept of “other-than-temporary” impairment, and instead focuses on determining whether any impairment is a result of a credit loss or other factors. The adoption of ASC 326 did not have a material impact on our unaudited condensed consolidated financial statements as of the adoption date.
NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates revenue by significant product type for the three and six-month periods ended June 30, 2023 and 2022:
Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |||||||||||||
| Oil sales | $ | $ | $ | $ | ||||||||||||
| Natural gas sales | ||||||||||||||||
| Natural gas liquids sales | ||||||||||||||||
| Total revenue from customers | $ | $ | $ | $ | ||||||||||||
There
were
| 8 |
NOTE 3 – OIL AND GAS PROPERTIES
During the six months ended June 30, 2023, the Company incurred costs attributable to final expenses related to the plugging and abandonment of the Lou Brock well.
During
the three and six months ended June 30, 2023, the Company recorded depletion expense of $
Geographical Information
The Company currently has properties in two geographical areas, the United States and Colombia. Revenues for the six months ended June 30, 2023 and long lived assets (net of depletion, amortization, and impairments) as of June 30, 2023 attributable to each geographical area are presented below:
Six Months Ended June 30, 2023 | As of June 30, 2023 | |||||||
| Revenues | Long Lived Assets, Net | |||||||
| United States | $ | $ | ||||||
| Colombia | ||||||||
| Total | $ | $ | ||||||
Revenues and long-lived assets attributable to the Company’s investments in Hupecol Meta LLC (“Hupecol Meta”), and its underlying assets and operations in Colombia, are excluded from the above table.
NOTE 4 – EQUITY INVESTMENT
The Company’s carrying value of its holdings in Hupecol Meta is reflected in the line item “equity investment – Hupecol Meta LLC” on the Company’s Consolidated Balance Sheet.
During
the six months ended June 30, 2023, the Company made capital contributions totaling $
In 2008, the Company adopted the Houston American Energy Corp. 2008 Equity Incentive Plan (the “2008 Plan”). The terms of the 2008 Plan, as amended in 2012 and 2013, allow for the issuance of up to shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.
In 2017, the Company adopted the Houston American Energy Corp. 2017 Equity Incentive Plan (the “2017 Plan”). The terms of the 2017 Plan, allow for the issuance of up to shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.
In 2021, the Company adopted the Houston American Energy 2021 Equity Incentive Plan (the “2021 Plan” and, together with the 2008 Plan and the 2017 Plan, the “Plans”). The terms of the 2021 Plan allow for the issuance of up to shares of the Company’s common stock pursuant to the grant of stock options and restricted stock.
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.
| 9 |
Stock Option Activity
| Options | Weighted-Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 1, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited | ||||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||
| Exercisable at June 30, 2023 | $ | $ | ||||||||||
During the six months ended June 30, 2023, options to purchase an aggregate of shares of the Company’s common stock were granted to the Company’s directors. The options have a ten-year life, are exercisable at $ per share, vest on the date of grant and 80% nine months from the date of grant.
During the three and six months ended June 30, 2023, the Company recognized $ and $, respectively, of stock-based compensation expense attributable to the amortization of stock options. As of June 30, 2023, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $. The unrecognized expense is expected to be recognized over a weighted average period of years and the weighted average remaining contractual term of the outstanding options and exercisable options at June 30, 2023 is years and years, respectively.
As of June 30, 2023, there were shares of common stock available for issuance pursuant to future stock or option grants under the Plans.
Stock-Based Compensation Expense
Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock-based compensation expense included in general and administrative expense | $ | $ | ||||||
| Earnings per share effect of share-based compensation expense – basic and diluted | $ | ) | $ | ) | ||||
NOTE 6 – CAPITAL STOCK
Common Stock – At-the Market Offering
In
November 2022, the Company entered into an At-the-Market Sales Agreement (the “Sales Agreement”) with Univest Securities,
LLC (“Univest”) pursuant to which the Company could sell (the “2022 ATM Offering”), at its option, up to an aggregate
of $
During
the six months ended June 30, 2023, the Company sold an aggregate of shares in connection with the 2022 ATM Offering and received
proceeds, net of commissions and expenses, of $
| 10 |
Warrants
A summary of warrant activity and related information for 2023 is presented below:
| Warrants | Weighted-Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 1, 2023 | $ | | ||||||||||
| Issued | ||||||||||||
| Exercised | ||||||||||||
| Expired | ||||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||
| Exercisable at June 30, 2023 | $ | $ | ||||||||||
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 income (loss) 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.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Numerator: | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Effect of common stock equivalents | ||||||||||||||||
| Net income (loss) adjusted for common stock equivalents | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Denominator: | ||||||||||||||||
| Weighted average common shares – basic | ||||||||||||||||
| Dilutive effect of common stock equivalents: | ||||||||||||||||
| Options and warrants | ||||||||||||||||
| Denominator: | ||||||||||||||||
| Weighted average common shares – diluted | ||||||||||||||||
| Earnings (loss) per common share – basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Earnings (loss) per common share – diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock warrants | ||||||||||||||||
| Stock options | ||||||||||||||||
| Total | ||||||||||||||||
| 11 |
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Lease Commitment
The
Company leases office facilities under an operating lease agreement that expires
| Year | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| Total future lease payments | ||||
| Less: imputed interest | ||||
| Present value of future operating lease payments | ||||
| Less: current portion of operating lease liabilities | ||||
| Operating lease liabilities, net of current portion | $ | |||
| Right of use assets | $ | |||
Total
base rental expense was $
| 12 |
| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Information
This Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the six months ended June 30, 2023, 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, 2022.
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, 2022.
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, 2022. As of, and for the six months ended, June 30, 2023, there have been no material changes or updates to our critical accounting policies.
Unevaluated Oil and Gas Properties
Unevaluated oil and gas properties not subject to amortization, include the following at June 30, 2023:
| June 30, 2023 | ||||
| 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 legacy properties in the South American country of Colombia, a substantial portion of which is expected to be reclassified to “costs subject to amortization” and evaluated for impairment.
Recent Developments
Drilling Activity
During the six months ended June 30, 2023:
| ● | no drilling activities were conducted on our U.S. properties; | |
| ● | our capital investment expenditures totaled $481,948, principally attributable to investments in our equity investment in Hupecol Meta LLC (“Hupecol Meta”); and | |
| ● | Hupecol Meta LLC drilled and completed, and production commenced on, the Venus 1-H horizontal well in Colombia. |
| 13 |
In July 2023, the Venus 2-H well was spud, plugged back and side-tracked by Hupecol Meta as the Venus 2-H ST1 well and, in August 2023, the well was completed and brought on production. Our estimated share of cost associated with the Venus 2-H ST1 well is $600,000.
Distributions from Equity Investment
During the six months ended June 30, 2023, we received distributions, totaling $648,475, from Hupecol Meta, representing our share of distributable net income and reflected as “Other Income” on our Statement of Operations.
Financing – At-the Market Offering
In November 2022, we entered into an At-the-Market Sales Agreement (the “Sales Agreement”) with Univest Securities, LLC (“Univest”) pursuant to which we could sell (the “2022 ATM Offering”), at our option, up to an aggregate of $3.5 million in shares of common stock through Univest, as sales agent. Sales of shares under the Sales Agreement (the “2022 ATM Offering”) were made, in accordance with placement notices delivered to Univest, which notices set parameters under which shares could be sold. The 2022 ATM Offering was made pursuant to a shelf registration statement by methods deemed to be “at the market,” as defined in Rule 415 promulgated under the Securities Act of 1933. We pay Univest a commission in cash equal to 3% of the gross proceeds from the sale of shares in the 2022 ATM Offering. We reimbursed Univest for $25,000 of expenses incurred in connection with the 2022 ATM Offering.
During the six months ended June 30, 2023, we sold an aggregate of 578,707 shares in connection with the 2022 ATM Offering and received proceeds, net of commissions and expenses, of $1,652,000.
Executive Compensation Changes
During the six months ended June 30, 2023, our compensation committee approved, and we paid, a cash bonus of $200,000 to our Chief Executive Officer and increased, effective July 1, 2023, our Chief Executive Officer’s annual base salary from $180,000 to $240,000.
Results of Operations
Oil and Gas Revenues. Total oil and gas revenues declined 56% to $204,390 in the three months ended June 30, 2023, compared to $462,989 in the three months ended June 30, 2022. Oil and gas revenues declined 51% to $434,414 in the six months ended June 30, 2023, compared to $886,809 for the six months ended June 30, 2022. The change in revenue was due to (i) a decline in oil production, down 13% and 20% for the three and six-month periods, (ii) a decrease in average sales price of oil, down 34% and 28% for the three and six-month periods; (iii) a decline in natural gas production, down, 13% and 6% for the three and six-month periods; and (iv) a decrease in average sales price of natural gas, down 84% and 77% for the three and six-month periods.
The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for the quarter and six months ended June 30, 2023 and 2022:
Six Months Ended June 30,(1) | Three Months Ended June 30,(1) | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Gross producing wells | 4 | 4 | 4 | 4 | ||||||||||||
| Net producing wells | 0.68 | 0.68 | 0.68 | 0.68 | ||||||||||||
| Net oil production (Bbl) | 4,359 | 5,478 | 2,116 | 2,438 | ||||||||||||
| Net gas production (Mcf) | 33,456 | 35,542 | 15,862 | 18,250 | ||||||||||||
| Average sales price – oil (per barrel) | $ | 71.82 | 99.11 | $ | 71.23 | $ | 108.05 | |||||||||
| Average sales price – natural gas (per Mcf) | $ | 1.25 | 5.38 | $ | 1.07 | $ | 6.57 | |||||||||
| (1) | All well, production and price information excludes wells operated by Hupecol Meta. |
The change in production volumes was primarily attributable to the natural decline in production. The change in average oil and natural gas sales price realized reflects declining global energy prices.
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Our current focus is on development of our CPO-11 assets in Colombia, which investments are accounted for using the equity method and, therefore, excluded from consolidation and from inclusion in operations in our Statement of Operations (See “Other Income” below for discussion of equity method investment results relating to the CPO-11 block). As our investments in oil and gas projects are focused in Colombia, and we have no present plans to drill domestic wells to replace and grow U.S. production, we expect production and revenues reported in our Statement of Operations to continue to decline for the foreseeable future.
Oil and gas sales revenues are entirely attributable to our U.S. properties.
Lease Operating Expenses. Lease operating expenses decreased 32% to $101,714 during the three months ended June 30, 2023, from $150,485 during the three months ended June 30, 2022. Lease operating expenses decreased 31% to $215,400 during the six months ended June 30, 2023, from $311,757 during the six months ended June 30, 2022. The decrease in lease operating expenses was attributable to the decline in oil production volumes.
All lease operating expenses are attributable to U.S. operations and exclude lease operating expenses associated with our investment in, and operation of, Hupecol Meta properties in Colombia.
Depreciation and Depletion Expense. Depreciation and depletion expense was $44,941 and $51,501 for the three months ended June 20, 2023 and 2022, respectively, and $91,896 and $109,740 for the six months ended June 30, 2023 and 2022, respectively. The change in depreciation and depletion was due to the decrease in oil production volumes.
General and Administrative Expenses (excluding stock-based compensation). General and administrative expense increased 174% to $638,745 during the three months ended June 30, 2023, from $233,376 during the three months ended June 30, 2022, and increased 71% to $884,119 during the six months ended June 30, 2023, from $517,991 during the six months ended June 30, 2022. The increase in general and administrative expenses was attributable to payment of a bonus of $200,000 to our CEO during the 2023 period (compared to 2022 when bonuses were paid in the third quarter) and an increase in professional fees (up approximately $150,000 relating to increases in accounting fees and the timing of our annual meeting which accelerated certain professional fees by one quarter compared to 2022).
Stock-Based Compensation. Stock-based compensation increased to $77,870 during the three months ended June 30, 2023, from $25,520 during the three months ended June 30, 2022 and increased 46% to $162,315 during the six months ended June 30, 2023, from $111,005 during the six months ended June 30, 2022. The increase in stock-based compensation year-over-year, relates to the timing of option grants to directors with 2023 grants made in the quarter ended June 30, 2023, while 2022 grants were made in the quarter ended September 30, 2022.
Other Income. Other income totaled $358,499 during the three months ended June 30, 2023, compared to $2,258 during the three months ended June 30, 2022, and totaled $723,110 during the six months ended June 30, 2023, compared to $2,489 during the six months ended June 30, 2022. Other income consisted of (i) equity investment distributions from Hupecol Meta, totaling $314,364 during the three months ended June 30, 2023 and $648,475 during the six months ended June 30, 2023, compared to no distributions during 2022; and (ii) interest income earned on cash balances, totaling $44,135 during the three months ended June 30, 2023, compared to $2,258 during the three months ended June 30, 2022, and $74,635 during the six months ended June 30, 2023, compared to $2,489 during the six months ended June 30, 2022.
Distributions from Hupecol Meta reflect, generally, our share of distributable net income of Hupecol Meta. Distributions should not be viewed as a measure of actual operating results of Hupecol Meta for the period of such distributions or any other periods. Distributions merely reflect determinations by the managers of Hupecol Meta to make distributions in accordance with contractual rights of the various members of Hupecol Meta within the discretion of the managers as permitted under the contracts governing Hupecol Meta. We report distributions from Hupecol Meta as “Other Income” to the extent that the character of the distributions are in the nature of income and not a return of capital. The distributions received during 2023 are, generally, attributable to operations of Hupecol Meta’s initial wells, the Saturno ST1 vertical well, the Venus 2A vertical well, a legacy well that had been shut-in, and the Venus 1-H well, Hupecol Meta’s first horizontal well, which began production in May 2023.
The increase in interest income from 2022 to 2023 was attributable to the increase in our cash balances, resulting from sales of common stock during 2023, and substantial increases in interests due to trends in the broad debt market.
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Financial Condition
Liquidity and Capital Resources. At June 30, 2023, we had a cash balance of $5,532,834 and working capital of $5,825,671, compared to a cash balance of $4,547,210 and working capital of $4,601,168 at December 31, 2022.
Cash Flows. Operating activities used $217,467 during the six months ended June 30, 2023, compared to $29,361 used during the six months ended June 30, 2022. The change in operating cash flow was primarily attributable to the timing of payment of cash bonuses (totaling $200,000 in 2023) which were paid during the quarter ended June 30, while 2022 bonuses were paid during the quarter ended September 30, and larger changes in operating assets and liabilities during 2023.
Investing activities used $448,909 during the six months ended June 30, 2023, compared to $262,444 used during the six months ended June 30, 2022. The change in funds used by investing activities is principally attributable to the commencement, and acceleration during 2023, of a drilling program on our CPO-11 assets in Colombia.
Financing activities provided $1,652,000 during the six months ended June 30, 2023, compared to $0 provided during the six months ended June 30, 2022. Cash provided by financing activities during the six months ended June 30, 2023 was attributable to funds received from the 2022 ATM offering.
Long-Term Liabilities. At June 30, 2023, we had long-term liabilities of $170,554, compared to $219,148 at December 31, 2022. Long-term liabilities at June 30, 2023 and December 31, 2022, 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 capital contribution obligations associated with our equity investment in Hupecol Meta, costs associated with the operation of our Permian Basin acreage and ongoing efforts to acquire, drill and complete prospects. The Venus 1-H well, the first horizontal well of Hupecol Meta in the Venus Exploration Area of the CPO-11 block in Colombia was drilled during the first six months of 2023. Our allocable share of costs associated with the Venus 1-H well was approximately $576,000. A second horizontal well on the CPO-11 block, the Venus 2-H ST1, commenced drilled, was plugged back and side-tracked in July 2023. Our estimated cost associated with the Venus 2-H ST1 well is approximately $490,000. The actual cost of such anticipated well, and the timing and number of well operations undertaken during 2023, in Colombia and the Permian Basin, will be principally controlled by the operators of our acreage, based on a number of factors, including but not limited to availability of financing, performance of existing wells on the subject acreage, energy prices and industry condition and outlook, costs of drilling and completion services and equipment and other factors beyond our control or that of our operators.
In addition to possible operations on our existing acreage holdings, we continue to evaluate drilling prospects in which may acquire an interest and participate.
During the six months ended June 30, 2023, we invested $481,947 for the acquisition and development of oil and gas properties, consisting of capital contributions to Hupecol Meta ($481,947). The $481,947 invested in Hupecol Metal was capitalized to our equity 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 2023 and for the upcoming twelve-month period.
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 limited 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.
Inflation
We believe that inflation has not had a significant impact on operations since inception. However, persistent inflation may increase our operating costs broadly, adversely affecting our operating results.
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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 June 30, 2023 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2023. 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 June 30, 2023 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) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.
| HOUSTON AMERICAN ENERGY CORP. | ||
| Date: August 14, 2023 | ||
| By: | /s/ John Terwilliger | |
| John Terwilliger | ||
| CEO and President (Principal Executive Officer and Principal Financial Officer) | ||
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