HOUSTON AMERICAN ENERGY CORP - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically 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 [X] 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” or an “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | [ ] | Accelerated filer | [ ] | Non-accelerated filer | [X] |
| Smaller reporting company | [X] | 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 [X]
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 |
As of November 13, 2019, we had 65,180,830 shares of $0.001 par value common stock outstanding.
HOUSTON AMERICAN ENERGY CORP.
FORM 10-Q
INDEX
| 2 |
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 453,594 | $ | 755,702 | ||||
| Accounts receivable – oil and gas sales | 102,455 | 136,042 | ||||||
| Prepaid expenses and other current assets | 116,168 | 66,381 | ||||||
| TOTAL CURRENT ASSETS | 672,217 | 958,125 | ||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Oil and gas properties, full cost method | ||||||||
| Costs subject to amortization | 61,037,507 | 60,397,878 | ||||||
| Costs not being amortized | 2,462,377 | 2,456,499 | ||||||
| Office equipment | 90,004 | 90,004 | ||||||
| Total | 63,589,888 | 62,944,381 | ||||||
| Accumulated depletion, depreciation, amortization, and impairment | (56,366,732 | ) | (56,082,902 | ) | ||||
| PROPERTY AND EQUIPMENT, NET | 7,223,156 | 6,861,479 | ||||||
| Right of use asset | 301,568 | — | ||||||
| Other assets | 3,167 | 3,167 | ||||||
| TOTAL ASSETS | $ | 8,200,108 | $ | 7,822,771 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 160,966 | $ | 61,826 | ||||
| Accrued expenses | 655 | 933 | ||||||
| Notes payable – related party, net of debt discount | 462,652 | — | ||||||
| Short-term lease liability | 94,430 | — | ||||||
| TOTAL CURRENT LIABILITIES | 718,703 | 62,759 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Lease liability | 245,281 | — | ||||||
| Reserve for plugging and abandonment costs | 41,817 | 38,754 | ||||||
| Deferred rent obligation | — | 43,965 | ||||||
| TOTAL LONG-TERM LIABILITIES | 287,098 | 82,719 | ||||||
| TOTAL LIABILITIES | 1,005,801 | 145,478 | ||||||
| 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; 1,085 and 1,085 shares issued and outstanding, respectively; liquidation preference of $1,085,000 | 1 | 1 | ||||||
| Series B Convertible Preferred Stock, par value $0.001; 1,000 shares authorized; 835 and 835 shares issued and outstanding, respectively; liquidation preference of $835,000 | 1 | 1 | ||||||
| Common stock, par value $0.001; 150,000,000 shares authorized 64,727,404 and 62,425,140 shares issued and outstanding, respectively | 64,727 | 62,425 | ||||||
| Additional paid-in capital | 73,625,397 | 73,084,009 | ||||||
| Accumulated deficit | (66,495,819 | ) | (65,469,143 | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | 7,194,307 | 7,677,293 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 8,200,108 | $ | 7,822,771 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 3 |
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| OIL AND GAS REVENUE | $ | 724,848 | $ | 1,881,683 | $ | 264,935 | $ | 552,946 | ||||||||
| EXPENSES OF OPERATIONS | ||||||||||||||||
| Lease operating expense and severance tax | 483,970 | 764,035 | 139,874 | 278,460 | ||||||||||||
| General and administrative expense | 965,423 | 1,165,854 | 309,822 | 301,495 | ||||||||||||
| Depreciation and depletion | 283,830 | 267,896 | 99,684 | 89,924 | ||||||||||||
| Total operating expenses | 1,733,223 | 2,197,785 | 549,380 | 669,879 | ||||||||||||
| Loss from operations | (1,008,375 | ) | (316,102 | ) | (284,445 | ) | (116,933 | ) | ||||||||
| OTHER INCOME | ||||||||||||||||
| Interest income | 1,953 | 102 | 66 | 102 | ||||||||||||
| Interest expense | (20,254 | ) | — | (20,254 | ) | — | ||||||||||
| Total other income | (18,301 | ) | 102 | (20,188 | ) | 102 | ||||||||||
| Net loss before taxes | (1,026,676 | ) | (316,000 | ) | (304,633 | ) | (116,831 | ) | ||||||||
| Income tax expense | — | — | — | — | ||||||||||||
| Net loss | (1,026,676 | ) | (316,000 | ) | (304,633 | ) | (116,831 | ) | ||||||||
| Dividends to Series A and B preferred stockholders | (172,800 | ) | (181,350 | ) | (57,600 | ) | (56,250 | ) | ||||||||
| Net loss attributable to common shareholders | $ | (1,199,476 | ) | $ | (497,350 | ) | $ | (362,233 | ) | $ | (173,081 | ) | ||||
| Basic and diluted loss per common share | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.00 | ) | ||||
| Based and diluted weighted average number of common shares outstanding | 62,686,681 | 60,079,314 | 63,082,485 | 61,220,932 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND SEPTEMBER 30, 2018
(Unaudited)
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance – January 1, 2019 | 1,920 | $ | 2 | 62,425,140 | $ | 62,425 | $ | 73,084,009 | $ | (65,469,143 | ) | $ | 7,677,293 | |||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — | — | — | — | (57,600 | ) | — | (57,600 | ) | |||||||||||||||||||
| Stock-based compensation | — | — | — | — | 14,219 | — | 14,219 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (239,620 | ) | (239,620 | ) | |||||||||||||||||||
| Balance – March 31, 2019 | 1,920 | 2 | 62,425,140 | 62,425 | 73,040,628 | (65,708,763 | ) | 7,394,292 | ||||||||||||||||||||
| Issuance of common stock | — | — | 280,100 | 280 | 55,790 | — | 56,070 | |||||||||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — | — | — | — | (57,600 | ) | — | (57,600 | ) | |||||||||||||||||||
| Stock-based compensation | — | — | — | — | 27,325 | — | 27,325 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (482,423 | ) | (482,423 | ) | |||||||||||||||||||
| Balance – June 30, 2019 | 1,920 | 2 | 62,705,240 | 62,705 | 73,066,143 | (66,191,186 | ) | 6,937,664 | ||||||||||||||||||||
| Issuance of common stock | — | — | 2,022,164 | 2,022 | 414,462 | — | 416,484 | |||||||||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — | — | — | — | (57,600 | ) | — | (57,600 | ) | |||||||||||||||||||
| Stock-based compensation | — | — | — | — | 57,444 | — | 57,444 | |||||||||||||||||||||
| Warrants issued as debt inducement | — | — | — | — | 144,948 | — | 144,948 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (304,633 | ) | (304,633 | ) | |||||||||||||||||||
| Balance – September 30, 2019 | 1,920 | $ | 2 | 64,727,404 | $ | 64,727 | $ | 73,625,397 | $ | (66,495,819 | ) | $ | 7,194,307 | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance – January 1, 2018 | 2,070 | $ | 2 | 59,260,101 | $ | 59,260 | $ | 72,482,303 | $ | (65,217,807 | ) | $ | 7,323,758 | |||||||||||||||
| Conversion of Series A Preferred Stock | (50 | ) | — | 250,000 | 250 | (250 | ) | — | — | |||||||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — | — | — | — | (62,850 | ) | — | (62,850 | ) | |||||||||||||||||||
| Stock-based compensation | — | — | — | — | 25,349 | — | 25,349 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (52,910 | ) | (52,910 | ) | |||||||||||||||||||
| Balance – March 31, 2018 | 2,020 | 2 | 59,510,101 | 59,510 | 72,444,552 | (65,270,717 | ) | 7,233,347 | ||||||||||||||||||||
| Issuance of common stock for cash | — | — | 800,000 | 800 | 286,879 | — | 287,679 | |||||||||||||||||||||
| Cashless exercise of options | — | — | 114,379 | 114 | (114 | ) | — | — | ||||||||||||||||||||
| Conversion of Series A Preferred Stock | (10 | ) | — | 27,778 | 28 | (28 | ) | — | — | |||||||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — | — | — | — | (62,250 | ) | — | (62,250 | ) | |||||||||||||||||||
| Stock-based compensation | — | — | — | — | 43,381 | — | 43,381 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (146,259 | ) | (146,259 | ) | |||||||||||||||||||
| Balance – June 30, 2018 | 2,010 | 2 | 60,452,258 | 60,452 | 72,712,420 | (65,416,976 | ) | 7,355,898 | ||||||||||||||||||||
| Issuance of common stock for cash | — | — | 1,417,926 | 1,418 | 399,453 | — | 400,871 | |||||||||||||||||||||
| Conversion of Series B Preferred Stock | (90 | ) | — | 338,889 | 339 | (339 | ) | — | — | |||||||||||||||||||
| Series A and Series B Preferred Stock dividends paid | — | — | — | — | (56,250 | ) | — | (56,250 | ) | |||||||||||||||||||
| Stock-based compensation | — | — | — | — | 14,217 | — | 14,217 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (116,831 | ) | (116,831 | ) | |||||||||||||||||||
| Balance – September 30, 2018 | 1,920 | $ | 2 | 62,209,073 | $ | 62,209 | $ | 73,069,501 | $ | (65,533,807 | ) | $ | 7,597,905 | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (1,026,676 | ) | $ | (316,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Depreciation and depletion | 283,830 | 267,896 | ||||||
| Accretion of asset retirement obligation | 3,063 | 2,322 | ||||||
| Stock-based compensation | 98,988 | 82,947 | ||||||
| Amortization of debt discount | 17,600 | — | ||||||
| Amortization of right of use asset | 56,417 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease/(increase) in accounts receivable | 33,587 | (4,077 | ) | |||||
| Increase in prepaid expenses and other current assets | (49,787 | ) | (23,453 | ) | ||||
| Increase in accounts payable and accrued expenses | 193,292 | 335 | ||||||
| Decrease in operating lease liability | (156,669 | ) | — | |||||
| Decrease in deferred rent | — | (3,960 | ) | |||||
| Net cash provided by (used in) operating activities | (546,355 | ) | 6,010 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments for the acquisition and development of oil and gas properties | (645,507 | ) | (119,926 | ) | ||||
| Net cash used in investing activities | (645,507 | ) | (119,926 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from the issuance of notes payable, net of debt discount | 590,000 | — | ||||||
| Proceeds from the issuance of common stock, net of expenses | 472,554 | 688,550 | ||||||
| Payment of preferred stock dividends | (172,800 | ) | (181,350 | ) | ||||
| Net cash provided by financing activities | 889,754 | 507,200 | ||||||
| Increase (decrease) in cash | (302,108 | ) | 393,284 | |||||
| Cash, beginning of period | 755,702 | 392,062 | ||||||
| Cash, end of period | $ | 453,594 | $ | 785,346 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | 2,654 | $ | — | ||||
| Taxes paid | $ | — | $ | — | ||||
| SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Conversion of convertible preferred stock to common stock | $ | — | $ | 617 | ||||
| Cashless exercise of stock options | $ | — | $ | 114 | ||||
| Change in accrued oil and gas development costs | $ | — | $ | 99,897 | ||||
| Debt discount from issuance of warrants as debt inducement | $ | 144,948 | $ | — | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 7 |
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, 2018.
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 approximately $1,026,676 for the nine months ended September 30, 2019. However, during 2018, the Company raised, net of offering costs, approximately $747,000 and, during the nine months ended September 30, 2019, the Company raised approximately $470,000 in its At-the-Market Offering (“ATM offering”) and $590,000 through the issuance of promissory notes. Capital raised during 2018 and the nine months ended September 30, 2019, together with reductions in general and administrative costs, have served to mitigate going concern considerations. As of September 30, 2019, the Company had a cash balance of $453,594. Subsequent to September 30, 2019, through the issuance date of these consolidated financial statements, the Company received an additional $79,495 from the sale of common stock under its ATM offering and $90,000 from the issuance of a promissory note. Additionally, the Company anticipates that revenue and profitability will increase with the commencement of production from the Yoakum County well during 2019 and anticipated drilling and development efforts.
The Company believes that its existing cash and anticipated operating cash flows will support its operations over the next twelve months, but will not fully support its expected acquisitions and drilling expenditures. Accordingly, the Company will require additional capital to fund its cost for such acquisitions and wells.
In order to fund its estimated acquisitions, drilling and completion costs of additional wells, the Company expects that it would seek additional capital from one or more sources, including additional sales of shares in its 2019 ATM Offering and private sales of equity and debt securities.
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 has no commitments to provide additional funding, and there can be no assurance that it 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 and fails to satisfy commitments relative to its interest in acreage, 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 commitments and may be required to curtail operations and forego opportunities.
| 8 |
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.
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the current presentation.
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 in excess of the FDIC’s current insured limit on interest bearing accounts of $250,000 as of September 30, 2019 of $68,873. The Company also had cash deposits of $6,719 in Colombian banks at September 30, 2019 that are not insured by the FDIC. The Company has not experienced any losses on its deposits of cash and cash equivalents.
Loss per Share
Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted in common shares that then shared in the earnings of the Company. In periods in which the Company reports a net loss, dilutive securities are excluded from the calculation of diluted net loss per share amounts as the effect would be anti-dilutive.
For the three and nine months ended September 30, 2019 and 2018, the following convertible preferred stock 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:
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Series A Convertible Preferred Stock | 5,425,000 | 5,425,000 | 5,425,000 | 5,425,000 | ||||||||||||
| Series B Convertible Preferred Stock | 2,320,556 | 2,320,556 | 2,320,556 | 2,320,556 | ||||||||||||
| Stock warrants | 1,230,000 | 50,000 | 1,230,000 | 50,000 | ||||||||||||
| Stock options | 6,062,166 | 4,978,832 | 6,062,166 | 4,978,832 | ||||||||||||
| Total | 15,037,722 | 12,774,388 | 15,037,722 | 12,774,388 | ||||||||||||
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under this new guidance, lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of greater than twelve months. The guidance requires qualitative disclosures along with certain specific quantitative disclosures for both lessees and lessors. The ASU and its related amendments are effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and are effective for interim periods in the year of adoption. The Company has adopted the new lease standard using the new transition option issued under the amendments in ASU 2018-11, Leases, which allowed the Company to continue to apply the legacy guidance in Accounting Standards Codification (ASC) 840, Leases, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company evaluated the impact of this new guidance and reviewed lease or possible lease contracts and evaluated contract related processes. The Company adopted ASU 2016-02 effective January 1, 2019 and recorded an initial right-of-use asset and liability for its operating leases of approximately $357,985.
| 9 |
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, 2019 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, 2019 and 2018:
Three Months Ended | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | |||||||||||||
| Oil sales | $ | 222,446 | $ | 297,967 | $ | 573,872 | $ | 1,145,643 | ||||||||
| Natural gas sales | 12,104 | 102,756 | 41,034 | 583,817 | ||||||||||||
| Natural gas liquids sales | 30,385 | 152,223 | 109,942 | 152,223 | ||||||||||||
| Total revenue from customers | $ | 264,935 | $ | 552,946 | $ | 724,848 | $ | 1,881,683 | ||||||||
There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of December 31, 2018 or September 30, 2019.
NOTE 3 – OIL AND GAS PROPERTIES
During the nine months ended September 30, 2019, the Company invested $645,507, net, for the acquisition and development of oil and gas properties, primarily consisting of cost of acquiring U.S. properties of $605,131 and the cost of development of U.S. properties of $34,500, net. Of the amount invested, the Company capitalized $5,878 to oil and gas properties not subject to amortization and capitalized $639,629 to oil and gas properties subject to amortization.
Geographical Information
The Company currently has properties in two geographical areas, the United States and Colombia. Revenues for the nine months ended September 30, 2019 and long-lived assets (net of depletion, amortization, and impairments) as of September 30, 2019 attributable to each geographical area are presented below:
| Nine
Months Ended September 30, 2019 | As of September 30, 2019 | |||||||
| Revenues | Long Lived Assets, Net | |||||||
| United States | $ | 724,848 | $ | 4,896,109 | ||||
| Colombia | — | 2,327,046 | ||||||
| Total | $ | 724,848 | $ | 7,223,156 | ||||
NOTE 4 – NOTES PAYABLE – RELATED PARTY
In September 2019, the Company issued promissory notes (the “Bridge Loan Notes”) with a total principal amount of $621,052, an original issue discount of 5%, warrants (the “Bridge Loan Warrants”) to purchase 1,180,000 shares of the Company’s common stock, and a term of 120 days. The net proceeds received by the Company for the Bridge Loan Notes and Warrants was $590,000.
| 10 |
The Bridge Loan Notes are unsecured obligations bearing interest at 12.0% per annum and payable interest only on the last day of each calendar month with any unpaid principal and accrued interest being payable in full on January 16, 2020.
The Bridge Loan Notes are subject to mandatory prepayment from and to the extent of (i) 100% of net proceeds received by the Company from any sales, for cash, of equity or debt securities (other than Bridge Loan Notes) of the Company, (ii) 100% of net proceeds received by the Company from the sale of assets (other than sales in the ordinary course of business); and (iii) 75% of net proceeds received from the sale of oil and gas produced from the Company’s Hockley County, Texas properties. Additionally, the Company has the option to prepay the Bridge Loan Notes, at its sole election, without penalty.
The Bridge Loan Notes were recorded net of debt discount that consists of (i) $31,052 of original issue discount on the Bridge Loan Notes and (ii) the relative fair value of the Bridge Loan Warrants of $144,948. The debt discount is amortized over the life of the Bridge Loan Notes as additional interest expense. During the three and nine months ended September 30, 2019, interest expense paid in cash totaled $2,654 and $2,654, respectively, and interest expense attributable to amortization of debt discount totaled $17,600 and $17,600, respectively. See “Note 6 – Capital Stock – Warrants – Bridge Loan Warrants.” As of September 30, 2019, the Company owed $621,052 under the Bridge Loan Notes and $0 of accrued interest outstanding due to interest payments totaling $2,654.
The holders of the Bridge Loan Notes are the CEO and a 10% shareholder of the Company. The holders of the Bridge Loan Notes waived mandatory prepayment at both September 30, 2019 and October 31, 2019.
NOTE 5 – 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 6,000,000 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” and, together with the 2008 Plan, the “Plans”). The terms of the 2017 Plan, allow for the issuance of up to 5,000,000 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, 2019 is presented below:
| Options | Weighted-Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 1, 2019 | 4,978,832 | $ | 0.77 | |||||||||
| Granted | 1,100,000 | 0.22 | ||||||||||
| Exercised | — | — | ||||||||||
| Forfeited | (16,666 | ) | 2.05 | |||||||||
| Outstanding at September 30, 2019 | 6,062,166 | $ | 0.67 | $ | — | |||||||
| Exercisable at September 30, 2019 | 5,648,833 | $ | 0.70 | $ | — | |||||||
During the nine months ended September 30, 2019, options to purchase an aggregate of 1,100,000 shares of the Company’s common stock were granted to the Company’s directors and to a non-executive employee. The options have a ten-year life and are exercisable at $0.22 per share, the fair market value on the date of grant. 1,000,000 of the options vest one year from the date of grant. 100,000 of the options 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 $200,562 based on the Black-Scholes Option Pricing model.
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The fair values of the options granted during the nine months ended September 30, 2019 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| Market value of common stock on grant date | 0.22 | |||
| Risk free interest rate | 2.10 | % | ||
| Dividend yield | 0 | % | ||
| Volatility factor | 85.7 | % | ||
| Weighted average expected life in years | 10 | |||
| Expected forfeiture rate | 0 | % |
As of September 30, 2019, no shares remain available for additional grants under the 2008 Plan and 4,937,834 shares remain available for additional grants under the 2017 Plan.
Stock-Based Compensation Expense
During the nine months ended September 30, 2019, a non-executive employee was granted 50,000 shares of the Company’s common stock as compensation for services.
During the nine months ended September 30, 2019, the Company recognized $93,678 of stock-based compensation expense attributable to the amortization of stock options and the issuance of common stock as compensation. As of September 30, 2019, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $224,133. The unrecognized expense is expected to be recognized over a weighted average period of 2.55 years and the weighted average remaining contractual term of the outstanding options and exercisable options at September 30, 2019 is 6.27 years and 6.09 years, respectively.
The following table reflects total stock-based compensation recorded by the Company for the nine months ended September 30, 2019 and 2018:
| Nine
Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Stock-based compensation expense included in general and administrative expense | $ | 98,988 | $ | 82,947 | ||||
| Earnings per share effect of share-based compensation expense – basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
NOTE 6 – CAPITAL STOCK
Series A Convertible Preferred Stock
During the nine months ended September 30, 2019 and 2018, respectively, the Company paid dividends on Series A Convertible Preferred Stock in the amount of $96,900 and $100,350. At September 30, 2019, there were 1,085 shares of Series A Convertible Preferred Stock issued and outstanding.
Series B Convertible Preferred Stock
During the nine months ended September 30, 2019 and 2018, respectively, the Company paid dividends on Series B Convertible Preferred Stock in the amount of $75,900 and $81,000. At September 30, 2019, there were 835 shares of Series B Convertible Preferred Stock issued and outstanding.
Common Stock
In May 2019, the Company entered into an At-the-Market Issuance Sales Agreement (the “Sales Agreement”) with WestPark Capital pursuant to which the Company may sell, at its option, up to an aggregate of $5.2 million in shares of common stock through WestPark Capital, as sales agent. Sales of shares under the Sales Agreement (the “2019 ATM Offering”) will be made, in accordance with one or more placement notices delivered by the Company to WestPark Capital, which notices shall set parameters under which shares may be sold. The 2019 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. The Company will pay WestPark a commission in cash equal to 3% of the gross proceeds from the sale of shares in the 2019 ATM Offering. Additionally, the Company reimbursed WestPark Capital for $18,000 of expenses incurred in connection with the 2019 ATM Offering.
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During the nine months ended September 30, 2019, the Company sold an aggregate of 2,252,264 shares in the 2019 ATM Offering and received proceeds, net of commissions, of $472,554.
Warrants
In September 2017, the Company issued warrants (the “Consultant Warrants”) to a consultant. The Consultant Warrants are exercisable to purchase 50,000 shares of common stock at $0.55 per share and expire December 31, 2021. The Consultant Warrants are first exercisable, subject to continuing provision of services under a services agreement, as to 12,500 shares on each of December 6, 2017, September 6, 2018, September 6, 2019 and September 6, 2020. The relative value of the warrants were valued on the date of grant at $16,132 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 1.63%; (2) expected life in years of 4.32; (3) expected stock volatility of 99.75%; and (4) expected dividend yield of 0%.
The Company recognized $1,756 and $168, respectively, of share-based compensation expense related to the vesting of the Consultant Warrants during the three months ended September 30, 2019 and 2018. The Company recognized $5,310 and $1,770, respectively, of share-based compensation expense related to the vesting of the Consultant Warrants during the nine months ended September 30, 2019 and 2018. As of September 30, 2019, total unrecognized stock-based compensation expense related to non-vested stock warrants was approximately $4,033. The unrecognized expense is expected to be recognized over a weighted average period of 0.25 years and the weighted average remaining contractual term of the outstanding warrants and exercisable warrants at September 30, 2019 is 0.25 years and 0.25 years, respectively.
In September 2019, the Company issued the Bridge Loan Warrants in conjunction with the Bridge Loan Notes. The Bridge Loan Warrants are exercisable, for a period of ten years, expiring September 18, 2029, to purchase an aggregate of 1,180,000 shares of common stock of the Company at $0.20 per share. The relative fair value of the warrants was determined on the date of grant at $144,948 using the Black Scholes option-pricing model with the following parameters: (1) risk free interest rate of 1.80%; (2) expected life in years of 10.0; (3) expected stock volatility of 82.9%; and (4) expected dividend yield of 0%. The relative fair value of the warrants was recorded as debt discount on the Bridge Loan Notes and is amortized as additional interest expense over the term of the notes.
A summary of warrant activity and related information for 2019 is presented below:
| Warrants | Weighted-Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 1, 2019 | 50,000 | $ | 0.55 | |||||||||
| Issued | 1,180,000 | 0.20 | ||||||||||
| Exercised | — | — | ||||||||||
| Expired | — | — | ||||||||||
| Outstanding at September 30, 2019 | 1,230,000 | $ | 0.21 | $ | — | |||||||
| Exercisable at September 30, 2019 | 1,217,500 | $ | 0.21 | $ | — | |||||||
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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, 2022. The implementation of ASU 842 resulted in a right of use asset of $301,568 and related lease liability of $339,711 as of September 30, 2019. During the nine months ended September 30, 2019, the operating cash outflows related to operating lease liabilities were $84,516 and the expense for the right of use asset for operating leases was $56,417. As of September 30, 2019, the Company’s operating lease had a weighted-average remaining term of 3.1 years and a weighted average discount rate of 12%. As of September 30, 2019, the lease agreement requires future payments of the lease liability as follows:
| Year | Amount | |||
| 2019 | $ | 32,384 | ||
| 2020 | 130,717 | |||
| 2021 | 133,087 | |||
| 2022 | 112,551 | |||
| 2023 | — | |||
| Total future lease payments | 408,739 | |||
| Less: imputed interest | (69,028 | ) | ||
| Present value of future operating lease payments | 339,711 | |||
| Less: current portion of operating lease liabilities | (94,430 | ) | ||
| Operating lease liabilities, net of current portion | $ | 245,281 | ||
| Right of use assets | $ | 301,568 | ||
Total base rental expense was $84,516, and $109,217 for the nine months ended September 30, 2019 and September 30, 2018, respectively and $22,293 and $40,836 for the three months ended September 30, 2019 and 2018 respectively. The Company does not have any capital leases or other operating lease commitments.
NOTE 7 – SUBSEQUENT EVENTS
2019 ATM Offering Sales
Subsequent to September 30, 2019, through the date hereof, the Company sold an aggregate of 453,426 shares in the 2019 ATM Offering and received proceeds, net of commissions and expenses, of $79,495.
OID Promissory Note
In October 2019, the Company issued a promissory note (the “OID Note”) with a principal amount of $100,000 and an original issue discount of 10%. The net proceeds received by the Company for the OID Note was $90,000.
The OID Note was an unsecured obligation bearing interest at 0% per annum and payable from any and all cash receipts of the Company with any unpaid principal and accrued interest being payable in full on October 31, 2019. The OID Note was repaid in full as of October 31, 2019.
The holder of the OID Note is a 10% shareholder of the Company.
Hupecol Meta Acquisition
In October 2019, the Company acquired (the “Hupecol Meta Acquisition”) an interest in Hupecol Meta, LLC (“Hupecol Meta”). Pursuant to the terms of the Hupecol Meta Acquisition, the Company paid consideration of $100,000.
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. Through its membership interest in Hupecol Meta, the Company holds a 1% interest in the Venus Exploration Area and a 0.5% interest in the remainder of the block.
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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, 2019, 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, 2018.
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, 2018.
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, 2018. As of, and for the nine months ended, September 30, 2019, 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, 2019:
| September 30, 2019 | ||||
| Acquisition costs | $ | 142,618 | ||
| Development and evaluation costs | 2,319,759 | |||
| Total | $ | 2,462,377 | ||
The carrying value of unevaluated oil and gas prospects above was primarily attributable to properties in the South American country of Colombia. We are maintaining our interest in these properties.
Recent Developments
Leasing Activity
Permian Basin. During the nine months ended September 30, 2019, we acquired, for $587,110, a 20% working interest in an approximately 5,871-acre lease block in the Northern Shelf of the Permian Basin in Texas. We are required to pay 26.667% of costs on the initial well on the block through the point at which the well is drilled, completed, equipped and ready for operation, production or disposal. Pursuant to the agreement to acquire such interest, we also secured the right to participate, at cost and for a period of five years, in a 20,367 acre area of mutual interest, including the acquired lease block.
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Colombia. In October 2019, we acquired (the “Hupecol Meta Acquisition”) an interest in Hupecol Meta, LLC (“Hupecol Meta”). Pursuant to the terms of the Hupecol Meta Acquisition, we paid consideration of $100,000.
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. Through our membership interest in Hupecol Meta, we hold a 1% interest in the Venus Exploration Area and a 0.5% interest in the remainder of the block.
Drilling Activity and Well Operations
During the nine months ended September 30, 2019, we drilled the Frost #1H well in Yoakum County, Texas, reaching total depth of approximately 10,000 feet, including an approximately 4,800-foot horizontal leg. The well was fractured, production facilities constructed and the well came on production on June 5, 2019 at which time oil production commenced while the well commenced unloading of frac fluid.
No drilling operations were ongoing at September 30, 2019.
During the nine months ended September 30, 2019, our capital investment expenditures for drilling, completion and related operations totaled $36,456, principally relating to one-time infrastructure/security investments in Reeves County.
In Louisiana, the Crown Paper well, in which we hold a royalty interest, was subject to local flooding which resulted in no royalty revenues being realized during the quarter ended June 30, 2019. The well came back on line in mid-August and royalties resumed in September 2019.
Our operator in Colombia is continuing discussions with federal and local officials in order to secure compensation for the value of, and our investment in, three concessions. Pending resolution of such discussions, no drilling activities are presently contemplated on those concessions.
Financing Activities
2019 At-the-Market Offering. In May 2019, we entered into an At-the-Market Issuance Sales Agreement (the “Sales Agreement”) with WestPark Capital pursuant to which we may sell, at our option, up to an aggregate of $5.2 million in shares of common stock through WestPark Capital, as sales agent. Sales of shares under the Sales Agreement (the “2019 ATM Offering”) will be made, in accordance with one or more placement notices delivered to WestPark Capital, which notices shall set parameters under which shares may be sold. The 2019 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 will pay WestPark a commission in cash equal to 3% of the gross proceeds from the sale of shares in the 2019 ATM Offering. Additionally, we reimbursed WestPark Capital for $18,000 of expenses incurred in connection with the 2019 ATM Offering. During the nine months ended September 30, 2019, we sold an aggregate of 2,252,264 shares in the 2019 ATM Offering and received proceeds, net of commissions, of $472,554.
Subsequent to September 30, 2019, through the date hereof, we sold an aggregate of 453,426 shares in the 2019 ATM Offering and received proceeds, net of commissions and expenses, of $79,495.
Bridge Loan Financing. In September 2019, we issued promissory notes (the “Bridge Loan Notes”) with a total principal amount of $621,052, an original issue discount of 5%, warrants (the “Bridge Loan Warrants”) to purchase 1,180,000 shares of the Company’s common stock, and a term of 120 days. The net proceeds received by the Company for the Bridge Loan Notes and Warrants was $590,000.
The Bridge Loan Notes are unsecured obligations bearing interest at 12.0% per annum and payable interest only on the last day of each calendar month with any unpaid principal and accrued interest being payable in full on January 16, 2020.
The Bridge Loan Notes are subject to mandatory prepayment from and to the extent of (i) 100% of net proceeds we receive from any sales, for cash, of equity or debt securities (other than Bridge Loan Notes), (ii) 100% of net proceeds we receive from the sale of assets (other than sales in the ordinary course of business); and (iii) 75% of net proceeds we receive from the sale of oil and gas produced from our Hockley County, Texas properties. Additionally, we have the option to prepay the Bridge Loan Notes, at our sole election, without penalty.
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The Bridge Loan Notes were recorded net of debt discount that consists of (i) $31,052 of original issue discount on the Bridge Loan Notes and (ii) the relative fair value of the Bridge Loan Warrants of $144,948. The debt discount is amortized over the life of the Bridge Loan Notes as additional interest expense. During the three and nine months ended September 30, 2019, interest expense paid in cash totaled $2,654 and $2,654, respectively, and interest expense attributable to amortization of debt discount totaled $17,600 and $17,600, respectively. As of September 30, 2019, we owed $621,052 under the Bridge Loan Notes and $0 of accrued interest outstanding due to interest payments totaling $2,654.
The holders of the Bridge Loan Notes are our CEO and a 10% shareholder. The holders of the Bridge Loan Notes waived mandatory prepayment at both September 30, 2019 and October 31, 2019.
OID Promissory Note. In October 2019,we issued a promissory note (the “OID Note”) with a principal amount of $100,000 and an original issue discount of 10%. The net proceeds received by the Company for the OID Note was $90,000.
The OID Note was an unsecured obligation bearing interest at 0% per annum and payable from any and all of our cash receipts with any unpaid principal and accrued interest being payable in full on October 31, 2019. The OID Note was repaid in full as of October 31, 2019.
The holder of the OID Note is a 10% shareholder of the Company.
Results of Operations
Oil and Gas Revenues. Total oil and gas revenues decreased 52% to $264,935 in the three months ended September 30, 2019, compared to $552,946 in the three months ended September 30, 2018. Oil and gas revenues decreased 61% to $724,848 in the nine months ended September 30, 2019, compared to $1,881,683 in the nine months ended September 30, 2018. The decrease in revenue was due to decreased production volumes attributable to our Reeves County wells, an adverse change in commodity pricing, and decreased royalties from our Crown Paper well due to local area flooding.
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, 2019 and 2018:
| Nine
Months Ended September 30 | Three
Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Gross producing wells | 10 | 9 | 10 | 9 | ||||||||||||
| Net producing wells | 0.98 | 0.95 | 0.98 | 0.95 | ||||||||||||
| Net oil production (Bbl) | 10,227 | 19,375 | 4,605 | 5,426 | ||||||||||||
| Net gas production (Mcf) | 78,430 | 201,083 | 29,274 | 80,000 | ||||||||||||
| Average sales price – oil (per barrel) | $ | 56.12 | $ | 59.13 | $ | 48.30 | $ | 54.92 | ||||||||
| Average sales price – natural gas (per Mcf) | $ | 1.92 | $ | 3.66 | $ | 1.43 | $ | 3.19 | ||||||||
The decrease in production reflects natural decline in production volumes from our Reeves County wells, partially offset by the commencement of production from the Frost #1H well.
The change in average sales prices realized reflects bottlenecks in transportation/delivery capabilities in the Permian Basin which adversely affected commodity pricing.
Royalties from our Crown Paper well decreased from approximately $17,486 and $28,224, respectively, in the three and nine months ended September 30, 2018 to $4,139 and $13,550, respectively, in the three and nine months ended September 30, 2019. The decrease in royalty income was attributable to local flooding. The Crown Paper well resumed production in mid-August and royalty income resumed during the third quarter of 2019.
All oil and gas sales revenues are attributable to U.S. operations.
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Lease Operating Expenses. Lease operating expenses decreased 50% to $139,874 during the three months ended September 30, 2019 from $278,460 during the three months ended September 30, 2018. Lease operating expenses decreased 37% to $483,970 during the nine months ended September 30, 2019 from $764,035 during the nine months ended September 30, 2018.
The change in total lease operating expenses was attributable to a decline in production during the period.
Depreciation and Depletion Expense. Depreciation and depletion expense was $99,684 and $89,924 for the three months ended September 30, 2019 and 2018, respectively, and $283,830 and $267,896 for the nine months ended September, 30, 2019 and 2018, respectively. The change in depreciation and depletion was due to increased capitalized costs subject to amortization and the commencement of production from the Frost #1H well, partially offset by natural decline in production volumes.
General and Administrative Expenses. General and administrative expense increased by 3% to $309,822 during the three months ended September 30, 2019 from $301,495 during the three months ended September 30, 2018 and decreased by 17% to $965,423 during the nine months ended September 30, 2019, from $1,165,854 during the nine months ended September 30, 2018. The change in general and administrative expense was primarily attributable to an increase in stock-based compensation expense of $43,227 during the three months ended September 30, 2019, and $16,041 during the nine months ended September 30, 2019, offset, during the nine months ended September 30, 2019, by cost containment measures, including a reduction in cash compensation resulting from the termination of our prior CEO in mid-2018.
Other Income (Expense). Other income (expense), net, totaled $18,301 of expense during the nine months ended September 30, 2019, compared to $102 of income during the nine months ended September 30, 2018, and totaled $20,188 of expense during the three months ended September 30, 2019, compared to $102 of income during the three months ended September 30, 2018. Other income (expense), net, consisted of interest income offset by interest expense. Interest expense during the three and nine months ended September 30, 2019 related to the Bridge Loan Notes and associated Bridge Loan Warrants issued during 2019, and, for both periods, consisted of cash interest expense of $2,654 and amortization of debt discount as additional interest expense of $17,600.
Financial Condition
Liquidity and Capital Resources. At September 30, 2019, we had a cash balance of $453,594 and working capital deficit of $46,486, compared to a cash balance of $755,702 and working capital of $895,366 at December 31, 2018.
Cash Flows. Operating activities used cash of $546,355 during the nine months ended September 30, 2019, compared to $6,010 provided during the nine months ended September 30, 2018. The change in operating cash flow was primarily attributable to the increased loss during 2019 which reflected the decline in oil and gas revenues and lower royalty income during the 2019 period.
Investing activities used cash of $645,507 during the nine months ended September 30, 2019, compared to $119,926 used during the nine months ended September 30, 2018. Cash used in investing activities was primarily attributable to our acquisition of acreage in the Northern Shelf of the Permian Basin ($587,110) during 2019 and acquisition of our Yoakum County acreage during 2018.
Financing activities provided cash of $889,754 during the nine months ended September 30, 2019, compared to $507,200 provided during the nine months ended September 30, 2018. During the nine months ended September 30, 2019, cash provided by financing activities consisted of proceeds from the sale of Bridge Loan Notes and Warrants ($590,000) and proceeds from the sale of common stock in the 2019 ATM Offering ($472,554), partially offset by the payment of dividends on preferred stock ($172,800). During the nine months ended September 30, 2018, cash provided in financing activities consisted of proceed from the sale of common stock in in our 2017 ATM Offering ($688,550), partially offset by the payment of dividends on our preferred stock ($181,350).
Long-Term Liabilities. At September 30, 2019, we had long-term liabilities of $287,098, compared to $82,719 at December 31, 2018. Long-term liabilities at September 30, 2019 and December 31, 2018, consisted of a reserve for plugging costs and the long-term lease liability.
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Capital and Exploration Expenditures and Commitments. Our principal capital and exploration expenditures relate to ongoing efforts to acquire, drill and complete prospects, in particular our Permian Basin acreage and our newly acquired Colombian acreage. Our principal capital and exploration expenditures during the next twelve months are expected to relate to acquisition of our new Colombian acreage ($100,000 paid October 2019), drilling additional wells on our Yoakum County acreage, drilling initial wells, and possibly additional wells, on our newly acquired acreage in the Northern Shelf Permian Basin and in Colombian and possibly opportunistic acquisitions of additional acreage. The actual timing and number of wells drilled 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.
During the nine months ended September 30, 2019, we invested $645,507 for the acquisition and development of oil and gas properties, consisting primarily of (1) acquisition costs for an interest in 5,871 acres in the Northern Shelf of the Permian Basin ($587,110) and (2) one-time infrastructure/security expenses in Reeves County ($36,456). Of the amount invested, we capitalized $5,878 to oil and gas properties not subject to amortization and capitalized to $639,629 oil and gas properties subject to amortization.
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 have incurred continuing losses since 2011, including a loss of $1,026,676 for the nine months ended September 30, 2019 and $251,000 for the year ended December 31, 2018. However, during 2018, we raised, net of offering costs, approximately $747,000 and, during the nine months ended September 30, 2019, we raised $472,554 in our ATM offering and $590,000 through the issuance of promissory notes and warrants. Capital raised during 2018 and the nine months ended September 30, 2019, together with reductions in general and administrative costs, have served to mitigate going concern considerations. As of September 30, 2019, we had a cash balance of approximately $453,594. Subsequent to September 30, 2019, through the date of this report, we received an additional $79,495 from the sale of common stock under our ATM offering and $90,000 from the issuance of a promissory note. Additionally, we anticipate that revenue and profitability will increase with the commencement of production from the Yoakum County well during 2019, the resumption of royalty revenue from our Crown Paper well and anticipated drilling and development efforts.
We believe that our existing cash and anticipated operating cash flows will support operations over the next twelve months but will not fully support our expected acquisition and drilling expenditures. Accordingly, we will require additional capital to fund our cost for such acquisition and wells.
In order to fund our estimated acquisition, drilling and completion costs of additional wells, we expect that we would seek additional capital from one or more sources, including additional sales of shares in our 2019 ATM Offering and private sales of equity and debt securities.
While we may, among other efforts, seek additional funding from “at-the-market” sales of common stock, and private sales of equity and debt securities, we presently have no commitments to provide additional funding, and there can be no assurance that we can secure the necessary capital to fund our share of drilling, acquisition or other costs on acceptable terms or at all. If, for any reason, we are unable to fund our share of drilling and completion costs and fail to satisfy commitments relative to our interest in our acreage, we may be subject to penalties or to the possible loss of some of our rights and interests in prospects with respect to which we fail to satisfy funding commitments and we may be required to curtail operations and forego opportunities.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or guarantees of third party obligations at September 30, 2019.
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, 2019 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, 2019. Such conclusion reflects the 2013 departure of our chief financial officer and assumption of duties of principal financial officer by our chief executive officer and the resulting lack of segregation of duties. Until we are able to remedy these material weaknesses, we are relying on third party consultants and our accounting firm to assist with financial reporting.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 6 | EXHIBITS |
| 20 |
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, 2019 | ||
| By: | ||
| James Schoonover | ||
| CEO
and President (Principal Executive Officer and Principal Financial Officer) | ||
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