HOUSTON AMERICAN ENERGY CORP - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2020

OR

For the transition period from ___________ to ______________.

Commission File Number 1-32955

HOUSTON AMERICAN ENERGY CORP.

(Exact name of registrant as specified in its charter)

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

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” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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]

As of May 12, 2020, we had 87,007,145 shares of $0.001 par value common stock outstanding.

HOUSTON AMERICAN ENERGY CORP.

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1 Financial Statements

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

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

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

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

HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

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

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, 2019.

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 $850,990 for the three months ended March 31, 2020. Additionally, as a result of the steep global economic slowdown that began in March 2020 as the coronavirus pandemic (“COVID-19”) spread, prices realized from oil and gas sales declined sharply over the last weeks of the quarter ended March 31, 2020, with such price declines expected to persist until governments worldwide are confident that the pandemic is adequately contained to permit renewed economic activity. Depending upon the duration of the pandemic and the resulting global economic slowdown, the Company may incur continuing declines in revenues and increased losses, associated from lower demand for energy and resulting depressed oil and gas prices. However, during the three months ended March 31, 2020, the Company raised a total, net of offering costs, of $4,434,169 in its ATM offering. As of March 31, 2020, there were no remaining funds available under the ATM Offering.

The Company believes that it has the ability to fund, from cash on hand (as a result of the ATM funding received in the current period), its operating costs and anticipated drilling operations, as well as mitigate the immediate impact of COVID-19, for at least the next twelve months following the issuance of these financial statements.

The actual timing and number of wells drilled during 2020 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. With the steep decline in energy prices in March 2020, due at least in part to the economic effects of the coronavirus, drilling operations are expected to be deferred until at least the second half of 2020 pending clarity as to the timing of economic recovery from the effects of the coronavirus.

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

Accounting Principles and Use of Estimates

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

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk include cash, cash equivalents and any marketable securities (if any). The Company had cash deposits of $2,631,585 in excess of the FDIC’s current insured limit on interest bearing accounts of $250,000 as of March 31, 2020. The Company also had cash deposits of $2,713 in Colombian banks at March 31, 2020 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 months ended March 31, 2020 and 2019, 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:

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 March 31, 2020 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-month periods ended March 31, 2020 and 2019:

There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of March 31, 2020 or 2019.

NOTE 3 – OIL AND GAS PROPERTIES

During the three months ended March 31, 2020, the Company invested $519,936, net, for the acquisition and development of oil and gas properties, consisting of cost of development of U.S. properties of $519,936, net, principally attributable to acreage in Yoakum County, Texas. Of the amount invested, the Company capitalized none to oil and gas properties not subject to amortization and capitalized $519,936 to oil and gas properties subject to amortization.The Company also invested $32,745 in Hupecol Meta relating to drilling operations in Colombia, reflected in the cost method investment asset.

During the three months ended March 31, 2020, the Company recorded an impairment of oil and gas properties of $429,116 due to a full cost ceiling test write-down primarily relating to a decline in energy prices.

Geographical Information

The Company currently has properties in two geographical areas, the United States and Colombia. Revenues for the three months ended March 31, 2020 and long lived assets (net of depletion, amortization, and impairments) as of March 31, 2020 attributable to each geographical area are presented below:

NOTE 4 – STOCK-BASED COMPENSATION EXPENSE

In 2008, the Company adopted the Houston American Energy Corp. 2008 Equity Incentive Plan (the “2008 Plan”). The terms of the 2008 Plan, as amended in 2012 and 2013, allow for the issuance of up to 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 three months ended March 31, 2020 is presented below:

During the three months ended March 31, 2020, the Company recognized $57,442 of stock-based compensation expense attributable to the amortization of stock options. As of March 31, 2020, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $118,167. The unrecognized expense is expected to be recognized over a weighted average period of 0.29 years and the weighted average remaining contractual term of the outstanding options and exercisable options at March 31, 2020 is 5.77 years and 4.91 years, respectively.

Shares available for issuance under the 2008 Plan as of March 31, 2020 totaled 0. Shares available for issuance under the 2017 Plan, as of March 31, 2020, totaled 3,191,667.

Stock-Based Compensation Expense

The following table reflects total stock-based compensation recorded by the Company for the three months ended March 31, 2020 and 2019:

NOTE 5 – CAPITAL STOCK

Common Stock - At-the-Market Offering

In May 2019, the Company entered into an At-the-Market Issuance Sales Agreement (the “Sales Agreement”) with WestPark Capital, Inc. (“WestPark Capital”) pursuant to which the Company could sell, at its option, up to an aggregate of $5.2 million in shares of its common stock through WestPark Capital, as sales agent. Sales of shares under the Sales Agreement (the “2019 ATM Offering”) were made, in accordance with one or more placement notices delivered by the Company to WestPark Capital, which notices set parameters under which shares could 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 paid 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.

During the three months ended March 31, 2020, in connection with the 2019 ATM Offering, the Company (1) sold an aggregate of 21,059,499 shares of its common stock and received net proceeds of $4,375,594, net of commissions, and expenses, and (2) collected $58,575 of subscriptions receivable attributable to shares sold under the 2019 ATM Offering during 2019.

Series A Convertible Preferred Stock

During the three months ended March 31, 2020 and 2019, the Company paid dividends on Series A Convertible Preferred Stock in the amount of $32,550. At March 31, 2020, there were 1,085 shares of Series A Convertible Preferred Stock issued and outstanding.

Series B Convertible Preferred Stock

During the three months ended March 31, 2020 and 2019, the Company paid dividends on Series B Convertible Preferred Stock in the amount of $25,050. At March 31, 2020, there were 835 shares of Series B Convertible Preferred Stock issued and outstanding.

Warrants

A summary of warrant activity and related information for 2020 is presented below:

NOTE 6 – 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.

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 months ended March 31, 2020, interest expense paid in cash totaled $3,350 and interest expense attributable to amortization of debt discount totaled $23,467. The Bridge Loan Note was repaid in full as of March 31, 2020.

The holders of the Bridge Loan Notes were the CEO and a 10% shareholder of the Company.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

Lease Commitment

The Company leases office facilities under an operating lease agreement that expires October 31, 2022. During the three months ended March 31, 2020, the operating cash outflows related to operating lease liabilities of $32,581 and the expense for the right of use asset for operating leases was $20,761. As of March 31, 2020, the Company’s operating lease had a weighted-average remaining term of 2.6 years and a weighted average discount rate of 12%. As of March 31, 2020, the lease agreement requires future payments as follows:

Total base rental expense was $30,048 and $32,175 for the three months ended March 31, 2020 and March 31, 2019, respectively. The Company does not have any capital leases or other operating lease commitments.

Forward-Looking Information

This Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the three months ended March 31, 2020, 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, 2019.

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, 2019.

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, 2019. As of, and for the three months ended, March 31, 2020, 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 March 31, 2020:

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

COVID-19

In early 2020, global health care systems and economies began to experience strain from the spread of the COVID-19 Coronavirus. As the virus spread, global economic activity began to slow and future economic activity was forecast to slow with a resulting forecast of a decline in oil and gas demand. In response, OPEC initiated discussions with Russia to lower production to support energy prices. By March 2020, with OPEC and Russia unable to agree on cuts, crude oil prices declined to less than $25 per barrel. Despite a subsequent agreement among major oil producers to cut global oil and gas production, energy prices remain at extreme depressed levels.

The decline in economic activity and energy demand accompanying the COVID-19 pandemic adversely affected our revenues during the three months ended March 31, 2020 and, if price declines persist, will adversely affect the economics of our existing wells and planned future wells, possibly resulting in impairment charges to existing properties and delaying or abandoning planned drilling operations as uneconomical.

In response to the COVID-19 pandemic, our staff has begun working remotely and many of our key vendors, service suppliers and partners have similarly begun to work remotely. As a result of such remote work arrangements, we anticipate that certain operational, reporting, accounting and other processes will slow which may result in longer time to execute critical business functions, higher operating costs and uncertainties regarding the quality of services and supplies, any of which could substantially adversely affect our operating results for as long as the current pandemic persists and potentially for some time after the pandemic subsides.

Drilling Activity

During the quarter ended March 31, 2020, (1) we drilled the Frost #2H well in Yoakum County, Texas, and (2) Hupecol Meta drilled the Montuno-1 well on the CPO-11 block in the Llanos Basin in Colombia. The Frost #2H well reached a total depth of approximately 10,230 feet, including an approximately 5,116-foot horizontal leg. Hydraulic fracturing and completion of the well were pending at March 31, 2020 and are expected to be deferred until energy market conditions improve. The Montuno-1 well was a dry hole.

No drilling operations were ongoing at March 31, 2020.

During the quarter ended March 31, 2020, our capital investment expenditures totaled $552,681, principally relating to Yoakum County, Texas drilling operations ($519,936) and investments in our cost method investment in Hupecol Meta ($32,745).

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 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 three months ended March 31, 2020, we (1) sold an aggregate of 21,059,499 shares in the 2019 ATM Offering and received proceeds, net of commissions, of $4,375,594, and (2) collected $58,575 of subscriptions receivable attributable to shares sold under the 2019 ATM Offering during 2019.

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 common stock, and a term of 120 days. Net proceeds received for the Bridge Loan Notes and Warrants totaled $590,000.

The Bridge Loan Notes were 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 were 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 had the option to prepay the Bridge Loan Notes, at our sole election, without penalty. The holders of the Bridge Loan Notes waived mandatory prepayment at the end of each month during 2019.

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 months ended March 31, 2020, interest expense paid in cash totaled $3,350. As of March 31, 2020, the Bridge Loan Notes had been repaid in full.

The holders of the Bridge Loan Notes were our Chief Executive Officer and a 10% shareholder.

Results of Operations

Oil and Gas Revenues. Total oil and gas revenues decreased 41% to $147,136 in the three months ended March 31, 2020, compared to $250,720 in the three months ended March 31, 2019. The decrease in revenue was due to decreased production volumes attributable to our Reeves County wells and an adverse change in commodity pricing, including a 7% decrease in crude oil prices realized and a 59% decrease in natural gas prices realized.

The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for the quarters ended March 31, 2020 and 2019:

The decrease in gross/net producing wells resulted from cessation of operation of two uneconomical wells in Louisiana during 2019, partially offset by the commencement of operations of a well in Yoakum County, Texas. The decrease in production was principally attributable to natural decline in production from our Reeves County, Texas wells, partially offset by production from our Yoakum County well commencing in 2019.

The change in average sales prices realized reflects the steep decline in global commodity prices associated with a decline in energy demand associated with the COVID-19 pandemic.

Oil and gas sales revenues by region were as follows:

Lease Operating Expenses. Lease operating expenses decreased 46% to $81,234 during the three months ended March 31, 2020 from $149,227 during the three months ended March 31, 2019. Lease operating expenses, by region were as follows:

The decrease in lease operating expenses was principally attributable to a reduction in wells operated, lower variable costs due to a natural decline in production and reduced severance taxes due to lower sales.

Depreciation and Depletion Expense. Depreciation and depletion expense was $90,822 and $92,529 for the three months ended March 31, 2020 and 2019, respectively. The change in depreciation and depletion was due to a decrease in production volumes.

Impairment of Oil and Gas Properties. Impairment of oil and gas properties was $429,116 and $0 for the three months ended March 31, 2020 and 2019, respectively. The change in impairment of oil and gas properties was due to a full cost ceiling test write-down in the current period primarily relating to a decline in energy prices. Depending on the timing of a recovery in energy prices, we may experience further impairments in future periods.

General and Administrative Expenses (excluding stock-based compensation).  General and administrative expense increased by 34% to $316,620 during the three months ended March 31, 2020 from $235,732 during the three months ended March 31, 2019. The increase in general and administrative expense was primarily attributable to increased exchange listing fees and increased professional fees.

Stock-Based Compensation. Stock-based compensation increased to $57,442 during the three months ended March 31, 2020 from $14,219 during the three months ended March 31, 2019. The increase was attributable to the vesting amortization of the fair value of stock option grants during 2019.

Other Income (Expense). Other income/expense, net, totaled $22,892 of expense during the three months ended March 31, 2020, compared to $1,367 of income during three months ended March 31, 2019. Other expense during the three months ended March 31, 2020 consisted of $3,925 of interest income, offset by interest expense of $26,817 relating to the Bridge Loan Notes, consisting of $3,350 interest paid in cash and $23,467 of interest attributable to amortization of the value of warrants issued in connection with the Bridge Loan Notes. Other income during the three months ended March 31, 2019, consisted of $1,367 of interest income.

Financial Condition

Liquidity and Capital Resources. At March 31, 2020, we had a cash balance of $2,922,349 and working capital of $2,800,456, compared to a cash balance of $97,915 and a working capital deficit of $748,426 at December 31, 2019.

Cash Flows. Operating activities used cash of $378,402 during the three months ended March 31, 2020, compared to $202,071 used during the three months ended March 31, 2019. The change in operating cash flow was attributable to (1) a 255% increase in net loss during the 2020 period resulting from the decline in oil and gas revenues during the 2020 period (down 41%) and an increase in operating expenses (up 98%) and (2) a $153,720 net change in operating assets and liabilities compared to the prior period and principally reflecting a reduction in accounts payable and accrued expenses.

Investing activities used $552,681 during the three months ended March 31, 2020, compared to $47,465 used during the three months ended March 31, 2019. The change in funds used by investing activities is principally attributable to drilling operations on the Frost #2H well during the current period.

Financing activities provided $3,755,517 during the three months ended March 31, 2020, compared to $57,600 used during the three months ended March 31, 2019. Cash provided by financing activities during the three months ended March 31, 2020 was attributable to funds received from the sale of common stock ($4,434,169, including $58,575 of subscriptions receivable relating to shares sold at year-end 2019) under our 2019 ATM Offering, partially offset by repayment of our Bride Loan Notes ($621,052) and payment of dividends on our preferred stock ($57,600). Cash used in financing activities during the three months ended March 31, 2019 was attributable to dividends on our preferred stock.

Long-Term Liabilities. At March 31, 2020, we had long-term liabilities of $241,438, compared to $263,596 at December 31, 2019. Long-term liabilities at March 31, 2020 and December 31, 2019, consisted of a reserve for plugging costs and the long-term lease liability.

Capital and Exploration Expenditures and Commitments. Our principal capital and exploration expenditures relate to ongoing efforts to acquire, drill and complete prospects, in particular our Permian Basin acreage and our newly acquired Colombian acreage. Given the current economic environment and the current COVID-19 pandemic, all planned additional drilling and development operations during 2020 are on hold pending improved conditions. Accordingly, unless and until industry conditions substantially improve, we do not presently anticipate making any material capital expenditures during 2020, although we may evaluate opportunistic acquisitions of additional acreage. The actual timing and number of wells drilled during 2020 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 three months ended March 31, 2020, we invested $519,936 for the acquisition and development of oil and gas properties, consisting of drilling and development operations in the U.S.. Of the amount invested, we capitalized none to oil and gas properties not subject to amortization and capitalized $519,936 to oil and gas properties subject to amortization. During the period, we also invested $32,745 in Hupecol Meta relating to drilling operations in Colombia.

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

With our receipt, during the three months ended March 31, 2020, of $4.4 million from sales of common stock under our 2019 ATM Offering, 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 2020.

In the event that we pursue additional acreage acquisitions or expand our drilling plans, we may be required to secure additional funding beyond our resources on hand. While we may, among other efforts, seek additional funding from “at-the-market” sales of common stock, and private sales of equity and debt securities, we presently have no commitments to provide additional funding, and there can be no assurance that we can secure the necessary capital to fund our share of drilling, acquisition or other costs on acceptable terms or at all. If, for any reason, we are unable to fund our share of drilling and completion costs and fail to satisfy commitments relative to our interest in our acreage, we may be subject to penalties or to the possible loss of some of our rights and interests in prospects with respect to which we fail to satisfy funding commitments and we may be required to curtail operations and forego opportunities. Unless and until the depressing economic effects of the coronavirus recede, we expect that new capital to fund projects will be difficult, if not impossible, to secure.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements or guarantees of third party obligations at March 31, 2020.

Inflation

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

Commodity Price Risk

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

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 March 31, 2020 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 March 31, 2020. 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 March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Exhibit

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.