HOUSTON AMERICAN ENERGY CORP - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2022

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 ☒ No ☐

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

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

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

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

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

HOUSTON AMERICAN ENERGY CORP.

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

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 AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(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 AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(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 NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(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, 2021.

Consolidation

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

Liquidity and Capital Requirements

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

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

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

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

Accounting Principles and Use of Estimates

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

Concentration of Credit Risk

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

Earnings (Loss) per Share

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

Recently Issued Accounting Pronouncements

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

Subsequent Events

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

NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue from Contracts with Customers

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

 SCHEDULE OF DISAGGREGATES REVENUE BY SIGNIFICANT PRODUCT

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

NOTE 3 – OIL AND GAS PROPERTIES

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

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

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

Geographical Information

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

 SCHEDULE OF REVENUES AND LONG LIVED ASSETS ATTRIBUTABLE TO GEOGRAPHICAL AREA

NOTE 4 – STOCK-BASED COMPENSATION EXPENSE

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

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

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

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

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

Stock Option Activity

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

 SUMMARY OF STOCK OPTION ACTIVITY

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

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

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

NOTE 5 – CAPITAL STOCK

Warrants

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

 SUMMARY OF WARRANT ACTIVITY

NOTE 6 – EARNINGS PER COMMON SHARE

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

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

SCHEDULE OF COMPUTATION OF DILUTED NET LOSS PER SHARE 

NOTE 7 - COMMITMENTS AND CONTINGENCIES

Lease Commitment

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

SCHEDULE OF FUTURE PAYMENTS UNDER LEASE AGREEMENT 

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

Forward-Looking Information

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

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

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

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

Critical Accounting Policies

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

Unevaluated Oil and Gas Properties

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

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

Recent Developments

Equity Investment

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

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

Drilling Activity

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

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

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

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

Colombian Elections

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

Results of Operations

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

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

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

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

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

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