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:
March 31, 2020
Acquisition costs $ 279,177
Development and evaluation costs 2,199,279
Total $ 2,478,456The 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.
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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:
Three Months Ended March 31,
2020 2019
Gross producing wells 4 5
Net producing wells 0.49 0.52
Net oil production (Bbl) 2,816 3,969
Net gas production (Mcf) 25,489 24,810
Average sales price - oil (per barrel) $ 40.79 $ 43.79
Average sales price - natural gas (per Mcf) $ 1.27 $ 3.08
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:
Colombia U.S. Total
2020 First Quarter
Oil sales $ - $ 114,851 $ 114,851
Gas sales $ - $ 10,058 $ 10,058
NGL sales $ - $ 22,227 $ 22,227
2019 First Quarter
Oil sales $ - $ 173,777 $ 173,777
Gas sales $ - $ 27,788 $ 27,788
NGL ales $ $49,155 $ 49,155Lease 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:
Colombia U.S. Total
2020 First Quarter $ - $ 81,234 $ 81,234
2019 First Quarter $ - $ 149,227 $ 149,227The 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.
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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.
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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.
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HOUSTON AMERICAN ENERGY CORP. 
