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 AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
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 (IRS Employer
incorporation or organization) 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 is a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
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 October 15, 2007, we had 27,920,172 shares of $.001 par value Common
Stock outstanding.
HOUSTON AMERICAN ENERGY CORP.
-----------------------------
FORM 10-Q
INDEX
Page No.
-------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of September 30, 2007 and December 31, 2006 . . . .3
Statements of Operations for the three months and nine months
ended September 30, 2007 and September 30, 2006 . . . . . . . . . . .4
Statements of Cash Flows for the nine months
ended September 30, 2007 and September 30, 2006 . . . . . . . . . . .5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . .6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 16
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . .17
PART II OTHER INFORMATION
Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . 18
------
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
--------------------------------
HOUSTON AMERICAN ENERGY CORP.
BALANCE SHEET
(Unaudited)
September 30, 2007 December 31, 2006
-------------------- -------------------
ASSETS
------
CURRENT ASSETS:
Cash $ 948,525 $ 409,008
Marketable securities 9,850,000 14,000,000
Accounts receivable 281,182 325,436
Prepaid expenses and other current assets 68,727 -
-------------------- -------------------
Total current assets 11,148,434 14,734,444
-------------------- -------------------
PROPERTY AND EQUIPMENT
Oil and gas properties - full cost method
Costs subject to amortization 11,831,281 6,796,308
Costs not being amortized 325,894 700,549
Office equipment 11,878 11,878
-------------------- -------------------
Total property and equipment 12,169,053 7,508,735
Accumulated depreciation and depletion (3,376,340) (2,260,463)
-------------------- -------------------
Total property and equipment, net 8,792,713 5,248,272
-------------------- -------------------
OTHER ASSETS 3,167 3,167
-------------------- -------------------
Total Assets $ 19,944,314 $ 19,985,883
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 195,678 $ 399,159
Accrued expenses 7,535 11,909
Foreign income taxes payable 153,602 121,216
-------------------- -------------------
Total current liabilities 356,815 532,284
-------------------- -------------------
LONG-TERM LIABILITIES:
Reserve for plugging costs 40,697 38,816
-------------------- -------------------
Total long-term liabilities 40,697 38,816
-------------------- -------------------
SHAREHOLDERS' EQUITY:
Common stock, $0.001 par value; 100,000,000 shares
authorized; 27,920,172 shares outstanding 27,920 27,920
Additional paid-in capital 22,336,665 22,042,624
Treasury stock, at cost; 100,000 shares (85,834) (85,834)
Accumulated deficit (2,731,949) (2,569,927)
-------------------- -------------------
Total shareholders' equity 19,546,802 19,414,783
-------------------- -------------------
Total liabilities and shareholders' equity $ 19,944,314 $ 19,985,883
==================== ===================
The accompanying notes are an integral part of these financial statements
3
HOUSTON AMERICAN ENERGY CORP.
STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- --------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenue:
Oil and gas $ 3,153,914 $ 2,380,593 $ 1,168,829 $ 891,029
------------ ------------ ------------ ------------
Total revenue 3,153,914 2,380,593 1,168,829 891,029
------------ ------------ ------------ ------------
Expenses of operations:
Lease operating expense and
severance tax 1,419,442 736,803 524,630 285,767
Joint venture expenses 99,291 121,206 20,237 40,083
General and administrative
expense 1,285,533 971,698 410,752 454,257
Depreciation and depletion 1,115,877 455,246 449,120 275,234
------------ ------------ ------------ ------------
Total operating expenses 3,920,143 2,284,953 1,404,739 1,055,341
------------ ------------ ------------ ------------
Income (loss) from operations (766,229) 95,640 (235,910) (164,312)
Other (income) expenses:
Interest income (504,763) (316,697) (144,209) (238,814)
Interest expense - 57,278 - -
Interest expense - derivative - 37,773 - -
Net change in fair value of
derivative liabilities - 170,949 - -
Interest expense - shareholders - 20,440 - -
Financing costs - 110,787 - 104
------------ ------------ ------------ ------------
Total other (income) expenses, net (504,763) 80,530 (144,209) (238,710)
------------ ------------ ------------ ------------
Net income before taxes (261,466) 15,110 (91,701) 74,398
Income tax expense (benefit) (99,443) 198,099 (366,891) 76,402
------------ ------------ ------------ ------------
Net income (loss) $ (162,023) $ (182,989) $ 275,190 $ (2,004)
============ ============ ============ ============
Basic income (loss) per share $ (0.01) $ (0.01) $ 0.01 $ (0.00)
============ ============ ============ ============
Diluted income (loss) per share $ (0.01) $ (0.01) $ 0.01 $ (0.00)
============ ============ ============ ============
Basic weighted average shares 27,920,172 22,297,527 27,920,172 27,820,172
============ ============ ============ ============
Diluted weighted average shares 27,920,172 22,297,527 28,021,482 27,820,172
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
-------------------------------------------------------------------------
4
HOUSTON AMERICAN ENERGY CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30
-------------------------------------------
2007 2006
--------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (162,023) $ (182,989)
Adjustments to reconcile net loss
to net cash from operations
Depreciation and depletion 1,115,877 455,246
Stock based compensation 294,042 209,867
Accretion expense - asset retirement obligation 1,881 -
Change in fair value of derivatives - 170,949
Amortization of debt discounts and deferred financing costs - 148,456
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable and other assets 34,601 311,251
(Increase) decrease in prepaid expense (59,074) (54,496)
Increase (decrease) in accounts payable, foreign income taxes
payable and accrued expenses (175,469) (446,446)
--------------------- --------------------
Net cash provided by operations 1,049,835 611,838
--------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of marketable securities 4,150,000 -
Acquisition of oil and gas properties (4,660,318) (2,592,406)
--------------------- --------------------
Net cash used by investing activities (510,318) (2,592,406)
--------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock, net of expenses - 15,386,583
Exercise of warrants - 191,250
Repayment of shareholder loan - (900,000)
--------------------- --------------------
Net cash provided by financing activities - 14,677,833
--------------------- --------------------
Increase in cash and equivalents 539,517 12,697,265
Cash, beginning of period 409,008 1,724,100
--------------------- --------------------
Cash, end of period $ 948,525 $ 14,421,365
===================== ====================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ - $ 110,773
===================== ====================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of convertible notes to common stock $ - $ 2,445,545
===================== ====================
Exercise of warrants $ - $ 610,719
===================== ====================
The accompanying notes are an integral part of these financial statements
5
HOUSTON AMERICAN ENERGY CORP.
Notes to Financial Statements
September 30, 2007
(Unaudited)
NOTE 1. - BASIS OF PRESENTATION
The accompanying unaudited 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 financial
statements. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the full year.
These financial statements should be read in conjunction with the financial
statements and footnotes, which are included as part of the Company's Form
10-KSB for the year ended December 31, 2006.
NOTE 2. - CHANGES IN PRESENTATION
Certain financial presentations for the periods presented for 2006 have been
reclassified to conform to the 2007 presentation.
NOTE 3. - RECENT ACCOUNTING PRONOUNCEMENTS
On February 15, 2007, the Financial Accounting Standards Board issued SFAS No.
159, "The Fair Value Option for Financial Assets and Financial Liabilities,"
which gives companies the option to measure eligible financial assets, financial
liabilities and firm commitments at fair value (i.e., the fair value option), on
an instrument-by-instrument basis, that are otherwise not permitted to be
accounted for at fair value under other accounting standards. The election to
use the fair value option is available when an entity first recognizes a
financial asset or financial liability or upon entering into a firm commitment.
Subsequent changes in fair value must be recorded in earnings. SFAS No. 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. We are in the process of evaluating the impact, if any, of
adopting this pronouncement.
NOTE 4. - MARKETABLE SECURITIES
At September 30, 2007 the Company held $9,850,000 in marketable securities,
which consisted of investments in corporate and municipal bonds. The Company
accounts for its investments in marketable securities pursuant to SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities", and has
classified all of its marketable securities as available-for-sale. Accordingly,
the investments are carried at fair market value with unrealized gains and
losses, net of tax, reported as a separate component of stockholders equity.
Realized gains and losses and declines in value determined to be other then
temporary in nature are included in interest income, net. There were no
unrealized gains or losses associated with these marketable securities at
September 30, 2007. There were no realized gains and losses recorded during the
nine month period ending September 30, 2007.
6
NOTE 5. - STOCK-BASED COMPENSATION EXPENSE
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards 123R, "Share-Based Payments", or SFAS 123R. The Company periodically
grants options to employees, directors and consultants under the Company's 2005
Stock Option Plan. These are accounted for in accordance with the provisions of
SFAS 123R and Emerging Issues Task Force Abstract No. 96-18, "Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling, Goods or Services" as well as other authoritative
accounting pronouncements. The Company is required to make estimates of the fair
value of the related instruments and recognize expense over the period
benefited, usually the vesting period.
A summary of stock option activity and related information for the nine months
ended September 30, 2007 is presented below:
Weighted-Average Aggregate
Options Exercise Price Intrinsic Value
------- ----------------- ----------------
Outstanding at January 1, 2007 309,000 $ 2.89 $ 450,450
Granted to Directors 30,000 5.45 -
Exercised - - -
Forfeited - - -
-------
Outstanding at September 30, 2007 339,000 $ 3.12 $ 450,450
=======
Exercisable at September 30, 2007 272,000 $ 3.15 $ 359,117
=======
The following table reflects share-based compensation recorded by the Company
for the nine months ended September 30, 2007 and 2006:
Nine Months Ended September 30,
2007 2006
------------------- ---------------
Share-based compensation expense included in reported net
income (loss) $ 294,042 $ 209,867
Basic and diluted earnings per share effect of share-based
compensation expense $ (.01) $ (.01)
=================== ===============
The following table reflects share-based compensation recorded by the Company
for the three months ended September 30, 2007 and 2006:
Three Months Ended September 30,
------------------ ------------------
2007 2006
------------------ ------------------
Share-based compensation expense included in reported net loss $ 41,166 $ 164,667
Basic and diluted earnings per share effect of share-based
compensation expense $ (0.00) $ (.01)
================== ==================
7
NOTE 6. - CONTINGENCIES AND COMMITMENTS
Executive Compensation
----------------------
In July 2007, the Company's Compensation Committee approved the payment of cash
bonuses to the Company's President, in the amount of $50,000, and the Company's
Chief Financial Officer, in the amount of $30,000, and approved an increase in
base salary of each, effective July 1, 2007, with the salary of the Company's
President increasing from $300,000 to $315,000 and the salary of the Company's
Chief Financial Officer increasing from $125,000 to $150,000.
In conjunction with the actions of the Compensation Committee regarding the
payment of bonuses and increase in base salary, the Compensation Committee also
approved grants of restricted stock to the Company's President (41,700 shares)
and the Company's Chief Financial Officer (13,900 shares). The restricted stock
has not been issued and the issuance of shares pursuant to these grants is
subject to satisfaction of various contingencies, including receipt of
shareholder approval and confirmation of compliance with applicable Nasdaq
corporate governance provisions, which will determine the ultimate measurement
date.
Possible Hupecol Transaction
----------------------------
On July 17, 2007, management of the Company was advised that Hupecol LLC
("Hupecol") had retained an investment bank for purposes of evaluating a
possible transaction (a "Transaction") involving the monetization of Hupecol
assets. The Transaction may involve the sale of some or all of the assets and
operations of Hupecol, an exchange or trade of assets, a public offering or
other similar transaction and may be effected in a single transaction or a
series of transactions.
The Company is an investor in Hupecol and the Company's interest in the assets
and operations of Hupecol represent all of the Company's assets and operations
in Colombia and are the principal assets and operations of the Company. The
Company's management intends to closely monitor the nature and progress of the
Transaction in order to protect the interests of the Company and its
shareholders. However, the Company has no effective ability to alter or prevent
a Transaction and is unable to predict whether or not a Transaction will in fact
occur or the nature or timing of any such Transaction. Further, the Company is
unable to estimate the actual value that it might derive from any such
Transaction and whether any such Transaction will ultimately be beneficial to
the Company and its shareholders.
NOTE 7 - GEOGRAPHICAL INFORMATION
The Company currently has operations in two geographical areas, the United
States and Colombia. Revenues for the nine months ended September 30, 2007 and
Long Lived Assets as of September 30, 2007 attributable to each geographical
area are presented below:
Nine Months Ended September 30, 2007
-------------------------------------------
Revenues Long Lived Assets, Net
------------------ -----------------------
United States $ 402,797 $ 2,136,449
Columbia 2,751,117 6,656,264
------------------ -----------------------
$ 3,153,914 $ 8,792,713
------------------ -----------------------
8
NOTE 8. - HUPECOL TAX ALLOCATION CREDITS
In August 2007, the Company was advised that Hupecol would be adjusting the
division of interests among the members of the various Hupecol entities to
reflect revised Colombian tax allocations among the various Hupecol entities.
Specifically, Hupecol advised that Colombian tax attributes were allocated among
the Hupecol entities without taking into account the specific contributions of
each individual entity resulting in an improper shifting of tax expenses and
benefits among the Hupecol entities and, in turn, the members of each of the
Hupecol entities, including the Company.
As a result of the adjustment by Hupecol, during the quarter ended September 30,
2007, the Company received a net credit from Hupecol for excess Colombian taxes
allocated to the Company in the amount of $662,688. The credit is reflected in
the Company's financial statements as a credit to income tax expense.
9
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, 2007, 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 the
Company expresses 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 1 of the
Company's Form 10-KSB for the year ended December 31, 2006.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. The
Company believes the information contained in this Form 10-Q to be accurate as
of the date hereof. Changes may occur after that date, and the Company will not
update that information except as required by law in the normal course of its
public disclosure practices.
Additionally, the following discussion regarding the Company's 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 1 and the financial statements in
Item 7 of Part II of the Company's Form 10-KSB for the fiscal year ended
December 31, 2006.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company believes certain critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its financial statements. A description of the Company's critical
accounting policies is set forth in the Company's Form 10-KSB for the year ended
December 31, 2006. As of, and for the nine months ended, September 30, 2007,
there have been no material changes or updates to the Company's critical
accounting policies other than the following updated information relating to
Unevaluated Oil and Gas Properties:
-- UNEVALUATED OIL AND GAS PROPERTIES. Unevaluated oil and gas properties not
subject to amortization include the following at September 30, 2007:
September 30, 2007
-------------------
Acquisition costs $ 186,869
Evaluation costs 52,164
Retention costs 86,861
-------------------
Total $ 325,894
===================
10
The carrying value of unevaluated oil and gas prospects includes $13,330
expended for properties in the South American country of Colombia at September
30, 2007. We are maintaining our interest in these properties and development
has or is anticipated to commence within the next twelve months.
CURRENT YEAR DEVELOPMENTS
Drilling Activity
During the nine months ended September 30, 2007, the Company drilled 19
international wells in Colombia, as follows:
- Eight wells were drilled on concessions in which we hold a 12.5% working
interest, of which two were on production as of September 30, 2007, one was
abandoned prior to reaching its target sands, one was converted to a water
disposal well after an unsuccessful completion attempt, one was shut in due
to mechanical problems, one was completed as a producer and subsequently
temporarily shut in due to weather conditions, and two were dry holes.
- 11 wells were drilled on concessions in which we hold a 1.6% working
interest, of which seven were in production as of September 30, 2007, one
was being completed as of September 30, 2007, two were dry holes, and one
completed well was shut in due to mechanical problems.
Two domestic wells, the Baronet #3 and the Weil #2 were drilled during the nine
months ended. The Baronet #3 was producing at September 30, 2007 and the Weil
#2 was a dry hole. We hold a 17.5% working interest with a 13.125% net revenue
interest in the Baronet #3 and a 4.38% working interest with a 3.19% net revenue
interest in the Weil #2.
At September 30, 2007 we planned to drill six additional international wells
over the balance of 2007.
We plan to drill 1 domestic well on the Caddo Lake Prospect, described below,
over the balance of 2007.
Leasehold Activity
During the quarter ended September 30, 2007, we acquired no additional oil and
gas interests. In October 2007, we acquired an interest in a 640 acre prospect
known as the Caddo Lake Prospect in Caddo Parish, Louisiana with a right to
participate in drilling on an additional 4,400 acres. We will pay 35% of the
costs of the initial well drilled on the Caddo Lake Prospect and have a 33.5%
Working Interest (25.125% Net Revenue Interest) until well payout. After well
payout, we will own a 27.25% Working Interest and 20.4375% Net Revenue Interest.
On all additional well costs after the initial well and on all additional lease
costs, we will have a 27.25% Working Interest with a 20.4375% Net Revenue
Interest.
Seismic Activity
During the quarter ended September 30, 2007, we conducted no new seismic
activity.
Possible Hupecol Transaction
On July 17, 2007, our management was advised that Hupecol LLC ("Hupecol") had
retained an investment bank for purposes of evaluating a possible transaction (a
"Transaction") involving the monetization of Hupecol assets. The Transaction may
involve the sale of some or all of the assets and operations of Hupecol, an
exchange or trade of assets, a public offering or other similar transaction and
may be effected in a single transaction or a series of transactions.
11
We are an investor in Hupecol and our interest in the assets and operations of
Hupecol represent all of our assets and operations in Colombia and are our
principal assets and operations. Our management intends to closely monitor the
nature and progress of the Transaction in order to protect our interests.
However, we have no effective ability to alter or prevent a Transaction and are
unable to predict whether or not a Transaction will in fact occur or the nature
or timing of any such Transaction. Further, we are unable to estimate the actual
value that it might derive from any such Transaction and whether any such
Transaction will ultimately be beneficial to our company and our shareholders.
Hupecol Tax Allocation Credits
In August 2007, we were advised that Hupecol would be adjusting the division of
interests among the members of the various Hupecol entities to reflect revised
Colombian tax allocations among the various Hupecol entities. Specifically,
Hupecol advised that Colombian tax attributes were allocated among the Hupecol
entities without taking into account the specific contributions of each
individual entity resulting in an improper shifting of tax expenses and benefits
among the Hupecol entities and, in turn, the members of each of the Hupecol
entities, including the Company.
As a result of the adjustment by Hupecol, during the quarter ended September 30,
2007, we received a net credit from Hupecol for excess Colombian taxes allocated
to the Company in the amount of $662,688. The credit is reflected in the
Company's financial statements as a credit to income tax expense.
RESULTS OF OPERATIONS
Oil and Gas Revenues. Total oil and gas revenues increased 31.2% to $1,168,829
in the quarter ended September 30, 2007 when compared to the quarter ended
September 30, 2006. For the first nine months of 2007, oil and gas revenues
increased 32.5%, to $3,153,914, when compared to the first nine months of 2006.
The increase in oil and gas revenue for both the quarter and nine months over
2006 is principally due to increased production resulting from the development
of the Columbian fields. We had interests in 31 producing wells in Colombia, 2
of which were temporarily shut in, as of September 30, 2007, and eight producing
wells in the U.S. during the 2007 nine month period as compared to 21 producing
wells in Columbia and 12 producing wells in the U.S. during the 2006 nine month
period. As of September 30, 2007, one of the Colombian wells was shut in due to
an inability to transport the oil as a result of weather conditions and one was
shut in due to mechanical problems.
The following table sets forth a comparison of hydrocarbon prices for the
quarter and nine month periods:
Quarter Ended September 30 Nine Months Ended September 30,
----------------------------- ----------------------------------
Hydrocarbon prices: 2007 2006 2007 2006
-------------- ------------- ------------ --------------------
Oil - Average price per barrel $ 62.57 $ 60.54 $ 61.12 $ 58.65
Gas - Average price per mcf 6.33 5.99 6.68 7.25
12
The following table sets forth a comparison of oil and gas sales by region for
the quarter and nine month periods.
Quarter Ended September 30, Nine Months, Ended September 30
------------------------------ ----------------------------------
Sales 2007 2006 2007 2006
-------------- -------------- ------------- -------------------
Oil Colombia $ 896,463 $ 733,177 $ 2,751,117 $ 1,816,048
US 40,979 18,324 102,777 69,916
-------------- -------------- ------------- -------------------
Total - Oil $ 937,442 $ 751,501 $ 2,853,894 $ 1,885,964
============== ============== ============= ===================
Gas Colombia $ - $ - $ - $ -
US 231,387 139,528 300,020 494,629
-------------- -------------- ------------- -------------------
Total - Gas $ 231,387 $ 139,528 $ 300,020 $ 494,629
============== ============== ============= ===================
Lease Operating Expenses. Lease operating expenses, excluding joint venture
expenses relating to our operations discussed below, increased 83.6% to $524,630
in the 2007 quarter from $285,767 in the 2006 quarter. For the nine months
ended September 30, 2007, lease operating expenses, excluding joint venture
expenses, increased 92.6%, to $1,419,442, compared to the 2006 nine month
period.
The increase in lease operating expenses was attributable to the increase in the
number of Colombian wells we operated during 2007 (31 wells as compared to 21
wells). Additionally operations have increased in workovers as well as in the
Dorotea and Cabiona areas. The company has a higher working interest in these
areas (12.5%), which increased the amount of operating expense the company
incurred during the period.
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------ -----------------------------------
Lease Operating Expenses and Severance Tax 2007 2006 2007 2006
-------------- -------------- --------------- ------------------
Colombia $ 472,089 $ 226,318 $ 1,321,744 $ 590,247
U.S. 52,541 59,449 97,698 146,556
-------------- -------------- --------------- ------------------
Total $ 524,630 $ 285,767 $ 1,419,442 $ 736,803
============== ============== =============== ==================
Joint Venture Expenses. The Company's allocable share of joint venture expenses
attributable to the Colombian Joint Venture totaled $20,237 during the 2007
quarter and $40,083 for the 2006 quarter. For the nine months ended September
30, 2007, joint venture expenses for Colombia totaled $99,291 as compared to
$121,206 for the nine months ended September 30, 2006. The decrease in joint
venture expenses was attributable to the operator reducing personnel working on
the undrilled contract areas.
Depreciation and Depletion Expense. Depreciation and depletion expense was
$449,120 and $275,234 for the quarters ended September 30, 2007 and 2006,
respectively, and $1,115,877 and $455,246 for the nine months ended September
30, 2007 and 2006, respectively. The increase for both the quarter and nine
months is due to increases in Colombian production and a 68.9% increase in the
depletable cost pool.
General and Administrative Expenses. General and administrative expense
(excluding stock based compensation) increased by 27.6% to $369,586 during the
quarter ended September 30, 2007 from $289,590 in the 2006 quarter. For the
nine months ended September 30, 2007, general and administrative expenses
(excluding stock based compensation) increased 30.1%, to $991,491 compared to
the 2006 nine month period. The increase in general and administrative expense
for the nine month period was primarily attributable to an increase in salary to
our President in mid-2006, increases in base salary of our President and chief
financial officer during the third quarter of 2007 and payment of bonuses during
2007.
13
Stock based compensation expense included in general and administrative expenses
decreased by 75% to $41,166 during the quarter ended September 30, 2007. For
the nine months ended September 30, 2007, stock based compensation expense
increased 40.1% to $294,042. The increase in stock-based compensation expense
was attributable to the 2006 grant of stock options in connection with the
hiring of our chief financial officer and the grants of options to our directors
during 2007. The decrease in the quarter was due to decrease in stock based
compensation attributable to the initial recording of stock compensation
relating to the hiring of our chief financial officer.
Other Income (Expense). Other income (expense) consists of interest earned on
cash balances and marketable securities, net of financing costs in the nature of
interest and deemed interest associated with outstanding shareholder loans and
convertible notes and warrants issued in May 2005 and outstanding during the
2006 period. Certain features of the convertible notes and warrants resulted in
the recording of a deemed derivative liability on the balance sheet and periodic
interest associated with the deemed derivative liabilities and changes in the
fair market value of those deemed liabilities.
Other income (expense), net totaled $144,209 of income during the quarter ended
September 30, 2007 as compared to net other expenses of $238,710 during the 2006
quarter. For the nine months ended September 30, 2007, other income, net,
totaled $504,763 as compared to $80,530 of net other expenses during the 2006
nine month period. The improvement in net other income (expense) resulted from
(1) the increased interest income during the 2007 nine month period ($504,763 in
the 2007 nine month period compared to $316,697 in the 2006 nine month period)
attributable to substantial increases in cash and marketable securities held
during the 2007 period following a 2006 private placement of common stock, and
(2) the absence of interest expense, financing fees and derivative related
expense during the 2007 period attributable to the retirement, or conversion,
during 2006 of all outstanding shareholder loans and convertible notes.
Income Tax Expense (Benefit). Income tax expense decreased to a benefit of
($366,891) during the 2007 quarter compared to the 2006 quarter. For the nine
months ended September 30, 2007, income tax expense decreased to a benefit of
$99,443, as compared to the 2006 period. The decrease in income tax expense
during the 2007 quarter and nine month period was attributable to the gain
associated with the reallocation of the Hupecol tax credits discussed above,
partially offset by an increase in revenue and an effective tax rate increase in
Colombia. Income tax expense during the 2007 and 2006 periods was entirely
attributable to operations in Colombia. The Company recorded no U.S. income tax
liability in the 2007 or 2006 periods.
FINANCIAL CONDITION
Liquidity and Capital Resources. At September 30, 2007 we had a cash balance of
$948,525 and working capital of $10,791,619 compared to a cash balance of
$409,008 and working capital of $14,202,160 at December 31, 2006. The decrease
in cash and working capital during the period was primarily attributable to
payment of drilling costs in Colombia and domestically in the United States.
Operating cash flows for the 2007 nine month period totaled $1,049,836 as
compared to cash provided by operations during the 2006 period of $611,838. The
change in operating cash flow was primarily attributable to the increase in oil
and gas sales revenues partially offset by increases in lease operating expenses
and general and administrative expense and reductions in payables and accrued
expenses.
Investing activities used $510,318 during the 2007 nine month period as compared
to $2,592,406 used during the 2006 period. The decrease in cash flows used by
investing activities during the current period was primarily attributable to the
receipt of funds from the sale of marketable securities which funded increased
oil and gas acquisition and drilling activities during the 2007 period.
14
Financing activities provided $14,677,833 during the 2006 nine month period from
the sale of common stock, exercise of warrants and repayment of a shareholder
loan. We had no financing activities during the 2007 period.
Long-Term Liabilities. At September 30, 2007, we had long-term liabilities of
$40,697 as compared to $38,816 at December 31, 2006. Long-term liabilities at
September 30, 2007 and December 31, 2006 consisted of a reserve for plugging and
abandonment costs.
Capital and Exploration Expenditures and Commitments. Our principal capital and
exploration expenditures relate to our ongoing efforts to acquire, drill and
complete prospects. With the receipt of additional equity financing in 2006 and
prior years, and the increase in our revenues, we expect that future capital and
exploration expenditures will be funded principally through funds on hand and
funds generated from operations.
During the first nine months of 2007, we invested approximately $4,660,318 for
the acquisition and development of oil and gas properties, consisting of (1)
drilling of 19 wells in Colombia ($3,431,180), (2) the drilling of two domestic
wells in the United States ($1,136,769), and (3) lease retention payments on
domestic properties of ($92,369).
At September 30, 2007, our only material contractual obligation requiring
determinable future payments was a lease relating to the Company's executive
offices which was unchanged when compared to the 2006 Form 10-KSB.
At September 30, 2007, our acquisition and drilling budget for the balance of
2007 totaled approximately $1,117,500, which consists of the drilling of six
wells in Colombia and one well in the U.S. Our acquisition and drilling budget
has historically been subject to substantial fluctuation over the course of a
year based upon successes and failures in drilling and completion of prospects
and the identification of additional prospects during the course of a year.
Management anticipates that our current financial resources combined with
increases in revenues over the past year will meet our anticipated objectives
and business operations, including planned property acquisitions and drilling
activities, for at least the next 12 months without the need for additional
capital. Management continues to evaluate producing property acquisitions as
well as a number of drilling prospects. It is possible, although not
anticipated, that we may require and seek additional financing if additional
drilling prospects are pursued beyond those presently under consideration.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements or guarantees of third party
obligations at September 30, 2007.
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 prices 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.
INTEREST RATE RISK
We invest funds in excess of projected short-term needs in interest rate
sensitive securities, primarily fixed maturity securities. While it is generally
our intent to hold our fixed maturity securities to maturity, we have classified
a majority of our fixed maturity portfolio as available-for-sale. In accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," our available-for-sale fixed maturity securities are carried at
fair value on the balance sheet with unrealized gains or losses reported net of
tax in accumulated other comprehensive income.
Increases and decreases in prevailing interest rates generally translate into
decreases and increases in fair values of fixed maturity securities.
Additionally, fair values of interest rate sensitive instruments may be affected
by the creditworthiness of the issuer, prepayment options, relative values of
alternative investments, the liquidity of the instrument and other general
market conditions. Because of the short-term nature of the interest bearing
investments, the quality of the issuers and the intent to hold those investments
to maturity, we do not believe we face any material interest rate risk with
respect to such investments.
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ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures under the supervision and with the participation of our chief
executive officer ("CEO") and chief financial officer ("CFO"). Based on this
evaluation, our management, including the CEO and CFO, concluded that our
disclosure controls and procedures were not effective at September 30, 2007.
During the quarter ended September 30, 2007, there were no changes in our
internal controls over financial reporting that materially affected, or are
reasonably likely to materially affect, internal controls over financial
reporting.
Management notes that the Company continues to lack adequate segregation of
duties in our financial reporting process, as our CFO serves as our only
internal accounting and financial reporting personnel and, as such, performs all
accounting and financial reporting functions. Accordingly, the preparation of
financial statements and the related monitoring controls surrounding this
process were not segregated.
We have no current plans to add accounting or financial reporting personnel and,
accordingly, expect to continue to lack segregation of accounting, financial
reporting and oversight functions. As operations increase in scope, we intend
to evaluate hiring additional in-house accounting personnel so as to provide for
appropriate segregation of duties within the accounting function.
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PART II
ITEM 6. EXHIBITS
Exhibit
Number Description
------ -----------
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.
By: /s/ John Terwilliger
John Terwilliger CEO and
President
By: /s/ James J. Jacobs
James J. Jacobs Chief
Financial Officer
Date: November 2, 2007