UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(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, 2005
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 0-33027
HOUSTON AMERICAN ENERGY CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 76-0675953
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
801 Travis Street, Suite 2020, 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 shell company (as
defined in Rule 12b-2 of the Exchange Act. Yes [_] No [X]
As of November 8, 2005, we had 19,968,089 shares of $.0001 par value Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one) Yes [_] No [X]
HOUSTON AMERICAN ENERGY CORP.
-----------------------------
FORM 10-QSB
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet as of September 30, 2005 . . . . . . . . . . . . . . . 3
Statements of Operations for the three months and nine months
ended September 30, 2005 and September 30, 2004. . . . . . . . . . . 4
Statements of Cash Flows for the nine months
ended September 30, 2005 and September 30, 2004. . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . 8
Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOUSTON AMERICAN ENERGY CORP.
BALANCE SHEET
September 30, 2005
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 1,790,184
Accounts receivable 473,649
Prepaid expenses 1,396
------------
Total current assets 2,265,229
------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties - full cost method
Costs subject to amortization 3,045,335
Costs not being amortized 714,283
Furniture and equipment 10,878
------------
Total property, plant and equipment 3,770,496
Accumulated depreciation and depletion (1,232,747)
------------
Total property, plant and equipment, net 2,537,749
------------
OTHER ASSETS 269,499
------------
Total Assets $ 5,072,477
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 358,621
------------
Total current liabilities 358,621
------------
LONG-TERM DEBT:
Notes payable to principal shareholder 1,000,000
Subordinated convertible notes 2,125,000
Reserve for plugging costs 44,456
------------
Total long-term liabilities 3,169,456
------------
SHAREHOLDERS' EQUITY:
Common stock, $0.001 par value; 100,000,000 shares
authorized; 19,968,089 shares outstanding 19,968
Additional paid-in capital 2,962,589
Treasury stock, at cost; 100,000 shares (85,834)
Accumulated deficit (1,352,323)
------------
Total shareholders' equity 1,544,400
------------
Total liabilities and shareholders' equity $ 5,072,477
============
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,
------------------------ ------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenue:
Oil and gas $ 1,824,582 $ 672,822 $ 732,642 $ 369,274
Consulting fees 25,000 - 25,000 -
Interest 21,084 4,995 13,314 692
----------- ----------- ----------- -----------
Total revenue 1,870,666 677,817 770,956 369,966
----------- ----------- ----------- -----------
Expenses of operations:
Lease operating expense and
severance tax 710,702 283,322 239,727 163,824
Joint venture expenses 43,105 25,637 15,681 19,589
General and administrative
Expense:
Professional fees 311,469 94,391 118,697 38,213
Salary and taxes 142,836 - 45,652 -
Rent 31,479 29,767 10,315 10,005
Financing fees 23,730 - 14,529 -
Directors fees 3,000 - 3,000 -
Shareholder relations 9,348 28,136 4,754 6,157
Travel and meals 15,234 14,791 7,772 5,222
Registration fees 2,680 8,258 685 5,020
Telephone and fax 6,340 3,939 2,637 1,445
Dues and subscription 8,347 9,289 3,872 3,587
Miscellaneous 11,857 14,335 3,453 5,978
Depreciation and depletion 223,392 88,918 53,035 31,425
Interest expense 123,420 54,000 60,500 22,400
----------- ----------- ----------- -----------
Total expenses 1,666,939 654,783 584,309 312,865
----------- ----------- ----------- -----------
Net income $ 203,727 $ 23,034 $ 186,647 $ 57,101
=========== =========== =========== ===========
Basic income per share $ 0.01 $ 0.00 $ 0.01 $ 0.00
=========== =========== =========== ===========
Diluted income per share $ 0.01 $ 0.00 $ 0.01 $ 0.00
=========== =========== =========== ===========
Basic weighted average shares 19,968,089 19,578,703 19,968,089 19,663,081
=========== =========== =========== ===========
Diluted weighted average shares 20,069,969 19,578,703 19,968,089 19,663,081
=========== =========== =========== ===========
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,
------------------------------------------
2005 2004
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from operations $ 203,727 $ 23,034
Adjustments to reconcile net income
to net cash from operations
Depreciation and depletion 223,392 88,918
Non-cash expenses 19,685 19,416
Changes in operating assets and liabilities:
(Increase) in accounts receivable (233,508) (148,937)
(Increase) decrease in prepaid expense 88,551 (25,987)
(Increase) decrease in other assets (123,455) 36,863
Increase in accounts payable and accrued expenses 118,264 140,176
-------------------- --------------------
Net cash provided by operations 296,656 133,483
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of properties and assets (1,353,085) (589,163)
Funds received in excess of prospect costs - 21,650
-------------------- --------------------
Net cash used by investing activities (1,353,085) (567,513)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock - 91,193
Issuance of debt 2,125,000 -
-------------------- --------------------
Net cash provided by financing activities 2,125,000 91,193
-------------------- --------------------
Increase (decrease) in cash and equivalents 1,068,571 (342,837)
Cash, beginning of period 721,613 663,422
-------------------- --------------------
Cash, end of period $ 1,790,184 $ 320,585
==================== ====================
SUPPLEMENT CASH FLOW INFORMATION:
Interest paid $ 54,000 $ 36,000
Taxes paid - -
SUPPLEMENT NON-CASH INVESTING AND
FINANCING ACTIVITIES
Stock issued for oil and gas activity - 47,500
Stock issued for financial public relations - 103,000
Warrants issued for financing fees 162,562
The accompanying notes are an integral part of these financial statements
5
HOUSTON AMERICAN ENERGY CORP.
Notes to Financial Statements
September 30, 2005
(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-QSB and
Item 310(b) of Regulation S-B. 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, 2004.
NOTE 2. - CHANGES IN PRESENTATION
Certain financial presentations for the periods presented for 2004 have been
reclassified to conform to the 2005 presentation.
NOTE 3. - SUBORDINATED CONVERTIBLE NOTES
On May 4, 2005, the Company entered into Purchase Agreements (the "Purchase
Agreements") with multiple investors pursuant to which the Company sold
$2,125,000 of 8% Subordinated Convertible Notes Due 2010 (the "Notes").
The Notes bear interest at 8%, provide for semi-annual interest payments and
mature May 1, 2010. The Notes are convertible, at the option of the holders,
into common stock of the Company at a price of $1.00 per share (the "Conversion
Price"), subject to standard anti-dilution provisions relating to splits,
reverse splits and other transactions, including issuances of common stock at
prices below the Conversion Price. The Notes are subject to automatic
conversion in the event the Company conducts an underwritten public offering of
its common stock from which the Company receives at least $5 million and the
public offering price is at least 150% of the then applicable Conversion Price.
The Company has the right to cause the Notes to be converted into common stock
after May 1, 2006 if the price of the Company's common stock exceeds 200% of the
then applicable Conversion Price on the date of conversion and for at least 20
trading days over the preceding 30 trading days. The Company has the right to
repurchase the Notes after May 1, 2007 at 103% of the face amount during 2007,
102% of the face amount during 2008, 101% of the face amount during 2009 and
100% of the face amount thereafter. The Notes are unsecured general obligations
of the Company and are subordinated to all other indebtedness of the Company
unless the other indebtedness is expressly made subordinate to the Notes. The
Company calculated the beneficial conversion feature for the convertible notes
and the amount was not material.
The Notes were offered and sold in private placement transaction pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 and Rule 506 promulgated thereunder. Each of the investors is either an
"accredited investor", as defined in Rule 501 promulgated under the Securities
Act, or a "qualified institutional buyer", as defined in Rule 144A promulgated
under the Securities Act.
6
Pursuant to the terms of the Purchase Agreements, the Company and the investors
entered into Registration Rights Agreements under which the Company agreed to
file with the Securities and Exchange Commission, within 90 days, a registration
statement covering the Notes and the common stock underlying the Notes and to
use its best efforts to cause the registration statement to become effective
within 180 days.
In connection with the placement of the Notes, the Company issued to the
placement agent in the offering a three year warrant (the "Placement Agent
Warrant") to purchase 191,250 shares of the Company's common stock at $1.00 per
share and paid commissions totaling $127,500. The Registration Rights
Agreements provide that the shares of common stock underlying the Placement
Agent Warrant are to be included in the registration statement required to be
filed.
NOTE 4. - WARRANTS
Activity of warrants during the nine months ended September 30, 2005 is as
follows:
Weighted
Average
Warrants Share Price
----------- ------------
Outstanding at beginning of period - -
Granted 191,250 $ 1.00
----------- ------------
Outstanding at end of period 191,250 $ 1.00
=========== ============
Warrants outstanding and exercisable as of September 30, 2005:
Exercise Number of Remaining Number of
Price Shares Life Shares
---------- --------- --------- ---------
$ 1.00 191,250 2.58 191,250
========== ========= ========= =========
NOTE 5. - FINANCING COSTS
In conjunction with the issuance of long-term debt described in Note 3 above,
the Company paid $127,500 in commissions and issued a warrant to the placement
agent to purchase 191,250 shares of the Company's common stock at an exercise
price of $1.00 per share expiring May 3, 2008. The market price on the date the
warrants were granted was $0.85. The warrants were valued on the date of grant
using the Black-Scholes pricing model at $162,562 using a risk free rate of
3.65%, a volatility factor of 412% and an expected life of 3 years.
The aggregate financing costs of $290,062, comprised of commissions and the
value of the warrant, are being expensed ratably over the life of the Notes as
financing costs. $14,529 and $23,730 of financing costs were expensed during
the quarter and nine months ended September 30, 2005. Unamortized financing
costs of $266,332 are classified as other assets.
NOTE 6 - CONTINGENCIES
The Company has entered into a settlement agreement with the bankruptcy estate
of Moose Oil and Gas Company pursuant to which the Company paid $25,000 to the
estate in full and final settlement of all claims asserted against the Company.
The trustee in the bankruptcy has approved the settlement. The settlement will
become final upon passage of a waiting period subject to the right of creditors
to contest the settlement during the waiting period.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Form 10-QSB quarterly report of Houston American Energy Corp. (the
"Company") for the nine months ended September 30, 2005, 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 following are factors that could cause actual results or events to differ
materially from those anticipated, and include, but are not limited to: general
economic, financial and business conditions; the Company's ability to minimize
expenses and exposures related to its oil and gas properties in which other
companies have control over the operations conducted on such properties; changes
in and compliance with governmental laws and regulations, including various
state and federal environmental regulations; and the Company's ability to obtain
additional necessary financing from outside investors and/or bank and mezzanine
lenders.
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-QSB 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.
The oil and gas industry is subject to volatile price movements based on various
factors including supply and demand and other factors beyond the control of the
Company. While the industry has generally benefited from higher prices during
the past two years, sudden and/or sustained decreases in energy prices can
occur, which could limit our ability to fund planned levels of capital
expenditures.
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-QSB, as well as the financial statements in Item 7 of Part II of the
Company's Form 10-KSB for the fiscal year ended December 31, 2004.
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, 2004. As of, and for the quarter ended, September 30,
2005, 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:
8
UNEVALUATED OIL AND GAS PROPERTIES. Unevaluated oil and gas properties not
subject to amortization include the following at September 30, 2005:
Acquisition costs $ 86,300
Evaluation costs 627,983
--------
Total $714,283
========
The carrying value of unevaluated oil and gas prospects include $442,936
expended for properties in the South American country of Colombia at September
30, 2005. We are maintaining our interest in these properties and development
has or is anticipated to commence within the next twelve months.
CURRENT YEAR DEVELOPMENTS
Through November 10, 2005, the Company has drilled two on-shore domestic wells
as follows:
- Drilling of a 10,600-foot well, the first well, on the South Sibley
Prospect in Webster Parish, Louisiana was completed in May 2005 with
multiple pay sands apparently identified. Sales from the well commenced
June 28, 2005. The Company has a 7.5% working interest at an 8.3% net
revenue interest carried to point of sales for the well.
- Drilling of a 12,100-foot well, the Baronet #2 well, on the Crowley
Prospect in Acadia Parish, Louisiana was completed in April 2005. The well
tested the Hayes Sand and flanks a natural gas well that produced 1.6 BCF
of natural gas from the Hayes Sand. After logging 21-feet of apparent net
pay, hole conditions deteriorated before logging could be completed. The
well was completed and production began in June 2005. The Company has a 3%
working interest and 2.25% net revenue interest until payout for the well.
Assuming the Baronet #2 performs consistently, the Company plans to drill a
developmental well on the Crowley Prospect during the first quarter of 2006.
Through November 10, 2005, the Company had acquired interests in four additional
domestic prospects: (1) a 8.25% working interest with a 6.1875% net revenue
interest, subject to a 25% working interest back in at payout, in the 425 acre
Sugarland Prospect in Vermillion Parish, Louisiana; (2) a 4.375% working
interest, subject to payment of 5.8334% of costs to the casing point in the
first well, in the 500 acre Hog Heaven Prospect in Jim Hogg County, Texas; (3) a
15% working interest with an 11.25% net revenue interest in the 1340 acre
Obenhaus Prospect in Wilbarger County, Texas; and (4) a 15% working interest
with an 11.25% net revenue interest in the 900 acre West Fargo Prospect in
Wilbarger County, Texas. Subject to rig availability, the Company plans to
commence drilling on each of these prospects before the end of 2005.
Through November 10, 2005, the Company has drilled nine international wells in
Colombia as follows:
- Drilling of 8 offset wells on the Cara Cara concession in Colombia was
completed with production commencing on the Bengala #4, #5, #6, #7ST and #8
and the Jaguar #5, #T5 and #T6. The Company holds a 1.59% working interest
in each of the wells subject to a 30% reversionary interest to Ecopetrol at
payout.
- The Tambaqui #5 well commenced drilling, and production began, in March
2005. The Company holds a 12.6% working interest in the well.
9
Seismic surveying began on our Cara Cara concession in Colombia as part of our
planned delineation of additional drilling prospects on the concession. Seismic
surveying was completed on our Dorotea and Cabiona concessions to establish
drilling prospect locations.
The Company and its partners plan to drill up to 2 additional wells on the Cara
Cara concession through the end of 2005.
The Company and its partners are permitting 30 drilling locations on the Dorotea
and Cabiona contract. The Company and its partners plan to add a second rig to
begin drilling the first well in the Cabiona and Dorotea contracts in the first
quarter of 2006.
Through November 10, 2005, the Company and its partners had also acquired an
additional drilling concession, known as the Surimena concession, in Colombia
covering approximately 108 square miles. The Company's net working interest in
the Surimena concession is 12.5%. Based on 2D seismic interpretation, drilling
on the Surimena concession is expected to commence in mid-2006.
RESULTS OF OPERATIONS
Oil and Gas Revenues. Total oil and gas revenues increased 171% to $1,824,582
in the nine months ended September 30, 2005 when compared to the nine months
ended September 30, 2004. The increase in revenue is due to (1) increased
production resulting from the development of the Columbian fields and the new
domestic wells that have come on line during the fourth quarter of 2004 and the
first nine months of 2005, and (2) increases in oil prices. The Company had
interests in 16 producing wells in Colombia and 8 producing wells in the U.S.
during the 2005 period as compared to 7 producing wells in Columbia and 6
producing wells in the U.S. during the 2004 period. Average prices from sales
were $47.81 per barrel of oil and $6.32 per mcf of gas during the 2005 period as
compared to $32.22 per barrel of oil and $5.35 per mcf of gas during the 2004
period. Following is a summary comparison, by region, of oil and gas sales for
the periods.
Columbia U.S. Total
---------- --------- ----------
2005 Period
Oil sales $1,360,647 $ 62,978 $1,423,625
Gas sales - 400,957 400,957
2004 Period
Oil sales 423,614 16,489 440,103
Gas sales - 232,719 232,719
Other Revenues. Other revenues consisted of interest income of $21,084 during
the 2005 period as compared to $4,995 during the 2004 period and consulting fees
of $25,000 during the 2005 period. The increase in interest income was
attributable to increased cash on hand following the May 2005 placement of
Subordinated Convertible Notes and increasing interest rates. The consulting
fee realized during the 2005 period was attributable to the one-time receipt of
a third party referral fee.
Lease Operating Expenses. Lease operating and severance tax expenses, excluding
joint venture expenses relating to our Columbian operations discussed below,
increased 151% to $710,702 in the 2005 period from $283,322 in the 2004 period.
The increase in lease operating expenses was attributable to the increase in the
number of producing wells during the 2005 period (24 wells as compared to 11
wells). Following is a summary comparison of lease operating expenses for the
periods.
Columbia U.S. Total
--------- --------- ---------
2005 Period $ 660,446 $ 50,256 $ 710,702
2004 Period 255,676 27,646 283,322
10
Joint Venture Expenses. The Company's allocable share of joint venture expenses
attributable to the Colombian Joint Venture totaled $43,105 during the 2005
period and $25,637 during the 2004 period. The increase in joint venture
expenses was attributable to an increase in operational activities of the joint
venture in acquiring new concessions.
Depreciation and Depletion Expense. Depreciation and depletion expense was
$223,392 and $88,918 for the periods ended September 30, 2005 and 2004,
respectively. The increase is due to increases in domestic and Colombian
production.
Interest Expense. Interest expense was $123,420 in the 2005 period and $54,000
in the 2004 period. The increase in interest expense was attributable to the
issuance, in May 2005, of $2,125,000 of Subordinated Convertible Notes.
General and Administrative Expenses. General and administrative expense
increased by 179% to $566,320 during the 2005 period from $202,906 in the 2004
period. The increase in general and administrative expense was primarily
attributable to the payment of salary (up $142,836 from $0) to the Company's
principal officer beginning in the fourth quarter of 2004 and increases in
professional fees (up $217,078, or 230%) relating primarily to legal fees
associated with the ongoing Moose Oil litigation.
FINANCIAL CONDITION
Liquidity and Capital Resources. At September 30, 2005 we had a cash balance of
$1,790,184 and working capital of $1,906,608 compared to a cash balance of
$721,613 and working capital of $771,392 at December 31, 2004. The increase in
cash and working capital during the period was primarily attributable to the
sale, during 2005, of $2,125,000 of Subordinated Convertible Notes partially
offset by investing activities relating to oil and gas properties.
Operating cash flows for the 2005 period totaled $296,656 as compared to
$133,483 during the 2004 period. The improvement in operating cash flow was
primarily attributable to improved profitability and increases in depreciation
and depletion, partially offset by changes in operating assets and liabilities.
Investing activities used $1,353,085 during the 2005 period as compared to
$567,513 used during the 2004 period. The increase in funds used in investing
activities during the current period was primarily attributable to the payment
of the Company's portion of seismic survey costs on Colombian prospects totaling
$453,198.
Financing activities provided $2,125,000 during the 2005 period attributable to
the sale of Subordinated Convertible Notes and $91,193 during the 2004 period
attributable to the issue of common stock.
Notes Payable. At September 30, 2005, our long-term debt was $3,169,456 as
compared to $1,000,000 at December 31, 2004. The increase in long-term debt was
attributable to the issuance during the period of $2,125,000 of Subordinated
Convertible Notes and recording a reserve for plugging costs of $44,456.
Notes payable at September 30, 2005 included loans from our principal
shareholder, in the amount of $1,000,000, bearing interest at 7.2% and maturing
January 1, 2007.
Notes payable also included $2,125,000 in principal amount of Convertible Notes.
The Convertible Notes bear interest at 8%, provide for semi-annual interest
payments and mature May 1, 2010. The Convertible Notes are convertible, at the
option of the holders, into common stock of the Company at a price of $1.00 per
share (the "Conversion Price"), subject to standard anti-dilution provisions
relating to splits, reverse splits and other transactions, including issuances
of common stock at prices below the Conversion Price. The Convertible Notes are
subject to automatic conversion in the event the Company conducts an
11
underwritten public offering of its common stock from which the Company receives
at least $5 million and the public offering price is at least 150% of the then
applicable Conversion Price. The Company has the right to cause the Convertible
Notes to be converted into common stock after May 1, 2006 if the price of the
Company's common stock exceeds 200% of the then applicable Conversion Price on
the date of conversion and for at least 20 trading days over the preceding 30
trading days. The Company has the right to repurchase the Convertible Notes
after May 1, 2007 at 103% of the face amount during 2007, 102% of the face
amount during 2008, 101% of the face amount during 2009 and 100% of the face
amount thereafter. The Convertible Notes are unsecured general obligations of
the Company and are subordinated to all other indebtedness of the Company unless
the other indebtedness is expressly made subordinate to the Convertible Notes.
Capital and Exploration Expenditures and Commitments. Our principal capital and
exploration expenditures relate to our ongoing efforts to acquire, drill and
complete prospects. Historically, we funded our capital and exploration
expenditures from funds borrowed from John F. Terwilliger, our principal
shareholder and officer. With the receipt of additional equity financing in
2003, 2004 and the May 2005 sale of convertible notes, and the increase in our
revenues, profitability and operating cash flows, 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 2005, we invested approximately $1,356,089 for
the acquisition and development of oil and gas properties, consisting of (1)
seismic surveying in Colombia ($453,198), (2) drilling the well on the Crowley
Prospect, and (3) drilling 9 wells in Colombia.
At September 30, 2005, our only material contractual obligations requiring
determinable future payments on our part were notes payable to our principal
shareholder and holders of subordinated convertible notes and our lease relating
to our executive offices.
In addition to the contractual obligations requiring that we make fixed
payments, in conjunction with our efforts to secure oil and gas prospects,
financing and services, we have, from time to time, granted overriding royalty
interests (ORRI) in various properties, and may grant ORRIs in the future,
pursuant to which we will be obligated to pay a portion of our interest in
revenues from various prospects to third parties.
At September 30, 2005, our acquisition and drilling budget for the balance of
2005 totaled approximately $392,000, consisting of (1) $50,000 for drilling of 2
wells in South America on the Cara Cara concession, and (2) $342,000 to drill 4
domestic wells on the Sugarland Prospect, the Hog Heaven Prospect, the Obenhaus
Prospect and the West Fargo Prospect. 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 our
increases in revenues over the past year will meet our anticipated objectives
and business operations, including our 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 the Company 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, 2005.
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INFLATION
We believe that inflation has not had a significant impact on our operations
since inception.
ITEM 3. 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") who also serves as chief financial officer. Based on
this evaluation, our management, including the CEO, concluded that our
disclosure controls and procedures were effective.
In connection with the audit of our financial statements for the fiscal year
ended December 31, 2004, our independent registered public accounting firm
informed us that we have significant deficiencies constituting material
weaknesses as defined by the standards of the Public Company Accounting
Oversight Board.
The weaknesses in question were detected during the audit of the company's
financial statements for the fiscal year ended December 31, 2004, which audit
occurred in February/March 2005.
The weaknesses were detected in the routine course of the audit review of
accounting for certain non-routine transactions.
The specific problems identified by the auditor to the company were (1) the lack
of segregation of duties necessary to maintain proper checks and balances
between functions and (2) the failure of internal personnel to adequately
communicate the scope and nature of non-routine transactions. The absence of
qualified full time accounting personnel in the company was a contributing
factor to the problems identified by the auditor. The specific circumstances
giving rise to the weaknesses include the company's President serving as both
Chief Executive Officer and as Chief Financial Officer and the company's
utilizing the services of contract accountants on a part time basis in the
absence of internal accounting personnel. As a result of the absence of full
time in-house accounting personnel and the failure of in-house personnel to
adequately communicate information to the company's outside contract
accountants, certain journal entries were not made until the time of the audit
when the need for such entries was identified by the auditor.
Because the company lacks the financial resources to support in-house accounting
personnel at this time, no formal steps have as yet been taken to resolve the
weaknesses identified by the auditor. The company is, however, emphasizing
improvement in its communications with its outside accounting personnel to
assure that non-routine transactions are accounted for in a timely manner.
Management concluded that the company's disclosure controls and procedures were
effective because the relevant information and data in question were known to
proper members of management to allow proper and timely disclosure in its
reports filed with the SEC and was, in fact, timely reported. The weaknesses in
question relate to internal control over financial reporting and not weaknesses
in disclosure controls and procedures.
During the quarter ended September 30, 2005, 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.
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PART II
ITEM 1. LEGAL PROCEEDS
The Company has entered into a settlement agreement with the bankruptcy estate
of Moose Oil and Gas Company pursuant to which the Company paid $25,000 to the
estate in full and final settlement of all claims asserted against the Company.
The trustee in the bankruptcy has approved the settlement. The settlement will
become final upon passage of a waiting period subject to the right of creditors
to contest the settlement during the waiting period.
ITEM 6. EXHIBITS
Exhibit
Number Description
------ -----------
31.1 Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certification 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
Date: November 14, 2005
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