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 June 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 August 1, 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 June 30, 2007 and December 31, 2006. . . . . . . . . . . . 3
Statements of Operations for the three months and six months
ended June 30, 2007 and June 30, 2006 . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows for the six months
ended June 30, 2007 and June 30, 2006 . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . 14
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . 15
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 16
Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOUSTON AMERICAN ENERGY CORP.
BALANCE SHEET
(Unaudited)
June 30, 2007 December 31, 2006
--------------- -------------------
ASSETS
------
CURRENT ASSETS:
Cash $ 274,052 $ 409,008
Marketable securities - Available for sale 11,000,000 14,000,000
Accounts receivable 267,642 325,436
Prepaid expenses and other current assets 99,570 -
--------------- -------------------
Total current assets 11,641,264 14,734,444
--------------- -------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties - full cost method
Costs subject to amortization 11,097,845 6,796,308
Costs not being amortized 319,016 700,549
--------------- -------------------
Total oil and gas properties 11,416,861 7,496,857
Accumulated depreciation and depletion (2,916,198) (2,250,529)
--------------- -------------------
Net oil and gas properties 8,500,663 5,246,328
--------------- -------------------
Other property, plant and equipment 11,878 11,878
Accumulated depreciation (11,022) (9,934)
--------------- -------------------
Net other property plant and equipment 856 1,944
Total property, plant and equipment, net 8,501,519 5,248,272
OTHER ASSETS 3,167 3,167
--------------- -------------------
Total Assets $ 20,145,950 $ 19,985,883
=============== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 779,515 $ 399,159
Accrued expenses 15,126 11,909
Foreign income taxes payable 80,794 121,216
--------------- -------------------
Total current liabilities 875,435 532,284
--------------- -------------------
LONG-TERM LIABILITIES:
Reserve for plugging costs 40,070 38,816
--------------- -------------------
Total long-term liabilities 40,070 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 22,295,499 22,042,624
Treasury stock, at cost; 100,000 shares (85,834) (85,834)
Accumulated deficit (3,007,140) (2,569,927)
--------------- -------------------
Total shareholders' equity 19,230,445 19,414,783
--------------- -------------------
Total liabilities and shareholders' equity $ 20,145,950 $ 19,985,883
=============== ===================
The accompanying notes are an integral part of these financial statements
3
HOUSTON AMERICAN ENERGY CORP.
STATEMENT OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------------------------- --------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenue:
Oil and gas $ 1,985,085 $ 1,489,564 $ 959,662 $ 823,392
------------ ------------ ------------ ------------
Total revenue 1,985,085 1,489,564 959,662 823,392
------------ ------------ ------------ ------------
Expenses of operations:
Lease operating expense and
severance tax 894,813 450,591 488,246 256,385
Joint venture expenses 79,054 81,568 39,433 31,644
General and administrative
Expense 874,780 517,441 521,142 305,862
Depreciation and depletion 666,756 180,012 394,978 90,533
------------ ------------ ------------ ------------
Total operating expenses 2,515,403 1,229,612 1,443,799 684,424
------------ ------------ ------------ ------------
(Loss) income from operations (530,318) 259,952 (484,137) 138,968
Other (income) expenses:
Interest income (360,554) (77,883) (187,234) (61,664)
Interest expense - 57,278 - 14,778
Interest expense - derivative - 37,773 - 20,883
Net change in fair value of
derivative liabilities - 170,949 - 67,872
Interest expense - shareholders - 20,440 - 4,240
Financing costs - 110,683 - 104,298
------------ ------------ ------------ ------------
Total other (income) expenses, net (360,554) 319,240 (187,234) 150,407
------------ ------------ ------------ ------------
Net loss before taxes (169,764) (59,288) (296,903) (11,439)
Income tax expense 267,449 121,697 139,688 59,544
------------ ------------ ------------ ------------
Net loss $ (437,213) $ (180,985) $ (436,591) $ (70,983)
============ ============ ============ ============
Basic and diluted income (loss)
per share $ (0.02) $ (0.01) $ (0.02) $ (0.00)
============ ============ ============ ============
Basic and diluted weighted
average shares 27,920,172 22,297,527 27,920,172 24,598,895
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
4
HOUSTON AMERICAN ENERGY CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30,
---------------------------------------
2007 2006
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (437,213) $ (180,985)
Adjustments to reconcile net loss
to net cash from operations
Depreciation and depletion 666,756 180,012
Stock based compensation 252,876 45,200
Change in fair value of derivatives - 170,949
Amortization of debt discounts and deferred financing costs - 148,456
Accretion of asset retirement obligation 1,254 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 53,794 203,601
(Increase) decrease in prepaid expense (95,570) (294,378)
Increase (decrease) in accounts payable and accrued expenses 343,151 (447,279)
------------------ -------------------
Net cash provided by (used in) operations 785,048 (174,424)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of marketable securities 3,000,000 -
Acquisition of oil and gas properties (3,920,004) (1,950,686)
------------------ -------------------
Net cash used by investing activities (920,004) (1,950,686)
------------------ -------------------
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 (decrease) in cash and equivalents (134,956) 12,552,723
Cash, beginning of period 409,008 1,724,100
------------------ -------------------
Cash, end of period $ 274,052 $ 14,276,823
================== ===================
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
June 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 impacts, if any, of
adopting this pronouncement.
NOTE 4. - MARKETABLE SECURITIES
At June 30, 2007 the Company held $11,000,000 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 June
30, 2007. There were no realized gains and losses recorded during the six month
period ending June 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 six months
ended June 30, 2007 is presented below:
Weighted-Average Aggregate
Options Exercise Price Intrinsic Value
------- ----------------- ----------------
Outstanding at January 1, 2007 309,000 $ 2.89 774,900
Granted May 21, 2007 30,000 5.45 -
Exercised - - -
Forfeited - - -
-------
Outstanding at June 30, 2007 339,000 $ 3.12 $ 774,900
=======
Exercisable at June 30, 2007 272,333 $ 3.15 $ 613,567
=======
The aggregate fair value of the options issued on May 21, 2007 with immediate
vesting was $143,000 based upon the Black-Scholes option pricing model using the
following estimates: 5.24% risk free rate, 88% volatility and a 10 year expected
life.
The following table reflects share-based compensation recorded by the Company
for the six months ended June 30, 2007 and 2006:
Six Months Ended June 30,
------------------------------
2007 2006
--------------- -------------
Share-based compensation expense included in reported net loss $ 252,876 $ 45,200
Earnings per share effect of share-based compensation expense $ (0.01) $ -
=============== =============
The following table reflects share-based compensation recorded by the Company
for the three months ended June 30, 2007 and 2006:
Three Months Ended June 30,
-------------------------------
2007 2006
-------------- ---------------
Share-based compensation expense included in reported net loss $ 197,988 $ 45,200
Earnings per share effect of share-based compensation expense $ (.01) $ -
=============== =============
7
NOTE 6. - GEOGRAPHICAL INFORMATION
The Company currently has operations in two geographical areas, the United
States and Colombia. Revenues for the six months ended June 30, 2007 and Long
Lived Assets as of June 30, 2007 attributable to each geographical area are
presented below:
Six Months Ended June 30, 2007
----------------------------------------
Revenues Long Lived Assets, Net
--------------- -----------------------
United States $ 130,430 $ 2,264,611
Colombia 1,854,655 6,236,908
--------------- -----------------------
$ 1,985,085 $ 8,501,519
=============== =======================
NOTE 7. -SUBSEQUENT EVENTS
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 issuance of
shares pursuant to the grants of restricted stock, as approved by the
Compensation Committee, is subject to satisfaction of various contingencies
including receipt of shareholder approval and confirmation of compliance with
applicable Nasdaq corporate governance provisions.
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.
8
Possible Hupecol Credits
--------------------------
On August 2, 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 those entities. Specifically,
Hupecol advised the Company that Colombian tax attributes were allocated among
the Hupecol entities without taking into account the specific contributions of
each individual entity, resulting in a shifting of tax expenses and benefits
among the Hupecol entities and, in turn, the members of each of the Hupecol
entities.
Based on advice from Hupecol, the Company expects to receive a credit from
Hupecol. The net credit to the Company from Hupecol is estimated to be
approximately $657,000. The accounting treatment of the credit to the Company
has yet to be finalized and is subject to review of the final credit amount and
accounting from Hupecol.
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 six months ended June 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.
9
As of, and for the six months ended, June 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 June 30, 2007:
June 30, 2007
--------------
Acquisition costs $ 185,503
Evaluation costs 53,530
Retention costs 79,983
--------------
Total 319,016
==============
The carrying value of unevaluated oil and gas prospects include $13,330 expended
for properties in the South American country of Colombia at June 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 six months ended June 30, 2007, the Company drilled 13 international
wells in Colombia, as follows:
- Eight wells were drilled on concessions in which we hold a 12.5% working
interest, of which one was being completed as of June 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, two were completed as producers and subsequently
temporarily shut in due to weather conditions, and two were dry holes.
- Five wells were drilled on concessions in which we hold a 1.6% working
interest, of which two were in production as of June 30, 2007, one was
being completed as of June 30, 2007, one was a dry hole, and one completed
well was shut in.
One domestic well, the Baronet #3, was drilled during the quarter ended, and was
producing at, June 30, 2007. We hold a 17.5% working interest with a 13.125%
net revenue interest in the Baronet #3.
At June 30, 2007 we planned to drill 13 additional international wells over the
balance of 2007.
Leasehold Activity
During the quarter ended June 30, 2007, we acquired no additional oil and gas
interests.
Seismic Activity
During the quarter ended June 30, 2007, we conducted no new seismic activity.
10
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.
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.
Possible Hupecol Credits
On August 2, 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 those entities. Specifically,
Hupecol advised the Company that Colombian tax attributes were allocated among
the Hupecol entities without taking into account the specific contributions of
each individual entity, resulting in a shifting of tax expenses and benefits
among the Hupecol entities and, in turn, the members of each of the Hupecol
entities.
Based on advice from Hupecol, the Company expects to receive a credit from
Hupecol. The net credit to the Company from Hupecol is estimated to be
approximately $657,000. The accounting treatment of the credit to the Company
has yet to be finalized and is subject to review of the final credit amount and
accounting from Hupecol.
RESULTS OF OPERATIONS
Oil and Gas Revenues. Total oil and gas revenues increased 17% to $959,662 in
the quarter ended June 30, 2007 when compared to the quarter ended June 30,
2006. For the first six months of 2007, oil and gas revenues increased 33%, to
$1,985,085, when compared to the first six months of 2006.
The increase in oil and gas revenue for both the quarter and six months over
2006 is principally due to increased production resulting from the development
of the Columbian fields. We had interests in 26 producing wells in Colombia
three of which were temporarily shut in as of June 30, 2007, and 8 producing
wells in the U.S. during the 2007 six month period as compared to 20 producing
wells in Columbia and 14 producing wells in the U.S. during the 2006 six month
period. As of June 30, 2007, two of the three Colombian wells were 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 six month periods:
Quarter Ended June 30, Six Months Ended June 30,
-------------------------- -----------------------------
Hydrocarbon prices: 2007 2006 2007 2006
------------ ------------ ------------- --------------
Oil - Average price per barrel $ 58.73 $ 53.81 $ 53.98 $ 57.62
Gas - Average price per mcf 8.44 7.79 8.20 6.24
11
The following table sets forth a comparison of oil and gas sales by region for
the quarter and six month periods.
Quarter Ended June 30, Six Months Ended June 30,
-------------------------- -----------------------------
Sales: 2007 2006 2007 2006
------------ ------------ ------------- --------------
Oil Colombia $ 890,735 $ 636,395 $ 1,854,655 $ 1,082,872
US 29,924 33,555 61,797 51,593
------------ ------------ ------------- --------------
Total - Oil $ 920,659 $ 669,950 $ 1,916,452 $ 1,134,465
============ ============ ============= ==============
Gas Colombia $ - $ - $ - $ -
US 39,003 153,442 68,633 355,099
------------ ------------ ------------- --------------
Total - Gas $ 39,003 $ 153,442 $ 68,633 $ 355,099
============ ============ ============= ==============
Lease Operating Expenses. Lease operating expenses, excluding joint venture
expenses relating to our Columbian operations discussed below, increased 90% to
$488,246 in the 2007 quarter from $256,385 in the 2006 quarter. For the six
months ended June 30, 2007, lease operating expenses, excluding joint venture
expenses, increased 99%, to $894,813, compared to the 2006 six month period.
The increase in lease operating expenses was attributable to the increase in the
number of Colombian wells we operated during 2007 (26 wells as compared to 20
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 June 30, Six Months Ended June 30,
-------------------------- -----------------------------
Lease Operating Expenses: 2007 2006 2007 2006
------------ ------------ ------------- --------------
Colombia $ 465,611 $ 212,270 $ 849,655 $ 358,047
U.S. 22,635 44,115 45,158 92,544
------------ ------------ ------------- --------------
Total $ 488,246 $ 256,385 $ 894,813 $ 450,591
============ ============ ============= ==============
Joint Venture Expenses. The Company's allocable share of joint venture expenses
attributable to the Colombian Joint Venture totaled $38,924 during the 2007
quarter and $31,644 for the 2006 quarter. For the six months ended June 30,
2007, joint venture expenses for Colombia totaled $66,441as compared to $81,568
for the six months ended June 30, 2006. The decrease in joint venture expenses
was attributable to the operator reducing personnel working on the undrilled
contracts areas.
Depreciation and Depletion Expense. Depreciation and depletion expense was
$394,978 and $90,533 for the quarters ended June 30, 2007 and 2006,
respectively, and $666,756 and $180,012 for the six months ended June 30, 2007
and 2006, respectively. The increase for both the quarter and six months is due
to increases in Colombian production and a 93% increase in the depletable cost
pool.
General and Administrative Expenses. General and administrative expense
increased by 70% to $521,142 during the quarter ended June 30, 2007 from
$305,862 in the 2006 quarter. For the six months ended June 30, 2007, general
and administrative expenses increased 69%, to $874,780, compared to the 2006 six
month period. The increase in general and administrative expense was primarily
attributable to increases in compensation expense relating to the hiring of our
chief financial officer in mid-2006, an increase in salary to our President in
mid-2006, an increase in compensation to directors in mid-2006 and stock-based
compensation expense associated with the 2006 grant of stock options in
connection with the hiring of our chief financial officer and the grants of
options during 2007. Subsequent to June 30, 2007, we paid bonuses to our
president and our chief financial officer, totaling $80,000, and increased the
base salaries of those officers by an aggregate of $40,000. Those increases in
compensation will be reflected in our general and administrative expenses
beginning in the third quarter of 2007.
12
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 $187,234 of income during the quarter ended
June 30, 2007 as compared to net other expenses of $(150,407) during the 2006
quarter. For the six months ended June 30, 2007, other income, net, totaled
$360,554 as compared to $(319,240) of net other expenses during the 2006 six
month period. The improvement in net other income (expense) resulted from (1)
increased interest income during the 2007 six month period ($360,554 in the 2007
six month period compared to $77,883 in the 2006 six 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. Income tax expense increased by 135% to $139,688 during the
2007 quarter compared to the 2006 quarter. For the six months ended June 30,
2007, income tax expense increased 120%, to $267,449, as compared to the 2006
period. The increase in income tax expense during the 2007 quarter and six month
period was attributable to the increase in revenue 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 June 30, 2007 we had a cash balance of
$274,053 and working capital of $10,765,829 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 cost in Colombia and domestically in the United States.
Operating cash flows for the 2007 six month period totaled $785,049 as compared
to cash used by operations during the 2006 period of $(174,424). The
improvement in operating cash flow was primarily attributable to an increase in
accounts payable.
Investing activities used $920,004 during the 2007 six month period as compared
to $1,950,686 used during the 2006 period. The decrease in funds used in
investing activities during the current period was primarily attributable to
sale of marketable securities which partially funded increased oil and gas
acquisition and drilling activities.
Financing activities provided $14,677,833 during the 2006 six month period from
the sale of common stock. We had no financing activities during the 2007
period.
Long-Term Liabilities. At June 30, 2007, we had long-term debt of $40,700 as
compared to $38,816 at December 31, 2006. Long-term debt at June 30, 2007 and
December 31, 2006 consisted of a reserve for plugging costs.
13
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 six months of 2007, we invested approximately $3,920,000 for
the acquisition and development of oil and gas properties, primarily consisting
of (1) drilling of 13 wells in Colombia ($2,338,721), and (2) the drilling of
one domestic well in the United States ($1,082,908).
At June 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 June 30, 2007, our acquisition and drilling budget for the balance of 2007
totaled approximately $1,263,000, which consisted of the drilling of 13 wells in
Colombia. 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 June 30, 2007.
INFLATION
We believe that inflation has not had a significant impact on operations since
inception.
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.
14
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.
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 June 30, 2007.
During the quarter ended June 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.
15
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 21, 2007, the following
proposals were adopted by the margins indicated:
1. To elect the following directors:
Number of Shares
---------------------
For Withheld
---------- ---------
O. Lee Tawes III 16,105,918 230,200
Edwin Broun III 16,105,918 230,200
Stephen Hartzell 16,105,918 230,200
In addition to the foregoing directors elected at the Annual Meeting, the
terms as director of John Terwilliger and John Boylan continued after the
Annual Meeting.
2. To ratify the appointment of Malone & Bailey, PC, certified public
accountants, as our independent auditors for the fiscal year ending
December 31, 2007.
For 16,323,418
Against 5,100
Abstain 7,600
16
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: August 13, 2007