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 March 31, 2008
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, a non-accelerated filer or a smaller reporting company.
See definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [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 May 12, 2008, we had 27,920,172 shares of $0.0001 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 March 31, 2008 and December 31, 2007 .. . . . . . . 3
Statements of Operations for the three months
ended March 31, 2008 and March 31, 2007 .. . . . . . . . . . . . . . . 4
Statements of Cash Flows for the three months
ended March 31, 2008 and March 31, 2007 .. . . . . . . . . . . . . . . 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 .. . . . . . . . . . . . . . . . . . . . . 14
PART II OTHER INFORMATION
Item 1A Risk Factors .. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOUSTON AMERICAN ENERGY CORP.
BALANCE SHEET
(Unaudited)
March 31, 2008 December 31, 2007
---------------- -------------------
ASSETS
------
CURRENT ASSETS:
Cash $ 9,417,206 $ 417,818
Marketable securities 1,000,000 9,650,000
Accounts receivable 1,243,235 577,512
Prepaid expenses 118,762 49,255
Other current assets 24,000 -
---------------- -------------------
Total current assets 11,803,203 10,694,585
---------------- -------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties - full cost method
Costs subject to amortization 13,381,216 12,714,669
Costs not being amortized 972,174 998,806
Office equipment 11,878 11,878
---------------- -------------------
Total property, plant and equipment 14,365,268 13,725,353
---------------- -------------------
Accumulated depreciation and depletion (4,050,108) (3,708,308)
---------------- -------------------
Total property, plant and equipment, net 10,315,160 10,017,045
---------------- -------------------
OTHER ASSETS 3,167 3,167
---------------- -------------------
Total Assets $ 22,121,530 $ 20,714,797
================ ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 550,820 $ 260,222
Accrued expenses 1,874 1,720
Foreign income taxes payable 275,106 74,141
---------------- -------------------
Total current liabilities 827,800 336,083
---------------- -------------------
LONG-TERM DEBT LIABILITIES:
Deferred rent obligation 20,404 20,206
Reserve for plugging costs 116,992 115,061
---------------- -------------------
Total long-term liabilities 137,396 135,267
---------------- -------------------
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 22,418,997 22,377,832
Treasury stock, at cost; 100,000 shares (85,834) (85,834)
Accumulated deficit (1,204,749) (2,076,470)
---------------- -------------------
Total shareholders' equity 21,156,334 20,243,447
---------------- -------------------
Total liabilities and shareholders' equity $ 22,121,530 $ 20,714,797
================ ===================
The accompanying notes are an integral part of these financial statements
3
HOUSTON AMERICAN ENERGY CORP.
STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31,
------------------- ---------------------
2008 2007
------------------- ---------------------
Revenue
Oil and gas $ 2,937,134 $ 1,025,422
------------------- ---------------------
Total revenue 2,937,134 1,025,422
------------------- ---------------------
Expenses of operations
Lease operating expense and severance taxes 876,842 406,566
Joint venture expenses 47,354 39,620
General and administrative expense 320,926 353,639
Depreciation and depletion 341,801 271,779
------------------- ---------------------
Total operating expenses 1,586,923 1,071,604
------------------- ---------------------
Income (loss) from operations 1,350,211 (46,182)
Other (income) expense
Interest income (94,041) (173,320)
------------------- ---------------------
Total other income (94,041) (173,320)
------------------- ---------------------
Income before taxes 1,444,252 127,138
Income tax expense 572,531 127,761
------------------- ---------------------
Net income (loss) $ 871,721 $ (623)
=================== =====================
Income (loss) per share-basic $ 0.03 $ (0.00)
=================== =====================
Income (loss) per share- diluted $ 0.03 $ (0.00)
=================== =====================
Basic weighted average shares 27,920,172 27,920,172
Diluted weighted average shares 28,061,583 27,920,172
=================== =====================
The accompanying notes are an integral part of these financial statements
4
HOUSTON AMERICAN ENERGY CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31,
------------------- ---------------------
2008 2007
------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 871,721 $ (623)
Adjustments to reconcile net income (loss)
to net cash from operations
Depreciation and depletion 341,801 272,407
Stock based compensation 41,166 54,888
Accretion expense - asset retirement obligation 1,931 -
Amortization of deferred rent 197 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (660,398) (234,353)
(Increase) in prepaid expense (98,832) (137,402)
Increase in accounts payable and accrued expenses 491,717 67,684
------------------- ---------------------
Net cash provided by operations 989,303 22,601
------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of marketable securities 8,650,000 2,000,000
Acquisition of oil and gas properties and assets net (639,915) (2,077,502)
------------------- ---------------------
Net cash provided by (used in) investing activities 8,010,085 (77,502)
------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES - -
------------------- ---------------------
Increase (decrease) in cash and equivalents 8,999,388 (54,901)
Cash, beginning of period 417,818 409,008
------------------- ---------------------
Cash, end of period $ 9,417,206 $ 354,107
=================== =====================
SUPPLEMENT CASH FLOW INFORMATION:
Interest paid - -
=================== =====================
Colombian cash taxes paid $ 297,425 $ 53,620
=================== =====================
The accompanying notes are an integral part of these financial statements
5
HOUSTON AMERICAN ENERGY CORP.
Notes to Financial Statements
March 31, 2008
(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-K
for the year ended December 31, 2007.
NOTE 2. - CHANGES IN PRESENTATION
Certain financial presentations for the periods presented for 2007 have been
reclassified to conform to the 2008 presentation.
NOTE 3. - RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157 "Fair Value
Measurements", which provides expanded guidance for using fair value to measure
assets and liabilities. SFAS 157 establishes a hierarchy for data used to value
assets and liabilities, and requires additional disclosures about the extent to
which a company measures assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. Implementation of SFAS 157 is required on January 1, 2008. The Company
is currently evaluating the impact of adopting SFAS 157 on the financial
statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations," which
revises SFAS No. 141 and changes multiple aspects of the accounting for business
combinations. SFAS No. 141R requires the acquirer to recognize most identifiable
assets acquired, liabilities assumed, and noncontrolling interests in the
acquiree at their full fair value on the acquisition date. Goodwill is to be
recognized as the excess of the consideration transferred plus the fair value of
the noncontrolling interest over the fair values of the identifiable net assets
acquired. Subsequent changes in the fair value of contingent consideration
classified as a liability are to be recognized in earnings, while contingent
consideration classified as equity is not to be remeasured. Costs such as
transaction costs are to be excluded from acquisition accounting, generally
leading to recognizing expense and additionally, restructuring costs that do not
meet certain criteria at acquisition date are to be subsequently recognized as
post-acquisition costs. SFAS No. 141R is effective for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company is
currently evaluating the impact that this issuance will have on its financial
position and results of operations.
6
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133".
SFAS 161 requires entities that utilize derivative instruments to provide
qualitative disclosures about their objectives and strategies for using such
instruments, as well as any details of credit-risk-related contingent features
contained within derivatives. SFAS 161 also requires entities to disclose
additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS 133 have been
applied, and the impact that hedges have on an entity's financial position,
financial performance, and cash flows. SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged. The Company currently does not anticipate the adoption of SFAS 161
will have a material impact on the disclosures already provided.
NOTE 4. - MARKETABLE SECURITIES
At March 31, 2008 the Company held $1,000,000 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 March
31, 2008. There were no realized gains and losses recorded during the three
month period ending March 31, 2008.
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. No stock options were granted during the
quarter ended March 31, 2008.
A summary of stock option activity and related information for the three months
ended March 31, 2008 is presented below:
Weighted-Average Aggregate
Options Exercise Price Intrinsic Value
------- ----------------- ----------------
Outstanding at January 1, 2008 339,000 $ 3.12 $ 285,789
Granted - - -
Exercised - - -
Forfeited - - -
-------
Outstanding at March 31, 2008 339,000 $ 3.12 $ 285,789
-------
Exercisable at March 31, 2008 272,333 $ 3.15 $ 231,287
=======
No options were exercised during the three months ended March 31, 2008. As of
March 31, 2008, total unrecognized stock-based compensation expense related to
non-vested stock options was $54,888.
7
The following table reflects share-based compensation recorded by the Company
for the three months ended March 31, 2008 and 2007:
Three Months Ended March 31,
-----------------------------
2008 2007
-------------- -------------
Share-based compensation expense included in reported net income $ 41,166 $ 54,888
Basic and diluted earnings per share effect of share-based
compensation expense $ (0.00) $ (0.00)
============== =============
NOTE 6. - CONTINGENCIES AND COMMITMENTS
Pending Sale of Caracara Prospect
In March 2008, Hupecol Caracara LLC, as owner/operator under the Caracara
Association Contract, entered into a Purchase and Sale Agreement to sell all of
its interest in the Caracara Association Contract and related assets for a sale
price of $920 million, subject to certain closing adjustments based on oil price
fluctuations and operations between the effective date of the sale, January 1,
2008, and the closing date. Pursuant to our investment in Hupecol Caracara LLC,
we hold a 1.594674% interest in the Caracara assets being sold and will receive
our proportionate interest in the net sale proceeds after deduction of
commissions and transaction expenses. The Company's Caracara assets subject to
the proposed sale had a net book value of $1,732,948 on the effective date of
the sale. During the quarter ended March 31, 2008, our revenues attributable to
the Caracara prospect totaled $2,129,178 and our lease operating expenses
attributable to the Caracara prospect totaled $233,147. Completion of the sale
of the Caracara assets is subject to satisfaction of various conditions set out
in the Purchase and Sale Agreement, including the granting of all consents and
approvals of the Colombian governmental authorities required for the transfer of
the assets to the purchaser.
Executive Compensation - Bonus Payments
In March 2008, the Company's board of directors approved the payment to members
of management of bonuses totaling $750,000. The bonuses are contingent upon the
sale of the Caracara prospect and are to be paid as proceeds are received from
the pending sale of the Caracara prospect. The bonuses are not reflected in the
financial statements at and for the quarter ended March 31, 2008 but will be
realized and reflected in the Company's financial statements when the
contingency relating to their payment is satisfied.
NOTE 7 - GEOGRAPHICAL INFORMATION
The Company currently has operations in two geographical areas, the United
States and Colombia. Revenues for the three months ended March 31, 2008 and Long
Lived Assets as of March 31, 2008 attributable to each geographical area are
presented below:
Three Months Ended March 31, 2008
-------------------------------------------
Revenues Long Lived Assets, Net
------------------- ----------------------
United States $ 119,156 $ 2,083,104
Colombia 2,817,978 8,232,056
8
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 three months ended March 31, 2008, contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. To the
extent that there are statements that are not recitations of historical fact,
such statements constitute forward-looking statements that, by definition,
involve risks and uncertainties. In any forward-looking statement, where we
express an expectation or belief as to future results or events, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will be achieved or accomplished.
The actual results or events may differ materially from those anticipated and as
reflected in forward-looking statements included herein. Factors that may cause
actual results or events to differ from those anticipated in the forward-looking
statements included herein include the Risk Factors described in Item 1A of our
Form 10-K for the year ended December 31, 2007.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. We believe
the information contained in this Form 10-Q to be accurate as of the date
hereof. Changes may occur after that date, and we will not update that
information except as required by law in the normal course of our public
disclosure practices.
Additionally, the following discussion regarding our financial condition and
results of operations should be read in conjunction with the financial
statements and related notes contained in Item 1 of Part 1 of this Form 10-Q, as
well as the Risk Factors in Item 1A and the financial statements in Item 7 of
Part II of our Form 10-K for the fiscal year ended December 31, 2007.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
is based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
We believe certain critical accounting policies affect the more significant
judgments and estimates used in the preparation of our financial statements. A
description of our critical accounting policies is set forth in our Form 10-K
for the year ended December 31, 2007. As of, and for the quarter ended, March
31, 2008, there have been no material changes or updates to our 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 March 31, 2008:
March 31, 2008
---------------
Acquisition costs $ 140,311
Evaluation costs 719,102
Retention costs 112,761
---------------
Total $ 972,174
===============
9
The carrying value of unevaluated oil and gas prospects include $13,330 expended
for properties in the South American country of Colombia at March 31, 2008. 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 quarter ended March 31, 2008, we drilled three international wells in
Colombia, as follows:
- one well was drilled on a concession in which we hold a 12.5% working
interest and was in production at March 31, 2008.
- one well was drilled on a concession in which we hold a 6.25% working
interest and was a dry hole.
- one well was drilled on a concession in which we hold a 1.6% working
interest and was in production at March 31, 2008.
No domestic wells were drilled during the quarter ended March 31, 2008. The
well drilled on our Caddo Lake prospect during the fourth quarter of 2007 was
waiting on completion at March 31, 2008.
At March 31, 2008, no drilling operations were ongoing in Colombia.
At March 31, 2008, we planned to drill one domestic well and 14 additional
international wells over the balance of 2008. Subsequent to March 31, 2008, the
operator in Colombia advised that the Las Garzas Dorada B1 well had been drilled
and production casing set and initial production results indicate a potential
flow rate in the range of 700 to 1,100 barrels per day. Well testing is ongoing
and actual production rates may vary from initial rates. The operator plans to
drill additional wells to delineate the reservoir and develop the field and to
develop field infrastructure to support continuous production. We hold a 12.5%
interest in the well and the Las Garzas prospect.
Leasehold Activity
During the quarter ended March 31, 2008, we acquired interests in two additional
prospects in South Louisiana for which we advanced leasehold costs of
approximately $7,770. We sold our interest in one of the two prospects - the
North Henry Bayou prospect - during the quarter, retaining a 4.5% carried
interest in the prospect, for which we received $60,301.
Seismic Activity
During the quarter ended March 31, 2008, our operator in Colombia acquired
approximately 65 miles of additional seismic and geological data. The additional
data relates primarily to prospects in which we hold a 12.5% working interest.
Our share of the costs of such data acquisition was $23,465.
Pending Sale of Caracara Prospect
In March 2008, Hupecol Caracara LLC, as owner/operator under the Caracara
Association Contract, entered into a Purchase and Sale Agreement to sell all of
its interest in the Caracara Association Contract and related assets for a sale
price of $920 million, subject to certain closing adjustments based on oil price
fluctuations and operations between the effective date of the sale, January 1,
2008, and the closing date.
10
Pursuant to our investment in Hupecol Caracara LLC, we hold a 1.594674% interest
in the Caracara assets being sold and will receive our proportionate interest in
the net sale proceeds after deduction of commissions and transaction expenses.
Our Caracara-related assets subject to the proposed sale had a net book value of
$1,732,948 as of the effective date of the sale. Production from the Caracara
prospect accounted for $2,129,178 of our revenues during the quarter ended March
31, 2008.
Completion of the sale of the Caracara assets is subject to satisfaction of
various conditions set out in the Purchase and Sale Agreement, including the
granting of all consents and approvals of the Colombian governmental authorities
required for the transfer of the assets to the purchaser.
Executive Compensation - Bonus Payments
In March 2008, our board of directors approved the payment to members of
management of bonuses totaling $750,000. The bonuses are contingent upon the
sale of the Caracara prospect and are to be paid as proceeds are received from
the pending sale of the Caracara prospect.
RESULTS OF OPERATIONS
Oil and Gas Revenues. Total oil and gas revenues increased 186.4% to $2,937,134
in the three months ended March 31, 2008 compared to $1,025,422 in the three
months ended March 31, 2007. The increase in revenue is principally due to
increased production resulting from the development of the Columbian fields and
higher oil prices. We had interests in 40 producing wells in Colombia and 8
producing wells in the U.S. during the 2008 quarter as compared to 22 producing
wells in Columbia and 8 producing wells in the U.S. during the 2007 quarter.
Average prices from sales were $95.10 per barrel of oil and $8.50 per mcf of gas
during the 2008 quarter as compared to $50.00 per barrel of oil and $9.04 per
mcf of gas during the 2007 quarter.
Columbia U.S. Total
---------- ------- ----------
2008 First Quarter
Oil sales $2,817,978 $46,266 $2,864,244
Gas sales - 72,890 72,890
2007 First Quarter
Oil sales $ 963,920 $27,646 $ 991,566
Gas sales - 33,856 33,856
Lease Operating Expenses. Lease operating expenses, excluding joint venture
expenses relating to our Columbian operations discussed below, increased 115.7%
to $876,842 in the 2008 quarter from $406,566 in the 2007 quarter. The increase
in lease operating expenses was attributable to the increase in the number of
Colombian wells producing during the 2008 period (40 wells as compared to 22
wells) and increased operating activities on prospects in which we hold a higher
working interest (12.5%) during 2008 as compared to 2007. Following is a
summary comparison of lease operating expenses for the periods.
Columbia U.S. Total
--------- ------- --------
2008 First Quarter $ 837,983 $38,859 $876,842
2007 First Quarter 384,043 22,523 406,566
Joint Venture Expenses. Our allocable share of joint venture expenses
attributable to the Colombian Joint Venture totaled $47,354 during the 2008
quarter and $39,620 during the 2007 quarter. The increase in joint venture
expenses was attributable to an increase in drilling activity in concessions in
which the Company owns a higher working interest.
11
Depreciation and Depletion Expense. Depreciation and depletion expense was
$341,801 and $271,779 for the quarter ended March 31, 2008 and 2007,
respectively. The increase is due to increases in Colombian production.
General and Administrative Expenses. General and administrative expense
decreased by 9.3% to $320,926 during the 2008 quarter from $353,639 during the
2007 quarter. The decrease in general and administrative expense was primarily
attributable to decreases in stock compensation and professional legal fees.
Other Income. Other income consists of interest earned on cash balances and
marketable securities. Other income totaled $94,041 during the 2008 quarter as
compared to $173,320 during the 2007 quarter. The decrease in other income
resulted from decreases in marketable securities held and amounts invested, and
a reduction in interest rates on short term cash investments.
Income Tax Expense. Income tax expense increased by 348.1% to $572,531 during
the 2008 quarter company from $127,761 during the 2007 quarter. The increase in
income tax expense during the 2008 quarter was attributable to the increase in
revenue in Colombia. Income tax expense during the 2008 quarter and the 2007
quarter was entirely attributable to operations in Colombia. The Company
recorded no U.S. income tax liability in the 2008 or 2007 quarters.
Effect of Pending Sale of Caracara Prospect. Assuming completion of the
proposed sale of our interest in the Caracara prospect, we will report a
one-time gain from the sale of those assets and will sustain an immediate
reduction in revenues and lease operating expenses attributable to our interest
in the Caracara prospect. During the quarter ended March 31, 2008, our revenues
attributable to the Caracara prospect totaled $2,129,178 and our lease operating
expenses attributable to the Caracara prospect totaled $233,147. Closing of the
pending sale of the Caracara prospect is subject to satisfaction of a number of
conditions. Accordingly, there is no assurance as to when, if ever, the sale of
the Caracara prospect will be completed.
We intend to utilize the proceeds from the pending sale of the Caracara prospect
to invest in future drilling of our remaining interests in Colombia in order to
replace revenues attributable to the Caracara prospect and grow our revenues.
We hold interests in seven Colombian prospects, other than the Caracara
prospect, and our interest in those prospects range from 6.25% to 12.5% as
compared to our interest in the Caracara prospect which is approximately 1.6%.
We will also utilize $750,000 of proceeds from the sale of the Caracara prospect
to pay bonuses to members of management.
FINANCIAL CONDITION
Liquidity and Capital Resources. At March 31, 2008, we had a cash balance of
$9,417,206 and working capital of $10,975,403 compared to a cash balance of
$417,818 and working capital of $10,358,502 at December 31, 2007. The increase
in working capital during the period was primarily attributable to increased
revenues from wells producing in Colombia.
Operating cash flows for the 2008 quarter totaled $989,303 as compared to
$22,601 during the 2007 quarter. The increase in operating cash flow was
primarily attributable to increased profitability during the 2008 quarter.
Investing activities provided $8,010,085 during the 2008 quarter compared to
$77,502 used during the 2007 quarter. The funds provided by/used in investing
activities reflect the sale of marketable securities of $8,650,000 during the
2008 quarter and $2,000,000 during the 2007 quarter. Funds used in investing
12
activities consisted of investments in oil and gas properties and assets of
$639,915 during the 2008 quarter and $2,077,502 during the 2007 quarter.
We had no financing activities during either the 2008 quarter or the 2007
quarter.
Capital and Exploration Expenditures and Commitments. Our principal capital and
exploration expenditures relate to ongoing efforts to acquire, drill and
complete prospects. We expect that future capital and exploration expenditures
will be funded principally through funds on hand and funds generated from
operations and from the sale of our interest in the Caracara prospect.
During the first quarter of 2008, we invested approximately $639,915 for the
acquisition and development of oil and gas properties, consisting of (1)
drilling of three wells in Colombia ($628,615), (2) seismic cost in Colombia
($23,465), (3) delay rentals on U.S. properties ($28,752), (4) leasehold costs
on U.S. properties ($7,770), (5) capital expenditures on U.S. wells ($11,614),
partially offset by proceeds from the sale of the North Henry Bayou prospect for
$60,301.
At March 31, 2008, 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 2007 Form 10-K.
At March 31, 2008, our remaining acquisition and drilling budget for the
balance of 2008 totaled approximately $6,130,000, which consisted of the
drilling of 14 wells in Colombia, one well in the United States, and seismic and
infrastructure cost. 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
expected operating cash flows and proceeds from the pending sale of our Caracara
interest 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 March 31, 2008.
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.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures of a
registrant designed to ensure that information required to be disclosed by the
registrant in the reports that it files or submits under the Exchange Act is
properly recorded, processed, summarized, and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures are performed under the supervision and with
the participation of our Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO") to allow for timely decisions regarding required disclosures.
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 CEO and CFO.
Based on this evaluation, our management, including the CEO and CFO, concluded
that our disclosure controls and procedures were effective at March 31, 2008.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter
ended March 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II
ITEM 1A. RISK FACTORS
We describe our business risk factors in Part I, Item 1A of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007. In addition to the
factors set forth in the referenced Form 10-K, our investors should also
consider the following additional risk factor affecting our business.
SEASONAL WEATHER CONDITIONS ADVERSELY AFFECT OUR ABILITY TO CONDUCT DRILLING,
DEVELOPMENT AND PRODUCTION ACTIVITIES IN COLOMBIA.
Oil and natural gas operations in Colombia are adversely affected by seasonal
weather conditions. The climate in the Llanos basin region of Colombia, where
our Colombian operations are located, is characterized by two seasons, a rainy
season and a dry season, each lasting approximately six months, with the rainy
season commencing around April and ending around November. Depending on the
prevailing weather conditions and existing infrastructure, we may have limited
or no access to our properties and our drilling and other activities in Colombia
may be curtailed or substantially halted during the rainy season. These
seasonal factors may result in fluctuations in our production and revenues, with
both typically being lower during the rainy season. Further, because of the
limitations on activities during the rainy season, operating activities
typically intensify during the dry season resulting in higher demand for
drilling rigs, oilfield equipment, services, supplies and qualified personnel,
which may lead to periodic shortages, and higher operating expenses during the
dry season. These factors could result in delays in our operations and
fluctuations in our operating results from quarter to quarter.
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
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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 F. Terwilliger
John Terwilliger
CEO and President
By: /s/ James J. Jacobs
James J. Jacobs
Chief Financial Officer
Date: May 12, 2008
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