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ITEM
2
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking
Information
This
Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the nine months ended September 30, 2021,
contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. To the
extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that,
by definition, involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future
results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will be achieved or accomplished.
The
actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included herein.
Factors that may cause actual results or events to differ from those anticipated in the forward-looking statements included herein include
the Risk Factors described in Item 1A herein and in our Form 10-K for the year ended December 31, 2020.
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, 2020.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe certain critical
accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. A description
of our critical accounting policies is set forth in our Form 10-K for the year ended December 31, 2020. As of, and for the nine months
ended, September 30, 2021, there have been no material changes or updates to our critical accounting policies.
Unevaluated
Oil and Gas Properties
Unevaluated
oil and gas properties not subject to amortization, include the following at September 30, 2021:
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September 30, 2021
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Acquisition costs
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$
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1,647,196
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Development and evaluation costs
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2,334,609
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Total
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$
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3,981,805
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The
carrying value of unevaluated oil and gas prospects above was primarily attributable to properties in the South American country of Colombia.
We are maintaining our interest in these properties.
Recent
Developments
Equity
Investment
In
2019, we acquired a 2% interest in Hupecol Meta, LLC (“Hupecol Meta”) (the “Hupecol Meta Acquisition”), reflected
as a cost method investment on our balance sheet.
During
the nine months ended September 30, 2021, we contributed an additional $191,214 to Hupecol Meta, including $99,716 to increase our ownership
interest to 7.85%.
Hupecol
Meta holds a working interest in the 639,405 gross acre CPO-11 block in the Llanos Basin in Colombia, comprised of the 69,128 acre Venus
Exploration Area and 570,277 acres, which was 50% farmed out by Hupecol Meta. As a result of Hupecol Meta’s 2021 purchase of additional
interest in the CPO-11 block and our agreement to increase our ownership interest in Hupecol Meta, through our membership interest in
Hupecol Meta, we hold a 6.99% interest in the Venus Exploration Area and a 3.495% interest in the remainder of the block.
Drilling
Activity
During
the nine months ended September 30, 2021, no drilling activities were conducted.
During
the nine months ended September 30, 2021, our capital investment expenditures totaled $30,237, principally relating to placing
our Johnson and O’Brien wells in Reeves County on gas lift.
Financing
Activities
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2021 At-the-Market Offering. In January 2021, we entered into a Sales Agreement with Univest Securities, LLC (“Univest”)
pursuant to which we could sell, at our option, up to an aggregate of $4,768,428 in shares of common stock through Univest, as sales
agent. Sales of shares under the Sales Agreement (the “2021 ATM Offering”) were made, in accordance with placement notices
delivered to Univest, which notices set parameters under which shares could be sold. The 2021 ATM Offering was made pursuant to a shelf
registration statement by methods deemed to be “at the market,” as defined in Rule 415 promulgated under the Securities Act
of 1933. We paid Univest a commission in cash equal to 3% of the gross proceeds from the sale of shares in the 2021 ATM Offering. Additionally,
we reimbursed Univest for $18,000 of expenses incurred in connection with the 2021 ATM Offering.
During
January 2021, we sold an aggregate of 2,108,520 shares in the 2021 ATM Offering and received proceeds, net of commissions, of $4.6 million.
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2021 Supplemental At-the-Market Offering. In February 2021, we entered into a second Sales Agreement with Univest pursuant to
which we could sell, at our option, up to an aggregate of $2,030,000 in shares of common stock through Univest, as sales agent. Sales
of shares under the Sales Agreement (the “2021 Supplemental ATM Offering”) were made, in accordance with placement notices
delivered to Univest, which notices set parameters under which shares could be sold. The 2021 Supplemental ATM Offering was made pursuant
to a shelf registration statement by methods deemed to be “at the market,” as defined in Rule 415 promulgated under the Securities
Act of 1933. We paid Univest a commission in cash equal to 3% of the gross proceeds from the sale of shares in the 2021 Supplemental
ATM Offering. Additionally, we reimbursed Univest for $18,000 of expenses incurred in connection with the 2021 Supplemental ATM Offering.
During
February 2021, we sold an aggregate of 813,100 shares in the 2021 Supplemental ATM Offering and received proceeds, net of commissions,
of $2.0 million.
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Conversion and Redemption of Preferred Stock. In February 2021, 60 shares of our 12% Series A Convertible Preferred Stock were
converted into 24,000 shares of our common stock, and we redeemed all remaining outstanding shares of our 12% Series A Convertible Preferred
Stock and 12% Series B Convertible Preferred Stock for $1.97 million plus accrued dividends totaling $32,700.
COVID-19
In
early 2020, global health care systems and economies began to experience strain from the spread of the COVID-19 Coronavirus. As the virus
spread, global economic activity began to slow and future economic activity slowed with a resulting decline in oil and gas demand and
prices. Such decline in prices adversely affected our revenues and profitability in 2020. As the COVID-19 pandemic began to recede, oil
and gas prices have risen during 2021. If a resurgence of COVID-19 occurs and results in price declines as occurred during 2020, the
economics of our existing wells and planned future wells, will be adversely affected, possibly resulting in impairment charges to existing
properties and delaying or abandoning planned drilling operations as uneconomical.
In
response to the COVID-19 pandemic, our staff and certain of our vendors, service suppliers and partners began working remotely. As a
result of such remote work arrangements, certain operational, reporting, accounting and other processes were slowed resulting in longer
time to execute critical business functions, higher operating costs and uncertainties regarding the quality of services and supplies.
While remote work risks have receded as the COVID-19 pandemic has begun to wane, we might experience future operating challenges in the
event of a resurgence of COVID-19.
Results
of Operations
Oil
and Gas Revenues. Total oil and gas revenues increased 130% to $290,375 in the three months ended September 30, 2021, compared
to $126,425 in the three months ended September 30, 2020. Oil and gas revenues increased 163% to $922,862 in the nine months ended
September 30, 2021, compared to $351,489 in the nine months ended September 30, 2020.
The
increase in revenue was due to (i) improved commodity pricing, including 86% and 254% increases in crude oil prices and
natural gas prices, respectively, realized during the three-month period and 76% and 397% increases in crude oil prices
and natural gas prices, respectively, realized during the nine-month period and (ii) a 55% increase in oil production volume during
the nine months ended September 30, 2021, and a 60% increase in oil production volume for the three months ended September 30,
2021, partially offset by a 17% and 38% declines in natural gas production for the three and nine-month periods, respectively.
The
following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices
for the quarter and nine months ended September 30, 2021 and 2020:
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Nine Months Ended
September 30
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Three Months Ended
September 30,
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2021
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2020
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2021
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2020
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Gross producing wells
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4
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4
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4
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4
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Net producing wells
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0.68
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0.78
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0.68
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0.78
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Net oil production (Bbl)
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11,391
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7,372
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3,096
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1,941
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Net gas production (Mcf)
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39,765
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64,269
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14,027
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16,941
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Average sales price – oil (per barrel)
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$
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60.51
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$
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34.45
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$
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68.96
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$
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37.12
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Average sales price – natural gas (per Mcf)
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$
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3.82
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$
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0.77
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$
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3.71
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$
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1.05
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The
gross/net producing wells reflects cessation of operation, and ultimate sale, of two uneconomical wells in Louisiana, offset by the commencement
of operations of two wells in Yoakum County, Texas. The change in production volumes was primarily attributable to the increase in production
at our Frost #1 and Frost #2 wells, partially offset by the shut-in of our O’Brien #3-H well for repair and natural decline in
production from our other Reeves County well. With our Reeves County wells being put on gas lift during the quarter ended September 30,
2021, we anticipate an increase in production from those wells in future periods.
The
change in average sales prices realized reflects a spike in natural gas prices attributable to increased demand accompanying the February
freezing weather in Texas and a broad recovery in global energy prices reflecting increased energy demand and reduced global supplies
as the global economy recovers from the COVID-19 pandemic.
All
oil and gas sales revenues are attributable to U.S. operations.
Lease
Operating Expenses. Lease operating expenses increased 245% to $184,869 during the three months ended September 30,
2021, from $53,603 during the three months ended September 30, 2020. Lease operating expenses increased 90% to $443,614 during the nine
months ended September 30, 2021, from $233,753 during the nine months ended September 30, 2020.
The
change in lease operating expenses was principally attributable to increased severance taxes associated with the increase in
revenues and non-recurring water disposal and operating costs incurred on the Lou Brock well during testing.
All
lease operating expenses are attributable to U.S. operations.
Depreciation
and Depletion Expense. Depreciation and depletion expense was $21,045 and $94,926 for the three months ended September
30, 2021 and 2020, respectively, and $79,680 and $237,071 for the nine months ended September, 30, 2021 and 2020,
respectively. The change in depreciation and depletion was due to The change in depreciation and depletion was due to the lower
depletable base during 2021 following the impairment charges in 2020.
Impairment
of Oil and Gas Properties. Impairment of oil and gas properties was $0 for the three months ended September 30, 2021 and 2020,
and $0 and $429,116 for the nine months ended September 30, 2021 and 2020, respectively. The change in impairment of oil and gas
properties was due to a full cost ceiling test write-down in the 2020 period primarily relating to a decline in energy prices during
the peak of the COVID-19 pandemic.
General and Administrative Expenses (excluding
stock-based compensation). General and administrative expense increased by 16% to $269,264 during the three months
ended September 30, 2021 from $231,309 during the three months ended September 30, 2020 and increased by 15% to $894,243
during the nine months ended September 30, 2021 from $778,149 during the nine months ended September 30, 2020. The increase in general
and administrative expense for the three and nine-month periods was primarily attributable to increased professional fees.
Stock-Based
Compensation. Stock-based compensation increased to $167,040 during the three months ended September 30, 2021 from $9,081
during the three months ended September 30, 2020, and increased 72% to $182,149 during the nine months ended September
30, 2021 from $105,846 during the nine months ended September 30, 2020. The change was attributable to the amortization of stock options
granted during 2021 and late 2020.
Other
Income (Expense). Other income/expense, net, totaled $968 of income during the three months ended September 30, 2021, compared
to $2,729 of income during the three months ended September 30, 2020, and totaled $12,129 of income during the nine months ended
September 30, 2021, compared to $14,811 of expense during the nine months ended September 30, 2020. Other income for all periods consisted
on interest earned on cash balances which, during the nine months ended September 30, 2020, was offset by interest expense relating to
Bridge Loan Notes. Interest income during the 2021 periods increased as a result of higher cash balances. The Bridge Loan Notes were
repaid in full in January 2020 and no interest expense will be paid relating to those notes after the quarter ended March 31, 2020.
Financial
Condition
Liquidity
and Capital Resources. At September 30, 2021, we had a cash balance of $4,943,181 and working capital of $5,120,069, compared
to a cash balance of $1,242,560 and working capital of $1,142,513 at December 31, 2020.
Cash
Flows. Operating activities used cash of $648,816 during the nine months ended September 30, 2021, compared to $836,060 used
during the nine months ended September 30, 2020. The change in operating cash flow was attributable to a lower loss incurred during the
2021 period.
Investing
activities used cash of $221,451 during the nine months ended September 30, 2021, compared to $1,327,397 used during the nine
months ended September 30, 2020. The change in funds used by investing activities is principally attributable to reduced drilling
and development activities in 2021.
Financing
activities provided $4,570,888 during the nine months ended September 30, 2021, compared to $3,640,317 provided during the nine months
ended September 30, 2020. Cash provided by financing activities during the nine months ended September 30, 2021 was attributable to funds
received from two ATM offerings ($6,575,889), partially offset by cash used to pay dividends on preferred stock ($37,201) and to redeem
all remaining outstanding shares of preferred stock ($1,967,800). Cash provided by financing activities during the nine months ended
September 30, 2020 was attributable to funds received from the sale of common stock ($4,434,169, including $58,575 of subscriptions receivable
relating to shares sold at year-end 2019) under our 2019 ATM Offering, partially offset by repayment of our Bride Loan Notes ($621,052)
and payment of dividends on our preferred stock ($103,200).
Long-Term
Liabilities. At September 30, 2021, we had long-term liabilities of $294,991, compared to $171,791 at December 31, 2020. Long-term
liabilities at September 30, 2021 and December 31, 2020, consisted of a reserve for plugging costs and the long-term lease liability.
Capital
and Exploration Expenditures and Commitments. Our principal capital and exploration expenditures relate to ongoing efforts to acquire,
drill and complete prospects, in particular our Permian Basin acreage and our newly acquired Colombian acreage. Based on discussions
with our Colombian operator, we anticipate that drilling operations on our CPO-11 block in Colombia will commence in early 2022.
Based on previously disclosed issues with fracking of our initial Hockley County well, Lou Brock #1-H, the well operator has recommended
plugging and abandoning that well and we expect to incur associated costs during the fourth quarter of 2021. The actual timing and number
of well operations undertaken during 2021 and 2022, in Colombia and the Permian Basin, will be principally controlled by the operators
of our acreage, based on a number of factors, including but not limited to availability of financing, performance of existing wells on
the subject acreage, energy prices and industry condition and outlook, costs of drilling and completion services and equipment and other
factors beyond our control or that of our operators.
In
addition to possible operations on our existing acreage holdings, we continue to evaluate drilling prospects in which may acquire an
interest and participate.
During
the nine months ended September 30, 2021, we invested $221,451 for the acquisition and development of oil and gas properties,
including additional contributions to our cost method investment in Hupecol Meta. $30,237 of the investments related to our Reeves
County acreage in the U.S. Permian Basin. $191,214 of the investments consisted of contributions to our cost method investment in Hupecol
Meta, including $99,716 paid to increase our ownership interest in Hupecol Meta. Of the amount invested, we capitalized $30,237
to oil and gas properties subject to amortization and capitalized $191,214 to our interest in Hupecol Meta.
As
our allocable share of well costs will vary depending on the timing and number of wells drilled as well as our working interest in each
such well and the level of participation of other interest owners, we have not established a drilling budget but will budget on a well-by-well
basis as our operators propose wells.
With
our receipt, during the first quarter of 2021, of $6,575,889 from sales of common stock under our ATM offerings, we believe that we have
the ability, through our cash on-hand, to fund operations and our cost for all planned wells expected to be drilled over the next twelve
months.
In
the event that we pursue additional acreage acquisitions or expand our drilling plans, we may be required to secure additional funding
beyond our resources on hand. While we may, among other efforts, seek additional funding from “at-the-market” sales of common
stock, and private sales of equity and debt securities, we presently have no commitments to provide additional funding, and there can
be no assurance that we can secure the necessary capital to fund our share of drilling, acquisition or other costs on acceptable terms
or at all. If, for any reason, we are unable to fund our share of drilling and completion costs and fail to satisfy commitments relative
to our interest in our acreage, we may be subject to penalties or to the possible loss of some of our rights and interests in prospects
with respect to which we fail to satisfy funding commitments and we may be required to curtail operations and forego opportunities. Unless
and until the depressing economic effects of the coronavirus recede, we expect that new capital to fund projects will be difficult, if
not impossible, to secure.
Off-Balance
Sheet Arrangements
We
had no off-balance sheet arrangements or guarantees of third party obligations at September 30, 2021.
Inflation
We
believe that inflation has not had a significant impact on operations since inception.