UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________.
Commission File Number 0-33027
HOUSTON AMERICAN ENERGY CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 76-0675953
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
801 Travis Street, Suite 2020, Houston, Texas 77002
(Address of principal executive offices)(Zip Code)
(713) 222-6966
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 8, 2006, we had 27,628,922 shares of $.0001 par value Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
HOUSTON AMERICAN ENERGY CORP.
-----------------------------
FORM 10-QSB
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet as of March 31, 2006 . . . . . . . . . . . . . . . . . . 3
Statements of Operations for the three months
ended March 31, 2006 and March 31, 2005. . . . . . . . . . . . . . . 4
Statements of Cash Flows for the three months
ended March 31, 2006 and March 31, 2005. . . . . . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . 8
Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . 13
PART II OTHER INFORMATION
Item 6.Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOUSTON AMERICAN ENERGY CORP.
BALANCE SHEET
March 31, 2006
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 1,262,811
Accounts receivable 265,439
------------
Total current assets 1,528,250
------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties - full cost method
Costs subject to amortization 4,236,446
Costs not being amortized 822,708
Furniture and equipment 10,878
------------
Total property, plant and equipment 5,070,032
Accumulated depreciation and depletion (1,462,030)
------------
Total property, plant and equipment, net 3,608,002
------------
OTHER ASSETS 107,465
------------
Total Assets $ 5,243,717
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 716,934
Derivative liability 2,916,252
Notes payable to principal shareholder 900,000
------------
Total current liabilities 4,533,186
------------
LONG-TERM DEBT:
Subordinated convertible notes - net of discount 51,057
Reserve for plugging costs 41,249
------------
Total long-term liabilities 92,306
------------
SHAREHOLDERS' EQUITY:
Common stock, $0.001 par value; 100,000,000 shares
authorized; 19,970,589 shares outstanding 19,971
Additional paid-in capital 2,851,920
Treasury stock, at cost; 100,000 shares (85,834)
Accumulated deficit (2,167,832)
------------
Total shareholders' equity 618,225
------------
Total liabilities and shareholders' equity $ 5,243,717
============
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,
-------------------------------------
2005 2006
----------------- ------------------
Revenue
Oil and gas $ 445,510 $ 666,172
Interest 2,204 16,219
----------------- ------------------
Total revenue 447,714 682,391
----------------- ------------------
Expenses of operations
Lease operating expense and severance taxes 170,773 194,651
Joint venture expenses 13,823 49,478
General and administrative expense 168,096 211,579
Depreciation and depletion 62,627 89,479
----------------- ------------------
Total operating expenses 415,319 545,187
----------------- ------------------
Income from operations 32,395 137,204
----------------- ------------------
Other expenses
Interest expense - derivative - 16,890
Net change in fair value of derivative liabilities - 103,077
Foreign taxes 11,326 62,153
Interest expense - 42,500
Interest expense on shareholder debt 18,000 16,200
Financing fees - 6,386
----------------- ------------------
Total other expenses 29,326 247,206
----------------- ------------------
Net income (loss) $ 3,069 $ (110,002)
================= ==================
Basic and diluted income (loss) per share $ 0.00 $ (0.01)
================= ==================
Basic and diluted weighted average shares 19,968,089 19,970,589
================= ==================
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,
--------------------------------------
2005 2006
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from operations $ 3,069 $ (110,002)
Adjustments to reconcile net loss
to net cash from operations
Depreciation and depletion 62,627 89,479
Derivative activity - 119,967
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (94,433) 307,882
(Increase) decrease in prepaid expense 65,546 9,965
Decrease in other assets - 6,386
Increase in accounts payable and accrued expenses 36,129 181,269
------------------ ------------------
Net cash provided by operations 72,938 604,946
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of oil and gas properties (511,621) (1,066,235)
------------------ ------------------
Net cash used by investing activities (511,621) (1,066,235)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES - -
------------------ ------------------
(Decrease) in cash and equivalents (438,683) (461,289)
Cash, beginning of period 721,613 1,724,100
------------------ ------------------
Cash, end of period $ 282,930 $ 1,262,811
================== ==================
SUPPLEMENT CASH FLOW INFORMATION:
Interest paid $ 18,000 $ 16,200
================== ==================
The accompanying notes are an integral part of these financial statements
5
HOUSTON AMERICAN ENERGY CORP.
Notes to Financial Statements
March 31, 2006
(Unaudited)
NOTE 1. - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Houston American Energy
Corp., a Delaware corporation (the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. They do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for a complete financial presentation. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation, have been included in the
accompanying unaudited financial statements. Operating results for the periods
presented are not necessarily indicative of the results that may be expected for
the full year.
These financial statements should be read in conjunction with the financial
statements and footnotes, which are included as part of the Company's Form
10-KSB for the year ended December 31, 2005.
NOTE 2. - CHANGES IN PRESENTATION
Certain financial presentations for the periods presented for 2005 have been
reclassified to conform to the 2006 presentation.
NOTE 3. - SUBORDINATED CONVERTIBLE NOTES AND WARRANTS - DERIVATIVE LIABILITIES
In conjunction with the issuance in May 2005 of Convertible Notes, the
conversion feature, the conversion price, reset provision and the Company's
optional early redemption right in the Convertible Notes have been bundled
together as a single compound embedded derivative liability and, using a layered
discounted probability-weighted cash flow approach, was initially fair valued at
$2,368,485 at May 4, 2005. The fair value model comprises multiple
probability-weighted scenarios under various assumptions reflecting the
economics of the Convertible Notes, such as the risk-free interest rate,
expected Company stock price and volatility, likelihood of conversion and or
redemption, and likelihood default status and timely registration. At inception,
the fair value of this single compound embedded derivative was bifurcated from
the host debt contract and recorded as a derivative liability which resulted in
a reduction of the initial notional carrying amount of the Convertible Notes (as
unamortized discount which will be amortized over a five-year period under the
effective interest method). At inception the excess of the unamortized discount
over the notional amount of the Convertible Note in the amount of $285,547 was
charged to expense in the Company's statement of operations.
At March 31, 2006, the Convertible Notes comprised the following:
Notional balance of Convertible Notes at March 31, 2006 $ 2,125,000
Adjustment - Discount for single compound derivative liability (2,073,943)
------------
Convertible Notes balance at March 31, 2006, as adjusted $ 51,057
============
For the period from December 31, 2005 through March 31, 2006, the amortization
of unamortized discount on the Convertible Notes was $16,890, which has been
classified as interest expense in the accompanying statement of operation.
6
The Derivative Liability reflected on the balance sheet at March 31, 2006
consists of the Derivative Liability-Compound Embedded Derivatives within the
Convertible Notes plus the Derivative Liability-Compound Embedded Derivatives
within the Warrants issued in conjunction with the Convertible Notes.
The Derivative Liability-Compound Embedded Derivatives within Convertible Notes
reflect the following activity for the period from December 31, 2005 through
March 31, 2006:
Balance at December 31, 2005 $2,384,046
Mark-to-market adjustment for the period from December 31, 2005 to
March 31, 2006 119,435
----------
Balance at March 31, 2006 $2,503,481
==========
The Derivative Liability-Compound Embedded Derivatives within Warrants reflect
the following activity for the period from December 31, 2005 to March 31, 2006.
Balance at December 31, 2005 $ 429,129
Mark-to-market adjustment for the period from December 31, 2005 to
March 31, 2006 (16,358)
---------
Balance at March 31, 2006 $412,771
=========
NOTE 4. - SUBSEQUENT EVENTS
Issuance of Common Stock and Warrants
On April 28, 2006, the Company entered into Subscription Agreements (the
"Purchase Agreements") with multiple investors pursuant to which the Company
sold 5,533,333 shares of common stock (the "Shares") for $16,599,999.
The Shares were offered and sold in a private placement transaction pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933 and Rule 506 promulgated thereunder. Each of the investors is an
"accredited investor", as defined in Rule 501 promulgated under the Securities
Act.
Pursuant to the terms of the Subscription Agreements, the Company and the
investors entered into Registration Rights Agreements under which the Company
agreed to file with the Securities and Exchange Commission, within 60 days, a
registration statement covering the Shares. In conjunction with the placement of
the Shares, John Terwilliger, O. Lee Tawes III and Edwin Broun III each entered
into lock-up agreements pursuant to which each agreed not to offer or sell any
shares of the Company's common stock until the earlier of the effective date of
the registration statement relating to the Shares or one year from the sale of
the Shares.
Sanders Morris Harris Inc. acted as placement agent in connection with the offer
and sale of the Shares. For its services as placement agent, Sanders Morris
Harris Inc. received commissions totaling $1,162,000 and a warrant (the
"Placement Agent Warrant") to purchase 415,000 shares of common stock at $3.00
per share. The Registration Rights Agreements provide that the shares of common
stock underlying the Placement Agent Warrant are to be included in the
registration statement to be filed.
Repayment of Shareholder Loan
Shareholder loans, in the principal amount of $900,000, were repaid in full from
the proceeds of the April 2006 private placement.
7
Conversion of 8% Subordinated Convertible Notes
On May 2, 2006, the Company notified the holders of its 8% Subordinated
Convertible Notes (the "Notes") of its election to convert the Notes into shares
of the Company's common stock. As a result of such election, the full principal
amount of the Notes of $2,125,000 has been satisfied by conversion of the same
into 2,125,000 shares of common stock.
The shares of common stock issued on conversion of the Notes were offered and
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933. Each of the investors is an "accredited investor",
as defined in Rule 501 promulgated under the Securities Act.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Form 10-QSB quarterly report of Houston American Energy Corp. (the
"Company") for the three months ended March 31, 2006, 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, 2005.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. The Company
believes the information contained in this Form 10-QSB to be accurate as of the
date hereof. Changes may occur after that date, and the Company will not update
that information except as required by law in the normal course of its public
disclosure practices.
Additionally, the following discussion regarding the Company's financial
condition and results of operations should be read in conjunction with the
financial statements and related notes contained in Item 1 of Part 1 of this
Form 10-QSB, as well as the 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, 2005.
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, 2005. As of, and for the quarter ended, March 31, 2006, there have
been no material changes or updates to the Company's critical accounting
policies other than the following updated information relating to Unevaluated
Oil and Gas Properties:
8
-- UNEVALUATED OIL AND GAS PROPERTIES. Unevaluated oil and gas properties not
subject to amortization include the following at March 31, 2006:
March 31, 2006
---------------
Acquistion costs $ 98,807
Evalution costs 723,900
---------------
Total $ 822,707
===============
The carrying value of unevaluated oil and gas prospects include $706,353
expended for properties in the South American country of Colombia at March 31,
2006. 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, 2006, the Company drilled 2 on-shore domestic
wells as follows:
- The Obenhaus #1, a 7,100 -foot well on the Obenhaus Prospect in Wilbarger
County, Texas was drilled and was a dry hole.
- The Riggins #1, a 6,400-foot test well on the West Fargo Prospect in
Wilbarger County, Texas was drilled and was deemed non-commercial.
At March 31, 2006, the Company had one domestic well being drilled, the
DDD-Evans #1, a 8,500-foot test well on the West Turkey Prospect in Hardeman
County, Texas that was completed in April 2006. The well went on production on
May 2, 2006 and as of May 9th was producing 95 BOPD.
At March 31, 2006, the Company had plans to drill 5 wells during the balance of
2006.
During the quarter ended March 31, 2006, the Company drilled 2 international
wells in Colombia, both of which were dry holes.
At March 31, 2006, the Company had 1 well being drilled in Colombia with plans
to drill 19 wells during the balance of 2006.
Leasehold Activity
During the quarter ended March 31, 2006, the Company acquired interests in one
additional domestic prospect, a 10% working interest with a 7.5% net revenue
interest in the 91.375 acre West Turkey Prospect in Hardeman County, Texas.
Seismic Activity
During the quarter ended March 31, 2006, the Company continued its ongoing
investment in acquiring and developing seismic data with respect to its
Colombian properties with shooting being completed on approximately 133 square
miles of prospect acreage during the quarter.
9
Capital Raising Activity
In April 2006, the Company sold, in a private placement, 5,533,333 shares of
common stock for gross proceeds of $16,599,999. In connection with the private
placement of shares, the Company paid to the placement agent commissions of
$1,162,000 and issued to the placement agent five year warrants to purchase
415,000 shares of common stock at $3.00 per share.
In May 2006, the Company repaid loans from its principal shareholder, in the
principal amount of $900,000, from the proceeds of the April 2006 private
placement.
In May 2006, the Company exercised its right to cause its outstanding 8%
Subordinated Convertible Notes, in the aggregate principal amount of $2,125,000,
to be converted into 2,125,000 shares of common stock.
RESULTS OF OPERATIONS
Oil and Gas Revenues. Total oil and gas revenues increased 49.5% to $666,172 in
the three months ended March 31, 2006 when compared to the three months ended
March 31, 2005. The increase in revenue is due to (1) increased production
resulting from the development of the Columbian fields and the new domestic
wells that have come on line during 2005, and (2) increases in oil and gas
prices. The Company had interests in 17 producing wells in Colombia and 14
producing wells in the U.S. during the 2006 quarter as compared to 11 producing
wells in Columbia and 7 producing wells in the U.S. during the 2005 quarter.
Average prices from sales were $50.85 per barrel of oil and $8.38 per mcf of gas
during the 2006 quarter as compared to $42.12 per barrel of oil and $5.33 per
mcf of gas during the 2005 quarter.
Columbia U.S. Total
--------- -------- --------
2006 Quarter
Oil sales $ 446,476 $ 18,038 $464,514
Gas sales - 201,658 201,658
2005 Quarter
Oil sales 323,892 21,855 345,747
Gas sales - 99,763 99,763
Lease Operating Expenses. Lease operating expenses, excluding joint venture
expenses relating to our Columbian operations discussed below, increased 14.0%
to $194,651 in the 2006 quarter from $170,773 in the 2005 quarter. The increase
in lease operating expenses was attributable to the increase in the number of
wells operated during the 2006 period (31 wells as compared to 18 wells).
Following is a summary comparison of lease operating expenses for the periods.
Columbia U.S. Total
--------- ------- --------
2006 Quarter $ 146,904 $47,747 $194,651
2005 Quarter 163,604 7,169 170,773
Joint Venture Expenses. The Company's allocable share of joint venture expenses
attributable to the Colombian Joint Venture totaled $49,478 during the 2006
quarter and $13,823 for the first quarter of 2005. The increase in joint venture
expenses was attributable to an increase in operational activities of the joint
venture in acquiring new concessions.
Depreciation and Depletion Expense. Depreciation and depletion expense was
$89,479 and $62,627 for the quarter ended March 31, 2006 and 2005, respectively.
The increase is due to increases in domestic and Colombian production.
10
General and Administrative Expenses. General and administrative expense
increased by 25.9% to $211,579 during the first quarter 2006 from $168,096 in
the first quarter 2005. The increase in general and administrative expense was
primarily attributable to professional fees to the auditors an fees incurred in
calculating the effects of FASB 133.
Other Expense. Other expense consists 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 foreign income taxes.
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 expenses, in total, increased from $29,326 in the first quarter of 2005 to
$247,206 in the first quarter of 2006. The increase in other expenses was
attributable to interest incurred on the convertible notes issued in May 2005
and deemed interest and related charges associated with the derivative liability
as well as an increase in foreign income taxes. During the 2005 period, other
expense was entirely attributable to interest accruing on a shareholder loan
($18,000) and income taxes attributable to operations in Colombia ($11,326).
During the 2006 period, other expense related primarily to deemed interest on
the derivative liability ($16,890), the net change in fair value of the
derivative liability ($103,077), interest accrued on the convertible notes
($42,500), interest accrued on the shareholder loan ($16,200) and Colombian
income taxes ($62,153). The decrease in interest on the shareholder loan was
attributable to a partial prepayment of the shareholder loan during 2005.
Subsequent to March 31, 2006, the shareholder loan, in the principal amount of
$900,000, was repaid in full from the proceeds of the Company's April 2006
private placement and, in May 2006, the subordinated convertible notes were
converted into common stock. Accordingly, interest expense is expected to
decrease substantially in, and following, the quarter ended June 30, 2006.
FINANCIAL CONDITION
Liquidity and Capital Resources. At March 31, 2006 the Company had a cash
balance of $1,262,811 and working capital deficit of $88,684 compared to a cash
balance of $1,724,100 and working capital of $1,771,722 at December 31, 2005.
The decrease in cash and working capital during the period was primarily
attributable to acquisitions of and investments in oil and gas properties and
the classification of $900,000 of shareholder loans as current liabilities at
March 31, 2006.
Derivative liabilities of $2,916,252 are recorded as current liabilities at
March 31, 2006 as compared to $2,813,175 at December 31, 2005 but are not
considered in computing working capital. The derivative liabilities represent
the deemed fair value of the embedded derivatives included in the subordinated
convertible notes and accompanying warrants that were issued during 2005 as
measured at March 31, 2006 and December 31, 2005. Included within the derivative
liabilities at March 31, 2006 was $2,073,943 attributable to the derivative
features in the subordinated convertible notes which amount is reflected as a
discount in the amount of the subordinated convertible note on the balance sheet
as compared to $2,090,833 at December 31, 2005.
Following the Company's April 2006 private placement, the Company repaid the
shareholder loan in full.
Operating cash flows for the 2006 quarter totaled $604,946 as compared to cash
provided by operations during the 2005 quarter of $72,938. The increase in
operating cash flow was primarily attributable to increased operating income
($104,809) and depreciation and depletion ($89,479), decreases in accounts
receivable, prepaid and other assets ($324,624) and increases in accounts
payable and accrued expenses ($181,269).
11
Investing activities used $1,066,235 during the 2006 quarter as compared to
$511,621 used during the 2005 quarter. The increase in funds used in investing
activities during the current quarter was primarily attributable to seismic
costs incurred in South America and drilling activity.
The Company had no financing activities during either the 2006 quarter or the
2005 quarter.
Subsequent to March 31, 2006, the Company completed a sale of 5,533,333 shares
of common stock for gross offering proceeds of $16,599,000. The Company paid
commissions totaling $1,162,000 in connection with the sale of common stock.
Long-Term Debt. At March 31, 2006, the Company had long-term debt of $92,306 as
compared to $975,416 at December 31, 2005. Long-term debt at March 31, 2006
consisted of a reserve for plugging costs of $41,249 and 8% subordinated
convertible notes in the principal amount of $2,125,000, recorded net of
discounts in the amount of $2,073,943 relating to the fair value of the embedded
derivatives included in the subordinated convertible notes. The change in
long-term debt was attributable to amortization of the discount on the
convertible notes and the reclassification of shareholder loans of $900,000 as
current liabilities.
In May 2006, the Company exercised its right to cause the 8% subordinated
convertible notes to be converted into common stock resulting in satisfaction in
the full of the notes, in the principal amount of $2,125,000, and the issuance
of 2,125,000 shares of common stock.
Capital and Exploration Expenditures and Commitments. The Company's principal
capital and exploration expenditures relate to our ongoing efforts to acquire,
drill and complete prospects. With the receipt of additional equity financing in
2003, 2004 and 2006 and the May 2005 sale of convertible notes, and the increase
in our revenues, profitability and operating cash flows, the Company expects
that future capital and exploration expenditures will be funded principally
through funds on hand and funds generated from operations.
During the first quarter of 2006, the Company invested approximately $1,066,000
for the acquisition and development of oil and gas properties, consisting of (1)
drilling of 3 domestic wells ($254,122), (2) drilling 2 wells in Colombia
($304,947), (3) acquisition of leases domestically ($99,923) and (4) seismic
activity in Colombia ($365,242).
At March 31, 2006, the Company's only material contractual obligations requiring
determinable future payments were a note payable to the Company's principal
shareholder, the 8% subordinated convertible notes and a lease relating to the
Company's executive offices which were unchanged when compared to the 2005 Form
10-KSB. As noted above, the shareholder loan was repaid in full and the
convertible notes were converted into common stock subsequent to March 31, 2006.
At March 31, 2006, the Company's acquisition and drilling budget for the balance
of 2006 totaled approximately $3,093,000, consisting of (1) $1,638,000 for
drilling of 20 wells in South America on the Cara Cara, Cabiona and Simon
concessions, (2) $1,015,000 to drill 5 domestic wells, and (3) $440,000 for
seismic in Colombia. The Company's 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.
12
Management anticipates that the Company's current financial resources, including
funding received from the April 2006 common stock offering, combined with our
increases in revenues over the past year will meet our anticipated objectives
and business operations, including our planned property acquisitions and
drilling activities, for at least the next 12 months without the need for
additional capital. Management continues to evaluate producing property
acquisitions as well as a number of drilling prospects. It is possible, although
not anticipated, that the Company may require and seek additional financing if
additional drilling prospects are pursued beyond those presently under
consideration.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements or guarantees of third party
obligations at March 31, 2006.
INFLATION
The Company believes that inflation has not had a significant impact on
operations since inception.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures under the supervision and with the participation of our chief
executive officer ("CEO") who also serves as chief financial officer. Based on
this evaluation, our management, including the CEO, concluded that our
disclosure controls and procedures were effective.
During the quarter ended March 31, 2006, there were no significant changes in
our internal controls over financial reporting that materially affected, or are
reasonably likely to materially affect, internal controls over financial
reporting.
In connection with the audit of our financial statements for the fiscal year
ended December 31, 2005, our independent registered public accounting firm
informed us that we have significant deficiencies constituting material
weaknesses as defined by the standards of the Public Company Accounting
Oversight Board. The material weaknesses were in our internal controls over
accounting for non-routine transactions as well as is in overall financial
reporting functions. The accounting firm noted that adequate segregation of
duties do not exist in our financial reporting process, as our President and CEO
also functions as our CFO. The President is performing these duties with
assistance from a part time consultant. Accordingly, the preparation of
financial statements and the related monitoring controls surrounding this
process have not been segregated.
The nature and size of our business have prevented us from being able to employ
sufficient resources to enable us to have an adequate segregation of duties
within our internal control system. We will continue to monitor and assess the
costs and benefits of additional staffing in the accounting and financial
reporting area.
13
PART II
ITEM 6. EXHIBITS
Exhibit
Number Description
------ -----------
31.1 Certification of CEO and CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
HOUSTON AMERICAN ENERGY CORP.
By: /s/ John Terwilliger
John Terwilliger
CEO and President
Date: May 12, 2006
14