Registration No. 333-134756
Filed Pursuant to Rule 424(b)(3)
PROSPECTUS
HOUSTON AMERICAN ENERGY CORP.
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8,264,583 Shares of Common Stock
This prospectus covers resales of shares of our common stock by certain
selling securityholders named herein. This prospectus also covers resales by
selling securityholders of shares of our common stock underlying warrants issued
to placement agents in connection with the placement of common stock and
convertible notes.
The selling securityholders may sell all or a portion of their securities
through public or private transactions at prevailing market prices or at
privately negotiated prices. We will not receive any part of the proceeds from
the sale of these shares by the selling securityholders.
Our common stock is traded on the OTC Electronic Bulletin Board under the
symbol "HUSA.OB". The last reported sale price of our common stock on the OTC
Electronic Bulletin Board on June 1, 2006 was $4.15 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PROSPECTUS DATED June 16, 2006
We will pay all expenses of this offering except for commissions, fees and
discounts of any underwriters, brokers, dealers or agents retained by the
selling securityholders. Estimated expenses payable in connection with this
offering are approximately $25,000. The aggregate proceeds to the selling
securityholders will be the purchase price of common stock sold less the
aggregate agents' commissions and underwriters' discounts, if any. We have
agreed to indemnify the selling securityholders and certain other persons
against certain liabilities, including liabilities under the Securities Act.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY US. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON
TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN OUR AFFAIRS SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
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About this Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Caution about Forward-Looking Statements. . . . . . . . . . . . . . . . . . . . . . . . 12
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . 12
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Management's Discussion and Analysis of Financial Condition and Results of Operations . 13
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . 33
Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . 34
Selling Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Where You Can Find More Information . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Index to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 45
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. The Selling Shareholders are offering to sell,
and seeking offers to buy, shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in the prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of common stock.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering appearing elsewhere in this prospectus and in our Financial Statements
and related notes and other documents incorporated herein by reference.
OUR COMPANY
Houston American Energy Corp. is an oil and gas exploration and production
company. In addition to seeking out oil and gas prospects using advanced
seismic techniques, we utilize the contacts of John F. Terwilliger, our sole
executive officer, to identify potential acquisition targets in the Onshore
Texas Gulf Coast Region of the State of Texas, where Mr. Terwilliger has been
involved in oil and gas exploration and production activities since 1983.
Further, we have through an interest in a limited liability company, interests
in multiple concessions in the South American country of Colombia. As a result,
we expect to be active in Colombia for the foreseeable future. Moreover, as
well as our own drilling activities and acquisition strategy, we may also
encourage others in the oil and gas industry to enter into partnerships or joint
ventures with us for the purpose of acquiring properties and conducting drilling
and exploration activities.
Our principal executive offices are located at 801 Travis Street, Suite 2020,
Houston, Texas 77007 and our telephone number is (713) 222-6966.
THE OFFERING
Securities offered:
Common stock 8,264,583 shares(1)
Common stock outstanding
before this offering 27,820,172 shares(2)
Common stock outstanding
after this offering 28,235,172 shares(3)
Use of proceeds We will not receive any proceeds from the sale of common stock
by the selling shareholders
OTCBB symbol HUSA
Risk Factors Purchase of the common stock offered hereby involves certain
risk, including risks associated with need for additional capital,
operating losses, uncertain value or decline in value of reserves,
dependence upon management and third parties, and operating
risks in the oil and gas industry, among others. See "Risk
Factors."
(1) Consists of (a) 7,849,583 shares presently outstanding, including 2,125,000
shares issued upon conversion of 8% Subordinated Convertible Notes and
191,250 shares issued upon conversion of $1.00 placement agent warrants,
and (b) 415,000 shares issuable upon exercise of $3.00 placement agent
warrants to purchase 415,000 shares of common stock.
(2) Shares outstanding as of June 1, 2006.
(3) Assumes exercise of 415,000 warrants.
3
RISK FACTORS
Investing in our securities involves risks. Before making an investment
decision, you should carefully consider the following risk factors, as well as
other information we include in this prospectus. Additional risks and
uncertainties not presently known to us or that we deem currently immaterial may
also impair our business operations. The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties that we are
unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occur, our business,
financial condition or results of operations could be materially and adversely
affected.
RISKS RELATED TO THE OIL AND NATURAL GAS INDUSTRY AND OUR BUSINESS
A SUBSTANTIAL OR EXTENDED DECLINE IN OIL AND NATURAL GAS PRICES MAY ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS AND OUR
ABILITY TO MEET OUR CAPITAL EXPENDITURE OBLIGATIONS AND FINANCIAL COMMITMENTS.
The price we receive for our oil and natural gas production heavily
influences our revenue, profitability, access to capital and future rate of
growth. 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 natural gas have been
volatile. These markets will likely continue to be volatile in the future. The
prices we receive for our production, and the levels of our production, depend
on numerous factors beyond our control. These factors include, but are not
limited to, the following:
- changes in global supply and demand for oil and natural gas;
- the actions of the Organization of Petroleum Exporting Countries, or
OPEC;
- the price and quantity of imports of foreign oil and natural gas;
- political conditions, including embargoes, in or affecting other
oil-producing activity;
- the level of global oil and natural gas exploration and
production activity;
- the level of global oil and natural gas inventories;
- weather conditions;
- technological advances affecting energy consumption; and
- the price and availability of alternative fuels.
Lower oil and natural gas prices may not only decrease our revenues on a
per unit basis but also may reduce the amount of oil and natural gas that we can
produce economically. Lower prices will also negatively impact the value of our
proved reserves. A substantial or extended decline in oil or natural gas prices
may materially and adversely affect our future business, financial condition,
results of operations, liquidity or ability to finance planned capital
expenditures.
A SUBSTANTIAL PERCENTAGE OF OUR PROPERTIES ARE UNDEVELOPED; THEREFORE THE RISK
ASSOCIATED WITH OUR SUCCESS IS GREATER THAN WOULD BE THE CASE IF THE MAJORITY OF
OUR PROPERTIES WERE CATEGORIZED AS PROVED DEVELOPED PRODUCING.
Because a substantial percentage of our properties are unproven
(approximately 99% by acreage), or proved undeveloped, we may require
significant additional capital to prove and develop such properties before they
may become productive. Further, because of the inherent uncertainties associated
with drilling for oil and gas, some of these properties may never be developed
to the extent that they result in positive cash flow. Even if we are successful
in our development efforts, it could take several years for a significant
portion of our undeveloped properties to be converted to positive cash flow.
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While our current business plan is to fund the development costs with funds
from our April 2006 private placement of common stock and cash flow from our
other producing properties, if such funds and cash flow are not sufficient we
may be forced to seek alternative sources for cash, through the issuance of
additional equity or debt securities, increased borrowings or other means.
DRILLING FOR AND PRODUCING OIL AND NATURAL GAS ARE HIGH RISK ACTIVITIES WITH
MANY UNCERTAINTIES THAT COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION
OR RESULTS OF OPERATIONS.
Our future success will depend on the success of our exploitation,
exploration, development and production activities. Our oil and natural gas
exploration and production activities are subject to numerous risks beyond our
control, including the risk that drilling will not result in commercially viable
oil or natural gas production. Our decisions to purchase, explore, develop or
otherwise exploit prospects or properties will depend in part on the evaluation
of data obtained through geophysical and geological analyses, production data
and engineering studies, the results of which are often inconclusive or subject
to varying interpretations. Please read "-Reserve estimates depend on many
assumptions that may turn out to be inaccurate" (below) for a discussion of the
uncertainty involved in these processes. Our cost of drilling, completing and
operating wells is often uncertain before drilling commences. Overruns in
budgeted expenditures are common risks that can make a particular project
uneconomical. Further, many factors may curtail, delay or cancel drilling,
including the following:
- delays imposed by or resulting from compliance with regulatory
requirements;
- pressure or irregularities in geological formations;
- shortages of or delays in obtaining equipment and qualified personnel;
- equipment failures or accidents;
- adverse weather conditions;
- reductions in oil and natural gas prices;
- title problems; and
- limitations in the market for oil and natural gas.
IF OIL AND NATURAL GAS PRICES DECREASE, WE MAY BE REQUIRED TO TAKE WRITE-DOWNS
OF THE CARRYING VALUES OF OUR OIL AND NATURAL GAS PROPERTIES, POTENTIALLY
NEGATIVELY IMPACTING THE TRADING VALUE OF OUR SECURITIES.
Accounting rules require that we review periodically the carrying value of
our oil and natural gas properties for possible impairment. Based on specific
market factors and circumstances at the time of prospective impairment reviews,
and the continuing evaluation of development plans, production data, economics
and other factors, we may be required to write down the carrying value of our
oil and natural gas properties. A write-down could constitute a non-cash charge
to earnings. It is likely the cumulative effect of a write-down could also
negatively impact the trading price of our securities.
RESERVE ESTIMATES DEPEND ON MANY ASSUMPTIONS THAT MAY TURN OUT TO BE INACCURATE.
ANY MATERIAL INACCURACIES IN THESE RESERVE ESTIMATES OR UNDERLYING ASSUMPTIONS
WILL MATERIALLY AFFECT THE QUANTITIES AND PRESENT VALUE OF OUR RESERVES.
The process of estimating oil and natural gas reserves is complex. It
requires interpretations of available technical data and many assumptions,
including assumptions relating to economic factors. Any significant inaccuracies
in these interpretations or assumptions could materially affect the estimated
quantities and present value of reserves shown in this report.
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In order to prepare our estimates, we must project production rates and
timing of development expenditures. We must also analyze available geological,
geophysical, production and engineering data. The extent, quality and
reliability of this data can vary. The process also requires economic
assumptions about matters such as oil and natural gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds.
Therefore, estimates of oil and natural gas reserves are inherently imprecise.
Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves most likely will vary from our estimates. Any
significant variance could materially affect the estimated quantities and
present value of our reserves. In addition, we may adjust estimates of proved
reserves to reflect production history, results of exploration and development,
prevailing oil and natural gas prices and other factors, many of which are
beyond our control.
You should not assume that the present value of future net revenues from
our proved reserves, as reported from time to time, is the current market value
of our estimated oil and natural gas reserves. In accordance with SEC
requirements, we generally base the estimated discounted future net cash flows
from our proved reserves on prices and costs on the date of the estimate. Actual
future prices and costs may differ materially from those used in the present
value estimate. If future values decline or costs increase it could negatively
impact our ability to finance operations, and individual properties could cease
being commercially viable, affecting our decision to continue operations on
producing properties or to attempt to develop properties. All of these factors
would have a negative impact on earnings and net income, and most likely the
trading price of our securities.
WE ARE DEPENDENT UPON THIRD PARTY OPERATORS OF OUR OIL AND GAS PROPERTIES.
Under the terms of the Operating Agreements related to our oil and gas
properties, third parties act as the operator of our oil and gas wells and
control the drilling activities to be conducted on our properties. Therefore, we
have limited control over certain decisions related to activities on our
properties, which could affect our results of operations. Decisions over which
we have limited control include:
- the timing and amount of capital expenditures;
- the timing of initiating the drilling and recompleting of wells;
- the extent of operating costs; and
- the level of ongoing production.
PROSPECTS THAT WE DECIDE TO DRILL MAY NOT YIELD OIL OR NATURAL GAS IN
COMMERCIALLY VIABLE QUANTITIES.
Our prospects are properties on which we have identified what we believe,
based on available seismic and geological information, to be indications of oil
or natural gas. Our prospects are in various stages of evaluation, ranging from
a prospect that is ready to drill to a prospect that will require substantial
additional seismic data processing and interpretation. There is no way to
predict in advance of drilling and testing whether any particular prospect will
yield oil or natural gas in sufficient quantities to recover drilling or
completion costs or to be economically viable. This risk may be enhanced in our
situation, due to the fact that a significant percentage (99%) of our reserves
are currently unproved reserves. The use of seismic data and other technologies
and the study of producing fields in the same area will not enable us to know
conclusively prior to drilling whether oil or natural gas will be present or, if
present, whether oil or natural gas will be present in commercial quantities. We
cannot assure you that the analogies we draw from available data from other
wells, more fully explored prospects or producing fields will be applicable to
our drilling prospects.
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WE MAY INCUR SUBSTANTIAL LOSSES AND BE SUBJECT TO SUBSTANTIAL LIABILITY CLAIMS
AS A RESULT OF OUR OIL AND NATURAL GAS OPERATIONS.
We are not insured against all risks. Losses and liabilities arising from
uninsured and underinsured events could materially and adversely affect our
business, financial condition or results of operations. Our oil and natural gas
exploration and production activities are subject to all of the operating risks
associated with drilling for and producing oil and natural gas, including the
possibility of:
- environmental hazards, such as uncontrollable flows of oil,
natural gas, brine, well fluids, toxic gas or other pollution into the
environment, including groundwater and shoreline contamination;
- abnormally pressured formations;
- mechanical difficulties, such as stuck oil field drilling and
service tools and casing collapse;
- fires and explosions;
- personal injuries and death; and
- natural disasters.
Any of these risks could adversely affect our ability to conduct operations
or result in substantial losses to our company. We may elect not to obtain
insurance if we believe that the cost of available insurance is excessive
relative to the risks presented. In addition, pollution and environmental risks
generally are not fully insurable. If a significant accident or other event
occurs and is not fully covered by insurance, then it could adversely affect us.
WE ARE SUBJECT TO COMPLEX LAWS THAT CAN AFFECT THE COST, MANNER OR FEASIBILITY
OF DOING BUSINESS.
Exploration, development, production and sale of oil and natural gas are
subject to extensive federal, state, local and international regulation. We may
be required to make large expenditures to comply with governmental regulations.
Matters subject to regulation include:
- discharge permits for drilling operations;
- drilling bonds;
- reports concerning operations;
- the spacing of wells;
- unitization and pooling of properties; and
- taxation.
Under these laws, we could be liable for personal injuries, property damage
and other damages. Failure to comply with these laws also may result in the
suspension or termination of our operations and subject us to administrative,
civil and criminal penalties. Moreover, these laws could change in ways that
substantially increase our costs. Any such liabilities, penalties, suspensions,
terminations or regulatory changes could materially adversely affect our
financial condition and results of operations.
OUR OPERATIONS MAY INCUR SUBSTANTIAL LIABILITIES TO COMPLY WITH THE
ENVIRONMENTAL LAWS AND REGULATIONS.
Our oil and natural gas operations are subject to stringent federal, state
and local laws and regulations relating to the release or disposal of materials
into the environment or otherwise relating to environmental protection. These
laws and regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentration of substances that
can be released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, and impose substantial
7
liabilities for pollution resulting from our operations. Failure to comply with
these laws and regulations may result in the assessment of administrative, civil
and criminal penalties, incurrence of investigatory or remedial obligations or
the imposition of injunctive relief. Changes in environmental laws and
regulations occur frequently, and any changes that result in more stringent or
costly waste handling, storage, transport, disposal or cleanup requirements
could require us to make significant expenditures to maintain compliance, and
may otherwise have a material adverse effect on our results of operations,
competitive position or financial condition as well as the industry in general.
Under these environmental laws and regulations, we could be held strictly liable
for the removal or remediation of previously released materials or property
contamination regardless of whether we were responsible for the release or if
our operations were standard in the industry at the time they were performed.
OUR OPERATIONS IN COLOMBIA ARE SUBJECT TO RISKS RELATING TO POLITICAL AND
ECONOMIC INSTABILITY.
We currently have interests in multiple oil and gas concessions in Colombia
and anticipate that operations in Colombia will constitute a substantial element
of our strategy going forward. The political climate in Colombia is unstable
and could be subject to radical change over a very short period of time. In the
event of a significant negative change in the political or economic climate in
Colombia, we may be forced to abandon or suspend our operations in Colombia.
UNLESS WE REPLACE OUR OIL AND NATURAL GAS RESERVES, OUR RESERVES AND PRODUCTION
WILL DECLINE, WHICH WOULD ADVERSELY AFFECT OUR CASH FLOWS AND INCOME.
Unless we conduct successful development, exploitation and exploration
activities or acquire properties containing proved reserves, our proved reserves
will decline as those reserves are produced. Producing oil and natural gas
reservoirs generally are characterized by declining production rates that vary
depending upon reservoir characteristics and other factors. Our future oil and
natural gas reserves and production, and, therefore our cash flow and income,
are highly dependent on our success in efficiently developing and exploiting our
current reserves and economically finding or acquiring additional recoverable
reserves. If we are unable to develop, exploit, find or acquire additional
reserves to replace our current and future production, our cash flow and income
will decline as production declines, until our existing properties would be
incapable of sustaining commercial production.
OUR SUCCESS DEPENDS ON OUR MANAGEMENT TEAM AND OTHER KEY PERSONNEL, THE LOSS OF
ANY OF WHOM COULD DISRUPT OUR BUSINESS OPERATIONS.
Our success will depend on our ability to retain John F. Terwilliger, our
sole executive officer, and to attract other experienced management and
non-management employees, including engineers, geoscientists and other technical
and professional staff. We will depend, to a large extent, on the efforts,
technical expertise and continued employment of such personnel and members of
our management team. If members of our management team should resign or we are
unable to attract the necessary personnel, our business operations could be
adversely affected.
THE UNAVAILABILITY OR HIGH COST OF DRILLING RIGS, EQUIPMENT, SUPPLIES, PERSONNEL
AND OIL FIELD SERVICES COULD ADVERSELY AFFECT OUR ABILITY TO EXECUTE ON A TIMELY
BASIS OUR EXPLORATION AND DEVELOPMENT PLANS WITHIN OUR BUDGET.
Shortages or the high cost of drilling rigs, equipment, supplies or
personnel could delay or adversely affect our development and exploration
operations. As the price of oil and natural gas increases, the demand for
production equipment and personnel will likely also increase, potentially
resulting, at least in the near-term, in shortages of equipment and personnel.
In addition, larger producers may be more likely to secure access to such
equipment by virtue of offering drilling companies more lucrative terms. If we
are unable to acquire access to such resources, or can obtain access only at
higher prices, not only would this potentially delay our ability to convert our
reserves into cash flow, but could also significantly increase the cost of
producing those reserves, thereby negatively impacting anticipated net income.
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IF OUR ACCESS TO MARKETS IS RESTRICTED, IT COULD NEGATIVELY IMPACT OUR
PRODUCTION, OUR INCOME AND ULTIMATELY OUR ABILITY TO RETAIN OUR LEASES.
Market conditions or the unavailability of satisfactory oil and natural gas
transportation arrangements may hinder our access to oil and natural gas markets
or delay our production. The availability of a ready market for our oil and
natural gas production depends on a number of factors, including the demand for
and supply of oil and natural gas and the proximity of reserves to pipelines and
terminal facilities. Our ability to market our production depends in substantial
part on the availability and capacity of gathering systems, pipelines and
processing facilities owned and operated by third parties. Our failure to obtain
such services on acceptable terms could materially harm our business.
We may operate in areas with limited or no access to pipelines, thereby
necessitating delivery by other means, such as trucking, or requiring
compression facilities. Such restrictions on our ability to sell our oil or
natural gas have several adverse affects, including higher transportation costs,
fewer potential purchasers (thereby potentially resulting in a lower selling
price) or, in the event we were unable to market and sustain production from a
particular lease for an extended time, possibly causing us to lose a lease due
to lack of production.
WE MAY NEED ADDITIONAL FINANCING TO SUPPORT OPERATIONS AND FUTURE CAPITAL
COMMITMENTS.
While we presently believe that our operating cash flows and funds on hand
will support our ongoing operations and anticipated future capital requirements,
a number of factors could result in our needing additional financing, including
reductions in oil and natural gas prices, declines in production, unexpected
developments in operations that could decrease our revenues, increase our costs
or require additional capital contributions and commitments to new acquisition
or drilling programs. We have no commitments to provide any additional
financing, if needed, and may be limited in our ability to obtain the capital
necessary to support operations, complete development, exploitation and
exploration programs or carry out new acquisition or drilling programs. We have
not thoroughly investigated whether this capital would be available, who would
provide it, and on what terms. If we are unable, on acceptable terms, to raise
the required capital, our business may be seriously harmed or even terminated.
COMPETITION IN THE OIL AND NATURAL GAS INDUSTRY IS INTENSE, WHICH MAY ADVERSELY
AFFECT OUR ABILITY TO COMPETE.
We operate in a highly competitive environment for acquiring properties,
marketing oil and natural gas and securing trained personnel. Many of our
competitors possess and employ financial, technical and personnel resources
substantially greater than ours, which can be particularly important in the
areas in which we operate. Those companies may be able to pay more for
productive oil and natural gas properties and exploratory prospects and to
evaluate, bid for and purchase a greater number of properties and prospects than
our financial or personnel resources permit. Our ability to acquire additional
prospects and to find and develop reserves in the future will depend on our
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. Also, there is substantial
competition for capital available for investment in the oil and natural gas
industry. We may not be able to compete successfully in the future in acquiring
prospective reserves, developing reserves, marketing hydrocarbons, attracting
and retaining quality personnel and raising additional capital.
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RISKS RELATED TO OUR COMMON STOCK
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, AND THIS MAY MAKE IT
DIFFICULT FOR YOU TO RESELL COMMON STOCK WHEN YOU WANT OR AT PRICES YOU FIND
ATTRACTIVE.
The price of our common stock quoted on the OTCBB constantly changes. We
expect that the market price of our common stock will continue to fluctuate.
Our stock price may fluctuate as a result of a variety of factors, many of
which are beyond our control. These factors include:
- quarterly variations in our operating results;
- operating results that vary from the expectations of management,
securities analysts and investors;
- changes in expectations as to our future financial performance;
- announcements by us, our partners or our competitors of leasing
and drilling activities;
- the operating and securities price performance of other companies
that investors believe are comparable to us;
- future sales of our equity or equity-related securities;
- changes in general conditions in our industry and in the economy,
the financial markets and the domestic or international political
situation;
- fluctuations in oil and gas prices;
- departures of key personnel; and
- regulatory considerations.
In addition, in recent years, the stock market in general has experienced
extreme price and volume fluctuations. This volatility has had a significant
effect on the market price of securities issued by many companies for reasons
often unrelated to their operating performance. These broad market fluctuations
may adversely affect our stock price, regardless of our operating results.
SHARES OF OUR COMMON STOCK MAY BE "PENNY STOCKS".
If the market price per share of our common stock is less than $5.00, the
shares of our common stock will be "penny stocks" as defined in the Exchange
Act. As a result, an investor may find it more difficult to dispose of or obtain
accurate quotations as to the price of the shares of our common stock. In
addition, the "penny stock" rules adopted by the SEC under the Exchange Act
subject the sale of shares of our common stock to regulations which impose sales
practice requirements on broker-dealers. For example, broker-dealers selling
penny stocks must, prior to effecting the transaction, provide their customers
with a document that discloses the risks of investing in penny stocks.
Furthermore, if the person purchasing the securities is someone other than
an accredited investor or an established customer of the broker-dealer, the
broker-dealer must also approve the potential customer's account by obtaining
information concerning the customer's financial situation, investment experience
and investment objectives. The broker-dealer must also make a determination
whether the transaction is suitable for the customer and whether the customer
has sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in penny stocks.
Accordingly, the SEC's rules may limit the number of potential purchasers of
shares of our common stock. Moreover, various state securities laws impose
restrictions on transferring "penny stocks," and, as a result, investors in our
common stock may have their ability to sell their shares impaired.
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THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY AFFECT OUR
STOCK PRICE.
Future sales of substantial amounts of our common stock or equity-related
securities in the public market or privately, or the perception that such sales
could occur, could adversely affect prevailing trading prices of our common
stock and could impair our ability to raise capital through future offerings of
equity or equity-related securities. No prediction can be made as to the
effect, if any, that future sales of shares of common stock or the availability
of shares of common stock for future sale, will have on the trading price of our
common stock.
OUR CHARTER AND BYLAWS, AS WELL AS PROVISIONS OF DELAWARE LAW, COULD MAKE IT
DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY AND ALSO COULD LIMIT THE
PRICE THAT INVESTORS ARE WILLING TO PAY IN THE FUTURE FOR SHARES OF OUR COMMON
STOCK.
Delaware corporate law and our charter and bylaws contain provisions that
could delay, deter or prevent a change in control of our company or our
management. These provisions could also discourage proxy contests and make it
more difficult for our stockholders to elect directors and take other corporate
actions without the concurrence of our management or board of directors. These
provisions:
- authorize our board of directors to issue "blank check" preferred
stock, which is preferred stock that can be created and issued by our
board of directors, without stockholder approval, with rights senior
to those of our common stock;
- provide for a staggered board of directors and three-year terms
for directors, so that no more than one-third of our directors could
be replaced at any annual meeting;
- provide that directors may be removed only for cause; and
- establish advance notice requirements for submitting nominations
for election to the board of directors and for proposing matters that
can be acted upon by stockholders at a meeting.
We are also subject to anti-takeover provisions under Delaware law, which
could also delay or prevent a change of control. Taken together, these
provisions of our charter, bylaws and Delaware law may discourage transactions
that otherwise could provide for the payment of a premium over prevailing market
prices of our common stock and also could limit the price that investors are
willing to pay in the future for shares of our common stock.
OUR MANAGEMENT OWNS A SIGNIFICANT AMOUNT OF OUR COMMON STOCK, GIVING THEM
INFLUENCE OR CONTROL IN CORPORATE TRANSACTIONS AND OTHER MATTERS, AND THEIR
INTERESTS COULD DIFFER FROM THOSE OF OTHER SHAREHOLDERS.
At June 1, 2006, our directors and executive officer, owned approximately
46 percent of our outstanding common stock. As a result, our current directors
and executive officer are in a position to significantly influence or control
the outcome of matters requiring a shareholder vote, including the election of
directors, the adoption of any amendment to our certificate of incorporation or
bylaws, and the approval of mergers and other significant corporate
transactions. Such level of control of the company may delay or prevent a change
of control on terms favorable to the other shareholders and may adversely affect
the voting and other rights of other shareholders.
11
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Business" and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in this prospectus that are not
historical facts. When used in this prospectus, the words "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "seeks," "should" or "will" or the negative of these terms or similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors."
USE OF PROCEEDS
The selling securityholders will receive all of the proceeds from the sale of
the common shares sold under this prospectus. We will not receive any proceeds
from the sale of these securities.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Since January 18, 2002, our Common Stock has been listed on the over-the-counter
electronic bulletin board ("OTCBB") under the symbol "HUSA". The following
table sets forth the range of high and low bid prices for each quarter during
the past two fiscal years.
High Low
------ ------
Calendar Year 2006
First Quarter . . . . . . . . 3.85 2.90
Calendar Year 2005
Fourth Quarter. . . . . . . . 3.50 2.65
Third Quarter . . . . . . . . 2.75 1.00
Second Quarter. . . . . . . . 1.25 0.76
First Quarter . . . . . . . . 1.00 0.78
Calendar Year 2004
Fourth Quarter. . . . . . . . 1.05 0.83
Third Quarter . . . . . . . . 1.10 0.83
Second Quarter. . . . . . . . 1.35 0.60
First Quarter . . . . . . . . 1.00 0.65
The quotations reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not represent actual transactions.
At June 1, 2006, the closing bid price of the Common Stock was $4.10.
As of June 1, 2006, there were approximately 972 record holders of our Common
Stock.
12
DIVIDEND POLICY
We have not paid dividends in the past and we intend to retain earnings, if any,
and will not pay cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements, general business conditions and such other
factors as the board of directors may deem relevant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Houston American Energy was incorporated in April 2001, for the purposes of
seeking oil and gas exploration and development prospects. Since inception, we
have sought out prospects utilizing the expertise and business contacts of John
F. Terwilliger, our sole executive officer. Through the third quarter of 2002,
the acquisition targets were in the Gulf Coast region of Texas and Louisiana,
where Mr. Terwilliger has been involved in oil and gas exploration for many
years. In the fourth quarter 2002, we initiated international efforts through a
Colombian joint venture more fully described below. Domestically and
internationally, the strategy is to be a non-operating partner with exploration
and production companies that have much larger resources and operations.
OVERVIEW OF OPERATIONS
Our operations are exclusively devoted to natural gas and oil exploration and
production.
Our focus, to date and for the foreseeable future, is the identification of oil
and gas drilling prospects and participation in the drilling and production of
prospects. We typically identify prospects and assemble various drilling
partners to participate in, and fund, drilling activities. We may retain an
interest in a prospect for our services in identifying and assembling prospects
without any contribution on our part to drilling and completion costs or we may
contribute to drilling and completion costs based on our proportionate interest
in a prospect.
We derive our revenues from our interests in oil and gas production sold from
prospects in which we own an interest, whether through royalty interests,
working interest or other arrangements. Our revenues vary directly based on a
combination of production volumes from wells in which we own an interest, market
prices of oil and natural gas sold and our percentage interest in each prospect.
Our well operating expenses vary depending upon the nature of our interest in
each prospect. We may bear no interest or a proportionate interest in the costs
of drilling, completing and operating prospects on which we own an interest.
Other than well drilling, completion and operating expenses, our principal
operating expenses relate to our efforts to identify and secure prospects,
comply with our various reporting obligations as a publicly held company and
general overhead expenses.
13
Business Developments During 2005
Drilling Activities
During 2005, we drilled 4 successful on-shore domestic wells as follows:
- In May 2005, a well was drilled on the South Sibley Prospect in Webster
Parish, Louisiana with multiple pay sands apparently identified. Sales from
the well commenced June 28, 2005. We have a 7.5% working interest at an
8.3% net revenue interest carried to point of sales for the well.
- In April 2005, the Baronet #2 well was drilled on the Crowley Prospect in
Acadia Parish, Louisiana. The well tested the Hayes Sand and flanks a
natural gas well that produced 1.6 BCF of natural gas from the Hayes Sand.
After logging 21-feet of apparent net pay, hole conditions deteriorated
before logging could be completed. The well was completed and production
began in June 2005. We have a 3% working interest and 2.25% net revenue
interest until payout for the well.
- In December 2005, the Broussard #1 well was drilled on the Sugarland
Prospect in Vermillion Parish, Louisiana with multiple pay sands apparently
indicated. The well was completed in January 2006 and production sales are
expected to begin in March 2006. We have an 8.25% working interest with a
6.1875% net revenue interest, subject to a 25% working interest back-in at
payout.
- In November 2005, the Weil #1 well was drilled on the Hog Heaven Prospect
in Jim Hogg County, Texas with multiple pay sands indicated. The well was
completed in January 2006 and production sales are expected to begin in
March 2006. We have a 4.375% working interest, subject to payment of
5.8334% of costs to the casing point in the first well.
We had no dry holes drilled during 2005.
During 2005, we drilled 10 international wells in South America as follows:
- Drilling of 9 offset wells on the Cara Cara concession in Colombia was
completed with production commencing on the Bengala #4, #5, #6, #7ST and #8
and the Jaguar #5, #T5, #T6 and #T7. We hold a 1.59% working interest in
each of the wells subject to a 30% reversionary interest to Ecopetrol at
payout.
- An oil well, the Tambaqui #5, was drilled and successfully completed under
the Tambaqui Association Contract in Columbia and began production in May
2005. We hold a 12.6% working interest and an 11.59% net revenue interest
in the well.
Leasehold Activities
During 2005, we invested approximately $506,837 for the acquisition of oil and
gas properties, consisting of (1) acquisition, by Hupecol, of the Surimena
concession covering approximately 108 square miles, (2) acquisition of a 8.25%
interest in the Sugarland Prospect, (3) acquisition of a 4.375% interest in the
Hog Heaven Prospect, (4) acquisition of a 15% interest in the West Fargo
Prospect, and (5) acquisition of a 15% interest in the Obenhaus Prospect.
14
Other Developments
Seismic surveying began on our Cara Cara concession in Colombia as part of our
planned delineation of additional drilling prospects on the concession. Seismic
surveying was completed on our Dorotea and Cabiona concessions to establish
drilling prospect locations.
In May 2005, we sold $2,125,000 of 8% Subordinated Convertible Notes Due 2010 to
multiple investors to provide funding to support our lease acquisition and
drilling activities in the U.S. and Colombia. In connection with the placement
of the convertible notes, we issued to the placement agent in the transaction a
three year warrant to purchase 191,250 shares of our common stock at $1.00 per
share and paid commissions totaling $127,500. Pursuant to the terms of the
placement of the convertible notes, we entered into a Registration Rights
Agreement with the purchasers of the notes and, pursuant to the Registration
Rights Agreement, filed a registration statement with the Securities and
Exchange Commission covering the resale of the shares of common stock underlying
the convertible notes as well as the shares issuable upon exercise of the
placement agent warrant.
In August 2005, we appointed three additional directors, adopted a stock option
plan and fixed the compensation of our non-employee directors.
BUSINESS DEVELOPMENTS DURING 2006
Drilling Activity
During the quarter ended March 31, 2006, we 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, we 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, we had plans to drill 5 wells during the balance of 2006.
During the quarter ended March 31, 2006, we drilled 2 international wells in
Colombia, both of which were dry holes.
At March 31, 2006, we 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, we 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.
15
Seismic Activity
During the quarter ended March 31, 2006, we continued our ongoing investment in
acquiring and developing seismic data with respect to our Colombian properties
with shooting being completed on approximately 133 square miles of prospect
acreage during the quarter.
Capital Raising Activity
In April 2006, we 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, we 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, we repaid loans from our principal shareholder, in the principal
amount of $900,000, from the proceeds of the April 2006 private placement.
In May 2006, we exercised our right to cause our 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.
CRITICAL ACCOUNTING POLICIES
The following describes the critical accounting policies used in reporting our
financial condition and results of operations. In some cases, accounting
standards allow more than one alternative accounting method for reporting, such
is the case with accounting for oil and gas activities described below. In
those cases, our reported results of operations would be different should we
employ an alternative accounting method.
Full Cost Method of Accounting for Oil and Gas Activities. The Securities and
Exchange Commission ("SEC") prescribes in Regulation S-X the financial
accounting and reporting standards for companies engaged in oil and gas
producing activities. Two methods are prescribed: the successful efforts method
and the full cost method. We follow the full cost method of accounting for oil
and gas property acquisition, exploration and development activities. Under
this method, all productive and nonproductive costs incurred in connection with
the exploration for and development of oil and gas reserves are capitalized.
Capitalized costs include lease acquisition, geological and geophysical work,
delay rentals, costs of drilling, completing and equipping successful and
unsuccessful oil and gas wells and related internal costs that can be directly
identified with acquisition, exploration and development activities, but does
not include any cost related to production, general corporate overhead or
similar activities. Gain or loss on the sale or other disposition of oil and
gas properties is not recognized unless significant amounts of oil and gas
reserves are involved. No corporate overhead has been capitalized as of
December 31, 2005. The capitalized costs of oil and gas properties, plus
estimated future development costs relating to proved reserves are amortized on
a units-of-production method over the estimated productive life of the reserves.
Unevaluated oil and gas properties are excluded from this calculation. The
capitalized oil and gas property costs, less accumulated amortization, are
limited to an amount (the ceiling limitation) equal to the sum of: (a) the
present value of estimated future net revenues from the projected production of
proved oil and gas reserves, calculated at prices in effect as of the balance
sheet date (with consideration of price changes only to the extent provided by
contractual arrangements) and a discount factor of 10%; (b) the cost of unproved
and unevaluated properties excluded from the costs being amortized; (c) the
lower of cost or estimated fair value of unproved properties included in the
costs being amortized; and (d) related income tax effects. Excess costs are
charged to proved properties impairment expense.
16
Unevaluated Oil and Gas Properties. Unevaluated oil and gas properties consist
principally of our cost of acquiring and evaluating undeveloped leases, net of
an allowance for impairment and transfers to depletable oil and gas properties.
When leases are developed, expire or are abandoned, the related costs are
transferred from unevaluated oil and gas properties to depletable oil and gas
properties. Additionally, we review the carrying costs of unevaluated oil and
gas properties for the purpose of determining probable future lease expirations
and abandonments, and prospective discounted future economic benefit
attributable to the leases. We record an allowance for impairment based on a
review of present value of future cash flows. Any resulting charge is made to
operations and reflected as a reduction of the carrying value of the recorded
asset. Unevaluated oil and gas properties not subject to amortization include
the following at December 31, 2005 and March 31, 2006:
At December 31, 2005 At March 31, 2006
--------------------- ------------------
Acquisition costs $ 44,548 $ 98,807
Evaluation costs 151,346 723,900
--------------------- ------------------
Total $ 195,894 $ 822,707
===================== ==================
The carrying value of unevaluated oil and gas prospects include $151,039 and
$706,353 expended for properties in South America at December 31, 2005 and March
31, 2006, respectively. We are maintaining our interest in these properties and
development has or is anticipated to commence within the next twelve months.
Subordinated Convertible Notes and Warrants - Derivative Financial Instruments.
The Subordinated Convertible Notes and Warrants issued during 2005 have been
accounted for in accordance with SFAS 133 and EITF No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.
We have identified the following instruments and derivatives requiring
evaluation and accounting under the relevant guidance applicable to financial
derivatives:
- Subordinated Convertible Notes
- Conversion feature
- Conversion price reset feature
- Company's optional redemption right
- Warrants
- Warrants exercise price reset feature
We have identified the conversion feature; the conversion price reset feature
and our optional early redemption right within the Convertible Notes to
represent embedded derivatives. These embedded derivatives have been bifurcated
from their respective host debt contracts and accounted for as derivative
liabilities in accordance with EITF 00-19. The conversion feature, the
conversion price reset feature and our optional early redemption right within
the Convertible Notes have been bundled together as a single hybrid compound
instrument in accordance with SFAS No. 133 Derivatives Implementation Group
Implementation Issue No. B-15, "Embedded Derivatives: Separate Accounting for
Multiple Derivative Features Embedded in a Single Hybrid Instrument."
We have identified the common stock warrant to be a detachable derivative. The
warrant exercise price reset provision is an embedded derivative within the
common stock warrant. The common stock warrant and the embedded warrant
exercise price reset provision have been accounted for as a separate single
hybrid compound instrument.
17
The single compound embedded derivatives within Subordinated Convertible Notes
and the derivative liability for Warrants have been recorded at fair value at
the date of issuance (May 4, 2005); and are marked-to-market each quarter with
changes in fair value recorded to our income statement as "Net change in fair
value of derivative liabilities." We have utilized a third party valuation firm
to fair value the single compound embedded derivatives under the following
methods: a layered discounted probability-weighted cash flow approach for the
single compound embedded derivatives within Subordinated Convertible Notes; and
the Black-Scholes model for the derivative liability for Warrants based on a
probability weighted exercise price".
The fair value of the derivative liabilities are subject to the changes in the
trading value of our common stock. As a result, our financial statements may
fluctuate from quarter-to-quarter based on factors, such as the price of our
stock at the balance sheet date, the amount of shares converted by note holders
and/or exercised by warrant holders. Consequently, our financial position and
results of operations may vary from quarter-to-quarter based on conditions other
than our operating revenues and expenses.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
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. We 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. Our 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.
18
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.
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 and 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.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Oil and Gas Revenues. Total oil and gas revenues increased $1,598,394, or
135.2%, to $2,780,457 in fiscal 2005 compared to $1,182,063 in fiscal 2004. The
increase in revenue is due to (1) increased production resulting from the
development of the Colombian fields and the new domestic wells that have come on
line during 2004 and 2005 and (2) increases in oil prices. We had interests in
17 producing wells in Colombia and 14 producing wells in North America during
2005 as compared to 8 producing wells in Colombia and 8 producing wells in North
America during 2004. Average prices from sales were $47.89 per barrel of oil
and $7.83 per mcf of gas during 2005 as compared to $33.31 per barrel of oil and
$5.43 per mcf of gas during 2004. Following is a summary comparison, by region,
of oil and gas sales for the periods.
Colombia North Total
America
---------- -------- ----------
Year ended 2005
Oil sales $2,041,072 $ 75,115 $2,116,187
Gas sales 0 664,270 664,270
Year ended 2004
Oil sales $ 808,472 $ 39,376 $ 847,848
Gas sales 0 334,215 334,215
19
Other Revenues. Other revenues, consisting of commission income and interest
income, increased by $88,133 to $94,191 in fiscal 2005 as compared to $6,058 in
fiscal 2004. The increase in other revenues was attributable to an increase in
interest income earned as a result of higher balances held following the 2005
placement of Subordinated Convertible Notes and the receipt during 2005 of a
one-time commission of $60,000.
Lease Operating Expenses. Lease operating expenses, excluding joint venture
expenses relating to our Colombia operations discussed below, increased 130.5%
to $953,624 in 2005 from $413,723 in 2004. The increase in lease operating
expenses was attributable to the increase in the number of wells operated during
2005. Following is a summary comparison of lease operating expenses for the
years ended December 31, 2005 and 2004.
Colombia North Total
America
--------- -------- ----------
Year ended 2005 $ 874,082 $ 79,542 $953,624
Year ended 2004 354,448 59,275 413,723
Joint Venture Expenses. Joint venture expenses totaled $61,500 in 2005 compared
to $41,944 in 2004. The joint venture expenses represent our allocable share of
the indirect field operating and region administrative expenses billed by the
operator of the Colombian concessions. The increase in joint venture expenses
was attributable to increased activities associated with acquiring new
concessions in Colombia.
Depreciation and Depletion Expense. Depreciation and depletion expense
increased by 71.5% to $363,196 in fiscal 2005 when compared to $211,759 in 2004.
The increase in depreciation and depletion expense was primarily attributable to
the increased production from new wells coming on line during 2004 and 2005.
General and Administrative Expenses. General and administrative expense
increased by 150.7% to $835,829 in 2005 from the $333,412 in 2004. The increase
in general and administrative expense was primarily attributable to an increase
in payroll expense (up $143,298 from $48,742) as a result of the our payment of
a salary to our principal officer beginning in the fourth quarter of 2004 and
increases in professional fees (up $354,139, or 235.1%) relating primarily to
legal fees associated with the Moose Oil litigation commenced during 2004 and
settled in 2005.
Interest Expense. Interest expense increased 155.4% to $183,920 in 2005
compared to $72,000 in 2004. Included in interest expense was $72,000 of
interest paid to our principal shareholder in both 2004 and 2005. The increase
in interest expense was attributable to the issuance, in May 2005, of $2,125,000
of subordinated convertible notes.
Derivative Related Expenses. In connection with the issuance during 2005 of the
subordinated convertible notes and related warrants, we, during 2005, reported
derivative related expenses arising in connection with derivative features
included in the subordinated convertible notes and the warrants, consisting of
derivative interest expense of $319,714 and a charge in the amount of the net
change in fair value of derivative liabilities of $402,628. We incurred no
similar expenses during fiscal 2004.
Derivative interest expense consisted of (1) the excess of the value of the
derivatives embedded in the subordinated convertible notes at closing over the
face amount of the notes ($243,485), plus (2) the value of the derivatives
embedded in the warrants ($42,063), plus (3) amortization of the recorded
discount on the convertible notes ($34,167) over a five year period under the
effective interest method.
20
The expense attributable to the net change in fair value of derivative
liabilities consisted of the increase in the recorded derivative liability
attributable to derivatives embedded in the subordinated convertible notes from
the date of issuance to December 31, 2005 ($15,561) using mark-to-market
accounting and the increase in the recorded derivative liability attributable to
derivatives embedded in the warrants from the date of issuance to December 31,
2005 ($387,067). We will evaluate the fair value of the derivative liabilities
on a quarter-to-quarter basis until the subordinated convertible notes and
warrants are no longer outstanding and changes in the fair value of the
derivative liability will result in charges or accretions to earnings based on
various factors affecting fair value including the price of the Company's stock
and the amounts of notes converted and warrants exercised.
Income Tax Expense. Income tax expense increased to $239,201 in fiscal 2005
from $0 in fiscal 2004. The increase in income tax expense during 2005 is
attributable to the estimated allocable share of Colombian income tax relating
to our interest in our Colombian venture. We recorded no U.S. income tax
liability in 2005 or 2004 and at December 31, 2005 had net operating losses of
approximately $1,173,000 and foreign tax credits of approximately $239,000.
Operating and Net Income (Loss). Operating income for fiscal 2005 totaled
$660,499 as compared to $187,283 in fiscal 2004. Net loss totaled $501,780 in
fiscal 2005 as compared to net income of $115,283 in fiscal 2004. The adverse
change in net income (loss) in 2005 was attributable, primarily, to the non-cash
non-operating charges arising from accounting for derivative features included
in the subordinated convertible note financing undertaken in 2005, and, to a
lesser extent, to increased fees and interest expense associated with the
financing and the incurrence of income tax expense from operations in Colombia.
FINANCIAL CONDITION
Liquidity and Capital Resources. At March 31, 2006 we had a cash balance of
$1,262,811 and a 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 our April 2006 private placement, we 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).
21
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.
We had no financing activities during either the 2006 quarter or the 2005
quarter.
Subsequent to March 31, 2006, we completed a sale of 5,533,333 shares of common
stock for gross offering proceeds of $16,599,000. We paid commissions totaling
$1,162,000 in connection with the sale of common stock.
Long-Term Debt. At March 31, 2006, we 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, we exercised our 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. Our principal capital and
exploration expenditures relate to our ongoing efforts to acquire, drill and
complete prospects. With the receipt of additional equity financing in 2003,
2004 and 2006 and the May 2005 sale of convertible notes, and the increase in
our revenues, profitability and operating cash flows, we expect that future
capital and exploration expenditures will be funded principally through funds on
hand and funds generated from operations.
During the first quarter of 2006, we 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, our only material contractual obligations requiring
determinable future payments were a note payable to our principal shareholder,
the 8% subordinated convertible notes and a lease relating to our 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, our 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.
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, 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,
22
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, 2006.
INFLATION
We believe that inflation has not had a significant impact on operations since
inception.
BUSINESS
GENERAL
Houston American Energy Corp. is an oil and gas exploration and production
company. Our oil and gas exploration and production activities are focused on
properties in the U.S. onshore Gulf Coast Region, principally Texas and
Louisiana, and development of concessions in the South American country of
Colombia. We seek to utilize the contacts and experience of our sole executive
officer, John F. Terwilliger, to identify favorable drilling opportunities, to
use advanced seismic techniques to define prospects and to form partnerships and
joint ventures to spread the cost and risks to us of drilling.
EXPLORATION PROJECTS
Our exploration projects are focused on existing property interests, and future
acquisition of additional property interests, in the onshore Texas Gulf Coast
region, Colombia and Louisiana.
Each of our exploration projects differs in scope and character and consists of
one or more types of assets, such as 3-D seismic data, leasehold positions,
lease options, working interests in leases, partnership or limited liability
company interests or other mineral rights. Our percentage interest in each
exploration project ("Project Interest") represents the portion of the interest
in the exploration project we share with other project partners. Because each
exploration project consists of a bundle of assets that may or may not include a
working interest in the project, our Project Interest simply represents our
proportional ownership in the bundle of assets that constitute the exploration
project. Therefore, our Project Interest in an exploration project should not
be confused with the working interest that we will own when a given well is
drilled. Each exploration project represents a negotiated transaction between
the project partners. Our working interest may be higher or lower than our
Project Interest.
Our principal exploration projects as of December 31, 2005 consisted on the
following:
WEBSTER PARISH, LOUISIANA. In Webster Parish, Louisiana, we hold a 7.5% working
interest at an 8.3% net revenue interest carried to point of sales for the first
well in over 4,000 acres known as the South Sibley Prospect. Drilling of a
10,600-foot well, the first well, on the South Sibley Prospect, was completed in
May 2005 with multiple pay sands apparently identified. Sales from the well
commenced June 28, 2005.
We also hold a 7.5% working interest at a 6.055% net revenue interest in the
Holley #1 well and associated 640-acre unit, acquired in December 2005, in
Webster Parish, Louisiana.
We intend to evaluate additional drilling sites and the drilling of additional
wells on our Webster Parish prospects in 2006.
23
IBERVILLE PARISH, LOUISIANA. In Iberville Parish, Louisiana, we have agreed,
subject to final review and approval of supporting documentation, to acquire a
6% working interest and a 4.2% net revenue interest subject to a 20% back in at
payout in a 300-acre leasehold known as the Green Jacket Prospect. Subject to
completion of the acquisition of the Green Jacket Prospect, drilling of a
13,200-foot test well is expected to begin in the second half of 2006 to test
multiple sands at a location based on 3D seismic and being adjacent to a well
that produced significant oil from two of the four objective sands.
ACADIA PARISH, LOUISIANA. In Acadia Parish, Louisiana, we hold a 3% working
interest and a 2.25% net revenue interest until payout in a 620-acre leasehold
known as the Crowley Prospect. The Hoffpauer #1 (formerly the Baronet #1) was
drilled in the third quarter of 2004. Commercial production of the well
commenced in December 2004. Drilling of a 12,100-foot well, the Baronet #2
well, on the Crowley Prospect in Acadia Parish, Louisiana was completed in April
2005. The well tested the Hayes Sand and flanks a natural gas well that
produced 1.6 BCF of natural gas from the Hayes Sand. After logging 21-feet of
apparent net pay, hole conditions deteriorated before logging could be
completed. The well was completed and production began in June 2005. Assuming
the Baronet #2 performs consistently, we may drill a developmental well on the
Crowley Prospect during 2006.
VERMILLION PARISH, LOUISIANA. In Vermillion Parish, Louisiana, we hold an 8.25%
working interest with a 6.1875% net revenue interest, subject to a 25% working
interest back in at payout, in the 425 acre Sugarland Prospect. The Broussard
#1 well, a 12,900-foot test well, was drilled on the Sugarland Prospect in
December 2005, with indications of multiple pay sands, and was completed in
January 2006. Sales from the Broussard #1 are expected to begin in March 2006.
We presently have no plans with respect to drilling additional wells on the
Sugarland Prospect.
JIM HOGG COUNTY, TEXAS. In Jim Hogg County, Texas, we hold a 4.375% working
interest, subject to payment of 5.8334% of costs to the casing point in the
first well, in the 500 acre Hog Heaven Prospect. The Weil #1 well, a 6,200-foot
test well, was drilled on the Hog Heaven Prospect in November 2005. Electric
log and sidewall core analysis indicate multiple pay sands in the Weil #1 well
with the well expected to be completed as a natural gas well, with some possible
oil production. The well was completed in January 2006 and production and sales
are expected to commence in March 2006. Based on the initial indications of
multiple pay sands, we intend to evaluate the possible drilling of multiple
offset wells beginning in 2006.
VICTORIA COUNTY, TEXAS. In Victoria County, Texas, we hold a 50% working
interest at a 40% net revenue interest in the Allar #2 well. The well, acquired
in December 2005, was re-completed in January 2006 as a producing gas well. We
presently have no plans to drill additional wells in Victoria County.
WILBARGER COUNTY, TEXAS. In Wilbarger County, Texas, we hold a 15% working
interest with an 11.25% net revenue interest in the 900-acre West Fargo
Prospect. The Riggins #1 well, a 6,400-foot test well, was drilled on the Wells
Fargo Prospect in April 2006 and was non-commercial.
We also hold a 15% working interest with an 11.25% net revenue interest in the
1340 acre Obenhaus Prospect in Wilbarger County, Texas. The Obenhaus #1 well,
a 7,200-foot test well, was drilled on the Obenhaus Prospect in March 2006 and
was a dry hole.
LLANOS BASIN, COLOMBIA. In the Llanos Basin, Colombia, we hold interests in (1)
a 232,050 acre tract known as the Cara Cara concession, (2) the Tambaqui
Association Contract covering 4,400 acres in the State of Casanare, Colombia,
(3) two concessions, the Dorotea Contract and the Cabiona Contract, totaling
over 136,000 acres, (4) the Surimena concession covering approximately 69,000
acres, (5) the Las Garzas concession covering approximately 103,000 acres, (6)
the Jagueyes Technical Evaluation Agreement ("TEA") covering approximately
324,000 acres, and (7) the Simon TEA covering approximately 166,000 acres.
24
Our interest in the Cara Cara, Dorotea, Cabiona, Surimena and Las Garzas
concessions and the Jagueyes TEA and Simon TEA are held through an interest in
Hupecol, LLC. We hold a 12.5% working interest in each of the prospects of
Hupecol. In conjunction with our interest in Hupecol, we also acquired, and
hold, a 12.6% working interest, with an 11.31% net revenue interest, in the
Tambaqui Association Contract.
The first well drilled in the Cara Cara concession, the Jaguar #1 well, was
completed in April 2003 with initial production of 892 barrels of oil per day.
In conjunction with the efforts to develop the Cara Cara concession, Hupecol
acquired 50 square miles of 3D seismic grid surrounding the Jaguar #1 well and
other prospect areas. That data is being utilized to identify additional drill
site opportunities to develop a field around the Jaguar #1 well and in other
prospect areas within the grid.
Our working interest in the Cara Cara concession and the Tambaqui Association
Contract are subject to an escalating royalty of 8% on the first 5,000 barrels
of oil per day, increasing to 20% at 125,000 barrels of oil per day. Our
interest in the Tambaqui Association Contract is subject to reversionary
interests of Ecopetrol, the state owned Colombian oil company, that could cause
50% of the working interest to revert to Ecopetrol after we have recouped four
times our initial investment. Our working interest in the additional
concessions is subject to an escalating royalty ranging from 8% to 20% depending
upon production volumes and pricing and an additional 6% to 10% per concession
when 5,000,000 barrels of oil have been produced on that concession.
In December 2003, we exercised our right to participate in the acquisition,
through Hupecol, of over 3,000 kilometers of seismic data in Colombia covering
in excess of 20 million acres. The seismic data is being utilized to map
prospects in key areas with a view to delineating multiple drilling
opportunities. We will hold a 12.5% interest in all prospects developed by
Hupecol arising from the acquired seismic data, including the Cabiona and
Dorotea concessions acquired in the fourth quarter of 2004, the Surimena
concession acquired in the second quarter of 2005, the Las Garzas concession
acquired in November 2005, the Jagueyes TEA acquired in May 2005 and the Simon
TEA acquired in June 2005. We plan to acquire, during 2006, 3D seismic data on
the Las Garzas contract, the Jagueyes TEA and the Simon TEA in order to further
delineate drilling opportunities on those prospects.
During 2005, Hupecol drilled 9 wells on the Cara Cara concession in Colombia to
offset, and delineate, the Jaguar #1 well, with production commencing on the
Bengala #4, #5, #6, #7ST and #8 and the Jaguar #5, #T5, #T6 and #7. We hold a
1.59% working interest in each of the wells subject to a 30% reversionary
interest to Ecopetrol at payout. During 2005, seismic surveying was undertaken
on the Cara Cara concession to delineate additional drilling prospects on the
concession. Through Hupecol, we presently plan to drill an additional 10 wells
on the Cara Cara concession during 2006.
During 2005, the Tambaqui #5 was drilled and began production under the Tambaqui
Association Contract. We hold a 12.6% working interest in the well. In
December 2005, we relinquished all acreage under the Tambaqui Association
Contract with the exception of 4,403 acres around the producing wells. We
presently have no plans to drill additional wells under the Tambaqui Association
Contract during 2006.
During 2005, seismic surveying was undertaken on the Dorotea and Cabiona
concessions to establish drilling prospect locations. We are permitting 30
drilling locations on the Dorotea and Cabiona concessions and, subject to
securing an additional drilling rig, plan to drill 1 well on the Cabiona
concession and 1 well on the Dorotea concession during 2006.
Based on 2D seismic interpretation, and rig availability, we plan to begin
drilling the Surimena concession during the first half of 2006.
25
In addition to our principal exploration projects, we hold various interests in
producing wells in Vermillion Parish, Louisiana, Plaquemines Parish, Louisiana,
Lavaca County, Texas, Matagorda County, Texas, San Patricio County, Texas and
Ellis County, Oklahoma. We have no present plans to conduct additional drilling
activities on those prospects.
The following table sets forth certain information about each of our exploration
projects:
Acres Leased or Under Option at December 31, 2005(1)
-------------------------------------------------------
Project
Project Area Project Gross Project Net Company Net Interest
------------------------------ ----------------- ----------------- ----------------- ------------------
TEXAS:
Jim Hogg County 500.00 500.0 21.88 4.38%
Wilbarger County
West Fargo Prospect . . . . . 900.00 900.00 135.00 15.00%
Obenhaus Prospect . . . . . . 1,340.00 1,340.00 201.00 15.00%
Lavaca County
Mavis Wharton . . . . . . . . 300.00 150.00 7.50 5.00%
West Hardys Creek . . . . . . 65.65 65.65 24.95 38.00%
San Patricio County 380.00 380.00 19.00 5.00%
Matagorda County
S.W. Pheasant Prospect. . . . 779.00 779.00 27.27 3.50%
Turtle Creek Prospect . . . . 672.00 672.00 23.52 3.50%
Nacogdoches County 80.94 80.94 80.94 100.00%
Victoria County 58.37 58.37 29.18 50.00%
----------------- ----------------- -----------------
Texas Sub-Total . . . . . . . . 5,075.96 4,925.96 570.24
LOUISIANA:
Webster Parish 6,244.00 4,457.00 334.28 7.50%
Iberville Parish 300.65 300.65 18.04 6.00%
Vermillion Parish
Sugarland Prospect. . . . . . 425.00 425.00 35.06 8.25%
LaFurs F-16 Well. . . . . . . 830.00 830.00 18.68 2.25%
Acadia Parish . . . . . . . . . 620.00 620.00 18.60 3.00%
Plaquemines Parish. . . . . . . 300.00 300.00 5.40 1.80%
----------------- ----------------- -----------------
Louisiana Sub-Total . . . . . . 8,719.65 6,932.65 430.06
OKLAHOMA
Jenny #1-14 . . . . . . . . . . 160.00 160.00 3.78 2.36%
----------------- ----------------- -----------------
Oklahoma Sub-Total. . . . . . . 160.00 160.00 3.78
COLOMBIA
Cara Cara Concession. . . . . 232,050.00 232,500.00 3,689.00 1.59%
Tambaqui Assoc. Contract (2). 4,403.00 4,403.00 555.00 12.6%
Dorotea Concession. . . . . . 51,321.00 51,321.00 6,415.00 12.5%
Cabiona Concession. . . . . . 86,066.00 86,066.00 10,758.00 12.5%
Surimena Concession . . . . . 69,189.00 69,189.00 8,649.00 12.5%
Las Garzas Concession . . . . 103,784.00 103,784.00 12,973.00 12.5%
Jagueyes TEA. . . . . . . . . 324,695.00 324,695.00 40,587.00 12.5%
Simon TEA . . . . . . . . . . 166,301.00 166,301.00 20,788.00 12.5%
----------------- ----------------- -----------------
Colombia Sub-Total. . . . . . . 1,037,809.00 1,037,809.00 104,414.00
----------------- ----------------- -----------------
Total . . . . . . . . . . . . . 1,051,764.61 1,049,827.61 105,418.08
================= ================= =================
26
(1) Project Gross Acres refers to the number of acres within a project. Project
Net Acres refers to leaseable acreage by tract. Company Net Acres are
either leased or under option in which we own an undivided interest.
Company Net Acres were determined by multiplying the Project Net Acres
leased or under option times our working interest therein.
(2) The project interest is the working interest in the concession and not
necessarily the working interest in the well.
DRILLING ACTIVITIES
In 2005, we drilled 4 exploratory and 10 developmental wells of which all 14
were completed and none were dry holes. In 2004, 9 exploratory and 7
developmental wells were drilled of which 11 were completed and 5 were dry
holes.
The following table sets forth certain information regarding the actual drilling
results for each of the years 2004 and 2005 as to wells drilled in each such
individual year:
Exploratory Wells (1) Developmental Wells (1)
---------------------------- ----------------------------
Gross Net Gross Net
------------- ------------- ------------- -------------
2004
----
Productive. . . . . . 4 0.128 7 0.220
Dry . . . . . . . . . 5 0.238 0 0
2005
----
Productive. . . . . . 4 0.231 10 0.226
Dry . . . . . . . . . 0 0 0 0
(1) Gross wells represent the total number of wells in which we owned an
interest; net wells represent the total of our net working interests owned
in the wells.
One well was in progress at December 31, 2005 on the Cara Cara prospect.
PRODUCTIVE WELL SUMMARY
The following table sets forth certain information regarding our ownership as of
December 31, 2005 of productive gas and oil wells in the areas indicated:
Gas Oil
---------------------------- ----------------------------
Gross Net Gross Net
------------- ------------- ------------- -------------
Texas . . . . . . . . . 6 0.934 0 0
Louisiana . . . . . . . 7 0.333 0 0
Oklahoma. . . . . . . . 1 0.024 0 0
Colombia. . . . . . . . 0 0 17 0.419
------------- ------------- ------------- -------------
Total. . . . . . . 14 1.291 17 0.419
============= ============= ============= =============
27
VOLUME, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, average prices received (net of transportation costs) and average
production costs associated with our sales of gas and oil for the periods
indicated:
Year Ended December 31,
--------------------------
2004 2005
------------ ------------
Net Production:
Gas (Mcf):
North America . . . . . . 61,519 106,449
South America . . . . . . 0 0
Oil (Bbls):
North America . . . . . . 886 1,396
South America . . . . . . 24,040 42,789
Average sales price:
Gas ($per Mcf) . . . . . . . 5.43 7.83
Oil (Bbls) . . . . . . . . . 33.31 47.89
Average production expense and
Taxes ($per Bbls):
North America . . . . . . . 5.08 4.16
South America . . . . . . . 16.15 20.43
NATURAL GAS AND OIL RESERVES
The following table summarizes the estimates of our historical net proved
reserves as of December 31, 2004 and 2005, and the present value attributable to
these reserves at these dates. The reserve data and present values were
prepared by Pressler Petroleum Consultants, Inc., independent petroleum
engineering consultants:
At December 31,
----------------------
2004 2005
---------- ----------
Net proved reserves (1):
Natural gas (Mcf) . . . . . . . . . . . . 202,420 850,650
Oil (Bbls). . . . . . . . . . . . . . . . 307,290 273,421
Standardized measure of discounted future net
cash flows (2). . . . . . . . . . . . . . . $4,005,624 $6,375,600
(1) At December 31, 2005, net proved reserves, by region, consisted of 270,621
barrels of oil in South America and 2,800 barrels of oil in North America;
all natural gas reserves were in North America.
(2) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10% per
annum and has been calculated in accordance with SFAS No. 69, "Disclosures
About Oil and Gas Producing Activities" (see Note 7 - Supplemental
Information on Oil and Gas Exploration, Development and Production
Activities (Unaudited)) and, in accordance with current SEC guidelines, and
does not include estimated future cash inflows from hedging. The
standardized measure of discounted future net cash flows
28
attributable to our reserves was prepared using prices in effect at the end
of the respective periods presented, discounted at 10% per annum on a
pre-tax basis.
In accordance with applicable requirements of the Securities and Exchange
Commission, we estimate our proved reserves and future net cash flows using
sales prices and costs estimated to be in effect as of the date we make the
reserve estimates. We hold the estimates constant throughout the life of the
properties, except to the extent a contract specifically provides for
escalation. Gas prices, which have fluctuated widely in recent years, affect
estimated quantities of proved reserves and future net cash flows. Any
estimates of natural gas and oil reserves and their values are inherently
uncertain, including many factors beyond our control. The reserve data
contained in this report represent only estimates. Reservoir engineering is a
subjective process of estimating underground accumulations of natural gas and
oil that cannot be measured in an exact manner. The accuracy of reserve
estimates is a function of the quality of available data and of engineering and
geological interpretation and judgment. As a result, estimates of different
engineers, including those we use, may vary. In addition, estimates of reserves
may be revised based upon actual production, results of future development and
exploration activities, prevailing natural gas and oil prices, operating costs
and other factors, which revision may be material. Accordingly, reserve
estimates may be different from the quantities of natural gas and oil that we
are ultimately able to recover and are highly dependent upon the accuracy of the
underlying assumptions. Our estimated proved reserves have not been filed with
or included in reports to any federal agency.
LEASEHOLD ACREAGE
The following table sets forth as of December 31, 2005, the gross and net acres
of proved developed and proved undeveloped and unproven gas and oil leases which
we hold or have the right to acquire:
Proved Developed Proved Undeveloped Unproven
-------------------- -------------------- ------------------------
Gross Net Gross Net Gross Net
--------- --------- --------- --------- ------------ ----------
Texas . . . . . 1,593.02 114.90 340.00 14.88 2,992.94 440.46
Louisiana . . . 3,145.00 164.44 310.00 9.30 3,477.65 256.32
Oklahoma. . . . 160.00 3.78 0 0 0 0
Colombia. . . . 2,720.00 78.48 1760.00 27.98 1,033,329.00 104,307.54
--------- --------- --------- --------- ------------ ----------
Total . . . 7,618.02 357.82 2410.00 52.16 1,039,799.59 105,004.32
========= ========= ========= ========= ============ ==========
During 2005, we acquired interests in (1) the 4,000+ acre South Sibley Prospect,
(2) the Holley #1 well and 640 acre unit, (3) the 300 acre Green Jacket
Prospect, (4) the 425 acre Sugarland Prospect, (5) the 500 acre Hog Heaven
Prospect, (6) the 900 acre West Fargo Prospect, (7) the 1,340 acre Obenhaus
Prospect, (8) the Allar #2 well and associated acreage, (9) the 69,189 acre
Surimena concession in Colombia, (10) the 103,784 acre Las Garzas concession in
Colombia, (11) the 324,695 acre Jagueyes TEA in Colombia, and (12) the 166,301
Simon TEA in Colombia. Also, during 2005, we relinquished (1) all acreage
(approximately 84,000 acres) in the Tambaqui Association Contract, other than
4,403 acres around the producing wells, (2) the 194 acre Donner Field lease in
Terrebone Parish, Louisiana, (3) the 726 acre Bougere Estate lease and Bougere
#1 well in St. John the Baptist Parish, Louisiana, and (4) approximately 1,668
acres of leaseholds in North Louisiana.
29
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried working,
net profits, working and other similar interests and contractual arrangements
customary in the gas and oil industry, liens for current taxes not yet due and
other encumbrances. As is customary in the industry in the case of undeveloped
properties, little investigation of record title is made at the time of
acquisition (other than preliminary review of local records).
Investigation, including a title opinion of local counsel, generally are made
before commencement of drilling operations.
MARKETING
At March 29, 2006, we had no contractual agreements to sell our gas and oil
production and all production was sold on spot markets.
EMPLOYEES
As of March 29, 2006, we had 1 full-time employee and no part time employees.
The employee is not covered by a collective bargaining agreement, and we do not
anticipate that any of our future employees will be covered by such agreement.
If our operations continue to grow as expected, we anticipate hiring as many as
2 additional employees by the end of 2006.
PROPERTIES
We currently lease approximately 2,000 square feet of office space in Houston,
Texas as our executive offices. Management anticipates that our space will be
sufficient for the foreseeable future. The monthly rental under the lease,
which expires on November 30, 2006, is $3,302.59.
A description of our interests in oil and gas properties is included above.
LEGAL PROCEEDINGS
We may from time to time be a party to lawsuits incidental to our business. As
of June 1, 2006, we were not aware of any current, pending, or threatened
litigation or proceedings that could have a material adverse effect on our
results of operations, cash flows or financial condition.
30
MANAGEMENT
The following table sets forth the names, ages and offices of our present
executive officers and directors. The periods during which such persons have
served in such capacities are indicated in the description of business
experience of such persons below.
Name Age Position
------------------- --- ---------------------------------
John Terwilliger 58 President, Treasurer and Director
Orrie Lee Tawes III 58 Director
Edwin Broun III 53 Director
Stephen Hartzell 52 Director
John Boylan 39 Director
The following is a biographical summary of the business experience of the
present directors and executive officers of the Company:
John F. Terwilliger has served as our president, secretary and treasurer since
our inception in April 2001. From 1988 to April 2002, Mr. Terwilliger served as
the chairman of the board and president of Moose Oil & Gas Company, and its
wholly-owned subsidiary, Moose Operating Co., Inc., both Houston, Texas based
companies. Prior to 1988, Mr. Terwilliger was the chairman of the board and
president of Cambridge Oil Company, a Houston, Texas based oil exploration and
production company. Mr. Terwilliger served in the United States Army, receiving
his honorable discharge in 1969. On April 9, 2002, Moose Oil & Gas Company and
its wholly-owned subsidiary, Moose Operating Co., Inc., filed a bankruptcy
petition under Chapter 7 of the United States Bankruptcy Code in Cause No.
02-33891-H507: 02-22892, in the United States District Court for the Southern
District of Texas, Houston Division. At the time of the filing of the
bankruptcy petition, Mr. Terwilliger was the chairman of the board and president
of both Moose Oil & Gas Company and Moose Operating Co., Inc. Mr. Terwilliger
resigned those positions on April 9, 2002.
O. Lee Tawes III has served as a director since August 2005. Mr. Tawes is
Executive Vice President and Head of Investment Banking, and a Director at
Northeast Securities Inc. From 2000-2001 he was Managing Director of Research
for C.E. Unterberg, Towbin, an investment and merchant banking firm specializing
in high growth technology companies. Mr. Tawes spent 20 years at Oppenheimer &
Co. Inc. and CIBC World Markets, where he was Director of Equity Research from
1991 to 1999. He was also Chairman of the Stock Selection Committee at CIBC, a
member of the firm's Executive Committee, and Commitment Committee. From 1972
to 1990, Mr. Tawes was an analyst covering the food and diversified industries
at Goldman Sachs & Co. from 1972 to 1979, and Oppenheimer from 1979 to 1990. As
food analyst, he was named to the Institutional Investor All America Research
Team five times from 1979 through 1989. Mr. Tawes has served as a Director of
Baywood International, Inc. since 2001. Mr. Tawes is a graduate of Princeton
University and received his MBA from Darden School at the University of
Virginia.
Edwin Broun III has served as a director since August 2005. Mr. Broun is the
owner/operator of Broun Energy, LLC, an oil and gas exploration and production
company. He co-founded, and from 1994 to 2003 was Vice President and Managing
Partner of, Sierra Mineral Development, L.C., an oil and gas exploration and
production company where he was responsible for reserve and economic evaluation
of acquisitions, drill site selection and workover design. From 1992 to 1994 he
was a partner and consultant in Tierra Mineral Develoment, L.C., where he
evaluated, negotiated and structured acquisitions, workovers and divestitures of
oil and gas holdings. From 1975 to 1992, Mr. Broun served in various petroleum
engineering capacities, beginning as a petroleum engineer with Atlantic
Richfield Company from 1975 to 1979 and Tenneco Oil Company from 1979 to 1982
and rising to serving in various management capacities as Acquisitions Manager
from 1982 to 1986 and Vice President, Engineering from 1986 to 1987 at ITR
Petroleum, Inc.; Vice President, Acquisitions from 1987 to 1988 and Vice
31
President, Houston District from 1988 to 1990 at General Atlantic Resources,
Inc.; and Vice President, Engineering and Acquisitions from 1990 to 1992 at West
Hall Associates, Inc. Mr. Broun received his B.S. in Petroleum Engineering from
the University of Texas and an M.S. in Engineering Management from the
University of Alaska.
Stephen Hartzell has served as a director since August 2005. Mr. Hartzell has
over 27 years of experience as a petroleum geologist. Since 2003, Mr. Hartzell
has been an owner operator of Southern Star Exploration, LLC, an independent oil
and gas company. From 1986 to 2003, Mr. Hartzell served as an independent
consulting geologist. From 1978 to 1986, Mr. Hartzell served as a petroleum
geologist, division geologist and senior geologist with Amoco Production
Company, Tesoro Petroleum Corporation, Moore McCormack Energy and American
Hunter Exploration. Mr. Hartzell received his B.S. in Geology from Western
Illinois University and an M.S. in Geology from Northern Illinois University.
John Boylan has served as a director since May 2006. Mr. Boylan has served as
Chief Financial Officer and Director of Business Development of Atasca
Resources, an independent oil and gas exploration and production company, since
2003. Since 1996 Mr. Boylan has also served as owner/operator of Boylan Energy
Corporation, an independent oil and gas exploration company. Mr. Boylan's
energy industry experience also includes serving as President, CEO and Managing
Partner of Birdwell Partners, an oil field services company, from 1999 to 2003
and service as Chief Financial Officer and Director of Business Development of
Prolithic Energy Company, an independent oil and gas exploration company, from
1998 to 2002. Prior to entering the energy business, Mr. Boylan was a
consultant and senior auditor providing professional services in a range of
accounting, financial and project management roles, including service as a
senior auditor for KPMG Peat Marwick from 1988 to 1990, service as a project
management consultant for R.L. Townsend & Associates from 1990 to 1991 and
service as senior associate project management consultant for Coopers & Lybrand
Consulting from 1991 to 1995. Mr. Boylan holds a Bachelors Degree in Accounting
from the University of Texas and an MBA Degree in Finance, Economics and
International Business from New York University. Mr. Boylan is a Certified
Public Accountant.
Our board of directors is divided into three classes, each elected for staggered
three-year terms. Messrs. Tawes, Broun and Hartzell are Class A directors with
terms expiring on the first annual meeting following their appointment. Mr.
Boylan is a Class B director with a term expiring on the second annual meeting
following his appointment. Mr. Terwilliger is a Class C director. His term is
scheduled to expire at the third annual meeting following his appointment.
Our executive officers are elected by our board of directors and serve terms of
one year or until their death, resignation or removal by the board of directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning cash and non-cash
compensation paid or accrued for services in all capacities during the year
ended December 31, 2005 of each person who served as our Chief Executive Officer
during fiscal 2005 and the next four most highly paid executive officers (the
"Named Officers").
Annual Compensation
Name and ------------------------------
Principal Position Year Salary($) Bonus($) Other ($)
------------------------- ---- --------- -------- ---------
John Terwilliger 2005 192,000 -0- -0-(1)(2)
President and 2004 45,000 -0- -0-(1)(2)
Chief Executive Officer 2003 -0- -0- -0-(1)(2)
---------------
32
(1) Mr. Terwilliger receives no other compensation or benefits other than
vacation benefits, expense reimbursements and participation in medical,
retirement and other benefit plans which are generally available to our
executives.
(2) Mr. Terwilliger received overriding royalty interests in three properties
identified by Mr. Terwilliger. No value was assigned to those overriding
royalty interests for purposes of this table. Payments received by Mr.
Terwilliger pursuant to those overriding royalty interests totaled $38,109,
$21,170, and $3,600 in 2005, 2004 and 2003, respectively.
We have no employment agreements with any of our officers or employees.
DIRECTOR COMPENSATION
Effective May 17, 2006, non-employee directors are reimbursed all expenses
associated with attendance of, or participation in, meetings and are entitled
to: (1) an annual retainer of $6,000 payable in quarterly installments, (2) an
annual retainer of $2,000 per committee on which a director serves, payable in
quarterly installments, (3) an annual retainer of $2,500 for service as audit
committee chair, payable in quarterly installments, (4) an annual retainer of
$1,500 for service as chair of committees other than the audit committee,
payable in quarterly installments, (5) a grant of 20,000 stock options on
initial election or appointment as a director, and (6) a grant of 10,000 stock
options immediately following each subsequent shareholders meeting at which a
director stands for reelection and is reelected. The options granted to
non-employee directors are exercisable at fair market value on the date of grant
and have a term of ten years. Prior to May 17, 2006, non-employee directors
were paid $1,000 per meeting attended or $500 per telephonic meeting.
BOARD COMMITTEES
We do not presently maintain an audit committee or any other committee of our
board of directors. Our board has approved the establishment of an audit
committee and compensation committee effective upon the listing of our stock on
an exchange, of which there can be no assurance that such listing will occur.
Because we do not presently maintain an audit committee, we have no audit
committee financial expert although we have determined that John Boylan
satisfies the criteria for service as an audit committee financial expert.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 2003, Mr. Terwilliger converted $441,516.29 of loans into 1,103,791
shares of our common stock and modified the repayment terms with respect to the
balance of the loans to us, totaling $1 million, to reduce the interest rate on
the loans to 7.2% and provide for a fixed maturity date of January 1, 2007.
Also, in December 2003, O. Lee Tawes, a principal shareholder, converted the
entire principal and accrued interest on his loans to us, in the amount of
$186,016.83, into 465,042 shares of common stock. As of December 31, 2005, we
owed $904,400 to Mr. Terwilliger, including accrued interest.
In conjunction with our efforts to secure oil and gas prospects, financing and
services, we have, from time to time, granted overriding royalty interests in
various mineral properties to Mr. Tawes. During 2005, approximately $25,000 was
paid to Mr. Tawes from these royalty interests.
In May 2005, Northeast Securities, Inc. acted as placement agent in connection
with our offer and sale of $2,125,000 of Subordinated Convertible Notes for
which Northeast Securities received commissions totaling $127,500 and a warrant
to purchase 191,250 shares of common stock at $1.00 per share. Mr. Tawes is
Executive Vice President, head of Investment Banking and a Director of Northeast
Securities.
In April 2006, we repaid the balance of the note owed to Mr. Terwilliger.
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 1, 2006, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of our common stock held by (i) each person known
by us to be the owner of more than 5% of the outstanding shares of our common
stock, (ii) each director, (iii) each named executive officer, and (iv) all
executive officers and directors as a group:
Name and Address Number of Shares Percentage
of Beneficial Owner(1) Beneficially Owned of Class(2)
---------------------------------------------------- ------------------- -----------
John F. Terwilliger 8,574,486 30.8%
801 Travis, Suite 2020
Houston, Texas 77002
Orrie Lee Tawes 3,307,044 (3) 11.9%
100 Wall Street
New York, New York 10005
Edwin Broun III 1,030,000 (4) 3.7%
6025 Riverview Way
Houston, Texas 77056
Stephen Hartzell 76,000 (5) *
John P. Boylan 20,000 (5) *
All directors and officers as a group (five persons) 13,007,530 (6) 46.6%
----------
* Less than 1%.
(1) Unless otherwise indicated, each beneficial owner has both sole voting and
sole investment power with respect to the shares beneficially owned by such
person, entity or group. The number of shares shown as beneficially owned
include all options, warrants and convertible securities held by such
person, entity or group that are exercisable or convertible within 60 days
of June 1, 2006.
(2) The percentages of beneficial ownership as to each person, entity or group
assume the exercise or conversion of all options, warrants and convertible
securities held by such person, entity or group which are exercisable or
convertible within 60 days, but not the exercise or conversion of options,
warrants and convertible securities held by others shown in the table.
(3) Shares shown as beneficially owned by Orrie Lee Tawes include 20,000 shares
issuable upon exercise of options held by Mr. Tawes and 119,034 held by his
wife, Marsha Russell. Excludes shares underlying warrants held by Northeast
Securities, Inc. as to which shares Mr. Tawes disclaims beneficial
ownership.
(4) Includes 20,000 shares issuable upon exercise of options held by Mr. Broun
and 10,000 shares held by his wife.
(5) Includes 20,000 shares issuable upon exercise of options.
(6) Includes 80,000 shares issuable upon exercise of outstanding options and
conversion of notes.
34
SELLING SHAREHOLDERS
The selling securityholders are holders of 7,849,583 shares of common stock and
the holders of warrants to purchase 415,000 shares of common stock. The shares
consist of (1) 5,533,333 shares issued in April 2006 in a private placement to
accredited investors, (2) 2,125,000 shares issued in May 2006 pursuant to the
conversion of $2,125,000 in principal amount of 8% Subordinated Convertible
Notes that were issued in May 2005 in a private placement to accredited
investors, and (3) 191,250 shares issued in May 2006 pursuant to the exercise of
$1.00 placement agent warrants that were issued in connection with the May 2005
private placement. The warrants consist of 415,000 warrants, exercisable at
$3.00 per share, issued to the placement agent in the April 2006 private
placement. Pursuant to the terms of the sale of the convertible notes, we
entered into a Registration Rights Agreement with each of the selling
securityholders wherein we agreed to register for resale the notes and the
shares of common stock issuable upon conversion of the notes and exercise of the
warrants issued in conjunction with the issuance of the notes. Pursuant to the
terms of the sale of the shares of common stock in the April 2006 private
placement, we entered into a Registration Rights Agreement with each of the
selling securityholders wherein we agreed to register for resale the shares of
common stock issued in the private placement and the shares of common stock
issuable upon exercise of the warrants issued in the conjunction with the
private placement.
The following table sets forth information with respect to the selling
securityholders and the respective common stock beneficially owned by each
selling securityholder that may be offered under this prospectus. The
information is based on information that has been provided to us by or on behalf
of the selling securityholders. With the exception of Edwin Broun III who has
served as one of our directors since August 2005, unless otherwise indicated
herein, none of the selling securityholders listed in the following table has,
or within the past three years has had, any position, office or other material
relationship with us or any of our predecessors or affiliates. Because the
selling securityholders may from time to time use this prospectus to offer all
or some portion of the common stock offered hereby, we cannot provide an
estimate as to the amount or percentage of any such type of security that will
be held by any selling securityholder upon termination of any particular
offering or sale under this prospectus. In addition, the selling securityholder
identified below may have sold, transferred or otherwise disposed of all or a
portion of any such securities since the date on which they provided us
information regarding their holdings, in transactions exempt from the
registration requirements of the Securities Act.
For the purposes of the following table, the number of our common shares
beneficially owned has been determined in accordance with Rule 13d-3 of the
Exchange Act, and such information is not necessarily indicative of beneficial
ownership for any other purpose. Under Rule 13d-3, beneficial ownership includes
any shares as to which a selling securityholder has sole or shared voting power
or investment power and also any shares which that selling securityholder has
the right to acquire within 60 days of the date of this prospectus through the
exercise of any stock option, warrants or other rights.
35
Common Stock Percentage of Beneficially Owned
Beneficially Owned Common Shares Common Shares After Completion of
Selling Securityholders Prior to Offering (1) Outstanding (29) Offered Hereby(1) Offering
---------------------------------------- --------------------- ---------------- ----------------- -------------------
E.C. Broun III 1,005,000 3.6% 200,000 805,000
Lorraine DiPaolo (28) 261,625 * 230,625 31,000
Camilla Bellick 150,000 * 125,000 25,000
Jacob Harris (28) 125,000 * 125,000 0
Alan M. Berman 100,000 * 100,000 0
Peter S. Rawlings (28) 100,000 * 100,000 0
Barry Garfinkel 100,000 * 100,000 0
William Lippe 100,000 * 100,000 0
David Schwartz & Florence
Schwartz JTROW 100,000 * 100,000 0
Richard Zorn (28) 180,625 (2) * 130,625 50,000
Ronald Sunderland 64,500 (3) * 50,000 14,500
Myron Zisser 50,000 * 50,000 0
Gorel Realty Company (4) 50,000 * 50,000 0
Mitchell Kessler 50,000 * 50,000 0
Eric Lippe 50,000 * 50,000 0
William P. Behrens (28) 62,000 * 62,000 0
William T. Behrens 3,000 * 3,000 0
The Churchill Fund QP, LP (5) 41,000 * 41,000 0
The Churchill Fund, LP (5) 34,000 * 34,000 0
Felix Z. Edwards III 25,000 * 25,000 0
Mary Willis 25,000 * 25,000 0
Judith Parnes 25,000 * 25,000 0
Marie Carlino 25,000 * 25,000 0
Michael Salmanson & Tobi
E. Zemsky, JTROW 25,000 * 25,000 0
Gem Holdings (6) 25,000 * 25,000 0
Bear Stearns Securities Corp as
Custodian for the benefit of
Bernard Korman IRA 25,000 * 25,000 0
Stanley Weirthorn Rev Trust
DTD 9/7/90 25,000 * 25,000 0
Edmund Dollinger 25,000 * 25,000 0
Southridge Drive Associates (7) 25,000 * 25,000 0
Mary A. Susnjara 35,000 25,000 10,000
Johannah F. Stefanakis 25,000 * 25,000 0
Richard R. Davis (28) 25,000 * 25,000 0
Anne O'Malley 28,000 * 25,000 3,000
Malcolm O'Malley 27,000 * 25,000 2,000
Miriam Salmanson 25,000 * 25,000 0
Joseph Martello 25,000 * 25,000 0
Roy Nelson & Anne Nelson,
JTROW 25,000 * 25,000 0
Edmund Karam & Barbara
Karam, JTROW 26,000 * 25,000 1,000
Kathleen Mullinix 25,000 * 25,000 0
Northeast Securities, Inc. (8)(27) 30,000 * 30,000 0
David T.R. Tsiang (28) 25,000 * 25,000 0
Jon Salmanson (28) 34,000 * 25,000 9,000
Merrill Lynch, Pierce, Fenner & Smith
FPO Robert A. Bonelli IRA (28) 15,000 * 15,000 0
Stephen Perrone (28) 15,000 * 15,000 0
Danny Nicholas (28) 5,000 * 5,000 0
2003 Houston Energy Partners (9)(28) 252,500 * 195,000 57,500
2004 Houston Energy Partners (9)(28) 63,000 * 55,000 8,000
Amaranth LLC (10)(28) 200,000 * 200,000 0
Atlantis Software Company
Employee Profit Sharing Plan (11)(28) 15,000 * 15,000 0
Basso Fund Ltd (12) 80,000 * 80,000 0
Basso Multi-Strategy Holding
Fund Ltd (12) 213,333 * 213,333 0
Basso Private Opportunity
Holding Fund Ltd. (12) 40,000 * 40,000 0
Ben T. Morris (28) 16,000 * 16,000 0
Bruce R. McMaken 10,000 * 10,000 0
Capital Ventures International (13)(28) 250,000 * 250,000 0
Cranshire Capital L.P. (14) 75,000 * 75,000 0
Don A. Sanders Restricted (28) 120,000 * 120,000 0
Don Weir and Julie Ellen Weir (28) 40,000 * 40,000 0
Erik S. Klefos (28) 20,000 (15) * 20,000 0
36
George L. Ball (28) 16,000 * 16,000 0
GLG Global Utilities Fund (16) 1,000,000 * 1,000,000 0
Harry Edelson 666,666 * 666,666 0
HHMI Investments L.P. (17) 41,000 * 41,100 0
Houston Energy International Ltd (9)(28) 269,000 * 250,000 19,000
Hudson Bay Fund, L.P. (18)(28) 100,000 * 100,000 0
IRA FBO Brede C. Klefos (28) 20,000 * 20,000 0
IRA FBO Robert Clifford (28) 25,000 * 25,000 0
Iroquois Master Fund Ltd. (19) 100,000 * 100,000 0
John H. and Jodi F. Malanga (28) 15,000 * 15,000 0
Katherine U. Sanders Children
Trust (20)(28) 120,000 * 120,000 0
Meadowbrook Opportunity
Fund LLC (21) 50,000 * 50,000 0
Michael S. Chadwick (28) 18,000 * 3,000 15,000
MotherRock Energy Master
Fund Ltd. (22) 1,137,300 * 1,000,000 137,300
Nite Capital, LP (23) 26,666 * 26,666 0
Rune Medhus & Elisa Medhus (28) 35,000 * 35,000 0
Sanders Opportunity Fund
(Institutional), L.P. (24)(28) 186,152 * 186,152 0
Sanders Opportunity Fund, L.P. (24)(28) 57,183 * 57,183 0
Tom Juda and Nancy Juda Living
Trust (28) 200,000 * 200,000 0
Walker Smith Capital (QP), L.P. (17) 70,200 * 70,200 0
Walker Smith Capital, L.P. (17) 12,453 * 12,453 0
Walker Smith International
Fund, Ltd. (17) 101,900 * 101,900 0
WS Opportunity Fund (QP), L.P. (25) 26,400 * 26,400 0
WS Opportunity Fund
International, Ltd. (25) 50,880 * 50,880 0
WS Opportunity Fund, L.P. (25) 30,400 * 30,400 0
Sanders Morris Harris Inc (26)(27) 415,000 * 415,000 0
* Less than 1%.
(1) Shares of common stock shown as beneficially owned include, and
the shares of common stock registered for sale hereby consist of, all
shares issuable upon exercise of the warrants.
(2) Includes 25,000 shares held by Richard Zorn, 25,000 shares held
by the Richard Zorn IRA, 30,625 shares underlying warrants held by
Richard Zorn, 50,000 shares held by Frances H. Zorn, the spouse of
Richard Zorn, and 50,000 shares held by LRZ Family Partnership.
Richard Zorn has investment and voting power with respect to the
shares held by LRZ Family Partnership.
(3) Includes 5,000 shares held by the Ronald Sunderland IRA and
59,500 shares held by the Sunderland Family Trust Dated 7/15/96 (#2).
Ronald Sunderland has investment and voting power with respect to the
shares held by Sunderland Family Trust Dated 7/15/96 (#2).
(4) Myron Gorel has investment and voting power with respect to the
shares held by Gorel Realty Company.
(5) Cecelia Brancato has investment and voting power with respect to
the shares held by The Churchill Fund QP, LP and The Churchill Fund,
LP.
(6) Marc Stern has investment and voting power with respect to the
shares held by Gem Holdings.
(7) Richard Swartz has investment and voting power with respect to
the shares held by Southridge Drive Associates.
(8) Robert Bonelli has investment and voting power with respect to
the shares held by Northeast Securities, Inc.
(9) Stephen H. Pouns has investment and voting power with respect to
the shares held by 2003, Houston Energy Partners, 2005 Houston Energy
Partners and Houston Energy International Ltd.
37
(10) Nicholas M. Maounis has investment and voting power with respect
to the shares held by Amaranth LLC.
(11) Rune Medhus has investment and voting power with respect to the
shares held by Atlantis Software Company Employee Profit Sharing Plan.
(12) Howard I. Fisher has investment and voting power with respect to
the shares held by Basso Fund Ltd., Basso Multi-Strategy Holding Fund
Ltd. and Basso Private Opportunities Holding Fund Ltd.
(13) Martin Kobinger has investment and voting power with respect to
the shares held by Capital Ventures International. Mr. Kobinger
disclaims any beneficial ownership of shares held by Capital Ventures
International.
(14) Mitchell P. Kopin has investment and voting power with respect to
the shares held by Cranshire Capital, L.P.
(15) Includes 10,000 shares held by Erik S. Klefos and 10,000 shares
held by IRA FBO Erik Klefos Pershing LLC as Custodian Rollover
Account.
(16) Noam Gottesman, Pierre Lagrange and Emmanuel Roman have
investment and voting power with respect to the shares held by GLG
Global Utilities Fund.
(17) Reid Walker and G. Stacy Smith have investment and voting power
with respect to the shares held by HHMI Investments, L.P., Walker
Smith Capital, L.P., Walker Smith Capital (QP), L.P., and Walker Smith
International Fund Ltd.
(18) Yoav Roth and John Doscas have investment and voting power with
respect to the shares held by Hudson Bay Fund, L.P. Mr. Roth and Mr.
Doscas each disclaim any beneficial ownership of shares held by Hudson
Bay Fund, L.P.
(19) Joshua Silverman has investment and voting power with respect to
the shares held by Iroquois Master Fund Ltd. Mr. Silverman disclaims
any beneficial ownership of shares held by Iroquois Master Fund Ltd.
(20) Don Weir has investment and voting power with respect to the
shares held by Katherine U. Sanders Children Trust.
(21) Michael Ragins has investment and voting power with respect to
the shares held by Meadowbrook Opportunity Fund LLC.
(22) J. Robert Collins has investment and voting power with respect to
the shares held by MotherRock Energy Master Fund Ltd.
(23) Keith A. Goodman has investment and voting power with respect to
the shares held by Nite Capital LP.
(24) Brad Sanders has investment and voting power with respect to the
shares held by Sanders Opportunity Fund (International), L.P. and
Sanders Opportunity Fund, L.P.
(25) Patrick Walker, Reid Walker and G. Stacy Smith have investment
and voting power with respect to the shares held by WS Opportunity
Fund, L.P., WS Opportunity Fund (QP), L.P., and WS Opportunity Fund
International, Ltd.
38
(26) Ben T. Morris has investment and voting power with respect to the
shares held by Sanders Morris Harris, Inc.
(27) This selling security holder has identified itself as a
registered broker-dealer. The shares indicated as held and offered by
this selling security holder represent shares underlying warrants
received as compensation for providing investment banking related
services in connection with the placement of the Notes and/or common
stock.
(28) This selling security holder has identified itself as an
affiliate of a registered broker-dealer and has represented to us that
such selling security holder acquired its common stock, or warrants,
in the ordinary course of business and, at the time of the purchase of
the common stock, notes and/or warrants or the underlying common
stock, such selling security holder had no agreements or
understandings, directly or indirectly, with any person to distribute
the common stock, the notes, the warrants or underlying common stock.
(29) Percentages based on number of shares of common stock outstanding
as of June 1, 2006.
PLAN OF DISTRIBUTION
The selling securityholders and their successors, including their transferees,
pledgees or donees or their respective successors, may sell the common stock
offered hereby directly to purchasers or through underwriters, broker-dealers or
agents, who may receive compensation in the form of discounts, concessions or
commissions from the selling securityholders or the purchasers. These discounts,
concessions or commissions as to any particular underwriter, broker-dealer or
agent may be in excess of those customary in the types of transactions involved.
We will not receive any of the proceeds from the sale of these securities. If
the shares of common stock are to be sold by transferees, pledgees or donees or
their respective successors then we must amend the list of selling
securityholders to include the transferee, pledgee or donee or their respective
successors as selling securityholders by amending the registration statement, of
which this prospectus is a part, or supplementing this prospectus, as required
by law.
The common stock may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market prices, at varying prices determined at the time of sale or at
negotiated prices. These sales may be affected in transactions, which may
involve crosses or block transactions:
- on any national securities exchange or quotation service on which
our common stock may be listed or quoted at the time of sale;
- in the over-the-counter market;
- otherwise than on these exchanges or services or in the
over-the-counter market; or
- through the writing of options, whether the options are listed on
an options exchange or otherwise.
In connection with the sale of the common stock, the selling securityholders may
enter into hedging transactions with broker-dealers, which may in turn engage in
short sales of the common stock in the course of hedging the positions they
assume. The selling securityholders may also sell the common stock and deliver
these securities to close out their short positions, or loan or pledge them to
broker-dealers that in turn may sell these securities.
39
The selling securityholders or their successors in interest may from time to
time pledge or grant a security interest in some or all of the common stock and,
if the selling securityholders default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell these securities
from time to time under this prospectus.
The aggregate proceeds to the selling securityholders from the sale of the
common stock offered by them will be the purchase price of the common stock less
discounts, concessions or commissions, if any. Each selling securityholder
reserves the right to accept and, together with its agents from time to time, to
reject, in whole or in part, any proposed purchase of these securities to be
made directly or through agents.
Our outstanding common stock is quoted on the OTC Bulletin Board under the
symbol "HUSA.OB."
In order to comply with the securities laws of some states, if applicable, the
common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless they have been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.
Selling securityholders that are also registered broker-dealers who act in
connection with the sale of shares of common stock under this prospectus, other
than those who have received shares as compensation for providing investment
banking related services, are "underwriters" within the meaning of the
Securities Act and any commissions they receive and proceeds of any sale of
shares of common stock may be deemed to be underwriting discounts and
commissions under the Securities Act. Neither we nor any selling securityholder
can presently estimate the amount of this compensation. Selling securityholders
who are "underwriters" within the meaning of the Securities Act will be subject
to the prospectus delivery requirements of the Securities Act.
The selling securityholders have acknowledged that they understand their
obligations to comply with the provisions of the Exchange Act and the rules
thereunder relating to stock manipulation, particularly Regulation M thereunder,
or any successor rules or regulations, and have agreed that neither they nor any
person acting on their behalf will engage in any transaction in violation of
these provisions.
In addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under Rule
144 or Rule 144A rather than pursuant to this prospectus.
To the extent required, the specific common stock to be sold, the names of the
selling securityholders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
discounts, concessions or commissions with respect to a particular offer will be
set forth in an amendment to the registration statement, of which this
prospectus is a part, or in a supplement to this prospectus, as required by law.
We will use our commercially reasonable best efforts to keep the registration
statement, of which this prospectus is a part, effective for the period set
forth above under "Description of Securities-Registration Rights." No sales may
be made pursuant to this prospectus after that period unless we amend the
registration statement, of which this prospectus is a part, or supplement this
prospectus, as required by law, to indicate that we have agreed to extend the
period of effectiveness.
We have agreed, among other things, to bear all fees and expenses, other than
selling expenses, discounts, concessions and commissions and expenses of counsel
to the selling securityholders, in connection with the registration and sale of
the shares of common stock under this prospectus.
40
DESCRIPTION OF SECURITIES
The securities offered herein consist of shares of common stock issued in an
April 2006 private placement, shares of common stock issued on conversion of 8%
Subordinated Convertible Notes issued in a May 2005 private placement, shares of
common stock issued on exercise of placement agent warrants issued in connection
with the May 2005 private placement, and shares of common stock underlying
placement agent warrants issued in connection with the April 2006 private
placement.
The following description is a summary of the material terms, rights and
provisions of the common stock and the convertible notes and placement agent
warrants and the registration rights agreements relating to the securities
issued in the private placements. It does not purport to be complete. This
summary is subject to and is qualified by reference to all the provisions of the
notes and the warrants and to all provisions of the registration rights
agreements. Wherever particular provisions or defined terms or form of note are
referred to, these provisions or defined terms are incorporated in this
prospectus by reference. We urge you to read the note because it and not this
description defines the rights of a holder of notes.
COMMON STOCK
Our authorized capital stock consists of 100,000,000 shares of Common Stock and
10,000,000 shares of preferred stock. As of June 1, 2006, there were 27,820,172
shares of Common Stock outstanding and no shares of preferred stock outstanding.
The shares of Common Stock currently outstanding are validly issued, fully paid
and non-assessable. Each holder of Common Stock is entitled to one vote for each
share owned of record on all matters voted upon by the stockholders and a
majority vote is required for action to be taken by the stockholders. In the
event of our liquidation, dissolution or winding-up, the holders of Common Stock
are entitled to share equally and ratably in our assets, if any are remaining
after the payment of all of our debts and liabilities and the liquidation
preference of any outstanding preferred stock. The holders of the Common Stock
have no preemptive rights or cumulative voting rights and there are no
redemption, sinking fund or conversion provisions applicable to the Common
Stock.
Holders of the Common Stock are entitled to receive dividends if, as and when
declared by the Board of Directors, out of funds legally available for such
purpose, subject to the dividend and liquidation rights of any preferred stock
that may be issued.
PREFERRED STOCK
Our Certificate of Incorporation provides that we may, by vote of our Board of
Directors, issue the preferred stock in one or more series having the rights,
preferences, privileges and restrictions thereon, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption (including
sinking fund provisions), redemption prices, liquidation preferences and the
number of shares constituting any series or designation of such series, without
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in our control
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of Common Stock. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others.
8% SUBORDINATED CONVERTIBLE NOTES
8% Subordinated Convertible Notes, in the aggregate principal amount of
$2,125,000, were issued in May 2005. The notes were general, unsecured
obligations of Houston American Energy Corp. and ranked junior to our secured
debt, to the extent of any assets securing such indebtedness, and to our
existing and future unsubordinated, unsecured debt. The notes matured on May 1,
2010 unless earlier converted or redeemed.
41
The notes were convertible into common stock at $1.00 per share at the election
of the holder subject to (1) our right, at any time after May 1, 2007, to redeem
the notes at specified premiums, (2) automatic conversion in the event of
certain qualifying underwritten public offerings of our common stock and (3) our
right, after May 1, 2006, to cause the conversion of the notes into common stock
provided that the market price of the common stock on the conversion date, and
for at least 20 of the 30 trading days ending on the conversion date, is in
excess of 200% of the then applicable conversion price.
On May 2, 2006, we notified the holders of the notes of our election to convert
the notes into common stock. As a result, we issued 2,125,000 shares of common
stock to the holders of the notes and the principal amount of the notes was
satisfied in full.
PLACEMENT AGENT WARRANTS
-- May 2005 Placement. In connection with the May 2005 placement of 8%
Subordinated Convertible Notes, we issued placement agent warrants to Northeast
Securities, Inc., and its designees, to purchase an aggregate of 191,250 shares
of common stock. The warrants expire May 4, 2008 and were exercisable at $1.00
per share. The warrants contained customary anti-dilution provisions for stock
dividends, stock splits and the like and, originally, included anti-dilution
provisions relating to sales of common stock at less than the exercise price.
The warrants were subsequently amended to delete the anti-dilution provision
relating to sales of common stock at less than the exercise price.
In May 2006, all of the $1.00 placement agent warrants were exercised.
-- April 2006 Placement. In connection with the April 2006 placement of common
stock, we issued placement agent warrants to Sanders Morris Harris Inc. to
purchase an aggregate of 415,000 shares of common stock. The warrants expire
April 28, 2011 and are exercisable at $3.00 per share. The warrants have net
exercise provisions under which the holder may, in lieu of payment of the
exercise price in cash, surrender the warrant and receive a net number of shares
based on the fair market value of our common stock at the time of exercise of
the warrant after deduction of the total exercise price. These warrants contain
customary anti-dilution provisions for stock dividends, stock splits and the
like.
REGISTRATION RIGHTS AGREEMENTS
-- May 2005 Placement. We entered into a registration rights agreement with the
initial purchasers of the convertible notes. Under the registration rights
agreement, we were required to file the registration statement covering resale
of the registrable securities by August 2, 2005. We were required to use our
reasonable best efforts to cause the registration statement to become effective
by October 31, 2005. The registration statement was filed and declared
effective on December 1, 2005. This prospectus supersedes the prospectus
included in the registration statement originally filed and declared effective
relating to the shares underlying the convertible notes and the placement agent
warrants issued in connection therewith.
The term "registrable securities," when used in connection with the May 2005
private placement, refers to the notes and the common stock issuable upon
conversion of the notes and the common issuable upon exercise of the placement
agent warrants. With respect to any registrable securities, we agreed to use our
reasonable best efforts to keep the registration statement effective until the
earliest of:
- the date when all registrable securities have been sold in
accordance with such registration statement; or
- the date when all of the registrable securities have been sold
pursuant to Rule 144; or
- the date on which the registrable securities are eligible to be
sold without any restriction pursuant to Rule 144(k); or
- the date when all of the registrable securities cease to be
outstanding.
42
We may suspend the use of the prospectus included in the registration statement
under certain circumstances relating to pending corporate developments, public
filings with the SEC and similar events. Any suspension period shall not exceed:
- 20 consecutive days; or
- 45 days during any 12-month period.
A holder who elects to sell registrable securities pursuant to the registration
statement will be required to:
- be named as a selling securityholder in the related prospectus;
- deliver a prospectus to purchasers; and
- be subject to the provisions of the registration rights
agreement, including indemnification provisions.
Under the registration rights agreement, we will:
- pay all expenses of the registration statement;
- provide each registered holder copies of the prospectus;
- notify holders when the registration statement has become effective;
and
- take other reasonable actions as are required to permit
unrestricted resales of the registrable securities in accordance with
the terms and conditions of the registration rights agreement.
-- April 2006 Placement. We entered into a registration rights agreement with
Sanders Morris Harris Inc., on its own behalf as holder of placement agent
warrants and on behalf of the initial purchasers of the common stock in the
April 2006 private placement. Under the registration rights agreement, we are
required to file the registration statement, of which this prospectus is a part,
covering resale of the registrable securities by June 27, 2006. We are required
to use our reasonable best efforts to cause the registration statement to become
effective as soon as possible.
The term "registrable securities," when used in connection with the April 2006
private placement, refers to the common stock issued in the private placement
and the common issuable upon exercise of the placement agent warrants. With
respect to any registrable securities, we agreed to use our reasonable best
efforts to keep the registration statement effective until the earliest of:
- the date when all registrable securities have been sold in
accordance with such registration statement; or
- the date on which the registrable securities are eligible to be
sold without any restriction pursuant to Rule 144; or
- one year after the termination of the placement agent warrant.
We may suspend the use of the prospectus included in the registration statement
under certain circumstances relating to pending corporate developments, public
filings with the SEC and similar events. Any suspension period shall not exceed
60 days during any 12-month period and shall no commence sooner than 60 days
after the end of any prior suspension period.
A holder who elects to sell registrable securities pursuant to the registration
statement will be required to:
- be named as a selling securityholder in the related prospectus;
- deliver a prospectus to purchasers; and
- be subject to the provisions of the registration rights
agreement, including indemnification provisions.
43
Under the registration rights agreement, we will:
- pay all expenses of the registration statement;
- provide each registered holder copies of the prospectus;
- notify holders when the registration statement has become effective;
and
- take other reasonable actions as are required to permit
unrestricted resales of the registrable securities in accordance with
the terms and conditions of the registration rights agreement.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by
Michael W. Sanders, Attorney at Law.
EXPERTS
Our audited consolidated financial statements included in this prospectus and
elsewhere in the registration statement to the extent and for the periods
indicated in their reports have been audited by Thomas Leger & Co., L.L.P.,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and exhibits. With
respect to references made in this prospectus to any of our contracts or other
documents, such references are not necessarily complete and you should refer to
the exhibits attached to the registration statement for copies of the actual
contract or document. We are required to file annual, quarterly and other
information with the SEC. You may read and copy any document we file with the
SEC at the SEC's public reference facilities at Room 1580, 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the SEC's
public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, such as us,
that file electronically with the SEC.
We intend to furnish each holder of our common stock annual reports containing
audited financial statements and a report thereon by independent certified
accountants. We will also furnish to each holder of our common stock such other
reports as may be required by law.
44
HOUSTON AMERICAN ENERGY CORP.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm . . . . . F-1
Balance Sheet as of December 31, 2005 F-2
Statements of Operations For the Years ended December 31, 2005
and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Shareholders' Equity For the Years Ended
December 31, 2005 and 2004. . . . . . . . . . . . . . . . . . F-4
Statements of Cash Flows For the Years Ended December 31,
2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . F-6
Balance Sheet as of March 31, 2006 (Unaudited). . . . . . . . . F-23
Statements of Operations For the Three Months Ended
March 31, 2006 and 2005 (Unaudited) . . . . . . . . . . . . . . F-24
Statements of Cash Flows For the Three Months Ended
March 31, 2006 and 2005 (Unaudited) . . . . . . . . . . . . . . F-25
Notes to Unaudited Financial Statements . . . . . . . . . . . . . F-26
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Houston American Energy Corp.
Houston, Texas
We have audited the accompanying balance sheet of Houston American Energy Corp.
as of December 31, 2005 and the related statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 2005 and 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the over-all financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the financial position of Houston American Energy Corp. as
of December 31, 2005, and the results of its operations and its cash flows for
the years ended December 31, 2005 and 2004 in conformity with accounting
principles generally accepted in the United States of America.
Thomas Leger & Co., L.L.P.
March 7, 2006
Houston, Texas
F-1
HOUSTON AMERICAN ENERGY CORP.
BALANCE SHEET
DECEMBER 31, 2005
------------------------------------------------------------------------------
ASSETS
------
CURRENT ASSETS
Cash $ 1,724,100
Accounts receivable 573,322
Prepaid expenses 9,965
------------
TOTAL CURRENT ASSETS 2,307,387
------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method
Costs subject to amortization 3,797,025
Costs not being amortized 195,894
Office equipment 10,878
------------
Total properties 4,003,797
Accumulated depreciation and depletion oil and gas properties (1,372,552)
------------
PROPERTY, PLANT AND EQUIPMENT, NET 2,631,245
------------
OTHER ASSETS 113,851
------------
TOTAL ASSETS $ 5,052,483
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 252,872
Accrued expenses 278,393
Derivative Liability 2,813,175
Accrued interest on shareholder loans 4,400
------------
TOTAL CURRENT LIABILITIES 3,348,840
------------
LONG-TERM DEBT
Subordinated convertible notes-net of discount 34,167
Notes payable to principal shareholder 900,000
Reserve for plugging costs 41,249
------------
TOTAL LONG-TERM DEBT 975,416
------------
SHAREHOLDERS' EQUITY
Common stock, par value $.001;
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 (2,057,830)
------------
TOTAL SHAREHOLDERS' EQUITY 728,227
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,052,483
============
The accompanying notes are an integral part of these financial statements.
F-2
HOUSTON AMERICAN ENERGY CORP.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
2005 2004
------------ ------------
REVENUE:
Oil and gas $ 2,780,457 $ 1,182,063
Commission income 60,000 -
Interest 34,191 6,058
------------ ------------
TOTAL REVENUE 2,874,648 1,188,121
OPERATING EXPENSES
Lease operating and production tax 953,624 413,723
Joint venture expense 61,500 41,944
Depreciation and depletion 363,196 211,759
General and administrative expense
Professional fees 504,742 150,603
Payroll expense 192,040 48,742
Rent 41,014 39,772
Shareholder relations 14,019 29,363
Travel and meals 21,650 16,046
Dues and subscriptions 10,618 11,141
Miscellaneous 51,746 37,745
------------ ------------
Total expenses 2,214,149 1,000,838
------------ ------------
OPERATING INCOME 660,499 187,283
OTHER EXPENSE
Interest expense-Derivative (319,714) -
Net change in fair value of derivative liabilities (402,628) -
Interest expense (111,920) -
Interest expense on shareholder debt (72,000) (72,000)
Financing fees (16,816) -
------------ ------------
Total other expense (923,078) (72,000)
(LOSS) INCOME BEFORE INCOME TAX (262,579) 115,283
PROVISION FOR INCOME TAX
Current 239,201 -
Deferred - -
------------ ------------
TOTAL INCOME TAX PROVISION 239,201 -
------------ ------------
NET (LOSS) INCOME $ (501,780) $ 115,283
============ ============
BASIC AND DILUTED INCOME PER SHARE $ (0.03) $ 0.01
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE SHARES 19,970,553 19,619,084
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
HOUSTON AMERICAN ENERGY CORP.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
-----------------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock
------------------------------- --------------------- Accumulated
Paid - in Equity
Shares Amount Capital Shares Amount (Deficit) Total
---------- ------- ---------- ---------- --------- ------------- -----------
Balance at December 31, 2003 19,285,106 $19,285 $2,299,767 $ - $ - $ (1,671,334) $ 647,718
Stock issued for -
Cash 532,983 533 349,910 350,443
Services 150,000 150 150,350 150,500
Purchase of treasury stock (100,000) (85,834) (85,834)
Net income - - - - - 115,283 115,283
---------- ------- ---------- ---------- --------- ------------- -----------
Balance at December 31, 2004 19,968,089 $19,968 $2,800,027 (100,000) $(85,834) $ (1,556,051) $1,178,110
Stock issued for -
Services 2,500 3 2,447 - - - 2,450
Stock options issued - - 49,447 - - - 49,447
Net income - - - - - (501,780) (501,780)
---------- ------- ---------- ---------- --------- ------------- -----------
Balance at December 31, 2005 19,970,589 $19,971 $2,851,921 (100,000) $(85,834) $ (2,057,831) $ 728,227
========== ======= ========== ========== ========= ============= ===========
The accompanying notes are an integral part of these financial statements.
F-4
HOUSTON AMERICAN ENERGY CORP.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
-----------------------------------------------------------------------------
2005 2004
------------ ----------
CASH FLOW FROM OPERATING ACTIVITIES
Income (loss) from operations $ (501,780) $ 115,283
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH FROM OPERATIONS
Depreciation and depletion 363,196 211,759
Non-cash expenses 51,895 17,166
Derivative expense 722,342
(Increase) in accounts receivable (333,180) (174,138)
(Increase) decrease in prepaid expense 79,983 (84,009)
(Increase) decrease in other assets 16,816 36,864
Increase in accounts payable
and accrued expenses 295,309 175,070
------------ ----------
Net cash provided by operations 694,581 297,995
------------ ----------
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of properties and assets (1,589,594) (611,897)
Funds in excess of prospect costs - 21,650
------------ ----------
Net cash used in investing activities (1,589,594) (590,247)
------------ ----------
CASH FLOW FROM FINANCING ACTIVITIES
Sale of common stock - net of costs - 350,443
Issuance of debt, net of costs 1,997,500 -
Payment on loans from principal shareholder (100,000) -
------------ ----------
Net cash provided by financing 1,897,500 350,443
------------ ----------
INCREASE IN CASH 1,002,487 58,191
Cash, beginning of period 721,613 663,422
------------ ----------
Cash, end of period $ 1,724,100 $ 721,613
============ ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 150,865 $ 67,600
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Stock issued for oil and gas activity $ - $ 47,500
The accompanying notes are an integral part of these financial statements.
F-5
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
NOTE 1. - NATURE OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL -Houston American Energy Corp. (a Delaware Corporation) ("the Company"
-------
or "HUSA") was incorporated on April 2, 2001. The Company is engaged, as a
non-operating joint owner, in the exploration, development, and production of
natural gas, crude oil, and condensate from properties located principally in
the Gulf Coast area of the United States and international locations with proven
production, which to date has focused on Columbia, South America.
GENERAL PRINCIPLES AND USE OF ESTIMATES - The financial statements have been
--------------------------------------------
prepared in conformity with accounting principles generally accepted in the
United States of America. In preparing financial statements, Management makes
informed judgments and estimates that affect the reported amounts of assets and
liabilities as of the date of the financial statements and affect the reported
amounts of revenues and expenses during the reporting period. On an ongoing
basis, Management reviews its estimates, including those related to such
potential matters as litigation, environmental liabilities, income taxes and
determination of proved reserves. Changes in facts and circumstances may result
in revised estimates and actual results may differ from these estimates.
Certain amounts for prior periods have been reclassified to conform to the
current presentation.
OIL AND GAS REVENUES - The Company recognizes sales revenues based on the amount
--------------------
of gas, oil and condensate sold to purchasers when delivery to the purchaser has
occurred and title has transferred. This occurs when production has been
delivered to a pipeline. Currently, the Company does not anticipate that the
oil and gas sold will be significantly different from the Company's production
entitlement.
OIL AND GAS PROPERTIES AND EQUIPMENT - The Company uses the full cost method of
-------------------------------------
accounting for exploration and development activities as defined by the SEC.
Under this method of accounting, the costs for unsuccessful, as well as
successful, exploration and development activities are capitalized as oil and
gas properties. Capitalized costs include lease acquisition, geological and
geophysical work, delay rentals, costs of drilling, completing and equipping the
wells and any internal costs that are directly related to acquisition,
exploration and development activities but does not include any costs related to
production, general corporate overhead or similar activities. Gain or loss on
the sale or other disposition of oil and gas properties is not recognized,
unless the gain or loss would significantly alter the relationship between
capitalized costs and proved reserves of oil and natural gas attributable to a
country.
The Company categorizes its full costs pools as costs subject to amortization
and costs not being amortized. The sum of net capitalized costs subject to
amortization, including estimated future development and abandonment costs, are
amortized using the unit-of-production method.
Office equipment is stated at original cost and is depreciated on the
straight-line basis over the useful life of the assets, which ranges from three
to five years. Oil and gas properties and office equipment carrying values do
not purport to represent replacement or market values.
Depreciation expense for office equipment was $2,175 and $2,175 at December 31,
2005 and 2004, respectively and accumulated reserved for depreciation was $7,633
at December 31, 2005. Depletion and amortization for oil and gas properties was
$359,521 and $206,584 at December 31, 2005 and 2004, respectively and
accumulated reserve for depletion and amortization was $1,364,918 at December
31, 2005. Repairs and maintenance are expensed as incurred.
F-6
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
COSTS EXCLUDED - Oil and gas properties include costs that are excluded from
---------------
capitalized costs being amortized. These amounts represent costs of investments
in unproved properties. The Company excludes these costs on a country-by-country
basis until proved reserves are found or until it is determined that the costs
are impaired. All costs excluded are reviewed quarterly to determine if
impairment has occurred. The amount of any impairment is transferred to the
costs subject to amortization.
CEILING TEST - Under the full cost method of accounting, a ceiling test is
-------------
performed each quarter. The full cost ceiling test is an impairment test
prescribed by Securities and Exchange Commission (SEC") Regulation S-X. The
ceiling test determines a limit, on a country-by-country basis, on the book
value of oil and gas properties. The capitalized costs of proved oil and gas
properties, net of accumulated depreciation, depletion and amortization ("DD&A")
and the related deferred income taxes, may not exceed the estimated future net
cash flows from proved oil and gas reserves, using prices in effect at the end
of the period with consideration of price change only to the extent provided by
contractual arrangement, discounted at 10%, net of related tax effects. If
capitalized costs exceed this limit, the excess is charged to expense and
reflected as additional accumulated DD&A.
Proved oil and gas reserves, as defined by SEC Regulation S-X, are the estimated
quantities of crude oil, natural gas, and condensate which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made. Prices
include consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
Proved developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery are included as proved developed
reserves only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
Proved undeveloped oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage are limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units are claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
The Company emphasizes that the volumes of reserves are estimates, which, by
their nature, are subject to revision. The estimates are made using all
available geological and reservoir data, as well as production performance data.
These estimates, made by an independent reservoir engineer (approximately 65% of
reserves) and a reservoir engineer that is a shareholder and director, are
reviewed and revised, either upward or downward, as warranted by additional
data. Revisions are necessary due to changes in assumptions based on, among
other things, reservoir performance, prices, economic conditions and
governmental restrictions. Decreases in prices, for example, may cause a
reduction in some proved reserves due to uneconomical conditions.
Unevaluated oil and gas properties not subject to amortization at December 31,
2005 include the following:
F-7
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
North South
America America Total
--------- --------- ---------
Acquistion costs $ 44,548 $ - $ 44,548
Geological, geophysical and screening costs 307 151,039 151,346
--------- --------- ---------
Total $ 44,855 $ 151,039 $ 195,894
========= ========= =========
ASSET RETIREMENT OBLIGATIONS - The Company has adopted SFAS 143, "Accounting for
----------------------------
Asset Retirement Obligations," which addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. For the company, asset retirement obligations
("ARO") represent the systematic, monthly accretion and depreciation of future
abandonment costs of tangible assets such as platforms, wells, service assets,
pipelines, and other facilities. SFAS 143 requires that the fair value of a
liability for an asset's retirement obligation be recorded in the period in
which it is incurred if a reasonable estimate of fair value can be made, and
that the corresponding cost is capitalized as part of the carrying amount of the
related long-lived asset. The liability is accreted to its then present value
each period, and the capitalized cost is depreciated over the useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount, an adjustment is made to the full cost pool, with no gain or loss
recognized, unless the adjustment would significantly alter the relationship
between capitalized costs and proved reserves. Under the company's previous
accounting method, the company included estimated future costs of abandonment
and dismantlement in full cost amortization base and amortized these costs as a
component of depletion expense. Subsequent to adoption of SFAS 143, the ARO
assets, which are carried on the balance sheet as part of the full cost pool,
have been included in our amortization base for the purposes of calculating
depreciation, depletion and amortization expense. For the purposes of
calculating the ceiling test, the future cash outflows associated with settling
the ARO liability have been included in the computation of the discounted
present value of estimated future net revenues.
The following table describes changes in our asset retirement liability during
each of the years ended December 31, 2005 and 2004. The ARO liability in the
table below includes amounts classified as both current and long-term at
December 31, 2005 and 2004.
Years Ended December 31,
2005 2004
------------- -------------
ARO liability at January 1, $ 39,952 $ 15,625
Accretion expense 4,504 3,000
Liabilities incurred from drilling 20,505
Liabilities incurred - assets acquired 3,501
Liabilities settled - assets abandoned (17,423)
Changes in estimates (9,790) 21,327
------------- -------------
ARO liability at December 31 $ 41,249 $ 39,952
============= =============
JOINT VENTURE EXPENSE - Joint venture expense reflects the indirect field
---------------------
operating and regional administrative expenses billed by the operator of the
Columbian CaraCara and Tambaqui concessions.
F-8
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
INCOME TAXES - Deferred income taxes are provided on a liability method whereby
-------------
deferred tax assets and liabilities are established for the difference between
the financial reporting and income tax basis of assets and liabilities as well
as operating loss and tax credit carry forwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
PREFERRED STOCK - The Company has authorized 10,000,000 shares of preferred
----------------
stock with a par value of $.001. The Board of Directors shall determine the
designations, rights, preferences, privileges and voting rights of the preferred
stock as well as any restrictions and qualifications thereon. No shares of
preferred stock have been issued.
STATEMENT OF CASH FLOWS - Cash equivalents consists of demand deposits and cash
------------------------
investments with initial maturity dates of less than three months.
NET LOSS PER SHARE - Basic loss per share is computed by dividing the net loss
--------------------
available to common shareholders by the weighted average of common shares
outstanding during the period. Diluted per share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments unless the
effect is anti-dilutive, thereby reducing the loss or increasing the income per
share.
CONCENTRATION OF RISK - The Company is dependent upon the industry skills and
-----------------------
contacts of John F. Terwilliger, the sole director and chief executive officer,
to identify potential acquisition targets in the onshore coastal Gulf of Mexico
region of Texas and Louisiana. Further, as a non-operator oil and gas
exploration and production company and through its interest in a limited
liability company and four concessions in the South American country of
Colombia, the Company is dependent on the personnel, management and resources of
those entities to operate efficiently and effectively.
As a non-operating joint interest owner, the Company has a right of investment
refusal on specific projects and the right to examine and contest its division
of costs and revenues determined by the company operator.
The Company currently has interests in several concessions in Colombia and
expects to be active in Colombia for the foreseeable future. The political
climate in Colombia is unstable and could be subject to radical change over a
very short period of time. In the event of a significant negative change in
political and economic stability in the vicinity of the Company's Colombian
operations, the Company may be forced to abandon or suspend their efforts.
Either of such events could be harmful to the Company expected business
prospects.
At December 31, 2005, 68% of the Company's net oil and gas property investment
and 73% of its revenue was with or derived from the company managing the
Columbian properties.
The majority of the oil production for 2005 from the Company's mineral interests
were sold to an international integrated oil company (96%) The gas production is
sold to U.S. natural gas marketing company based on the highest bid. There were
no other product sales of more than 10% to a single buyer.
The Company maintains its cash in two banks in Houston, Texas. The total cash
balance is insured by the F.D.I.C. up to $100,000 per bank. The Company had
cash balances on deposit with the two banks in Houston, Texas that exceeded the
balances insured by the F.D.I.C. by $1,524,000.
Stock-Based Compensation - In December 2002, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amends SFAS No. 123. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results of operations. As the Company has not elected to
change to the fair value based method of accounting for stock based employee
compensation, the adoption of SFAS No. 148 did not have a material impact on the
Company's financial position or results of operations. All disclosure
requirements of SFAS No. 148 have been adopted and are reflected in these
financial statements.
F-9
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, and
complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB 25, compensation expense is based on the
difference, if any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock. The Company
accounts for stock and options to non-employees at fair value in accordance with
the provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus on
Issue No. 96-18.
RESTATEMENT OF INTERIM QUARTERS
-------------------------------
The Company has recently determined that its original accounting for the
Subordinated Convertible Notes ("Convertible Notes") and Warrants ("Warrants")
issued on May 4, 2005, were not reported in accordance with generally accepted
accounting principles. The Notes were originally recorded at their notional
amounts; and the fair value of the Warrants was included in Shareholders'
Equity. The Company subsequently determined that the Convertible Notes and
Warrants contain detachable and embedded derivatives. The Company has revised
its accounting for the Convertible Notes and Warrants in this filing, and will
concurrently file amendments to its previously filed Forms 10-QSB for the three
and six months ended June 30, 2005, and the three and nine months ended
September 30, 2005.
SUBORDINATED CONVERTIBLE NOTES AND WARRANTS- DERIVATIVE FINANCIAL INSTRUMENTS
-----------------------------------------------------------------------------
The Convertible Notes and the Warrants have been accounted for in accordance
with SFAS 133 and EITF No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."
The Company has identified the following instruments and derivatives:
Convertible Notes
Conversion feature
Conversion price reset feature
Company's optional redemption right
Warrants
Warrants exercise price reset feature
The Company has identified the conversion feature; the conversion price reset
feature and the Company's optional early redemption right within the Convertible
Notes to represent embedded derivatives. These embedded derivatives have been
bifurcated from their respective host debt contracts and accounted for as
derivative liabilities in accordance with EITF 00-19. The conversion feature,
the conversion price reset feature and the Company's optional early redemption
right within the Convertible Notes have been bundled together as a single hybrid
compound instrument in accordance with SFAS No. 133 Derivatives Implementation
Group Implementation Issue No. B-15, "Embedded Derivatives: Separate Accounting
for Multiple Derivative Features Embedded in a Single Hybrid Instrument."
The Company has identified the common stock warrant to be a detachable
derivative. The warrant exercise price reset provision is an embedded
derivative within the common stock warrant. The common stock warrant and the
embedded warrant exercise price reset provision have been accounted for as a
separate single hybrid compound instrument.
The Single Compound Embedded Derivatives within Convertible Notes and the
Derivative Liability for Warrants have been recorded at fair value at the date
of issuance (May 4, 2005); and are marked-to-market each quarter with changes in
fair value recorded to the Company's income statement as "Net change in fair
value of derivative liabilities." The Company has utilized a third party
valuation firm to fair value the single compound embedded derivatives under the
following methods: a layered discounted probability-weighted cash flow approach
for the Single Compound Embedded Derivatives within Convertible Notes; and the
Black-Scholes model for the Derivative Liability for Warrants based on a
probability weighted exercise price".
F-10
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
The fair value of the derivative liabilities are subject to the changes in the
trading value of the Company's common stock. As a result, the Company's
financial statements may fluctuate from quarter-to-quarter based on factors,
such as the price of the Company's stock at the balance sheet date, the amount
of shares converted by note holders and/or exercised by warrant holders.
Consequently, our financial position and results of operations may vary from
quarter-to-quarter based on conditions other than our operating revenues and
expenses.
RECENT ACCOUNTING DEVELOPMENTS - In April 2005, the Securities and Exchange
--------------------------------
Commission amended the effective date of Statement of Financial Accounting
Standards No. 123R, "Share Based Payment" ('SFAS 123R"), from the first interim
or annual period after June 15, 2005 to the beginning of the next fiscal year
that begins after June 15, 2005. SFAS 123R requires that the cost of all
share-based payments to employees, including grants of employee stock options,
be recognized in the financial statements based on their fair values. That cost
will be recognized as an expense over the vesting period of the award. Pro forma
disclosures previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. In addition, the Company will be required to
determine fair value in accordance with SFAS 123R. The Company does not expect
that SFAS 123R will have a material impact on its consolidated financial
statements.
In May 2005, the Financial Accounting Standards Board ('FASB") issued
Statement of Financial Accounting Standards No. 154, "Accounting Changes and
Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No.
3"('SFAS 154"), which is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. SFAS 154 applies
to all voluntary changes in accounting principles, and changes the accounting
and reporting requirements for a change in accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements of a
voluntary change in accounting principle unless it is impracticable. APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. SFAS 154 also requires that
a change in depreciation, amortization, or depletion method for long-lived, non
financial assets be accounted for as a change in accounting estimate effected by
a change in accounting principle. SFAS 154 carries forward without change the
guidance in APB 20 for reporting the correction of an error in previously issued
financial statements, a change in accounting estimate and a change in reporting
entity, as well as the provisions of SFAS 3 that govern reporting accounting
changes in interim financial statements. The Company does not expect that SFAS
154 will have a material impact on its consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29"
("SFAS No. 153"). Previous guidance regarding the accounting for nonmonetary
assets was based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. This previous
guidance, however, included certain exceptions to that principle, SFAS No. 153
amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. The
provisions of SFAS No. 153 are generally effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of SFAS No. 153 will have a material impact on its
consolidated financial statements.
F-11
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47). FIN 47 is an interpretation
of FAS No. 143, Asset Retirement Obligations, and relates to the timing of
liability recognition for legal obligations associated with the retirement of a
tangible long-lived asset in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The adoption of FIN 47, effective December 31, 2005, did not have an
effect on the Company's consolidated results of operations or financial
position.
NOTE 2. - NOTES PAYABLE
NOTE PAYABLE - SHAREHOLDER
A note payable at December 31, 2005, in the amount of $900,000, is owed to John
Terwilliger, Chief Executive Officer, who is also a significant shareholder. The
note is not secured, bears interest at 7.2% and is due on January 1, 2007 with
interest paid monthly, based on cash flow.
SUBORDINATED CONVERTIBLE NOTES
On May 4, 2005, the Company entered into purchase agreements with multiple
investors pursuant to which the Company sold $2,125,000 of 8% subordinated
convertible notes due 2010.
The notes bear interest at 8%, provide for semi-annual interest payments and
mature May 1, 2010. The notes are convertible, at the option of the holders,
into common stock of the Company at a price of $1.00 per share, subject to
standard anti-dilution provisions relating to splits, reverse splits and other
transactions plus a reset provision whereby the conversion price may be adjusted
downward to a lower price per share if the Company issues its common stock to
others below the stated conversion price. The notes are subject to automatic
conversion in the event the Company conducts an underwritten public offering of
its common stock from which the Company receives at least $5 million and the
public offering price is at least 150% of the then applicable conversion price.
The Company has the right to cause the notes to be converted into common stock
after May 1, 2006 if the price of the Company's common stock exceeds 200% of the
then applicable conversion price on the date of conversion and for at least 20
trading days over the preceding 30 trading days. The Company has the right to
repurchase the Notes after May 1, 2007 at 103% of the face amount during 2007,
102% of the face amount during 2008, 101% of the face amount during 2009 and
100% of the face amount thereafter. The notes are unsecured general obligations
of the Company and are subordinated to all other indebtedness of the Company
unless the other indebtedness is expressly made subordinate to the notes.
The conversion feature, the conversion price, reset provision and the Company's
optional early redemption right 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 (as amended -
see restatement in Note 1) 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.
F-12
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
At May 4, 2005 (inception as amended), the Convertible Notes were adjusted as
follows:
Notional balance of Convertible Notes at inception $ 2,125,000
Adjustment-Discount for single compound derivative liability (2,125,000)
------------
Convertible Notes balance at inception, as adjusted $ -
============
At December 31, 2005, the Convertible Notes comprised the following:
Notional balance of Convertible Notes at December 31, 2005 $ 2,125,000
Adjustment-Discount for single compound derivative liability (2,090,833)
------------
Convertible Notes balance at December 31, 2005, as adjusted $ 34,167
============
For the period from inception of the Convertible Notes (May 4, 2005) through
December 31, 2005, the amortization of unamortized discount on the Convertible
Notes was $34,167, which has been classified as interest expense in the
accompanying statement of operation.
The Derivative Liability-Compound Embedded Derivatives within Convertible Notes
reflect the following activity for the period from inception (May 4, 2005)
through December 31, 2005:
Balance at inception (May 4, 2005) $2,368,485
Mark-to-market adjustment for the period from inception through December 31, 2005 15,561
----------
Balance at December 31, 2005 $2,384,046
==========
WARRANTS
On May 4, 2005, the Company entered into three year warrant agreements (the
"Warrants") with nine parties whereby 191,250 warrants were issued at an
exercise price of $1.00 per share, subject to a reset provision whereby the
exercise price would be adjusted downward in the event the Company issued its
common stock to others at a price below the initial warrant exercise price. This
reset provision represents an embedded derivative, which has not been bifurcated
from the host warrant contract (as both are derivatives) and has been a
derivative liability at its fair value at date of inception utilizing the
Black-Scholes method with a probability weighted exercise price. This fair value
model comprises multiple probability-weighted scenarios under various
assumptions reflecting the economics of the warrants, such as risk free interest
rate, expected Company stock price and volatility, likelihood of exercise, and
timely registration. The assumptions used at December 31, 2005 were a risk-free
interest rate of 3.08%, volatility of 40%, expected term of 2.3 years, dividend
yield of 0.00% and a probability weighted exercise price of $.983. The common
stock warrants and the embedded warrant price reset provision were initially
fair valued (as amended-see restatement in Note 1) at $42,063 at May 4, 2005. At
inception, the amount of the value assigned over the notional amount of the
Convertible Note in the amount of $42,063 was charged to expense in the
Company's statement of operations.
The Derivative Liability-Compound Embedded Derivatives within Warrants reflect
the following activity for the period from inception (May 4, 2005) through
December 31, 2005.
F-13
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
Balance at inception (May 4, 2005) $ 42,063
Mark-to-market adjustment for the period from inception through December 31, 2005 387,067
--------
Balance at December 31, 2005 $429,130
========
Activity of warrants during the year ended December 31, 2005 is as follows:
Weighted
Average
Warrants Share Price
-------- ------------
Outstanding at beginning of period - -
Granted 191,250 $ 1.00
-------- -------------
Outstanding at end of period 191,250 $ 1.00
======== =============
Warrants outstanding and exercisable as of December 31, 2005:
Exercise Number of Remaining Number of
Price Shares Life Shares
--------- --------- --------- ---------
1.00 191,250 2.58 191,250
========= ========= ========= =========
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
For the period from inception of the Convertible Notes and Warrants (May 4,
2005) through December 31, 2005, the change in fair value of the derivative
liabilities includes the following:
Derivative Liability-Compound Embedded Derivatives within Convertible Notes $ 15,561
Derivative liability-Compound Embedded Derivatives within Common Stock Warrants 387,067
--------
Net increase in fair value of derivative liabilities $402,628
========
NOTE 3. - RELATED PARTIES
In conjunction with the Company's efforts to secure oil and gas prospects,
financing and services, it has, from time to time, granted overriding royalty
interests in the Company's various mineral properties to John F. Terwilliger,
Chief Executive Officer, and Orrie L. Tawes, a significant shareholder. During
2005 and 2004, approximately $60,000 and $36,000, respectively, was paid to John
Terwilliger and Orrie L. Tawes from these royalty interests.
F-14
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
NOTE 4 - INCOME TAXES
The following table sets forth a reconciliation of the statutory federal income
tax for the year ended December 31, 2005 and 2004.
2005 2004
------------ -----------
(Loss) income before income taxes $ (262,579) $ 115,238
============ ===========
Income tax computed at statutory rates $ (89,277) $ 39,196
Derivative expense 245,596 -
Effect of foreign tax provision, before effect of
changes in tax rate, on the total tax provision 171,247 -
Permanent differences, nondeductible expenses 1,934 7,168
Increase (decrease) in valuation allowance (96,766) (58,264)
Other 6,467 11,900
------------ -----------
Tax provision $ 239,201 $ -
============ ===========
Current provision
United States $ - $ -
Foreign 239,201 -
Deferred provision - -
------------ -----------
Total provision $ 239,201 $ -
============ ===========
No federal income taxes have been paid since the inception of the Company. The
Company has a net operating loss carry forward of approximately $1,173,000 which
will expire in 2016 through 2018. In addition, the Company has approximately
$239,000 of foreign tax credit carryforward which will expire in 2016. The
Company's net operating loss carryforwards may be subject to annual limitations,
which could reduce or defer the utilization of the loss as a result of an
ownership change as defined in section 382 of the Internal Revenue Code.
The tax effects of the temporary differences between financial statement income
and taxable income are recognized as a deferred tax asset and liability.
Significant components of the deferred tax asset and liability as of December
31, 2005 are set out below.
2005 2004
------------ ------------
Deferred tax asset:
Net operating loss carryforwards $ 398,888 $ 459,550
Foreign tax credit carryforward 239,201
Asset retirement obligation 15,115 13,584
Valuation allowance (420,450) (337,259)
Book over tax depreciation, depletion
and capitalization methods on oil
and gas properties (234,250) (137,371)
Book over tax accrued interest payments 1,496 1,496
------------ ------------
Net deferred tax asset $ - $ -
============ ============
F-15
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
FOREIGN INCOME TAXES
----------------------
The Company owns an interest in a Limited Liability Company that operates the
activities in Columbia. Colombia's tax rate is 38.5%. Based on information
provided by the manager of the LLC the company has determined their share of the
Columbia tax liability for 2005 will be $239,201. This amount has been accrued
in the fourth quarter and will be funded by withholdings from the revenue
received in 2006.
NOTE 5. - STOCK OPTION
On August 12, 2005, the Company's Board of Directors adopted the Houston
American Energy Corp. 2005 Stock Option Plan (the "Plan"). The terms of the Plan
allow for the issuance of options to purchase 500, 000 shares of the Company's
common stock. Persons eligible to participate in the Plan are key employees,
consultants and directors of the Company. During the year the Company granted
60,000 options to the members of the Board of Directors and 29,000 to
consultants.
The fair value of the options granted to consultants was valued on the date of
the grant using the Black-Scholes option-pricing model with the following
assumptions, risk-free interest rate of 4.29%, expected life of 10 years ,
expected stock volatility of 40%, expected dividend yield 0.0%. Using this model
yielded a value of $49,447 which was charge to expense in 2005.
The fair value of the options granted to members of the board of directors was
valued on the date of the grant using the Black-Scholes option-pricing model
with the following assumptions, risk-free interest rate of 4.29%, expected life
of 10 years , expected stock volatility of 40%, expected dividend yield 0.0%. If
the Company had accounted for the option as recommended in SFAS 123, directors
fee expense would have had the following pro forma effect on our net loss and
earnings per share for the year ended December 31, 2005.
Net loss as reported $(501,780)
Less: Directors fees determined using fair value method (69,600)
----------
Net (loss) $(571,380)
==========
Net loss per share - as reported $ (0.03)
Net loss per share pro-forma $ (0.03)
F-16
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
Option activity during 2005 is as follows:
Weighted
Average
Options Share Price
------- ------------
Outstanding at beginning of year - $ -
Granted 89,000 2.42
Excersied - -
Forfieted - -
------- ------------
Outstanding at end of year 89,000 $ 2.42
======= ============
NOTE 6. - COMMON STOCK
During the year ended December 31, 2005, the Company issued 2,500 shares of its
common stock for services valued at $2,450.
NOTE 7. - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT - The Company leases office facilities under an operating lease
----------------
agreement which expires November 30, 2006. The lease agreement requires payments
of $33,026 in 2006. Total rental expense in 2005 was $41,014 and $39,772 in
2004. The Company does not have any capital leases or other operating lease
commitments.
LEGAL CONTINGENCIES - The Company is subject to legal proceedings, claims and
--------------------
liabilities that arise in the ordinary course of its business. The Company
accrues for losses associated with legal claims when such losses are probable
and can be reasonably estimated. These accruals are adjusted as further
information develops or circumstances change. During the twelve months ended
December 31, 2005, the Company was named as defendant in a suit filed in the
United States Bankruptcy Court for the Southern District of Texas. The Company
settled the bankruptcy litigation. The Company paid the $25,000 to settle the
case.
DEVELOPMENT COMMITMENTS - During the ordinary course of oil and gas prospect
------------------------
development, the Company commits to a proportionate share for the cost of
acquiring mineral interest, drilling exploratory or development wells and
acquiring seismic and geological information. At January 1, 2006, our
acquisition and drilling budget for 2006 totaled $1,700,000.
POST RETIREMENT BENEFITS - At December 31, 2005, the Company does not have any
--------------------------
pension plans, other postretirement benefits or employee savings plans.
NOTE 8 - SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT AND
PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by Statement of Financial
Accounting Standards No. 69, "Disclosures about Oil and gas Producing
Activities".
GEOGRAPHICAL DATA - The following table shows the Company's oil and gas revenues
-----------------
and lease operating expenses, which includes the joint venture expenses incurred
in South America, by geographic area:
F-17
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
2005 2004
REVENUES
North America $ 739,384 $ 373,591
South America 2,041,072 808,472
---------- ----------
$2,780,456 $1,182,063
========== ==========
PRODUCTION COST
North America $ 79,542 $ 59,275
South America 874,082 354,448
---------- ----------
$ 953,624 $ 413,723
========== ==========
CAPITAL COSTS - Capitalized costs and accumulated depletion relating to the
--------------
Company's oil and gas producing activities as of December 31, 2005, all of which
are onshore properties located in the United States and Columbia, South America
are summarized below:
NORTH SOUTH
AMERICA AMERICA TOTAL
----------- ----------- -----------
Unproved properties not
being amortized $ 44,855 $ 151,039 $ 195,894
Properties being amortized 1,760,286 2,039,944 3,800,230
Accumulated depreciation, depletion
and amortization (960,053) (404,865) (1,364,918)
----------- ----------- -----------
Total capitalized costs $ 845,088 $1,786,118 $2,631,206
=========== =========== ===========
AMORTIZATION RATE
-----------------
The amortization rate per unit based on barrel equivalents was $6.08 for North
America and $6.82 for South America.
ACQUISITION, EXPLORATION AND DEVELOPMENT COSTS INCURRED -Costs incurred in oil
---------------------------------------------------------
and gas property acquisition, exploration and development activities for
December 31, 2005 and 2004 is summarized below:
2005
-----------------------
North South
America America
---------- ----------
Property acquisition costs:
Proved $ 733,719 $ 355,000
Unproved 44,548 -
Exploration costs 954,916 1,508,388
Development costs 71,950 324,398
---------- ----------
Total costs incurred $1,805,133 $2,187,786
========== ==========
F-18
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
2004
----------------------
North South
America America
---------- ----------
Property acquisition costs:
Proved $ 776,219 $ 405,002
Unproved 48,636 12,159
Exploration costs 428,476 128,275
Development costs 21,077 583,685
---------- ----------
Total costs incurred $1,274,408 $1,129,121
========== ==========
RESERVE INFORMATION AND RELATED STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
--------------------------------------------------------------------------------
CASH FLOWS -
----------
The supplemental unaudited presentation of proved reserve quantities and related
standardized measure of discounted future net cash flows provides estimates only
and does not purport to reflect realizable values or fair market values of the
Company's reserves. Volumes reported for proved reserves are based on
reasonable estimates. These estimates are consistent with current knowledge of
the characteristics and production history of the reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than those of producing oil and gas
properties. Accordingly, significant changes to these estimates can be expected
as future information becomes available.
Proved reserves are those estimated reserves of crude oil (including condensate
and natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainly to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment, and operating methods.
Independent petroleum engineers estimated proved reserves for the Company's
properties which represented approximately 65% of total estimated future net
revenues at December 31, 2005. The remaining reserves were estimated by a
petroleum engineer who is also a shareholder and director of the Company.
Reserve definitions and pricing requirements prescribed by the Securities and
Exchange Commission were used. Total estimated proved developed and undeveloped
reserves by product type and the changes therein are set forth below for the
years indicated.
F-19
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
North America South America Total
--------------------- -------------------- ---------------------
Gas (mcf) Oil (bbls) Gas(mcf) Oil (bbls) Gas (mcf) Oil (bbls)
--------- ---------- -------- ---------- --------- ----------
Total proved reserves
Balance December 31, 2003 176,600 4,400 - 269,707 176,600 274,107
Extensions and discoveries 54,458 11,274 - 264,981 54,458 276,255
Revisions of prior estimates 32,881 (3,198) - (214,948) 32,881 (218,146)
Production (61,519) (886) - (24,040) (61,519) (24,926)
--------- ---------- -------- ---------- --------- ----------
Balance December 31, 2004 202,420 11,590 - 295,700 202,420 307,290
Extensions and discoveries 270,536 424 - 146,109 270,536 146,533
Revisions of prior estimates 456,656 (7,810) - (128,290) 456,656 (136,100)
Production (78,962) (1,404) - (42,898) (78,962) (44,302)
--------- ---------- -------- ---------- --------- ----------
Balance December 31, 2005 850,650 2,800 - 270,621 850,650 273,421
========= ========== ======== ========== ========= ==========
Proved developed reserves
at December 31, 2004 141,000 2,500 97,610 141,000 100,110
========= ========== ========== ========= ==========
at December 31, 2005 364,970 560 - 200,437 364,970 200,997
========= ========== ======== ========== ========= ==========
The standardized measure of discounted future net cash flows relating to proved
oil and gas reserves is computed by applying year-end prices of oil and gas
(with consideration of price changes only to the extent provided by contractual
arrangements) to the estimated future production of proved oil and gas reserves,
less estimated future expenditures (based on year-end costs) to be incurred in
developing and producing the proved reserves, less estimated related future
income tax expenses (based on year-end statutory tax rates, with consideration
of future tax rates already legislated), and assuming continuation of existing
economic conditions. Future income tax expenses give effect to permanent
differences and tax credits but do not reflect the impact of continuing
operations including property acquisitions and exploration. The estimated
future cash flows are then discounted using a rate of ten percent a year to
reflect the estimated timing of the future cash flows.
F-20
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
------------------------------
Standard measu005:
NORTH SOUTH
AMERICA AMERICA TOTAL
---------- ----------- ------------
Future net cash flows $7,838,800 $13,738,632 $21,577,432
Future production cost 3,596,700 5,281,244 8,877,944
Future income tax expense 413,513 3,608,140 4,021,653
---------- ----------- ------------
Future net cash flow 3,828,587 4,849,248 8,677,835
10% annual discount for timing of cash flows 1,217,161 1,085,074 2,302,235
---------- ----------- ------------
Standardized measure of discounted future net
cash flow relating to proved oil and gas reserves $2,611,426 $ 3,764,174 $ 6,375,600
========== =========== ============
Changes in standardized measure:
Change due to current year operations
Sales, net of production costs $(1,826,833)
Changes due to revisions in standardized variables:
Income taxes (2,530,084)
Accretion of discount 517,721
Net change in sales and transfer price, net of production costs 1,332,704
Revision and others (1,374,796)
Discoveries 4,865,019
Changes in production rates and other 1,386,245
------------
Net 2,369,976
Beginning of year 4,005,624
------------
End of year $ 6,375,600
============
F-21
HOUSTON AMERICAN ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
---------------------------------
Standard measure of discounted future net cash flows at December 31, 2004:
NORTH SOUTH
AMERICA AMERICA TOTAL
---------- ----------- ------------
Future net cash flows $1,693,780 $10,018,312 $11,712,092
Future production cost 267,550 4,709,171 4,976,721
Future income tax expense 271,884 1,219,685 1,491,569
---------- ----------- ------------
Future net cash flow 1,154,346 4,089,456 5,243,802
10% annual discount for timing of cash flows 310,053 928,125 1,238,178
---------- ----------- ------------
Standardized measure of discounted future net
cash flow relating to proved oil and gas reserves $ 844,293 $ 3,161,331 $ 4,005,624
========== =========== ============
Changes in standardized measure:
Change due to current year operations
Sales, net of production costs $ (726,396)
Changes due to revisions in standardized variables:
Income taxes (516,350)
Accretion of discount 389,559
Revision and others (2,329,947)
Discoveries 4,016,119
------------
Net 832,985
Beginning of year 3,172,639
------------
End of year $ 4,005,624
============
F-22
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
F-23
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
F-24
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
F-25
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.
F-26
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.
F-27
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.
F-28