Business context and reporting period
Issuer mismatch: The supplied filing is Houston American Energy Corp.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017; it is not identified as a filing of Abundia Global Impact Group, Inc.
Houston American is an oil and gas exploration and production company with U.S. and Colombian properties. Its near-term focus was acquiring, drilling and bringing wells online in Reeves County, Texas. The filing states that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Three months ended September 30, 2017 | Nine months ended September 30, 2017 | Comparable 2016 period |
|---|---|---|---|
| Oil and gas revenue | $111,741 | $215,649 | $39,738 and $121,885, respectively |
| Operating expenses | $733,519 | $1,809,179 | $410,930 and $1,328,972, respectively |
| Operating loss | $(621,778) | $(1,593,530) | $(371,192) and $(1,207,087), respectively |
| Net loss | $(786,278) | $(1,754,951) | $(370,343) and $(1,200,200), respectively |
| Basic and diluted loss per share | $(0.01) | $(0.03) | $(0.01) and $(0.02), respectively |
Revenue increased year over year, but operating costs substantially exceeded revenue. General and administrative expense was $1.63 million for the nine months, up 36%; operating-loss margin was approximately negative 739% for that period. The filing reports no income tax expense. Interest expense was $171,605 for the nine months, primarily from bridge-note interest and amortization of the related debt discount.
- Cash and liquidity: Cash was $409,606 at September 30, 2017, versus $481,172 at year-end 2016. Working capital was negative $100,170, versus positive $423,795.
- Cash flows: Operating activities used $1,241,127; investing activities used $3,878,984; financing activities provided $5,048,545. Cash decreased $71,566 over the nine months.
- Capital investment: The company reports $4,302,506 invested in property acquisition and development, including Reeves County acreage and drilling. Cash-flow investing outlays were lower in part because $423,522 of oil and gas development costs were accrued.
- Debt and liabilities: The $600,000 face amount of bridge notes was repaid by September 30. No notes payable are shown on the period-end balance sheet. Total liabilities were $625,277, including $548,975 of current liabilities and $76,302 of long-term liabilities.
- Equity and dilution: Shareholders’ equity was $6,505,642. The company had issued 56,800,262 common shares at September 30 and reported 57,713,964 outstanding as of November 2. Preferred stock carried 12% cumulative dividends; preferred shares, warrants and options could result in substantial dilution.
Material changes versus the prior comparable period
- Nine-month revenue rose 77%, and third-quarter revenue rose 181%, reflecting initial production and well testing from the first Reeves County wells. Nine-month net loss widened to $1.75 million from $1.20 million.
- Operating cash use increased from $1,023,200 to $1,241,127. Investing cash use rose sharply from $92,217 to $3,878,984, principally reflecting Texas acreage acquisition and drilling.
- Financing shifted from cash use in 2016 to $5.05 million provided in 2017, including common and preferred stock sales and bridge financing. The company also began paying preferred dividends and repaid the bridge notes.
- Cash and working capital deteriorated despite the financing, while oil and gas property, net, increased to $6,678,947 from $2,456,927 at year-end 2016.
Outlook, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, negative operating cash flow, low commodity prices and financial commitments. It said cash, including $467,874 raised after quarter-end, was expected to support operations through the balance of 2017 but would not fund planned 2018 drilling. Additional financing may be needed; there is no assurance it can be obtained.
- Operations outlook: Gas sales from the O’Brien #3H well began in October; sales from the Johnson State #1H were expected to begin by mid-November. Management anticipated substantially higher production and revenue from the fourth quarter, but said profitability and positive operating cash flow would require further successful drilling. Two additional Reeves County wells were expected in first-quarter 2018, subject to financing and other conditions.
- Colombia: Permitting opposition delayed drilling on the Serrania concession; work on Los Picachos and Macaya was also deferred. The company may need a satisfactory permitting resolution, substitute prospects or other compensation for its investment.
- Funding and commodity risks: Management cited potential inability to fund drilling commitments, possible penalties or loss of property interests, and volatile oil and gas prices. The company had not historically hedged production, though it was evaluating hedging.
- Financing and compensation: The ATM program allowed up to $5 million in common-stock sales; $3,049,515 net had been raised by September 30, with another $467,874 net afterward. The CEO’s $250,000 annual salary included deferred amounts payable when the compensation committee determines the company can afford them. Preferred stock dividends and convertible terms are additional claims on future cash and equity.
- Controls: Management concluded disclosure controls were ineffective, citing a lack of segregation of duties after the CFO’s 2013 departure; third-party consultants and the accounting firm were assisting with reporting.
Important facts for investors to verify
- Confirm the issuer identity: the provided filing names Houston American Energy Corp., despite the request metadata naming Abundia Global Impact Group, Inc.
- Review subsequent filings for actual production, sales, operating costs and cash flows from the Reeves County wells, and compare them with management’s fourth-quarter expectations.
- Track financing availability and use of proceeds, ATM share issuance, warrant exercises, preferred dividends and potential dilution; verify funding for the planned 2018 drilling program.
- Monitor progress on Colombian permits, related commitments and any change in the carrying value or recoverability of those properties.
- Assess the going-concern disclosure, negative working capital and ineffective disclosure controls, including whether the control weakness was remediated.