Houston American Energy Corp. — Q3 2018 Form 10-Q
Entity note: The request identifies Abundia Global Impact Group, Inc., but the supplied filing is for Houston American Energy Corp. This summary reflects the filing provided. The quarter ended September 30, 2018; financial statements are unaudited.
Business context and financial performance
The company is an oil and gas exploration and production company with U.S. and Colombian interests. Its reported production revenue came from the United States, including two Reeves County wells that began commercial production in Q4 2017. No wells were drilled during the first nine months of 2018.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Oil and gas revenue | $552,946 | $111,741 | $1,881,683 | $215,649 |
| Operating expenses | $669,879 | $733,519 | $2,197,785 | $1,809,179 |
| Operating loss | $(116,933) | $(621,778) | $(316,102) | $(1,593,530) |
| Net loss | $(116,831) | $(786,278) | $(316,000) | $(1,754,951) |
| Net loss attributable to common shareholders | $(173,081) | $(849,566) | $(497,350) | $(1,835,521) |
| Loss per common share | $(0.00) | $(0.02) | $(0.01) | $(0.04) |
Q3 revenue rose 395% and nine-month revenue rose 772%, principally reflecting higher production from the Reeves County wells; oil and gas sales prices also increased. Nine-month lease operating expense rose to $764,035 from $95,260, while general and administrative expense fell to $1,165,854 from $1,627,433, primarily due to lower legal and compensation costs. Depletion and depreciation increased with production and the larger depletion base.
Cash flow, balance sheet and liquidity
- At September 30, cash was $785,346, current assets $1,164,174, current liabilities $52,095, and working capital $1,112,079. Total assets were $7,733,265 and shareholders’ equity was $7,597,905.
- Nine-month operating cash flow was positive $6,010, versus cash used of $1,241,127 in 2017. Investing activities used $119,926, versus $3,878,984 in 2017. Financing activities provided $507,200, mainly from $688,550 of net ATM common-stock proceeds, partly offset by $181,350 of preferred dividends.
- Total liabilities were $135,360, including $83,265 of long-term liabilities. The balance sheet reports no notes payable at September 30, 2018. Preferred shares had stated liquidation preferences of $1.085 million for Series A and $835,000 for Series B.
- Common shares outstanding were 62,209,073 at September 30, compared with 59,260,101 at year-end 2017. The company also had outstanding convertible preferred stock, options and 50,000 warrants, presenting potential dilution.
Changes, outlook and risks
- Management said cash holdings, subsequent escrow proceeds and revenue were expected to support operations for the next 12 months. However, available resources were not expected to fund the company’s share of Reeves County drilling and completion costs; additional capital may be required. The company had no commitments for additional financing and gave no quantified earnings or production guidance.
- Capital spending was curtailed while the company awaited development plans from the new Reeves County operator and drilling proposals for its Yoakum County acreage. Colombia drilling remained deferred amid opposition and permitting issues affecting the Serrania concession; work on Los Picachos and Macaya was also deferred.
- The company acquired a 12.5% working interest, subject to a proportionate 10% back-in after payout, in an approximately 650-acre Yoakum County lease block for about $135,330. Management also said it was seeking additional acreage or strategic transactions.
- In October 2018, the company entered a new ATM agreement permitting up to $1.9 million in common-stock sales, with a 3% sales commission and $18,000 of reimbursed expenses. It also received $89,230 from previously written-off escrow receivables; management expected to record this as a non-recurring gain in Q4 2018.
- The board terminated the CEO and president during Q2 2018. A director was serving as interim CEO and president while the company searched for a replacement.
- Management identified disclosure controls and procedures as ineffective at September 30, citing a material weakness from lack of segregation of duties after the CFO’s 2013 departure. Consultants and the accounting firm were assisting with financial reporting. The company reported no material change in internal control during the quarter.
- Oil and gas prices are volatile, and the company had not historically hedged production. Management noted that future drilling depends on operator plans, financing, commodity prices, service costs and other factors outside the company’s control. Failure to fund its share of costs could result in penalties or loss of acreage interests. A salt-water disposal well expected to come online in Q4 might lower water-transport costs, but timing and savings were uncertain.
Investor verification priorities
- Confirm the correct company: the supplied filing is Houston American Energy Corp., not Abundia Global Impact Group, Inc.
- Reconcile the MD&A’s December 31, 2017 cash figure of $396,062 with the balance sheet and cash-flow statement, both of which report $392,062.
- Track the operators’ drilling proposals, permitting progress in Colombia, and the capital required to fund prospective wells and acquisitions.
- Assess the dilution and financing implications of ATM sales, preferred-stock conversions and outstanding equity awards.
- Monitor remediation of the disclosed material weakness and the company’s reliance on outside financial-reporting assistance.