Houston American Energy Corp
Houston American Energy Corp (HUSA) is an independent oil and gas company focused on the development, exploration, exploitation, acquisition, and production of natural gas and crude oil properties in the U.S. Permian Basin and Gulf Coast regions, particularly Texas and Louisiana, and in the South American country of Colombia.
The company focus on early identification of, and entrance into, existing and emerging resource plays, particularly in the U.S. Permian Basin and Gulf Coast and in Colombia. The company do not operate properties but typically seek to partner with, or invest in, larger operators in the development of resources or retain interests, with or without contribution on its part, in prospects identified, packaged and promoted to larger operators. By entering these plays earlier and partnering with, investing in or promoting to, larger operators, the company believe the company can capture larger resource potential at lower cost and minimize its exposure to drilling risks and costs and ongoing operating costs.1
We, along with its partners, actively manage its resources through opportunistic acquisitions and divestitures where reserves can be identified, developed, monetized and financial resources redeployed with the objective of growing reserves, production and shareholder value.
Properties
The company's exploration and development projects are focused on existing property interests, and future acquisition of additional property interests, in the Texas Permian Basin, the onshore Texas and Louisiana Gulf Coast region and in the South American country of Colombia.
Each of its property interests differ 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, corporate equity interests or other mineral rights. The company's percentage interest in each property represents the portion of the interest in the property the company share with other partners in the property. Because each property consists of a bundle of assets that may or may not include a working interest in the project, its stated interest in a property simply represents its proportional ownership in the bundle of assets that constitute the property. Therefore, its interest in a property should not be confused with the working interest that the company will own when a given well is drilled. Each of its exploration and development projects represents a negotiated transaction between the project partners relating to one or more properties. The company's working interest may be higher or lower than its stated interest.
Recent Developments
Leasing Activity
During the six months ended June 30, 2017, the company acquired, for $986,000, a 25% working interest (subject to a proportionate 5% back-in after payout) in two lease blocks (the Johnson tract and the O’Brien tract) covering 717.25 acres in Reeves County, Texas.
In conjunction with the planned drilling and development of its O’Brien tract, and in order to optimize the length of the planned horizontal leg and anticipated recoveries, its operator entered into a pooling agreement pursuant to which the owner of an adjoining acreage block contributed a portion of that acreage to the contract area covering its O’Brien tract. As a result, its effective acreage under the O’Brien lease is increased and its working interest in wells drilled under the pooling agreement was reduced.
Drilling Activity
During the six months ended June 30, 2017, its drilling operations consisted of:
Johnson State #1H well, its first well on its Reeves County, Texas acreage was drilled; hydraulic fracturing operations on the well were ongoing at June 30, 2017; and O’Brien #3H well, its second Reeves County well, commenced drilling operations and drilling was ongoing at June 30, 2017
During the six months ended June 30, 2017, its capital investment expenditures for drilling operations totaled $1,166,438.
In Colombia, its operator is continuing to carry on discussions with federal and local officials in order to overcome opposition to their efforts to secure necessary permits to commence drilling operations on its Serrania concession. Until a satisfactory resolution is reached allowing the issuance of necessary permits, substituting equivalent prospects or otherwise compensating for the value of, and investments in, its Serrania concession, its operator is continuing to defer further efforts to commence drilling on the Serrania concession.
The company's operator has also deferred commencement of work on the Los Picachos and Macaya concessions until satisfactory resolution of the permitting issues on the Serrania concession.
In July 2017, hydraulic fracturing operations were completed on the Johnson State #1H well and drilling operations were completed on the O’Brien #3H well. Sales from the Johnson State #1H well and hydraulic fracturing operations on the O’Brien #3H well are expected to commence in August 2017 and sales from the O’Brien #3H well are expected to commence in September 2017.
Financing Activity
In January 2017, the company issued 1,200 shares of 12% Series A Convertible Preferred Stock (the “Series A Preferred Stock”) for aggregate gross proceeds of $1.2 million.
The Series A Preferred Stock 
accrues a cumulative dividend, commencing July 1, 2017, at 12% payable, if and when declared, quarterly; (ii) is convertible at the option of the holder into shares of common stock at a conversion price of $0.20 per share, (iii) has a liquidation preference of $1,000 per share plus accrued and unpaid dividends; and (iv) is redeemable at its option, commencing on the second anniversary of the issue date, at a premium to issue price, which premium decreases from 12% to 0% following the fifth anniversary of the issue date, plus accrued and unpaid dividends. Proceeds from the issuance of the Series A Preferred Stock were used to acquire its interest in oil and gas properties in Reeves County, Texas and the balance, after offering expenses, was added to working capital.
In May 2017, the company received $909,600 from the sale of 909.6 Units (the “Units”), each Unit consisting of one share of 12.0% Series B Convertible Preferred Stock (the “Series B Preferred Stock”) and a Warrant (the “Series B Warrant”). Proceeds from the sale of Units were used to fund its share of drilling costs on a first well on its Reeves County, Texas acreage with proceeds in excess of such costs, after offering costs, added to working capital.
The Series B Preferred Stock accrues a cumulative dividend at 12% payable, if and when declared, quarterly; (ii) is convertible at the option of the holder into shares of common stock at a conversion price of $0.36 per share, (iii) has a liquidation preference of $1,000 per share plus accrued and unpaid dividends; and (iv) is redeemable at its option, commencing on the second anniversary of the issue date, at a premium to issue price, which premium decreases from 12% to 0% following the fifth anniversary of the issue date, plus accrued and unpaid dividends. During the six months ended June 30, 2017, the company paid $17,282 of dividends on its Series B Preferred Stock.
The Series B Warrants are exercisable, for a period of nine months, to purchase an aggregate of 3,001,680 shares of common stock at $0.43 per share. The relative fair value of the warrants were valued on the date of grant at $194,934 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 1.10%; (2) expected life in years of 0.75; (3) expected stock volatility of 92.36%; and (4) expected dividend yield of 0%.
In June 2017, the company issued promissory notes (the “Bridge Loan Notes”) in the principal amount of $600,000 and warrants (the “Bridge Loan Warrants”) to purchase common stock. The company received aggregate consideration for the Bridge Loan Notes and Warrants of $570,000. Proceeds from the issuance of the Bridge Loan Notes were used to fund its share of drilling costs on the O’Brien #3H well and the balance, after offering expenses, was added to working capital.
The Bridge Loan Notes are unsecured obligations bearing interest at 12.0% per annum and payable interest only on the last day of each calendar month with any unpaid principal and accrued interest being payable in full in 120 calendar days.
The Bridge Loan Notes are subject to mandatory prepayment from and to the extent of 100% of net proceeds the company receive from any sales, for cash, of equity or debt securities (other than Bridge Loan Notes), (ii) 100% of net proceeds the company receive from the sale of assets (other than sales in the ordinary course of business); and (iii) 75% of net proceeds the company receive from the sale of oil and gas produced from its Reeves County, Texas properties. Additionally, Houston American has the option to prepay the Bridge Loan Notes, at its sole election, without penalty.
The Bridge Loan Warrants are exercisable, for a period of one year, to purchase an aggregate of 600,000 shares of common stock at $0.50 per share.
In July 2017, the company entered into an At-the-Market Issuance Sales Agreement (the “Sales Agreement”) with WestPark Capital, Inc. (“WestPark Capital”) pursuant to which the company may sell, at its option, up to an aggregate of $5 million in shares of its common stock through WestPark Capital, as sales agent. Sales of shares under the Sales Agreement (the “ATM Offering”) will be made, in accordance with one or more placement notices the company may deliver to WestPark Capital, which notices shall set parameters under which shares may be sold. The ATM Offering will be made pursuant to a shelf registration statement by methods deemed to be “at the market,” as defined in Rule 415 promulgated under the Securities Act of 1933. The company will pay WestPark a commission in cash equal to 3% of the gross proceeds from the sale of shares in the ATM Offering. Additionally, the company reimbursed WestPark Capital for $25,000 of expenses incurred in connection with the ATM Offering. Proceeds from the ATM Offering are expected to be used to repay the Bridge Loan Notes, to pay drilling and development costs and for working capital.
As of August 14, 2017, the company had sold an aggregate of 2,957,327 shares in the ATM Offering and had received proceeds, net of commissions and expenses, of $1,708,149, of which $300,000 was used to prepay Bridge Loan Notes.
In July 2017, holders of Bridge Loan Notes in the face amount totaling $300,000 agreed to waive mandatory prepayment at July 31, 2017 otherwise payable from proceeds of the ATM Offering.
Employment Arrangements
During the quarter ended March 31, 2017, its compensation committee approved revised employment terms of John Boylan, its Chairman, CEO and President, and the company hired a Vice President – Business Development to assist in implementation of its growth plan.
The principal terms of Mr. Boylan’s compensation, as revised during the quarter, include an annual base salary of $250,000, effective January 1, 2017, with $10,000 per month being payable on a current basis, and full salary and accrued unpaid salary being payable at such time as the compensation committee determines that the Company has sufficient financial capability to pay such amounts; (ii) annual bonuses as determined by the compensation committee; (iii) grant, pursuant to its Production Incentive Compensation Plan, of a 1% interest in its revenues from all wells drilled on its Reeves County, Texas acreage; and (iv) grant of a stock option to purchase 500,000 shares of common stock.
During the six months ended June 30, 2017, the company terminated its newly hired Vice President – Business Development and options granted pursuant to the terms of employment expired unvested and unexercised.
