UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC20549

FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ______________.

Commission File Number 1-32955

HOUSTON AMERICAN ENERGY CORP.
(Exact name of registrant as specified in its charter)

Delaware
 
76-0675953
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

801 Travis Street, Suite 1425, Houston, Texas77002
 (Address of principal executive offices)(Zip Code)

(713) 222-6966
(Registrant's telephone number, including area code)

 
 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   x  No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No x

As of August 14, 2013, we had 52,180,045 shares of $0.001 par value Common Stock outstanding.
 

HOUSTON AMERICAN ENERGY CORP.

FORM 10-Q

INDEX

 
 
 
Page No.
PART I.
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
Financial Statements (Unaudited)
 
 
 
 
 
 
3
 
 
4
 
 
5
 
 
6
 
 
 
 
Item 2.
 
14
 
 
 
 
Item 3.
 
19
 
 
 
 
Item 4.
 
20
 
 
 
 
PART II
 
OTHER INFORMATION
 
 
 
 
 
Item 5.
 
20
 
 
 
 
Item 6.
 
21

PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
June 30, 2013
   
December 31, 2012
 
ASSETS
 
   
 
CURRENT ASSETS
 
   
 
Cash
 
$
8,915,861
   
$
5,626,345
 
Restricted cash – letter of credit
   
—
     
3,056,250
 
Accounts receivable – other
   
86,507
     
3,436,305
 
Escrow receivable – current
   
2,095,228
     
2,095,228
 
Prepaid expenses and other current assets
   
173,293
     
36,539
 
TOTAL CURRENT ASSETS
   
11,270,889
     
14,250,667
 
 
               
PROPERTY AND EQUIPMENT
               
Oil and gas properties – full cost method
               
Costs subject to amortization
   
50,312,756
     
47,093,419
 
Costs not being amortized
   
2,759,645
     
5,809,297
 
Office equipment
   
90,004
     
90,004
 
Total property, plant and equipment
   
53,162,405
     
52,992,720
 
Accumulated depreciation, depletion and impairment
   
(50,333,081
)
   
(47,105,751
)
TOTAL PROPERTY AND EQUIPMENT, NET
   
2,829,324
     
5,886,969
 
 
               
OTHER ASSETS
               
Other assets
   
3,167
     
3,167
 
TOTAL ASSETS
 
$
14,103,380
   
$
20,140,803
 
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
 
$
6,591
   
$
84,740
 
Accrued cash call to operator
   
—
     
3,219,128
 
Accrued expenses
   
31,336
     
90,923
 
Taxes payable
   
281,478
     
1,711,007
 
TOTAL CURRENT LIABILITIES
   
319,405
     
5,105,798
 
 
               
LONG-TERM LIABILITIES
               
Reserve for plugging and abandonment costs
   
8,148
     
7,872
 
Taxes payable – long-term
   
—
     
193,398
 
TOTAL LONG-TERM LIABILITIES
   
8,148
     
201,270
 
TOTAL LIABILITIES
    327,553       5,307,068  
 
COMMITMENTS AND CONTINGENCIES
               
 
               
SHAREHOLDERS’ EQUITY
               
Common stock, $0.001 par value; 150,000,000 shares authorized; 52,180,045 shares issued and outstanding
   
52,180
     
52,180
 
Additional paid-in capital
    64,977,791    
63,963,257
 
Accumulated deficit
   
(51,254,144
)
   
(49,181,702
)
TOTAL SHAREHOLDERS’ EQUITY
   
13,775,827
     
14,833,735
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
14,103,380
   
$
20,140,803
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
(Unaudited)

 
 
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
   
   
 
OIL AND GAS REVENUE
 
$
34,255
   
$
356,857
   
$
19,223
   
$
36,347
 
 
                               
EXPENSES OF OPERATIONS
                               
Lease operating expense and severance tax
   
19,631
     
158,648
     
11,061
     
19,047
 
Joint venture expenses
   
—
     
3,244
     
—
     
—
 
General and administrative expense
   
2,173,864
     
3,113,187
      1,301,217      
2,032,339
 
Impairment of oil and gas properties
   
—
     
36,628,919
     
—
     
16,633,074
 
Gain on sale of oil and gas properties
   
(86,025
)
   
(315,119
)
   
—
     
—
 
Depreciation and depletion
   
8,202
     
55,467
     
3,172
     
6,185
 
Total operating expenses
    2,115,672      
39,644,346
      1,315,450      
18,690,645
 
 
                               
Loss from operations
   
(2,081,417
)
   
(39,287,489
)
   
(1,296,227
)
   
(18,654,298
)
 
                               
OTHER INCOME (EXPENSE)
                               
Interest income
   
12,931
     
6,692
     
11,125
     
2,242
 
Other expense
   
(19,289
)
   
(44,012
)
   
(151
)
   
(13,869
)
Total other income (expense)
   
(6,358
)
   
(37,320
)
   
10,974
     
(11,627
)
 
                               
Net loss before taxes
   
(2,087,775
)
   
(39,324,809
)
   
(1,285,253
)
   
(18,665,925
)
 
                               
Income tax expense (benefit)
   
(15,333
)
   
3,365,365
     
(18,986
)
   
3,356,154
 
 
                               
Net loss
 
$
(2,072,442
)
 
$
(42,690,174
)
 
$
(1,266,267
)
 
$
(22,022,079
)
 
                               
Basic and diluted loss per common share
 
$
(0.04
)
 
$
(1.29
)
 
$
(0.02
)
 
$
(0.63
)
 
                               
Based and diluted weighted average common shares outstanding
   
52,180,045
     
33,004,790
     
52,180,045
     
34,844,351
 
 
                               
COMPREHENSIVE LOSS
                               
Net loss
 
$
(2,072,442
)
 
$
(42,690,174
)
 
$
(1,266,267
)
 
$
(22,022,079
)
Unrealized loss on marketable securities
   
—
     
(393,306
)
   
—
     
(159,548
)
Net comprehensive loss
 
$
(2,072,442
)
 
$
(43,083,480
)
 
$
(1,266,267
)
 
$
(22,181,627
)

The accompanying notes are an integral part of these unaudited consolidated financial statements.
HOUSTON AMERICAN ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012
(Unaudited)

 
 
For the Six Months Ended June 30,
 
 
 
2013
   
2012
 
 
 
   
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
   
 
Net loss
 
$
(2,072,442
)
 
$
(42,690,174
)
Adjustments to reconcile net loss to net cash provided by (used in) operations:
               
Depreciation and depletion
   
8,202
     
55,467
 
Stock-based compensation
    1,014,534      
1,284,165
 
Impairment of oil and gas properties
   
—
     
36,628,919
 
Accretion of asset retirement obligation
   
276
     
648
 
Amortization of deferred rent
   
—
     
(3,620
)
Gain on sale of oil and gas properties – Colombia
    (86,025 )     
(315,119
)
Deferred tax asset
   
—
     
3,195,583
 
Changes in operating assets and liabilities:
               
Decrease in accounts receivable
   
3,349,798
     
40,491
 
Increase in prepaid expense
   
(136,754
)
   
(119,293
 
Decrease in accounts payable and accrued liabilities
   
(1,760,663
)
   
(16,733
)
Net cash provided by (used) in operating activities
    316,926      
(1,939,666
)
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
               
Restricted cash released
   
3,056,250
     
—
 
Payments for the acquisition and development of oil and gas properties
   
(169,685
)
   
(14,866,511
)
Proceeds from sale of Colombian oil and gas properties, net of expenses
    86,025      
1,027,068
 
Purchase of marketable securities
   
—
     
(156,818
)
Net cash provided by (used) in investing activities
    2,972,590      
(13,996,261
)
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from sale of common stock, net of expenses of $746,300
   
—
     
12,397,700
 
Net cash provided by financing activities
   
—
     
12,397,700
 
 
               
Increase (decrease) in cash
   
3,289,516
     
(3,538,227
)
Cash, beginning of period
   
5,626,345
     
9,930,284
 
Cash, end of period
 
$
8,915,861
   
$
6,392,057
 
 
               
SUPPLEMENTAL CASH FLOW INFORMATION
               
Interest paid
   
—
   
$
—
 
Income taxes paid
   
1,607,608
   
$
172,246
 
 
NON-CASH INVESTING AND FINANCING ACTIVITIES
               
Accrued oil and gas development cost
   
—
   
$
3,728,695
 
Sales price of oil and gas properties placed in escrow
   
—
   
$
166,995
 
Unrealized loss on available for sale securities
   
—
   
$
393,306
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

HOUSTON AMERICAN ENERGY CORP.
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated 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-Q.  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 consolidated financial statements.  Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes, which are included as part of the Company’s Form 10-K for the year ended December 31, 2012.

Consolidation

The accompanying consolidated financial statements include all accounts of the Company and its subsidiaries (HAEC Louisiana E&P, Inc. and HAEC Caddo Lake E&P, Inc.). All significant inter-company balances and transactions have been eliminated in consolidation.

Accounting Principles and Use of Estimates

The consolidated 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 the related valuation allowance, determination of proved reserves of oil and gas and asset retirement obligations. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk include cash, cash equivalents and any marketable securities. The Company had cash deposits of $5.5 million in excess of the FDIC’s current insured limit on interest bearing accounts of $250,000 as of June 30, 2013. The Company has not experienced any losses on its deposits of cash and cash equivalents.

Loss per Share

Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average common shares outstanding for the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares that then shared in the earnings of the Company.  The Company’s only outstanding potentially dilutive securities are options and warrants.  Using the treasury stock method, outstanding ‘in-the-money’ options would have increased our diluted weighted average shares outstanding by approximately 55,600 and 55,600 shares, respectively, for the three and six months ended June 30, 2013 and by approximately 92,551 and 351,691 shares, respectively, for the three and six months ended June 30, 2012; however, due to losses during these periods, these options were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.

Subsequent Events

The Company has evaluated all transactions from June 30, 2013 through the financial statement issuance date for subsequent eventdisclosure consideration.
Recent Accounting Pronouncements

No accounting standards or interpretations issued recently are expected to a have a material impact on our consolidated financial position, operations or cash flows.

NOTE 2 – RESTRICTED CASH

At December 31, 2012, the Company had Restricted Cash – Letter of Credit in the amount of $3,056,250 attributable to funds posted as collateral to secure a standby letter of credit.  During the six months ended June 30, 2013, the letter of credit obligation was terminated and the cash securing the letter of credit was returned to the Company eliminating the Restricted Cash – Letter of Credit balance.  See Note 8 – Commitments and Contingencies – Standby Letter of Credit – CPO 4 Block.

NOTE 3 – ACCOUNTS RECEIVABLE – OTHER

Tax Refund

At December 31, 2012, the Company had established an account receivable – other relating to an estimated federal income tax refund in the amount of approximately $3.3 million.  During the six months ended June 30, 2013, the Company collected the income tax refund and the receivable was eliminated.

Hupecol Operating, LLC

During 2011, Hupecol Operating, LLC (“Hupecol”) disbursed funds from a 5% contingency escrow established with a portion of the proceeds from the sale of Hupecol Dorotea & Cabiona Holdings, LLC (“HDC, LLC”), to pay certain operating expenses incurred on behalf of the purchaser of these entities.  Hupecol is currently seeking reimbursement from the purchaser for these expenses as part of the post-closing process and expects to collect within the next twelve months.  As a result of this activity, the Company has established a receivable from Hupecol for the Company’s proportionate share of the escrow funds disbursed for these expenses of $86,507.  The amount due from Hupecol is classified as accounts receivable – other in the accompanying balance sheet.

NOTE 4 – COMPREHENSIVE LOSS – UNREALIZED LOSS ON MARKETABLE SECURITIES

During 2012, the Company held common stock in a publicly traded company.  This investment was classified as marketable securities - available for sale and, accordingly, any unrealized changes in market values were recognized as other comprehensive income in the consolidated statements of operations. During the six months ended June 30, 2012, the Company purchased additional common shares in the same publicly traded company at a cost of $156,817 and recognized other comprehensive losses during the three and six months ended June 30, 2012 of $159,548 and $393,306, respectively, reflecting the unrealized decline in value of this investment as of June 30, 2012.  All of the securities were sold during 2012 and, accordingly, no marketable securities were owned at June 30, 2013 nor did the Company report any unrealized loss on marketable securities during the three and six months ended June 30, 2013.

NOTE 5 – ESCROW RECEIVABLE

At June 30, 2013 and December 31, 2012, the Company’s balance sheet reflected the following escrow receivables relating to various oil and gas properties previously held by the Company:

 
 
Balance as of June 30, 2013
 
Description
 
Current
   
Noncurrent
   
Total
 
 
 
   
   
 
Tambaqui Escrow
 
$
22,029
   
$
—
   
$
22,029
 
HDC LLC & HL LLC 15% Escrow
   
1,827,929
     
—
     
1,827,929
 
HDC LLC & HL LLC Contingency
   
57,321
     
—
     
57,321
 
HC LLC 13.33% Escrow
   
151,048
     
—
     
151,048
 
HC LLC Contingency
   
36,901
     
—
     
36,901
 
TOTAL
 
$
2,095,228
   
$
—
   
$
2,095,228
 

 
Balance as of December 31, 2012
 
Description
 
Current
   
Noncurrent
   
Total
 
           
Tambaqui Escrow
 
$
22,029
   
$
—
   
$
22,029
 
HDC LLC and HL LLC 15% Escrow
   
1,827,929
     
—
     
1,827,929
 
HDC LLC and HL LLC Contingency
   
57,321
     
—
     
57,321
 
HC LLC 13.33% Escrow
   
151,048
     
—
     
151,048
 
HC LLC Contingency
   
36,901
     
—
     
36,901
 
TOTAL
 
$
2,095,228
   
$
—
   
$
2,095,228
 

There were no settlements and releases relating to the escrow receivables during the six months ended June 30, 2013.

NOTE 6 – OIL AND GAS PROPERTIES

During the six months ended June 30, 2013, the Company invested $169,685 for the development of oil and gas properties, consisting of (1) preparation and evaluation costs in Colombia of $105,228, and (2) costs on U.S. properties of $64,457.  Of the amount invested, the Company capitalized $210 to oil and gas properties subject to amortization, and $169,475 to oil and gas properties not subject to amortization, primarily attributable to preparation and evaluation cost in Colombia of $105,288 and leasehold cost in the U.S. of $64,247.

Termination of Interest in CPO 4 Prospect

In March 2013, the Company entered into a Settlement Agreement with SK Innovation, operator and principal owner of the CPO 4 prospect.  Pursuant to the terms of the Settlement Agreement, the Company terminated, and agreed to convey to SK Innovation, its entire interest in the CPO 4 prospect and each of the Company and SK Innovation agreed to release any and all claims each may have against the other under the Operating Agreement with respect to the CPO 4 prospect. The Company was relieved of any and all obligations under past, present and future capital calls relating to the CPO 4 prospect, including accrued cash calls at December 31, 2012 of $3,219,128.The Company’s balance sheet reflects a reduction in the cash call obligation and an increase in accumulated depletion, depreciation, amortization and impairment, each in the amount of $3,219,128.

Impairments

In April 2012, the Company, together with the operator, determined to cease efforts to test and complete the Tamandua #1 sidetrack well on the CPO 4 prospect in Colombia.  As a result of the determination to cease efforts to complete the Tamandua #1 well, the Company included the costs related to the Tamandua #1 well in the full cost pool for inclusion in the ceiling test.  The Company recorded impairment charges of $6,531,455 and $26,527,300 during the three and six months ended June 30, 2012, respectively, to write off costs not being amortized that were attributable to the drilling of the Tamandua #1 well on the Company’s CPO 4 block as well as to write off seismic exploration and evaluation cost, general and administrative cost and environmental and governmental cost that were attributable to the CPO 4 block through June 30, 2012.

In July 2012, the Company determined to plug and abandon the Cachirre #1 well on the CPO 4 prospect in Colombia.  As a result of such determination, the Company included the costs related to the Cachirre #1 well in the full cost pool for inclusion in the ceiling test at June 30, 2012.  The Company recorded an impairment charge of $10,101,619 during the three and six months ended June 30, 2012 to write off costs not being amortized that were attributable to the drilling of the Cachirre #1 well as well as to write off seismic exploration and evaluation cost, general and administrative cost and environmental and governmental cost that were attributable to the CPO 4 block through June 30, 2012.

Sale of Oil and Gas Properties

During the first quarter of 2012, the Company sold all of its interest in Hupecol Cuerva, LLC (“HC, LLC”), which holds interests in the La Cuerva block and, pending approval of the Colombian authorities, the LLA 62 block, together covering approximately 90,000 acres in the Llanos Basin in Colombia.

HC, LLC sold for $75 million, adjusted for working capital.  13.3% of the sales price of HC, LLC will be held in escrow to fund potential claims arising from the sale.  Pursuant to its 1.6% ownership interest in HC, LLC, the Company received 1.6% in the net sale proceeds after deduction of commissions, overriding royalty interest, and transaction expenses; subject to the escrow holdback and a further contingency holdback by Hupecol of 1.3% of the sales price.  Following completion of the sale of HC, LLC, the Company had no continuing interest in the La Cuerva and LLA 62 blocks.

At December 31, 2011, the Company’s estimated proved reserves associated with the La Cuerva and LLA 62 blocks totaled 94,619 barrels of oil, which represented 82% of the Company’s estimated proved oil and natural gas reserves. Sales of oil and gas properties under the full cost method of accounting are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and reserves. Since the sale of these oil and gas properties would significantly alter the relationship, the Company recognized a gain on the sale of $315,119 during the six months ended June 30, 2012, computed as follows:

Sales price
 
$
1,224,393
 
Add: Transfer of asset retirement and other obligations
   
34,471
 
Less: Transaction costs
   
(30,330
)
Less: Prepaid deposits
   
(54,857
)
Less: Carrying value of oil and gas properties, net
   
(858,558
)
Net gain on sale
 
$
315,119
 

The following table presents pro forma data that reflects revenue, income from continuing operations, net loss and loss per common share for the three and six months ended June 30, 2012 as if the HC, LLC sale had occurred at the beginning of each period and excludes the gain on sale.

 
Pro-Forma Information:
 
Three Months Ended
June 30, 2012
   
Six Months Ended
June 30, 2012
 
 
 
   
 
Oil and gas revenue
 
$
36,347
   
$
93,672
 
Loss from operations
 
$
(18,654,298
)
 
$
(39,701,581
)
Net loss
 
$
(18,826,496
)
 
$
(39,899,473
)
 
               
Basic and diluted loss per common share
 
$
(0.63
)
 
$
(1.20
)

The Company currently has operations in two geographical areas, the United States and Colombia. Revenues for the three and six months ended June 30, 2013 and 2012 and Long Lived Assets (net of depletion, amortization, and impairments) as of June 30, 2013 and December 31, 2012 attributable to each geographical area are presented below:

 
 
Three Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2013
   
As of June 30, 2013
 
 
 
Revenues
   
Revenues
   
Long Lived Net Assets
 
 
 
   
   
 
United States
 
$
19,223
   
$
34,255
   
$
1,106,812
 
Colombia
   
—
     
—
     
1,722,512
 
Total
 
$
19,223
   
$
34,255
   
$
2,829,324
 

 
 
Three Months Ended
June 30, 2012
   
Six Months Ended
June 30, 2012
   
As of December 31, 2012
 
 
 
Revenues
   
Revenues
   
Long Lived Net Assets
 
 
 
   
   
 
United States
 
$
36,347
   
$
93,671
   
$
1,050,557  
Colombia
   
—
     
263,186
     
4,836,412
 
Total
 
$
36,347
   
$
356,857
   
$
5,886,969  

NOTE 7 – STOCK-BASED COMPENSATION EXPENSE AND WARRANTS

The Company periodically grants options to employees, directors and consultants under the Company’s 2005 Stock Option Plan and the Company’s 2008 Equity Incentive Plan (together, the “Plans”).  The Company is required to make estimates of the fair value of the related instruments and recognize expense over the period benefited, usually the vesting period.

In March 2013, the Company’s board of directors approved an amendment to the 2008 Equity Incentive Plan to increase the shares reserved thereunder to 6,000,000 shares, subject to approval of such amendment by the Company’s shareholders, which shareholder approval was received in June 2013.

Stock Option Activity

A summary of stock option activity and related information for the six months ended June 30, 2013 is presented below:

 
 
Options
   
Weighted-Average Exercise Price
 
Aggregate Intrinsic Value
 
 
 
   
 
 
Outstanding at January 1, 2013
   
2,443,057
   
$
5.68
 
 
Granted
   
2,215,525
(1)
   
.41
 
 
Exercised
   
—
     
—
 
 
Forfeited
   
(31,250
)
   
14.46
 
 
Outstanding at June 30, 2013
   
4,627,332
   
$
3.33
   
$
—
 
Exercisable at June 30, 2013
   
3,747,332
   
$
3.63
   
$
—
 

(1) Includes 915,525 options granted in June 2012, the exercise of which options was subject to shareholder approval of an amendment to the Company’s 2008 Equity Incentive Plan to increase the shares reserved for issuance thereunder, which approval was obtained in June 2013.

On June 11, 2012, options to purchase an aggregate of 915,525 shares were granted to employees and non-employee directors, which options were exercisable on and after shareholder approval of an amendment to the Company’s 2008 Equity Incentive Plan to increase the shares reserved under the plan to facilitate exercise.  The options have a ten year life and an exercise price of $1.65. The options granted subject to amendment of the plan were not reflected in stock-based compensation expense at the time of their original grant but are, instead, reflected in the three and six month periods ended June 30, 2013, following receipt of shareholder approval of the plan amendment on June 11, 2013.  The options were valued on the date of shareholder approval at $164,376 using the Black-Scholes option-pricing model with the following parameters:  (1) risk-free interest rate of 1.26%, (2) expected life in years of 5.6, (3) expected stock volatility of 105%, and (4) expected dividend yield of 0%.  The Company determined the options qualify as ‘plain vanilla’ under the provisions of SAB 107 and the simplified method was used to estimate the expected option life.

On June 11, 2013, options to purchase an aggregate of 100,000 shares were granted to non-employee directors and options to purchase an aggregate of 1,200,000 shares were granted to employees.

The 100,000 options granted to non-employee directors vested 20% on the grant date and vest as to the remaining 80% nine months from the grant date, have a ten year life and have an exercise price of $0.3075 per share. The option grants to non-employee directors were valued on the date of grant at $24,507 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 1.26%, (2) expected life in years of 5.6, (3) expected stock volatility of 105%, and (4) expected dividend yield of 0%.  The Company determined the options qualify as ‘plain vanilla’ under the provisions of SAB 107 and the simplified method was used to estimate the expected option life.

The 1,200,000 options granted to employees vested 50% on the grant date and vest as to the remaining 50% on the first anniversary of the grant date, have a ten year life and have an exercise price of $0.3075 per share. The option grants to employees were valued on the date of grant at $294,085 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 1.26%, (2) expected life in years of 5.6, (3) expected stock volatility of 105%, and (4) expected dividend yield of 0%.  The Company determined the options qualify as ‘plain vanilla’ under the provisions of SAB 107 and the simplified method was used to estimate the expected option life.

During the three and six months ended June 30, 2013, the Company recognized $599,040 and $891,462, respectively, of stock compensation expense attributable to the amortization of unrecognized stock-based compensation.
As of June 30, 2013, total unrecognized stock-based compensation expense related to non-vested stock options was $892,225. The unrecognized expense is expected to be recognized over a weighted average period of 0.80 years and the weighted average remaining contractual term of the outstanding options and exercisable options at June 30, 2013 is 7.73 years and 7.44 years, respectively.

Shares available for issuance under the Plans as of June 30, 2013 totaled 1,372,668.

Restricted Stock Activity

During 2011, the Company granted to officers an aggregate of 45,000 shares of restricted stock, which shares vest over a period of three years.  The fair value of $743,400 was determined based on the fair market value of the shares on the date of grant.  This value is being amortized over the vesting period and, during the three and six months ended June 30, 2013, $62,156 and $123,072, respectively, was amortized to expense.  As of June 30, 2013, there was $235,545 of unrecognized compensation cost related to unvested restricted stock.  The cost is expected to be recognized over a weighted average period of approximately 0.95 years.

Share-Based Compensation Expense

The following table reflects share-based compensation recorded by the Company for the three months ended June 30, 2013 and 2012:

 
Three Months Ended
June 30,
 
 
2013
 
2012
 
 
 
 
Share-based compensation expense included in general and administrative expense
 
$
661,196    
$
748,227
 
Earnings per common share effect of share-based compensation expense – basic and diluted
 
$
(0.01
)
 
$
(0.02
)

The following table reflects share-based compensation recorded by the Company for the six months ended June 30, 2013 and 2012:

 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
 
 
Share-based compensation expense included in general and administrative expense
 
$
1,014,534
   
$
1,284,165
 
Earnings per common share effect of share-based compensation expense – basic and diluted
 
$
(0.017
)
 
$
(0.04
)

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Lease Commitment

The Company leases office facilities under an operating lease agreement that expires May 31, 2017.  As of June 30, 2013, the lease agreement requires future payments as follows:

Year
 
Amount
 
2013
   
44,527
 
2014
   
91,432
 
2015
   
93,793
 
2016
   
96,162
 
2017
   
40,479
 
Total
 
$
366,393
 

For the three and six months ended June 30, 2013, the total base rental expense was $22,180 and $44,112, respectively.  The Company does not have any capital leases or other operating lease commitments.

Standby Letter of Credit – CPO 4 Block

On November 5, 2009, JP Morgan Chase issued a Letter of Credit to Banco de Bogota S.A. for $2,037,500. Banco de Bogota then in turn issued a Stand by Letter of Credit to the Agency De National Hydrocarbons to guaranty the Company’s compliance and proper execution of the work obligations relating to the phase one (1) work program of the CPO-4 block for the Company’s 25% interest in the Block. Per the Standby Letter of Credit issued between JP Morgan Chase and Banco de Bogota, the Company was required to keep on deposit with JP Morgan Chase $2,037,500.

On December 2, 2010, JP Morgan Chase amended the Letter of Credit to Banco de Bogota S.A. to increase the total amount of the Letter of Credit to $3,056,250. Banco de Bogota then in turn issued an amended Stand by Letter of Credit to the Agency de National Hydrocarbons to guarantee the Company’s compliance and proper execution of the work obligations relating to the phase one (1) work program for the CPO-4 block for the Company’s 37.5% interest in the Block. Per the amended Standby Letter of Credit issued between JP Morgan Chase and Banco de Bogota, the date of expiration was extended until April 1, 2013 and the Company was required to keep on deposit with JP Morgan Chase $3,056,250. This increase in deposits was related to the Company increasing its interest in the CPO 4 block from 25.0% to 37.5%. All other terms and conditions of the Letter of Credit remained unchanged.  The Company paid Banco de Bogota $13,025 in fees during the six months ended June 30, 2013 related to the Letter of Credit and recorded the fees as other expense.  The deposit with JP Morgan Chase was classified as restricted cash – letter of credit in the accompanying balance sheet as of December 31, 2012.  Due to the settlement agreement with SK Innovation in which the Company assigned its 37.5% interest in the CPO 4 prospect, the Company did not be renew the Letter of Credit and, in April 2013, the funds securing the Letter of Credit, in the amount of $3,056,250, were released to the Company.

Legal Contingencies

The Company has been the subject of a formal investigation being conducted by the Securities and Exchange Commission (the “SEC”). Pursuant to the investigation, the Company received subpoenas issued by the SEC. The subpoenas called for the testimony of certain of the Company’s officers and the delivery of certain documents. The subpoenas were issued pursuant to a nonpublic formal order of private investigation issued by the SEC on March 1, 2011, which followed a nonpublic informal inquiry commenced by the SEC in October 2010. The Company received a copy of the nonpublic formal order of private investigation on February 10, 2012 in connection with a subpoena issued by the SEC. The SEC is investigating whether there have been any violations of the federal securities laws and appears to have narrowed the focus of their investigation to matters relating to disclosures in the late 2009 and early 2010 time period regarding resource potential for the CPO 4 prospect.  The Company has presented information supporting its disclosure relative to resource potential on the CPO 4 prospect.  The investigation does not represent a conclusion by the staff that there have been any violations of the federal securities laws nor whether the staff would conclude that any enforcement action is appropriate. At this time, the Company has not been made aware of a finding by the SEC of any securities violations. Also, as stated in the subpoenas issued by the SEC, the investigation does not mean that the SEC has a negative opinion of any person, entity or security. The Company has cooperated fully, and is committed to continuing to cooperate fully, with the SEC in this matter. It is not possible at this time to predict the timing or outcome of the SEC investigation, including whether or when any proceedings might be initiated, when these matters may be resolved or what, if any, penalties or other remedies may be imposed, and whether any such penalties or remedies would have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

On April 27, 2012, a purported class action lawsuit was filed in the U.S. District Court for the Southern District of Texas against the Company and certain of its executive officers: Steve Silverman v. Houston American Energy Corp. et al ., Case No. 4:12-CV-1332.  The complaint generally alleges that, between March 29, 2010 and April 18, 2012, all of the defendants violated Sections 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and the individual defendants violated Section 20(a) of the Exchange Act in making materially false and misleading statements including certain statements related to the status and viability of the Tamandua #1 well. Two additional class action lawsuits were filed against the Company in May 2012. The complaints seek unspecified damages, interest, attorneys’ fees, and other costs. On September 20, 2012, the court consolidated the class action lawsuits and appointed a lead plaintiff and on November 15, 2012 the lead plaintiffs filed an amended complaint.  On January 14, 2013, we filed a motion to dismiss which remains pending before the court. The Company believes all of the claims in the consolidated class action lawsuits are without merit and intends to vigorously defend against these claims. It is not possible at this time to predict the timing or outcome of the class action lawsuits that have or may be filed. The Company expects to incur costs and to devote management time and resources to defending such lawsuits.

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. Except as noted, the Company is currently not a party to any known material litigation.

NOTE 9 – TAXES

The Company has estimated that its effective tax rate for U.S. purposes will be zero for 2013, and consequently, recorded no U.S. income tax liability or tax expense for the three and six months ended June 30, 2013.  Income tax expense for 2012 was entirely attributable to the Company’s Colombian operations and represents the actual taxes paid or accrued in both Colombia and the United States.

Due to uncertainty regarding ultimate realization, the Company has established a valuation allowance of approximately $20,500,000 to fully reserve the net deferred tax assets as of June 30, 2013.  During 2010, the Company paid federal income taxes totaling $3,344,126.  Due to net operating losses generated in 2011 and 2012, the Company filed an amended 2010 federal income tax return and, during June 2013, received a full refund of this amount.

During the three and six months ended June 30, 2013, significant temporary differences between financial statement net loss and estimated taxable income related primarily to the impairment of oil and gas properties and the stock compensation expense recognized for book purposes during the period.

NOTE 10 – SUBSEQUENT EVENTS

Management Changes – Termination of Certain Equity Grants

In July 2013, the Company’s chief financial officer resigned to pursue other opportunities and the Company determined not to renew the employment agreement of our Senior Vice President of Exploration on its expiration in August 2013.  As a result of such events, 5,000 shares of restricted stock held by each of those officers is subject to forfeiture as of the date of termination of employment.  Similarly, unvested stock option grants to purchase an aggregate of 150,000 shares of common stock each will terminate as of the date of termination of employment.

Production Incentive Compensation Plan

In August 2013, the Company’s compensation committee adopted a Production Incentive Compensation Plan.  The purpose of the Plan is to encourage employees and consultants participating in the Plan to identify and secure for the Company participation in attractive oil and gas opportunities.

Under that Plan, the committee may establish one or more Pools and designate employees and consultants to participate in those Pools and designate prospects and wells, and a defined percentage of the Company’s revenues from those wells, to fund those Pools.  Only prospects acquired on or after establishment of the Plan, and excluding all prospects in Colombia, may be designated to fund a Pool.  The maximum percentage of the Company’s share of revenues from a well that may be designated to fund a Pool is 2% (the “Pool Cap”); provided, however, that with respect to wells with a net revenue interest to the 8/8 of less than 73%, the Pool Cap with respect to such wells shall be reduced on a 1-for-1 basis such that no portion of the Company’s revenues from a well may be designated to fund a Pool if the NRI is 71% or less.

Designated participants in a Pool will be assigned a specific percentage out of the Company’s revenues assigned to the Pool and will be paid that percentage of such revenues from all wells designated to such Pool and spud during that participant’s employment or services with the Company.  In no event may the percentage assigned to the Company’s chief executive officer relative to any well within a Pool exceed one-half of the applicable Pool Cap for that well.  Payouts of revenues funded into Pools shall be made to participants not later than 60 days following year end, subject to the committee’s right to make partial interim payouts.  Participants will continue to receive their percentage share of revenues from wells included in a Pool and spud during the term of their employment or service so long as revenues continue to be derived by the Company from those wells even after termination of employment or services of the Participant; provided, however, that a participant’s interest in all Pools shall terminate on the date of termination of employment or services where such termination is for cause.

In the event of certain changes in control of the Company, the acquirer or survivor of such transaction must assume all obligations under the Plan; provided, however, that in lieu of such assumption obligation, the committee may, at its sole discretion, assign overriding royalty interests in wells to substantially mirror the rights of participants under the Plan.  Similarly, the committee may, at any time, assign overriding royalty interests in wells in settlement of obligations under the Plan.

The Plan is administered by the Company’s compensation committee which shall consult with the Company’s chief executive officer relative to Pool participants, prospects, wells and interests assign although the committee will have final and absolute authority to make all such determinations.

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the six months ended June 30, 2013, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby.  To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties.  In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.

The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included herein.  Factors that may cause actual results or events to differ from those anticipated in the forward-looking statements included herein include the Risk Factors described in Item 1A herein and in our Form 10-K for the year ended December 31, 2012.

Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof.  We believe the information contained in this Form 10-Q to be accurate as of the date hereof.  Changes may occur after that date, and we will not update that information except as required by law in the normal course of our public disclosure practices.

Additionally, the following discussion regarding our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part 1 of this Form 10-Q, as well as the Risk Factors in Item 1A and the financial statements in Item 7 of Part II of our Form 10-K for the fiscal year ended December 31, 2012.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  We believe certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.  A description of our critical accounting policies is set forth in our Form 10-K for the year ended December 31, 2012.  As of, and for the six months ended, June 30, 2013, there have been no material changes or updates to our critical accounting policies.

Recent Developments

Drilling Activity

During the six months ended June 30, 2013, we drilled no wells and, at June 30, 2013, no drilling operations were ongoing.

Sale of La Cuerva and LLA 62 Blocks

During the first quarter of 2012, we sold all of our interest in Hupecol Cuerva, LLC (“HC, LLC”), which holds interests in the La Cuerva block and, pending approval of the Colombian authorities, the LLA 62 block, together covering approximately 90,000 acres in the Llanos Basin in Colombia.HC, LLC sold for $75 million, adjusted for working capital.  13.3% of the sales price of HC, LLC will be held in escrow to fund potential claims arising from the sale.  Pursuant to our 1.6% ownership interest in HC, LLC, we received 1.6% in the net sale proceeds after deduction of commissions, overriding royalty interest, and transaction expenses; subject to the escrow holdback and a further contingency holdback by Hupecol.  Following completion of the sale of HC, LLC, we have no continuing interest in the La Cuerva and LLA 62 blocks. Net proceeds from the sale, net to our interests, after all funds are released, are expected to be $1,224,393.

CPO 4 Termination

During the six months ended June 30, 2013, we made no capital expenditures with respect to the CPO 4 prospect in Colombia but entered into a Settlement Agreement with SK Innovation, operator and principal owner of the CPO 4 prospect.  Pursuant to the terms of the Settlement Agreement, we terminated, and agreed to convey to SK Innovation, our entire interest in the CPO 4 prospect and weand SK Innovation agreed to release any and all claims each may have against the other under the Operating Agreement with respect to the CPO 4 prospect. We were relieved of any and all obligations under past, present and future capital calls relating to the CPO 4 prospect, including accrued cash calls at December 31, 2012 of $3,219,128. Our balance sheet reflects a reduction in the cash call obligation and an increase in accumulated depletion, depreciation, amortization and impairment, each in the amount of $3,219,128.  In conjunction with the termination of our interest in the CPO 4 Block, during the six months ended June 30, 2013, we terminated a standby letter of credit obligation and $3,056,250 of funds posted as collateral to secure a standby letter of credit and previously recorded as restricted cash was returned to us.

Colombian Developments – Serrania, Los Picachos and Macaya

During the six months ended June 30, 2013, our capital investment expenditures in Colombia related to the preparation and evaluation of our three concessions in Colombia, which amount totaled $105,228.  During the second half of 2013, we anticipate drilling two test wells on the Serrania concession, and have budgeted approximately $1.4 million as our share of capital costs in connection with these activities.

In addition, we anticipate shooting approximately 83.6 kilometers of 2-D seismic on the Los Picachos concession and approximately 201.9 kilometers of 2-D seismic on the Macaya Concession during the second half of 2013.  In connection with these seismic acquisitions, we have budged approximately $2.0 million as our share of costs in connection with the planned seismic shoots.

Domestic Developments

With the termination of our interest in the CPO 4 prospect and improving economics in the U.S. energy sector, during the first half of 2013, we began actively evaluating opportunities to invest and participate in domestic oil and gas prospects.  Our management team, led by our CEO, has evaluated numerous opportunities and is sourcing and evaluating additional domestic opportunities.  As of June 30, 2013, no commitments had yet been entered into to participate in additional prospects.

During the second quarter of 2013, the operator of the Crown Paper #1 well in the Profit Island Field in East Baton Rouge Parish, Louisiana successfully carried out a recompletion of the well.  We hold a 5.675% royalty interest in the well which reduces to 2.838% after we have received royalties totaling $264,000 since inception. As a result of the recompletion, production from the well was down for the quarter and six month periods but, following the recompletion, is expected to increase going forward.

In July 2013, we agreed to participate in drilling a 10,000’ test well in Pecos County, Texas.  The well, sited on a 725 acre lease block, is planned to test the Devonian chert and Strawn formation targeting potential oil pay.  The block is expected to accommodate multiple offset locations should the test be successful. We will hold a 10% working interest after the casing point in the test well and in the entire lease block. Our costs in the test well are expected to be $400,000 or less which will be funded from working capital.  Drilling operations are expected to begin in September 2013.

Colombian Tax

During 2012, we engaged our tax advisors in Colombia to evaluate certain tax and other filings made in Colombia by them and other advisors for 2009, 2010 and 2011.  Our advisors identified inconsistencies between tax and non-tax filings with respect to equity investments made by us in Colombia.  Based on guidance from our advisors, during 2012 we recorded a foreign tax liability of $1,883,266 of which $1,601,787 was paid during the six months ended June 30, 2013 and the remaining balance is expected to be paid over the next twelve months, relating primarily to a newly enacted Colombian equity tax measure based on the equity of our Colombian branch as of January 1, 2011.

Tax Refund

During the six months ended June 30, 2013, we received a U.S. income tax refund of approximately $3.3 million attributable to the amendment of our 2010 federal tax return to carry back net operating losses from 2011 and 2012.

Compensation Expense

In June 2013, our shareholders approved an increase in the shares reserved for issuance under our 2008 Equity Incentive Plan.

With approval of the increase in shares reserved under the 2008 Equity Incentive Plan, 915,525 options granted during 2012 became exercisable.  In addition, in June 2013, we granted 1,200,000 stock options to employees and 100,000 stock options to non-employee directors.  As a result of such grants and approval of the increase in shares reserved under the plan and resulting exercisability of 2012 option grants, we recognized $599,040 and $891,462 of compensation expense during the three and six months ended June 30, 2013, in addition to stock compensation expense attributable to the amortization of unrecognized stock-based compensation from prior year grants.

Management Changes

In July 2013, our chief financial officer resigned to pursue other opportunities and we determined not to renew the employment agreement of our Senior Vice President of Exploration on its expiration in August 2013.  Until a replacement is hired to fill the chief financial officer position, the functions of our chief financial officer will be handled by other employees and consultants.  The Senior Vice President of Exploration position is not expected to be filled at this time as that position was focused on the CPO 4 prospect in which we no longer hold an interest.  As a result of those changes in management, our overhead is expected to decrease by more than $500,000 annually.  Additionally, 5,000 shares of restricted stock held by each of those officers is subject to forfeiture as of the date of termination of employment.  Similarly, unvested stock option grants to purchase an aggregate of 150,000 shares of common stock each will terminate as of the date of termination of employment.

Production Incentive Compensation Plan

In August 2013, the Company’s compensation committee adopted a Production Incentive Compensation Plan.  The purpose of the Plan is to encourage employees and consultants participating in the Plan to identify and secure for the Company participation in attractive oil and gas opportunities.

Under that Plan, the committee may establish one or more Pools and designate employees and consultants to participate in those Pools and designate prospects and wells, and a defined percentage of the Company’s revenues from those wells, to fund those Pools.  Only prospects acquired on or after establishment of the Plan, and excluding all prospects in Colombia, may be designated to fund a Pool.  The maximum percentage of the Company’s share of revenues from a well that may be designated to fund a Pool is 2% (the “Pool Cap”); provided, however, that with respect to wells with a net revenue interest to the 8/8 of less than 73%, the Pool Cap with respect to such wells shall be reduced on a 1-for-1 basis such that no portion of the Company’s revenues from a well may be designated to fund a Pool if the NRI is 71% or less.

Designated participants in a Pool will be assigned a specific percentage out of the Company’s revenues assigned to the Pool and will be paid that percentage of such revenues from all wells designated to such Pool and spud during that participant’s employment or services with the Company.  In no event may the percentage assigned to the Company’s chief executive officer relative to any well within a Pool exceed one-half of the applicable Pool Cap for that well.  Payouts of revenues funded into Pools shall be made to participants not later than 60 days following year end, subject to the committee’s right to make partial interim payouts.  Participants will continue to receive their percentage share of revenues from wells included in a Pool and spud during the term of their employment or service so long as revenues continue to be derived by the Company from those wells even after termination of employment or services of the Participant; provided, however, that a participant’s interest in all Pools shall terminate on the date of termination of employment or services where such termination is for cause.

In the event of certain changes in control of the Company, the acquirer or survivor of such transaction must assume all obligations under the Plan; provided, however, that in lieu of such assumption obligation, the committee may, at its sole discretion, assign overriding royalty interests in wells to substantially mirror the rights of participants under the Plan.  Similarly, the committee may, at any time, assign overriding royalty interests in wells in settlement of obligations under the Plan.

The Plan is administered by the Company’s compensation committee which shall consult with the Company’s chief executive officer relative to Pool participants, prospects, wells and interests assign although the committee will have final and absolute authority to make all such determinations.

Results of Operations

Oil and Gas Revenues.  Total oil and gas revenues decreased 47% to $19,223 in the three months ended June 30, 2013 compared to $36,347 in the three months ended June 30, 2012.  For the six month period, oil and gas revenues decreased 90% to $34,255 in the six months ended June 30, 2013 compared to $356,857 in the six months ended June 30, 2012.

The decrease in revenue was due to the sale of the La Cuerva concession during the first quarter of 2012 as well as a recompletion of the Crown Paper #1 well that was ongoing during the second quarter of 2013.

The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for the quarter and six months ended June 30, 2013 and 2012:

 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Gross producing wells
   
6
     
6
     
6
     
22
 
Net producing wells
   
0.19
     
0.18
     
0.19
     
0.44
 
Net oil production (bbl)
   
159
     
249
     
269
     
2,384
 
Net gas production (mcf)
   
643
     
2,951
     
1,749
     
7,251
 
Average sales price – oil (per barrel)
 
$
105.83
   
$
113.42
   
$
103.70
   
$
110.13
 
Average sales price – natural gas (per Mcf)
 
$
3.71
   
$
2.76
   
$
3.65
   
$
3.42
 

The number of gross wells shown above for the six months ended June 30, 2012  includes the 16 gross (0.256 net) wells attributable to the La Cuerva concession that were sold during the first quarter of 2012.  At June 30, 2012, the Company had 6 gross (0.18 net) wells.

The change in average sales prices realized reflects fluctuations in global commodity prices.

Oil and gas sales revenues by region were as follows:

   
Colombia
   
U.S.
   
Total
 
2013 First Six Months            
Oil sales  
$
—
   
$
27,873
   
$
27,873
 
Gas sales    
—
     
6,382
     
6,382
 
2012 First Six Months
                       
Oil sales
 
$
263,182
*
 
$
68,878
   
$
332,060
 
Gas sales
   
—
     
24,797
     
24,797
 

* Includes a $69,186 payment from Hupecol for oil produced in 2011 which is considered immaterial to the financial statements.

Lease Operating Expenses.   Lease operating expenses, excluding joint venture expenses relating to our Colombian operations discussed below, decreased 42% to $11,061in the 2013 quarter from $19,047 in the 2012 quarter.  For the six month period, lease operating expenses decreased 88% to $19,631 from $158,648 in the 2012 period.  The decrease in lease operating expenses during the six month period was attributable to the sale of our interest in the La Cuerva concession during the first quarter of 2012.

Following is a summary comparison of lease operating expenses, by region, for the periods.

   
Colombia
   
U.S.
   
Total
 
Quarter
   
- 2013
   
$
—
   
$
11,061
   
$
11,061
 
 
   
- 2012
   
$
—
   
$
19,047
   
$
19,047
 
 
                               
Six Months
   
- 2013
   
$
—
   
$
19,631
   
$
19,631
 
 
   
- 2012
   
$
118,734
   
$
39,914
   
$
158,648
 

Consistent with our business model and operating history, we experience steep declines in lease operating expenses following strategic divestitures and anticipate lease operating expenses to ramp up to levels consistent with regional costs as new wells are brought on line.

Joint Venture Expenses.  Our allocable share of joint venture expenses attributable to the Colombian Joint Venture with Hupecol totaled $0and $0 during the three months ended June 30, 2013 and 2012, respectively, and $0 and $3,244 during the six months ended June 30, 2013 and 2012, respectively.  The change in joint venture expenses was attributable to the sale of our La Cuerva prospect during 2012 and operation of no wells in Colombia during 2013.

Depreciation and Depletion Expense.   Depreciation and depletion expense was $3,172 and $6,185 for the quarter ended June 30, 2013 and 2012, respectively, and $8,202 and $55,467 for the six months ended June 30, 2013 and 2012, respectively.  The decrease in depreciation and depletion was due to the sale of our interest in the La Cuerva concession and a resulting reduction in production.

Gain on sale of oil and gas properties. The sale of our indirect interests in Hupecol Cuerva, LLC resulted in a gain of $315,119 during the 2012 six month period. During the six months ended June 30, 2013, post-closing adjustments related to the sale of our indirect interests in Hupecol Cuerva, LLC resulted in a gain of $86,025.

Impairment Expense .  Termination of our testing and completion efforts on our Tamandua #1 sidetrack well and Cachirre #1 well resulted in impairment expense of $16,633,074 and $36,628,919, respectively, during the quarter and six months ended June 30, 2012.

General and Administrative Expenses.  General and administrative expense decreased by 36% to $1,301,217 during the 2013 quarter from $2,032,339 during the 2012 quarter and by 30% to $2,173,864 during the 2013 six-month period from $3,113,187 during the 2012 six-month period.

The decrease in general and administrative expense was primarily attributable to a decrease in stock compensation of $87,029 and $269,630, respectively, during the quarter and six-month periods, and a decrease in cash compensation paid of $392,634 and $377,068, respectively, during the quarter and six-month periods.  The decrease in stock compensation expense reflects the decrease in share price of options granted.  The decrease in cash compensation paid reflected cash bonuses paid during the 2012 periods.

Other Income (Expense) .  Other income (expense) consists of interest earned on cash balances, net of other bank fees.  Other income (expense), net totaled $10,974 net gain and $6,358 net expense during the three and six-month periods ended June 30, 2013, respectively, as compared to $11,627 of net expense and $37,320 of net expense during the three and six-month periods ending June 30, 2012, respectively.  The change was attributable to interest income received on tax refunds for the quarter and Colombian fees for the year.

Income Tax Expense/Benefit .  We reported income tax benefit of $18,986 during the 2013 quarter compared to income tax expense of $3,356,154 during the 2012 quarter.  For the six months ended June 30, 2013, we reported income tax benefit of $15,333 as compared to income tax expense of $3,365,365 during the 2012 six-month period.  The change in income tax expense was attributable to the sale of our properties in Colombia during 2012. We over accrued some tax expense during 2012.

Financial Condition

Liquidity and Capital Resources.  At June 30, 2013, we had a cash balance of $8,915,861 and working capital of $10,951,484, compared to a cash balance of $5,626,345 and working capital of $9,144,869 at December 31, 2012. The change in working capital during the period was primarily attributable to our settlement with SK Innovation terminating our interest in the CPO 4 prospect and release of our cash call commitment obligations totaling $3,219,128 at December 31, 2012.

Operating activities provided cash of $316,926 during the 2013 six month period as compared to $1,939,666 of cash used during the 2012 six-month period.  The change in operating cash flow was primarily attributable to tax refunds received totaling approximately $3.3 million.

Investing activities provided $2,972,590 during the 2013 six-month period compared to $13,996,261 used during the 2012 six-month period.  The funds provided by investing activities during the 2013 period reflects the release, following termination of our interest in the CPO 4 block, of restricted cash in the amount of $3,056,250 securing a standby letter of credit obligation to secure performance relative to the CPO 4 block, partially offset by investments in oil and gas properties. Cash used in investing activities during the 2012 period reflects the receipt of $1,027,068 from the sale of our interest in Hupecol Cuerva LLC, partially offset by investments in oil and gas properties and assets and the purchase of marketable securities of $156,818.

Financing activities during 2012 provided $12,397,700 of net proceeds from the sale of units of common stock and warrants in May 2012.

Long-Term Liabilities .  At June 30, 2013, we had long-term liabilities of $8,148 as compared to $201,270 at December 31, 2012.  Long-term liabilities consist of a reserve for plugging costs and accrued foreign taxes payable. The decrease in long-term liabilities at June 30, 2013 was attributable to reclassifying accrued foreign taxes payable as short term.

Capital and Exploration Expenditures and Commitments.  Our principal capital and exploration expenditures relate to ongoing efforts to acquire, drill and complete prospects.  We expect that future capital and exploration expenditures will be funded principally through funds on hand and funds generated by proceeds from anticipated financing transactions.

During the six months ended June 30, 2013, we invested $169,685 for the development of oil and gas properties, consisting of (1) preparation and evaluation costs in Colombia of $105,288, and (2) costs on U.S. properties of $64,457. Of the amount invested, the Company capitalized $209 to oil and gas properties subject to amortization, and $169,476 to oil and gas properties not subject to amortization, primarily attributable to preparation and evaluation cost in Colombia of $105,288 and leasehold cost in the U.S. of $64,457.

Our estimated capital expenditure budget for the balance of 2013 is approximately $3.5 million and relates to the anticipated drilling of two test wells on the Serrania concession and seismic shoots on the Los Picachos and Macaya concessions.  Drilling and seismic plans for 2013 may change based on field conditions and other factors beyond our control or the control of Hupecol, operator of the Serrania, Los Picachos and Macaya concessions, and as such there can be no assurance as to the timing of these operations.

We anticipate that our cash on hand will be adequate to fully fund our operations during 2013, including our capital expenditure budget. However, it is possible that we will require additional capital to fully fund our 2013 drilling budget.  If, for any reason, we are unable to fully fund our drilling budget and fail to satisfy commitments reflected therein, we may be subject to penalties or to the possible loss of some of our rights and interests in prospects with respect to which we fail to satisfy funding commitments.  We have no commitments to provide any additional financing should we require and seek such financing and there is no guarantee that we will be able to secure additional financing on acceptable terms, or at all, to fully fund our 2013 drilling budget and to support future acquisitions and development activities.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements or guarantees of third party obligations at June 30, 2013.

Inflation

We believe that inflation has not had a significant impact on operations since inception.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

The price we receive for our oil and gas production heavily influences our revenue, profitability, access to capital and future rate of growth. Crude 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 gas have been volatile, and these markets will likely continue to be volatile in the future. The prices we receive for production depends on numerous factors beyond our control.

We have not historically entered into any hedges or other transactions designed to manage, or limit, exposure to oil and gas price volatility.

ITEM 4 CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of June 30, 2013 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2013.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 5 OTHER INFORMATION

In August 2013, the Company’s compensation committee adopted a Production Incentive Compensation Plan.  The purpose of the Plan is to encourage employees and consultants participating in the Plan to identify and secure for the Company participation in attractive oil and gas opportunities.

Under that Plan, the committee may establish one or more Pools and designate employees and consultants to participate in those Pools and designate prospects and wells, and a defined percentage of the Company’s revenues from those wells, to fund those Pools.  Only prospects acquired on or after establishment of the Plan, and excluding all prospects in Colombia, may be designated to fund a Pool.  The maximum percentage of the Company’s share of revenues from a well that may be designated to fund a Pool is 2% (the “Pool Cap”); provided, however, that with respect to wells with a net revenue interest to the 8/8 of less than 73%, the Pool Cap with respect to such wells shall be reduced on a 1-for-1 basis such that no portion of the Company’s revenues from a well may be designated to fund a Pool if the NRI is 71% or less.

Designated participants in a Pool will be assigned a specific percentage out of the Company’s revenues assigned to the Pool and will be paid that percentage of such revenues from all wells designated to such Pool and spud during that participant’s employment or services with the Company.  In no event may the percentage assigned to the Company’s chief executive officer relative to any well within a Pool exceed one-half of the applicable Pool Cap for that well.  Payouts of revenues funded into Pools shall be made to participants not later than 60 days following year end, subject to the committee’s right to make partial interim payouts.  Participants will continue to receive their percentage share of revenues from wells included in a Pool and spud during the term of their employment or service so long as revenues continue to be derived by the Company from those wells even after termination of employment or services of the Participant; provided, however, that a participant’s interest in all Pools shall terminate on the date of termination of employment or services where such termination is for cause.

In the event of certain changes in control of the Company, the acquirer or survivor of such transaction must assume all obligations under the Plan; provided, however, that in lieu of such assumption obligation, the committee may, at its sole discretion, assign overriding royalty interests in wells to substantially mirror the rights of participants under the Plan.  Similarly, the committee may, at any time, assign overriding royalty interests in wells in settlement of obligations under the Plan.

The Plan is administered by the Company’s compensation committee which shall consult with the Company’s chief executive officer relative to Pool participants, prospects, wells and interests assign although the committee will have final and absolute authority to make all such determinations.
ITEM 6 EXHIBITS

Exhibit
 
Number
Description

 
Production Incentive Compensation Plan

 
Certification of CEO and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 
Certification of CEO and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.

 
HOUSTON AMERICAN ENERGY CORP.
Date:  August 13, 2013
 
 
 
By:
/s/ John F. Terwilliger
 
 
John Terwilliger
 
 
CEO and President (Principal executive officer and
 
 
  Principal financial officer)
 
 
21
Exhibit 10.1
 
HOUSTON AMERICAN ENERGY CORP.
 
PRODUCTION INCENTIVE COMPENSATION PLAN
 
1. Definitions .

The following definitions shall apply to the Plan:

“Applicable Revenues” shall mean the Company’s proportionate share of gross revenues, after deduction of ad valorem, severance and other taxes measured by production, from Designated Wells.

“Board” shall mean the board of directors of the Company, as comprised from time to time.

“Cause” shall have the meaning assigned to such term in any individual employment or service agreement with a Designated Participant or, if no such agreement exists or if such agreement does not define “Cause,” Cause shall mean (i) a Designated Participant’s act(s) of gross negligence or willful misconduct in the course of Designated Participant’s employment with, or services to, the Company that is or could reasonably be expected to be materially injurious to the Company or any of its subsidiaries, (ii) willful failure or refusal by a Designated Participant to perform in any material respect his or her duties or responsibilities, (iii) misappropriation by a Designated Participant of any assets of the Company or any of its subsidiaries, (iv) embezzlement or fraud committed by a Designated Participant, or at his or her direction, (v) a Designated Participant’s conviction of, or pleading “guilty” or “ no contest” to a felony under United States state or federal law.

“Change in Control” shall mean any one of the following: (i) any person is or becomes the “Beneficial Owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such person any securities acquired directly from the Company) representing 30% or more of the Company’s then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company’s stockholders was approved or recommended by a vote of at least a two-thirds of the directors then still in office who either were directors on the Effective Date or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a re-capitalization of the Company (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such person any securities acquired directly from the Company) representing 30% or more of the combined voting power of the Company’s then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity at least 75% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the holders of common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.

1
“Committee” shall mean a committee established by the Board to administer the Plan.

“Company” shall mean Houston American Energy Corp., a Delaware corporation, and its subsidiaries.

“Designated Participant(s)” shall mean employees and/or consultants designated by the Committee to participate in the Plan.

“Designated Participant Percentage Interest” shall mean each Designated Participants assigned interest in Applicable Revenues from a Designated Well.

“Designated Percentage” shall mean a percentage, specified by the Committee, of Specified Revenues from a Designated Well(s), not to exceed the Pool Cap.

“Designated Well(s)” shall mean wells drilled on Eligible Prospects and designated as a Designated Well and assigned to a Pool by the Committee.

“Effective Date” shall mean the date on which this Plan is adopted by the Board.

“Eligible Prospects” shall mean any interest in an oil and gas prospect acquired by the Company on or after the date of adoption of the Plan and designated as such by the Committee, whether a fee estate, working interest, net revenue interest, royalty interest, or any other interest in which the Company, directly or indirectly, derives revenues measured by oil, gas or condensates produced; provided, however, that no oil and gas prospects in the country of Colombia shall be Eligible Prospects.

“NRI” shall mean net revenue interest, or a share of oil and gas production after all royalty and overriding royalty interests.

2
“Plan” shall mean this Houston American Energy Corp. Production Incentive Compensation Plan, as amended from time to time.

“Pool(s)” shall mean one or more groups of Designated Participants, holding Designated Interests in Designated Well(s).

“Pool Cap” shall mean two percent (2%).

“Post-Termination Wells” shall mean, with respect to a Designated Participant, wells spud after the Termination of employment by, or services to, the Company of such Designated Participant.

“Termination” or “Termination Date” shall mean the termination, or date of such termination, as appropriate, of employment by, or services to, the Company of any Designated Participant, regardless of the reason.

“Vested Well Interest” shall mean, with respect to a Designated Participant and determined as of a specific date, the respective Designated Participant Participation Interest in each Designated Well, spud on or prior to that date of such Designated Participant, in each Pool in which such Designated Participant has been assigned a Designated Participant Participation Interest.

2. Purpose of the Plan

The Plan is intended to provide a method for attracting and retaining key employees of the Company, and to encourage such individuals to remain with the Company and devote their best efforts to its affairs, in particular the Company’s efforts to identify and secure participation interests in attractive oil and gas opportunities.

3. Administration of the Plan

The Plan shall be administered by the Committee which shall be appointed from time to time by the Board.  Unless otherwise determined by the Board, the Company’s Compensation Committee shall act as the Committee under this Plan.

The Committee shall have authority to establish Pools and to designate Eligible Prospects, Designated Participants, Designated Participant Percentage Interests, Designated Percentages and Designated Wells.  The Committee shall consult with, and receive input from, the Company’s chief executive officer, and other officers as it deems appropriate, regarding such designations but the Committee will retain sole final authority in that regard.  The Committee is authorized to interpret the Plan and from time to time adopt such rules, regulations, definitions and forms consistent with the provisions of the Plan as it may deem advisable to carry out the purposes of the Plan.  All decisions made by the Committee with respect to the Plan shall be final.

3
4. Establishment of Pools

The Committee shall, at its sole discretion, establish one or more Pools.  Each Pool shall be designated, and known, by a name consisting of the year of formation of the Pool and the sequential number representing the order in which such Pool was formed in that year.  The Committee shall, in establishing a Pool, select from Eligible Prospects, and Designated Wells drilled on such prospects shall be included in the Pool, and shall select Designated Participants to participate in such Pool as well as selecting the Designated Interest with respect to each Designated Well and the Designated Participant Percentage Interest.

Example 1 . The first Pool formed in 2013 shall be designated “2013-1 Pool.” That Pool may consist of all Designated Wells drilled on Eligible Prospect X with a Designated Percentage of 2% and Designated Participants consisting of employees A, B and C, each holding Designated Participant Percentage Interests of 1%, 0.5% and 0.5%, respectively.  For so long as A, B and C remain Designated Participants they will be entitled to receive 1%, 0.5% and 0.5%, respectively, of the Applicable Revenues from each Designated Well drilled on that Eligible Prospect.

In the event that the Committee determines to designate additional, or a different group of, Designated Participants than comprise an existing Pool, or at any such time as the Committee may so determine, the Committee shall establish an additional Pool(s) reflecting the unique combination of Designated Participants, Designated Participant Percentage Interests, Eligible Prospects, Designated Wells and Designated Percentage.

Example 2.  If, during 2013 and assuming the 2013-1 Pool is in existence as described in Example 1, the Committee determines to grant interests under this Plan to Designated Participants consisting of employees A, B and D, the Committee shall establish a new Pool designated “2013-2 Pool.”   In that case, the 2013-1 Pool will continue to operate as described and the new 2013-2 Pool will be established to include such Eligible Prospects, Designated Wells, Designated Percentage and Designated Participant Percentage Interest as the Committee shall determine.

Each Pool shall receive and distribute to Designated Participants their relative Designated Participant Percentage Interest in all Applicable Revenues from Designated Wells so long as the Designated Wells continue to generate Applicable Revenues.

4
Example 3 .  If wells 1, 2 and 3 on Eligible Prospect X are Designated Wells in the 2013-1 Pool, Designated Participants A, B and C hold 1%, 0.5% and 0.5% Designated Participant Percentage Interests and Designated Wells 1, 2 and 3 generate $100,000 of Applicable Revenue during 2013, Designated Participants A, B and C will receive distributions from the 2013-1 Pool of $1,000, $500 and $500, respectively, relative to 2013.

Multiple Pools may, but are not required to, have overlapping Eligible Prospects and overlapping Designated Wells; provided, however, that the total Designated Percentage with respect to any Designated Well shall not exceed the Pool Cap and, provided further, that no Pool shall include a well spud prior to the date of establishment of such Pool.

Example 4 .  If the 2013-3 Pool relating to Eligible Prospect Y includes Designated Participants E, F and G, with a Designated Percentage of 1% in Designated Wells 4, 5 and 6, allocated among Designated Participants E, F and G with Designated Participant Percentage Interests of 0.5%, 0.25% and 0.25%, the Committee may also establish the 2013-4 Pool, also relating to Eligible Prospect Y and relating to Designated Participants H, I and J, provided that the aggregate Designated Percentage does not, when added to the Designated Percentage in the 2013-3 Pool with respect to Eligible Prospect Y, exceed the Pool Cap and, provided, further, that the 2013-4 Pool shall not include Designated Wells 4, 5 and 6 although the 2013-3 Pool and 2013-4 Pool may each include identical Designated Wells spud following establishment of the 2013-4 Pool.

5. Designated Participants and Designated Participant Percentage Interests .

The Committee, in consultation with the chief executive officer and/or members of management of the Company, may select any employee and/or consultant of the Company as a Designated Participant and include such Designated Participant in any one or more Pools as it so determines; provided, however, that no member of the Committee shall, during his or her service on the Committee, be granted an interest in any Pool.

With respect to each Designated Participant, the Committee, in consultation with the chief executive officer and/or members of management of the Company, may select the Designated Participant Percentage Interest relative to each Designated Well in each respective Pool; provided, however, that in no event may the Designated Participant Percentage Interest of the Company’s Chief Executive Officer in any Designated Well exceed one-half of the applicable Pool Cap with respect to such Designated Well.

5
6. Eligible Prospects, Designated Wells and Designated Percentage .

The Committee, in consultation with the chief executive officer and/or members of management of the Company, may select for inclusion in any Pool(s) such Eligible Prospects as it may deem appropriate.

The Committee, in consultation with the chief executive officer and/or members of management of the Company, may select for inclusion in any Pool(s) one or more Designated Wells; provided that a Pool may only include Designated Wells spud on or after the date of establishment of a Pool.  The Committee may, at its sole discretion, designated wells drilled on an Eligible Prospect as Designated Well as each such well is spud or may designate a specified number or all wells on an Eligible Prospect spud after establishment of a Pool as Designated Wells.

The Committee, in consultation with the chief executive officer and/or members of management of the Company, may select Designated Percentages with respect to each Designated Well, provided that the Designated Percentage as to any individual Designated Well included, in the aggregate, in all Pools shall not exceed the Pool Cap.  Notwithstanding the foregoing, if the Company’s NRI in a Designated Well is less than 73% (determined on an 8/8 basis), the Pool Cap shall be reduced on a 1 for 1 basis and no well with an NRI of 71% or less may be a Designated Well.

Example 5 .  If the Company’s NRI in a Designated Well is 72%, or 1% less than the minimum NRI, the Pool Cap would be reduced by 1% from 2% to 1%.  With respect to that Designated Well, the maximum Designated Percentage would be 1%.

7. Pool Payout .

The Committee shall, not later than sixty (60) days following the end of each calendar year, determine the Applicable Revenues with respect to each Pool.  Promptly following determination of the Applicable Revenues with respect to a Pool, the Committee shall cause to be paid to each Designated Participant in that Pool his or her respective Designated Participant Percentage Interest in the Applicable Revenues of Designated Wells in the Pool.  The Committee may, at its sole discretion, make partial interim payouts with respect to one or more Pools.

8. Vesting of Participation .

Subject to the termination provisions set forth in Section 9, each Designated Participant’s interest in each Pool vests on the date of grant and shall continue thereafter regardless of whether the Designated Participant is employed by, or providing services to, the Company.

6
9. Termination of Employment or Services .

Upon the Termination of a Designated Participant, (a) where Termination is for “cause”, the Designated Participant’s interest in each Pool in which such Designated Participant is participating shall terminate on the Termination Date and such Designated Participant shall only be entitled to payment of amounts accruing through the Termination Date after which no further payments from any Pool shall be earned or owing, and (b) where Termination is other than for “cause”, including resignation, retirement, death or disability of a Designated Participant, the Designated Participant’s Vested Well Interest in each Pool shall continue following Termination and the Designated Participant, including his estate and/or survivors, shall continue to receive payouts from each Pool so long as Applicable Revenues are derived from Designated Wells in such Pools; provided, however, that any such Designated Participant shall have no interest in, and shall receive no portion of Applicable Revenues attributable to, Post-Termination Wells.

10. Change in Control .

In the event of a Change in Control of the Company, as a condition of such Change in Control, the acquirer or survivor of such transaction must assume all obligations of the Company under the Plan; provided, however, that the Committee may, at its sole discretion, assign overriding royalty interests in Designated Wells to Designated Participants, in the manner described in Section 11 below, in which case, the assumption of the obligations of the Company under the Plan shall be deemed waived.

11. Assignment of Overriding Royalties .

The Committee may, at its sole discretion, from time to time cause the Company to assign to some or all of the Designated Participants overriding royalty interests in settlement of some or all the obligations of the Company to make payments from any one or more Pools.  In the event that the Committee elects to cause overriding royalty interests to be assigned to Designated Participants, those overriding royalty interests shall be structured to substantially mirror the rights of each such Designated Participant immediately prior to such assignment and shall be conditioned upon receipt by the Company of a written acknowledgement from any such Designated Participant that such assignment is made in full settlement of the corresponding right and obligation under the Plan.

12. Nature of the Plan .

The Plan shall constitute an unfunded, unsecured obligation of the Company to make cash payments in accordance with the provisions of the Plan.  The establishment of the Plan and the assignment of interests in the Plan shall not create a trust.  Legal and equitable title to all Eligible Prospects and Designated Wells shall remain in the Company and no Designated Participant shall have any security or other interest in any of the Eligible Prospects or Designated Wells or any other assets of the Company.  Nothing in the Plan shall in any way inhibit the Company from dealing with Eligible Prospects or Designated Wells in any manner.

7
13. Employment Relationship .

A Designated Participant shall be considered to be in the employment or service of the Company as long as he or she remains an employee or service provider to the Company, any subsidiary of the Company or any enterprise which acquires the Company in a Change in Control transaction.  Nothing in the adoption or implementation of the Plan shall confer on any employee or consultant the right to continued employment or service with the Company or affect in any way the right of the Company to terminate his or her employment or service at any time.  Any question as to whether and when there has been a Termination, and the cause of such Termination, shall be determined by the Committee and its determination shall be final.

14. Prohibition Against Assignment or Encumbrance .

No right, title, interest or benefit hereunder shall ever be liable for or charged with any of the torts or obligations of a Designated Participant or any person claiming under a Designated Participant, or be subject to seizure by any creditor of a Designated Participant or any person claiming under a Designated Participant.  No Designated Participant or any person claiming under a Designated Participant shall have the power to anticipate or dispose of any right, title, interest or benefit hereunder in any manner until the same shall have been actually distributed free and clear of the terms of the Plan.

15. No Right of Inspection .

Neither the Plan nor any action taken thereunder shall be construed as giving a Designated Participant the right to an accounting or to examine the books or affairs of the Company or to question or review management decisions relating to the Company, its properties or activities.

16. Amendment or Termination of Plan .

The Board shall have the right to alter, amend or terminate the Plan at any time, except that no alteration, amendment or termination will be made without a Designated Participant’s consent if such alternation, amendment or termination would impair the rights of such Designated Participant with respect to interests in Pools then existing.
 
 
8
Exhibit 31.1

CERTIFICATION OF CEO AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 15 U.S.C. SECTION
 10A, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John Terwilliger, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Houston American Energy Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respect the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

Date: August 13, 2013

 
/s/ John F. Terwilliger
 
 
John F. Terwilliger,
 
 
Chief Executive Officer and Principal
 
 
Financial Officer
 
 
 
Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, John Terwilliger, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Houston American Energy Corp. on Form 10-Q for the quarterly period ended June 30, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Houston American Energy Corp.

 
By:
/s/ John F. Terwilliger
 
 
Name:
John F. Terwilliger
 
 
Title:
Chief Executive Officer and Principal Financial Officer
 
 
Dated:
August 13, 2013