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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the Quarterly Period Ended March 31, 2023
  or
   
☐ 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 000-06814

 

 

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   83-0205516
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

1616 S. Voss Road, Suite 725, Houston, Texas   77057
(Address of principal executive offices)   (Zip Code)

 

(346) 509-8734

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)   Name of each exchange on which registered
Common stock, par value $0.01   USEG   NASDAQ Stock Market LLC
(Nasdaq Capital Market)

 

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 ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES ☒ NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐
Non-accelerated filer ☒   Smaller reporting company ☒
    Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

 

The registrant had 25,234,672 shares of its common stock, par value $0.01 per share, outstanding as of May 10, 2023.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page
Cautionary Note About Forward-Looking Statements 3
     
Part I. FINANCIAL INFORMATION 4
     
Item 1. Financial Statements 4
  Condensed Consolidated Balance Sheets (unaudited) 4
  Condensed Consolidated Statements of Operations (unaudited) 5
  Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) 6
  Condensed Consolidated Statements of Cash Flows (unaudited) 7
  Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
     
Part II. OTHER INFORMATION 28
     
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Mine Safety Disclosures 29
Item 5. Other Information 29
Item 6. Exhibits 30
     
Signatures 31

 

2
 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Report” or “Form 10-Q”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are forward-looking statements.

 

Examples of forward-looking statements in this Report include:

 

  ● planned capital expenditures for oil and natural gas exploration and environmental compliance;
  ● potential drilling locations and available spacing units, and possible changes in spacing rules;
  ● cash expected to be available for capital expenditures and to satisfy other obligations;
  ● recovered volumes and values of oil and natural gas approximating third-party estimates;
  ● anticipated changes in oil and natural gas production;
  ● drilling and completion activities and opportunities;
  ● timing of drilling additional wells and performing other exploration and development projects;
  ● expected spacing and the number of wells to be drilled with our oil and natural gas industry partners;
  ● when payout-based milestones or similar thresholds will be reached for the purposes of our agreements with our partners;
  ● expected working and net revenue interests, and costs of wells, relating to the drilling programs with our partners;
  ● actual decline rates for producing wells;
  ● future cash flows, expenses and borrowings;
  ● pursuit of potential acquisition opportunities;
  ● economic downturns, wars and increased inflation and interest rates, and possible recessions caused thereby;
  ● the effects of global pandemics on our operations, properties, the market for oil and gas, and the demand for oil and gas;
  ● our expected financial position;
  ● our expected future overhead reductions;
  ● our ability to become an operator of oil and natural gas properties;
  ● our ability to raise additional financing and acquire attractive oil and natural gas properties; and
  ● other plans and objectives for future operations.

 

These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” “up to,” and similar terms and phrases. Though we believe that the expectations reflected in these statements are reasonable, they involve certain assumptions, risks and uncertainties. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, under and incorporated by reference in, “Risk Factors”, below, the risks discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC” or the “Commission”). Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above.

 

All forward-looking statements speak only at the date of the filing of this Report. We do not undertake any obligation to update or revise publicly any forward-looking statements except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.

 

3
 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

  

March 31,

2023

  

December 31,

2022

 
         
ASSETS          
Current assets:          
Cash and equivalents  $2,421   $4,411 
Oil and natural gas sales receivable   2,048    3,193 
Marketable equity securities   107    107 
Other current assets   1,160    558 
Real estate assets held for sale, net of selling costs   175    175 
           
Total current assets   5,911    8,444 
           
Oil and natural gas properties under full cost method:          
Unevaluated properties   1,584    1,584 
Evaluated properties   204,282    203,144 
Less accumulated depreciation, depletion, amortization and impairment   

(98,825

)   (96,725)
           
Net oil and natural gas properties   107,041    108,003 
           
Property and equipment, net   861    651 
Right-of-use asset   813    868 
Other assets   343    354 
           
Total assets  $114,969   $118,320 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $7,641   $7,832 
Accrued compensation and benefits   357    1,111 
Commodity derivative liability-current   369    1,694 
Asset retirement obligations-current   657    668 
Current lease obligation   174    189 
           
Total current liabilities   9,198    11,494 
           
Credit facility   12,000    12,000 
Asset retirement obligations- noncurrent   15,091    14,774 
Long-term lease obligation, net of current portion   750    794 
Deferred tax liability   836    898 
Other noncurrent liabilities   6    6 
           
Total liabilities   37,881    39,966 
           
Commitments and contingencies (Note 8)   -     -  
           
Shareholders’ equity:          
Common stock, $0.01 par value; 245,000,000 shares authorized; 25,234,672 and 25,023,812 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively   252    250 
Additional paid-in capital   217,265    216,690 
Accumulated deficit   (140,429)   (138,586)
           
Total shareholders’ equity   77,088    78,354 
           
Total liabilities and shareholders’ equity  $114,969   $118,320 

 

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

 

4
 

 

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(In thousands, except share and per share amounts)

 

   2023   2022 
         
Revenue:          
Oil  $7,095   $7,833 
Natural gas and liquids   1,177    1,039 
           
Total revenue   8,272    8,872 
           
Operating expenses:          
Lease operating expense   4,523    2,735 
Production taxes   520    572 
Depreciation, depletion, accretion and amortization   2,417    1,886 
General and administrative expenses   2,772    2,946 
Total operating expenses   10,232    8,139 
           
Operating (loss) income   (1,960)   733 
           
Other income (expense):          
Commodity derivative gain (loss)   919    (6,837)
Marketable equity securities gain   -    81 
Interest expense, net   (268)   (50)
Total other income (expense)   651    (6,806)
           
Net loss before income taxes   (1,309)   (6,073)
Income tax benefit   62    2,689 
Net loss  $(1,247)  $(3,384)
           
Basic and diluted weighted average shares outstanding   25,178,565    23,717,240 
Basic and diluted net loss per share  $(0.05)  $(0.14)

 

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

 

5
 

 

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(in thousands, except share amounts)

 

   Shares   Amount   Capital   Deficit   Total 
       Additional         
   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Capital   Deficit   Total 
                     
Balances, December 31, 2021   4,676,301   $47   $149,276   $(135,888)  $13,435 
Shares issued for acquired properties   19,905,736    199    64,495         64,694 
Stock-based compensation   -    -    1,500         1,500 
Shares issued upon vesting of restricted stock awards   373,500    4    (4)   -    - 
Shares withheld to settle tax withholding obligations for restricted stock awards   (81,725)   (1)   (306)   -    (307)
Exercise of warrants   50,000    -    213    -    213 
Net loss   -    -    -    (3,384)   (3,384)
                          
Balances, March 31, 2022   24,923,812   $249   $215,174   $(139,272)  $76,151 
                          
Balances, December 31, 2022   25,023,812   $250   $216,690   $(138,586)  $78,354 
Stock-based compensation   -    -    727    -    727 
Shares issued upon vesting of restricted stock awards   273,000    3    (3)   -    - 
Shares withheld to settle tax withholding obligations for restricted stock awards   (62,140)   (1)   (149)   -    (150)
Cash dividends $0.0225 per share                  (596)   (596)
Net loss   -    -    -    (1,247)   (1,247)
                          
Balances, March 31, 2023   25,234,672   $252   $217,265   $(140,429)  $77,088 

 

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

 

6
 

 

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(in thousands)

 

   2023   2022 
         
Cash flows from operating activities:          
Net loss  $(1,247)  $(3,384)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation, depletion, accretion, and amortization   2,417    1,886 
Deferred income taxes   (62)   (2,689)
Unrealized (gain) loss on commodity derivatives   (1,325)   5,193 
Gain on marketable equity securities   -    (81)
Amortization of debt issuance costs   12    10 
Stock-based compensation   727    1,500 
Right of use asset amortization   55    24 
Changes in operating assets and liabilities:          
Oil and natural gas sales receivable   1,145    (3,337)
Other assets   52    (212)
Accounts payable and accrued liabilities   (715)   2,594 
Accrued compensation and benefits   (754)   (990)
Payments on operating lease liability   (58)   (27)
Payments for asset retirement obligations   (11)   - 
           
Net cash provided by operating activities   236    487 
           
Cash flows from investing activities:          
Acquisition of properties   -    (783)
Oil and natural gas capital expenditures   (1,106)   (855)
Expenditures for cash calls   -    (1,456)
Property and equipment expenditures   (261)   (159)
           
Net cash used in investing activities   (1,367)   (3,253)
           
Cash flows from financing activities:          
Borrowings on credit facility   -    4,000 
Repayment of debt   -    (3,847)
Payment of fees for credit facility   -    (172)
Repayments of insurance premium finance note payable   (112)   (78)
Exercise of warrant   -    195 
Shares withheld to settle tax withholding obligations for restricted stock awards   (151)   (307)
Dividends paid   (596)   - 
           
Net cash used in financing activities   (859)   (209)
           
Net decrease in cash and equivalents   (1,990)   (2,975)
           
Cash and equivalents, beginning of period   4,411    4,422 
           
Cash and equivalents, end of period  $2,421   $1,447 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Please see Note-15- Supplemental Disclosures of Cash Flow Information.

 

7
 

 

U.S. ENERGY CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Operations

 

U.S. Energy Corp. (collectively with its wholly-owned subsidiaries, Energy One LLC (“Energy One”) and New Horizon Resources LLC (“New Horizon Resources”), referred to as the “Company” in these Notes to Unaudited Condensed Consolidated Financial Statements) is incorporated in the State of Delaware. The Company’s principal business activities are focused on the acquisition, exploration and development of oil and natural gas properties in the United States.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”) and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on April 13, 2023. Our financial condition as of March 31, 2023, and operating results for the three months ended March 31, 2023, are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2023.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of oil and gas properties acquired, oil and natural gas reserves that are used in the calculation of depreciation, depletion, amortization and impairment of the carrying value of evaluated oil and natural gas properties; realizability of unevaluated properties; production and commodity price estimates used to record accrued oil and natural gas sales receivables; future prices of commodities used in the valuation of commodity derivative contracts; and the cost and timing of future asset retirement obligations. The Company evaluates its estimates on an on-going basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable. Due to inherent uncertainties, including the future prices of oil and natural gas, these estimates could change in the near term and such changes could be material.

 

Recently Adopted Accounting Standards

 

On January 1, 2023, the Company adopted ASU 2016-13 to Topic 326, Financial Instruments-Credit Losses, as amended by other related ASUs that provided targeted improvements. The standard changes the impairment model for trade receivables and other financial assets measured at amortized cost. This ASU requires the use of a new forward-looking “expected loss” model compared to the previous “incurred loss” model, resulting in accelerated recognition of credit losses. This ASU primarily applies to the Company’s accounts receivable balances, of which the majority are received within a short-term period of one to three months. The Company monitors the credit quality of its counterparties through review of collections, credit ratings, and other analyses. The Company develops its estimated allowance for credit losses primarily using an aging method and analyses of historical loss rates as well as consideration of current and future conditions that could impact its counterparties’ credit quality and liquidity. The adoption and implementation of this ASU did not have a material impact on the Company’s financial statements.

 

Industry Segment and Geographic Information

 

The Company operates in the exploration and production segment of the oil and gas industry, onshore in the United States. The Company reports as a single industry segment.

 

Principles of Consolidation

 

The accompanying financial statements include the accounts of U.S. Energy Corp. and its wholly-owned subsidiaries Energy One and New Horizon Resources. All inter-company balances and transactions have been eliminated in consolidation.

 

2. ACQUISITIONS

 

January 2022 Acquisition

 

On January 5, 2022 (the “Closing Date”), the Company closed the acquisitions (the “Acquisition”) contemplated by three separate Purchase and Sale Agreements (the “Purchase Agreements” and the “Closing”), entered into by the Company on October 4, 2021, with each of (a) Lubbock Energy Partners LLC (“Lubbock”); (b) Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC (collectively, “Banner”), and (c) Synergy Offshore LLC (“Synergy”, and collectively with Lubbock and Banner, the “Sellers”). Pursuant to the Purchase Agreements, the Company acquired certain oil and gas properties from the Sellers, representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, Eagle Ford, and Mid-Continent. The acquisition also included certain wells, contracts, technical data, records, personal property and hydrocarbons associated with the acquired assets (collectively with the oil and gas properties acquired, the “Acquired Assets”).

 

8
 

 

The Company accounted for the acquisition of the Acquired Assets as an asset acquisition. The purchase price for the Acquired Assets was (a) $125,000 in cash and 6,568,828 shares of our common stock, as to Lubbock; (b) $1,000,000 in cash, the assumption of $3.3 million of debt, and 6,790,524 shares of common stock, as well as the novation of certain hedges which had a mark to market loss of approximately $3.1 million as of the Closing Date, as to Banner; and (c) $125,000 in cash and 6,546,384 shares of common stock, as to Synergy. The aggregate purchase price under all the Purchase Agreements was $66.4 million, representing $1.25 million in cash, the value of 19,905,736 shares of our common stock on the Closing Date of $64.7 million and purchase price adjustments of $0.5 million. In addition, we assumed various liabilities, including the repayment of $3.3 million in debt, as well as a derivative liability from the novation of the hedges discussed above of $3.1 million, suspense accounts and asset retirement obligations.

 

   Amount 
   (in thousands) 
Amounts incurred:     
Cash  $1,250 
Value of 19,905,736 shares issued   64,694 
Purchase price adjustments   487 
Transaction costs   1,267 
Total consideration paid   67,698 
      
Debt assumed   3,347 
Commodity derivative liabilities assumed   3,152 
Suspense accounts assumed   1,276 
Employee obligations assumed   100 
Asset retirement obligations assumed   9,614 
Deferred tax liabilities   2,819 
Total liabilities assumed   20,308 
      
Total consideration paid and liabilities assumed  $88,006 
      
Allocation to acquired assets:     
Proved oil and gas properties(1)   87,672 
Vehicles   165 
Deposit account   169 
      
Total allocation to acquired assets  $88,006 

 

(1) Included in the above purchase price adjustments is settlement for oil in temporary storage at the lease in tank batteries. The Company does not separately account for oil in temporary storage until the oil is sold and title transfers to the purchaser. Consistent with the Company’s accounting policy and reporting of similar transactions this amount was recorded within Evaluated Properties on the Company’s condensed consolidated balance sheet.

 

Liberty County, Texas Acquisition

 

On May 3, 2022, the Company acquired certain operated oil and gas producing properties in Liberty County, Texas, adjacent to its existing assets in the area, for $1.0 million in an all-cash transaction. The effective date of the transaction was April 1, 2022. The assets include approximately 1,022 acres, which are 100% held by production, a gas pipeline and associated infrastructure. In addition, the Company assumed suspense accounts of $0.2 million and asset retirement obligations of $0.5 million. The Company accounted for the acquisition as an asset acquisition.

 

East Texas Acquisition

 

On July 27, 2022, the Company closed a purchase and sale agreement for the acquisition of properties from ETXENERGY, LLC (“ETXENERGY”). The properties are located in Henderson and Anderson Counties, Texas (the “East Texas Assets”). The properties consist of approximately 16,600 net acres, all of which are held by production and certain wells and gathering systems. The initial purchase price for the East Texas Assets was $11.9 million in cash. The effective date of the acquisition of the East Texas Assets was June 1, 2022. The Company accounted for the acquisition as an asset acquisition.

 

   Amount 
   (in thousands) 
Amounts incurred:     
Cash  $11,875 
Purchase price adjustments   (1,048)
Transaction costs   63 
Total consideration paid   10,890 
      
Suspense accounts assumed   380 
Asset retirement obligations assumed   1,689 
Total liabilities assumed   2,069 
      
Total consideration paid and liabilities assumed  $12,959 
      
Allocation to acquired assets:     
Proved oil and gas properties  $12,959 

 

9
 

 

3. REVENUE RECOGNITION

 

The Company’s operated oil production is sold at the delivery point specified in the contract. The Company collects an agreed-upon index price, net of pricing differentials. The purchaser takes custody, title and risk of loss of the oil at the delivery point; therefore, control passes at the delivery point. The Company does not separately account for oil in temporary storage at the site of production prior to its transfer to the purchaser. The Company recognizes revenue at the net price received when control transfers to the purchaser. Natural gas and natural gas liquid (“NGL”) are sold at the lease location, which is generally when control of the natural gas and NGL transfers to the purchaser, and revenue is recognized as the amount received from the purchaser.

 

The Company does not disclose the values of unsatisfied performance obligations under its contracts with customers as it applies the practical exemption in accordance with Accounting Standards Codification (ASC) 606. The exemption applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to the remaining performance obligations is not required.

 

The Company reports operated revenue as the gross amount received from the purchasers before taking into account transportation costs. Production taxes are reported separately, and transportation costs are included in lease operating expense in the accompanying condensed consolidated statements of operations. The revenue and costs in the condensed consolidated statements of operations were reported gross for the three months ended March 31, 2023 and 2022, as the gross amounts were known.

 

The Company reports non-operated revenue as the Company’s net share received from the well operators. Production taxes are reported separately, and transportation costs are included in lease operating expense in the accompanying unaudited condensed consolidated statements of operations. The revenue and costs were reported gross for the three months ended March 31, 2023 and 2022, as the gross amounts were known.

 

The Company’s non-operated revenues are derived from its interest in the sales of oil and natural gas production. The sales of oil and natural gas are made under contracts that operators of the wells have negotiated with third-party customers. The Company receives payment from the sale of oil and natural gas production between one to three months after delivery. At the end of each period when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in oil and natural gas sales receivable in the condensed consolidated balance sheets. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received; however, differences have been, and are expected to be, insignificant. Accordingly, the variable consideration is not constrained. As a non-operator of its oil and natural gas properties, the Company records its share of the revenues and expenses based upon the information provided by the operators within the revenue statements.

 

The Company’s oil and natural gas production is typically sold at delivery points to various purchasers under contract terms that are common in the oil and natural gas industry. Regardless of the contract type, the terms of these contracts compensate the well operators for the value of the oil and natural gas at specified prices, and then the well operators remit payment to the Company for its share in the value of the oil and natural gas sold.

 

The Company disaggregates revenues from its share of revenue from the sale of oil and natural gas and liquids by region. The Company’s revenues in its Rockies, West Texas, South Texas, Gulf Coast and Mid- Continent regions for the three months ended March 31, 2023 and 2022, are presented in the following table:

 

   2023   2022 
   Three months ended
March 31,		 
   2023   2022 
   (in thousands) 
Revenue:        
Rockies        
Oil  $2,381   $3,391 
Natural gas and liquids   132    193 
Total   2,513    3,584 
           
South Texas          
Oil   1,132    1,636 
Natural gas and liquids   

88

    139 
Total   1,220    1,775 
           
West Texas          
Oil   890    1,428 
Natural gas and liquids   62    62 
Total   952    1,490 
           
Gulf Coast          
Oil   727    717 
Natural gas and liquids   108    4 
Total   835    721 
           
Mid-Continent           
Oil   1,965    759 
Natural gas and liquids   787    543 
Total   2,752    1,302 
           
Combined Total  $8,272   $8,872 

 

10
 

 

Significant concentrations of credit risk

 

The Company has exposure to credit risk in the event of non-payment of oil and natural gas receivables by purchasers of its operated oil and natural gas properties and the joint interest operators of the Company’s non-operated oil and natural gas properties. The following table presents the purchasers that accounted for 10% or more of the Company’s total oil and natural gas revenue for at least one of the periods presented:

 

  2023   2022 
Purchaser A   18%   25%
Purchaser B   15%   -%
Purchaser C   13%   15%
Purchaser D   11%   16%

 

4. LEASES

 

The Company’s right-of-use assets and lease liabilities are recognized at their discounted present value under the following captions in the condensed consolidated balance sheets at March 31, 2023 and December 31, 2022:

 

  

March 31,

2023

   December 31,
2022		 
   (in thousands) 
Right of use asset balance        
Operating lease  $813   $868 
Lease liability balance          
Short-term operating lease  $174   $189 
Long-term operating lease   750    794 
Total operating leases  $924   $983 

 

The Company recognizes lease expense on a straight-line basis excluding short-term and variable lease payments, which are recognized as incurred. Short-term lease cost represents payments for office leases with original terms less than one year. Beginning in March 2020, the Company subleased its Denver, Colorado office and recognized sublease income as a reduction of rent expense. The term of the sublease was through the term of the Company’s Denver office lease, which terminated on January 31, 2023. Following are the amounts recognized as components of rental expense for the three months ended March 31, 2023 and 2022:

 

   2023   2022 
   Three Months ended March 31, 
   2023   2022 
   (in thousands) 
Operating lease cost  $65   $31 
Short-term lease cost   269    2 
Sublease income   -    (16)
Total lease costs  $334   $17 

 

The Company’s Houston office operating lease does not contain implicit interest rates that can be readily determined; therefore, the Company used the incremental borrowing rates in effect at the time the Company entered into the leases.

 

   As of March 31, 
   2023   2022 
   (in thousands) 
Weighted average lease term (years)   4.7    0.9 
Weighted average discount rate   4.25%   9.26%

 

11
 

 

Maturity of operating lease liabilities with terms of one year or more as of March 31, 2023 are presented in the following table:

 

  

March 31,

2023

 
   (in thousands) 
2023  $156 
2024   213 
2025   218 
2026   224 
2027   210 
Total lease payments  $1,021 
Less: imputed interest   (97)
Total lease liability  $924 

 

5. OIL AND NATURAL GAS PRODUCTION ACTIVITIES

 

Divestitures

 

During the three months ended March 31, 2023 and 2022, there were no divestitures of oil and gas properties.

 

Ceiling Test and Impairment

 

The reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In the calculation of the ceiling test as of March 31, 2023, the Company used $90.97 per barrel for oil and $5.95 per one million British Thermal Units (MMbtu) for natural gas (as further adjusted for property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used was 10%.

 

For the three months ended March 31, 2023, and 2022, the Company did not record ceiling test write downs of its oil and natural gas properties.

 

6. DEBT

 

On January 5, 2022, the Company entered into a five-year credit agreement (“Credit Agreement”) with Firstbank Southwest (“Firstbank”) as administrative agent for one or more lenders (the “Lenders”), which provided for a revolving line of credit with an initial borrowing base of $15 million, and a maximum credit amount of $100 million. Borrowings under the Credit Agreement are collateralized by a first priority, perfected lien and security interests on substantially all assets of the Company (subject to permitted liens and other customary exceptions). On July 26, 2022, the Company, in anticipation of the closing of the ETXENERGY East Texas acquisition entered into a letter agreement with FirstBank whereby it increased the borrowing base under the Credit Agreement from $15 million to $20 million. On July 27, 2022, in connection with the closing of the ETXENERGY Acquisition, the Company borrowed $10.7 million under the Credit Agreement. Under the Credit Agreement, revolving loans may be borrowed, repaid and re-borrowed until January 5, 2026, when all outstanding amounts must be repaid. Interest on the outstanding amounts under the Credit Agreement will accrue at an interest rate equal to (a) the greatest of (i) the prime rate in effect on such day, and (b) the Federal Funds rate in effect on such day (as determined in the Credit Agreement) plus 0.50%, and an applicable margin that ranges between 0.25% to 1.25% depending on utilization of the amount of the borrowing base (the “Applicable Margin”). The weighted average interest rate on the Credit Agreement for the three months ended March 31, 2023 and 2022, was 8.41% and 4.25% per annum, respectively. The Company recognized interest expense inclusive of amortization of debt issuance costs on the Credit Agreement for the three months ended March 31, 2023 and 2022 of $263 thousand and $46 thousand, respectively.

 

The Credit Agreement contains various restrictive covenants and compliance requirements, which include, among other things: (i) maintenance of certain financial ratios, as defined in the Credit Agreement tested quarterly, that limit the Company’s ratio of total debt to EBITDAX (as defined in the Credit Agreement) to 3:1 and require its ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at 1:1 or higher; (ii) restrictions on making restricted payments as defined in the Credit Agreement, including the payment of cash dividends and repurchases of equity interests (subject to certain limited rights to make restricted payments as long as no event of default has occurred, or would result from the restricted payment, certain financial ratios are met and the borrowing availability after giving pro forma effect to any borrowing to be made on the date of the restricted payment is greater than, or equal to, 20% of the then existing borrowing base); (iii) limits on the incurrence of additional indebtedness; (iv) a prohibition on the entry into commodity swap contracts exceeding a specified percentage of our expected production; and (v) restrictions on the disposition of assets. As of March 31, 2023, the borrowing base was $20 million, and the Company was in compliance with all financial covenants related to the Credit Agreement.

 

12
 

 

A total of $3.5 million was borrowed under the Credit Agreement immediately upon the entry into such Credit Agreement on January 5, 2022. The $3.5 million was immediately used to repay $3.3 million of debt assumed as part of the acquisition of the Acquired Assets. The amount outstanding on the Credit Agreement as of March 31, 2023, was $12.0 million.

 

7. COMMODITY DERIVATIVES

 

The Company’s results of operations and cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of its exposure to price volatility from producing crude oil and natural gas, the Company enters into commodity derivative contracts to protect against price declines in future periods. The Company does not enter into derivative contracts for speculative purposes. The Company has not elected to designate the derivative contracts as cash flow hedges; therefore, the instruments do not qualify for hedge accounting. Accordingly, changes in the fair value of the derivative contracts are recorded in the condensed consolidated statements of operations and are included in cash flows from operating activities in the condensed consolidated statement of cash flows.

 

On January 5, 2022, the Company and NextEra Energy Marketing LLC (“NextEra”) entered into an International Swap Dealers Association, Inc. Master Agreement and Schedule (the “Master Agreement”), facilitating the Company to enter into derivative contracts to manage the risk associated with its business relating to commodity prices. The Company’s obligations to NextEra under the Master Agreement are secured by the collateral which secures the loans under the Credit Agreement on a pari passu and pro rata basis with the principal of such loans. The structure of the derivative contacts may include swaps, caps, floors, collars, locks, forwards and options.

 

The Company’s entry into and the obligations of the Company under the Master Agreement were required conditions to the January 2022 acquisition closing, pursuant to which the Company was required to assume and novate certain hedges which had a mark to market loss of approximately $3.1 million as of the Closing Date. In addition, on January 12, 2022, the Company entered into additional NYMEX WTI crude oil commodity derivative contracts with NextEra for 2022 and 2023 production. As of March 31, 2023, the Company had commodity derivative contracts outstanding through the fourth quarter of 2023 as summarized in the tables below:

 

   Collars   Fixed Price Swaps 
Commodity/
Index/		 

Quantity

Crude oil

   Weighted Average Prices  

Quantity

 Crude oil

   Weighted
Average Swap		 
Maturity Period 

(Bbls)(1)

   Floors   Ceilings  

(Bbls)(1)

   Price 
                     
NYMEX WTI                         
Crude Oil 2023 Contracts:                         
Second quarter 2023   53,500   $60.00   $81.04    6,000   $59.02 
Third quarter 2023   52,600   $60.00   $81.04    -   $- 
Fourth quarter 2023   51,200   $60.00   $81.04    -   $- 
Total 2023   157,300   $60.00   $81.04    6,000   $59.02 

 

(1) “Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons.

 

The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets by category:

 

  

March 31,

2023

  

December 31,

2022

 
   (in thousands) 
Derivative liabilities:          
Current liabilities  $369   $1,694 
Total derivative liabilities  $369   $1,694 

 

13
 

 

As of March 31, 2023, all commodity derivative contracts held by the Company were subject to master netting arrangements with its counterparty. The terms of the Company’s derivative agreements provide for offsetting of amounts payable or receivable between it and the counterparty for contracts that settle on the same date. The Company’s agreements also provide that in the event of an early termination, the counterparty has the right to offset amounts owed or owing under that and any other agreement. The Company’s accounting policy is to offset positions that settle on the same date with the same counterparty. See Note 13-Fair Value Measurements for disclosure of the fair value of derivative assets and liabilities on a gross and net basis.

 

The following table summarizes the commodity components of the derivative settlement gain (loss) as well as the components of the net derivative loss line-item presentation in the accompanying condensed consolidated statement of operations:

 

   2023   2022 
   Three Months Ended March 31, 
   2023   2022 
   (in thousands) 
Derivative settlement gain (loss)          
Oil contracts  $(378)  $(1,547)
Gas contracts   (28)   (97)
Total net derivative settlement gain (loss)  $(406)  $(1,644)
           
Total net derivative gain (loss)        $ 
Oil contracts  $859    (6,296)
Gas contracts   60    (541)
Total net derivative gain (loss)  $919   $(6,837)

 

8. COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.

 

9. SHAREHOLDERS’ EQUITY

 

At March 31, 2023, the Company had 25,234,672 shares of common stock outstanding and 245,000,000 authorized. In addition, as of March 31, 2023, the Company had 5,000,000 authorized but unissued shares of preferred stock. On January 5, 2022, the Company issued 19,905,736 shares of common stock in connection with the acquisition of the Acquired Assets.

 

Stock Options Plans

 

From time to time, the Company may grant stock options under its incentive plan covering shares of common stock to employees of the Company. Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option. These awards typically expire ten years from the grant date.

 

For the three months ended March 31, 2023 and 2022, there was no compensation expense related to stock options. As of March 31, 2022, all stock options had vested. No stock options were granted or exercised during the three months ended March 31, 2023 or 2022. Stock options to purchase 750 shares of common stock expired during the three months ended March 31, 2022. Presented below is information about stock options outstanding and exercisable as of March 31, 2023, and December 31, 2022:

 

   March 31, 2023   December 31, 2022 
   Shares   Price   Shares   Price 
                     
Stock options outstanding and exercisable   28,122   $54.03    28,122   $54.03 

 

14
 

 

The following table summarizes information for stock options outstanding and for stock options exercisable at March 31, 2023:

 

Options Outstanding   Options Exercisable 
    Exercise   Weighted   Remaining       Weighted 
Number of   Price
Range		   Average
Exercise		   Contractual
Term		   Number of   Average
Exercise		 
Shares   Low   High   Price   (years)   Shares   Price 
                          
 16,500   $7.20   $11.60   $10.00    4.5    16,500   $10.00 
 10,622    90.00    124.80    106.20    1.1    10,622    106.20 
 1,000    226.20    226.20    226.20    1.5    1,000    226.20 
                                 
 28,122   $7.20   $226.20   $54.03    3.1    28,122   $54.03 

 

Restricted Stock

 

The Company grants restricted stock under its incentive plan covering shares of common stock to employees and directors of the Company. In January 2023, 796,434 restricted stock awards were granted to employees and directors from the 2021 Equity Incentive Plan. The restricted stock awards are time-based awards and are amortized ratably over the requisite service period. Restricted stock vests ratably on each anniversary following the grant date provided the grantee is employed on the vesting date. Forfeitures of restricted stock awards are recognized as they occur. Restricted stock granted to employees, when vested, may be settled through the net issuance of shares, reduced by the number of shares required to pay withholding taxes. Non-vested shares of restricted stock are not included in common shares outstanding until vesting has occurred.

 

The following table presents the changes in non-vested, time-based restricted stock awards to all employees and directors for the three months ended March 31, 2023:

 

   Shares   Weighted-Avg.
Grant Date
Fair Value
per Share		 
     
Non-vested restricted stock as of December 31, 2022   687,000   $3.79 
Granted   796,434   $2.30 
Vested   (273,000)  $3.78 
Non-vested restricted stock as of March 31, 2023   1,210,434   $2.81 

 

For the three months ended March 31, 2023 and 2022, the Company recognized $0.7 million and $1.5 million, respectively of stock compensation expense related to restricted stock grants. Total compensation cost related to non-vested time-based awards and not yet recognized in the Company’s condensed consolidated statements of operations as of March 31, 2023 was $2.6 million. This cost is expected to be recognized over a weighted average period of 2.1 years.

 

10. ASSET RETIREMENT OBLIGATIONS

 

The Company has asset retirement obligations (“AROs”) associated with the future plugging and abandonment of proved properties. Initially, the fair value of a liability for an ARO is recorded in the period in which the ARO is incurred with a corresponding increase in the carrying amount of the related asset. The liability is accreted to its present value each period and the capitalized cost is depleted over the life of the related asset. If the liability is settled for an amount other than the recorded amount, an adjustment to the full-cost pool is recognized. The Company had no assets that are restricted for the purpose of settling AROs.

 

The Company recorded $9.6 million of ARO related to the assets acquired in the January 5, 2022 acquisition, $0.5 million of ARO related to the assets acquired in the May 3, 2022 acquisition of Liberty County, Texas assets and $1.7 million of ARO related to the assets acquired in the July 27, 2022 acquisition. See Note 2- Acquisitions.

 

In the fair value calculation for the ARO there are numerous assumptions and judgments, including the ultimate retirement cost, inflation factors, credit-adjusted risk-free discount rates, timing of retirement and changes in legal, regulatory, environmental, and political environments. To the extent future revisions to assumptions and judgments impact the present value of the existing ARO, a corresponding adjustment is made to the oil and natural gas property balance.

 

The following is a reconciliation of the changes in the Company’s liabilities for asset retirement obligations as of March 31, 2023 and December 31, 2022:

 

  

March 31, 2023

   December 31, 2022 
   (in thousands) 
Balance, beginning of year  $15,442   $1,461 
Acquired   11    11,811 
Cost and life revisions   41   1,825 
Plugged   (11)   (407)
Sold   -    (189)
Accretion   265    941 
Balance, end of period  $15,748   $15,442 

 

15
 

 

11. INCOME TAXES

 

The Company’s tax provision or benefit from income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Each quarter the Company updates its estimate of the annual effective tax rate and makes a year-to-date adjustment to the provision. The Company’s effective tax rate was approximately 4% and 43% for the three months ended March 31, 2023 and 2022, respectively. The primary difference in the Company’s effective tax rate and the statutory rate for the three months ended March 31, 2023 related to the movement in the valuation allowance against the Company’s net deferred tax assets.

 

The Company’s income tax benefit for the three months ended March 31, 2022 includes a discrete income tax benefit of $2.4 million related to the release of a portion of the Company’s previously established valuation allowance to offset deferred tax liabilities arising from the January 5, 2022 transaction.

 

Deferred taxes are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets, liabilities, net operating losses and tax credit carry-forwards. We review our deferred tax assets (“DTAs”) and valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulative results in recent years. The January 5, 2022 transaction triggered an Internal Revenue Code Section 382 ownership change, and therefore placed additional limitations on the Company’s pre-transaction NOL and other tax attributes. As such, the Company is projecting that as of December 31, 2023 it will not have sufficient DTAs available to offset the expected future taxable income that will be generated by the realization of the Company’s deferred tax liabilities.

 

The Company recognizes, measures, and discloses uncertain tax positions whereby tax positions must meet a “more-likely-than-not” threshold to be recognized. During the three months ended March 31, 2023 and 2022, no adjustments were recognized for uncertain tax positions.

 

12. LOSS PER SHARE

 

Basic net loss per common share is calculated by dividing net loss attributable to common shareholders by the weighted-average number of common shares outstanding for the respective period. Diluted net loss per common share is calculated by dividing adjusted net loss by the diluted weighted average number of common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist of stock options and unvested shares of restricted common stock, which are measured using the treasury stock method. When the Company recognizes a net loss, as was the case for the three months ended March 31, 2023 and 2022, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of dilutive net loss per common share.

 

The following table sets forth the calculation of basic and diluted net loss per share for the three months ended March 31, 2023 and 2022:

 

           
   Three Months Ended March 31, 
   2023   2022 
   (in thousands except per share data) 
Net loss applicable to common shareholders  $(1,247)  $(3,384)
           
Basic weighted-average common shares outstanding   25,179    23,717 
Dilutive effect of potentially dilutive securities   -    - 
Diluted weighted-average common shares outstanding   25,179    23,717 
           
Basic net loss per share  $(0.05)  $(0.14)
Diluted net loss per share  $(0.05)  $(0.14)

 

For the three months ended March 31, 2023 and 2022, potentially dilutive securities excluded from the calculation of weighted average shares because they were anti-dilutive are as follows:

 

   2023   2022 
   (in thousands) 
Stock options   28    30 
Unvested shares of restricted stock   1,210    787 
Total   1,238    817 

 

16
 

 

13. FAIR VALUE MEASUREMENTS

 

The Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the hierarchy level. The three levels of inputs that may be used to measure fair value are defined as:

 

Level 1 - Quoted prices for identical assets and liabilities traded in active exchange markets.

 

Level 2 - Observable inputs other than Level 1 that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or other observable inputs that can be corroborated by observable market data.

 

Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

The Company has processes and controls in place to attempt to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed, and any material exposures are evaluated through a management review process.

 

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following is a description of the valuation methodologies used for complex financial instruments measured at fair value:

 

Recurring Fair Value Measurements

 

Commodity Derivative Instruments

 

The Company measures the fair value of commodity derivative contracts using an income valuation technique based on the contract price of the underlying positions, crude oil and natural gas forward curves, discount rates, and Company or counterparty non-performance risk. The fixed-price swaps and collar derivative contracts are included in Level 2. The fair value of commodity derivative contracts and their presentation in our unaudited condensed consolidated balance sheet as of March 31, 2023 are presented below:

 

 

   Quoted Prices in Active Markets for Identical Assets
(Level 1)		   Significant Other Observable Inputs
(Level 2)		   Significant Unobservable Inputs
(Level 3)		   Total
Fair Value		   Effect
of
Netting		   Net Fair Value Presented in the Unaudited Condensed Consolidated Balance
Sheet		 
(in thousands)
Assets                        
Current:                        
Commodity derivatives  $-   $325   $-   $325   $(325)  $- 
                               
Liabilities                              
Current:                              
Commodity derivatives  $-   $(694)  $-   $(694)  $325   $(369)
                               
Net derivative instruments  $-   $(369)  $-   $(369)  $-   $(369)

 

 

17
 

 

Marketable Equity Securities

 

We measure the fair value of marketable equity securities based on quoted market prices obtained from independent pricing services. The Company has an investment in the marketable equity securities of Anfield Energy (“Anfield”), which it acquired as consideration for sales of certain mining operations. Anfield is traded in an active market under the trading symbol AEC:TSXV and has been classified as Level 1.

 

   March 31,   December 31, 
   2023   2022 
Current assets:          
Marketable equity securities          
Number of shares owned   2,421,180    2,421,180 
Quoted market price  $0.04430   $0.04429 
           
Fair value of marketable equity securities  $107,258   $107,234 

 

Nonrecurring Fair Value Measurements

 

Asset Retirement Obligations

 

The Company measures the fair value of asset retirement obligations as of the date a well is acquired, the date a well begins drilling, or the date the Company revises its ARO assumptions. The Company’s estimated asset retirement obligation is based on historical experience in plugging and abandoning wells, estimated economic lives, estimated plugging and abandonment costs and federal and state regulatory requirements, all unobservable inputs, and therefore, are designated as Level 3 within the valuation hierarchy. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised. The credit adjusted risk-free rate used to discount the Company’s plugging and abandonment liabilities range from 7.30% to 9.75%. See Note 10-Asset Retirement Obligations.

 

Other Assets and Liabilities

 

The Company evaluates the fair value on a non-recurring basis of properties acquired in asset acquisitions using inputs that are not observable in the market and are therefore designated as Level 3 inputs within the fair value hierarchy. The Company evaluated the fair value of its January 2022 asset acquisition based on discounted future cash flows using estimated production at estimated prices based on NYMEX strip pricing adjusted for differentials, operating costs, production taxes and development costs, all discounted at 10%. This evaluation resulted in an estimate of fair value of $87.7 million. The Company has also valued asset acquisitions using a multiple of expected cash flows based on comparable transactions. For the asset acquisition of East Texas assets that was completed on July 27, 2022, the Company used a cash flow multiple of approximately 1.75 times estimated cash flows of $7.3 million.

 

The Company evaluates the fair value on a non-recurring basis of its 13.84-acre land parcel in Riverton, Wyoming , which is currently listed for sale and classified as held for sale, when circumstances indicate that the value has been impaired. At March 31 2023, the Company estimated the fair value of its real estate assets based on a market approach with comparison to recent comparable sales, all Level 3 inputs within the fair value hierarchy.

 

Credit facility

 

The Company’s credit facility approximates fair value because the interest rate is variable and reflective of market rates.

 

The carrying value of financial instruments included in current assets and current liabilities approximate fair value due to the short-term nature of those instruments.

 

18
 

 

14. OTHER CURRENT ASSETS AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Other Current Assets

 

The following table presents the components of other current assets as of the dates indicated:

 

  

March 31,

2023

  

December 31,

2022

 
   (in thousands) 
Prepaid expense  $747   $138 
Joint interest billings receivable   325    332 
Income tax receivable   50    50 
Other   38    38 
           
Total other current assets  $1,160   $558 

 

Accounts Payable and Accrued Liabilities.

 

The following table presents the components of accounts payable and accrued liabilities as of the dates indicated:

 

  

March 31,

2023

  

December 31,

2022

 
   (in thousands) 
Accounts payable  $2,212   $2,566 
Operating expense accruals   1,055    1,378 
Revenue payables   3,582    3,503 
Production taxes payable   186    319 
Insurance premium financing   597    54 
Other   9    12 
           
Total accounts payable and accrued expenses  $7,641   $7,832 

 

15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

           
   Three Months Ended
March 31,		 
   2023   2022 
   (in thousands) 
Cash paid for interest  $(268)  $(36)
           
Investing activities:          
Change in capital expenditure accruals  $18   $166 
Change in accrual for acquisition costs   -    (546)
Common stock issued for acquisition of properties   -    64,694 
Assumption of commodity derivative liability in acquisition of properties   -    3,152 
Assumption of debt in acquisition of properties   -    3,347 
Assumption of suspense accounts in acquisition of properties   -    1,276 
Addition of operating lease liability and right of use asset   -    - 
Asset retirement obligations   43    9,614 
Financing activities:          
Financing of insurance premiums with note payable  $654   $588 

 

16. SUBSEQUENT EVENTS

 

On April 26, 2023, the Board of Directors of the Company authorized and approved a share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock. Subject to any future extensions, the repurchase program is scheduled to expire on June 30, 2024, when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when the program is discontinued by the Company.

 

Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program will be funded using the Company’s working capital.

 

On May 8, 2023, the Company’s Board of Directors approved a quarterly dividend of $0.0225 per share of common stock outstanding. The dividend will be paid on May 30, 2023, to stockholders of record as of the close of business on May 19, 2023.

 

19
 

 

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

 

Introduction

 

This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on April 13, 2023 (the “Annual Report”).

 

Certain abbreviations and oil and gas industry terms used throughout this Report are described and defined in greater detail under “Glossary of Oil and Natural Gas Terms” on page 4 of our Annual Report.

 

Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited condensed consolidated financial statements included above under “Part I - Financial Information” – “Item 1. Financial Statements”.

 

In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the industries in which we operate in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, we have not independently verified any of it, and we have not commissioned any such information.

 

See also “Cautionary Statement About “Forward-Looking Statements” above.

 

Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “U.S. Energy”, and “U.S. Energy Corp.” refer specifically to U.S. Energy Corp. and its consolidated subsidiaries.

 

In addition, unless the context otherwise requires and for the purposes of this report only:

 

● “Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons;
   
● “BOE” refers to barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids, to six Mcf of natural gas;
   
● “Bopd” refers to barrels of oil day;
   
● “Mcf” refers to a thousand cubic feet of natural gas;
   
● “Mcfe” means 1,000 cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids;
   
● “NGL” refers to natural gas liquids;
   
● “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
   
● “SEC” or the “Commission” refers to the United States Securities and Exchange Commission;
   
● “Securities Act” refers to the Securities Act of 1933, as amended; and
   
● “WTI” means West Texas Intermediate.

 

20
 

 

Where You Can Find Other Information

 

We file annual, quarterly, and current reports, proxy statements and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC like us at https://www.sec.gov (our filings can be found at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000101594) and on the “Investors – SEC Filings” page of our website at https://usnrg.com. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.

 

Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

 

  ● General Overview. A general overview of the Company and our operations.
     
  ● Recent Developments. Discussion of recent developments affecting the Company and our operations.
     
  ● Plan of Operations and Strategy. Discussion of our strategy moving forward and how we plan to seek to increase stockholder value.
     
  ● Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
     
  ● Results of Operations. An analysis of our financial results comparing the three months ended March 31, 2023 and 2022.
     
  ● Liquidity and Capital Resources. A discussion of our financial condition, including descriptions of balance sheet information and cash flows.

 

General Overview

 

U.S. Energy Corp. was incorporated in the State of Wyoming on January 26, 1966, and reincorporated to Delaware effective on August 3, 2022. We are an independent energy company focused on the acquisition and development of oil and natural gas producing properties in the continental United States. Our principal properties and operations are in the Rockies region (Montana, Wyoming and North Dakota), the Mid-Continent (Oklahoma, Kansas and North and East Texas), West Texas, South Texas and Gulf Coast regions.

 

We have historically explored for and produced oil and natural gas through a non-operator business model, however, during 2020 we acquired operated properties in North Dakota, New Mexico, Wyoming and the Texas Gulf Coast, and on January 5, 2022, we closed the acquisitions of certain oil and gas properties from three separate sellers, representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, Eagle Ford, and Mid-Continent regions.

 

Our business strategy going forward is to enhance the value of our acquired operated assets through evaluation of selected properties with the goal of increasing production and reserves. We plan to deploy our capital in a conservative and strategic manner and pursue value-enhancing transactions. We also continuously evaluate strategic alternative opportunities that we believe will enhance stockholder value.

 

Global commodity and financial markets continue to be subject to heightened levels of uncertainty and volatility as a result of inflation, disruptions resulting from recent bank failures, and the ongoing conflict between Russia and Ukraine and associated economic and trade sanctions on Russia. These circumstances have driven commodity price volatility and have contributed to increased service provider and other costs, and a rise in interest rates, and could have further industry-specific impacts that may require us to adjust our business plan.

 

Recent Developments

 

Acquisitions

 

On January 5, 2022, we closed the acquisitions of assets from three separate Purchase and Sale Agreements entered into by the Company on October 4, 2021, with (i) Lubbock Energy Partners LLC, (ii) Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC (collectively, “Banner”), and (iii) Synergy Offshore LLC for approximately $66.4 million. The acquisition had an effective date of January 1, 2022. The purchase price included payment of $1.25 million in cash and issuance of 19,905,736 shares of our common stock, valued at $64.7 million. In addition, we assumed Banner’s debt of approximately $3.3 million and derivative positions, which were in a loss position of $3.1 million. The assets acquired include certain oil and gas properties representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, Eagle Ford, and Mid-Continent. The acquisition also included certain wells, contracts, technical data, records, personal property and hydrocarbons associated with the acquired assets.

 

21
 

 

On May 3, 2022, the Company acquired certain operated oil and gas producing properties in Liberty County, Texas, adjacent to its existing assets in the area, for $1.0 million in an all-cash transaction. The effective date of the transaction was April 1, 2022. The assets include approximately 1,022 acres, which are 100% held by production, a gas pipeline and associated infrastructure. In addition, the Company assumed suspense accounts of $0.2 million and asset retirement obligations of $0.5 million. The Company accounted for the acquisition as an asset acquisition.

 

On June 29, 2022, the Company entered into a Purchase and Sale Agreement (the “PSA”) with ETXENERGY, LLC (the “Seller”). Pursuant to the PSA, we agreed to acquire all of the Seller’s rights to, and interest in, certain operated producing properties totaling approximately 16,600 net acres, located in Henderson and Anderson Counties, Texas, adjacent to the Company’s existing assets in the area. Substantially all of the acreage is developed and/or held by production. The acquisition also included certain wells, pipelines, contracts, technical data, records, personal property and hydrocarbons associated with the Properties, including two pipeline gathering systems and related infrastructure (collectively with the oil and gas properties to be acquired, the “ETXEnergy Assets”). The PSA closed on July 27, 2022, at which time we acquired the ETXEnergy Assets in consideration for the purchase price of $11.875 million in cash, less purchase price adjustments. The effective date of the acquisition was June 1, 2022.

 

On July 26, 2022, in anticipation of the closing of the PSA, we entered into a letter agreement with Firstbank whereby we increased our borrowing base under the Credit Agreement from $15 million to $20 million, and paid the administrative agent an upfront fee of $32,500 in connection with such increase (the “Borrowing Base Increase”).

 

Dividend

 

On February 23, 2023, the Company paid a quarterly cash dividend of $0.0225 per share of common stock outstanding to stockholders of record at the close of business on February 10, 2023.

 

Stock Repurchase Program

 

On April 26, 2023, the Board of Directors of the Company authorized and approved a share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock. Subject to any future extensions, the repurchase program is scheduled to expire the earlier of on June 30, 2024, or when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when the program is discontinued by the Company.

 

Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market prices, or by other means in accordance with federal securities laws. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program will be funded using the Company’s working capital.

 

Plan of Operations and Strategy

 

Continuing through 2023 and beyond, we intend to seek additional opportunities in the oil and natural gas sector, including but not limited to further acquisition of assets, participation with current and new industry partners in their exploration and development projects, acquisition of existing companies, and the purchase of oil and natural gas producing assets. In addition, we plan to grow production by performing workovers on operated idle wells acquired in 2022 to return them back to production.

 

Key elements of our business strategy include:

 

  ● Deploy our Capital in a Conservative and Strategic Manner and Review Opportunities to Bolster our Liquidity. In the current industry environment, maintaining liquidity is critical. Therefore, we plan to be highly selective in the projects we evaluate and plan to review opportunities to bolster our liquidity and financial position through various means.
     
  ● Evaluate and Pursue Value-Enhancing Transactions. We continuously evaluate strategic alternative opportunities that we believe will enhance shareholder value.

 

Critical Accounting Policies and Estimates

 

The preparation of our unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is detailed in Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2022 Annual Report on Form 10-K filed with the SEC on April 13, 2023.

 

Recently Adopted Accounting Standards

 

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 to Topic 326, Financial Instruments-Credit Losses. See Note 1 in the accompanying notes to unaudited condensed consolidated financial statements included in Part 1, Item 1 for additional discussion of the adoption and implementation of this ASU on our financial statements and disclosures.

 

22
 

 

Results of Operations

 

Comparison of our Statements of Operations for the Three Months Ended March 31, 2023 and 2022

 

For the three months ended March 31, 2023, we recorded a net loss of $1.2 million, which was primarily due to lower revenues as a result of lower commodity prices we received on our production during the period and higher lease operating costs. For the three months ended March 31, 2022, we recorded a net loss of $3.4 million, which was primarily due to losses on our commodity derivative contracts during the period of $6.8 million. In the following sections we discuss our revenue, operating expenses and non-operating income and expenses for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

 

Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the three months ended March 31, 2023 and 2022:

 

  

Three months ended

March 31,

   Change 
   2023   2022   Amount   Percent 
   (in thousands except average prices and production quantities) 
Revenue:                
Oil  $7,095   $7,833   $(738)   -9%
Natural gas and liquids   1,177    1,039    

138

    

13

%
                     
Total  $8,272   $8,872   $(600)   -7%
                     
Production quantities:                    
Oil (Bbls)   91,311    90,821    490    1%
Natural gas and liquids (Mcfe)   384,106    179,343    204,763    114%
BOE   155,329    120,712    34,617    29%
                     
Average sales prices:                    
Oil (Bbls)  $77.70   $86.25   $(8.55)   

10

%
Natural gas and liquids (Mcfe)   3.06    5.79    (2.73)   

47

%
BOE  $53.25   $73.50   $(20.25)   -28%

 

The decrease in our oil and gas revenue of $0.6 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was due primarily to a decrease in commodity pricing of 28% on a per BOE basis, which was partially offset by an increase of 29% in production quantities on a per BOE basis. The increase in our gas production quantities primarily relates to production from properties we acquired in July 2022.

 

For the three months ended March 31, 2023, we produced 155,329 BOE, or an average of 1,726 BOE per day, as compared to 120,712 BOE or 1,341 BOE per day during the comparable period in 2022. The production mix shifted to become less oil weighted in 2023, due to the acquisition in July 2022 of operated properties with relatively more natural gas production. During the three months ended March 31, 2023, our BOE production mix was 59% oil and 41% natural gas and liquids compared to 75% oil and 25% natural gas and liquids in the comparable period of 2022.

 

Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the three months ended March 31, 2023 and 2022:

 

   Three months ended
March 31,		   Change 
   2023   2022   Amount   Percent 
   (in thousands) 
Production taxes  $520   $572   $(52)   -9%
Lease operating expense   4,523    2,735    1,788    65%
                     
Total  $5,043   $3,307   $1,736    52%

 

23
 

 

For the three months ended March 31, 2023, production taxes were $520 thousand a decrease of $52 thousand, or 9%, compared to the comparable period of 2022. This decrease was primarily attributable to the decrease in oil revenues of 9% related primarily to the decreases in commodity pricing as discussed above. For the three months ended March 31, 2023, lease operating expenses were $4.5 million or $29.12 per BOE, an increase of $1.8 million when compared to the $2.7 million or $22.65 per BOE for the three months ended March 31, 2022. The increase in lease operating expense was due to increases in cost for services and materials, as well as additional activity on wells acquired in 2022.

 

Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) was $2.4 million and $1.9 million for the three months ended March 31, 2023 and 2022, respectively. Our depletion rate was $13.52 per BOE and $13.65 per BOE for the three months ended March 31, 2023 and 2022, respectively. Our DD&A rate can fluctuate because of acquisitions, changes in drilling and completion costs, impairments, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated costs to drill and complete proved undeveloped reserves.

 

General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the three months ended March 31, 2023 and 2022:

 

   Three months ended
March 31,		   Change 
   2023   2022   Amount   Percent 
   (in thousands) 
Compensation and benefits, including directors’ fees  $1,187   $629   $558    89%
Stock-based compensation   727    1,500    (773)   -51%
Professional fees, insurance and other   858    817    41    5%
                     
Total  $2,772   $2,946   $(174)   -6%

 

General and administrative expenses decreased by $0.2 million during the three-month period ended March 31, 2023, as compared to the prior year period. The decrease was primarily attributable to a decrease of $0.8 million related to the amortization of stock-based compensation awards granted to employees and directors during the period. Compensation expenses increased $0.6 million related to the addition of employees added in 2022. Professional fees, Insurance and other expenses remained fairly constant for both periods.

 

Non-Operating Income (Expense). Presented below is a comparison of our non-operating income (expense) for the three months ended March 2023 and 2022:

 

   Three months ended
March 31,		   Change 
   2023   2022   Amount   Percent 
   (in thousands) 
Commodity derivative gain (loss), net  $919   $(6,837)  $7,756    113%
Gain on marketable equity securities   -    81    (81)   -100%
Interest, net   (268)   (50)   (218)   436%
                     
Total other income (expense)  $651   $(6,806)  $7,457    110%

 

24
 

 

Commodity derivative gain (loss), net is the result of changes in derivative fair values associated with fluctuations in forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. For the three months ended March 31, 2023, we recognized gains on commodity derivative contracts of $0.9 million, primarily as the result of a reduction in the mark-to-market liability of our outstanding commodity derivative contracts as the result of lower commodity prices. See Note 7 Commodity Derivatives in the notes to the unaudited condensed consolidated financial statements.

 

The gain on marketable equity securities represents the change in fair value of our investment in Anfield Energy. The value of our investment in Anfield Energy did not change significantly during the three months ended March 31, 2023. For the three months ended March 31, 2022, we recognized an unrealized gain on marketable equity securities of $81 thousand.

 

Interest, net represents the interest on our credit facility with Firstbank Southwest. The increase in interest expense, net represents an increase in the amount borrowed on the credit facility as well as an increase in the interest rate. As of March 31, 2023, we had borrowed $12.0 million on the credit facility as compared to $3.5 million borrowed as of March 31, 2022. The average interest rate increased to 8.41% for the three months ended March 31, 2023, as compared to 4.25% for the three months ended March 31, 2022. See Note 6 Debt in the notes to the unaudited condensed consolidated financial statements.

 

Liquidity and Capital Resources

 

Based on the current commodity price environment, we believe we have sufficient liquidity and capital resources to execute our business plan while continuing to meet our current financial obligations. We continue to manage our commitments in order to maintain flexibility with regard to our activity level and capital expenditures.

 

Sources of Cash

 

For the three months ended March 31, 2023, we funded our capital expenditures with cash on hand and cash flows from operating activities. If during 2023, cash flows are not sufficient to fund our capital expenditures and operations, we may also use borrowings under our credit facility or raise funds through new equity offerings or from other sources of financing. If we raise additional funds through the issuance of equity, the percentage ownership of our current stockholders could be diluted. Additionally, we may enter into carrying cost and sharing arrangements with third parties for certain development programs. All of our sources of liquidity can be affected by the general conditions of the broader economy, force majeure events, fluctuations in commodity prices, operating costs, tax law changes, and volumes produced, all of which would affect us and our industry.

 

We have no control over the market prices for oil and gas, although we may be able to influence the amount of our realized revenues from oil and gas through the use of commodity derivative contracts as part of our commodity price risk management program. Commodity derivative contracts may limit the prices we receive from our oil and gas sales if oil and gas prices rise substantially over the price established by the commodity derivative contract. See Note 7- Commodity Derivatives in Part I, Item 1 of this report for additional information about our oil and gas commodity derivative contracts currently in place and the timing of the settlement of those contracts.

 

25
 

 

Credit Agreement

 

On January 5, 2022, we entered into a five-year credit agreement with Firstbank Southwest as administrative agent, which provides for a revolving line of credit with a borrowing base of $20 million, and a maximum credit amount of $100 million (the “Credit Agreement”). Under the Credit Agreement, revolving loans may be borrowed, repaid and re-borrowed until January 5, 2026, when all outstanding amounts must be repaid. The Credit Agreement contains customary indemnification requirements, representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries. In addition, the Credit Agreement contains financial covenants, tested quarterly, that limit our ratio of total debt to EBITDAX (as defined in the Credit Agreement) to 3:1 and require our ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at 1:1 or higher. We were in compliance with all financial covenants as of March 31, 2023. Please refer to Note 6 - Debt in Part I, Item 1 of this report for additional discussion.

 

The borrowing base is redetermined semi-annually on or about April 1 and October 1 of each year during the five-year term of the Credit agreement. At the April 2023 redetermination there was no change in the borrowing base. The next borrowing base redetermination date is scheduled for October 1, 2023. Our borrowing base can be adjusted as a result of changes in commodity prices, acquisitions or divestitures of proved properties, or financing activities, all as provided for in the Credit Agreement.

 

Cash flows provided by our operating activities, proceeds received from divestitures of properties, capital markets activities, and our capital expenditures, including acquisitions, all impact the amount we borrow under our revolving Credit Agreement. The amount outstanding on the Credit Agreement as of March 31, 2023, was $12.0 million.

 

Uses of Cash

 

We use cash for the acquisition and development of oil and gas properties and for the payment of operating and general and administrative costs, settlements of commodity derivative contracts, debt obligations, including interest and payment of dividends. Expenditures for the acquisition and development of oil and gas properties are the primary use of our capital resources. During the three months ended March 31, 2023, we spent approximately $1.4 million on capital expenditures.

 

The amount and allocation of our future capital expenditures will depend upon a number of factors, including our cash flows from operating, investing, and financing activities, our ability to execute our development program, and the number and size of acquisitions that we complete. In addition, the impact of oil and gas, prices on investment opportunities, the availability of capital, tax law changes, and the timing and results of our development activities may lead to changes in funding requirements for future development. We periodically review our capital expenditure budget to assess if changes are necessary based on current and projected cash flows, acquisition and divestiture activities, and other factors. Our 2023 capital program is expected to be approximately $5.9 million. We will continue to monitor the economic environment through the remainder of the year and adjust our activity level as warranted.

 

Cash Flows

 

The following table summarizes our cash flows for the three months ended March 31, 2023 and 2022:

 

   Three months ended
March 31,		     
   2023   2022   Change 
   (in thousands) 
Net cash provided by (used in):               
Operating activities  $236   $487   $(251)
Investing activities   (1,367)   (3,253)   1,886 
Financing activities   (859)   (209)   (650)

 

26
 

 

Operating Activities. Cash provided by operating activities for the three months ended March 31, 2023 was $0.2 million as compared to cash provided by operating activities of $0.5 million for the comparable period in 2022. The decrease in cash provided by operating activities is mainly attributable to a reduction in cash receipts for revenues as a result of a decrease in the price we received for our oil and natural gas production and an increase in lease operating expenses, due to increases in cost for services and materials, as well as additional activity on wells acquired in 2022. These reductions were partially offset by decreases in cash paid to settle commodity derivative contracts.

 

Investing Activities. Cash used in investing activities for the three months ended March 31, 2023, was $1.4 million as compared to $3.3 million for the comparable period in 2022. The primary use of cash in our investing activities for the three months ended March 31, 2023, was the capital expenditures related to returning idle wells to production and improvements to our gathering system in East Texas.

 

Financing Activities. Cash used in financing activities for the three months ended March 31, 2023, was $0.9 million as compared to $0.2 million for the comparable period in 2022. The cash used in financing activities during the three months ended March 31, 2023, was primarily attributable to a cash dividend paid during the 2023 period of $0.6 million, cash paid to settle taxes on the vesting of share-based compensation awards of $0.2 million and principal payments on our insurance premium finance note payable of $0.1 million. Cash used in financing activities during the three months ended March 31, 2022, represent cash paid to settle taxes on the vesting of share-based compensation awards of $0.3 million, and payments of principal on our insurance premium finance note of $0.1 million, which were partially offset by proceeds received on the exercise of stock warrants of $0.2 million.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

Item 4. Controls and Procedures

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

We are required to maintain disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure

 

As of March 31, 2023, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the results of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls were not effective as of March 31, 2023 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Such determination was made in part on material weaknesses in our internal control over financial reporting as of December 31, 2022, as discussed below.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on April 13, 2023, in connection with our assessment of the effectiveness of our internal control over financial reporting at the end of our last fiscal year, management identified the following material weaknesses in our internal control over financial reporting as of December 31, 2022 and is in the process of remediating such material weaknesses as of March 31, 2023:

 

● Third party information technology general controls (“ITGCs”) related to our accounting system were not designed appropriately and reliance could not be placed on the processing integrity of the accounting system.

 

27
 

 

● Certain control activities with a review component were not implemented and operating effectively for a sufficient portion of the year and did not include sufficient evidence of review procedures performed or formal approval by the reviewer.
   
● Certain business process controls were not implemented for a sufficient portion of the year and did not include sufficient evidence of operation.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Changes in Internal Control over Financial Reporting

 

Except as disclosed below there were no changes in our internal control over financial reporting during the three months ended March 31, 2023, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 

During the fiscal quarter ended March 31, 2023, we have made efforts to improve the documentation of review for control activities with a review component to include review notes and documented approval by the reviewer. In addition, in January 2023, we began evaluating accounting systems for conversion. We anticipate converting to a new accounting system during the first fiscal quarter of 2024. The accounting system we select will have ITGCs that are designed effectively by the software provider and independently tested.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

 

Prior litigation which has been settled to date, is described in, and incorporated by reference in, this “Item 1. Legal Proceedings” of this Quarterly Report on Form 10-Q from, Note 8-Commitments, Contingencies and Related-Party Transactions-Litigation in the Notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.

 

Item 1A. Risk Factors.

 

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on April 13, 2023, under the heading “Item 1A. Risk Factors”, except as discussed below, and investors should review the risks provided in the Annual Report, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Annual Report, under “Item 1A. Risk Factors”, and below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.

 

Our stock repurchases are discretionary and even if effected, they may not achieve the desired objectives.

 

On April 26, 2023, the Board of Directors of the Company authorized and approved a share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock. Subject to any future extensions, the repurchase program is scheduled to expire on June 30, 2024. Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. To date, no shares of common stock have been repurchased by the Company. The program does not obligate the Company to acquire a minimum amount of shares.

 

There can be no assurance that any repurchases pursuant to our stock repurchase program will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchase such shares. The amounts and timing of the repurchases may also be influenced by general market conditions, regulatory developments (including recent legislative actions which, subject to certain conditions, may impose an excise tax of 1% on our stock repurchases) and the prevailing price and trading volumes of our common stock. If our financial condition deteriorates or we decide to use our cash for other purposes, we may suspend repurchase activity at any time.

 

28
 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Sales of Unregistered Securities

 

There have been no sales of unregistered securities during the quarter ended March 31, 2023, and from the period from April 1, 2023, to the filing date of this Report.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The following table sets forth share repurchase activity for the respective periods:

 

 

 

 

 

 

 

Period

 

 

 

 

 

 

Total Number
of Shares
Purchased

  

 

 

 

 

Average
Price Paid Per
Share

   Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs(1)		  

Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs(1)

 
January 1 – January 31, 2023   62,140(2)  $2.42    —   $— 
February 1 – February 28, 2023   —   $—    —   $— 
March 1 – March 31, 2023   —    —    —   $— 
Total   —   $—    —   $— 

 

(1) On April 26, 2023, the Board of Directors of the Company authorized and approved a share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock. Subject to any future extensions, the repurchase program is scheduled to expire on June 30, 2024, when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when the program is discontinued by the Company. Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program will be funded using the Company’s working capital. To date, no shares of common stock have been repurchased by the Company. The program does not obligate the Company to acquire a minimum amount of shares.

 

(2) Under our 2021 Equity Incentive Plan, the Company may permit an employee to satisfy minimum statutory federal, state and local tax withholding obligations arising from equity awards, including fully-vested and restricted stock awards, to elect to have the Company withhold otherwise deliverable restricted stock to satisfy such tax withholding obligation. The following table provides information with respect to shares withheld by the Company to satisfy these obligations to the extent permitted by the Company and requested by employees. These repurchases were not part of any publicly announced stock repurchase program.

 

Item 3. Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

29
 

 

Item 6. Exhibits

 

        Incorporated by Reference    
Exhibit
No.		   Description   Form   File No.   Exhibit   Filing Date   Filed/Furnished
Herewith
                         
10.1†   U.S. Energy Corp. Form of Restricted Stock Grant Agreement (2022 Equity Incentive Plan)  

S-8

  

333-267267

  

4.3

  

9/2/2022

    
                         
31.1*   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002                   X
32.1♦   Certification of Chief Executive Officer and Chief Financial Officer under Rule 13a-14(b)                   X
101.INS   Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document                   X
101.SCH*   Inline XBRL Schema Document                   X
101.CAL*   Inline XBRL Calculation Linkbase Document                   X
101.DEF*   Inline XBRL Definition Linkbase Document                   X
101.LAB*   Inline XBRL Label Linkbase Document                   X
101.PRE*   Inline XBRL Presentation Linkbase Document                   X
104*   Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set                   X

 

* Filed herewith.
   
† Exhibit constitutes a management contract or compensatory plan or agreement.
   
♦ Furnished herewith.

 

30
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  U.S. ENERGY CORP.
     
Date: May 11, 2023 By: /s/ Ryan L. Smith
    RYAN L. SMITH, Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal Financial and Accounting Officer)

 

31

 

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