UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

~~[X]~~☒	~~Quarterly report pursuant to section~~QUARTERLY REPORT PURSUANT TO SECTION 13 ~~or 15(d) of the Securities Exchange Act of~~OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, ~~2020~~2021
		or
~~[ ]~~	~~Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934~~
☐	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

~~U.S. ENERGY CORP.~~

(Exact Name of Registrant as Specified in its Charter)

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

675 Bering Dr, Suite ~~100,~~ 390, Houston TX, Texas		77057
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(303)993-3200

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 per share		USEG		The NASDAQ Stock Market LLC (The NASDAQ Capital ~~Market~~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 ~~[X]~~ ☒ 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 ~~[X]~~ ☒ 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 ~~[X]~~ ☒			Smaller reporting company ~~[X]~~☒
			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 ~~[X]~~ ☒

The registrant had ~~2,915,654~~4,676,301 shares of its common stock, par value $0.01 per share, outstanding as of November ~~16, 2020.~~10, 2021.

TABLE OF CONTENTS

		Page
~~Part I.~~Cautionary Note About Forward-Looking Statements		~~FINANCIAL INFORMATION~~	3

Part I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets (unaudited)	34
	Condensed Consolidated Statements of Operations (unaudited)	45
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)	56
	Condensed Consolidated Statements of Cash Flows (unaudited)	67
	Notes to Unaudited Condensed Consolidated Financial Statements	78
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2522
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3832
Item 4.	Controls and Procedures	3832

Part II.	OTHER INFORMATION	33

Item 1.	Legal Proceedings	3933
Item 1A.	Risk Factors	3933
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4538
Item 3.	Defaults Upon Senior Securities	4538
Item 4.	Mine Safety Disclosures	4538
Item 5.	Other Information	4538
Item 6.	Exhibits	4539

Signatures		4640

Table of Contents

Cautionary Note About 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 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:

	●	Statements regarding the planned completion of three pending purchase and sale agreements, discussed in greater detail below, including the timing thereof and results thereof;

	●	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 and possible recessions caused thereby (including as a result of COVID-19);

	●	the effects of global pandemics, such as COVID-19 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,

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report and other documents we file with the Securities and Exchange Commission (“SEC”), including without limitation, the following sections: Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as may be updated in our subsequent Quarterly Reports on Form 10-Q. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “may,” “could,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. 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, 2020, and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Table of Contents

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)

	September 30, 2020			December 31, 2019			September 30, 2021			December 31, 2020

ASSETS
Current assets:
Cash and equivalents	$	1,039		$	1,532		$	6,955		$	2,854
Oil and natural gas sales receivable		199			716			1,084			514
Marketable equity securities		109			307			248			181
Prepaid and other current assets		355			138			282			184
Real estate assets held for sale, net of selling costs		725			-			250			975

Total current assets		2,427			2,693			8,819			4,708

Oil and natural gas properties under full cost method:
Unevaluated properties		1,694			3,741			1,698			1,597
Evaluated properties		92,615			89,113			94,843			93,549
Less accumulated depreciation, depletion, amortization and impairment		(87,611	)		(84,400	)
Less accumulated depreciation, depletion, amortization, and impairment								(88,063	)		(87,708	)

Net oil and natural gas properties		6,698			8,454			8,478			7,438

Other assets:
Property and equipment, net		275			2,115			117			25
Right-of-use asset		141			179			143			127
Other assets		65			26			40			65

Total other assets		481			2,320			300			217

Total assets	$	9,606		$	13,467		$	17,597		$	12,363

LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	888		$	974		$	734		$	1,457
Accrued compensation and benefits		257			191			269			312
Commodity derivative								116			-
Related party secured note payable		375			-			-			375
Insurance premium note payable		42			-			101			-
Current lease obligation		63			58			110			65
Warrant liability								93			-

Total current liabilities		1,625			1,223			1,423			2,209

Noncurrent liabilities:
Asset retirement obligations		1,229			819			1,441			1,408
Warrant liability		137			73
Warrant liability, net of current portion								-			95
Long-term lease obligation, net of current portion		95			142			49			78
Other long-term liabilities		6			-			6			6
Total noncurrent liabilities		1,467			1,034			1,496			1,587

Total liabilities		3,092			2,257			2,919			3,796

Commitments and contingencies (Note 9)
Preferred stock: Authorized 100,000 shares, 50,000 shares of Series A Convertible (par value $0.01) issued and outstanding; liquidation preference of $3,538 and $3,228 as of September 30, 2020 and December 31, 2019, respectively		2,000			2,000

Shareholders’ equity:
Common stock, $0.01 par value; unlimited shares authorized; 1,449,754 and 1,340,583 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		15			13
Common stock, $0.01 par value; unlimited shares authorized; 4,676,301 and 3,317,893 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively								47			33
Additional paid-in capital		137,848			136,876			149,037			142,652
Accumulated deficit		(133,349	)		(127,679	)		(134,406	)		(134,118	)

Total shareholders’ equity		4,514			9,210			14,678			8,567

Total liabilities, preferred stock and shareholders’ equity	$	9,606		$	13,467
Total liabilities and shareholders’ equity							$	17,597		$	12,363

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

Table of Contents

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(In thousands, except share and per share amounts)

													2021			2020			2021			2020
	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2020			2019			2020			2019			2021			2020			2021			2020

Revenue:
Oil	$	362		$	1,571		$	1,418		$	4,746		$	1,593		$	362		$	4,232		$	1,418
Natural gas and liquids		39			62			95			320			191			39			419			95

Total revenue		401			1,633			1,513			5,066			1,784			401			4,651			1,513

Operating expenses:
Oil and gas operations:
Lease operating expenses		290			410			1,032			1,348			586			290			1,631			1,032
Production taxes		30			107			110			323			133			30			343			110
Depreciation, depletion, accretion and amortization		81			180			291			550
Depreciation, depletion, accretion, and amortization														151			81			415			291
Impairment of oil and natural gas properties		1,149			-			2,943			-			-			1,149			-			2,943
General and administrative expenses		607			989			1,546			3,117			686			607			2,233			1,546

Total operating expenses		2,157			1,686			5,922			5,338			1,556			2,157			4,622			5,922

Operating loss		(1,756	)		(53	)		(4,409	)		(272	)
Operating income (loss)														228			(1,756	)		29			(4,409	)

Other income (expense):
Loss on real estate held for sale		-			-			(651	)		-
Impairment of real estate		-			-			(403	)		-
(Loss) gain on marketable equity securities		(32	)		(240	)		(153	)		(235	)
Loss and impairment on real estate held for sale														(141	)		-			(141	)		(1,054	)
Commodity derivative loss, net														(25	)		-			(235	)		-
Gain (loss) on marketable equity securities														(6	)		(32	)		67			(153	)
Warrant revaluation gain (loss)		55			(23	)		(65	)		219			27			55			2			(65	)
Rental property loss, net		(5	)		(16	)		(40	)		(39	)
Rental property (loss) gain, net														(15	)		(5	)		8			(40	)
Other income		26			50			54			100			12			26			39			54
Interest, net		(1	)		1			(3	)		(19	)		1			(1	)		(57	)		(3	)

Total other income (expense)		43			(228	)		(1,261	)		26
Total other (expense) income														(147	)		43			(317	)		(1,261	)

Net loss	$	(1,713	)	$	(281	)	$	(5,670	)	$	(246	)
Net income (loss)													$	81		$	(1,713	)	$	(288	)	$	(5,670	)
Accrued preferred stock dividends		(107	)		(95	)		(310	)		(273	)		-			(107	)		-			(310	)
Net loss applicable to common shareholders	$	(1,820	)	$	(376	)	$	(5,980	)	$	(519	)
Basic and diluted weighted shares outstanding		1,399,754			1,340,583			1,386,515			1,340,583
Basic and diluted loss per share	$	(1.30	)	$	(0.28	)	$	(4.31	)	$	(0.39	)
Net income (loss) applicable to common shareholders													$	81		$	(1,820	)	$	(288	)	$	(5,980	)

Basic weighted-average common shares outstanding														4,676,301			1,399,754			4,429,870			1,386,515
Diluted weighted-average common shares outstanding														4,721,301			1,399,754			4,429,870			1,386,515
Basic net income (loss) per common share													$	0.02		$	(1.30	)	$	(0.07	)	$	(4.31	)
Diluted net income (loss) per common share													$	0.02		$	(1.30	)	$	(0.07	)	$	(4.31	)

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

Table of Contents

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2020~~2021 AND ~~2019~~2020

(in thousands, except share amounts)

						Additional									Shares			Amount		Capital			Deficit			Total
	Common Stock					Paid-in			Accumulated											Additional
	Shares			Amount		Capital			Deficit			Total			Common Stock					Paid-in			Accumulated
															Shares			Amount		Capital			Deficit			Total

Balances, December 31, 2020																3,317,893		$	33	$	142,652		$	(134,118	)	$	8,567
Issuance of shares in underwritten offering, net of offering costs of $488																1,131,600			11		5,272			-			5,283
Issuance of shares for related party secured note payable conversion																97,962			1		437			-			438
Issuance of shares for settlement of related party legal costs																90,846			1		405			-			406
Issuance of shares upon vesting of restricted stock awards																47,000			1		(1	)		-			-
Shares withheld to settle tax withholding obligations for restricted stock awards																(9,000	)		-		(38	)		-			(38	)
Stock-based compensation																-			-		79			-			79
Settlement of fractional shares in cash
Settlement of fractional shares in cash, shares
Shares issued in acquisition of New Horizon Resources
Shares issued in acquisition of New Horizon Resources, shares
Exercise of stock warrants
Exercise of stock warrants
Net loss																-			-		-			(162	)		(162	)
Balances, March 31, 2021																4,676,301		$	47	$	148,806		$	(134,280	)	$	14,573
Stock-based compensation																-			-		116			-			116
Net loss																-			-		-			(207	)		(207	)
Balances, June 30, 2021																4,676,301		$	47	$	148,922		$	(134,487	)	$	14,482
Stock-based compensation																-			-		115			-			115
Net income																-			-		-			81			81
Balances, September 30, 2021																4,676,301		$	47	$	149,037		$	(134,406	)	$	14,678

Balances, December 31, 2019		1,340,583		$	13	$	136,876		$	(127,679	)	$	9,210			1,340,583		$	13	$	136,876		$	(127,679	)	$	9,210
Settlement of fractional shares in cash		(327	)		-		(1	)		-			(1	)		(327	)		-		(1	)		-			(1	)
Shares issued in acquisition of New Horizon Resources		59,498			1		239			-			240			59,498			1		239			-			240
Share-based compensation		-			-		42			-			42			-			-		42			-			42
Net loss		-			-		-			(306	)		(306	)		-			-		-			(306	)		(306	)
Balances, March 31, 2020		1,399,754			14		137,156			(127,985	)		9,185			1,399,754			14		137,156			(127,985	)		9,185
Share-based compensation		-			-		64			-			64
Stock-based compensation																-			-		64			-			64
Net loss		-			-		-			(3,651	)		(3,651	)		-			-		-			(3,651	)		(3,651	)
Balances, June 30, 2020		1,399,754			14		137,220			(131,636	)		5,598			1,399,754			14		137,220			(131,636	)		5,598
Share-based compensation		-			-		64			-			64
Beginning balance																1,399,754			14		137,220			(131,636	)		5,598
Stock-based compensation																-			-		64			-			64
Exercise of stock warrants		50,000			1		564			-			565			50,000			1		564			-			565
Net loss		-			-		-			(1,713	)		(1,713	)		-			-		-			(1,713	)		(1,713	)
Net income (loss)																-			-		-			(1,713	)		(1,713	)
Balances, September 30, 2020		1,449,754		$	15	$	137,848		$	(133,349	)	$	4,514			1,449,754			15		137,848			(133,349	)		4,514

Balances, December 31, 2018		1,340,583		$	13	$	136,835		$	(127,129	)	$	9,719
Share-based compensation		-			-		13			-			13
Net income		-			-		-			15			15
Balances, March 31, 2019		1,340,583			13		136,848			(127,114	)		9,747
Share-based compensation							13						13
Net income										20			20
Balances, June 30, 2019		1,340,583			13		136,861			(127,094	)		9,780
Share-based compensation							9						9
Net loss										(281	)		(281	)
Balances, September 30, 2019		1,340,583		$	13	$	137,870		$	(127,375	)	$	9,508
Ending balance																1,449,754			15		137,848			(133,349	)		4,514

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

Table of Contents

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2020~~2021 AND ~~2019~~2020

(in thousands)

	2020			2019			2021			2020

Cash flows from operating activities:
Net loss	$	(5,670	)	$	(246	)	$	(288	)	$	(5,670	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion, accretion, and amortization		352			651			415			352
Impairment of oil and gas properties		2,943			-			-			2,943
Impairment of real estate		403			-
Loss on real estate held for sale		651			-
Loss on marketable equity securities		153			235
Loss (gain) on warrant revaluation		65			(219	)
Loss and impairment on real estate held for sale								141			1,054
Unrealized loss on commodity derivatives								116			-
(Gain) loss on marketable equity securities								(67	)		153
(Gain) loss on warrant revaluation								(2	)		65
Loss on related party debt conversion and settlement of legal costs								76			-
Stock-based compensation		170			35			310			170
Right of use asset amortization		38			35			66			38
Debt issuance cost amortization		-			7
Changes in operating assets and liabilities:
Decrease (increase) in:
Oil and natural gas sales receivable		531			(415	)		(570	)		531
Other assets		(20	)		138			130			(20	)
Increase (decrease) in:
Accounts payable and accrued liabilities		(188	)		149			(215	)		(188	)
Accrued compensation and benefits		66			(35	)		(43	)		66
Payments on operating lease liability		(43	)		(38	)		(66	)		(43	)
Payments for asset retirement obligations								(22	)		-

Net cash (used in) provided by operating activities		(549	)		297
Net cash used in operating activities								(19	)		(549	)

Cash flows from investing activities:
Acquisition of New Horizon Resources, net of cash acquired		(122	)		-
Acquisition of FieldPoint properties		(529	)		-
Acquisitions, net of cash acquired								-			(651	)
Oil and natural gas capital expenditures		(79	)		(142	)		(1,399	)		(79	)
Proceeds from sale of oil and gas properties								30			-
Property and equipment expenditures								(93	)		-
Proceeds from sale of real estate								440			-
Proceeds from sale of marketable securities		45			-			-			45
Payment received on note receivable		20			20			20			20

Net cash used in investing activities:		(665	)		(122	)		(1,002	)		(665	)

Cash flows from financing activities:
Payment on credit facility		(61	)		(937	)
Proceeds from secured note payable		375			-
Payments on insurance premium finance note payable		(157	)		(193	)
Proceeds from sale of common stock, net of issuance costs								5,283			-
Proceeds from related party secured note payable								-			375
Proceeds from warrant exercise		565			-						565
Repayment of credit facility								-			(61	)
Repayments of insurance premium finance note payable								(122	)		(157	)
Shares withheld to settle tax withholding obligations for restricted stock awards								(39	)		-
Payment for fractional shares in reverse stock split		(1	)		-			-			(1	)

Net cash provided by (used in) financing activities		721			(1,130	)
Net cash provided by financing activities								5,122			721

Net decrease in cash and equivalents		(493	)		(955	)
Net increase (decrease) in cash and equivalents								4,101			(493	)

Cash and equivalents, beginning of period		1,532			2,340			2,854			1,532

Cash and equivalents, end of period	$	1,039		$	1,385		$	6,955		$	1,039

Supplemental disclosures of cash flow information and non-cash activities:
Cash payments for interest	$	5		$	26		$	3		$	5
Investing activities:
Issuance of stock in acquisition of New Horizon Resources		240			-			-			240
Change in capital expenditure accruals		58			24			(30	)		58
Exchange of undeveloped lease acreage for oil and gas properties		-			379
Adoption of lease standard		-			228
Prepaid rent liability netted with proceeds on sale of real estate								143			-
Addition of operating lease liability and right of use asset								82			-
Asset retirement obligations		(315	)		(14	)		26			(315	)
Financing activities:
Issuance of stock for conversion of related party secured note payable and accrued interest								438			-
Issuance of stock for settlement of related party legal costs								406			-
New Horizon credit facility assumed		61			-			-			61
Financing of insurance premiums with note payable		199			228			223			199

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

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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~~wholly-owned subsidiaries, isEnergy One LLC and New Horizon Resources, LLC, referred to as the “Company” in these Notes to Unaudited Condensed Consolidated Financial Statements) was incorporated in the State of Wyoming on January 26, 1966. 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 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, ~~2019,~~2020, as filed with the SEC on March ~~30, 2020.~~26, 2021. Our financial condition as of September 30, ~~2020,~~2021, and operating results for the three and nine months ended September 30, ~~2020,~~2021, 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, ~~2020.~~2021.

~~Reverse Stock Split~~

On January 6, 2020, the Company completed a one-for-ten reverse stock split (the “Reverse Stock Split”) with respect to the Company’s outstanding common stock. For purposes of presentation, the unaudited condensed consolidated financial statements and footnotes have been adjusted for the number of post-split shares as if the split had occurred at the beginning of earliest period presented.

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 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; futures prices of commodities used in the valuation of commodity derivative contracts; valuation of warrant instruments; valuation of real estate assets ~~acquired and liabilities assumed in acquisitions~~held for sale; and the cost 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.

Significant Accounting Policies

The Company does not designate commodity derivative contracts as cash flow hedges, and therefore the contracts do not qualify for hedge accounting. Changes in fair value of derivative contracts are recorded in the condensed consolidated statement of operations. The fair value of derivative contracts is recorded as either an asset or a liability on the condensed consolidated balance sheet.

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Principles of Consolidation

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

~~Recently Adopted Accounting Pronouncements~~2. ACQUISITIONS

~~Fair Value Measurements.~~ ~~In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-13,~~ ~~Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements~~~~. The ASU amends the disclosure requirements in Topic 820,~~ ~~Fair Value Measurements~~. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. As a result of the Company’s adoption of this ASU on January 1, 2020, the fair value measurement disclosures for the warrants, which are the Company’s only Level 3 fair value measurement changed. The Company removed the disclosure of the processes for measuring the warrants and added quantitative information of the significant unobservable inputs used to develop the valuation of the warrants.

~~2. ACQUISITIONS~~

New Horizon Resources

On March 1, 2020, the Company acquired all the issued and outstanding equity interests of New Horizon. Its assets include acreage and operated producing properties in North Dakota (the “New Horizon Properties”). The Company accounted for the acquisition of the New Horizon Properties as a business combination. The consideration paid at closing consisted of 59,498 shares of the Company’s restricted common stock, ~~$150,000~~$150,000 in cash and the assumption of certain liabilities (the “New Horizon Acquisition”). The New Horizon Acquisition gives the Company operated properties in its core area of operations. The New Horizon Properties consist of nine gross wells (five net wells), and approximately 1,300 net acres located primarily in McKenzie and Divide Counties, North Dakota, which are 100% held by production and average a 63% working interest.

SCHEDULE OF BUSINESS ACQUISITIONS

	Amount
	(in thousands)
Fair value of net assets:
Proved oil and natural gas properties	$	564
Other current assets		14
Other long-term assets		58
Total assets acquired		636
Asset retirement obligations		(163	)
Current payables		(50	)
Credit facility		(61	)
Net assets acquired	$	362
Fair value of consideration paid for net assets:
Cash consideration	$	150
Issuance of common stock (59,498 shares at $4.04 per share)		240
Cash acquired		(28	)
Total fair value of consideration transferred	$	362

For the nine months ended September 30, ~~2020,~~2021, the Company recorded revenues of approximately ~~$69~~$150 thousand, and lease operating and workover expenses of approximately ~~$131~~$47 thousand related to the New Horizon Properties. Assuming that the acquisition of the New Horizon properties had occurred on January 1, ~~2019,~~2020, the Company would have recorded revenues of ~~$100~~$100 thousand and expenses of ~~$153~~$153 thousand for the nine months ended September 30, ~~2020, and revenues of $192 thousand and expenses of $258 thousand for the nine months ended September 30, 2019.~~2020. These results are not necessarily indicative of the results that would have occurred had the Company completed the acquisition on the date indicated, or that will be attained in the future. Subsequent to the closing of the New Horizon Acquisition, the Company repaid the outstanding liabilities assumed at closing.

FieldPoint Petroleum

On September 25, 2020, the Company acquired certain oil and gas properties primarily located in Lea County, New Mexico and Converse County, Wyoming. The properties were acquired from FieldPoint Petroleum Corporation (“FieldPoint”) pursuant to FieldPoint’s Chapter 7 bankruptcy process (the “FieldPoint Properties”). The Company accounted for the acquisition of the FieldPoint Properties as an asset acquisition. ~~Total cash~~The total amount paid for the FieldPoint Properties ~~as of September 30, 2020,~~ was ~~$529~~$597 thousand, which includes the purchase price of ~~$500~~$500 thousand and transaction costs of ~~$29 thousand.~~$97 thousand, of which $29 thousand was paid via the issuance of 7,075 shares of the Company’s common stock. The Company also recorded purchase price adjustments of $31 thousand for net revenues received, less operating expenses related to periods prior to the closing of the transaction. In addition, the Company ~~accrued $80 thousand for unpaid transaction costs and~~ recorded asset retirement obligations of ~~$236~~$203 thousand for the assets acquired. Substantially all of the value of the acquired FieldPoint ~~Proerties acquired consists~~Properties consist of mature proved developed producing reserves. Following is a summary of the amounts recorded for the assets acquired:

SUMMARY OF AMOUNTS INCURRED FOR ASSETS ACQUIRED

	Amount
	(in thousands)
Amounts incurred:
Cash consideration	$	500
Transaction costs		97
Purchase price adjustments		(31	)
Total consideration paid		566

Asset retirement obligations assumed		203

Total evaluated property	$	769

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Amount
(in thousands)
Amounts incurred:
Cash consideration $ 500
Transaction costs 109
Total $ 609

Asset retirement obligations $ (236 )

Acquisition of Liberty County Properties

On November 9, 2020, the Company entered into a Purchase and Sale Agreement (the “PSA”) to acquire certain assets from Newbridge Resources LLC (“Newbridge”). The transaction closed on December 1, 2020, with an effective date of November 1, 2020. The assets include operated producing properties in Liberty County, Texas (the “Liberty County Properties”). The Liberty County Properties include 41 wells which have a 100% working interest and an average 86% net revenue interest and approximately 680 net acres located primarily in Liberty County, Texas which are 100% held by production. The Company issued 67,254 shares of its common stock, which at the closing price of $4.24 on the date of the closing of the PSA, were valued at $285 thousand, in consideration for the acquisition. The Company accounted for the acquisition of the Liberty County Properties as an asset acquisition. The total amount paid was $326 thousand including transaction costs of $41 thousand. In addition, the Company recorded asset retirement obligations of $192 thousand for the assets acquired. Substantially all of the value of the Liberty County Properties acquired consisted of mature proved developed producing reserves and proved developed non-producing reserves. Following is a summary of the amounts recorded for the assets acquired:

SUMMARY OF AMOUNTS INCURRED FOR ASSETS ACQUIRED

	Amount
	(in thousands)
Amounts incurred:
Value of 67,254 shares issued	$	285
Transaction costs		41
Total consideration paid		326

Asset retirement obligations assumed		192

Total evaluated property	$	518

3. REAL ESTATE HELD FOR SALE

The Company owns a 14-acre tract in Riverton, Wyoming with a two-story, 30,400 square foot office building. The building served as the Company’s corporate headquarters until 2015 and is currently being leased to government agencies and other non-affiliated companies. In 2020 the Company made the decision to sell the land and building and began a process to determine the price at which it would list the property for sale. The process included obtaining an appraisal, analyzing operating statements for the building, reviewing capitalization rates and consulting a large national commercial real estate company. The Company determined that the realizable value of the building was in the range of $700 thousand to $900 thousand. A special committee of the board of directors was formed to evaluate the sales process and is exploring all available options to sell the land and building and will ultimately recommend any action to the Board of Directors regarding any potential sale. During the three months ended September 30, ~~2020~~2021, the Company ~~entered into an agreement with~~completed the sale of its 30,400 square foot office building and the related 14-acre tract in Riverton, Wyoming, which was classified as held for sale. The Company received net proceeds of $440 thousand and recorded a ~~large national commercial broker to sell~~loss of $141 thousand on the ~~building. Following are the pre-impairment carrying amounts~~sale of the ~~land and building at~~property during the period. For the nine months ended September 30, 2020, the Company recorded impairment of $651 thousand related to the property.

The Company continues to hold approximately 13 acres of land in Riverton, Wyoming with an estimated fair value, net ~~proceeds, and a calculation~~ of ~~the loss recognized~~selling costs of $250 thousand, which is classified as ~~a component of other income and expense~~held for sale in the ~~unaudited~~ condensed consolidated ~~statement~~balance sheet at September 30, 2021. During the nine months ended September 30, 2020, the Company recorded impairment of ~~operations.~~$403 thousand related to the land.

Amount
(in thousands)
Pre-impairment carrying value of real estate held for sale:
Building $ 720
Building improvements 276
Land 380
Total 1,376

Fair value of real estate held for sale:
Estimated sales price $ 800
Estimated cost to sell (75 )
Estimated net proceeds $ 725

Loss recognized on real estate assets held for sale $ 651

910

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4. REVENUE RECOGNITION

The Company’s revenues are primarily derived from its non-operated interest in the sales of oil and natural gas production. ~~Prior to the acquisition of New Horizon, which was completed on March 1, 2020, and the acquisition of FieldPoint Petroleum, which was completed on September 25, 2020 all~~The sales of oil and natural gas ~~were~~are made under contracts that ~~third-party~~ operators of ~~oil and natural gas~~the wells have negotiated with third-party customers. The Company receives ~~payments~~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 ~~unaudited 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 insignificant.~~received. Accordingly, the variable consideration is not constrained. ~~As a non-operator of its oil and natural gas~~For the properties in which the Company holds non-operated interest, the Company records its share of the revenues and expenses based upon the information provided by the operators within the revenue statements.

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 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’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.

~~Generally,~~During 2020, the Company acquired operated oil and gas producing properties (see Note 2- Acquisitions, above). The Company sells its oil production at the delivery point specified in the contract and 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 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 revenue as the gross amount received from the well operators before taking into account production taxes and transportation costs. Production taxes are reported separately, and transportation costs are included in lease operating expense in the accompanying unaudited condensed consolidated statements of operations. The ~~revenues~~revenue and costs in the ~~condensed~~ consolidated ~~financial~~ statements of operations were reported gross for the three and nine months ended September 30, 2021 and 2020, as the gross amounts were known.

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The ~~following table presents our disaggregated~~Company’s operated revenues are growing. Operated revenues for the three months ended September 30, 2021, and 2020 were 30% and 5% of total revenues, respectively. The Company’s operated revenues for the nine months ended September 30, 2021, and 2020 were 31% and 5%, respectively. The Company disaggregates total revenues from its share of revenue from the sale of oil and natural gas and liquids by ~~major source~~state. The Company’s revenues in North Dakota, Texas, New Mexico and ~~geographic area~~other states for the three and nine months ended September 30, 2021 and 2020, ~~and 2019.~~are presented in the following table:

SCHEDULE OF DISAGGREGATED REVENUE


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019		2021		2020		2021			2020
	(in thousands)								(in thousands)
Revenue:
North Dakota
Oil	$	270	$	564	$	901	$	1,723	$	665	$	270	$	1,886		$	901
Natural gas and liquids ⁽¹⁾		34		16		66		109
Natural gas and liquids										101		34		249			66
Total	$	304	$	580	$	967	$	1,832	$	766	$	304	$	2,135		$	967

Texas
Oil	$	92	$	1,007	$	517	$	3,023	$	739	$	92	$	1,857		$	517
Natural gas and liquids		5		46		29		211		89		5		187			29
Total	$	97	$	1,053	$	546	$	3,234	$	828	$	97	$	2,044		$	546

New Mexico
Oil									$	73	$	-	$	286		$	-
Natural gas and liquids										-		-		-			-
Total									$	73	$	-	$	286		$	-

Other
Oil									$	116	$	-	$	203		$	-
Natural gas and liquids										1		-		(17	)		-
Total									$	117	$	-	$	186		$	-

Total revenue	$	401	$	1,633	$	1,513	$	5,066	$	1,784	$	401	$	4,651		$	1,513

Significant concentrations of credit risk

The Company has exposure to credit risk in the event of ~~nonpayment~~non-payment of oil and natural gas receivables by purchasers and by joint interest operators ~~and purchasers~~ of the Company’s oil and natural gas properties. ~~During~~The following table presents the ~~nine-month periods ended September 30, 2020~~purchasers and ~~2019, the~~ joint interest operators that accounted for 10% or more of the Company’s total oil and natural gas revenue for at least one of the periods ~~presented are as follows:~~presented:

SCHEDULE OF SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

Operator 2020 2019

CML Exploration LLC 32 % 54 %
Zavanna LLC 47 % 29 %

Operator	2021			2020
Zavanna, LLC		35	%		47	%
Infinity Hydrocarbons, LLC		27	%		5	%
CML Exploration, LLC		9	%		32	%

5. LEASES

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and recorded a $228 thousand right-of-use asset and a $252 thousand lease liability representing the present value of minimum payment obligations associated with the Company’s Denver office operating lease, which has non-cancellable terms in excess of one year. The Company does not have any financing leases. The Company has elected the following practical expedients available under ASC 842: (i) excluding from the condensed consolidated balance sheet leases with terms that are less than one year, (ii) for agreements that contain both lease and non-lease components, combining these components together and accounting for them as a single lease, (iii) the package of practical expedients, which allows the Company to avoid reassessing contracts that commenced prior to adoption that were properly evaluated under legacy GAAP, and (iv) the policy election that eliminates the need for adjusting prior period comparable financial statements prepared under legacy lease accounting guidance. As such, there was no required cumulative effect adjustment to accumulated deficit at January 1, 2019.

During the ~~three and~~ nine months ended September 30, ~~2020 and 2019,~~2021, the Company ~~did not acquire any~~acquired right-of-use assets ~~or incur any~~and operating lease ~~liabilities.~~liability of $82 thousand associated with entering into a non-cancellable, long-term lease agreement for office space in Houston, Texas. The Company’s right-of-use assets and lease liabilities are recognized at their discounted present value under the following captions in the ~~unaudited condensed~~ consolidated balance ~~sheet~~sheets at September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

SCHEDULE OF CONSOLIDATED BALANCE SHEET

	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020
	(in thousands)				(in thousands)
Right of use asset balance
Operating lease	$	141	$	179	$	143	$	127
Lease liability balance
Short-term operating lease	$	63	$	58	$	110	$	65
Long-term operating lease		95		142		49		78
	$	158	$	200
Total operating leases					$	159	$	143

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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 costs represent payments for our Houston, Texas office lease, ~~which has~~prior to February 2021, when the Company entered into a new 25-month lease ~~term of one year.~~for its Houston office. Beginning in March 2020, the Company subleased its Denver, Colorado office and recognizes sublease income as a reduction of rent expense. Following are the amounts recognized ~~sublease income.~~as components of rental expense for the three and nine months ended September 30, 2021 and 2020:

SCHEDULE OF LEASE COSTS


	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019		2020			2019		2021			2020			2021			2020
	(in thousands)										(in thousands)
Operating lease cost	$	17		$	17	$	51		$	51	$	31		$	17		$	95		$	51
Short-term lease cost		6			4		16			11		2			6			7			16
Sublease income		(10	)		-		(25	)		-		(16	)		(10	)		(48	)		(25	)
Total lease costs	$	13		$	21	$	42		$	62	$	17		$	13		$	54		$	42

The Company’s Denver and Houston office operating ~~lease does~~leases do not contain an implicit interest ~~rate~~rates that can be readily ~~determined. Therefore,~~determined; therefore, the Company used the incremental borrowing ~~rate of 8.75% as established under~~rates in effect at the ~~Company’s prior credit facility as~~time the ~~discount rate.~~Company entered into the leases.

SCHEDULE OF WEIGHTED AVERAGE LEASE

	September 30,						As of September 30,
	2020			2019			2021			2020
	(in thousands)
Weighted average lease term (years)		2.3			3.3			1.4			2.3
Weighted average discount rate		8.75	%		8.75	%		9.26	%		8.75	%

The future minimum lease commitments as of September 30, ~~2020~~2021, are presented in the table ~~below.~~below in thousands. Such commitments are reflected at undiscounted values and are reconciled to the discounted present value on the ~~unaudited condensed~~ consolidated balance sheet as follows:

SCHEDULE OF FUTURE MINIMUM LEASE COMMITMENTS

	Amount			Amount
Remainder of 2020	$	18
2021		75
Remainder of 2021				$	30
2022		76			122
2023		6			18
Total lease payments		175			170
Less: imputed interest		(17	)		(11	)
Total lease liability	$	158		$	159

As discussed in Note 3- Real Estate Held for Sale, during the three months ended September 30, 2021, the Company ~~owns a~~sold its 14-acre tract in Riverton, Wyoming with a two-story, 30,400 square foot office building. The ~~Company recognized a loss on real estate~~building was not depreciated while it was held for sale. Prior to the sale ~~related to~~of the building and land, ~~during~~ the ~~nine months ended September 30, 2020 of $651 thousand. The building will not be depreciated while it is held for sale. The~~ net capitalized cost ~~of the building and the land~~ subject to operating leases ~~at September 30, 2020 and December 31, 2019 are~~were as follows:

SCHEDULE OF PROPERTY SUBJECT TO OPERATING LEASES

	September 30, 2020			December 31, 2019
	(in thousands)
Building subject to operating leases	$	4,654		$	4,654		$	4,654
Land		380			380			380
Less: accumulated depreciation		(3,658	)		(3,599	)		(3,658	)
Loss on real estate held for sale		(651	)		-
Loss on leased real estate held for sale								(651	)
Building subject to operating leases, net	$	725		$	1,435		$	725

The future lease maturities of the Company’s operating leases as of September 30, 2020 are presented in the table below. Such maturities are reflected at undiscounted values to be received on an annual basis.

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Amount
(in thousands)
Remainder of 2020 $ 40
2021 161
2022 165
2023 169
2024 163
Remaining through June 2029 695
Total lease maturities $ 1,393
The Company recognized, as a component of rental property (loss) gain, net in the unaudited condensed consolidated statements of operations, the following ~~loss on rental property~~operating lease income and expense related to its Riverton, Wyoming office building for the three and nine months ended September 30, ~~2020~~2021 and ~~2019:~~2020:
SCHEDULE OF LOSS ON RENTAL PROPERTY

Three Months Ended
September 30, Nine Months Ended
September 30, Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019 2021 2020 2021 2020
(in thousands) (in thousands)
Operating lease income $ 51 $ 54 $ 161 $ 150 $ 29 $ 51 $ 131 $ 161
Operating lease expense (56 ) (34 ) (143 ) (99 ) (44 ) (56 ) (123 ) (143 )
Depreciation - (36 ) (58 ) (90 ) - - - (58 )
Rental property loss, net $ (5 ) $ (16 ) $ (40 ) $ (39 )
Rental property (loss) gain, net $ (15 ) $ (5 ) $ 8 $ (40 )
6. OIL AND NATURAL GAS PRODUCTION ACTIVITIES
Divestitures
During the nine months ended September 30, 2021, the Company sold approximately 12 net acres of undeveloped acreage in Midland County, Texas for approximately $30 thousand. There were no divestures of oil and natural gas producing properties during the nine months ended September 30, 2020.
Ceiling Test and Impairment
The Company did not record a ceiling test write-write down of its oil and natural gas properties during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, the Company recorded a ceiling test write down of $2.9 million. The reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no0 influence in the determination of present value. In the calculation of the ceiling test as of September 30, ~~2020,~~2021, the Company used ~~$43.40~~$57.64 per barrel for oil and ~~$1.97~~$2.94 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%~~10%.
The Company recorded ceiling test write-downs of its oil and natural gas properties of $1.1 million and $2.9 million during the three and nine month periods ended September 30, 2020, respectively, due to a reduction in the value of proved oil and natural gas reserves primarily as a result of a decrease in crude oil prices and the performance of a South Texas well drilled in the prior year. In addition,7. DEBT
On March 4, 2021, the Company ~~evaluated its unevaluated property and recorded~~closed a ~~reclassification to the depletable base of the full cost pool of $2.1 million during the nine months ended September 30, 2020 related to a reduction in value of certain of its acreage.~~
~~7. DEBT~~
~~On September 24, 2020, the Company entered into a $375 thousand secured promissory note~~Debt Conversion Agreement (the “Conversion Agreement”) with APEG Energy II, ~~LP,~~L.P. (“APEG II”), which entity Patrick E. Duke, a former director of the Company, has shared voting power and shared investment ~~power over (“~~power. The Conversion Agreement was related to a $375,000 related party secured note payable the Company borrowed from APEG ~~II”)~~II on September 24, 2020 (the “Note”). The Note ~~accrues~~accrued interest at ~~10%~~10% per annum and ~~matures on~~ had a maturity date of September 24, ~~2021.~~2021. The Note iswas secured by the Company’s ~~wholly owned~~wholly-owned subsidiary, Energy One’s oil and natural gas producing properties. InUnder the terms of the Note, the Company may repay the Note prior to maturity, however, in the event ~~that~~of a prepayment of the Note, ~~is repaid prior~~the Company was required to pay APEG II the amount of interest which would have accrued through maturity (at 10% per annum). Pursuant to the ~~maturity~~Conversion Agreement, the Company converted the related party secured note payable of $375,000 and accrued interest to the date ~~there is a prepayment penalty of 10%~~ of the ~~principal~~Note’s September 24, 2021 maturity of $37,500 by issuing 97,962 shares of unregistered common stock with a value on the date of the Conversion Agreement of $438,000. The difference of $25,500 between the value of the shares issued and the $412,500 amount of the Note ~~less~~and accrued ~~interest. At September 30, 2020, APEG II held approximately 40%~~interest through the date of maturity is recorded as interest expense, net, in the condensed consolidated statements of operations.
8. COMMODITY DERIVATIVE
The Company’s ~~outstanding common stock.~~
~~On December 27, 2017,~~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, the Company entered into ~~an exchange agreement (“Exchange Agreement”) by and among U.S. Energy Corp.~~a fixed-price swap commodity derivative contract to protect against price declines in future periods on 100 barrels of crude oil per day from March 1 to December 31, 2021, at $61.90, ~~its wholly owned subsidiary Energy One and APEG II, pursuant to which,~~based on the ~~terms and subject~~calendar month average of West Texas Intermediate Crude Oil (“WTI”). There are no collateral requirements for the fixed-price swap derivative contract. The Company does not enter into derivative contracts for speculative purposes. The Company has not elected to designate the ~~conditions~~fixed-price swap as a cash flow hedge; therefore, the instrument does not qualify for hedge accounting. Accordingly, changes in the fair value of the ~~Exchange Agreement, APEG II exchanged $4.5 million~~fixed-price swap contract are recoded in the unaudited condensed consolidated statements of outstanding borrowings under the Company’s credit facility for 581,927 newly-issued shares of common stock of the Company, par value $0.01 per share, with an exchange price of $7.67, which represented a 1.3% premium over the 30-day volume weighted average price of the Company’s common stock on September 20, 2017 (the “Exchange Shares”). Accrued, unpaid interest on the credit facility held by APEG II was paidoperations and are included in cash atflows from operating activities in the ~~closing~~condensed consolidated statement of cash flows.
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The following table presents the ~~transaction.~~
~~The credit facility was fully repaid~~impact of our fixed-price derivative contract on ~~March 1, 2019 and on July 30, 2019, matured and was terminated. Borrowings under the credit facility were secured by Energy One’s oil and natural gas producing properties. Interest expense~~our condensed consolidated statements of operations for the three and nine months ended September 30, ~~2019 was $20 thousand, including the amortization of debt issuance costs of $7 thousand. The weighted average interest rate on the credit facility was 8.75% for the period until maturity in 2019.~~2021 and 2020:
SCHEDULE OF IMPACT OF FIXED-PRICE DERIVATIVE CONTRACT

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(in thousands)
Commodity derivative loss, net:
Settlements $ (80 ) $ - $ (119 ) $ -
Unrealized loss on commodity derivatives 55 - (116 ) -
Total commodity derivative loss, net $ (25 ) $ - $ (235 ) $ -
~~8. WRITE-OFF OF DEPOSIT~~
In December 2017, the Company entered into a Letter of Intent (��LOI”) with Clean Energy Technology Association, Inc. (“CETA”) to purchase an option to acquire 50 shares of CETA, or lease certain oil and natural gas properties inside an area of mutual interest. The Company made a $250,000 option payment, which was refundable in the event that the Company and CETA were unable to complete the transaction by August 1, 2018. In 2018, the Company paid an additional $124,000 to CETA. In September 2019, the Company issued CETA a demand letter requesting return of the amounts deposited. As of September 30, 2020, the Company has received six payments from CETA totaling $250,000. While the Company is pursuing collection of $50,000 of the remaining deposit, the Company has established an allowance of the amount due from CETA at September 30, 2020, due to the uncertainty of collection. See ~~Note 9~~-~~Commitments, Contingencies and Related-Party Transactions.~~
9. COMMITMENTS, CONTINGENCIES AND RELATED-PARTY TRANSACTIONS
Litigation
Arbitration of Employment ~~Claim.~~Claim
In July 2020, the Company received a request for arbitration from its former Chief Executive Officer, David Veltri claiming that the Company breached his employment agreement. The Company intends to vigorously contest this matter and believes these claims are without merit. The employment agreement requires that any disputes be submitted to binding arbitration. The Company has insurance for these types of claims and has reported the request for arbitration to its insurance carrier. ~~The~~Through September 30, 2021, the Company ~~believes it is probable that it will incur future~~has incurred defense costs in this matter of $117 thousand and has accrued ~~$100~~$10 thousand ~~at September 30, 2020,~~for future defense costs, representing ~~the amount of~~ the Company’s responsibility for costs under the insurance policy.
~~As of September 30,~~APEG II Litigation
From February 2019 until August 2020, ~~all litigation as described below involving~~ the Company was involved in litigation with its former Chief Executive Officer, David Veltri and at the time its largest shareholder, APEG II and ~~its~~APEG II’s general partner, APEG Energy II, GP (together with APEG II, “APEG”) ~~has been dismissed. As of September 30, 2020, APEG II held approximately 40%~~. In addition, Patrick E. Duke, a former director of the ~~Company’s outstanding common stock, is~~Company, had shared voting and shared investment power over APEG. The litigation arose as a result of a vote at the ~~holder of its secured promissory note and was the secured lender under the Company’s credit facility, prior to its maturity on July 30, 2019.~~
~~APEG II Litigation~~
On February ~~14,~~25, 2019 ~~the Company’s~~ board of directors (the Board”) (only one member of which remained on the Board following the Company’s 2019 Annual Meeting of Shareholders held on December 10, 2019) received a letter from APEG II urging the Company to establish a seven-person, independent board of directors, establish a corporate business plan and reduce its corporate general and administrative expenses. APEG II is the Company’s largest shareholder, owning approximately 40% of its outstanding common stock, and, as of September 30, 2020, was the secured lender under its secured promissory note.
On February 25, 2019, APEG II provided an access termination notice to the Company’s bank under its collateral documents, which resulted in all of the funds held in the collateral accounts, which totaled approximately $1.8 million, being wired to APEG II on March 1, 2019. On March 1, 2019, David Veltri, the Company’s former Chief Executive Officer and President, filed a lawsuit against APEG II in the Company’s name (the “Texas Litigation”) in the District Court of Harris County Texas, 190^th Judicial District (the “Texas State Court”). The Texas State Court granted the motion for a temporary restraining order (“TRO”) and ordered APEG to return immediately the approximate $1.8 million in cash previously wired to APEG II.
On March 4, 2019, APEG II filed an emergency motion with the U.S. District Court for the Southern District of Texas (the “Texas Federal Court”) in order to remove the Texas Litigation from the Texas State Court to the Texas Federal Court and to stay or modify the TRO. Following a hearing on March 4, 2019, the Texas Federal Court vacated the TRO and the Court ordered APEG to return the Company’s funds, less the outstanding balance due to APEG II under the credit facility of approximately $937 thousand, resulting in the Company receiving approximately $850 thousand.
~~On February 25, 2019, the Company’s Board held a~~ meeting ~~at which it voted~~ to terminate Mr. Veltri for ~~cause as Chief Executive Officer and President as a result of~~ using Company funds outside of his authority and for other reasons. Mr. Veltri, along with John Hoffman, a former Board member, called into question whether or not such action was properly taken at the Board meeting. On March 8, 2019, the Company’s Audit Committee intervened in the Texas Litigation by filing an emergency motionreasons (the ~~“AC Motion”~~“Texas Litigation”). The AC Motion requested that the Texas Federal Court order that all of the Company’s funds and matters be placed under the control of its Chief Financial Officer and that control of these functions be removed from its former Chief Executive Officer, who had been terminated by the Board on February 25, 2019.
On March 12, 2019, the Texas Federal Court granted the AC Motion, ordering that any disbursement made by the Company must be approved in writing by the Audit Committee in advance. Additionally, the Texas Federal Court ordered that the Company’s Chief Financial Officer must be appointed as the sole signatory on all of the Company’s bank accounts.
~~On July 30, 2020, the Company, filed~~In a ~~Notice of Voluntary Dismissal of its~~separate lawsuit, ~~against Mr. Veltri. All matters related to the Texas litigation were dismissed in August 2020.~~
~~Litigation with Former Chief Executive Officer~~
~~In connection with the above described litigation with~~ APEG ~~II, APEG II then~~ initiated ~~a second lawsuit on March 18, 2019 as~~ a shareholder derivative action in Colorado against Mr. Veltri ~~as a result of~~due to his refusal to recognize the Board’s decision to terminate him ~~for cause~~ (the “Colorado Litigation”). The Company was named as a nominal defendant in the Colorado Litigation. The Colorado litigation was dismissed in May 2020 and the Texas Litigation was dismissed in August 2020. On March 4, 2021, the Company issued 90,846 shares of unregistered common stock, which had a value on the date of issuance of $406 thousand, to APEG ~~II complaint~~in reimbursement of APEG’s legal costs in the Colorado ~~Litigation alleged that Mr. Veltri’s employment was terminated by the Board~~ and ~~sought an injunction and temporary restraining order against Mr. Veltri to prevent him from continuing to act as the Company’s Chief Executive Officer, President and Chairman.~~Texas Litigation.
On April 30, 2019, the Audit Committee took over the control of the defense of the Company, prosecution of its claims against APEG II, and filed third-party claims on behalf of the Company against Mr. Veltri and Mr. Hoffman, at the time a director of the Company, asserting that Mr. Veltri was responsible for any damages that APEG II claimed, including attorneys’ fees, and that Mr. Veltri and Mr. Hoffman should be removed from the Board. On May 22, 2019, the Company and APEG II entered into a settlement agreement with Mr. Hoffman, pursuant to which Mr. Hoffman agreed to resign from the Board and committees thereof, and the Company agreed to pay up to $50,000 of his legal fees incurred. Further, the Company released Mr. Hoffman from any claims related to the Texas Litigation, APEG II released the Company from any claims that may have been caused by Mr. Hoffman, and Mr. Hoffman released the Company from any and all claims he may have had against the Company and its Board.
In the Colorado Litigation, the United States District Court for the District of Colorado (“the Colorado Federal Court”) granted interim preliminary injunctive relief to APEG II against Mr. Veltri, holding that Mr. Veltri, without authorization, continued to hold himself out to be, and continued to act as, the Company’s President and Chief Executive Officer. Pursuant to the Order, Mr. Veltri was preliminarily enjoined from acting as, or holding himself out to be, the Company’s President and/or Chief Executive Officer, pending a trial on the merits. Ryan L. Smith, the Company’s Chief Financial Officer at the time, was appointed temporary custodian of the Company with the charge to act as the Company’s Interim Chief Executive Officer.
On May 30, 2019, the Colorado Federal Court issued a subsequent order (the “Second Order”), appointing C. Randel Lewis as custodian of the Company pursuant to the Wyoming Business Corporation Act and to take over for Mr. Smith in acting as the Company’s Interim Chief Executive Officer and to serve on the Board as Chairman. The Second Order noted that the primary purpose of having Mr. Lewis serve as custodian was to resolve the Board deadlock regarding Mr. Veltri’s termination. Pursuant to the Second Order, Mr. Lewis, as custodian, was ordered to act in place of the Board to appoint one independent director to replace Mr. Hoffman. On June 13, 2019, Mr. Lewis appointed Catherine J. Boggs to serve as an independent director until the 2019 annual meeting of the Company’s shareholders, which was held on December 10, 2019. Following such annual meeting, the Board appointed Ryan L. Smith to serve as the Company’s Chief Executive Officer, replacing Mr. Lewis in that role. Following the annual meeting, the Colorado Federal Court also discharged Mr. Lewis from serving as custodian, Interim Chief Executive Officer and as a member of the Board.
~~On May 20, 2020, the Colorado Litigation was dismissed.~~
10. PREFERRED STOCK
The Company’s articles of incorporation authorize the issuance of up to 100,000 shares of preferred stock, ~~$0.01~~$0.01 par value. Shares of preferred stock may be issued with such dividend, liquidation, voting and conversion features as may be determined by the Board of Directors without shareholder approval. The Company ~~has designated~~ is authorized to issue 50,000 shares of Series P preferred stock ~~of which none are outstanding.~~in connection with a shareholder rights plan that expired in 2011.
On ~~February 12, 2016,~~December 31, 2020, the Company ~~issued~~ redeemed all 50,000 shares of then ~~newly designated~~outstanding Series A Convertible Preferred Stock (the “Preferred Stock”) ~~to Mt. Emmons Mining Company (“MEM”)~~, by making a ~~subsidiary~~cash payment of ~~Freeport McMoRan,. The Preferred Stock was issued in connection with~~$2.0 million and issuing 328,000 shares of its common stock, which at the ~~disposition~~date of the Company’s mining segment, whereby MEM acquired the property and replaced the Company as permittee and operator of a water treatment plant (the “Acquisition Agreement”). The Preferred Stock was issued atredemption had a value of ~~$40~~$3.68 per share for ~~an aggregate~~a total redemption price of $2$3.2 million. The ~~Preferred Stock~~ liquidation preference ~~initially $2 million, increases by quarterly dividends~~on the date of ~~12.25% per annum (the “Adjusted Liquidation Preference”). At~~redemption was $3.6 million. The difference between the ~~option~~redemption price and the liquidation preference of the ~~holder, each share~~preferred stock was included as a reduction of ~~Preferred~~the net loss available to common shareholders in the calculation of loss per share.
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11. SHAREHOLDERS’ EQUITY
Common Stock ~~may initially be converted into 1.33~~
At September 30, 2021, the Company had 4,676,301 shares of common stock (the “Conversion Rate”) for an aggregate of 66,667 shares. The Conversion Rate is subject to anti-dilution adjustments for stock splits, stock dividends and certain reorganization events and to price-based anti-dilution protections. At September 30, 2020 and December 31, 2019,outstanding. On February 17, 2021, the ~~aggregate number of~~Company sold 1,131,600 shares of common stock ~~issuable upon conversion is 79,334 shares, which is the maximum number~~for net proceeds of ~~shares issuable upon conversion.~~$5.3 million.
The Preferred Stock is senior to other classes or series of shares of the Company with respect to dividend rights and rights upon liquidation. No dividend or distribution will be declared or paid on junior stock, including the Company’s common stock, (1) unless approved by the holders of Preferred Stock and (2) unless and until a like dividend has been declared and paid on the Preferred Stock on an as-converted basis. The Preferred Stock does not vote with the Company’s common stock on an as-converted basis on matters put before the Company’s shareholders. However, the holders of the Preferred Stock have the right to approve specified matters as set forth in the certificate of designation and have the right to require the Company to repurchase the Preferred Stock in the event of a change of control, which has not been triggered as of September 30, 2020. Concurrent with entry into the Acquisition Agreement and the Series A Purchase Agreement, the Company and MEM entered into an Investor Rights Agreement, which provides MEM rights to certain information and Board observer rights. MEM has agreed that it, along with its affiliates, will not acquire more than 16.86% of the Company’s issued and outstanding shares of common stock.Warrants
~~11. SHAREHOLDERS’ EQUITY~~
~~Warrants~~
In December 2016, the Company completed a registered direct offering of 100,000 shares of common stock at a net gross price of ~~$15.00~~$15.00 per share. Concurrently, the investors received warrants to purchase 100,000 shares of common stock of the Company at an exercise price of ~~$20.05~~$20.05 per share, for a period of five years from the final closing date of June 21, 2017. The warrants include anti-dilution rights. The total net proceeds received by the Company were approximately ~~$1.32~~$1.3 million. The fair value of the warrants upon issuance ~~was $1.24~~were $1.2 million, with the remaining ~~$0.08~~$0.1 million being attributed to common stock. On September 29, 2020, the Company received proceeds of ~~$565~~$565 thousand related to the exercise of warrants to purchase 50,000 shares of common stock. The warrants have been classified as liabilities due to features in the warrant agreement that give the warrant holder an option to require the Company to redeem the warrant at a calculated fair value in the event of a “Fundamental Transaction,” as defined in the warrant agreement. The fair value of the remaining warrants to purchase 50,000 shares of common stock was ~~$137~~$93 thousand and ~~$73~~$95 thousand at September 30, ~~2020~~2021 and December 31, ~~2019, respectively~~2020, respectively.
Pursuant to the original warrant agreement, as a result of common stock issuances ~~made during the year ended December 31, 2018,~~at various prices, the warrant exercise price ~~was~~has been reduced from ~~$20.50 to $11.30 per share. The warrant~~its original $20.50 exercise price ~~was further reduced~~ to ~~$5.25 as a result~~the floor price of $3.92, which is the exercise price of the ~~registered direct offering of 315,810 shares of common stock which was completed on October 2, 2020 (See Note 16~~ ~~Subsequent Events)~~.warrants at September 30, 2021.
Stock Options
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.
~~Total stock-based compensation expense related to stock options was $0 and $26 thousand for~~For the nine months ended September 30, 2021 and 2020, ~~and 2019, respectively.~~there was 0 compensation expense related to stock options. As of ~~September 30, 2020,~~December 31, 2019, all stock options had vested.NaN stock options were granted or exercised, during the nine months ended September 30, 2021 or 2020. During the nine months ended September 30, ~~2020~~2021 and ~~2019, no stock options were granted, exercised, or forfeited. During the nine months ended September 30,~~ 2020, ~~stock~~ options to purchase 332 shares and 166 shares, respectively, expired. Presented below is information about stock options outstanding and exercisable as of September 30, ~~2020~~2021 and December 31, ~~2019. All shares and prices per share have been adjusted for the Reverse Stock Split.~~2020:
SCHEDULE OF STOCK OPTIONS ACTIVITY
September 30, 2020 December 31, 2019
Shares Price Shares Price

Stock options outstanding 31,367 $ 64.78 31,533 $ 66.04

Stock options exercisable 31,367 $ 64.78 31,533 $ 66.04
September 30, 2021 December 31, 2020
Shares Price Shares Price

Stock options outstanding and exercisable 31,035 $ 62.79 31,367 $ 64.78
The following table summarizes information for stock options outstanding and ~~for stock options~~ exercisable at September 30, ~~2020:~~2021:
SCHEDULE OF STOCK OPTIONS OUTSTANDING AND EXERCISABLE
Options Outstanding Options Outstanding Options Exercisable Options Outstanding Options Exercisable
Exercise Price Weighted Remaining Weighted Weighted Remaining Weighted
Number of Number of Range
Average
Exercise

Contractual
Term
Number of
Average
Exercise
Number of Exercise Price
Range
Average
Exercise

Contractual
Term
Number of
Average
Exercise

Shares Shares Low High Price (years) Shares Price Shares Low High Price (years) Shares Price

16,500 $ 7.03 $ 11.60 $ 10.00 7.3 16,500 $ 10.00 16,500 $ 7.20 $ 11.60 $ 10.00 6.0 16,500 $ 10.00
10,622 90.00 124.80 106.20 3.6 10,622 106.20 10,622 90.00 124.80 106.20 2.6 10,622 106.20
2,913 139.20 171.00 147.39 1.7 2,913 147.39 2,913 139.20 171.00 147.39 0.7 2,913 147.39
1,332 226.20 251.40 232.48 3.2 1,332 232.48 1,000 226.20 226.20 226.20 2.6 1,000 226.20

31,367 $ 7.20 $ 251.40 $ 64.78 5.2 31,367 $ 64.78 31,035 $ 7.20 $ 226.20 $ 62.79 4.2 31,035 $ 62.79
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~~In January 2020, the~~ Restricted Stock
Company ~~granted 48,000~~grants restricted stock under its incentive plan covering shares of common stock to ~~the Company’s Chief Executive Officer, of which 24,000 shares vest after one year~~employees and ~~24,000 vest after two years. In addition, the Company granted a total of 28,000 restricted shares to members~~directors of the ~~Board, which vest~~Company. The restricted stock awards are time-based awards and are amortized ratably over the requisite service period. Restricted stock vests ratably on ~~January 28, 2021. For~~each anniversary following the grant date provided the grantee is employed on the vesting date. Restricted stock granted to employees, when vested are net settled through the issuance of shares, net of the number of shares required to pay withholding taxes.
The following table presents the changes in non-vested, time-based restricted stock awards to all employees and directors for the nine months ended September 30, ~~2020,~~2021:
SCHEDULE OF NON-VESTED TIME-BASED RESTRICTED STOCK AWARDS
Shares
Weighted-Avg.
Grant Date
Fair Value
per Share

Non-vested restricted stock at December 31, 2020 71,000 $ 4.89
Granted 150,000 $ 4.72
Vested (47,000 ) $ 4.89
Non-vested restricted stock at September 30, 2021 174,000 $ 4.75
The following table presents the ~~Company recognized $170 thousand in~~ stock compensation expense related to ~~these restricted stock grants. At September 30, 2020, the unrecognized expense related to the~~ restricted stock grants ~~was $202 thousand.~~for the three and nine months ended September 30, 2021 and 2020:
SCHEDULE OF STOCK COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK GRANTS
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(in thousands)
Stock compensation expense $ 115 $ 64 $ 310 $ 170
Total compensation cost related to non-vested time-based awards not yet recognized in the Company’s condensed consolidated statements of operations as of September 30, 2021, is $534 thousand. This cost is expected to be recognized over a weighted average period of 2.5 years.
12. 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.
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 September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:
SCHEDULE OF ASSET RETIREMENT OBLIGATIONS

Nine Months Ended
September 30, 2020

Year Ended
December 31, 2019

September 30,
2021

December 31,
2020

(in thousands) (in thousands)
Balance, beginning of year $ 819 $ 939 $ 1,408 $ 819
Accretion 23 22 59 43
Sold/Plugged (12 ) (130 ) (70 ) (12 )
New drilled wells - 2
Change in discount rate - (14 )
Liabilities incurred for acquisition of New Horizon wells 163 -
Liabilities incurred for acquisition of FieldPoint wells 236 -
Acquired 44 558
Balance, end of period $ 1,229 $ 819 $ 1,441 $ 1,408
13. INCOME TAXES
The Company estimated the applicable effective tax rate expected for the full fiscal year. The Company’s effective tax rate used to estimate income taxes on a current year-to-date basis is 0%0% for ~~both~~ the ~~three and~~ nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.
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~~In December 2017, the Company paid down debt through the issuance of common stock. This issuance represented a 49.3% ownership change in the Company. See~~ ~~Note 7-Debt.~~ This change in ownership, combined with other equity events, triggered loss limitations under Internal Revenue Code Section 382. As a result, the Company wrote-off a total of $32.2 million of gross deferred tax assets through December 31, 2018. Since the Company maintains a valuation allowance against these tax assets, there was no impact to the condensed consolidated statements of operations.
Deferred tax assets (“DTAs”) are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities and for operating losses and tax credit carryforwards. We review our 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. Consistent with the position at December 31, ~~2019,~~2020, the Company maintains a full valuation allowance recorded against all DTAs. The Company, therefore, had no recorded DTAs as of September 30, ~~2020.~~2021. We anticipate that we will continue to record a valuation allowance against our DTAs in all jurisdictions until such time as we are able to determine that it is “more-likely-than-not” that those DTAs will be realized.
At December 31, 2020, the Company had approximately $8.9 million in net operating loss carryovers (after limitations). During the nine months ended September 30, 2021 and year ended December 31, 2020, the Company issued approximately 1.3 million and 2.0 million additional shares of common stock, respectively in various transactions. The Company is currently evaluating whether these issuances represented an ownership change that would have triggered a loss limitation under Internal Revenue Code (“I.R.C.”) Section 382. However, since the Company maintains a valuation allowance against these tax assets there is no impact to the condensed consolidated statement of operations for the three and nine months ended September 30, 2021.
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 and nine months ended September 30, 2021 and 2020, ~~and 2019, no~~0 adjustments were recognized for uncertain tax positions.
On March 27, 2020, President Trump signed into U.S. federal law the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss (“NOL”) carryback periods, alternative minimum tax (“AMT”) credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, the CARES Act (i) eliminates the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019 or 2020, (ii) increases the net interest expense deduction limit to 50% of adjusted taxable income from 30% for tax years beginning January 1, 2019 and 2020 and (iv) allows taxpayers with AMT credits to claim a refund in 2020 for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act of 2017. The Company is in the process of analyzing the different aspects of the CARES Act to quantify the impact of these provisions on the Company’s income taxes but expects that there will be no material impact from the CARES Act to the Company’s tax position.
14. ~~EARNINGS (LOSS)~~LOSS PER SHARE
Basic net income and loss per common share is calculated by dividing net income or loss attributable to common shareholders by the weighted-average number of common shares outstanding for the respective period. Diluted net income and loss per common share is calculated by dividing adjusted net income or 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 warrants, which are measured using the treasury stock method, the conversion feature of the Series A ~~Convertible~~ Preferred Stock prior to redemption, and unvested shares of restricted common stock. When the Company recognizes a net loss, ~~attributable to common shareholders,~~ as was the case for the ~~three and nine-month periods~~nine months ended September 30, ~~2020~~2021 and ~~2019,~~the three and nine months ended September 30, 2020, 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 income and loss per ~~share.~~share for the three and nine months ended September 30, 2021 and 2020:
SCHEDULE OF BASIC AND DILUTED NET LOSS PER SHARE
Three Months Ended
September 30, Nine Months Ended
September 30, 2021 2020 2021 2020
2020 2019 2020 2019 Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands except per share data) 2021 2020 2021 2020
Net loss $ (1,713 ) $ (281 ) $ (5,670 ) $ (246 )
(in thousands except per share data)
Net income (loss) $ 81 $ (1,713 ) $ (288 ) $ (5,670 )
Accrued dividend on Series A preferred stock (107 ) (95 ) (310 ) (273 ) - (107 ) - (310 )
Loss applicable to common shareholders $ (1,820 ) $ (376 ) $ (5,980 ) $ (519 ) $ 81 $ (1,820 ) $ (288 ) $ (5,980 )
Basic weighted average common shares outstanding 1,400 1,341 1,387 1,341 4,676 1,400 4,430 1,387
Dilutive effect of potentially dilutive securities - - - -
Dilutive effect of warrants 2 - - -
Dilutive effect of unvested restricted stock 43 - - -
Diluted weighted average common shares outstanding 1,400 1,341 1,387 1,341 4,721 1,400 4,430 1,387

Basic net loss per share $ (1.30 ) $ (0.28 ) $ (4.31 ) $ (0.39 )
Diluted net loss per share $ (1.30 ) $ (0.28 ) $ (4.31 ) $ (0.39 )
Basic net income (loss) per share $ 0.02 $ (1.30 ) $ (0.07 ) $ (4.31 )
Diluted net income (loss) per share $ 0.02 $ (1.30 ) $ (0.07 ) $ (4.31 )
The following table presents the weighted-average common share equivalents excluded from the calculation of diluted ~~loss~~earnings per share due to their anti-dilutive effect:
SCHEDULE OF ANTIDILUTIVE WEIGHTED AVERAGE SHARES
Three Months Ended
September 30, Nine Months Ended
September 30, Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019 2021 2020 2021 2020
(in thousands) (in thousands)
Stock options 32 32 32 32 - 32 31 32
Restricted stock 76 - 69 -
Unvested shares of restricted stock - 76 158 69
Warrants 100 100 100 100 - 100 50 100
Series A preferred stock 79 79 79 79 - 79 - 79
Total 287 211 280 211 - 287 239 280
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15. 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.
Warrant Valuation
The warrants contain a dilutive issuance and other provisions that cause the warrants to be accounted for as a liability. Such warrant instruments are initially recorded and valued as a Level 3 liability and are accounted for at fair value with changes in fair value reported in earnings. There were no changes in the methodology to value the warrants. The Company worked with a third-party valuation expert to estimate the value of the warrants at ~~September 30, 2020 and~~ December 31, ~~2019~~2020 using a ~~Lattice~~Black Scholes model, with the following observable and unobservable inputs:
SCHEDULE OF FAIR VALUE ASSUMPTIONS
September 30, 2020 December 31, 2019
September 30,
2021
December 31,
2020

Number of warrants outstanding 50,000 100,000 50,000 50,000
Expiration date June 21, 2022 June 21, 2022 June 21, 2022 June 21, 2022
Exercise price $ 5.25 $ 11.30 $ 3.92 $ 3.92
Beginning share price $ 5.00 $ 3.00 $ 4.58 $ 3.68
Dividend yield 0 % 0 % 0 % 0 %
Average volatility rate ⁽¹⁾ 115 % 80 % 106 % 120 %
Probability of down-round event ⁽²⁾ 50 % 25 % 0 % 0 %
Risk free interest rate 0.13 % 1.59 % 0.11 % 0.11 %
⁽¹⁾ The average volatility represents the Company’s ~~2-year~~ volatility measurement for the remaining term of the warrants, the observed volatility of our peer group over a similar period, and the stock market volatility as of the valuation date.
⁽²⁾ Represents the estimated probability of a future down-round event during the remaining term of the warrants.
At September 30, 2021 and December 31, 2020, the Company used the average value calculated by the ~~Lattice~~Black-Scholes model as opposed to a Monte Carlo model, because the strike price is set at the floor of ~~$137 thousand with a range from $135 thousand to~~ $ 143 thousand. At December 31, 2019, the Company used the average value of $73 thousand with a range from $60 thousand to $120 thousand. An increase in any of the inputs would cause an increase in the fair value of the warrants. Likewise, a decrease in any input would cause a decrease in the fair value of the warrants.3.92 and therefore cannot be rounded down further.
Marketable Equity Securities ~~Valuation~~
The fair value of marketable equity securities is based on quoted market prices obtained from independent pricing services. The Company ~~acquired its~~has an investment in the marketable equity securities of Anfield Energy ~~Inc.~~ (“Anfield”), which it acquired as consideration for sales of certain mining operations. Anfield is traded ~~on the TSX Venture Exchange,~~in an active market under the trading symbol AEC:TSXV and has been classified as Level 1. ~~On July 22, 2020,~~
SCHEDULE OF INVESTMENT IN THE MARKETABLE EQUITY SECURITIES

September 30,
2021
December 31,
2020

Number of shares owned 2,421,180 2,421,180
Quoted market price $ .10227 $ .07455

Fair value $ 247,610 $ 180,500
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Commodity Derivative Instruments
During the nine months ended September 30, 2021, the Company entered into a ~~share purchase agreement to sell 1,210,455 common shares~~fixed-price swap derivative contract. The Company measures the fair value of derivative contracts using an income valuation technique based on the contract price of the ~~Company’s holdings~~underlying positions, crude oil forward curves, discount rates, and counterparty non-performance risk from a marketplace participant’s perspective. The fixed-price swap derivative contract is included in ~~Anfield for approximately $45 thousand. Following~~Level 2.
Asset Retirement Obligations
The Company measures the ~~sale,~~fair value of asset retirement obligations as of the ~~Company owns 2,420,910 shares~~date a well is acquired or the date a well begins drilling using a discounted cash flow method based on unobservable inputs in ~~Anfield.~~the market and therefore are designated as Level 3 within the valuation hierarchy.
Other Assets and Liabilities
The Company evaluates the fair value on a non-recurring basis of properties acquired in business combinations. The fair value of the oil and gas properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production which we reasonably expect, and estimated prices adjusted for differentials. Unobservable inputs include estimated future oil and natural gas production, prices, operating and development costs, and a discount rate of ~~10%~~10%, all Level 3 inputs within the fair value hierarchy.
The Company evaluates the fair value on a non-recurring basis of its Riverton, Wyoming real estate assets when circumstances indicate that the value has been impaired. ~~The change in the economic environment due to the COVID-19 pandemic and the property’s remote location has caused a lack of relevant comparable sales to use as a basis for estimating fair value.~~ At ~~June~~September 30, ~~2020,~~2021, the Company estimated the fair value of ~~the~~its real estate assets based upon discussion with a broker in the ~~expected annual net operating income of the building, estimated capitalization rates for properties in rural areas~~area and ~~values for vacant land based on~~recent comparable sales, all Level 3 inputs within the fair value hierarchy.
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.
Recurring Fair Value Measurements
Recurring measurements of the fair value of assets and liabilities as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:
SCHEDULE OF RECURRING MEASUREMENTS OF FAIR VALUE OF ASSETS AND LIABILITIES
September 30, 2020 December 31, 2019 September 30, 2021 December 31, 2020
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
(in thousands) (in thousands)
Current Assets:
Marketable Equity Securities $ 109 $ - $ - $ 109 $ 307 $ - $ - $ 307 $ 248 $ - $ - $ 248 $ 181 $ - $ - $ 181

Current Liabilities:
Commodity derivatives $ - 116 - 116 - - �� - -
Warrants - - 93 93 - - - -
- 116 93 209 - - - -

Non-current Liabilities:
Warrants $ - $ - $ 137 $ 137 $ - $ - $ 73 $ 73 $ - $ - $ - $ - $ - $ - $ 95 $ 95
The following table presents a reconciliation of our Level 3 warrants measured at fair ~~value~~value:
SCHEDULE OF RECONCILIATION OF CHANGES IN LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS
Nine Months Ended September 30, 2020 Year Ended December 31, 2019
Nine Months
Ended
September 30,
2021

Year Ended
December 31,
2020

(in thousands) (in thousands)
Fair value liabilities of Level 3 instruments beginning of period $ 73 $ 425 $ 95 $ 73

Net loss (gain) on warrant valuation 64 (352 )
-
(Gain) loss on warrant valuation (2 ) 22
Fair value liabilities of Level 3 instruments end of period $ 137 $ 73 $ 93 $ 95
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16. SUBSEQUENT EVENTS
~~Registered Direct Offering~~
On October ~~2, 2020, we closed~~4, 2021, the Company entered into Purchase and Sale Agreements with Lubbock Energy Partners LLC (“Lubbock”); Banner Oil & Gas, LLC, Woodford Petroleum, LLC, and Llano Energy LLC (collectively, “Banner”), and Synergy Offshore LLC (“Synergy”, and collectively with Lubbock and Banner, the “Sellers”). Pursuant to the Purchase and Sale Agreements (collectively, the “Purchase Agreements”), the Company agreed to acquire certain oil and gas properties from the Sellers, representing a ~~registered direct offering~~diversified conventional portfolio of ~~315,810~~operated, producing, oil-weighted assets located across the Rockies, West Texas, Eagle Ford, and Mid Continent. The acquisition will also include certain wells, contracts, technical data, records, personal property and hydrocarbons associated with the acquired assets (collectively with the oil and gas properties to be acquired, the “Acquired Assets”).
The initial base purchase price for the assets is (a) $125,000 in cash and 6,568,828 shares of our common stock, ~~at $5.25 per share, for~~as to Lubbock; (b) $1,000,000 in cash, the assumption of $3.3 million in liabilities, and 6,790,524 shares of common stock, as to Banner; and (c) $125,000 in cash and 6,546,384 shares of common stock, as to Synergy. The aggregate ~~gross proceeds~~purchase price under all the Purchase Agreements will be $1.25 million in cash, 19,905,736 shares of ~~approximately $1,658,000, before deducting~~common stock (the “PSA Shares”), and the ~~placement agent fees~~assumption of $3.3 million in debt. The initial base purchase prices are also subject to customary working capital and ~~related offering expenses. The net proceeds from~~other adjustments as set forth in the ~~offering were approximately $1,523,500. The Offering was the result of a Securities~~Purchase Agreements.
Each Purchase Agreement ~~(the “Purchase Agreement”)~~required the Company ~~had entered~~to place a $500,000 deposit into ~~on September 30, 2020 with~~escrow ($1.5 million in aggregate) (the “Deposits”). The Deposits are to be used for closing price adjustments, and subject to certain ~~institutional investors (the “Purchasers”) The~~liquidated damages provisions of the Purchase Agreements, in the event the Purchase Agreements are terminated under certain circumstances.
Each Purchase Agreement ~~contains customary~~has substantially similar terms (other than certain differences related to assets acquired, purchase terms, certain representations and warranties, and other matters, as individually negotiated by the parties).
The Purchase Agreements are subject to termination prior to the closing of the transactions (the “Transactions”) contemplated by the Purchase Agreements (each the “Closing” and such date, the “Closing Date”) under certain circumstances, including, in the event the Closing has not occurred by February 28, 2022.
In the event the Purchase Agreements are terminated under certain circumstances, the Sellers are able to keep the Deposits and we are required to reimburse them for their reasonable out-of-pocket expenses associated with the Transactions. Under certain other conditions, we are eligible to obtain the return of the Deposit upon termination of the Purchase Agreements.
The transactions contemplated by the Purchase Agreements are expected to close in the first quarter of 2022, subject to satisfaction of customary closing conditions, including approval of the transactions contemplated by the Purchase Agreements, and the issuance of the PSA Shares, by the shareholders of the Company, as required by applicable Nasdaq Capital Market rules.
The conditions to the closing of the Purchase Agreements may not be met, and such Closing may not ultimately occur on the terms set forth in the Purchase Agreements, if at all.
Upon closing of the transactions, the Sellers will own approximately 80.98% of the Company’s then outstanding shares of common stock, and will effectively control the Company, and as such, the Transactions will result in a change of control of the Company.
The Purchase Agreements contemplated the Company and the Sellers entering into various other agreements at Closing, including a registration rights agreement, nominating and voting agreement and contribution agreement. Pursuant to the Purchase Agreements, at Closing, the Company will be required to (i) increase the size of the Company’s Board of Directors to seven members (with one of the current members of the Board resigning) and appoint two (2) individuals, each appointed by the Sellers under the Purchase Agreements, as well as Duane H. King, to the Board of Directors of the Company; and (ii) appoint John A. Weinzierl as Chairman; Ryan L. Smith as Chief Executive Officer and Chief Financial Officer; and Donald Kessel as Chief Operating Officer of the Company. The nominating and voting agreement, will provide for all the Sellers to agree to appoint and nominate each of their designated director nominees to the Board of Directors, with each Seller having the right, for so long as they hold at least 15% of the Company’s outstanding common stock, to appoint two members to the Board of Directors of the Company and the ~~Purchasers, and customary indemnification rights and obligations~~right, so long as they hold at least 5% (but less than 15%) of the ~~parties. Until~~Company’s outstanding common stock, to appoint one person each to the ~~twelve month anniversary~~Board of Directors. In connection with the entry into the Purchase Agreements, the Company and the Sellers entered into a customary escrow agreement in connection with the Deposits.
On October 25, 2021, each of the Sellers and the Company entered into a First Amendment to Purchase and Sale Agreements (the “First Amendment”), which amended each of the Purchase Agreements to update the terms of the exhibits thereto which set forth a form of nominating and voting agreement (the “Voting Agreement”) to be entered into at the closing of the ~~Offering,~~transactions contemplated by the Purchase Agreements. As originally contemplated, the Voting Agreement was to provide for all the Sellers to agree to appoint and nominate each of their designated director nominees to the Board of Directors of the Company, ~~is required to offer~~with each Seller having the right, for so long as they held at least 5% of the ~~Purchasers~~Company’s outstanding common stock, to appoint two members to the Board of Directors of the Company. The First Amendment modified the Voting Agreement to provide that each Seller has the right to ~~participate in an amount up~~appoint two members to ~~50%~~the Board of any subsequent financing transaction undertaken by the Company at the offering price of the subsequent financing transaction. Additionally, each of the officers and directors of the Company pursuant to lock-up agreements agreed not to sellDirectors, as long such Seller holds 15% or ~~transfer any of the Company securities which they hold, subject to certain exceptions, during the 180-day period following the closing of the Offering.~~
23
~~Acquisition of Newbridge Properties~~
On November 9, 2020, the Company, through its wholly-owned subsidiary New Horizon entered into a Purchase and Sale Agreement (“PSA”) to acquire certain assets from Newbridge Resources LLC (“Newbridge”). The transaction, which is subject to customary closing conditions, is expected to close during the fourth quarter of 2020. The assets include acreage and operated producing properties in Liberty County, Texas (the “Newbridge Properties”). The Newbridge Properties also consist of approximately 680 net acres located primarily in Liberty County, Texas which are 100% held by production, and which average a 100% working interest and 86% net revenue interest. The consideration payable by the Company for the Newbridge Properties will consist of $250,000 in shares of U.S. Energy restricted common stock (the “Newbridge Acquisition” and the “Purchase Price”). The number of shares issuable will equal the Purchase Price divided by the lesser (i.e., the calculation which results in the greatest number of shares) of (a) the closing sales pricemore of the Company’s common stock, ~~as traded on The NASDAQ Capital Market on~~and thereafter, such Seller has the ~~day prior~~right to appoint one member to the ~~closing; and (b) the volume weighted average price~~Board of Directors, as long as such Seller holds 5% or more of the Company’s common stock, ~~as traded on~~in order for such Voting Agreement to comply with Nasdaq rules and requirements. The ~~NASDAQ Capital Market, for the 15 trading days immediately prior to the closing date of the PSA. The effective date of the Acquisition will be November 1, 2020.~~
~~Underwritten Offering~~
On November 16, 2020, we closed an underwritten offering of an aggregate of 1,150,000 shares of our common stock at a public offering price of $3.00 per share. The net proceeds to the Company from the offering, after deducting the underwriting discount, the underwriters’ fees and expenses and our estimated offering expenses, are expectedVoting Agreement is contemplated to be ~~approximately $3.0 million. We intend to use~~entered into at or around the ~~net proceeds from this offering for general corporate purposes, capital expenditures, working capital, and potential acquisitions of oil and gas properties.~~closing.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
~~Forward Looking Statements~~Introduction
This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in and incorporated by reference into this Form 10-Q are forward-looking statements. When used in this Form 10-Q, the words “will”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “seek”, “estimate” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements in this Form 10-Q include statements regarding our expected future revenue, income, production, liquidity, cash flows, reclamation and other liabilities, expenses and capital projects, future capital expenditures and future transactions. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. These factors include those associated with our ability to find oil and natural gas reserves that are economically recoverable, the volatility of oil, natural gas liquids and natural gas prices, declines in the values of our properties that have resulted in and may in the future result in additional ceiling test write downs, our ability to replace reserves and sustain production, our estimate of the sufficiency of our existing capital sources, our ability to raise additional capital to fund cash requirements for our participation in oil and gas properties and for future acquisitions, the uncertainties involved in estimating quantities of proved oil and natural gas reserves, in prospect development and property acquisitions or dispositions and in projecting future rates of production or future reserves, the timing of development expenditures and drilling of wells, hurricanes and other natural disasters and the operating hazards attendant to the oil and gas and minerals businesses, and the effects of COVID-19, including decreases in the price of oil and gas associated therewith and potential rescissions caused thereby and the governmental actions implemented to stop the spread of such virus.
~~You should read the matters described and incorporated by reference in “Risk Factors~~” and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
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, ~~2019,~~2020, filed with the Securities and Exchange Commission on March ~~30, 2020~~26, 2021 (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 5 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 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, and we have not independently verified any of it.
See also “Cautionary Note 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.
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 ~~http:~~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 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. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A.
● Plan of Operations and Strategy. Discussion of our strategy moving forward and how we plan to seek to increase stockholder value.
● Recent Developments. Discussion of recent developments affecting the Company and our operations.
● 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 and nine months ended September 30, 2021, and 2020.
● Liquidity and Capital Resources. A discussion of our financial condition, including descriptions of balance sheet information and cash flows.
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General Overview
U.S. Energy Corp. - is a Wyoming corporation organized in 1966. 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 business activities are currently focused in South Texas, the Williston Basin in North Dakota, Lea County in New Mexico and Converse County in Wyoming.
We have historically explored for and produced oil and natural gas through a non-operator business model. As a non-operator, we rely on our operating partners to propose, permit, drill, complete and produce oil and natural gas wells. Before a well is drilled, the operator provides all oil and natural gas interest owners in the designated well the opportunity to participate in the drilling and completion costs and revenues of the well on a pro-rata basis. Our operating partners also produce, transport, market and account for all oil and natural gas production. With recent acquisitions in 2020 of New Horizon Resources, ~~and~~ certain FieldPoint Petroleum wells and certain wells in Liberty County, Texas we now operate ~~a small portion~~approximately 30% of our production.
Plan of Operations and Strategy
We currently plan to complete the acquisition of the Acquired Assets (as discussed below), which acquisitions we anticipate closing in the first quarter of 2022, and thereafter 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 producing assets. In addition, we plan to grow production by performing workovers on operated idle wells acquired 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 will be highly selective in the projects we evaluate and will review opportunities to bolster our liquidity and financial position through various means.
● Evaluate and Pursue Value-Enhancing Transactions. We plan to continuously evaluate strategic alternative opportunities that we believe will enhance shareholder value.
Recent Developments
Acquisition
As described in greater detail in Note 16. Subsequent Events, in the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this report, on October 4, 2021, we entered into the Purchase Agreements with the Sellers.
Pursuant to the Purchase Agreements, we agreed to acquire certain oil and gas properties from the Sellers, representing a diversified, conventional portfolio of operated, producing, oil-weighted assets located across the Rockies, West Texas, Eagle Ford, and Mid-Continent. The acquisition will also include certain wells, contracts, technical data, records, personal property and hydrocarbons associated with the acquired assets. The transactions contemplated by the Purchase Agreements are sometimes referred to herein as the “Purchase”.
The initial base purchase price for the assets is (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 in liabilities, and 6,790,524 shares of common stock, 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 will be $1.25 million in cash, 19,905,736 shares of common stock, and the assumption of $3.3 million in debt. The initial base purchase prices are also subject to customary working capital and other adjustments as set forth in the Purchase Agreements.
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~~Recent Developments~~
~~On September 25, 2020, we acquired certain operated and non-operated producing properties primarily located~~Each Purchase Agreement required the Company to place a $500,000 deposit into escrow ($1.5 million in Lea County, New Mexico and Converse County, Wyoming. The acquired properties consist of select upstream assets of FieldPoint Petroleum Corporation (“FieldPoint”) and were acquired pursuant to FieldPoint’s Chapter 7 bankruptcy process (the “FieldPoint Properties”)aggregate). The ~~purchase~~Deposits are to be used for closing price adjustments, and subject to certain liquidated damages provisions of the Purchase Agreements, in the event the Purchase Agreements are terminated under certain circumstances.
The Purchase Agreements are subject to termination prior to the closing of the transactions contemplated by the Purchase Agreements under certain circumstances, including, in the event the Closing has not occurred by February 28, 2022.
In the event the Purchase Agreements are terminated under certain circumstances, the Sellers are able to keep the Deposits and we are required to reimburse them for their reasonable out-of-pocket expenses associated with the ~~FieldPoint Properties was $500,000, which was paid~~Transactions. Under certain other conditions, we are eligible to obtain the return of the Deposit upon termination of the Purchase Agreements.
The transactions contemplated by the Purchase Agreements are expected to close in ~~cash. We entered into a $375 thousand secured promissory note with APEG Energy II LP, which entity Patrick E. Duke, a director~~the first quarter of 2022, subject to satisfaction of customary closing conditions, including approval of the transactions contemplated by the Purchase Agreements, and the issuance of the PSA Shares, by the shareholders of the Company, ~~has shared~~as required by applicable Nasdaq Capital Market rules.
The conditions to the closing of the Purchase Agreements may not be met, and such Closing may not ultimately occur on the terms set forth in the Purchase Agreements, if at all.
Upon closing of the transactions, the Sellers will own approximately 80.98% of the Company’s then outstanding shares of common stock, and will effectively control the Company, and as such, the Transactions will result in a change of control of the Company.
The Purchase Agreements contemplated the Company and the Sellers entering into various other agreements at Closing, including a registration rights agreement, nominating and voting ~~power~~agreement and ~~shared investment power over (“APEG II”) (the “Note”). The Note accrues interest~~contribution agreement. Pursuant to the Purchase Agreements, at ~~10% per annum~~Closing, the Company will be required to (i) increase the size of the Company’s Board of Directors to seven members (with one of the current members of the Board resigning) and ~~matures on September 24, 2021. The Note is secured~~appoint two (2) individuals, each appointed by the ~~Company’s wholly owned subsidiary, Energy One’s oil and natural gas producing properties. In~~Sellers under the ~~event that the Note is repaid prior~~Purchase Agreements, as well as Duane H. King, to the ~~maturity date there is a prepayment penalty~~Board of ~~10%~~Directors of the ~~principal amount~~Company; and (ii) appoint John A. Weinzierl as Chairman; Ryan L. Smith as Chief Executive Officer and Chief Financial Officer; and Donald Kessel as Chief Operating Officer of the ~~Note less accrued interest. At September 30, 2020, APEG II held approximately 40%~~Company. The nominating and voting agreement, will provide for all the Sellers to agree to appoint and nominate each of their designated director nominees to the Board of Directors, with each Seller having the right, for so long as they hold at least 15% of the Company’s outstanding common ~~stock.~~
~~On October 2, 2020, we closed a registered direct offering~~stock, to appoint two members to the Board of 315,810 shares of our common stock, at $5.25 per share, for aggregate gross proceeds of approximately $1,658,000, before deducting the placement agent fees and related offering expenses. The net proceeds from the offering were approximately $1,523,500. The Offering was the result of a Securities Purchase Agreement (the “Purchase Agreement”) the Company had entered into on September 30, 2020 with certain institutional investors (the “Purchasers”) The Purchase Agreement contains customary representations and warranties and agreementsDirectors of the Company and the ~~Purchasers, and customary indemnification rights and obligations~~right, so long as they hold at least 5% (but less than 15%) of the ~~parties. Until~~Company’s outstanding common stock, to appoint one person each to the ~~twelve month anniversary~~Board of Directors. In connection with the entry into the Purchase Agreements, the Company and the Seller entered into a customary escrow agreement in connection with the Deposits.
On October 25, 2021, each of the Sellers and the Company entered into a First Amendment to Purchase and Sale Agreements (the “First Amendment”), which amended each of the Purchase Agreements to update the terms of the exhibits thereto which set forth a form of nominating and voting agreement (the “Voting Agreement”) to be entered into at the closing of the ~~Offering,~~transactions contemplated by the Purchase Agreements. As originally contemplated, the Voting Agreement was to provide for all the Sellers to agree to appoint and nominate each of their designated director nominees to the Board of Directors of the Company, ~~is required to offer~~with each Seller having the right, for so long as they held at least 5% of the ~~Purchasers~~Company’s outstanding common stock, to appoint two members to the Board of Directors of the Company. The First Amendment modified the Voting Agreement to provide that each Seller has the right to ~~participate in an amount up~~appoint two members to ~~50%~~the Board of ~~any subsequent financing transaction undertaken by the Company at the offering price~~Directors, as long as such Seller holds 15% or more of the ~~subsequent financing transaction. Additionally, each~~Company’s common stock, and thereafter, such Seller has the right to appoint one member to the Board of Directors, as long as such Seller holds 5% or more of the ~~officers~~Company’s common stock, in order for such Voting Agreement to comply with Nasdaq rules and ~~directors of the Company pursuant~~requirements. The Voting Agreement is contemplated to ~~lock-up agreements agreed not to sell or transfer any of the Company securities which they hold, subject to certain exceptions, during the 180-day period following the closing of the Offering.~~
~~On November 9, 2020, U.S. Energy Corp., through its wholly-owned subsidiary New Horizon~~be entered into a Purchase and Sale Agreement (“PSA”) to acquire certain assets from Newbridge Resources LLC (“Newbridge”). The transaction, which is subject to customary closing conditions, is expected to close duringat or around the fourth quarter of 2020. The assets include acreage and operated producing properties in Liberty County, Texas (the “Newbridge Properties”). The Newbridge Properties also consist of approximately 680 net acres located primarily in Liberty County, Texas which are 100% held by production, and which average a 100% working interest and 86% net revenue interest. The consideration payable by the Company for the Newbridge Properties will consist of $250,000 in shares of U.S. Energy restricted common stock (the “Acquisition” and the “Purchase Price”). The number of shares issuable will equal the Purchase Price divided by the lesser (i.e., the calculation which results in the greatest number of shares) of (a) the closing sales price of U.S. Energy’s common stock as traded on The NASDAQ Capital Market on the day prior to the closing; and (b) the volume weighted average price of U.S. Energy’s common stock, as traded on The NASDAQ Capital Market, for the 15 trading days immediately prior to the closing date of the PSA (as applicable, the “Newbridge Shares”). The effective date of the Acquisition was November 1, 2020.closing.
On November 16, 2020, we closed an underwritten offering of an aggregate of 1,150,000 shares of our common stock at a public offering price of $3.00 per share. The net proceeds to the Company from the offering, after deducting the underwriting discount, the underwriters’ fees and expenses and our estimated offering expenses, are expected to be approximately $3.0 million. We intend to use the net proceeds from this offering for general corporate purposes, capital expenditures, working capital, and potential acquisitions of oil and gas properties.
Impacts of COVID-19 Pandemic and Effect on Economic Environment
In early March 2020, there was ~~a global~~an outbreak of a novel strain of coronavirus, which causes the infectious disease known as COVID-19, ~~that has~~which resulted in a drastic decline in global demand of certain mineral and energy products including crude oil. As a result of the lower demand caused by the COVID-19 pandemic and the oversupply of crude oil, spot and future prices of crude oil fell to historic lows during the second quarter of 2020, ~~and remain depressed.~~which remained depressed for the majority of 2020. Operators in North Dakota’s Williston Basin responded by significantly decreasing drilling and completion activity and shutting in or curtailing production from a significant number of producing ~~wells. Operators decisions on these matters are changing rapidly and it is difficult to predict the future effects on the Company’s business.~~wells, all of which have since come back online. Lower oil and natural gas prices not only decrease our revenues, but an extended decline in oil or gas prices may materially and adversely affect our future business, financial position, cash flows, results of operations, liquidity, ability to finance planned capital expenditures and the oil and natural gas reserves that we can economically produce.
Additionally, the outbreak of COVID-19 and decreases in commodity prices resulting from oversupply, government-imposed travel restrictions, and other constraints on economic activity ~~have~~ caused a significant decrease in the demand for oil and has created disruptions and volatility in the global marketplace for oil and gas ~~beginning in~~during the first quarter of 2020, and continuing through most of 2020, which negatively affected our results of operations and cash ~~flows. These conditions have persisted throughout the second and third quarters and continue to negatively affect our results of operations and cash flows.~~flows during 2020. While demand and commodity prices have ~~shown signs of recovery, they~~recently recovered and are ~~not~~ back to pre-pandemic levels, ~~and~~our financial results may continue to be depressed in future quarters. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including the duration and scope of the pandemic; governmental, business, and individuals’ actions in response to the pandemic; the availability and efficacy of vaccines and boosters, and the willingness of individuals to obtain such vaccines and boosters; future virus mutations; and the impact on economic activity including the possibility of recession or financial market instability. These factors may adversely impact the supply and demand for oil and gas and our ability to produce and transport oil and gas and perform operations at and on our properties. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including investments, receivables, and forward-looking guidance.
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Table of Contents
At September 30, 2020, we performed an impairment review resulting in the Company recording an additional ceiling test write down of $1.1 million due to the effect lower crude oil prices had on the value of its proved reserves. In the calculation of the ceiling test as of September 30, 2020, the Company used $43.40 per barrel for oil and $1.97 per mcf for natural gas (as further adjusted for differentials related to 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%. These prices represent the average of first day of the month prices for oil and natural gas for each month in the twelve-month period ended September 30, 2020. If depressed prices for crude oil continue, it is likely that the Company will experience additional ceiling test write-downs in 2020 and 2021 as higher prices from earlier quarters in 2019 and the first quarter of 2020 used in the calculation of the average price are replaced with the more recent lower priced quarters.
~~Legal Proceedings~~
In July 2020, we received a request for arbitration from our former Chief Executive Officer claiming that we breached his employment agreement. We intend to vigorously contest this matter and believe these claims are without merit. The employment agreement requires that any disputes be submitted to binding arbitration. We have insurance for these types of claims and have reported the request for arbitration to our insurance carrier. We believe it is probable that we will incur future defense costs in this matter and have accrued $100 thousand at September 30, 2020, representing the amount of the Company’s responsibility for costs under the insurance policy.
APEG II, which entity Patrick E. Duke, a director of the Company has shared voting power and shared investment power over, is our largest shareholder holding approximately 40% of our outstanding common stock, and its general partner, APEG Energy II, GP (together with APEG II, “APEG”), were involved in litigation with us and our former Chief Executive Officer, David Veltri. On July 29, 2020 APEG filed a Notice of Voluntary Dismissal in their lawsuit against us and Mr. Veltri and on July 30, 2020, we filed a Notice of Voluntary Dismissal in our Lawsuit against Mr. Veltri. The litigation was formally dismissed in August 2020. For more detail regarding such litigation, please see the sections ~~Litigation—APEG II Litigation~~ ~~and~~ ~~–Litigation with Former Chief Executive Officer~~ in ~~Note 9~~—~~Commitments, Contingencies and Related-Party Transactions~~ ~~in the Notes to the Unaudited Condensed Consolidated Financial Statements included in~~ ~~Part I-Financial Information- Item 1. Financial Statements~~ ~~of this report.~~
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 ~~2019~~2020 Annual Report on Form 10-K filed with the SEC on March 26, 2021 (the “2020 Annual Report”) and under “Note 1. Organization and Significant Accounting Policies” in the notes to consolidated financial statements included in our 2020 Annual Report.
The Company’s results of operations and operating cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of our exposure to price volatility from producing crude oil, we entered into a crude oil derivative swap contract during the nine months ended September 30, ~~2020.~~2021, to protect against price declines in future periods. The Company does not designate commodity derivative contracts as a cash flow hedges and therefore the contract does not qualify for hedge accounting. Changes in fair value of the swap contract are recorded in the unaudited condensed consolidated statement of operations. The fair value of the swap contract is recorded as either an asset or a liability on the unaudited condensed consolidated balance sheet.
Recently Issued Accounting Standards
~~Please refer to the section entitled~~ ~~Recently Adopted Accounting Pronouncements~~ ~~under~~ ~~Note 1 – Organization, Operations and Significant Accounting Policies~~ ~~in the Notes to the Unaudited~~We do not believe that any recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our Condensed Consolidated Financial Statements ~~included in Part I, Item 1 of this report for additional information on recently adopted accounting standards.~~or related disclosures.
28
Results of Operations
Comparison of our Statements of Operations for the Three Months Ended September 30, ~~2020~~2021 and ~~2019~~2020
For the three months ended September 30, ~~2020,~~2021, we recorded a net ~~loss~~income of ~~$1,713~~$81 thousand as compared to a net loss of ~~$281~~$1,713 thousand for the three months ended September 30, ~~2019.~~2020. In the following sections we discuss our revenue, operating expenses and non-operating income for the three months ended September 30, ~~2020~~2021, compared to the three months ended September 30, ~~2019.~~2020.
Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the three months ended September 30, ~~2020~~2021 and ~~2019 (dollars in thousands, except average sales prices):~~2020:

Three months ended
September 30,
Change Three months ended
September 30, Change
2020 2019 Amount Percent 2021 2020 Amount Percent
(in thousands except average prices and production quantities)
Revenue:
Oil $ 362 $ 1,571 $ (1,209 ) -77 % $ 1,593 $ 362 $ 1,231 340 %
Gas 39 62 (23 ) -37 % 191 39 152 390 %

Total $ 401 $ 1,633 $ (1,232 ) -75 % $ 1,784 $ 401 $ 1,383 345 %

Production quantities:
Oil (Bbls) 10,354 28,266 (17,912 ) -63 % 24,349 10,354 13,995 135 %
Gas (Mcf) 18,591 37,978 (19,387 ) -51 % 53,462 18,591 34,871 188 %
BOE 13,453 34,596 (21,143 ) -61 % 33,260 13,453 19,807 147 %
BOE per day 362 146 216 148 %

Average sales prices:
Oil (Bbls) $ 34.96 $ 55.58 $ (20.62 ) -37 % $ 65.42 $ 34.96 $ 30.46 87 %
Gas (Mcf) 2.10 1.63 0.47 29 % 3.57 2.10 1.47 70 %
BOE $ 29.81 $ 47.20 $ (17.39 ) -37 % $ 53.64 $ 29.81 $ 23.83 80 %
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Table of Contents
The ~~decrease~~increase in our oil and gas revenue of ~~$1,232~~$1,383 thousand for the three months ended September 30, ~~2020~~2021, as compared to the three months ended September 30, ~~2019~~2020, was due to ~~a decrease~~an increase in oil production of ~~63%~~135% and ~~decrease~~an increase in the realized price received for our oil production of ~~37%~~87%. The ~~decline~~increase in oil prices is primarily due to ~~reduced~~stronger demand for crude oil on a global basis ~~beginning~~as the world recovered from government mandated lockdowns which began in mid-March 2020 ~~as a result~~in order to reduce the spread of the COVID-19 pandemic. In addition, our oil price differential widened, particularly for our North Dakota properties where the differential from WTI increased to $6.40 per barrel as compared to $4.37 per barrel in the comparable period in 2019. The ~~decrease~~increase in oil production volumes is primarily the result of ~~operators shutting~~the acquisitions of properties we completed during 2020, and our efforts in the first nine months of 2021 to return idle wells to production. During the three months ended September 30, 2021, we produced 10,745 Bbls of oil from properties which were acquired in late 2020. In addition, during the three months ended September 30, 2021, we experienced production onincreases in our legacy non-operated properties, primarily in North Dakota ~~properties~~ as ~~a response to low oil prices and~~ the ~~production declines from our South Texas wells drilled~~result of workovers in ~~late 2018 and early 2019.~~which we participated.
For the three months ended September 30, ~~2020,~~2021, we produced ~~13,453~~33,260 BOE, or an average of ~~146~~362 BOE per day, as compared to ~~34,596~~13,453 BOE or ~~376~~146 BOE per day during the comparable period in ~~2019. This decrease~~2020. During the three months ended September 30, 2021, our BOE production mix was ~~mainly attributable~~73% oil and 27% natural gas compared to ~~North Dakota operators shutting~~77% oil and 23% gas in the comparable period of 2020. The increase in gas as a percentage of total production asincreased due to the ~~result~~acquisition of ~~low prices and~~non-operated gas producing properties in the ~~production declines from the previously mentioned South Texas wells.~~second half of 2020.
Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the three months ended September 30, ~~2020~~2021 and ~~2019 (dollars in thousands):~~2020:

Three months ended
September 30,
Change Three months ended
September 30, Change
2020 2019 Amount Percent 2021 2020 Amount Percent
(in thousands)
Production taxes $ 30 $ 107 $ (77 ) -72 % $ 133 $ 30 $ 103 343 %
Lease operating expense 290 410 (120 ) -29 % 586 290 296 102 %

Total $ 320 $ 517 $ (197 ) -38 % $ 719 $ 320 $ 399 125 %
For the three months ended September 30, ~~2020,~~2021, production taxes ~~decreased~~increased by ~~$77~~$103 thousand, or ~~72%~~343%, compared to the comparable period in ~~2019.~~2020. This ~~decrease~~increase was ~~primarily~~ attributable to the ~~decrease~~increase in oil ~~revenues.~~revenues of 340% from the three months ended September 30, 2020. For the three months ended September 30, ~~2020,~~2021, lease operating expenses ~~decreased~~increased by ~~$120~~$296 thousand when compared to the three months ended September 30, ~~2019~~2020, due to ~~cost cutting measures enacted due to low commodity prices~~increased activity from operated properties acquired after September 30, 2020 and ~~reduced field activity.~~participating in workovers of our non-operated properties during the period.
Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) rate for the three months ended September 30, ~~2020~~2021 was $3.93 per BOE ($151 thousand in aggregate) compared to $5.32 per BOE ~~compared to $5.04 per BOE~~($81 thousand in aggregate) for the three months ended September 30, ~~2019. For the most recently completed quarter, our depletion rate was impacted by the reduction in reserve quantities, primarily due to pricing revisions.~~2020. Our DD&A rate can fluctuate because of 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.
Impairment of Oil and Natural Gas Properties. ~~For~~During the three months ended September 30, 2020, we recorded an impairment of $1.1 million due to the net capitalized cost of our oil and natural gas properties exceeding the full cost ceiling limitation. ~~For~~Specifically, at September 30, 2020, we performed an impairment review resulting in the Company recording a ceiling test write down of $1.1 million for the three months ended September 30, ~~2019~~2020, due to the effect lower crude oil prices had on the value of its proved reserves. In the calculation of the ceiling test as of September 30, 2020, the Company used $43.40 per barrel for oil and $1.97 per Mcf for natural gas (as further adjusted for differentials related to 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%. These prices represent the average of first day of the month prices for oil and natural gas for each month in the twelve-month period ended September 30, 2020. During the three months ended September 30, 2021, there was no such full cost ceiling limitation.
General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the three months ended September 30, ~~2020~~2021 and ~~2019 (dollars in thousands):~~2020:

Three months ended
September 30,
Change Three months ended
September 30, Change
2020 2019 Amount Percent 2021 2020 Amount Percent
(in thousands)
Compensation and benefits, including directors $ 365 $ 177 $ 188 106 %
Compensation and benefits, including directors’ fees $ 421 $ 365 $ 56 15 %
Professional fees, insurance and other 242 812 (570 ) -70 % 265 242 23 10 %

Total $ 607 $ 989 $ (382 ) -39 % $ 686 $ 607 $ 79 13 %
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Table of Contents
General and administrative expenses ~~decreased~~increased by ~~$382~~$79 thousand during the three-month period ended September 30, ~~2020~~2021, as compared to the prior year ~~period primarily due to a reduction in professional fees.~~period. The ~~decrease~~increase was primarily attributable to ~~a reduction in legal fees~~an increase of ~~$239 thousand. In the prior year period, we incurred legal costs of $104~~$56 thousand ~~primarily as a result of the APEG II litigation. See~~ ~~Litigation—APEG II Litigation~~ ~~and~~ ~~–Litigation with Former Chief Executive Officer~~ in ~~Note 9~~—~~Commitments, Contingencies and Related-Party Transactions~~ in the Notes to the Financial Statements included in Part I, Item 1 of this report. Accounting fees also decreased $324 thousand for the three months ended September 30, 2020 when compared to the prior year period due to fees related to the forensic accounting investigation in the prior year period. These decreases in professional fees were partially offset by an increase in compensation and benefits, ~~of $188 thousand~~including directors’ fees, due to the ~~amortization~~hiring in April 2021 of ~~stock-based compensation awards granted to our Chief Executive Officer and members~~a Vice President of ~~our Board in January 2020 and an incentive-based compensation accrual of $150 thousand.~~Operations.
30
Non-Operating Income (Expense). Presented below is a comparison of our non-operating income (expense) for the three months ended September 30, ~~2020~~2021 and ~~2019 (dollars in thousands):~~2020:

Three months ended
September 30,
Change Three months ended
September 30, Change
2020 2019 Amount Percent 2021 2020 Amount Percent
(in thousands)
Loss on real estate held for sale $ (141 ) $ - $ (141 ) (100 )%
Commodity derivative loss (25 ) - (25 ) (100 )%
Loss on marketable equity securities $ (32 ) $ (240 ) 208 87 % (6 ) (32 ) 26 81 %
Warrant revaluation gain (loss) 55 (23 ) 78 339 %
Warrant revaluation gain 27 55 (28 ) (51 )%
Rental property loss, net (5 ) (16 ) 11 69 % (15 ) (5 ) (10 ) (200 )%
Other income 26 50 (24 ) -48 %
Other 12 26 (14 ) (54 )%
Interest, net (1 ) 1 (2 ) -200 % 1 (1 ) 2 200 %

Total other income (expense) $ 43 $ (228 ) $ 271 119 % $ (147 ) $ 43 $ (190 ) (442 )%
~~For~~During the three months ended September 30, ~~2020~~2021, we ~~recognized an unrealized loss on marketable equity securities~~completed the sale of $32 thousand as compared to a loss of $240 thousand for the comparable period of 2019. The unrealized losses represent the decline in value of our investment in Anfield. In July 2020, we sold 1,210,455 shares of Anfield, representing one-third of our total investment, for proceeds of $45 thousand. We expect to sell the remaining shares in the fourth quarter of 2020 and the first quarter of 2021.
For the three months ended September 30, 2020, we recognized a warrant revaluation gain of $55 thousand as compared to a loss of $23 thousand during the three months ending September 30, 2019. The gain for the three months ended September 30, 2020 was attributable to a decrease in the warrant liability primarily due to an exercise of 50,000 of the 100,000 outstanding warrants during the period, which was partially offset by an increase in the liability due to an increase in the value of our common stock at September 30, 2020.
~~For the three months ending September 30, 2020 we recognized a loss on rental property. The loss represents rental expenses in excess of rental income related to~~ our Riverton, Wyoming ~~office building.~~building and the related parcel of land, which was classified as held for sale. We ~~have entered into~~received net proceeds of $440 thousand and incurred an ~~agreement with a large national commercial broker to sell~~additional loss on the ~~office building.~~
~~In 2018, due to uncertainty~~sale of collection, we wrote off a receivable of $374 thousand related to a refundable deposit for a transaction that was not completed. For the three months ended September 30, 2020, we recovered $25 thousand of the receivable. For the three months ended September 30, 2019 we recovered $50 thousand related to the recovery of the same receivable. The total amounts of the receivable collected through September 30, 2020 is $250$141 thousand. See Note ~~7-Write-Off of Deposit~~3—Real Estate Held for Sale in the ~~notes~~Notes to the condensed consolidated financial statements included in Part I, Item 1 of this report.
For the three months ended September 30, 2021, we recognized a loss on our fixed-price swap commodity derivative contract of $25 thousand. In March 2021, we entered into the swap contract to fix the price of 100 barrels of crude oil at $61.90 per barrel through December 31, 2021. The fixed-price swap contract represented approximately 38% of our oil production for the three months ended September 30, 2021. The loss is related to a change in the fair value of the fixed-price swap contract due to the increase in the price of crude oil during the period. See Note 8 Commodity Derivative in the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this report.
For the three months ended September 30, 2021, we recognized an unrealized loss on marketable equity securities of $6 thousand as compared to a loss of $32 thousand for the comparable period of 2020. The unrealized loss represents the decrease in value of our investment in Anfield Energy Inc. See Note 15. Fair Value Measurements—Marketable Equity Securities in the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this report.
For the three months ended September 30, 2021, we recognized a warrant revaluation gain of $27 thousand as compared to a gain of $55 thousand during the three months ending September 30, 2020. The gain for the three months ended September 30, 2021 and 2021 were attributable to a decreases in the value of our common stock during the periods. See Note 15. Fair Value Measurements—Warrant Valuation in the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this report.
For the three months ending September 30, 2021, we recognized a loss on rental property. The loss represents rental expense in excess of rental income related to our Riverton, Wyoming office building, which was sold on August 31, 2021.
Interest, net represents the interest ~~related to our insurance premium finance note net of interest~~income earned on our cash ~~balances~~deposits in excess of the interest expense on ~~deposit at our bank.~~the short-term financing of insurance premiums for certain policies.
Comparison of our Statements of Operations for the Nine Months Ended September 30, ~~2020~~2021 and ~~2019~~2020
~~For~~During the nine months ended September 30, ~~2020,~~2021, we recorded a net loss of ~~$5,670~~$288 thousand as compared to a net loss of ~~$246~~$5,670 thousand for the nine months ended September 30, ~~2019.~~2020. In the following sections we discuss our revenue, operating expenses and non-operating income for the nine months ended September 30, ~~2020~~2021, compared to the nine months ended September 30, ~~2019.~~2020.
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Table of Contents
Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the nine months ended September 30, 2021 and 2020 ~~and 2019 (dollars in~~(in thousands, except average sales ~~prices)~~prices and production quantities):

Nine months ended
September 30,
Change Nine months ended
September 30, Change
2020 2019 Amount Percent 2021 2020 Amount Percent

Revenue:
Oil $ 1,418 $ 4,746 $ (3,328 ) -70 % $ 4,232 $ 1,418 $ 2,814 198 %
Gas 95 320 (225 ) -70 % 419 95 324 341 %

Total $ 1,513 $ 5,066 $ (3,553 ) -70 % $ 4,651 $ 1,513 $ 3,138 207 %

Production quantities:
Oil (Bbls) 42,369 83,006 (40,637 ) -49 % 70,298 42,369 27,929 66 %
Gas (Mcf) 72,025 151,381 (79,356 ) -52 %
Gas (Mcfe) 125,629 72,025 53,604 74 %
BOE 54,373 108,236 (53,863 ) -50 % 91,236 54,373 36,863 68 %
BOE per day 334 209 125 60 %

Average sales prices:
Oil (Bbls) $ 33.47 $ 57.18 $ (23.71 ) -42 % $ 60.20 $ 33.47 $ 26.73 80 %
Gas (Mcf) 1.31 2.11 (0.80 ) -38 %
Gas (Mcfe) 3.34 1.31 2.03 155 %
BOE $ 27.82 $ 46.81 $ (18.99 ) -41 % $ 50.98 $ 27.82 $ 23.16 83 %
The ~~decrease~~increase in our oil and gas revenue of ~~$3,553~~$3,138 thousand for the nine months ended September 30, ~~2020~~2021 as compared to the nine months ended September 30, ~~2019~~2020 was due primarily to ~~a decrease~~an increase in oil production of ~~49%~~66% and ~~decrease~~an increase in the realized price received for our oil production of ~~42%~~80%. The ~~decline~~increase in oil prices is primarily due to ~~reduced~~stronger demand for crude oil on a global basis ~~beginning~~as the world recovered from government mandated lockdowns which began in mid-March 2020, ~~as a~~to reduce the spread of COVID-19. The increase in oil production volumes is primarily the result of the ~~COVID-19 pandemic. In addition,~~acquisitions of properties we completed during 2020, and our ~~oil price differential widened significantly, particularly for our North Dakota properties where the differential from WTI increased to $7.08 per barrel as compared to $4.37 per barrel~~efforts in the ~~comparable period in 2019. The decrease in~~first nine months of 2021 to return idle wells to production. During the nine months ended September 30, 2021, we produced 27,620 Bbls of oil ~~production quantities is the result of operators shutting in production in our North Dakota~~from properties ~~beginning in April 2020 as a response to low oil prices, and the production declines from our South Texas wells, which were drilled~~acquired in late ~~2018 and early 2019.~~2020.
For the nine months ended September 30, ~~2020,~~2021, we produced ~~54,373~~91,236 BOE, or an average of ~~198~~334 BOE per day, as compared to ~~108,236~~54,373 BOE or ~~396~~209 BOE per day during the comparable period in ~~2019.~~2020. This ~~decrease~~increase was mainly attributable to the acquisition of properties in late 2020 and the return to production of idle wells during the nine months ended September 30, 2021. In addition, during the nine months ended September 30, 2020, certain North Dakota operators ~~shutting~~temporarily shut-in production in ~~production as the result of~~response to low ~~prices and the production declines from the previously mentioned South Texas wells.~~commodity prices.
Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 (dollars in thousands):

Nine months ended
September 30,
Change Nine months ended
September 30, Change
2020 2019 Amount Percent 2021 2020 Amount Percent

Production taxes $ 110 $ 323 $ (213 ) -66 % $ 343 $ 110 $ 233 212 %
Lease operating expense 1,032 1,348 (316 ) -23 % 1,631 1,032 599 58 %

Total $ 1,142 $ 1,671 $ (529 ) -32 % $ 1,974 $ 1,142 $ 832 73 %
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Table of Contents
For the nine months ended September 30, ~~2020,~~2021, production taxes ~~decreased~~increased by ~~$213~~$233 thousand, or ~~66%~~212%, as compared to the comparable period in ~~2019.~~2020. This ~~decrease~~increase was primarily attributable to the ~~decrease~~increase in oil revenues, which ~~decreased~~increased by ~~70%~~198% compared to ~~2019. For~~2020. During the nine months ended September 30, ~~2020,~~2021, lease operating expenses ~~decreased~~increased by ~~$316~~$599 thousand when compared to the nine months ended September 30, ~~2019~~2020, as ~~the~~a result of ~~operators shutting in production, cost cutting measures enacted due to low commodity prices and reduced field activity.~~the acquisition of properties during 2020.
Depreciation, Depletion and Amortization. Our DD&A rate for the nine months ended September 30, ~~2020~~2021 was $3.90 per BOE ($415 thousand in aggregate) compared to $5.05 per BOE ~~compared to $4.90 per BOE~~($291 thousand in aggregate) for the nine months ended September 30, ~~2019.~~2020. For the nine months ended September 30, 2020, our depletion rate was impacted by a reclassification of $2.1 million of our unevaluated properties and the reduction in reserve quantities at September 30, 2020, primarily due to pricing revisions. Our DD&A rate can fluctuate as a result of 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.
Impairment of Oil and Natural Gas Properties. ~~For~~During the nine months ended September 30, 2020, we recorded an impairment of $2.9 million due to the net capitalized cost of our oil and natural gas properties exceeding the full cost ceiling limitation. ~~For the nine months ended~~Specifically, at September 30, ~~2019, there was no such full cost~~2020, we performed an impairment review resulting in the Company recording a ceiling ~~limitation.~~
~~General and Administrative Expenses.~~ ~~Presented below is a comparison~~test write down of ~~our general and administrative expenses~~$2.9 million for the nine months ended September 30, ~~2020 and 2019 (dollars in thousands):~~

Nine months ended
September 30,
Change
2020 2019 Amount Percent

Compensation and benefits, including directors $ 884 $ 655 $ 229 35 %
Professional fees, insurance and other 662 2,434 (1,772 ) -73 %
Bad debt expense - 28 (28 ) 100 %

Total $ 1,546 $ 3,117 $ (1,571 ) -50 %
~~General and administrative expenses decreased by $1,571 thousand for the nine-month period ended September 30, 2020 as compared~~2021, due to the nine-month period ended September 30, 2019 due to a reduction in professional fees. The decrease was primarily attributable to a reduction in legal fees of $1,421 thousand, including the removal of $250 thousand for litigation settlement accruals. The APEG litigation was dismissed in August 2020, without us incurring certain estimated legal costs. Also included in legal fees during the period is an accrual of $100 thousand for a claim from a former employee that will go to arbitration. In the prior year’s period, we incurred legal costs of $1,281 thousand, primarily as the result of the APEG II litigation. See ~~Litigation—APEG II Litigation~~ ~~and~~ ~~–Litigation with Former Chief Executive Officer~~ in ~~Note 9~~—~~Commitments, Contingencies and Related-Party Transactions~~ in the Notes to the Financial Statements included in Part I, Item 1 of this report. Compensation and benefits increased $229 thousand due to amortization of stock-based compensation awards granted to our Chief Executive Officer and directors in January 2020 of $170 thousand and an accrual for 2020 bonuses of $225 thousand. These increases were partially offset by a reduction in salary expense due toeffect lower ~~headcount.~~
~~Non-Operating Income (Expense).~~ ~~Presented below is a comparison of our non-operating income (expense) for the nine months ended September 30, 2020 and 2019 (dollars in thousands):~~

Nine months ended
September 30,
Change
2020 2019 Amount Percent

Loss on real estate held for sale (651 ) - (651 ) - %
Impairment of real estate (403 ) - (403 ) - %
Unrealized loss on marketable equity securities (153 ) (235 ) 82 35 %
Warrant revaluation (loss) gain (65 ) 219 (284 ) -130 %
Rental property loss (40 ) (39 ) (1 ) -3 %
Other income 54 100 (46 ) -46 %
Interest, net (3 ) (19 ) 16 84 %

Total other income (expense) $ (1,261 ) $ 26 $ (1,287 ) -4950, %
During the nine months ended September 30, 2020 we reclassified our Riverton, Wyoming office building and the related parcel of land to real estate held for sale. Concurrent with the reclassification we recognized a $651 thousand loss to adjust the carrying amount of the land and building to its estimated fair value of $725 thousand. See ~~Note 3~~—~~Real Estate Held for Sale~~ ~~in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this report.~~
During the nine months ended September 30, 2020 we recorded impairment of $403 thousand related to three land parcels totalling 13.85 acres that we own in Riverton, Wyoming, which are not currently offered for sale.
~~During the nine months ended September 30, 2020 we recognized an unrealized loss~~crude oil prices had on marketable equity securities of $153 thousand as compared to an unrealized loss of $235 thousand for the comparable period of 2019. The unrealized loss represents the decline in value of our investment in Anfield Energy Inc. In July 2020, we sold 1,210,455 shares, representing one-third of our total investment for proceeds of $45 thousand. We expect to sell the remaining shares in the fourth quarter of 2020.
During the nine months ended September 30, 2020, we recognized a warrant revaluation loss of $65 thousand as compared to a gain of $219 thousand during the nine months ended September 30, 2019. The loss during the nine months ended September 30, 2020 was attributable to an increase in the warrant liability, primarily as a result of the increase in the value of ~~our common stock, which was partially offset an exercise of 50,000 of the 100,000 outstanding warrants during the period.~~
In 2018, due to uncertainty of collection, we wrote off a receivable of $374 thousand related to a refundable deposit for a transaction that was not completed. During the nine months ended September 30, 2020, we recovered $50 thousand of the receivable. During the nine months ended September 30, 2019 we recovered $100 thousand related to the recovery of the same receivable. The total amounts of the receivable collected through September 30, 2020 is $250 thousand. See ~~Note 7-Write-Off of Deposit~~ ~~in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this report.~~
Interest, net decreased by $16 thousand during the nine months ended September 30, 2020 compared to the comparable period in 2019. The decrease was attributable to the reduction in the principal balance of our credit facility, which was repaid in full on March 1, 2019.
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~~Non-GAAP Financial Measures- Adjusted EBITDAX~~
Adjusted EBITDAX represents income (loss) from continuing operations as further modified to eliminate depreciation, depletion accretion and amortization, impairment, stock-based compensation expense, unrealized gains and loss on marketable equity securities, gains and losses on warrant revaluation, unrealized losses on the reclassification of real estate to held for sale, interest expense net of interest income, and other items set forth in the table below. Adjusted EBITDAX excludes certain items that we believe affect the comparability of operating results and items that are generally one-time in nature or whose timing and/or amount cannot be reasonably estimated.
Adjusted EBITDAX is a non-GAAP measure that is presented because we believe it provides useful additional information to investors and analysts as a performance measure. In addition, adjusted EBITDAX is widely used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the oil and natural gas exploration and production industry, and many investors use the published research of industry research analysts in making investment decisions. Adjusted EBITDAX should not be considered in isolation or as a substitute for net income (loss), income (loss) from operations, net cash provided by operating activities, or profitability or liquidity measures prepared under GAAP. Because adjusted EBITDAX excludes some, but not all items that affect net income (loss) and may vary among companies, the adjusted EBITDAX amounts presented may not be comparable to similar metrics of other companies.
~~The following table provides reconciliations of income (loss) from continuing operations to adjusted EBITDAX for the nine months ended September 30, 2020 and 2019:~~
Nine months ended
September 30,
2020 2019
(in thousands)
Loss from continuing operations (GAAP) $ (5,670 ) $ (246 )
Depreciation, depletion, accretion and amortization 291 550
Impairment of oil and gas properties 2,943 -
Loss on real estate held for sale 651 -
Impairment of real estate 403 -
Loss on marketable equity securities 153 235
Loss (gain) on warrant revaluation 65 (219 )
Stock-based compensation expense 170 35
Interest, net 3 19

Adjusted EBITDAX (Non-GAAP) $ (991 ) $ 374
~~Liquidity and Capital Resources~~
~~The following table sets forth certain measures of our liquidity as of September 30, 2020 and December 31, 2019:~~
September 30, 2020
December 31,
2019
Change
(in thousands)
Cash and equivalents $ 1,039 $ 1,532 $ (493 )
Working capital ⁽¹⁾ 802 1,470 (668 )
Total assets 9,606 13,467 (3,195 )
Total shareholders’ equity 4,598 9,210 (3,793 )

Select Ratios:
Current ratio ⁽²⁾ 1.5 to 1.0 2.2 to 1.0
⁽¹⁾ ~~Working capital is computed by subtracting total current liabilities from total current assets.~~
⁽²⁾ ~~The current ratio is computed by dividing total current assets by total current liabilities.~~
As of September 30, 2020, we had working capital of $802 thousand compared to working capital of $1,470 thousand as of December 31, 2019, a decrease of $668 thousand. This decrease was primarily attributable to cash used in operating activities of $549 thousand and cash payments of $183 thousand for the acquisition of New Horizon, including repayment of its credit facility and the cash payment of $529 thousand for the acquisition of certain assets from FieldPoint which were partially offset by the reclassification of real estate held for sale of $725 thousand.
As of September 30, 2020, we had cash and cash equivalents of $1,039 thousand and accounts payable and accrued liabilities of $1,145 thousand. As of November 5, 2020, we had cash and cash equivalents of approximately $2,415 thousand and accounts payable and accrued liabilities of approximately $690 thousand.
In early March 2020, the New York Mercantile Exchange (NYMEX) WTI crude oil price decreased significantly and although it has increased to $38.49 per barrel as of November 5, 2020, it remained historically low for much of the three-month period ended September 30, 2020. Currently, we do not have any commodity derivative contracts in place to mitigate the effect of lower commodity prices on our revenues. Lower oil and natural gas prices not only decrease our revenues, but an extended decline in oil or gas prices may materially and adversely affect our future business, financial position, cash flows, results of operations, liquidity, ability to finance planned capital expenditures and the oil and natural gas reserves that we can economically produce.
Lower crude prices could also affect the realizability of our oil and gas properties. For the three and nine months ended September 30, 2020 we recorded ceiling test write-downs of $1.1 million and 2.9 million, respectively.proved reserves. In the calculation of the ceiling test as of September 30, 2020, wethe Company used $43.40 per barrel for oil and $1.97 per ~~mcf~~Mcf for natural gas (as further adjusted for differentials related to property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of ~~our~~the Company’s producing properties. The discount factor used was 10%. These prices represent the average of first day of the month prices for oil and natural gas for each month in the twelve-month period ended September 30, 2020. ~~If depressed prices~~During the nine months ended September 30, 2021, there was no such full cost ceiling limitation.
General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for ~~crude oil continue, it is likely that~~ the ~~Company will experience additional ceiling test write-downs~~nine months ended September 30, 2021 and 2020 (dollars in ~~2020~~thousands):
Nine months ended
September 30, Change
2021 2020 Amount Percent

Compensation and benefits, including directors $ 1,170 $ 884 $ 286 32 %
Professional fees, insurance and other 1,063 662 401 61 %

Total $ 2,233 $ 1,546 $ 687 44 %
General and administrative expenses increased by $687 thousand during the nine-month period ended September 30, 2021, as ~~higher prices from earlier quarters~~compared to the nine-month period ended September 30, 2020, due to an increase in ~~2019 and the first quarter~~professional fees of ~~2020, used~~$401 thousand. The increase was primarily attributable to an increase in legal fees. On March 4, 2021, we issued 90,846 shares of unregistered common stock valued at $406 thousand to APEG in reimbursement of legal costs they incurred in the ~~calculation of the average price, are replaced with the more recent lower priced quarters.~~
~~The Company owns a 14-acre tract~~Texas and Colorado Litigation, which was dismissed in ~~Riverton, Wyoming with a two-story, 30,400 square foot office building. The building served as the Company’s corporate headquarters until 2015~~2020. See Note 9-Commitments, Contingencies and is currently being leased to government agencies and other non-affiliated companies. In 2020, the Company made the decision to sell the land and building and began a process to determine the price at which it would list the property for sale. The Company determined that the realizable value of the building was Related Party Transactions-APEG II Litigation in the ~~range of $700 thousand to $900 thousand. A special committee of the Board was formed to evaluate the sales process and ultimately recommend any action~~Notes to the ~~Board regarding any potential action.~~ condensed consolidated financial statements included in Part I, Item 1 of this report. Compensation and benefits increased $286 thousand due to the hiring in April 2021 of a new Vice President of Operations and an increase in the amortization of stock-based compensation due to awards granted to our officers and directors in January and February 2021.
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Non-Operating Income (Expense). Presented below is a comparison of our non-operating income (expense) for the nine months ended September 30, 2021 and 2020 (dollars in thousands):
Nine months ended
September 30, Change
2021 2020 Amount Percent

Loss on real estate held for sale (141 ) (1,054 ) 913 87 %
Derivative loss (235 ) - (235 ) (100 )%
Unrealized gain (loss) on marketable equity securities 67 (153 ) 220 143 %
Warrant revaluation gain (loss) 2 (65 ) 67 103 %
Rental property income (loss) 8 (40 ) 48 120 %
Other income 39 54 (15 ) (28 )%
Interest, net (57 ) (3 ) (54 ) (1,800 )%

Total other income (expense) $ (317 ) $ (1,261 ) $ 944 75 %
During the ~~three~~nine months ended September 30, 2020, we reclassified our Riverton, Wyoming building and the related parcel of land to real estate held for sale. Concurrent with the reclassification we recognized a $1,054 thousand loss to adjust the carrying amount of the land and building to its estimated fair value of $975 thousand. In August 2021, we completed the sale of the building and related land for cash proceeds of $440 thousand and recorded an additional loss of $141 thousand. The building and related land was included in assets held for sale on the condensed consolidated balance sheet with an estimated fair value of $725 thousand. See Note 3—Real Estate Held for Sale in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this report.
For the nine months ended September 30, 2021, we recognized a loss on our fixed-price swap commodity derivative contract of $235 thousand. In March 2021, we entered into the swap contract to fix the price of 100 barrels of crude oil at $61.90 per barrel from March 1, 2021 through December 31, 2021. The fixed-price swap contract represented approximately 39% of our oil production through September 30, 2021. The loss is related to a change in the fair value of the fixed-price swap contract due to the increase in the price of crude oil during the period. See Note 8 Commodity Derivative in the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this report.
During the nine months ended September 30, 2021, we recognized an ~~agreement with a large national commercial broker~~unrealized gain on marketable equity securities of $67 thousand as compared to ~~sell~~an unrealized loss of $153 thousand for the ~~building.~~
~~In July 2020, we sold 1,210,455 shares~~comparable period of 2020. The unrealized gain represents the increase in value of our investment in Anfield Energy Inc. ~~and received proceeds~~See Note 15. Fair Value Measurements—Marketable Equity Securities in the Notes to the condensed consolidated financial statements included in Part I, Item 1 of ~~approximately $45 thousand.~~this report.
During the nine months ended September 30, 2021, we recognized a warrant revaluation gain of $2 thousand as compared to a loss of $65 thousand during the nine months ended September 30, 2020. The ~~sale represented one-third~~gain during the nine months ended September 30, 2021 was attributable to a decrease in the warrant liability, primarily as a result of the decrease in the value of our ~~total investment in Anfield. We intend~~common stock, compared to ~~dispose of~~ the ~~remaining shares~~loss during the ~~fourth fiscal quarter of 2020.~~
On October 2, 2020 the Company closed on a registered direct offering (the “Offering”) of 315,810 shares (the “Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”), at $5.25 per share, for aggregate gross proceeds of approximately $1,658,000, before deducting the placement agent fees and related offering expenses. The net proceeds from the offering were approximately $1,523,500. ~~The Offering was the result of a Securities Purchase Agreement (the “Purchase Agreement”) the Company had entered into on~~nine months ended September 30, 2020, ~~with certain institutional investors (the “Purchasers”) The Purchase Agreement contains customary representations and warranties and agreements~~primarily as a result of the ~~Company and~~increase in the ~~Purchasers, and customary indemnification rights and obligations~~value of our common stock.
During the nine months ended September 30, 2021, we recognized a gain in other income of $25 thousand from the partial recovery of a deposit written off in 2018. For the nine months ended September 30, 2020, we recognized a $50 thousand gain related to the recovery of the parties. Until the twelve month anniversary of the closing of the Offering, the Company is required to offer each of the Purchasers the right to participate in an amount up to 50% of any subsequent financing transaction undertakensame deposit.
Interest, net increased by the Company at the offering price of the subsequent financing transaction. Additionally, each of the officers and directors of the Company pursuant to lock-up agreements agreed not to sell or transfer any of the Company securities which they hold, subject to certain exceptions,$54 thousand during the ~~180-day~~nine months ended September 30, 2021 compared to the comparable period in 2020. On March 4, 2021, we entered into a Debt Conversion Agreement with APEG II. Pursuant to the agreement we repaid the note and accrued interest to the maturity date by issuing 97,962 shares. See Note 7-Debt in the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this report.
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Liquidity and Capital Resources
The following table sets forth certain measures of our liquidity as of September 30, 2021 and December 31, 2020:
September 30,
2021 December 31,
2020 Change
(in thousands)
Cash and equivalents $ 6,955 $ 2,854 $ 4,101
Working capital ⁽¹⁾ 7,396 2,499 4,897
Total assets 17,597 12,363 5,234
Total shareholders’ equity 14,678 8,567 6,111

Select Ratios:
Current ratio ⁽²⁾ 6.2 to 1.0 2.2 to 1.0
⁽¹⁾ Working capital is computed by subtracting total current liabilities from total current assets.
⁽²⁾ The current ratio is computed by dividing total current assets by total current liabilities.
As of September 30, 2021, we had working capital of $7.4 million compared to working capital of $2.5 million as of December 31, 2020, an increase of $4.9 million. This increase was primarily attributable to the ~~closing~~sale of ~~the Offering.~~
~~On November 16, 2020, we closed an underwritten offering of an aggregate of 1,150,000~~1,131,600 shares of our common stock in an underwritten offering at a public offering price of ~~$3.00~~$5.10 per share. The net proceeds to ~~the Company from the offering,~~us after deducting the underwriting ~~discount, the underwriters’ fees~~discounts, commissions and ~~expenses and our estimated~~ offering expenses, ~~are expected to be~~were approximately ~~$3.0~~$5.3 million. ~~We intend to use the net proceeds from this offering for general corporate purposes, capital expenditures, working capital,~~
As of September 30, 2021, we had cash and ~~potential acquisitions~~cash equivalents of ~~oil~~$7.0 million and ~~gas properties~~accounts payable and accrued liabilities of $0.7 million. As of November 10, 2021, we had cash and cash equivalents of approximately $5.3 million and accounts payable and accrued liabilities of approximately $0.7 million.
If we have needs for ~~financing~~additional capital in ~~2020,~~the fourth quarter of 2021, alternatives that we will consider would potentially include entering into a reserve-based credit facility, selling all or a partial interest in certain of our non-operated oil and natural gas assets, selling our marketable equity securities, issuing additional shares of our common stock for cash or as consideration for acquisitions, and other alternatives, as we determine how to best fund our capital programs and meet our financial ~~objectives.~~obligations.
Cash Flows
The following table summarizes our cash flows for the nine months ended September 30, ~~2020~~2021 and ~~2019:~~2020:
Nine months ended
September 30, Nine months ended
September 30,
2020 2019 Change 2021 2020 Change
(in thousands) (in thousands)
Net cash provided by (used in):
Operating activities $ (549 ) $ 297 $ (846 ) $ (19 ) $ (549 ) $ 530
Investing activities (665 ) (122 ) (543 ) (1,002 ) (665 ) (337 )
Financing activities 721 (1,130 ) 1,851 5,122 721 4,401
Operating Activities. Cash used in operating activities for the nine months ended September 30, ~~2020~~2021 was ~~$549~~$19 thousand as compared to cash ~~provided by~~used in operating activities ~~$297~~$549 thousand for the comparable period in ~~2019.~~2020. The ~~increase~~decrease in cash used in operating activities is mainly attributable to ~~the decrease~~increases in cash receipts for revenues, ~~of $3,553 thousand,~~ which ~~was~~were partially offset by ~~a decrease~~an increase in ~~lease~~payments for operating ~~expenses, production taxes~~ and general and administrative ~~costs of $2,100 thousand.~~expenses.
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Investing Activities. Cash used in investing activities for the nine months ended September 30, ~~2019~~2021, was ~~$665~~$1,002 thousand as compared to ~~$122~~$665 thousand for the comparable period in ~~2019.~~2020. The primary use of cash in our investing activities for the nine months ended September 30, 2021, was the capital expenditures of oil and gas properties related to returning idle wells to production in our Liberty County, Texas field. The comparable number in 2020 ~~was~~mainly represents the cash paid for the acquisition of New Horizon and FieldPoint for net cash of ~~$122 thousand and the acquisition of certain assets from FieldPoint for $529~~$651 thousand.
Financing Activities. Cash provided by financing activities for the nine months ended September 30, ~~2020~~2021 was ~~$721 thousand~~$5.1 million as compared to cash ~~used in~~provided by financing activities of ~~$1,130~~$721 thousand for the comparable period in ~~2019.~~2020. The cash provided by financing activities during the nine months ended September 30, ~~2020~~2021, was primarily attributable to cash received from the sale of 1.1 million shares of common stock of $5.3 million. The comparable number in ~~connection with~~2020 represents proceeds from the related party secured note payable of $375 thousand and proceeds from the exercise of warrants of $565 thousand, ~~and proceeds from the secured note payable of $375 thousand. These~~which were partially offset by cash used to repay the ~~repayment~~credit facility $61 thousand and payments on the premium finance note payable of $157 ~~thousand on a note payable to finance insurance premiums and repayment of the New Horizon credit facility of $61~~ thousand. For the nine months ended September 30, 2019 cash used in financing activities included repayment of $937 thousand outstanding under our credit facility and $193 thousand for the repayment of our note payable to finance insurance premiums.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We evaluate our transactions to determine if any variable interest entities exist. If it is determined that we are the primary beneficiary of a variable interest entity, that entity will be consolidated in our consolidated financial statements. We have not been involved in any unconsolidated SPE transactions during the periods covered by this report.
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.~~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 ~~information~~to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the ~~required timeframe, as~~time periods specified in the Commission’s rules ~~of the SEC.~~and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
~~Management, with the participation~~As of ~~our Chief Executive Officer and Chief Financial Officer, evaluated~~September 30, 2021, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures ~~(as~~as defined in Rules 13a-15(e) and 15d-15(e) ~~under~~of the Exchange ~~Act) as~~Act. Based on the results of the ~~end of~~evaluation, the ~~period covered by this report. Based on such evaluation, our~~ Chief Executive Officer and Chief Financial Officer ~~determined~~concluded that our disclosure controls ~~and procedures~~ were not effective as of September 30, 2021 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.
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, ~~2019,~~2020, filed with the SEC on March ~~30, 2020,~~26, 2021, 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, ~~2019~~2020 and is in the process of remediating such material weaknesses as of September 30, ~~2020:~~2021:
● We had inadequate segregation of duties as a result of limited accounting staff and resources, which ~~has impacted~~may impact our ability to prevent or detect material errors in our consolidated financial ~~statements and to properly implement new accounting standards.~~statements.
● We had inadequate ~~controls over physical and~~segregation of duties related to logical access to our ~~information technology systems.~~accounting systems, which may affect our ability to prevent or detect material errors in the recorded transactions.
Changes in Internal Control over Financial Reporting.
There have been no changes to our system of internal control over financial reporting during the three months ended September 30, ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, our system of controls over financial reporting.
We have designed a remediation plan to strengthen our internal control over financial reporting and have taken, and will continue to take, remediation steps to address the material weaknesses described above. We will also continue to take steps to further improve our disclosure controls and procedures and our internal controls over financial reporting.
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.
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Table of Contents
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
In July 2020, the Company received a request for arbitration from its former Chief Executive Officer claiming that the Company breached his employment agreement. The agreement requires that any disputesInformation regarding legal proceedings can be submitted to binding arbitration. The Company has insurance for these types of claims and has reported the request for arbitration to its insurance carrier. The Company believes it is probable that it will incur future costsfound in ~~this matter and has accrued $100 thousand at (September) June 30, 2020, representing the amount of the Company’s responsibility for costs under the policy. See~~ ~~Arbitration of Employment Claim~~ in Note 9—~~Commitments,~~-Commitments, Contingencies and Related-Party ~~Transactions~~Transactions-Litigation in the Notes to the ~~Financial Statements~~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, ~~2019,~~2020, as filed with the SEC on March ~~30, 2020,~~26, 2021, under the heading “Item 1A. Risk Factors”, which are incorporated by reference herein, except as discussed below, and investors should review the risks provided in the Annual Report and below, 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~~“Item 1A. Risk ~~Factors”~~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.
The following risk factors relating to the proposed Purchase and Purchase Agreements supplement the risk factors included in the Annual Report.
Risks Relating to ~~Our Business:~~the Purchase
U.S. Energy and the Sellers may fail to complete the Purchase if certain required conditions, many of which are outside the Company’s control, are not satisfied.
Completion of the Purchase is subject to various customary closing conditions, including, but not limited to:
● approval and adoption of the Purchase Agreements by U.S. Energy stockholders,
● the absence of any order of injunction prohibiting the consummation of the Purchase,
● no material adverse effect occurring with respect to U.S. Energy or the Acquired Assets,
● certain exceptions and materiality and materiality standards, the accuracy of the representations and warranties of the parties to the Purchase Agreements, and
● performance and compliance by the parties to the Purchase Agreements in all material respects with agreements and covenants contained in the Purchase Agreements.
Many of the conditions to completion of the Purchase are not within either U.S. Energy’s or the Sellers’s control, and none of the parties can predict when, or if, these conditions will be satisfied. If any of these conditions are not satisfied or waived prior to February 28, 2022, it is possible that the Purchase Agreements may be terminated. Although U.S. Energy and the Sellers are committed to closing the Purchase, they may not be able to satisfy or receive the various closing conditions and obtain the necessary approvals in a timely fashion or at all.
~~Our success~~
The Purchase will require significant management resources.
The implementation of the Purchase will require significant time, attention, and resources of our senior management and others within U.S. Energy, potentially diverting their attention from the conduct of U.S. Energy’s business.
Failure to complete the Purchase could negatively impact U.S. Energy’s stock price and future businesses and financial results.
If the Purchase is ~~dependent~~not completed, U.S. Energy will be subject to several risks, including the following:
● U.S. Energy and its subsidiaries may experience negative reactions from their suppliers, vendors, landlords, joint venture partners and other business partners;
● certain damages for which U.S. Energy may be liable to Sellers under the terms and conditions of the Purchase Agreements, including termination fees in certain circumstances;
● payment for certain costs relating to the Purchase, whether or not the Purchase is completed, such as legal, accounting, financial advisor and printing fees;
● negative reactions from the financial markets, including declines in the price of U.S. Energy’s stock due to the fact that current prices may reflect a market assumption that the Purchase will be completed;
● diverted attention of Company management to the Purchase rather than to U.S. Energy’s operations and pursuit of other opportunities that could have been beneficial to it; and
● litigation related to any failure to complete the Purchase or related to any enforcement proceeding commenced against U.S. Energy to perform its obligations pursuant to the Purchase Agreements.
If the Purchase is not completed, the risks described above may materialize and they may have a material adverse effect on U.S. Energy’s results of operations, cash flows, financial position and stock price.
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U.S. Energy cannot participate in a superior acquisition unless U.S. Energy forfeits the Deposits to the Sellers.
In connection with the entry into the Purchase Agreements, each Seller and U.S. Energy entered into an escrow agreement, pursuant to which U.S. Energy placed $500,000 into escrow ($1.5 million in aggregate when including all three Purchase Agreement deposits). If a Seller is entitled to terminate its applicable Purchase Agreement pursuant to a material breach by us of any applicable provision of the applicable Purchase Agreement (subject to certain cure rights), or an update to a disclosure schedule by us prior to closing would constitute a material adverse effect on our operations or assets, or if (i) our Board of Directors changes their recommendation to stockholders to approve the Purchase Agreements and the terms thereof, (ii) we breach or fail to perform in any material respect our obligations to file and mail a proxy statement or hold a special meeting, (iii) the required stockholder approval of the Purchase Agreements and issuance of the PSA Shares is not obtained, or the additional listing approval of such shares on the Nasdaq Capital Market has not been obtained, by February 28, 2022, or (iv) any of the other Purchase Agreements are terminated prior to closing, such Seller has the right, as their sole and exclusive remedy and in lieu of all other damages, to terminate the agreement, receive the applicable Deposit as liquidated damages and be entitled to reimbursement from us of all of the Sellers’ reasonable out-of-pocket expenses incurred in connection with the contemplated transaction.
These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of U.S. Energy’s stock or assets from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the Purchase. Similarly, these provisions might result in a potential third-party acquirer proposing to pay a lower price to U.S. Energy stockholders than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances. If the Purchase Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Purchase.
Completion of the Purchase may trigger change in control or other provisions in certain agreements to which U.S. Energy is a party.
The completion of the Purchase may trigger change in control or other provisions in certain agreements to which U.S. Energy is a party. If U.S. Energy is unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the applicable agreements, including in some instances potentially terminating the agreements or seeking monetary damages. Even if U.S. Energy is able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to the combined business. For example, certain of the Company’s outstanding warrant agreements include provisions which allow such holders the right, following a fundamental transaction, which includes where a person or group of persons acquires more than 50% of the outstanding shares of common stock of the Company, subject to certain requirements, and which may include the Purchase, to require the Company to repurchase such securities at their Black Scholes values, which repurchase amounts may be significant and may be significantly greater than the exercise prices of ~~oil and natural gas. Low oil~~such warrants, even if they are out-of-the-money. As a result, in the event such warrant holders do not consent to the Purchase, exercise their warrants before the date of closing of the Purchase, or ~~natural gas prices~~otherwise agree to modify such warrants, the Company may be forced to expend significant resources repurchasing such warrants and the ~~substantial volatility in these prices~~funding for such repurchases may not be available on favorable terms.
U.S. Energy will be subject to various uncertainties and contractual restrictions while the Purchase is pending that could adversely affect its business and ~~are expected to continue to adversely affect, our~~operations.
Uncertainty about the effect of the Purchase on joint venture partners and other persons may have an adverse effect on U.S. Energy’s business, financial condition and results of operations. It is possible that some joint venture partners and other persons with whom U.S. Energy has business relationships may delay or defer certain business decisions, or might decide to seek to terminate, change or renegotiate their relationship with U.S. Energy as a result of the Purchase, which could negatively affect U.S. Energy’s financial results, as well as the market price of U.S. Energy stock, regardless of whether the Purchase is completed.
Additionally, under the terms of the Purchase Agreements, U.S. Energy is subject to certain restrictions on the conduct of its business prior to completing the Purchase. The Purchase Agreements subject U.S. Energy to restrictions on its business activities prior to the closing date. The Purchase Agreements obligate U.S. Energy to carry on its business in the ordinary course consistent with past practice. These restrictions could prevent U.S. Energy from pursuing certain business opportunities that arise prior to the closing date and are outside the ordinary course of business. Such limitations could negatively affect U.S. Energy’s businesses and operations prior to the completion of the Purchase or termination of the Purchase Agreements.
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U.S. Energy may have difficulty attracting, motivating and retaining executives and other employees in light of the Purchase.
Uncertainty about the effect of the Purchase on U.S. Energy’s employees may impair its ability to attract, retain and motivate personnel until the Purchase is completed. Employee retention may be particularly challenging during the pendency of the Purchase, as employees may feel uncertain about their future roles with the combined organization. In addition, U.S. Energy may have to provide additional compensation in order to retain employees. If employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to become employees of the combined company, the combined company’s ability to realize the anticipated benefits of the Purchase could be adversely affected.
The number of shares of common stock issuable pursuant to the Purchase Agreements will cause significant dilution to existing stockholders and a change of control.
The initial base purchase price for the Acquired Assets is (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 in liabilities, and 6,790,524 shares of common stock, as well as the novation or liquidation of certain hedges which have a mark to market loss of approximately $3.4 million as of the date of this filing, 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 will be $1.25 million in cash, 19,905,736 shares of common stock, and the assumption of $3.3 million in debt, as well as the novation or liquidation of certain hedges which had a mark to market loss of approximately $3.4 million as of the date of this filing. As such, following the completion of the Purchase, the Sellers will own approximately 80.8% of our outstanding common stock and the current owners of U.S. Energy common stock will own approximately 19.2% of our outstanding common stock (without taking into account shares of common stock issuable upon exercise of options, and assuming no additional shares of common stock are issued prior to Closing). As a result, the total shares of common stock issuable upon closing of the Purchase will cause significant dilution to existing stockholders, and result in a change of control of U.S. Energy.
The consummation of the Purchase will result in a change of control of the Company.
After the completion of the Purchase, the current stockholders of U.S. Energy will own a significantly smaller percentage of the combined company than their ownership of U.S. Energy prior to the Purchase. At the effective time of the Purchase, U.S. Energy’s equity holders will collectively own approximately 19.2% of the outstanding shares of the combined company, based on the current number of U.S. Energy shares outstanding. This calculation does not contemplate outstanding U.S. Energy option awards, which will remain outstanding under their existing terms following the Purchase. In addition, the seven-member board of directors of U.S. Energy following the closing will initially be comprised of three members selected by the Sellers, with the further right, subject to certain requirements, for each Seller to appoint one other member to the Board, which could bring such Seller appointed board membership up to six members of a then ten person Board of Directors, thereby giving the Sellers full control over the board. Consequently, U.S. Energy’s stockholders will be able to exercise less influence over the management and policies of U.S. Energy following the closing than they currently exercise over the management and policies of U.S. Energy. The Sellers will therefore exercise control in determining the outcome of all corporate transactions or other matters, including the election and removal of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a further change in control. Any investors who purchase shares or hold shares prior to the Purchase will be minority stockholders and as such will have little to no say in the direction of the Company and the election of directors. Additionally, it will be impossible for investors to remove the directors appointed by the Sellers for so long as the contemplated nominating and voting agreement which will be entered into at closing remains in place, which will mean they will remain in control of who serves as officers of the Company as well as whether any changes are made in the Board of Directors. An owner of the Company’s securities should keep in mind that your shares, and your voting of such shares, will likely have little effect on the outcome of corporate decisions. The interests of the Sellers may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other stockholders. The Sellers may be subject to future conflicts of interest which negatively affect the interests of other stockholders of the Company.
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U.S. Energy may fail to realize the anticipated benefits of the Purchase and may assume unanticipated liabilities.
The success of the Purchase will depend on, among other things, U.S. Energy’s ability to combine U.S. Energy and the Acquired Assets in a manner that realizes the various benefits, growth opportunities and synergies identified by combining U.S. Energy’s assets with the Acquired Assets. Achieving the anticipated benefits of the Purchase is subject to a number of risks and uncertainties. U.S. Energy will as a result of the Purchase, assume all of the liabilities associated with the acquired properties, subject to certain indemnification rights described in the Purchase Agreements and environmental, title and other problems could reduce the value of the properties to U.S. Energy. Also, it is uncertain whether U.S. Energy’s and the acquired properties and assets can be integrated in an efficient and effective manner.
In addition, the integration of operations following the Purchase will require the attention of U.S. Energy’s management and other personnel, which may distract their attention from U.S. Energy’s day-to-day business and operations and ~~our ability~~prevent U.S. Energy from realizing benefits from other opportunities. Completing the integration process may be more expensive than anticipated, and U.S. Energy cannot assure you that it will be able to ~~meet our capital expenditure requirements~~affect the integration of these operations smoothly or efficiently or that the anticipated benefits of the Purchase will be achieved.
Combining the businesses of U.S. Energy and the Acquired Assets may be more difficult, costly and time-consuming than expected, which may adversely affect the combined company’s results and negatively affect the value of U.S. Energy’s common stock following the Purchase.
U.S. Energy entered into the Purchase Agreements because it believes that combining the Acquired Assets and its current operations will produce benefits and cost savings. However, following the completion of the Purchase, U.S. Energy’s management will need to integrate U.S. Energy’s and the Acquired Assets respective operations. The combination will be a complex, costly and time-consuming process, and the management of the combined company may face significant challenges in implementing such integration, many of which may be beyond the control of management, including, without limitation:
● latent impacts resulting from the diversion of U.S. Energy’s management team’s attention from ongoing business concerns as a result of management’s attention to the Purchase and integration of the Acquired Assets;
● difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects;
● the possibility of faulty assumptions underlying expectations regarding the integration process, including with respect to the intended tax-efficient transactions;

● unanticipated issues in integrating accounting, information technology, communications programs, financial ~~obligations.~~procedures and operations, and other systems, procedures and policies;

● difficulties in managing a larger combined company, addressing differences in business culture and retaining key personnel;

~~The prices we receive for our oil~~

● difficulties in integrating new employees, and natural gas heavily influence our revenue, profitability, cash flow available for capital expenditures, access to capital, and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minormanaging a larger workforce;

● unanticipated changes in ~~supply~~applicable laws and ~~demand. Historically,~~regulations;

● managing tax costs or inefficiencies associated with integrating the ~~commodities market~~operations of the combined company;

● coordinating geographically separate organizations; and

● unforeseen expenses or delays associated with the Purchase.

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Some of these factors will be outside of the control of U.S. Energy, and any one of them could result in increased costs and diversion of management’s time and energy, as well as decreases in the amount of expected revenue that could materially impact the business, financial conditions and results of operations of the combined company. The integration process and other disruptions resulting from the Purchase may also adversely affect the combined company’s relationships with employees, suppliers, customers, distributors, licensors and others with whom U.S. Energy has ~~been volatile. For example,~~business or other dealings, and difficulties in integrating the ~~price~~businesses of crude oil has experienced significant volatility over the last five years. We believe that prices for natural gas experienced declines of similar magnitude. An extended period of continued lower oil prices, or additional price declines, will have further adverse effects on us. The prices we receive for our production,U.S. Energy and the Acquired Assets could harm the reputation of the combined company.

If the combined company is not able to successfully integrate the assets and operations of U.S. Energy and the Acquired Assets in an efficient, cost-effective and timely manner, the anticipated benefits and cost savings of the Purchase may not be realized fully, or at all, or may take longer to realize than expected, and the value of U.S. Energy’s common stock, the revenues, levels of ~~our production, will continue~~expenses and results of operations may be affected adversely. If the combined company is not able to ~~depend on numerous factors,~~adequately address integration challenges, the combined company may be unable to successfully integrate the assets and operations of U.S. Energy and the Acquired Assets or realize the anticipated benefits of the Purchase.

Significant costs are expected to be incurred in connection with the consummation of the Purchase and integration of the Company and the Acquired Assets into a single business, including legal, accounting, financial advisory and other costs.

If the ~~following:~~Purchase is consummated, the Company expects to incur significant costs in connection with integrating the Acquired Assets with the Company’s current operations and personnel. These costs may include costs for:

	●	~~the domestic and foreign supply of oil and natural gas;~~employee redeployment, relocation or severance;
	●	~~the domestic and foreign demand for oil and natural gas;~~
	●	~~the prices~~integration of information systems; and ~~availability of competitors’ supplies of oil and natural gas;~~
	●	~~the actions of the Organization of Petroleum Exporting Countries, or OPEC, and state-controlled oil companies relating to oil price and production controls;~~
	●	~~the price and quantity of foreign imports of oil and natural gas;~~
	●	~~the impact of U.S. dollar exchange rates on oil and natural gas prices;~~
	●	~~domestic and foreign governmental regulations and taxes;~~
	●	~~speculative trading of oil and natural gas futures contracts;~~
	●	~~localized supply and demand fundamentals, including the availability, proximity, and capacity of gathering and transportation systems for natural gas;~~
	●	~~the availability of refining capacity;~~
	●	~~the prices and availability of alternative fuel sources;~~
	●	~~the threat, or perceived threat, or results, of viral pandemics, for example, as experienced with the COVID-19 pandemic in 2020;~~
	●	~~weather conditions and natural disasters;~~
	●	~~political conditions in or affecting oil and natural gas producing regions, including the Middle East and South America;~~
	●	~~the continued threat of terrorism and the impact of military action and civil unrest;~~
	●	~~public pressure on, and legislative and regulatory interest within, federal, state, and local governments to stop, significantly limit, or regulate hydraulic fracturing activities;~~
	●	~~the level of global oil and natural gas inventories and exploration and production activity;~~
	●	~~authorization of exports from the United States of liquefied natural gas;~~
	●	~~the impact of energy conservation efforts;~~
	●	~~technological advances affecting energy consumption; and~~
	●	~~overall worldwide economic conditions.~~employee training.

~~Declines~~

In addition, the Company expects to incur a number of non-recurring costs associated with combining the operations of the Company and the Acquired Assets, which cannot be estimated accurately at this time. The Company will also incur transaction fees and other costs related to the Purchase. Additional unanticipated costs may be incurred in ~~oil~~the integration of the Company’s operations and the Acquired Assets. Although the Company expects that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the Company’s operations with the Acquired Assets, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or ~~natural gas prices~~at all. There can be no assurance that the Company will ~~reduce not only our revenue but also~~be successful in these integration efforts.

In connection with the Purchase, U.S. Energy may be required to take write-downs or write-offs, restructuring and impairment or other charges; and/or may lose the ability to use certain net operating losses, that could negatively affect the business, assets, liabilities, prospects, outlook, financial condition and results of operations of U.S. Energy.

Although U.S. Energy has conducted extensive due diligence in connection with the Purchase, U.S. Energy cannot assure you that this diligence revealed all material issues that may be present, that it would be possible to uncover all material issues through a customary amount of ~~oil~~due diligence, or that factors outside of U.S. Energy’s control will not later arise. Even if U.S. Energy’s due diligence successfully identifies certain risks, unexpected risks may arise and ~~natural gas that we,~~previously known risks may materialize in a manner not consistent with U.S. Energy’s preliminary risk analysis. Further, as a result of the Purchase, purchase accounting, and the ~~operators~~proposed operation of ~~our properties, can produce economically. Should natural gas~~U.S. Energy going forward, U.S. Energy may be required to take write-offs or ~~oil prices remain at current levels for an extended period, our wells, including our non-operated wells,~~write-downs, restructuring and impairment or other charges. As a result, U.S. Energy may be forced to ~~be shut-in,~~write-down or write-off assets, restructure its operations, or incur impairment or other charges that could negatively affect the business, assets, liabilities, prospects, outlook, financial condition and ~~we may be forced to delay some~~results of operations of U.S. Energy, any or all of ~~our exploration and development plans for our prospects and cease exploration~~which could have a material adverse effect on the value of U.S. Energy’s securities.

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In addition, in general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to annual limitations on its ability to use its pre-change net operating losses (NOLs) or ~~development activities on certain prospects due~~other tax attributes to offset future taxable income or reduce taxes. The issuance of the PSA Shares to the ~~anticipated unfavorable economics from such activities. As a~~Sellers and other changes in our stock ownership may result ~~we will have~~in an ownership change within the meaning of Section 382 of the Code; accordingly, our pre-Closing NOLs may be subject to ~~make substantial downward adjustments to our estimated proved reserves, each of which would~~limitation under Section 382. This may have a material adverse effect on our ~~business, financial condition,~~future operating results.

U.S. Energy may become involved in securities class action litigation that could divert management’s attention and ~~results of operations. Due to~~harm the lower demand caused by the COVID-19 pandemic and the oversupply of crude oil, spot and futures prices of crude oil fell to historic lows during the second quarter of 2020 and remain depressed. Operators in North Dakota’s Williston Basin responded by significantly decreasing drilling and completion activity and shutting in or curtailing production from a significant number of producing wells.

The operators of our Williston Basin wells recently temporarily shut-in such wells to preserve oil and gas reserves for production during a more favorable oil price environment, and while such wells have resumed production, our wells may again be shut-in, should market conditions significantly deteriorate.

In early March 2020, there was a global outbreak of COVID-19 that has resulted in a drastic decline in global demand of certain mineral and energy products including crude oil. As a result of the lower demand caused by the COVID-19 pandemic and the oversupply of crude oil, spot and future prices of crude oil fell to historic lows during the second quarter of 2020 and remain depressed. Operators in North Dakota’s Williston Basin (including the operators of our wells) responded by significantly decreasing drilling and completion activity and shutting in or curtailing production from a significant number of producing wells. Operators decisions on these matters are changing rapidly and it is difficult to predict the future effects on the Company’s business. Lower oil and natural gas prices not only decrease our revenues, but an extended decline in oil or gas prices may materially and adversely affect our future business, financial position, cash flows, results of operations, liquidity, ability to finance planned capital expenditures and the oil and natural gas reserves that we can economically produce. While our producing wells are shut-in, we do not generate revenues from such wells, and would need to use our cash on hand and funds we receive from borrowings and the sale of equity in order to pay our operating expenses. A continued period of low-priced oil may make it non-economical for our wells to operate, which would have a material adverse effect on our operating results and the value of our assets. We cannot estimate the future price of oil, and as such cannot estimate, when our wells may again be shut-in by their operators.

~~Our~~combined company’s business, and ~~operations have been adversely affected by, and are expected to continue to be adversely affected by, the COVID-19 pandemic, and may be adversely affected by other similar outbreaks.~~

As a result of the COVID-19 pandemic or other adverse public health developments, including voluntary and mandatory quarantines, travel restrictions, and other restrictions, our operations, and those of our subcontractors, customers, and suppliers, have and are anticipated to continue to experience delays or disruptions and temporary suspensions of operations. In addition, our financial condition and results of operations have been and are likely to continue to be adversely affected by the COVID-19 pandemic.

The timeline and potential magnitude of the COVID-19 outbreak are currently unknown. The continuation or amplification of this virus could continue to more broadly affect the United States and global economy, including our business and operations, and the demand for oil and gas. For example, the outbreak of coronavirus has resulted in a widespread health crisis that will adversely affect the economies and financial markets of many countries, resulting in an economic downturn that will affect our operating results. Other contagious diseases in the human population could have similar adverse effects. In addition, the effects of COVID-19 and concerns regarding its global spread have recently negatively impacted the domestic and international demand for crude oil and natural gas, which has contributed to price volatility, impacted the price we receive for oil and natural gas, and has materially and adversely affected the demand for and marketability of our production, and is anticipated to continue to adversely affect the same for the foreseeable future. As the potential impact from COVID-19 is difficult to predict, the extent to which it will negatively affect our operating results, or the duration of any potential business disruption is uncertain. The magnitude and duration of any impact will depend on future developments and new information that may emerge regarding the severity and duration of COVID-19 and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, have already negatively affected our first, second, and third-quarter results of operations, due both to decreases in the overall market prices of oil and gas and well shut-ins (provided that all wells previously shut-in during the second quarter are now back online) and are anticipated to have a negative impact on multiple future quarters’ results as well, as a result of various factors including potential further decreases in, or prolonged periods of decreased pricing in, oil and gas, potential further well shut-ins and the possible continued decline in global demand for oil and gas.

~~We may be forced to write-down material portions of our assets if low oil prices continue.~~

The COVID-19 pandemic has led to an economic downturn resulting in lower oil prices, and the Company could be required to shut-in some or all of its production in the future should market conditions deteriorate. A continued period of low prices may force us to incur material write-downs of our oil and natural gas properties, which could have a material effect on the value of our properties, and cause the value of our securities to decline in value. For example, at June 30, 2020, we performed an impairment review resulting in the Company recording a ceiling test write-down of $1.8 million due to the effect lower crude oil prices had on the value of its proved reserves. In addition, the Company evaluated its unevaluated property at June 30, 2020, and recorded a reclassification to the depletable base of the full cost pool of $2.1 million related to a reduction in value of certain of its acreage. In the calculation of the ceiling test as of June 30, 2020, the Company used $47.17 per barrel for oil and $2.07 per thousand cubic feet (mcf) for natural gas (as further adjusted for differentials related to 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%. These prices represent the average of the first day of the month prices for oil and natural gas for each month in the twelve-month period ended June 30, 2020. At September 30, 2020, we performed another impairment review resulting in the Company recording a ceiling test write down of $1.1 million due to the effect lower crude oil prices had on the value of its proved reserves. In the calculation of the ceiling test as of September 30, 2020, the Company used $43.40 per barrel for oil and $1.97 per mcf for natural gas (as further adjusted for differentials related to 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%. These prices represent the average of first day of the month prices for oil and natural gas for each month in the twelve-month period ended September 30, 2020. If depressed prices for crude oil continue, it is likely that the Company will experience additional ceiling test write-downs in 2020 and 2021 as higher prices from earlier quarters in 2019 and the first quarter of 2020, used in the calculation of the average price, are replaced with the more recent lower priced quarters.

Declining general economic, business or industry conditions have, and will continue to have, a material adverse effect on our results of operations, liquidity, and financial condition, and are expected to continue having a material adverse effect for the foreseeable future.

Concerns over global economic conditions, the threat of pandemic diseases and the results thereof, energy costs, geopolitical issues, inflation, the availability and cost of credit, the United States mortgage market, and a declining real estate market in the United States have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatile prices of oil and natural gas, declining business and consumer confidence, and increased unemployment, have precipitated an economic slowdown and a recession, which could expand to a global depression. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices and are expected to continue having a material adverse effect for the foreseeable future. If the economic climate in the United States or abroad continues to deteriorate, demand for petroleum products could diminish, which could further impact the price at which we can sell our oil, natural gas, and natural gas liquids, affect the ability of our vendors, suppliers and customers to continue operations, and ultimately adversely impact our results of operations, liquidity and financial condition to a greater extent than it has already.

~~Downturns and volatility in global economies and commodity and credit markets have materially adversely affected our business, results of operations, and financial condition.~~

Our results of operations are materially adversely affected by the conditions of the global economies and the credit, commodities, and stock markets. Among other things, we have recently been adversely impacted, and anticipate to continue to be adversely impacted, due to a global reduction in consumer demand for oil and gas, and consumer lack of access to sufficient capital to continue to operate their businesses or to operate them at prior levels. In addition, a decline in consumer confidence or changing patterns in the availability and use of disposable income by consumers can negatively affect the demand for oil and gas and as a result our results of operations.

We may purchase oil and natural gas properties with liabilities or risks that we did not know about or that we did not assess correctly, and, as a result, we could be subject to liabilities that could adversely affect our results of operations.

Before acquiring oil and natural gas properties, we estimate the reserves, future oil and natural gas prices, operating costs, potential environmental liabilities, and other factors relating to the properties. However, our review involves many assumptions and estimates, and their accuracy is inherently uncertain. As a result, we may not discover all existing or potential problems associated with the properties we buy. We may not become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. We generally do not perform inspections on every well or property, and weinsurance coverage may not be ~~able~~sufficient to ~~observe mechanical~~cover all costs and environmental problems even when we conduct an inspection. The seller may not be willing or financially able to give us contractual protection against any identified problems, and we may decide to assume environmental and other liabilities in connection with the properties we acquire. If we acquire properties with risks or liabilities we did not know about or that we did not assess correctly, our business, financial condition, and results of operations could be adversely affected as we settle claims and incur cleanup costs related to these liabilities.damages.

If we do not hedge our exposure to reductions in oil and natural gas prices, we may be subject to significant reductions in prices. Alternatively, we may use oil and natural gas price hedging contracts, which involve credit risk and may limit future revenues from price increases and result in significant fluctuations in our profitability.

In the ~~event that we continue to choose not to hedge our exposure to reductions in oil and natural gas prices by purchasing futures and/~~past, securities class action or ~~by using other hedging strategies, we may be subject to a~~stockholder derivative litigation often follows certain significant ~~reduction in prices which could have~~business transactions, such as a material ~~negative impact on our profitability. Alternatively, we~~acquisition such as the Purchase. The combined company may ~~elect to use hedging transactions with respect to a portion~~become involved in this type of our oil and natural gas production to achieve more predictable cash flow and to reduce our exposure to price fluctuations. While the use of hedging transactions limits the downside risk of price declines, their use also may limit future revenues from price increases. Hedging transactions also involve the risk that the counterparty may be unable to satisfy its obligations. We do not currently have any hedges in place.

~~Stockholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of securities.~~

Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of shares of our common stock, preferred stock, or warrants to purchase shares of our common stock. Our Board of Directors has authority, without action or vote of the stockholders,subject to the requirements of The NASDAQ Capital Market (which generally require shareholder approval for any transactions which would result in the issuance of more than 20% of our then outstanding shares of common stock or voting rights representing over 20% of our then outstanding shares of stock, subject to certain exceptions, including sales in a public offering and/or sales which are undertaken at or above the lower of the closing price immediately preceding the signing of the binding agreement or the average closing price for the five trading days preceding the signing of the binding agreement), to issue all or part of the authorized but unissued shares of common stock, preferred stock or warrants to purchase such shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to marketlitigation in the future. ~~These actions will result in dilution of the ownership interests of existing stockholders~~Litigation often is expensive and ~~may further dilute common stock book value,~~diverts management’s attention and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of us, because the shares may be issued to parties or entities committed to supporting existing management.

~~If persons engage in short sales of our common stock, including sales of shares to be issued upon exercise of our outstanding warrants, the price of our common stock may decline.~~

Selling short is a technique used by a shareholder to take advantage of an anticipated decline in the price of a security. In addition, holders of options and warrants will sometimes sell short knowing they can, in effect, cover through the exercise of an option or warrant, thus locking in a profit. A significant number of short sales or a large volume of other sales within a relatively short period of time can create downward pressure on the market price of a security. Further sales of common stock issued upon exercise of our outstanding warrants could cause even greater declines in the price of our common stock due to the number of additional shares available in the market upon such exercise, which could encourage short sales that could further undermine the value of our common stock. Stockholders could, therefore, experience a decline in the values of their investment as a result of short sales of our common stock.

~~Our business has been and may continue to be impacted by adverse commodity prices.~~

The price of crude oil has experienced significant volatility over the last five years, including dropping below $0 per barrel in April 2020, due in part to reduced global demand stemming from the COVID-19 pandemic and oversupply, provided that pricing has since increased to around $35-$40 per barrel as of the filing of this prospectus. A prolonged period of low market prices for oil and natural gas, or further declines in the market prices for oil and natural gas, will likely result in capital expenditures being further curtailed and will adversely affect the Company’s business, financial condition and liquidity and its ability to meet obligations, targets or financial commitments and could ultimately lead to restructuring or filing for bankruptcy, which would have a material adverse effect on the Company’s stock price and indebtedness. Additionally, lower oil and natural gas prices have, and may in the future, cause, a decline in the Company’s stock price. During the year ended December 31, 2019, the daily Cushing, Oklahoma West Texas Intermediate (“~~WTI~~”) oil spot price ranged from a high of $66.24 per barrel (Bbl) to a low of $46.31 per Bbl and the NYMEX natural gas Henry Hub spot price ranged from a high of $4.25 per one million British Thermal Units (MMBtu) to a low of $1.75 per MMBtu. During the nine months ended September 30, 2020, the daily Cushing, Oklahoma WTI oil spot price ranged from a high of $63.27 per Bbl to a low of $(36.98) per Bbl in April 2020 and the NYMEX natural gas Henry Hub spot price ranged from a high of $2.57 per MMBtu to a low of $1.33 per MMBtu.

We believe that the global markets, in reaction to general economic conditions and perceived impacts of future global supply, have caused large fluctuations in price, and we believe significant future price swings are likely. We believe that natural gas prices and NGL prices have experienced volatility of comparable magnitude over the same period. Volatility in the prices we receive for our oil and natural gas production have and may continue to adversely affect many aspects of our business, including our financial condition, revenues, results of operations, cash flows, liquidity, reserves, rate of growth, and the carrying value of our oil and natural gas properties, all of which depend primarily or in part upon those prices. The reduction in drilling activity will likely result in lower production and, together with lower realized oil prices, lower revenue, and lower net income or a higher net loss. Declines in the prices we receive for our oil and natural gas can also adversely affect our ability to finance capital expenditures, make acquisitions, raise capital, and satisfy our financial obligations. In addition, declines in prices can reduce the amount of oil and natural gas that we can produce economically and the estimated future cash flow from that production and, as a result, adversely affect the quantity and the present value of our proved reserves. Among other things, a reduction in the amount or present value of our reserves can limit the capital available to us, and the availability of other sources of capital likely will be based to a significant degree on the estimated quantity and value of the reserves.

~~Warrants we have granted include anti-dilutive rights.~~

~~Currently we have outstanding warrants to purchase 50,000 shares of common stock with an exercise price of $5.25 per share, which are subject to “full ratchet~~” anti-dilution in the event the Company issues additional common stock or common stock equivalents at a price per share less than the exercise price in effect, subject to a floor of $3.92 per share, during the term of the warrants (through June 21, 2022). Specifically, if, while the warrants are outstanding, we issue or are deemed to have issued (which includes shares issuable upon exercise of warrants and options and conversion of convertible securities) securities for consideration less than the then-current exercise price of the warrants, subject to certain excepted issuances, the exercise price of such warrants is automatically reduced to the lowest price per share of the consideration provided or deemed to have been provided for such securities.

~~Risks Relating to our Securities:~~

~~We currently have an unlimited number of shares of common stock authorized and there may be future issuances or sales of our common stock,~~resources, which could adversely affect the ~~market price of our common stock and dilute a shareholder’s ownership of common stock.~~combined company’s business.

The exercise of (a) any options granted to executive officers and other employees under our equity compensation plans and (b) of any warrants and other issuances of our common stock could have an adverse effect on the market price of the shares of our common stock. Additionally, other than the restrictions in connection with our recent securities offerings (namely, a customary lock-up prohibiting us from issuing additional securities through the 180^th day following the closing of our November 2020 underwritten offering) we are not restricted from issuing additional shares of common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive shares of common stock, and currently have an unlimited number of authorized shares of common stock, provided that we are subject to the requirements of The NASDAQ Capital Market (which generally requires shareholder approval for any transactions which would result in the issuance of more than 20% of our then outstanding shares of common stock or voting rights representing over 20% of our then outstanding shares of stock). Issuances of a substantial number of shares of our common stock and/or sales of a substantial number of shares of our common stock in the public market or the perception that such issuances or sales might occur could materially adversely affect the market price of the shares of our common stock. Because our decision to issue securities in the future, including in connection with any future offering, will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future issuances or offerings. Accordingly, our stockholders bear the risk that our future issuances and/or offerings will reduce the market price of our common stock and dilute their stock holdings in us.

~~Our stock price has historically been and is likely to continue to be, volatile.~~

~~Our stock is traded on The NASDAQ Capital Market under the symbol “USEG~~”. During the last 52 weeks, our common stock has traded as high as $18.57 per share and as low as $2.44 per share. We expect our common stock will continue to be subject to wide fluctuations as a result of a variety of factors, including factors beyond our control. These factors include:

	●	~~price volatility in the oil and natural gas commodities markets;~~
	●	~~variations in our drilling, recompletion, and operating activity;~~
	●	~~relatively small amounts of our common stock trading on any given day;~~
	●	~~additions or departures of key personnel;~~
	●	~~legislative and regulatory changes; and~~
	●	~~changes in the national and global economic outlook.~~

The stock market has recently experienced significant price and volume fluctuations, and oil and natural gas prices have declined significantly. These fluctuations have particularly affected the market prices of securities of oil and natural gas companies like ours.

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 September 30, ~~2020,~~2021, and from the period from October 1, ~~2020,~~2021, to the filing date of this Report, which have not previously been disclosed in our Annual Report on Form 10-K or a Current Report on Form 8-K.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Table of Contents

Item 6. Exhibits

Incorporated by Reference

Exhibit
No.

Description

Form

File No.

Exhibit

Filing
Date

Filed/Furnished
Herewith

2.1

Purchase and Sale Agreement between among Lubbock Energy Partners, LLC, as seller, and U.S. Energy Corp., as purchaser, dated as of October 4, 2021

8-K

000-06814

2.1

October 6, 2021

2.2

Purchase and Sale Agreement between among Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC, as sellers, and U.S. Energy Corp., as purchaser, dated as of October 4, 2021

8-K

000-06814

2.2

October 6, 2021

2.3

Purchase and Sale Agreement between among Synergy Offshore, LLC, as seller, and U.S. Energy Corp., as purchaser, dated as of October 4, 2021

8-K

000-06814

2.3

October 6, 2021

2.4

First Amendment to Purchase and Sale Agreements between Lubbock Energy Partners, LLC; Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC; Synergy Offshore, LLC, and U.S. Energy Corp., dated as of October 25, 2021

8-K

000-06814

2.4

October 27, 2021

31.1*

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1♦

Certification of Chief Executive Officer and Chief Financial Officer under Rule 13a-14(b)

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

101.SCH*

Inline XBRL Schema Document

101.CAL*

Inline XBRL Calculation Linkbase Document

101.DEF*

Inline XBRL Definition Linkbase Document

101.LAB*

Inline XBRL Label Linkbase Document

101.PRE*

Inline XBRL Presentation Linkbase Document

104*

Inline XBRL for the cover page of this Quarterly Report on Form 10-Q included in the Exhibit 101 Inline XBRL Document Set

*	Filed herewith.

†	Exhibit constitutes a management contract or compensatory plan or agreement.

♦	Furnished herewith.

Table of Contents

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. ~~(Registrant)~~

Date: November ~~16, 2020~~12, 2021	By:	/s/ Ryan L. Smith
		RYAN L. SMITH, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal ~~Financial/~~Financial and Accounting Officer)

~~EXHIBIT INDEX~~

Incorporated by Reference
Exhibit
No. Description Form File No. Exhibit
Filing
Date
Filed/Furnished
Herewith
1.1 Placement Agency Agreement, dated September 29, 2020, between the Company and Kingswood Capital Markets, a division of Benchmark Investments, Inc. 8-K 000-06814 1.1 October 2, 2020
1.2
Form of Underwriting Agreement dated November 10, 2020 by and between U.S. Energy Corp and Kingswood Capital Markets, division of Benchmark Investments, Inc.
S-1/A 333-249738
1.2
November 10, 2020
3.1 Amended and Restated Articles of Incorporation 10-K 000-06814 3.1 March 30, 2020
3.2 Certificate of Designation for Series A Convertible Preferred Stock (incorporated by reference from Exhibit A to Exhibit 3.1) 10-K 000-06814 3.1 March 30, 2020
3.3 Amended and Restated Bylaws, dated as of August 5, 2019 8-K 000-06814 3.2 August 9, 2019
10.1 Membership Interest Purchase Agreement dated March 1, 2020 by and among U.S. Energy Corp, as Buyer, and Donald A. Kessel and Robert B. Foss, as Sellers 8-K 000-06814 10.1 March 5, 2020
#10.2 Asset Purchase Agreement dated September 25, 2020, by and among U.S. Energy Corp, as Buyer, and Mr. Randolph N. Osherow, as Chapter 7 trustee in the Bankruptcy Case of FieldPoint Petroleum Corporation S-1 333-249738 10.16 October 30, 2020
10.3 $375,000 Secured Promissory Note dated September 24, 2020 entered into by U.S. Energy Corp., to evidence amounts owed to APEG Energy II, L.P. S-1 333-249738 10.17 October 30, 2020
#10.4 Form of Securities Purchase Agreement, dated September 30, 2020, by and between the Company and the Purchasers thereunder 8-K 000-06814 10.1 October 2, 2020
10.5† Form of Lock-Up Agreements for September 2020 Offering 8-K 000-06814 10.2 October 2, 2020
#10.6 Purchase and Sale Agreement dated November 9, 2020, by and among New Horizon Resources LLC, as Buyer, and Newbridge Resources LLC as Seller 8-K 000-06814 10.1 November 9, 2020
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 XBRL Instance Document X
101.SCH XBRL Schema Document X
101.CAL XBRL Calculation Linkbase Document X
101.DEF XBRL Definition Linkbase Document X
101.LAB XBRL Label Linkbase Document X
101.PRE XBRL Presentation Linkbase Document X

*	~~Filed herewith.~~

†	~~Exhibit constitutes a management contract or compensatory plan or agreement.~~

#	Certain schedules, annexes, and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request; provided, however, that U.S. Energy Corp. may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.

♦	~~In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not~~

4740

	Amount
	(in thousands)
Pre-impairment carrying value of real estate held for sale:
Building	$	720
Building improvements		276
Land		380
Total		1,376

Fair value of real estate held for sale:
Estimated sales price	$	800
Estimated cost to sell		(75	)
Estimated net proceeds	$	725

Loss recognized on real estate assets held for sale	$	651

	September 30, 2021				December 31, 2020
	Shares		Price		Shares		Price

Stock options outstanding and exercisable		31,035	$	62.79		31,367	$	64.78

Options Outstanding	Options Outstanding									Options Exercisable				Options Outstanding									Options Exercisable
		Exercise Price				Weighted		Remaining				Weighted							Weighted		Remaining				Weighted
Number of	Number of	Range				Average Exercise		Contractual Term		Number of		Average Exercise		Number of	Exercise Price Range				Average Exercise		Contractual Term		Number of		Average Exercise
Shares	Shares	Low		High		Price		(years)		Shares		Price		Shares	Low		High		Price		(years)		Shares		Price

	16,500	$	7.03	$	11.60	$	10.00		7.3		16,500	$	10.00	16,500	$	7.20	$	11.60	$	10.00		6.0		16,500	$	10.00
	10,622		90.00		124.80		106.20		3.6		10,622		106.20	10,622		90.00		124.80		106.20		2.6		10,622		106.20
	2,913		139.20		171.00		147.39		1.7		2,913		147.39	2,913		139.20		171.00		147.39		0.7		2,913		147.39
	1,332		226.20		251.40		232.48		3.2		1,332		232.48	1,000		226.20		226.20		226.20		2.6		1,000		226.20

	31,367	$	7.20	$	251.40	$	64.78		5.2		31,367	$	64.78	31,035	$	7.20	$	226.20	$	62.79		4.2		31,035	$	62.79

	Shares			Weighted-Avg. Grant Date Fair Value per Share

Non-vested restricted stock at December 31, 2020		71,000		$	4.89
Granted		150,000		$	4.72
Vested		(47,000	)	$	4.89
Non-vested restricted stock at September 30, 2021		174,000		$	4.75

	Nine Months Ended September 30, 2020			Year Ended December 31, 2019			September 30, 2021			December 31, 2020
	(in thousands)						(in thousands)
Balance, beginning of year	$	819		$	939		$	1,408		$	819
Accretion		23			22			59			43
Sold/Plugged		(12	)		(130	)		(70	)		(12	)
New drilled wells		-			2
Change in discount rate		-			(14	)
Liabilities incurred for acquisition of New Horizon wells		163			-
Liabilities incurred for acquisition of FieldPoint wells		236			-
Acquired								44			558
Balance, end of period	$	1,229		$	819		$	1,441		$	1,408

⁽¹⁾	The average volatility represents the Company’s ~~2-year~~ volatility measurement for the remaining term of the warrants, the observed volatility of our peer group over a similar period, and the stock market volatility as of the valuation date.
⁽²⁾	Represents the estimated probability of a future down-round event during the remaining term of the warrants.

	September 30, 2021		December 31, 2020

Number of shares owned		2,421,180		2,421,180
Quoted market price	$	.10227	$	.07455

Fair value	$	247,610	$	180,500

	Nine Months Ended September 30, 2020		Year Ended December 31, 2019			Nine Months Ended September 30, 2021			Year Ended December 31, 2020
	(in thousands)					(in thousands)
Fair value liabilities of Level 3 instruments beginning of period	$	73	$	425		$	95		$	73

Net loss (gain) on warrant valuation		64		(352	)
		-
(Gain) loss on warrant valuation							(2	)		22
Fair value liabilities of Level 3 instruments end of period	$	137	$	73		$	93		$	95

●	“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.

	●	General Overview. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A.

	●	Plan of Operations and Strategy. Discussion of our strategy moving forward and how we plan to seek to increase stockholder value.

	●	Recent Developments. Discussion of recent developments affecting the Company and our operations.

	●	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 and nine months ended September 30, 2021, and 2020.

	●	Liquidity and Capital Resources. A discussion of our financial condition, including descriptions of balance sheet information and cash flows.

	●	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 will be highly selective in the projects we evaluate and will review opportunities to bolster our liquidity and financial position through various means.

	●	Evaluate and Pursue Value-Enhancing Transactions. We plan to continuously evaluate strategic alternative opportunities that we believe will enhance shareholder value.

	Three months ended September 30,				Change						Three months ended September 30,				Change
	2020		2019		Amount			Percent			2021		2020		Amount		Percent
											(in thousands except average prices and production quantities)
Revenue:
Oil	$	362	$	1,571	$	(1,209	)		-77	%	$	1,593	$	362	$	1,231		340	%
Gas		39		62		(23	)		-37	%		191		39		152		390	%

Total	$	401	$	1,633	$	(1,232	)		-75	%	$	1,784	$	401	$	1,383		345	%

Production quantities:
Oil (Bbls)		10,354		28,266		(17,912	)		-63	%		24,349		10,354		13,995		135	%
Gas (Mcf)		18,591		37,978		(19,387	)		-51	%		53,462		18,591		34,871		188	%
BOE		13,453		34,596		(21,143	)		-61	%		33,260		13,453		19,807		147	%
BOE per day												362		146		216		148	%

Average sales prices:
Oil (Bbls)	$	34.96	$	55.58	$	(20.62	)		-37	%	$	65.42	$	34.96	$	30.46		87	%
Gas (Mcf)		2.10		1.63		0.47			29	%		3.57		2.10		1.47		70	%
BOE	$	29.81	$	47.20	$	(17.39	)		-37	%	$	53.64	$	29.81	$	23.83		80	%

	⁽¹⁾	~~Working capital is computed by subtracting total current liabilities from total current assets.~~
	⁽²⁾	~~The current ratio is computed by dividing total current assets by total current liabilities.~~

	September 30, 2021		December 31, 2020		Change
	(in thousands)
Cash and equivalents	$	6,955	$	2,854	$	4,101
Working capital ⁽¹⁾		7,396		2,499		4,897
Total assets		17,597		12,363		5,234
Total shareholders’ equity		14,678		8,567		6,111

Select Ratios:
Current ratio ⁽²⁾		6.2 to 1.0		2.2 to 1.0

	⁽¹⁾	Working capital is computed by subtracting total current liabilities from total current assets.
	⁽²⁾	The current ratio is computed by dividing total current assets by total current liabilities.

	●	We had inadequate segregation of duties as a result of limited accounting staff and resources, which ~~has impacted~~may impact our ability to prevent or detect material errors in our consolidated financial ~~statements and to properly implement new accounting standards.~~statements.
	●	We had inadequate ~~controls over physical and~~segregation of duties related to logical access to our ~~information technology systems.~~accounting systems, which may affect our ability to prevent or detect material errors in the recorded transactions.