UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended | |
or | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________________ |
Commission File Number 000-06814
(Exact Name of Registrant as Specified in its Charter)
Delaware | 83-0205516 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
1616 S. Voss | 77057 | |
(Address of principal executive offices) | (Zip Code) |
(346) 509-8734
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Common stock, par value $0.01 | USEG | NASDAQ Stock Market LLC (Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☒ | Smaller reporting company ☒ | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The registrant had November 8, 2022.August 14, 2023. shares of its common stock, par value $0.01 per share, outstanding as of
TABLE OF CONTENTS
2 |
Cautionary Statement About Forward-Looking StatementsCAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report” or “Form 10-Q”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are forward-looking statements.
Examples of forward-looking statements in this Report include:
● | planned capital expenditures for oil and natural gas exploration and environmental compliance; | |
● | potential drilling locations and available spacing units, and possible changes in spacing rules; | |
● | cash expected to be available for capital expenditures and to satisfy other obligations; | |
● | recovered volumes and values of oil and natural gas approximating third-party estimates; | |
● | anticipated changes in oil and natural gas production; | |
● | drilling and completion activities and opportunities; | |
● | timing of drilling additional wells and performing other exploration and development projects; | |
● | expected spacing and the number of wells to be drilled with our oil and natural gas industry partners; | |
● | when payout-based milestones or similar thresholds will be reached for the purposes of our agreements with our partners; | |
● | expected working and net revenue interests, and costs of wells, relating to the drilling programs with our partners; | |
● | actual decline rates for producing wells; | |
● | future cash flows, expenses and borrowings; | |
● | pursuit of potential acquisition opportunities; | |
● | economic downturns, | |
● | the effects of global pandemics | |
● | our expected financial position; | |
● | our expected future overhead reductions; | |
● | our ability to become an operator of oil and natural gas properties; | |
● | our ability to raise additional financing and acquire attractive oil and natural gas properties; and | |
● | other plans and objectives for future operations. |
These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” “up to,” and similar terms and phrases. Though we believe that the expectations reflected in these statements are reasonable, they involve certain assumptions, risks and uncertainties. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, under and incorporated by reference in, “Risk Factors”, below, the risks discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, and those discussed in other documents we file with the SEC. We undertake no obligation to reviseSecurities and Exchange Commission (the “SEC” or publicly release the results of any revision to these forward-looking statements, except as required by law.“Commission”). Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above.
All forward-looking statements speak only at the date of the filing of this Report. We do not undertake any obligation to update or revise publicly any forward-looking statements except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.
3 |
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 2022 | December 31, 2021 | June 30, 2023 | December 31, 2022 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and equivalents | $ | 3,093 | $ | 4,422 | $ | 1,175 | $ | 4,411 | ||||||||
Oil and natural gas sales receivable | 4,520 | 933 | 2,714 | 3,193 | ||||||||||||
Marketable equity securities | 106 | 191 | 91 | 107 | ||||||||||||
Prepaid and other current assets | 378 | 179 | ||||||||||||||
Other current assets | 973 | 558 | ||||||||||||||
Commodity derivative asset-current | 8 | - | ||||||||||||||
Real estate assets held for sale, net of selling costs | 175 | 250 | 175 | 175 | ||||||||||||
Total current assets | 8,272 | 5,975 | 5,136 | 8,444 | ||||||||||||
Oil and natural gas properties under full cost method: | ||||||||||||||||
Unevaluated properties | 1,584 | 1,588 | 1,584 | 1,584 | ||||||||||||
Evaluated properties | 201,572 | 95,088 | 205,463 | 203,144 | ||||||||||||
Less accumulated depreciation, depletion, amortization and impairment | (94,376 | ) | (88,195 | ) | ||||||||||||
Less accumulated depreciation, depletion and amortization | (101,391 | ) | (96,725 | ) | ||||||||||||
Net oil and natural gas properties | 108,780 | 8,481 | 105,656 | 108,003 | ||||||||||||
Pending acquisition | - | 2,767 | ||||||||||||||
Property and equipment, net | 634 | 188 | 913 | 651 | ||||||||||||
Right-of-use asset | 933 | 120 | 773 | 868 | ||||||||||||
Other assets | 375 | 132 | 330 | 354 | ||||||||||||
Total assets | $ | 118,994 | $ | 17,663 | $ | 112,808 | $ | 118,320 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 8,196 | $ | 1,447 | $ | 8,464 | $ | 7,832 | ||||||||
Accrued compensation and benefits | 683 | 1,162 | 611 | 1,111 | ||||||||||||
Commodity derivative liability-current | 1,991 | - | - | 1,694 | ||||||||||||
Asset retirement obligations-current | 1,965 | - | 668 | 668 | ||||||||||||
Premium finance note | 216 | - | ||||||||||||||
Warrant liability | - | 19 | ||||||||||||||
Current lease obligation | 182 | 114 | 176 | 189 | ||||||||||||
Total current liabilities | 13,233 | 2,742 | 9,919 | 11,494 | ||||||||||||
Credit facility | 12,500 | - | 12,000 | 12,000 | ||||||||||||
Commodity derivative liability-noncurrent | 6 | - | ||||||||||||||
Asset retirement obligations-noncurrent | 12,091 | 1,461 | ||||||||||||||
Lease obligation-noncurrent | 837 | 19 | ||||||||||||||
Asset retirement obligations- noncurrent | 15,226 | 14,774 | ||||||||||||||
Long-term lease obligation, net of current portion | 704 | 794 | ||||||||||||||
Deferred tax liability | 610 | 898 | ||||||||||||||
Other noncurrent liabilities | 6 | 6 | 6 | 6 | ||||||||||||
Total liabilities | 38,673 | 4,228 | 38,465 | 39,966 | ||||||||||||
Commitments and contingencies (Note 8) | - | - | - | - | ||||||||||||
Shareholders’ equity: | ||||||||||||||||
Common stock, $ par value; shares authorized; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 250 | 47 | ||||||||||||||
Common stock, $ | par value; shares authorized; and shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively251 | 250 | ||||||||||||||
Additional paid-in capital | 216,267 | 149,276 | 217,632 | 216,690 | ||||||||||||
Accumulated deficit | (136,196 | ) | (135,888 | ) | (143,540 | ) | (138,586 | ) | ||||||||
Total shareholders’ equity | 80,321 | 13,435 | 74,343 | 78,354 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 118,994 | $ | 17,663 | $ | 112,808 | $ | 118,320 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4 |
U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20222023 AND 20212022
(In thousands, except share and per share amounts)
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||
September 30, | September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
Oil | $ | 8,979 | $ | 1,593 | $ | 28,146 | $ | 4,232 | $ | 7,028 | $ | 11,334 | $ | 14,124 | $ | 19,167 | ||||||||||||||||
Natural gas and liquids | 2,820 | 191 | 6,005 | 419 | 950 | 2,146 | 2,127 | 3,185 | ||||||||||||||||||||||||
Gathering fee | 27 | - | 27 | - | ||||||||||||||||||||||||||||
Total revenue | 11,826 | 1,784 | 34,178 | 4,651 | 7,978 | 13,480 | 16,251 | 22,352 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Lease operating expenses | 5,350 | 586 | 12,732 | 1,631 | 3,877 | 4,646 | 8,400 | 7,382 | ||||||||||||||||||||||||
Production taxes | 817 | 133 | 2,302 | 343 | 538 | 913 | 1,058 | 1,485 | ||||||||||||||||||||||||
Depreciation, depletion, accretion and amortization | 2,528 | 151 | 6,985 | 415 | 2,896 | 2,571 | 5,313 | 4,457 | ||||||||||||||||||||||||
General and administrative expenses | 2,708 | 686 | 8,296 | 2,233 | 3,368 | 2,642 | 6,140 | 5,588 | ||||||||||||||||||||||||
Total operating expenses | 11,403 | 1,556 | 30,315 | 4,622 | 10,679 | 10,772 | 20,911 | 18,912 | ||||||||||||||||||||||||
Operating income | 423 | 228 | 3,863 | 29 | ||||||||||||||||||||||||||||
Operating income (loss) | (2,701 | ) | 2,708 | (4,660 | ) | 3,440 | ||||||||||||||||||||||||||
Other non-operating income (expense): | ||||||||||||||||||||||||||||||||
Commodity derivative gain (loss) | 4,025 | (25 | ) | (4,944 | ) | (235 | ) | 288 | (2,132 | ) | 1,208 | (8,969 | ) | |||||||||||||||||||
Marketable equity securities (loss) gain | (45 | ) | (6 | ) | (85 | ) | 67 | |||||||||||||||||||||||||
Impairment on real estate held for sale | (75 | ) | (141 | ) | (75 | ) | (141 | ) | ||||||||||||||||||||||||
Other (expense) income, net | (2 | ) | 24 | (8 | ) | 49 | ||||||||||||||||||||||||||
Interest, net | (187 | ) | 1 | (295 | ) | (57 | ) | |||||||||||||||||||||||||
Marketable equity securities loss | (16 | ) | (121 | ) | (16 | ) | (40 | ) | ||||||||||||||||||||||||
Other expense, net | (6 | ) | (5 | ) | (6 | ) | (6 | ) | ||||||||||||||||||||||||
Interest expense, net | (289 | ) | (60 | ) | (558 | ) | (108 | ) | ||||||||||||||||||||||||
Total other non-operating income (expense) | 3,716 | (147 | ) | (5,407 | ) | (317 | ) | (23 | ) | (2,318 | ) | 628 | (9,123 | ) | ||||||||||||||||||
Net income (loss) before income taxes | $ | 4,139 | $ | 81 | $ | (1,544 | ) | $ | (288 | ) | $ | (2,724 | ) | $ | 390 | $ | (4,032 | ) | $ | (5,683 | ) | |||||||||||
Income tax (expense) benefit | (29 | ) | 2,392 | 209 | (268 | ) | 270 | 2,421 | ||||||||||||||||||||||||
Net income (loss) | $ | 4,110 | $ | 81 | $ | 848 | $ | (288 | ) | $ | (2,515 | ) | $ | 122 | $ | (3,762 | ) | $ | (3,262 | ) | ||||||||||||
Basic weighted shares outstanding | 24,390,193 | 4,676,301 | 24,548,385 | 4,429,870 | ||||||||||||||||||||||||||||
Diluted weighted shares outstanding | 24,682,476 | 4,721,301 | 24,891,148 | 4,429,870 | ||||||||||||||||||||||||||||
Basic earnings (loss) per share | $ | 0.16 | $ | 0.02 | $ | 0.03 | $ | (0.07 | ) | $ | ) | $ | $ | ) | $ | ) | ||||||||||||||||
Diluted earnings (loss) per share | $ | 0.16 | $ | 0.02 | $ | 0.03 | $ | (0.07 | ) | $ | ) | $ | $ | ) | $ | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5 |
U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20222023 AND 20212022
(in thousands, except share amounts)
Shares | Amount | Capital | Deficit | Total | Shares | Amount | Capital | Deficit | Total | |||||||||||||||||||||||||||||||
Additional | Additional | |||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | 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 | |||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (162 | ) | (162 | ) | |||||||||||||||||||||||||||||||||
Balances, March 31, 2021 | 4,676,301 | $ | 47 | $ | 148,806 | $ | (134,280 | ) | $ | 14,573 | ||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 116 | - | 116 | |||||||||||||||||||||||||||||||||||
Net income | - | - | - | (207 | ) | (207 | ) | |||||||||||||||||||||||||||||||||
Balances, June 30, 2021 | 4,676,301 | 47 | 148,922 | (134,487 | ) | $ | 14,482 | |||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 115 | - | 115 | |||||||||||||||||||||||||||||||||||
Net loss | - | - | - | 81 | 81 | |||||||||||||||||||||||||||||||||||
Balances, September 30, 2021 | 4,676,301 | $ | 47 | $ | 149,037 | $ | (134,406 | ) | $ | 14,678 | ||||||||||||||||||||||||||||||
Balances, December 31, 2021 | 4,676,301 | $ | 47 | $ | 149,276 | $ | (135,888 | ) | $ | 13,435 | 4,676,301 | $ | 47 | $ | 149,276 | $ | (135,888 | ) | $ | 13,435 | ||||||||||||||||||||
Shares issued for acquired properties | 19,905,736 | 199 | 64,495 | 64,694 | 19,905,736 | 199 | 64,495 | 64,694 | ||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 1,500 | 1,500 | - | - | 1,500 | 1,500 | ||||||||||||||||||||||||||||||||
Shares issued upon vesting of restricted stock awards | 373,500 | 4 | (4 | ) | - | - | 373,500 | 4 | (4 | ) | - | - | ||||||||||||||||||||||||||||
Shares withheld to settle tax withholding obligations for restricted stock awards | (81,725 | ) | (1 | ) | (306 | ) | - | (307 | ) | (81,725 | ) | (1 | ) | (306 | ) | - | (307 | ) | ||||||||||||||||||||||
Exercise of warrants | 50,000 | - | 213 | - | 213 | 50,000 | - | 213 | - | 213 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | (3,384 | ) | (3,384 | ) | - | - | - | (3,384 | ) | (3,384 | ) | ||||||||||||||||||||||||||
Balances, March 31, 2022 | 24,923,812 | $ | 249 | $ | 215,174 | $ | (139,272 | ) | $ | 76,151 | 24,923,812 | $ | 249 | $ | 215,174 | $ | (139,272 | ) | $ | 76,151 | ||||||||||||||||||||
Cash dividends, $ per share | (578 | ) | (578 | ) | ||||||||||||||||||||||||||||||||||||
Cash dividends, $ | per share- | - | - | (578 | ) | (578 | ) | |||||||||||||||||||||||||||||||||
Stock-based compensation | 609 | 609 | - | - | 609 | - | 609 | |||||||||||||||||||||||||||||||||
Net income | - | - | - | 122 | 122 | - | - | - | 122 | 122 | ||||||||||||||||||||||||||||||
Balances, June 30, 2022 | 24,923,812 | $ | 249 | $ | 215,783 | (139,728 | ) | 76,304 | 24,923,812 | $ | 249 | $ | 215,783 | $ | (139,728 | ) | $ | 76,304 | ||||||||||||||||||||||
Cash dividends, $ per share | (578 | ) | (578 | ) | ||||||||||||||||||||||||||||||||||||
Balances, December 31, 2022 | 25,023,812 | $ | 250 | $ | 216,690 | $ | (138,586 | ) | $ | 78,354 | ||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 727 | - | 727 | |||||||||||||||||||||||||||||||||||
Shares issued upon vesting of restricted stock awards | 100,000 | 1 | (1 | ) | - | - | 273,000 | 3 | (3 | ) | - | - | ||||||||||||||||||||||||||||
Shares withheld to settle tax withholding obligations for restricted stock awards | (62,140 | ) | (1 | ) | (149 | ) | - | (150 | ) | |||||||||||||||||||||||||||||||
Cash dividends $ | per share(596 | ) | (596 | ) | ||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,247 | ) | (1,247 | ) | |||||||||||||||||||||||||||||||||
Balances, March 31, 2023 | 25,234,672 | $ | 252 | $ | 217,265 | $ | (140,429 | ) | $ | 77,088 | ||||||||||||||||||||||||||||||
Balances | 25,234,672 | $ | 252 | $ | 217,265 | $ | (140,429 | ) | $ | 77,088 | ||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 485 | - | 485 | - | - | 607 | - | 607 | ||||||||||||||||||||||||||||||
Net income | - | - | - | 4,110 | 4,110 | |||||||||||||||||||||||||||||||||||
Balances, September 30, 2022 | 25,023,812 | 250 | 216,267 | (136,196 | ) | 80,321 | ||||||||||||||||||||||||||||||||||
Cash dividends, $ | per share- | - | - | (596 | ) | (596 | ) | |||||||||||||||||||||||||||||||||
Cash dividends, per share | - | - | - | (596 | ) | (596 | ) | |||||||||||||||||||||||||||||||||
Share repurchases | (163,300 | ) | (1 | ) | (240 | ) | (241 | ) | ||||||||||||||||||||||||||||||||
Net loss | - | - | - | (2,515 | ) | (2,515 | ) | |||||||||||||||||||||||||||||||||
Balances, June 30, 2023 | 25,071,372 | $ | 251 | $ | 217,632 | $ | (143,540 | ) | $ | 74,343 | ||||||||||||||||||||||||||||||
Balances | 25,071,372 | $ | 251 | $ | 217,632 | $ | (143,540 | ) | $ | 74,343 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6 |
U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20222023 AND 20212022
(in thousands)
2022 | 2021 | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 848 | $ | (288 | ) | |||||||||||
Net loss | $ | (3,762 | ) | $ | (3,262 | ) | ||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation, depletion, accretion, and amortization | 6,985 | 415 | 5,313 | 4,457 | ||||||||||||
Deferred income taxes | (2,460 | ) | - | (288 | ) | (2,460 | ) | |||||||||
Unrealized (gain) loss on commodity derivatives | (1,155 | ) | 116 | |||||||||||||
Loss (gain) on marketable equity securities | 85 | (67 | ) | |||||||||||||
Impairment and loss on real estate held for sale | 75 | 141 | ||||||||||||||
Total commodity derivative (gains) losses, net | (1,208 | ) | 8,969 | |||||||||||||
Commodity derivative settlements paid | (494 | ) | (4,487 | ) | ||||||||||||
Loss on marketable equity securities | 16 | 40 | ||||||||||||||
Amortization of debt issuance costs | 32 | - | 24 | 20 | ||||||||||||
Loss on warrant revaluation | - | (2 | ) | |||||||||||||
Loss on related party debt conversion and settlement of legal costs | - | 76 | ||||||||||||||
Stock-based compensation | 2,594 | 310 | 1,334 | 2,109 | ||||||||||||
Right of use asset amortization | 140 | 66 | 95 | 75 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Oil and natural gas sales receivable | (3,587 | ) | (570 | ) | 479 | (5,198 | ) | |||||||||
Other assets | 320 | 130 | 240 | (192 | ) | |||||||||||
Accounts payable and accrued liabilities | 5,456 | (215 | ) | 314 | 4,315 | |||||||||||
Accrued compensation and benefits | (479 | ) | (43 | ) | (500 | ) | (675 | ) | ||||||||
Payments on operating lease liability | (68 | ) | (66 | ) | (102 | ) | (49 | ) | ||||||||
Payments for asset retirement obligations | (289 | ) | (22 | ) | ||||||||||||
Net cash provided by (used in) operating activities | 8,497 | (19 | ) | |||||||||||||
Payments on asset retirement obligations | (52 | ) | - | |||||||||||||
Net cash provided by operating activities | 1,409 | 3,662 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Acquisition of proved properties | (12,610 | ) | - | - | (4,383 | ) | ||||||||||
Oil and natural gas capital expenditures | (5,369 | ) | (1,399 | ) | (2,402 | ) | (1,131 | ) | ||||||||
Expenditures for pending acquisitions | - | (592 | ) | |||||||||||||
Property and equipment expenditures | (379 | ) | (93 | ) | (373 | ) | (295 | ) | ||||||||
Proceeds from sale of oil and gas properties | 1,250 | 30 | - | 1,231 | ||||||||||||
Proceeds from sale of real estate | - | 440 | ||||||||||||||
Payment received on note receivable | - | 20 | ||||||||||||||
Net cash used in investing activities | (17,108 | ) | (1,002 | ) | (2,775 | ) | (5,170 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from sale of common stock, net of issuance costs | - | 5,283 | ||||||||||||||
Borrowings on credit facility | 15,200 | - | 4,500 | |||||||||||||
Repayment of debt | (6,047 | ) | - | (3,847 | ) | |||||||||||
Payment of fees for credit facility | (207 | ) | - | (174 | ) | |||||||||||
Repayments of insurance premium finance note payable | (396 | ) | (122 | ) | (286 | ) | (236 | ) | ||||||||
Exercise of warrant | 195 | - | 195 | |||||||||||||
Shares withheld to settle tax withholding obligations for restricted stock awards | (307 | ) | (39 | ) | (151 | ) | (307 | ) | ||||||||
Dividend paid | (1,156 | ) | ||||||||||||||
Net cash provided by financing activities | 7,282 | 5,122 | ||||||||||||||
Dividends paid | (1,192 | ) | (578 | ) | ||||||||||||
Repurchases of common stock | (241 | ) | - | |||||||||||||
Net (decrease) increase in cash and equivalents | (1,329 | ) | 4,101 | |||||||||||||
Net cash used in financing activities | (1,870 | ) | (447 | ) | ||||||||||||
Net decrease in cash and equivalents | (3,236 | ) | (1,955 | ) | ||||||||||||
Cash and equivalents, beginning of period | 4,422 | 2,854 | 4,411 | 4,422 | ||||||||||||
Cash and equivalents, end of period | $ | 3,093 | $ | 6,955 | $ | 1,175 | $ | 2,467 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Please see Note-14-Note-15- Supplemental Disclosures of Cash Flow Information.
7 |
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
U.S. Energy Corp. (collectively with its wholly-owned subsidiaries, Energy One LLC (“Energy One”) and New Horizon Resources LLC (“New Horizon Resources”), referred to as the “Company” in these Notes to Unaudited Condensed Consolidated Financial Statements) wasis incorporated in the State of Wyoming on January 26, 1966, and recently reincorporated to Delaware, as discussed below.Delaware. The Company’s principal business activities are focused on the acquisition exploration and development of onshore oil and natural gas properties in the United States. Effective on August 3, 2022,States, which the Company changed its state of incorporation fromconsiders a single operating segment. Our principal properties and operations are in the State of Wyoming to the State of Delaware (the “Reincorporation”) by means of a Plan of Conversion, effective August 3, 2022 (the “Plan of Conversion”). The Reincorporation, including the Plan of Conversion, was submitted to a vote of, and approved by, the Company’s stockholders at the Company’s 2022 Annual Meeting of Stockholders held on June 21, 2022. The Reincorporation was accomplished by filing: (i) an Application for Certificate of Transfer with the Secretary of State of the State of Wyoming (the “Wyoming Certificate of Transfer”); (ii) a Certificate of Conversion with the Secretary of State of the State of Delaware (the “Delaware Certificate of Conversion”); and (iii) a Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Delaware Certificate of Incorporation”).
The Reincorporation did not result in any change in headquarters, business, jobs, management, location of any of the offices or facilities, number of employees, assets, liabilities or net worth (other than as a result of the costs incident to the Reincorporation) of the Company. The resulting Delaware corporation (“U.S. Energy-Delaware”) (i) is deemed to be the same entity as the Company as incorporated in Wyoming (“U.S. Energy-Wyoming”) for all purposes underRockies region (Montana, Wyoming and Delaware law, (ii) continues to have all ofNorth Dakota), the rights, privileges,Mid-Continent (Oklahoma, Kansas and powers of U.S. Energy-Wyoming, (iii) continues to possess all ofNorth and East Texas), and the properties of U.S. Energy-Wyoming,West Texas, South Texas, and (iv) continues to have all of the debts, liabilities, and duties of U.S. Energy-Wyoming.Gulf Coast regions.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”) and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included.
For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the SEC on March 28, 2022.April 13, 2023. Our financial condition as of SeptemberJune 30, 2022,2023, and operating results for the three and ninesix months ended SeptemberJune 30, 2022,2023, are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2022.2023.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of oil and gas properties acquired, oil and natural gas reserves that are used in the calculation of depreciation, depletion, amortization, and impairment of the carrying value of evaluated oil and natural gas properties; realizability of unevaluated properties; production and commodity price estimates used to record accrued oil and natural gas sales receivables; future prices of commodities used in the valuation of commodity derivative contracts; and the cost and timing of future asset retirement obligations. The Company evaluates its estimates on an on-going basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable. Due to inherent uncertainties, including the future prices of oil and natural gas, these estimates could change in the near term and such changes could be material.
Industry Segment and Geographic InformationRecently Adopted Accounting Standards
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 to Topic 326, Financial Instruments-Credit Losses, as amended by other related ASUs that provided targeted improvements. The standard changes the impairment model for trade receivables and other financial assets measured at amortized cost. This ASU requires the use of a new forward-looking “expected loss” model compared to the previous “incurred loss” model, resulting in accelerated recognition of credit losses. This ASU primarily applies to the Company’s accounts receivable balances, of which the majority are received within a short-term period of one to three months. The Company operates inmonitors the explorationcredit quality of its counterparties through review of collections, credit ratings, and production segment of the oil and gas industry, onshore in the United States.other analyses. The Company reportsdevelops its estimated allowance for credit losses primarily using an aging method and analyses of historical loss rates as well as consideration of current and future conditions that could impact its counterparties’ credit quality and liquidity. The adoption and implementation of this ASU did not have a single industry segment.material impact on the Company’s financial statements.
Principles of Consolidation
The accompanying financial statements have been prepared in conformity with GAAP and include the accounts of U.S. Energy Corp. and its wholly-owned subsidiaries Energy One and New Horizon Resources. U.S. Energy Corp. accounts for its share of oil and gas exploration and production activities, in which it has a direct working interest, by reporting its proportionate share of assets, liabilities, revenues, costs, and cash flows within the relevant lines on the balance sheets, statements of operations, and statements of cash flows. All inter-company balances and transactions have been eliminated in consolidation.
2. ACQUISITIONS
On July 27,January 2022 the Company closed a purchase and sale agreement for the acquisition of properties from ETXENERGY, LLC (“ETXENERGY”). The properties are located in Henderson and Anderson Counties, Texas (the “East Texas Assets”). The properties consist of approximately 16,600Acquisition net acres, all of which is held by production and certain wells and gathering systems. The initial purchase price for the East Texas Assets was $11.9 million in cash. The effective date of the acquisition of the East Texas Assets was June 1, 2022. The Company accounted for the acquisition as an asset acquisition.
SUMMARY OF AMOUNTS INCURRED FOR ASSETS ACQUIRED
Amount | ||||
(in thousands) | ||||
Amounts incurred: | ||||
Cash | $ | 11,875 | ||
Value of shares issued | - | |||
Purchase price adjustments | (1,041 | ) | ||
Transaction costs | 57 | |||
Total consideration paid | 10,891 | |||
Suspense accounts assumed | 343 | |||
Asset retirement obligations assumed | 1,689 | |||
Total liabilities assumed | 2,032 | |||
Total consideration paid and liabilities assumed | $ | 12,923 | ||
Allocation to acquired assets: | ||||
Proved oil and gas properties | $ | 12,923 |
On January 5, 2022 (the “Closing Date”), the Company closed the acquisitions (the “Acquisition”) contemplated by three separate Purchase and Sale Agreements (the “Purchase Agreements” and the “Closing”), entered into by the Company on October 4, 2021, with each of (a) Lubbock Energy Partners LLC (“Lubbock”); (b) Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC (collectively, “Banner”), and (c) Synergy Offshore LLC (“Synergy”, and collectively with Lubbock and Banner, (thethe “Sellers”). Pursuant to the Purchase Agreements, the Company acquired certain oil and gas properties from the Sellers, representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, Eagle Ford, and Mid-Continent. The acquisition also included certain wells, contracts, technical data, records, personal property and hydrocarbons associated with the acquired assets (collectively with the oil and gas properties acquired, the “Acquired Assets”).
8 |
The Company accounted for the acquisition of the Acquired Assets as an asset acquisition. The purchase price for the Acquired Assets was (a) $125,000 in cash and shares of our common stock, as to Lubbock; (b) $1,000,000 in cash, the assumption of $3.3 million of debt, and shares of common stock, as well as the novation of certain hedges which had a mark to market loss of approximately $3.1 million as of the Closing Date, as to Banner; and (c) $125,000 in cash and shares of common stock, as to Synergy. The aggregate purchase price under all the Purchase Agreements was $67.466.4 million, representing $1.25 million in cash, the value of shares of our common stock on the Closing Date of $64.7 million and purchase price adjustments on the Closing Date of $1.40.5 million. In addition, we assumed various liabilities, including the repayment of $3.3 million in debt, as well as a derivative liability from the novation of the hedges discussed above of $3.1 million, suspense accounts and asset retirement obligations.
SUMMARY OF AMOUNTS INCURRED FOR ASSETS ACQUIRED
Amount | Amount | |||||||
(in thousands) | (in thousands) | |||||||
Amounts incurred: | ||||||||
Amounts incurred as of the Closing Date: | ||||||||
Cash | $ | 1,250 | $ | 1,250 | ||||
Value of shares issued | 64,694 | 64,694 | ||||||
Purchase price adjustments | 1,497 | 487 | ||||||
Transaction costs | 1,267 | 1,267 | ||||||
Total consideration paid | 68,708 | 67,698 | ||||||
Debt assumed | 3,347 | 3,347 | ||||||
Commodity derivative liabilities assumed | 3,152 | 3,152 | ||||||
Suspense accounts assumed | 1,276 | 1,276 | ||||||
Employee obligations assumed | 100 | 100 | ||||||
Asset retirement obligations assumed | 9,855 | 9,614 | ||||||
Deferred tax liabilities | 2,460 | 2,819 | ||||||
Total liabilities assumed | 20,190 | 20,308 | ||||||
Total consideration paid and liabilities assumed | $ | 88,898 | $ | 88,006 | ||||
Allocation to acquired assets: | ||||||||
Proved oil and gas properties | 87,278 | 87,672 | ||||||
Oil inventory in tanks | 1,286 | |||||||
Vehicles | 165 | 165 | ||||||
Deposit account | 169 | 169 | ||||||
Total allocation to acquired assets | $ | 88,898 | $ | 88,006 |
(1) | Included in the above purchase price adjustments is settlement for oil in temporary storage in tank batteries at the leases. The Company does not separately account for oil in temporary storage until the oil is sold and title transfers to the purchaser. Consistent with the Company’s accounting policy and reporting of similar transactions this amount was recorded within Evaluated Properties on the Company’s condensed consolidated balance sheet. |
Liberty County, Texas Acquisition
On May 3, 2022, the Company acquired certain operated oil and gas producing properties in Liberty County, Texas, adjacent to its existing assets in the area, for $1.0 million in an all-cash transaction. The effective date of the transaction was April 1, 2022. The assets include approximately 1,022 acres, which are 100% held by production, a gas pipeline and associated infrastructure. In addition, the Company assumed suspense accounts of $0.2 million and asset retirement obligations of $0.5 million. The Company accounted for the acquisition as an asset acquisition.
East Texas Acquisition
On July 27, 2022, the Company closed a purchase and sale agreement for the acquisition of properties from ETXENERGY, LLC (“ETXENERGY”). The properties are located in Henderson and Anderson Counties, Texas (the “East Texas Assets”). The properties consist of approximately 16,600 net acres, all of which are held by production and certain wells and gathering systems. The initial purchase price for the East Texas Assets was $11.9 million in cash. The effective date of the acquisition of the East Texas Assets was June 1, 2022. The Company accounted for the acquisition as an asset acquisition.
SUMMARY OF AMOUNTS INCURRED FOR ASSETS ACQUIRED
Amount | ||||
(in thousands) | ||||
Amounts incurred as of the closing date: | ||||
Cash | $ | 11,875 | ||
Purchase price adjustments | (1,048 | ) | ||
Transaction costs | 63 | |||
Total consideration paid | 10,890 | |||
Suspense accounts assumed | 380 | |||
Asset retirement obligations assumed | 1,689 | |||
Total liabilities assumed | 2,069 | |||
Total consideration paid and liabilities assumed | $ | 12,959 | ||
Allocation to acquired assets: | ||||
Proved oil and gas properties | $ | 12,959 |
9 |
3. REVENUE RECOGNITION
The Company’s operated oil production is sold at the delivery point specified in the contract. The Company collects an agreed-upon index price, net of pricing differentials. The purchaser takes custody, title and risk of loss of the oil at the delivery point; therefore, control passes at the delivery point. The Company does not separately account for oil in temporary storage at the site of production prior to its transfer to the purchaser. The Company recognizes revenue at the net price received when control transfers to the purchaser. Natural gas and natural gas liquid (“NGL”) are sold at the lease location, which is generally when control of the natural gas and NGL transfers to the purchaser, and revenue is recognized as the amount received from the purchaser.
The Company does not disclose the values of unsatisfied performance obligations under its contracts with customers as it applies the practical exemption in accordance with Accounting Standards Codification (ASC) 606. The exemption applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to the remaining performance obligations is not required.
The Company reports revenue as its proportionate share of the gross amount received from the well operatorspurchasers 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 revenue and costs in the consolidated statements of operations were reported gross for the three and nine months ended September 30, 2022 and 2021, as the gross amounts were known.
The Company’s non-operated revenues are derived from its interest in the sales of oil and natural gas production. The sales of oil and natural gas are made under contracts that operators of the wells have negotiated with third-party customers. The Company receives payment from the sale of oil and natural gas production between one to three months after delivery. At the end of each period when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in oil and natural gas sales receivable in the 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. Accordingly, the variable consideration is not constrained. As a non-operator of its oil and natural gas properties, the Company records its share of the revenues and expenses based upon the information provided by the operators within the revenue statements.
The Company’s oilOil 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. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received; however, differences have been, and are expected to be, insignificant. Accordingly, the variable consideration is not constrained. As a non-operator of its oil and natural gas properties, the Company records its share of the revenues and expenses based upon the information provided by the operators within the revenue statements.
The Company disaggregates revenues from its share of revenue from the sale of oil and natural gas and liquids by region. The Company’s revenues in its Rockies, West Texas, South Texas and Gulf Coast, and Mid- ContinentMid-Continent regions for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, are presented in the following table:
SCHEDULE OF DISAGGREGATED REVENUE
2023 | 2022 | 2023 | 2022 | |||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue: | ||||||||||||||||
Rockies | ||||||||||||||||
Oil | $ | 2,470 | $ | 4,587 | $ | 4,808 | $ | 7,978 | ||||||||
Natural gas and liquids | 128 | 343 | 216 | 536 | ||||||||||||
Total | $ | 2,598 | $ | 4,930 | $ | 5,024 | $ | 8,514 | ||||||||
West Texas, South Texas, and Gulf Coast | ||||||||||||||||
Oil | $ | 3,022 | $ | 4,823 | $ | 5,978 | $ | 8,604 | ||||||||
Natural gas and liquids | 112 | 475 | 321 | 680 | ||||||||||||
Total | $ | 3,134 | $ | 5,298 | $ | 6,299 | $ | 9,284 | ||||||||
Mid-Continent | ||||||||||||||||
Oil | $ | 1,536 | $ | 1,825 | $ | 3,338 | $ | 2,584 | ||||||||
Natural gas and liquids | 710 | 1,427 | 1,590 | 1,970 | ||||||||||||
Total | $ | 2,246 | $ | 3,252 | $ | 4,928 | $ | 4,554 | ||||||||
Combined Total | $ | 7,978 | $ | 13,480 | $ | 16,251 | $ | 22,352 |
10 |
SCHEDULE OF DISAGGREGATED REVENUE
2022 | 2021 | 2022 | 2021 | |||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue: (1) | ||||||||||||||||
Rockies | ||||||||||||||||
Oil | $ | 3,407 | $ | 752 | $ | 11,385 | $ | 2,066 | ||||||||
Natural gas and liquids | 343 | 101 | 879 | 249 | ||||||||||||
Total | $ | 3,750 | $ | 853 | $ | 12,264 | $ | 2,315 | ||||||||
South Texas | ||||||||||||||||
Oil | $ | 1,670 | $ | 230 | $ | 5,482 | $ | 633 | ||||||||
Natural gas and liquids | 275 | 19 | 668 | 47 | ||||||||||||
Total | $ | 1,945 | $ | 249 | $ | 6,150 | $ | 680 | ||||||||
West Texas | ||||||||||||||||
Oil | $ | 1,370 | $ | 271 | $ | 4,202 | $ | 672 | ||||||||
Natural gas and liquids | 35 | 71 | 208 | 141 | ||||||||||||
Total | $ | 1,405 | $ | 342 | $ | 4,410 | $ | 813 | ||||||||
Gulf Coast | ||||||||||||||||
Oil | $ | 878 | $ | 312 | $ | 2,838 | $ | 838 | ||||||||
Natural gas and liquids | 144 | - | 258 | - | ||||||||||||
Total | $ | 1,022 | $ | 312 | $ | 3,096 | $ | 838 | ||||||||
Mid-Continent | ||||||||||||||||
Oil | $ | 1,654 | $ | 28 | $ | 4,239 | $ | 22 | ||||||||
Natural gas and liquids | 2,023 | - | 3,992 | (17 | ) | |||||||||||
Gathering fee | 27 | - | 27 | - | ||||||||||||
Total | $ | 3,704 | $ | 28 | $ | 8,258 | $ | 5 | ||||||||
Combined Total | $ | 11,826 | $ | 1,784 | $ | 34,178 | $ | 4,651 |
Significant concentrations of credit risk
The Company has exposure to credit risk in the event of non-payment of oil and natural gas receivables by purchasers of its operated oil and natural gas properties and the joint interest operators of the Company’s non-operated oil and natural gas properties. The following table presents the purchasers that accounted for 10% or more of the Company’s total oil and natural gas revenue for at least one of the periods presented:
SCHEDULE OF REVENUE FROM PURCHASERSCONCENTRATION OF CREDIT RISK
Nine Months Ended September 30, | 2023 | 2022 | ||||||||||||||
Purchaser | 2022 | 2021 | ||||||||||||||
Six Months Ended June 30, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Purchaser A | 24 | % | 27 | % | 23 | % | 23 | % | ||||||||
Purchaser B | 21 | % | - | 18 | % | 22 | % | |||||||||
Purchaser C | 6 | % | 35 | % | ||||||||||||
Concentration risk percentage | 18 | % | 22 | % |
4. LEASES
During the nine months ended September 30, 2022, the Company acquired right-of-use assets andThe Company’s operating lease liabilities of $953 thousand associated with entering into a 67-month 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 condensed consolidated balance sheets at SeptemberJune 30, 20222023 and December 31, 2021:2022:
SCHEDULE OF CONSOLIDATED BALANCE SHEET
September 30, 2022 | December 31, 2021 | |||||||
(in thousands) | ||||||||
Right of use asset balance | ||||||||
Operating lease | $ | 933 | $ | 120 | ||||
Lease liability balance | ||||||||
Short-term operating lease | $ | 182 | $ | 114 | ||||
Long-term operating lease | 837 | 19 | ||||||
Total operating leases | $ | 1,019 | $ | 133 |
June 30, 2023 | December 31, 2022 | |||||||
(in thousands) | ||||||||
Right-of-use assets | $ | 773 | $ | 868 | ||||
Lease liabilities | ||||||||
Current lease obligation | $ | 176 | $ | 189 | ||||
Long-term lease obligation | 704 | 794 | ||||||
Total lease liabilities | $ | 880 | $ | 983 |
The Company recognizes lease expense on a straight-line basis excluding short-term and variable lease payments, which are recognized as incurred. Short-term lease costs representcost represents payments for office spaceleases with original terms less than one year. Beginning in Golden, Colorado and our Houston, Texas office lease, prior to February 2021. In May 2022,March 2020, the Company entered into a new 67-month lease for additional office space in Houston, Texas. The Company subleasessubleased its former Denver, Colorado office and recognizesrecognized sublease income as a reduction of rent expense. The term of the sublease was through the term of the Company’s Denver office lease, which terminated on January 31, 2023. Following are the amounts recognized as components of rental expense for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:
SCHEDULE OF LEASE COSTS
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Operating lease cost | $ | 77 | $ | 31 | $ | 177 | $ | 95 | $ | 49 | $ | 69 | $ | 114 | $ | 100 | ||||||||||||||||
Short-term lease cost | 2 | 2 | 6 | 7 | 184 | 2 | 453 | 4 | ||||||||||||||||||||||||
Sublease income | (21 | ) | (16 | ) | (54 | ) | (48 | ) | - | (17 | ) | - | (33 | ) | ||||||||||||||||||
Total lease costs | $ | 58 | $ | 17 | $ | 129 | $ | 54 | $ | 233 | $ | 54 | $ | 567 | $ | 71 |
The Company’s Denver and Houston office operating leases dolease does not contain implicit interest rates that can be readily determined; therefore, the Company used the incremental borrowing rates in effect at the time the Company entered into the leases.
SCHEDULE OF WEIGHTED AVERAGE LEASE
As of September 30, | As of June 30, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Weighted average lease term (years) | 5.0 | 1.4 | 4.4 | 5.1 | ||||||||||||
Weighted average discount rate | 4.47 | % | 9.26 | % | 4.25 | % | 4.60 | % |
The future minimum lease commitments as of September 30, 2022 are presented in the table below in thousands. Such commitments are reflected at undiscounted values and are reconciled to the discounted present value on the consolidated balance sheet as follows:
SCHEDULE OF FUTURE MINIMUM LEASE COMMITMENTS
Amount | ||||
Remainder of 2022 | $ | 47 | ||
2023 | 225 | |||
2024 | 213 | |||
2025 | 218 | |||
2026 | 224 | |||
2027 | 210 | |||
Total lease payments | 1,137 | |||
Less: imputed interest | (118 | ) | ||
Total lease liability | $ | 1,019 |
In August 2021, the Company sold its 14-acre tract in Riverton, Wyoming with a two-story, 30,400 square foot office building. The Company recognized a loss on the rental property for the three months ended September 30, 2021 of $15 thousand and rental income, net of rental operating expenses of $8 thousand for the nine months ended September 30, 2021 related to the office building.
Maturity of operating lease liabilities with terms of one year or more as of June 30, 2023 are presented in the following table:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS
June 30, 2023 | ||||
(in thousands) | ||||
2023 | $ | 105 | ||
2024 | 213 | |||
2025 | 218 | |||
2026 | 224 | |||
2027 | 210 | |||
Total lease payments | $ | 970 | ||
Less: imputed interest | (90 | ) | ||
Total lease liability | $ | 880 |
5. OIL AND NATURAL GAS PRODUCTION ACTIVITIES
Divestitures
During the ninesix months ended SeptemberJune 30, 2023 there were no divestitures of oil and gas properties. During the six months ended June 30, 2022, the Company divested of the Wildhorse Waterflood Unit in Osage County, Oklahoma, which was part of the Acquired Assets acquired on January 5, 2022. Net proceeds from the sale of the waterflood unitWildhorse Waterflood Unit were $1.2 million. During the nine months ended September 30, 2021,In addition, in December 2022, the Company sold its approximately 1230% interest in two non-operated wells in Zavala County, Texas and associated acreage of approximately 4,500 acres of undeveloped acreagefor $1.1 million. The proceeds from divestitures are recorded as reductions in Midland County, Texas for approximately $30 thousand.the full cost pool.
Ceiling Test and Impairment
The Company did not record a ceiling test write-down of its oil and natural gas properties during the nine months ended September 30, 2022 or 2021. The reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In the calculation of the ceiling test as of SeptemberJune 30, 2022,2023, the Company used $91.7182.82 per barrel for oil and $6.134.76 per one million British Thermal Units (MMbtu) for natural gas (as further adjusted for property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used was 10%.
For the three and six months ended June 30, 2023, and 2022, the Company did not record ceiling test write downs of its oil and natural gas properties.
6. DEBT
On January 5, 2022, the Company entered into a five-yearfour-year credit agreement (“Credit Agreement”) with Firstbank Southwest (“Firstbank”) as administrative agent for one or more lenders (the “Lenders”), which providesprovided for a revolving line of credit with an initial borrowing base of $15 million, and a maximum credit amount of $100 million. Borrowings under the Credit Agreement are collateralized by a first priority, perfected lien and security interests on substantially all assets of the Company (subject to permitted liens and other customary exceptions). On July 26, 2022, the Company, in anticipation of the closing of the ETXENERGY East Texas acquisition entered into a letter agreement with FirstBank whereby it increased the borrowing base under the Credit Agreement from $15 million to $20 million. On July 27, 2022, in connection with the closing of the ETXENERGY Acquisition, the Company borrowed $
10.7 million under the Credit Agreement.
Under the Credit Agreement, revolving loans may be borrowed, repaid and re-borrowed until January 5, 2026, when all outstanding amounts must be repaid. Interest on the outstanding amounts under the Credit Agreement will accrue at an interest rate equal to (a) the greatest of (i) the prime rate in effect on such day, and (b) the Federal Funds rate in effect on such day (as determined in the Credit Agreement) plus 0.50%, and an applicable margin that ranges between 0.25% to 1.25% depending on utilization of the amount of the borrowing base (the “Applicable Margin”). The weighted average interest rateInterest expense recognized on the Credit Agreement and the weighted average interest rates for the three and ninesix months ended SeptemberJune 30, 2022, was 6.25%2023 and 5.71% per annum, respectively2022. The Company recognized interest expense inclusive of amortization of debt issuance costs on are presented in the Credit Agreement for the three and nine months ended September 30, 2022 of $182 thousand and $292 thousand, respectively.following table:
SCHEDULE OF DEBT
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(in thousands) | ||||||||||||||||
Interest expense | $ | 267 | $ | 56 | $ | 519 | $ | 100 | ||||||||
Weighted average interest rate | 8.9 | % | 4.7 | % | 8.7 | % | 4.5 | % |
The Credit Agreement contains various restrictive covenants and compliance requirements, which include, among other things:include: (i) maintenance of certain financial ratios, as defined in the Credit Agreement tested quarterly, that limit the Company’s ratio of total debt to EBITDAX (as defined in the Credit Agreement) to 3:1 and require its ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at 1:1 or higher; (ii) a restrictionrestrictions on making restricted payments as defined in the Credit Agreement, including the payment of cash dividends and repurchases of equity interests (subject to certain limited rights to declare and pay dividendsmake restricted payments as long as no event of default has occurred, andor would result from the restricted payment, certain financial ratios are met)met and the borrowing availability after giving pro forma effect to any borrowing to be made on the date of the restricted payment is greater than, or equal to, 20% of the then existing borrowing base); (iii) limits on the incurrence of additional indebtedness; (iv) a prohibition on the entry into commodity swap contracts exceeding a specified percentage of our expected production; and (v) restrictions on the disposition of assets. As of SeptemberJune 30, 2022,2023, the borrowing base was $20 million, and the Company was in compliance with all financial covenants related to the Credit Agreement.
12 |
A total of $
3.5 million was borrowed under the Credit Agreement immediately upon the entry into such Credit Agreement on January 5, 2022. The $3.5 million was immediately used to repay $3.3 million of debt assumed as part of the acquisition of the Acquired Assets. The amount outstanding on the Credit Agreement as of SeptemberJune 30, 2023 and December 31, 2022, was $12.512.0 million.
On March 4, 2021, the Company closed a Debt Conversion Agreement (the “Conversion Agreement”) with APEG Energy II, L.P. (“APEG II”), which entity Patrick E. Duke, a former director of the Company, has shared voting power and shared investment power over. The Conversion Agreement was related to a $375,000 related party secured note payable the Company borrowed from APEG II on September 24, 2020 (the “Note”). The Note accrued interest at 10% per annum and had a maturity date of September 24, 2021. The Note was secured by the Company’s wholly-owned subsidiary, Energy One’s oil and natural gas producing properties. Under the terms of the Note, the Company may repay the Note prior to maturity, however, in the event of a prepayment of the Note, 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 Conversion Agreement, the Company converted the related party secured note payable of $375,000 and accrued interest to the date of the Note’s September 24, 2021 maturity of $37,500 by issuing shares of unregistered common stock with a value on the date of the Conversion Agreement of $438,000. The difference of $ between the value of the shares issued and the $412,500 amount of the Note and accrued interest through the date of maturity is recorded as interest expense, net, in the condensed consolidated statements of operations.
7. COMMODITY DERIVATIVES
The Company’s results of operations and cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of its exposure to price volatility from producing crude oil and natural gas, the Company entersmay enter into commodity derivative contracts to protect against price declines in future periods. The Company does not enter into derivative contracts for speculative purposes. The Company hasdoes not elected to designate the derivative contracts as cash flow hedges; therefore, the instruments do not qualify forcurrently apply hedge accounting. Accordingly, changes in the fair value of the derivative contracts are recorded in the unaudited condensed consolidated statements of operations and are included as a non-cash adjustment to net income in cash flows fromthe operating activities section in the condensed consolidated statement of cash flows.
On January 5, 2022, the Company and NextEra Energy Marketing LLC (“NextEra”) entered into an International Swap Dealers Association, Inc. Master Agreement and Schedule (the “Master Agreement”), facilitating the Company to enter into derivative contracts to manage the risk associated with its business relating to commodity prices. The Company’s obligations to NextEra under the Master Agreement are secured by the collateralliens and security interests which securesalso secure the loans under the Credit Agreement on a pari passu and pro rata basis with the principal of such loans. The structure of the derivative contacts may include swaps, caps, floors, collars, locks, forwards and options.
The Company’s entry into and the obligations of the Company under the Master Agreement were required conditions to the Closing of the Banner Purchase Agreement,January 2022 acquisition closing, pursuant to which the Company was required to assume and novate certain hedges of Banner which had a mark to market loss of approximately $3.1 million as of the Closing Date. In addition, on January 12, 2022, the Company entered into additional NYMEX WTI crude oil commodity derivative contracts with NextEra for 2022 and 2023 production. As of SeptemberJune 30, 2022,2023, the Company had commodity derivative contracts outstanding through the fourth quarter of 2023 as summarized in the tables below:
SCHEDULE OF COMMODITY DERIVATIVE CONTRACTS
Collars | Fixed Price Swaps | |||||||||||||||||||
Quantity | Quantity | |||||||||||||||||||
Commodity/ Index/ | Crude Oil-(Bbls)(1) Natural | Weighted Average Prices | Crude Oil- (Bbls) Natural | Weighted Average | ||||||||||||||||
Maturity Period | Gas-(Mmbtu)(2) | Floors | Ceilings | Gas-(Mmbtu) | Price | |||||||||||||||
NYMEX WTI | ||||||||||||||||||||
Crude Oil 2022 Contracts: | ||||||||||||||||||||
Fourth quarter 2022 | 71,800 | $ | 59.86 | $ | 80.34 | 9,000 | $ | 49.99 | ||||||||||||
Total Remaining 2022 | 71,800 | $ | 59.86 | $ | 80.44 | 9,000 | $ | 49.99 | ||||||||||||
Crude Oil 2023 Contracts: | ||||||||||||||||||||
First quarter 2023 | 66,200 | $ | 57.73 | $ | 76.00 | 6,000 | $ | 59.20 | ||||||||||||
Second quarter 2023 | 53,500 | $ | 60.00 | $ | 81.04 | 6,000 | $ | 59.20 | ||||||||||||
Third quarter 2023 | 52,600 | $ | 60.00 | $ | 81.04 | - | $ | - | ||||||||||||
Fourth quarter 2023 | 51,200 | $ | 60.00 | $ | 81.04 | - | $ | - | ||||||||||||
Total 2023 | 223,500 | $ | 59.33 | $ | 79.55 | 12,000 | $ | 59.20 | ||||||||||||
NYMEX Henry Hub | ||||||||||||||||||||
Natural Gas 2022 Contracts: | ||||||||||||||||||||
Fourth quarter 2022 | - | $ | - | $ | - | 60,000 | $ | 2.96 | ||||||||||||
Total remaining 2022 | - | $ | - | $ | - | 60,000 | $ | 2.96 | ||||||||||||
Natural Gas 2023 Contracts: | ||||||||||||||||||||
First quarter 2023 | - | $ | - | $ | - | 60,000 | $ | 2.96 |
Collars | ||||||||||||
Quantity Crude oil | Weighted Average Prices | |||||||||||
Commodity/ Index/ Maturity Period | (Bbls)(1) | Floors | Ceilings | |||||||||
NYMEX WTI | ||||||||||||
Crude Oil 2023 Contracts: | ||||||||||||
Third quarter 2023 | 52,600 | $ | 60.00 | $ | 81.04 | |||||||
Fourth quarter 2023 | 51,200 | $ | 60.00 | $ | 81.04 | |||||||
Total 2023 | 103,800 | $ | 60.00 | $ | 81.04 |
(1) | “Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons. |
The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets by category:
SCHEDULE OF FAIR VALUE OF COMMODITY DERIVATIVE CONTRACTS
September 30, 2022 | December 31, 2021 | June 30, 2023 | December 31, 2022 | |||||||||||||
(in thousands) | ||||||||||||||||
Derivative assets: | ||||||||||||||||
Current assets | $ | 8 | $ | - | ||||||||||||
Total derivative assets | $ | 8 | $ | - | ||||||||||||
(in thousands) | ||||||||||||||||
Derivative liabilities: | ||||||||||||||||
Current liabilities | $ | 1,991 | $ | - | $ | - | $ | 1,694 | ||||||||
Non-current liabilities | 6 | - | ||||||||||||||
Total derivative liabilities | $ | 1,997 | $ | - | $ | - | $ | 1,694 |
13 |
As of SeptemberJune 30, 2022,2023, all commodity derivative contracts held by the Company were subject to master netting arrangements with its counterparty. The terms of the Company’s derivative agreements provide for the offsetting of amounts payable or receivable between it and the counterparty for contracts that settle on the same date. The Company’s agreements also provide that in the event of an early termination, the counterparty has the right to offset amounts owed or owing under that and any other agreement. The Company’s accounting policy is to offset positions that settle on the same date with the same counterparty. See Note 13-Fair Value Measurements for disclosure of the fair value of derivative assets and liabilities on a gross and net basis.
The following table summarizes the commodity components of the derivative settlement gain (loss) as well as the components of the net derivative loss line-item presentation in the accompanying condensed consolidated statement of operations:
SCHEDULE OF DERIVATIVE SETTLEMENT GAIN LOSS
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Derivative settlement losses: | ||||||||||||||||||||||||||||||||
Oil contracts | $ | (1,291 | ) | $ | (80 | ) | $ | (5,428 | ) | $ | (119 | ) | $ | (89 | ) | $ | (2,590 | ) | $ | (466 | ) | $ | (4,137 | ) | ||||||||
Gas contracts | (321 | ) | - | (671 | ) | - | - | (239 | ) | (28 | ) | (350 | ) | |||||||||||||||||||
Total derivative settlement losses | $ | (1,612 | ) | $ | (80 | ) | $ | (6,099 | ) | $ | (119 | ) | $ | (89 | ) | $ | (2,829 | ) | $ | (494 | ) | $ | (4,487 | ) | ||||||||
Total net derivative loss: | ||||||||||||||||||||||||||||||||
Oil contracts | $ | 4,338 | (25 | ) | $ | (4,026 | ) | (235 | ) | $ | 288 | $ | (2,068 | ) | $ | 1,148 | $ | (8,364 | ) | |||||||||||||
Gas contracts | (313 | ) | - | (918 | ) | - | - | (64 | ) | 60 | (605 | ) | ||||||||||||||||||||
Total net derivative loss | $ | 4,025 | (25 | ) | $ | (4,944 | ) | $ | (235 | ) | ||||||||||||||||||||||
Total net derivative gains (losses) | $ | 288 | $ | (2,132 | ) | $ | 1,208 | $ | (8,969 | ) |
8. COMMITMENTS CONTINGENCIES AND RELATED-PARTY TRANSACTIONSCONTINGENCIES
LitigationContingencies
In July 2020, the Company received a request for arbitration from its former Chief Executive Officer, David Veltri claiming that it breached his employment agreement. The Company settledis subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation in December 2021 by paying Mr. Veltri and his attorneys $750 thousand,claims are not expected to have a material effect on the results of which $375 thousand was reimbursed byoperations, the Company’s insurance carrier. Total amounts incurred byfinancial position, or the Company related to the litigation was $427 thousand.
APEG II Litigation
From February 2019 until August 2020, the Company was involved in litigation with its former Chief Executive Officer, David Veltri, and at the time its largest shareholder, APEG II and APEG II’s general partner, APEG Energy II, GP (together with APEG II, “APEG”). In addition, Patrick E. Duke, a former directorcash flows of the Company, had shared voting and shared investment power over APEG. The litigation arose as a result of a vote at the February 25, 2019 board of directors meeting to terminate Mr. Veltri for using Company funds outside of his authority and for other reasons (the “Texas Litigation”). In a separate lawsuit, APEG initiated a shareholder derivative action in Colorado against Mr. Veltri due to his refusal to recognize the Board’s decision to terminate him (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 shares of unregistered common stock, which had a value on the date of issuance of $406 thousand, to APEG in reimbursement of APEG’s legal costs in the Colorado and Texas Litigation.Company.
9. SHAREHOLDERS’ EQUITY
At June 30, 2023, the Company had 241 thousand to repurchase shares of common stock as part of a share repurchase plan. On January 5, 2022, the Company issued shares of common stock in connection with the acquisition of the Acquired Assets. shares of common stock outstanding and authorized. In addition, as of June 30, 2023, the Company had authorized but unissued shares of preferred stock. During the three months ended June 30, 2023, the Company paid $
Stock Options Plans
From time to time, the Company may grant stock options under its incentive plan covering shares of common stock to employees of the Company. Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option. These awards typically expire ten years from the grant date.
For the three and ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, there was compensation expense related to stock options. As of December 31, 2019,June 30, 2022, all stock options had vested. stock options were granted or exercised during the ninethree or six months ended SeptemberJune 30, 20222023 or 2021.2022. Stock options tofor the purchase of shares and sharesof common stock expired during the ninesix months ended SeptemberJune 30, 2022 and September 30, 2021, respectively.2022. The stock options had de minimis intrinsic values for the periods reported. Presented below is information aboutfor stock options outstanding and exercisable as of SeptemberJune 30, 2022,2023, and December 31, 2021:2022:
September 30, 2022 | December 31, 2021 | |||||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Stock options outstanding and exercisable | 28,122 | $ | 31,035 | $ |
June 30, 2023 | December 31, 2022 | |||||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Stock options outstanding and exercisable | 28,122 | $ | 28,122 | $ |
14 |
SCHEDULE OF STOCK OPTIONS OUTSTANDING AND EXERCISABLE
Options Outstanding | Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | ||||||||||||||||||||||||||||||||||||||||||||||||
Exercise | Weighted | Remaining | Weighted | Exercise | Weighted | Remaining | Weighted | |||||||||||||||||||||||||||||||||||||||||||||
Number of | Number of | Price Range | Average Exercise | Contractual Term | Number of | Average Exercise | Number of | 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 | $ | $ | $ | 16,500 | $ | 16,500 | $ | $ | $ | 16,500 | $ | |||||||||||||||||||||||||||||||||||||||||
10,622 | 90.00 | 124.80 | 10,622 | 106.20 | 10,622 | 90.00 | 124.80 | 10,622 | 106.20 | |||||||||||||||||||||||||||||||||||||||||||
1,000 | 226.20 | 226.20 | 1,000 | 226.20 | 1,000 | 226.20 | 226.20 | 1,000 | 226.20 | |||||||||||||||||||||||||||||||||||||||||||
28,122 | $ | 7.20 | $ | 226.20 | $ | 28,122 | $ | 54.03 | 28,122 | $ | 7.20 | $ | 226.20 | $ | 28,122 | $ | 54.03 |
Restricted Stock
From time to time theThe Company grants restricted stock under its incentive plan covering shares of common stock to employees and directors of the Company. In January 2023, restricted stock awards were granted to employees and directors from the 2021 Equity Incentive Plan and 2022 Equity Incentive Plan. In addition, in June 2023, per the terms of his employment agreement 100,000 restricted stock awards were issued to the Company’s new Chief Financial Officer. The restricted stock awards are time-based awards and are amortized ratably over the requisite two-year service period. Restricted stock vests ratably on each anniversary following the grant date provided the grantee is employed on the vesting date. Forfeitures of restricted stock awards are recognized as they occur. Restricted stock granted to employees, when vested, are netmay be settled through the net issuance of shares, net ofreduced by the number of shares required to pay withholding taxes. Non-vested shares of restricted stock are not included in common shares outstanding until vesting has occurred.
The following table presents the changes in non-vested, time-based restricted stock awards to all employees and directors for the ninesix months ended SeptemberJune 30, 2022:2023:
SCHEDULE OF NON-VESTED TIME-BASEDTIME- BASED RESTRICTED STOCK AWARDS
Shares | Weighted-Avg. Grant Date Fair Value per Share | Shares | Weighted-Avg. Grant Date Fair Value per Share | |||||||||||||
Non-vested restricted stock as of December 31, 2021 | 174,000 | $ | 4.75 | |||||||||||||
Non-vested restricted stock as of December 31, 2022 | 687,000 | $ | 3.79 | |||||||||||||
Granted | 986,500 | $ | 3.70 | 896,434 | $ | 2.21 | ||||||||||
Vested | (473,500 | ) | $ | 3.95 | (273,000 | ) | $ | 3.78 | ||||||||
Non-vested as of September 30, 2022 | 687,000 | $ | 3.79 | |||||||||||||
Forfeited | (60,000 | ) | $ | 2.30 | ||||||||||||
Non-vested restricted stock as of June 30, 2023 | 1,250,434 | $ | 2.73 |
The following table presentsFor the three and six months ended June 30, 2023, the Company recognized $ million and $ million, respectively, of stock compensation expense related to restricted stock grants forgrants. For the three and ninesix months ended SeptemberJune 30, 2022, the Company recognized $ million and 2021:$
SCHEDULE OF STOCK COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK GRANTS
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||||
Stock compensation expense | $ | 485 | $ | 115 | $ | 2,594 | $ | 310 |
million, respectively, of stock compensation expense related to restricted stock grants. Total compensation cost related to non-vested time-based awards and not yet recognized in the Company’s condensed consolidated statements of operations as of SeptemberJune 30, 2022,2023 was $ million. This cost is expected to be recognized over a weighted average period of years.
Dividends
During the three-month periods ended March 31 and June 30, 2023, the Company’s board of directors approved the declaration and payment of quarterly cash dividends of $1.2 million and $0.6 million, respectively. As an update to the existing shareholder returns program, on August 9, 2023, the Board of Directors suspended the Company’s dividend payment program, with the associated future capital resources being allocated towards the Company’s share repurchase program and repayments of our credit facility’s outstanding balance. per share of common stock. For the six months ended June 30, 2023 and 2022, the Company paid dividends of $
15 |
Share Repurchase Program
On April 26, 2023, the Board of Directors of the Company authorized and approved a share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock. Subject to any future extensions, the repurchase program is scheduled to expire the earlier of on June 30, 2024, or when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when the program is discontinued by the Company.
Under the stock repurchase program, shares are repurchased from time to time in the open market or through negotiated transactions at prevailing market prices, or by other means in accordance with federal securities laws. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program is funded using the Company’s working capital. The repurchased shares are cancelled and therefore will not be held in treasury or reissued.
During the three months ended June 30, 2023, the Company paid $0.2 million for the repurchase of shares at a weighted average price of $ per share.
10. ASSET RETIREMENT OBLIGATIONS
The Company has asset retirement obligations (“AROs”) associated with the future plugging and abandonment of proved properties. Initially, the fair value of a liability for an ARO is recorded in the period in which the ARO is incurred with a corresponding increase in the carrying amount of the related asset. The liability is accreted to its present value each period and the capitalized cost is depleted over the life of the related asset. If the liability is settled for an amount other than the recorded amount, an adjustment to the full-cost pool is recognized. The Company had no assets that are restricted for the purpose of settling AROs.
The Company recorded $9.99.6 million of ARO related to the assets acquired in the January 5, 2022 acquisition, $0.5 million of ARO related to the assets acquired in the May 3, 2022 acquisition of Liberty County, Texas assets and $1.7$1.7 million of ARO related to the assets acquired in the July 27, 2022 acquisition. See Note 2- Acquisitions.
In the fair value calculation for the ARO there are numerous assumptions and judgments, including the ultimate retirement cost, inflation factors, credit-adjusted risk-free discount rates, timing of retirement and changes in legal, regulatory, environmental, and political environments. To the extent future revisions to assumptions and judgments impact the present value of the existing ARO, a corresponding adjustment is made to the oil and natural gas property balance.
The following is a reconciliation of the changes in the Company’s liabilities for asset retirement obligations as of SeptemberJune 30, 20222023 and December 31, 2021:2022:
SCHEDULE OF ASSET RETIREMENT OBLIGATION
September 30, 2022 | December 31, 2021 | June 30, 2023 | December 31, 2022 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Balance, beginning of year | $ | 1,461 | $ | 1,408 | $ | 15,442 | $ | 1,461 | ||||||||
Acquired | 12,047 | 45 | ||||||||||||||
Life revisions | 131 | - | ||||||||||||||
Sold/Plugged | (289 | ) | (70 | ) | ||||||||||||
Acquired or incurred | 11 | 11,811 | ||||||||||||||
Cost and life revisions | (43 | ) | 1,825 | |||||||||||||
Plugged | (52 | ) | (407 | ) | ||||||||||||
Sold | - | (189 | ) | |||||||||||||
Accretion | 706 | 78 | 536 | 941 | ||||||||||||
Balance, end of period | $ | 14,056 | $ | 1,461 | $ | 15,894 | $ | 15,442 |
11. INCOME TAXES
The Company’s tax provision or benefit from income taxes for interim periods is generally determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Each quarter the Company updates its estimate of the annual effective tax rate and makes a year-to-date adjustment to the provision. However, for the nine months ended September 30, 2022, the estimated annual effective tax rate presented a distorted amount of expense in relation to the year-to-date results. As such, the Company has determined the tax benefit for the nine months ended September 30, 2022 on an actual year-to-date basis instead of applying the estimated annual effective tax rate. The Company’s effective tax rate was approximately 1557% and 0.045% for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The primary difference in the Company’s effective tax rate and the statutory rate for the ninesix months ended SeptemberJune 30, 20222023 related to the movement in the valuation allowance against the Company’s net deferred tax assets.
The Company’s income tax benefit for the ninesix months ended SeptemberJune 30, 2022 includes a discrete income tax benefit of $2.4 million related to the release of a portion of the Company’s previously established valuation allowance to offset deferred tax liabilities arising from the January 5, 2022 transaction.
Deferred taxes are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets, liabilities, net operating losses and tax credit carry-forwards. We review our deferred tax assets (“DTAs”) and valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulative results in recent years. The January 5, 2022 transaction triggered an Internal Revenue Code (IRC) Section 382 ownership change, and therefore placed additional limitations on the Company’s pre-transaction net operating loss (NOL) and other tax attributes.
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 ninethree and six months ended SeptemberJune 30, 20222023 and 2021,2022, no adjustments were recognized for uncertain tax positions.
Basic net income (loss)loss per common share is calculated by dividing net income (loss)loss attributable to common shareholders by the weighted-average number of common shares outstanding for the respective period. Diluted net income (loss)loss per common share is calculated by dividing adjusted net income (loss)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,unvested shares of restricted common stock, which are measured using the treasury stock method, and unvested shares of restricted common stock.method. When the Company recognizes a net loss, as was the case for the ninethree and six months ended SeptemberJune 30, 2021,2023 and the six months ended June 30, 2022, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of dilutive net loss per common share. Unvested shares of restricted stock participate in dividend distributions and are therefore included as a reduction in the calculation of income attributable to common shareholders. See Note 9- Shareholders’ Equity.
SCHEDULE OF BASIC AND DILUTED NET LOSS PER SHARE
2022 | 2021 | 2022 | 2021 | |||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(in thousands except per share data) | ||||||||||||||||
Net income (loss) | $ | 4,110 | $ | 81 | $ | 848 | $ | (288 | ) | |||||||
Less: undistributed earnings allocated to participating securities | (101 | ) | - | - | - | |||||||||||
Undistributed earnings attributable to common shareholders | $ | 4,009 | $ | 81 | $ | (308 | ) | $ | (288 | ) | ||||||
Basic weighted average common shares outstanding | 24,390 | 4,676 | 24,548 | 4,430 | ||||||||||||
Dilutive effect of unvested restricted stock | 292 | 43 | 343 | - | ||||||||||||
Dilutive effect of warrants | - | 2 | - | - | ||||||||||||
Diluted weighted average common shares outstanding | 24,682 | 4,721 | 24,891 | 4,430 | ||||||||||||
Basic net income (loss) per share | $ | 0.16 | $ | 0.02 | $ | 0.03 | $ | (0.07 | ) | |||||||
Diluted net income (loss) per share | $ | 0.16 | $ | 0.02 | $ | 0.03 | $ | (0.07 | ) |
2023 | 2022 | 2023 | 2022 | |||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(in thousands except per share data) | ||||||||||||||||
Net income (loss) | $ | (2,515 | ) | $ | 122 | $ | (3,762 | ) | $ | (3,262 | ) | |||||
Basic weighted average common shares outstanding | 25,187 | 24,924 | 25,183 | 24,324 | ||||||||||||
Dilutive effect of potentially dilutive securities | - | 341 | - | - | ||||||||||||
Diluted weighted average common shares outstanding | 25,187 | 25,265 | 25,183 | 24,324 | ||||||||||||
Basic net income (loss) per share | $ | (0.10 | ) | $ | 0.00 | $ | (0.15 | ) | $ | (0.13 | ) | |||||
Diluted net income (loss) per share | $ | (0.10 | ) | $ | 0.00 | $ | (0.15 | ) | $ | (0.13 | ) |
SCHEDULE OF ANTI-DILUTIVE WEIGHTED AVERAGE SHARES
2023 | 2022 | 2023 | 2022 | |||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(in thousands) | ||||||||||||||||
Stock options | 28 | 30 | 28 | 30 | ||||||||||||
Unvested shares of restricted stock | 1,250 | - | 1,250 | 787 | ||||||||||||
Total | 1,278 | 30 | 1,278 | 817 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||||
Stock options | - | - | - | 31 | ||||||||||||
Unvested shares of restricted stock | - | - | - | 158 | ||||||||||||
Warrants | - | - | - | 50 | ||||||||||||
Total | - | - | - | 239 |
17 |
13. FAIR VALUE MEASUREMENTS
The Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the hierarchy level. The three levels of inputs that may be used to measure fair value are defined as:
Level 1 - Quoted prices for identical assets and liabilities traded in active exchange markets.
Level 2 - Observable inputs other than Level 1 that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or other observable inputs that can be corroborated by observable market data.
Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Recurring Fair Value MeasurementsThe Company has processes and controls in place to estimate fair value. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed, and any material exposures are evaluated through a management review process.
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following is a description of the valuation methodologies used for complex financial instruments measured at fair value:
Recurring Fair Value Measurements
Commodity Derivative Instruments
We measureThe Company measures the fair value of commodity derivative contracts using an income valuation technique based on the contract price of the underlying positions, crude oil and natural gas forward curves, discount rates, and Company or counterparty non-performance risk. The fixed-price swaps and collar derivative contracts are included in Level 2. The fair value of commodity derivative contracts and their presentation in our unaudited condensed consolidated balance sheet as of SeptemberJune 30, 20222023 are presented below:
SCHEDULE OF RECURRING MEASUREMENTS OF FAIR VALUE OF ASSETS AND LIABILITIES
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | Effect of Netting | Net Fair Value Presented in the Condensed Consolidated Balance Sheet | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | Effect of Netting | Net Fair Value Presented in the Unaudited Condensed Consolidated Balance Sheet | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commodity derivatives | $ | - | $ | 780 | $ | - | $ | 780 | $ | (780 | ) | $ | - | $ | - | $ | 129 | $ | - | $ | 129 | $ | (121 | ) | $ | 8 | ||||||||||||||||||||||
Non-current: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commodity derivatives | $ | - | $ | 546 | $ | - | $ | 546 | $ | (546 | ) | $ | - | |||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commodity derivatives | $ | - | $ | (2,771 | ) | $ | - | $ | (2,771 | ) | $ | 780 | $ | (1,991 | ) | $ | - | $ | (121 | ) | $ | - | $ | (121 | ) | $ | 121 | $ | - | |||||||||||||||||||
Non-current: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commodity derivatives | $ | - | $ | (552 | ) | $ | - | $ | (552 | ) | $ | 546 | $ | (6 | ) | |||||||||||||||||||||||||||||||||
Net derivative instruments | $ | - | $ | (1,997 | ) | $ | - | $ | (1,997 | ) | $ | - | $ | (1,997 | ) | $ | - | $ | 8 | $ | - | $ | 8 | $ | - | $ | 8 |
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Marketable Equity Securities
We measure the fair value of marketable equity securities based on quoted market prices obtained from independent pricing services. The Company has an investment in the marketable equity securities of Anfield Energy (“Anfield”), which it acquired as consideration for sales of certain mining operations. Anfield is traded in an active market under the trading symbol AEC:TSXV and has been classified as Level 1.
SCHEDULE OF INVESTMENT IN THE MARKETABLE EQUITY SECURITIES
September 30, | December 31, | |||||||||||||||
2022 | 2021 | June 30, 2023 | December 31, 2022 | |||||||||||||
Current assets: | ||||||||||||||||
Marketable equity securities | ||||||||||||||||
Number of shares owned | 2,421,180 | 2,421,180 | 2,421,180 | 2,421,180 | ||||||||||||
Quoted market price | $ | 0.04382 | $ | 0.07874 | $ | 0.03771 | $ | 0.04429 | ||||||||
Fair value of marketable equity securities | $ | 106,096 | $ | 190,641 | $ | 91,293 | $ | 107,234 |
Credit Facility
The Company’s credit facility approximates fair value because the interest rate is variable and reflective of market rates.
Other Financial Instruments
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.
Nonrecurring Fair Value Measurements
Asset Retirement Obligations
The Company measures the fair value of asset retirement obligations as of the date a well is acquired, the date a well begins drilling, or the date the Company revises its ARO assumptions using a discounted cash flow methodassumptions. The Company’s estimated asset retirement obligation is based on historical experience in plugging and abandoning wells, estimated economic lives, estimated plugging and abandonment costs and federal and state regulatory requirements, all unobservable inputs, including estimates of the costs to abandon and the timing of when the Company will ultimately abandon the asset. These estimates are based on engineering estimates and estimated reserve life and therefore, are designated as Level 3 within the valuation hierarchyhierarchy. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised. The credit adjusted risk-free rate used to discount the Company’s plugging and abandonment liabilities range from 7.30% to 9.75%. See See Note 10- 10-Asset Retirement Obligations.
Other Assets and Liabilities
The Company evaluates the fair value on a non-recurring basis of properties acquired in asset acquisitions using inputs that are not observable in the market and are therefore designated as Level 3 inputs within the fair value hierarchy. The Company has evaluated the fair value of its January 2022 asset acquisitionsacquisition based on discounted future cash flows using estimated production at estimated prices based on NYMEX strip pricing adjusted for differentials, operating costs, production taxes and development costs, all discounted at 10%. This evaluation resulted in an estimate of fair value of $87.7 million. The Company has also valued asset acquisitions using a multiple of expected cash flows based on comparable transactions. For the asset acquisition of East Texas assets that was completed on July 27, 2022, the Company used a cash flow multiple of approximately 1.75 times estimated cash flows of $7.3 million.
The carryingCompany evaluates the fair value on a non-recurring basis of its 13.84-acre land parcel in Riverton, Wyoming, which is currently listed for sale and classified as held for sale, when circumstances indicate that the value has been impaired. At June 30, 2023, the Company estimated the fair value of financial instruments included in currentits real estate assets and current liabilities approximatebased on a market approach with comparison to recent comparable sales, all Level 3 inputs within the fair value due to the short-term nature of those instruments. The carrying value of the amounts borrowed under the Credit Agreement approximate fair value because the interest on the Credit Agreement is at a floating rate.hierarchy.
19 |
14. OTHER CURRENT ASSETS AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
14.Other Current Assets
The following table presents the components of other current assets as of the dates indicated:
SCHEDULE OF OTHER CURRENT ASSETS
June 30, 2023 | December 31, 2022 | |||||||
(in thousands) | ||||||||
Prepaid expense | $ | 550 | $ | 138 | ||||
Joint interest billings receivable | 352 | 332 | ||||||
Income tax receivable | 33 | 50 | ||||||
Other | 38 | 38 | ||||||
Total other current assets | $ | 973 | $ | 558 |
Accounts Payable and Accrued Liabilities.
The following table presents the components of accounts payable and accrued liabilities as of the dates indicated:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
June 30, 2023 | December 31, 2022 | |||||||
(in thousands) | ||||||||
Accounts payable | $ | 2,538 | $ | 2,566 | ||||
Operating expense and oil and gas property accruals | 1,136 | 1,378 | ||||||
Revenue payables | 3,983 | 3,503 | ||||||
Production taxes payable | 370 | 319 | ||||||
Insurance premium financing | 422 | 54 | ||||||
Other | 15 | 12 | ||||||
Total accounts payable and accrued expenses | $ | 8,464 | $ | 7,832 |
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
SCHEDULE OF SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
2022 | 2021 | 2023 | 2022 | |||||||||||||
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Cash paid for interest | $ | (259 | ) | $ | (3 | ) | $ | (558 | ) | $ | (86 | ) | ||||
Investing activities: | ||||||||||||||||
Change in capital expenditure accruals | 244 | (30 | ) | $ | 50 | $ | 453 | |||||||||
Change in accrual for acquisition costs | (546 | ) | - | - | (546 | ) | ||||||||||
Common stock issued for acquisition of properties | 64,694 | - | - | 64,694 | ||||||||||||
Assumption of commodity derivative liability in acquisition of properties | 3,152 | - | - | 3,152 | ||||||||||||
Assumption of debt in acquisition of properties | 3,347 | - | - | 3,347 | ||||||||||||
Assumption of suspense accounts in acquisition of properties | 1,619 | - | - | 1,276 | ||||||||||||
Addition of operating lease liability and right of use asset | 953 | 82 | - | 953 | ||||||||||||
Prepaid rent liability netted with proceeds on sale of real estate | - | 143 | ||||||||||||||
Asset retirement obligations | 11,889 | 26 | (32 | ) | 10,302 | |||||||||||
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 | ||||||||||||||
Financing of insurance premiums with note payable | 588 | 223 | $ | 654 | $ | 588 |
15.16. SUBSEQUENT EVENTS
On October 27,
Under the full-cost method of accounting, the net book value of proved oil and gas properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the estimated after-tax future net cash flows from proved oil and gas reserves. Estimated future net cash flows are calculated using the unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months, adjusted for location and quality differentials, held flat for the life of the production (except where prices are defined by contractual arrangements), less estimated operating costs, production taxes and future development costs, all discounted at 10 percent per annum. Future cash outflows associated with settling accrued asset retirement obligations are excluded from the calculation.
As of June 30, 2023, no ceiling test write-down of our oil and gas assets was necessary. However, we expect to record a write-down of our oil and gas properties in the third quarter of 2023 due to lower commodity prices used in the calculation of the ceiling test as higher third quarter 2022 the Company’s Board of Directors approved a quarterly dividend of $ per share of common stock outstanding. The dividendrealized prices will be paidremoved from the ceiling calculation and replaced with lower third quarter 2023 commodity prices. Depending on November 22, 2022,actual commodity prices, estimated price differentials, lease operating costs, revisions to stockholdersreserve estimates, and the amount and timing of record ascapital expenditures, the write-down could be approximately $3 million to $4 million in the third quarter of 2023. Additional write-downs could be incurred in the closefourth quarter of business on November 8, 2022.2023.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the Securities and Exchange Commission on March 28, 2022April 13, 2023 (the “Annual Report”“Annual Report”).
Certain abbreviations and oil and gas industry terms used throughout this Report are described and defined in greater detail under “Glossary“Glossary of Oil and Natural Gas Terms”Terms” on page 34 of our Annual Report.
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited condensed consolidated financial statements included above under “Part“Part I - Financial Information”Information” – “Item“Item 1. Financial Statements”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.it, and we have not commissioned any such information.
See also “Cautionary“Cautionary Statement About “Forward-Looking Statements”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 subsidiariessubsidiaries.
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 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.The inclusion of any website address in this Report is intended to be an inactive textual reference only and not an active hyperlink. The information contained in, or that can be accessed through, such website is not part of or incorporated into this Report.
Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
● | General Overview. A general overview of the Company and our operations. | |
● | Recent Developments. Discussion of recent developments affecting the Company and our operations. | |
● | Plan of Operations and Strategy. Discussion of our strategy moving forward and how we plan to seek to increase stockholder value. | |
● | Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. | |
● | Results of Operations. An analysis of our financial results comparing the three and | |
● | Liquidity and Capital Resources. A discussion of our financial condition, including descriptions of balance sheet information and cash flows. |
General Overview
U.S. Energy Corp. is a Delaware corporation, originally organizedwas incorporated in the State of Wyoming inon January 26, 1966, and recently reincorporated to Delaware as discussed below.effective on August 3, 2022. We are an independent energy company focused on the acquisition and development of oil and natural gas producing properties in the continental United States. Our business activitiesprincipal properties and operations are currently focused in the Rockies region (Montana, Wyoming and North Dakota), the Mid-Continent region (Oklahoma, Kansas and North and East Texas), and the West Texas, South Texas theand Gulf Coast region.
We have historically explored for and produced oil and natural gas through a non-operator business model, however, during 2020 we acquired operated properties in North Dakota, New Mexico, Wyoming and the Texas Gulf Coast, and on January 5, 2022, we closed the acquisitions of certain oil and gas properties from three separate sellers, representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, South Texas and mid-continent.Mid-Continent regions.
Our strategic objectivebusiness strategy is to be a consolidatorenhance the value of high-quality producingour acquired operated assets in the United Statesthrough evaluation of selected properties with the potential to optimizegoal of increasing production and generate free cashflow through low-risk development projectsreserves. We plan to deploy our capital in a conservative and strategic manner and pursue value-enhancing transactions. We also continuously evaluate strategic alternative opportunities that we believe will enhance stockholder value.
Global commodity and financial markets continue to be subject to heightened levels of uncertainty and volatility as a result of inflation, disruptions resulting from recent bank failures, and the ongoing conflict between Russia and Ukraine and associated economic and trade sanctions on existing assets, while maintaining an attractive shareholder returns program. We are committedRussia. These circumstances have driven commodity price volatility and have contributed to Environmental, Social,increased service provider costs as well as other costs and Governance (ESG) stewardshipa rise in interest rates, and being a leader in reducingcould have further industry-specific impacts that may require us to adjust our carbon footprint in the areas in which we operate.business plan.
Material Developments
Acquisitions
On August 3,January 5, 2022, we closed the acquisitions of assets from three separate Purchase and Sale Agreements entered into by the Company changed its stateon October 4, 2021, with (i) Lubbock Energy Partners LLC, (ii) Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC (collectively, “Banner”), and (iii) Synergy Offshore LLC for approximately $66.4 million. The acquisition had an effective date of incorporation fromJanuary 1, 2022. The purchase price included payment of $1.25 million in cash and issuance of 19,905,736 shares of our common stock, valued at $64.7 million. In addition, we assumed Banner’s debt of approximately $3.3 million and derivative positions, which were in a loss position of $3.1 million. The assets acquired include certain oil and gas properties representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the State of Wyoming to the State of Delaware (the “Reincorporation”) by means of a Plan of Conversion, effective August 3, 2022 (the “Plan of Conversion”).Rockies, West Texas, South Texas, and Mid-Continent. The Reincorporation, including the Plan of Conversion, was submitted to a vote of,acquisition also included certain wells, contracts, technical data, records, personal property and approved by, the Company’s stockholders at the Company’s 2022 Annual Meeting of Stockholders held on June 21, 2022 (the “2022 Annual Meeting”), as set forth in the Company definitive proxy statement on Schedule 14A as filedhydrocarbons associated with the Securities and Exchange Commission on April 29, 2022 (the “Definitive Proxy Statement”).acquired assets.
The Reincorporation was accomplished by filing: (i) an Application for Certificate of Transfer with the Secretary of State of the State of Wyoming (the “Wyoming Certificate of Transfer”); (ii) a Certificate of Conversion with the Secretary of State of the State of Delaware (the “Delaware Certificate of Conversion”); and (iii) a Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Delaware Certificate of Incorporation”). In connection with the Reincorporation, the Company’s Board of Directors adopted new amended and restated bylaws in the form attached to the Plan of Conversion, which are as were set forth in the Definitive Proxy Statement (the “Delaware Bylaws”).
UponOn May 3, 2022, the effectivenessCompany acquired certain operated oil and gas producing properties in Liberty County, Texas, adjacent to its existing assets in the area, for $1.0 million in an all-cash transaction. The effective date of the Reincorporation on August 3, 2022:
Certain rightstransaction was April 1, 2022. The assets include approximately 1,022 acres, which are 100% held by production, a gas pipeline and associated infrastructure. In addition, the Company assumed suspense accounts of the Company’s stockholders changed as a result$0.2 million and asset retirement obligations of the Reincorporation, and such changes are described in greater detail in the Definitive Proxy Statement under the section entitled “Proposal 6: Approval of the Reincorporation of U.S. Energy Corp. From a Wyoming Corporation to a Delaware Corporation”.
The Reincorporation did not affect the trading of the Company’s shares of common stock on the Nasdaq Capital Market in any respect.$0.5 million. The Company believes thataccounted for the Reincorporation did not affect any of the Company’s material contracts with any third parties, and that the Company’s rights and obligations under such material contractual arrangements will continue to be rights and obligations of the Company after the Reincorporation. The Reincorporation did not result in any change in headquarters, business, jobs, management, location of any of the offices or facilities, number of employees, assets, liabilities or net worth (other thanacquisition as a result of the costs incident to the Reincorporation) of the Company.
Recent Developments
Acquisition of Propertiesan asset acquisition.
On July 27,June 29, 2022, the Company entered into a Purchase and Sale Agreement (the “PSA”) with ETXENERGY, LLC (the “Seller”). Pursuant to the PSA, we closed onagreed to acquire all of the acquisition ofSeller’s rights to, and interest in, certain oil and natural gasoperated producing properties from ETXENERGY, LLC totaling approximately 16,600 net acres, located in Henderson and Anderson Counties, Texas, foradjacent to the initial purchase priceCompany’s existing assets in the area. Substantially all of $11.9 million in cash (the “ETXENERGY Acquisition”).the acreage is developed and/or held by production. The Company financed the ETXENERGY Acquisition with $1.2 million of cash on hand and borrowings under its existing Credit Facility of $10.7 million. The asset acquiredacquisition also includeincluded certain wells, pipelines, contracts, technical data, records, personal property and hydrocarbons associated with the properties,Properties, including two pipeline gathering systems and related infrastructure.infrastructure (collectively with the oil and gas properties to be acquired, the “ETXEnergy Assets”). The PSA closed on July 27, 2022, at which time we acquired the ETXEnergy Assets in consideration for the purchase price of $11.875 million in cash, less purchase price adjustments. The effective date of the acquisition was June 1, 2022.
On July 26, 2022, in anticipation of the closing of the ETXENERGY AcquisitionPSA, we entered into a letter agreement with FirstBank Southwest, the administrative agent of our existing Credit Agreement,Firstbank whereby we increased theour borrowing base under the Credit Agreement from $15 million to $20 million. On July 27, 2022,million, and paid the administrative agent an upfront fee of $32,500 in connection with the closing of the ETXENERGY Acquisition, we borrowed $10.7 million on the Credit Agreement. We have repaid $2.2 million on the amounts borrowed under the Credit Agreement since the Acquisition. The total amount outstanding on the Credit Agreement as of November 8, 2022, is $12.5 million.such increase (the “Borrowing Base Increase”).
Dividends
On February 23, 2023 and May 30, 2023, the Company paid a quarterly cash dividends of $0.0225 per share of common stock outstanding to stockholders of record at the close of business on February 10, 2023 and May 19, 2023. Total dividends paid during the six months ended June 30, 2023 were $1.2 million. The Board of Directors suspended the Company’s dividend payment policy on August 9, 2023, with the associated capital resources going towards the Company’s share repurchase program and repayments of our credit facility’s outstanding balance.
Stock Repurchase Program
On April 26, 2023, the Board of Directors of the Company authorized and approved a share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock. Subject to any future extensions, the repurchase program is scheduled to expire on the earlier of June 30, 2024, when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when the program is discontinued by the Company.
Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market prices, or by other means in accordance with federal securities laws. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program will be funded using the Company’s working capital.
During the three months ended June 30, 2023, the Company paid $241 thousand for the repurchase of 163,300 shares at a weighted average price of $1.48 per share.
Full-Cost Method Ceiling Test
As commodity prices have decreased in 2023 relative to 2022 prices, we expect to record a write-down of our oil and gas properties in the third quarter of 2023 due to lower commodity prices being used in the calculation of the full-cost method ceiling test. Depending on actual commodity prices, estimated price differentials, lease operating costs, revisions to reserve estimates, and the amount and timing of capital expenditures, the write-down could be approximately $3 million to $4 million in the third quarter of 2023. Additional write-downs could be incurred in the fourth quarter of 2023.
Plan of Operations and Strategy
Continuing through 2022the second half of 2023 and beyond, we intend to seek additional opportunities in the oil and natural gas sector, including but not limited to further acquisition of assets, participation with current and new industry partners in their exploration and development projects, acquisition of existing companies, and the purchase of oil and natural gas producing assets. In addition, we plan to grow production by performing workovers on operated idle wells acquired in 2022 to return them 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 | |
● | Evaluate and Pursue Value-Enhancing Transactions. We |
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 20212022 Annual Report on Form 10-K filed with the SEC on March 28, 2022.April 13, 2023.
Recently IssuedAdopted Accounting Standards
We do not believe that any recently issued but not yet effective accounting standards, if currentlyOn January 1, 2023, the Company adopted would have a material effectAccounting Standards Update (“ASU”) 2016-13 to Topic 326, Financial Instruments-Credit Losses. See Note 1 in the accompanying notes to unaudited condensed consolidated financial statements included in Part 1, Item 1 for additional discussion of the impact of the adoption of this ASU on our Condensed Consolidated Financial Statements or relatedfinancial statements and disclosures.
23 |
Results of Operations
Comparison of our Statements of Operations for the Three Months Ended SeptemberJune 30, 20222023 and 20212022
For the three months ended SeptemberJune 30, 2023, we recorded a net loss of $2.5 million, which was primarily due to lower revenues as a result of lower commodity prices, which resulted in reduced revenues on our production during the period. For the three months ended June 30, 2022, we recorded net income of $4.1 million, which was primarily due to gains on our commodity derivative contracts of $4.0$0.1 million. For the three months ended September 30, 2021, we recorded net income of $81 thousand. In the following sections we discuss our revenue, operating expenses and non-operating income and expenses for the three months ended SeptemberJune 30, 2022,2023, compared to the three months ended SeptemberJune 30, 2021.2022.
Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the three months ended SeptemberJune 30, 20222023 and 2021:2022:
Three months ended September 30, | Change | |||||||||||||||
2022 | 2021 | Amount | Percent | |||||||||||||
(in thousands except average prices and production quantities) | ||||||||||||||||
Revenue: | ||||||||||||||||
Oil | $ | 8,979 | $ | 1,593 | $ | 7,386 | 463 | % | ||||||||
Natural gas and liquids | 2,820 | 191 | 2,629 | 1,376 | % | |||||||||||
Gathering fee | 27 | - | 27 | 100 | % | |||||||||||
Total | $ | 11,826 | $ | 1,784 | $ | 10,042 | 563 | % | ||||||||
Production quantities: | ||||||||||||||||
Oil (Bbls) | 95,429 | 24,349 | 71,080 | 292 | % | |||||||||||
Natural gas and liquids (Mcfe) | 394,659 | 53,462 | 341,197 | 638 | % | |||||||||||
BOE | 161,206 | 33,260 | 127,946 | 384 | % | |||||||||||
BOE per day | 1,752 | 362 | 1,390 | |||||||||||||
Average sales prices: | ||||||||||||||||
Oil (Bbls) | $ | 94.09 | $ | 65.42 | $ | 28.68 | 44 | % | ||||||||
Natural gas and liquids (Mcfe) | 7.15 | 3.57 | 3.58 | 100 | % | |||||||||||
BOE | $ | 73.19 | $ | 53.64 | $ | 19.73 | 37 | % |
Three months ended June 30, | Change | |||||||||||||||
2023 | 2022 | Amount | Percent | |||||||||||||
(in thousands except average prices and production quantities) | ||||||||||||||||
Revenue: | ||||||||||||||||
Oil | $ | 7,028 | $ | 11,334 | $ | (4,306 | ) | (38 | )% | |||||||
Natural gas and liquids | 950 | 2,146 | (1,196 | ) | (56 | )% | ||||||||||
Total | $ | 7,978 | $ | 13,480 | $ | (5,502 | ) | (41 | )% | |||||||
Production quantities: | ||||||||||||||||
Oil (Bbls) | 114,900 | 107,845 | 7,055 | 7 | % | |||||||||||
Natural gas and liquids (Mcfe) | 380,419 | 326,308 | 54,111 | 17 | % | |||||||||||
BOE | 178,303 | 162,230 | 16,073 | 10 | % | |||||||||||
BOE/Day | 1,959 | 1,783 | 176 | 10 | % | |||||||||||
Average sales prices: | ||||||||||||||||
Oil (Bbls) | $ | 61.17 | $ | 105.09 | $ | (43.92 | ) | (42 | )% | |||||||
Natural gas and liquids (Mcfe) | 2.50 | 6.58 | (4.08 | ) | (62 | )% | ||||||||||
BOE | $ | 44.74 | $ | 83.09 | $ | (38.35 | ) | (46 | )% |
The increasedecrease in our oil and gas revenue of $10.0$5.5 million for the three months ended SeptemberJune 30, 2022,2023, as compared to the three months ended SeptemberJune 30, 2021,2022, was due primarily to an increase in oil production of 292% and an increase in natural gas and liquids production of 638%. In addition, the realized prices for our oil production increased by 44% and the realized price received for our natural gas and liquids increased 100%. The increases in production are primarily due to the properties acquireda decrease in the January 2022 and July 2022 acquisitions. The increase in crude oil and natural gas and liquids prices is primarily due to the impactcommodity pricing of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia. Additionally, prices increased from 2021 due to stronger demand for crude oil46% on a globalper BOE basis, as the world recovered from government mandated lockdowns which beganwas partially offset by an increase of 10% in mid-March 2020 and continued into 2021, which were put in place to reduce the spread of COVID-19.
production quantities on a per BOE basis. For the three months ended SeptemberJune 30, 2022,2023, we produced 161,206178,303 BOE, or an average of 1,7521,959 BOE per day, as compared to 33,260162,230 BOE or 362an average of 1,783 BOE per day during the comparable period in 2021; however, the2022. The increase in our production quantities relates to production from properties in East Texas that we acquired in July 2022. The production mix shifted to become less oil weighted in the 2022 period due to the acquisitions completed in January and July 2022 of properties withremained relatively higher natural gas production.consistent between periods. During the three months ended SeptemberJune 30, 2022,2023, our BOE production mix was 59%64% oil and 41%36% natural gas and liquids compared to 75%66% oil and 25%34% natural gas and liquids inproduced during the comparable period of 2021.three months ended June 30, 2022.
Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the three months ended SeptemberJune 30, 20222023 and 2021:2022:
Three months ended September 30, | Change | |||||||||||||||
2022 | 2021 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Lease operating expense | $ | 5,350 | $ | 586 | $ | 4,764 | 813 | % | ||||||||
Production taxes | $ | 817 | $ | 133 | $ | 684 | 514 | % | ||||||||
Total | $ | 6,167 | $ | 719 | $ | 5,448 | 758 | % |
Three months ended June 30, | Change | |||||||||||||||
2023 | 2022 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Lease operating expense | $ | 3,877 | $ | 4,646 | $ | (769 | ) | (17 | )% | |||||||
Production taxes | $ | 538 | $ | 913 | $ | (375 | ) | (41 | )% | |||||||
Total | $ | 4,415 | $ | 5,559 | $ | (1,144 | ) | (21 | )% | |||||||
Lease operating expense per BOE | $ | 21.75 | $ | 28.61 | $ | (6.87 | ) | (24 | )% |
24 |
For the three months ended SeptemberJune 30, 2022,2023, lease operating expenses were $5.4$3.9 million or $33.19$21.75 per BOE, an increasea decrease of $4.8$0.8 million when compared to the $586 thousand$4.6 million or $17.62$28.61 per BOE for the three months ended SeptemberJune 30, 2021.2022. The increasedecrease in lease operating expense was due to increaseda reduction in well workover activity asin 2023 when compared to 2022. The decrease on a per BOE basis is the result of increased efficiency from the propertiesintegration of assets acquired in January and July 2022. Lease operating expense includes expense workovers, which for the three months ended September 30, 2022 were $9.79 per BOE. The expensed workovers were primarily in our West Texas region where we were required to perform mechanical integrity tests on shut-in wells. During the quarter we also experienced significant cost increases for services and materials, including tubing, and rental equipment. We expect equally high workover expense related to West Texas to continue into the next quarterly period.
For the three months ended SeptemberJune 30, 2022,2023, production taxes were $817$538 thousand, an increasea decrease of $684$375 thousand, or 514%41%, compared to the comparable period of 2021.2022. This increase in production taxes isdecrease was primarily attributable to the increasedecrease in revenues of 563% primarily41% related to the increasesdecreases in production from properties acquired in January and July 2022 and the increase in pricing. See Note 2 Acquisitions to the footnotes to the unaudited financial statements included herein under “Part I - Financial Information” – “Item 1. Financial Statements”.commodity pricing as discussed above.
Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) ratewas $2.9 million and $2.6 million for the three months ended SeptemberJune 30, 2023 and 2022, respectively. Our depletion rate was $15.66$14.39 per BOE compared to $4.54and $14.20 per BOE for the three months ended SeptemberJune 30, 2021. The increase in the DD&A rate was related to the acquisition of properties in January2023 and July 2022.2022, respectively. Our DD&A rate can fluctuate because of acquisitions, changes in drilling and completion costs, impairments, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated costs to drill and complete proved undeveloped reserves.future development costs.
General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the three months ended SeptemberJune 30, 20222023 and 2021:2022:
Three months ended September 30, | Change | Three months ended June 30, | Change | |||||||||||||||||||||||||||||
2022 | 2021 | Amount | Percent | 2023 | 2022 | Amount | Percent | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Compensation and benefits | $ | 1,198 | $ | 305 | $ | 893 | 293 | % | $ | 1,330 | $ | 1,189 | $ | 141 | 12 | % | ||||||||||||||||
Stock-based compensation | 485 | 116 | 369 | 318 | % | 607 | 609 | (2 | ) | - | % | |||||||||||||||||||||
Professional fees, insurance and other | 1,025 | 265 | 760 | 287 | % | 1,431 | 844 | 587 | 70 | % | ||||||||||||||||||||||
Total | $ | 2,708 | $ | 686 | $ | 2,022 | 295 | % | $ | 3,368 | $ | 2,642 | $ | 726 | 27 | % |
General and administrative expenses increased by $2.0$0.7 million during the three-month period ended SeptemberJune 30, 2022,2023, as compared to the prior year period. The increase was primarily attributable to an increase of $0.9 million related compensation and benefits. Compensation and benefits increased due to the addition of 36 employees as of September 30, 2022, compared to September 30, 2021, mainly as a result of the January 2022 acquisition. Stock-based compensation increased $0.4 million due to the amortization of stock-based compensation awards granted to employees and directors in January 2022, which were mainly in connection with new directors and officers appointed as a result of the January 2022 acquisition. Professionalprofessional fees Insurance and other expenses increased $0.8 million, primarily due to increases in consulting, accounting, legal and insurance expenses related to the acquisition of properties in January 2022.2022 audit, additional contract accounting personnel costs and Delaware franchise taxes.
Non-Operating Income (Expense). Presented below is a comparison of our non-operating income (expense) for the three months ended SeptemberJune 30, 20222023 and 2021:2022:
Three months ended September 30, | Change | |||||||||||||||
2022 | 2021 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Commodity derivative gain (loss) | $ | 4,025 | $ | (25 | ) | $ | 4,050 | * | % | |||||||
Marketable equity securities loss | (45 | ) | (6 | ) | (39 | ) | (650 | )% | ||||||||
Impairment and loss on real estate held for sale | (75 | ) | (141 | ) | 66 | 47 | % | |||||||||
Other (expense) income, net | (2 | ) | 24 | (26 | ) | (108 | )% | |||||||||
Interest expense, net | (187 | ) | 1 | (188 | ) | * | % | |||||||||
Total other non-operating income (expense) | $ | 3,716 | $ | (147 | ) | $ | 3,863 | * | % |
Three months ended June 30, | Change | |||||||||||||||
2023 | 2022 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Commodity derivative gain (loss), net | $ | 288 | $ | (2,132 | ) | $ | 2,420 | 114 | % | |||||||
Marketable equity securities gain (loss) | (16 | ) | (121 | ) | 105 | 87 | % | |||||||||
Other income (expense), net | (6 | ) | (5 | ) | (1 | ) | (20 | )% | ||||||||
Interest, net | (289 | ) | (60 | ) | (229 | ) | (382 | )% | ||||||||
Total non-operating income (expense) | $ | (23 | ) | $ | (2,318 | ) | $ | 2,295 | 99 | % |
Commodity derivative gain (loss), net, is the result of changes in derivative fair values associated with fluctuations in forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. For the three months ended SeptemberJune 30, 2022,2023, we recognized gains on commodity derivative contracts that we assumed in the January 2022 acquisition,of $0.3 million, primarily as well as contracts we added during the period of $4.0 million. The gain was the result of a reduction in the mark-to-market liability of our outstanding commodity derivative contracts due to lower commodity prices. See Note 7 Commodity Derivatives in the notes to the unaudited condensed consolidated financial statements.
The loss on marketable equity securities represents the change in fair value of our investment in Anfield Energy.
Interest, net represents the interest on our credit facility with Firstbank Southwest. The increase in interest expense, net represents an increase in the amount borrowed on the credit facility as well as an increase in the interest rate. As of June 30, 2023, we had borrowed $12.0 million on the credit facility as compared to $4.0 million borrowed as of June 30, 2022. The average interest rate increased to 8.9% for the three months ended June 30, 2023, as compared to 4.7% for the three months ended June 30, 2022. See Note 6 Debt in the notes to the unaudited condensed consolidated financial statements.
Comparison of our Statements of Operations for the Six Months Ended June 30, 2023 and 2022
For the six months ended June 30, 2023, we recorded a net loss of $3.8 million, which was primarily due to a loss from operations of $4.7 million. This loss was partially offset by gains on our commodity derivative liabilitycontracts of $1.2 million during the period. Our operating loss is due to lower commodity prices and higher costs for services and materials experienced during the period. For the six months ended June 30, 2022, we recorded a reductionnet loss of $3.3 million.
Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the six months ended June 30, 2023 and 2022:
Six months ended June 30, | Change | |||||||||||||||
2023 | 2022 | Amount | Percent | |||||||||||||
(in thousands except average prices and production quantities) | ||||||||||||||||
Revenue: | ||||||||||||||||
Oil | $ | 14,124 | $ | 19,167 | $ | (5,033 | ) | (26 | )% | |||||||
Natural gas and liquids | 2,127 | 3,185 | (1,058 | ) | (33 | )% | ||||||||||
Total | $ | 16,251 | $ | 22,352 | $ | (6,101 | ) | (27 | )% | |||||||
Production quantities: | ||||||||||||||||
Oil (Bbls) | 206,211 | 198,666 | 7,545 | 4 | % | |||||||||||
Natural gas and liquids (Mcfe) | 764,451 | 505,651 | 258,800 | 51 | % | |||||||||||
BOE | 333,620 | 282,942 | 50,678 | 18 | % | |||||||||||
BOE/Day | 1,843 | 1,563 | 280 | 18 | % | |||||||||||
Average sales prices: | ||||||||||||||||
Oil (Bbls) | $ | 68.49 | $ | 96.48 | $ | (27.99 | ) | (29 | )% | |||||||
Natural gas and liquids (Mcfe) | $ | 2.78 | $ | 6.30 | $ | (3.52 | ) | (56 | )% | |||||||
BOE | $ | 48.71 | $ | 79.00 | $ | (30.29 | ) | (38 | )% |
The decrease in our oil and gas revenue of $6.1 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, was due primarily to a decrease in commodity prices. Our realized price for oil was down 29% and the realized price received for natural gas and liquids was down 56% from the prior year period. Partially offsetting the decrease in revenues from declines in commodity prices was an increase in the volumes we produced during the period. For the six months ended June 30, 2023, we produced 333,620 BOE, or an average of 1,843 BOE per day, as compared to 282,942 BOE or 1,563 BOE per day, during the comparable period in 2022. Our oil production was up 4% and our natural gas and liquids production was up 51% compared to the prior year period. The increase in the volumes of natural gas and liquids produced is primarily due to the acquisition of our East Texas assets in July 2022 with relatively more natural gas production. See Note 2 – Acquisitions. The production mix shifted to become slightly less oil weighted in 2023 when compared to 2022. Our BOE production mix was 62% oil and 38% natural gas and liquids during the six months ended June 30, 2023 compared to 70% oil and 30% natural gas and liquids in the comparable period of 2022.
Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the six months ended June 30, 2023 and 2022:
Six months ended June 30, | Change | |||||||||||||||
2023 | 2022 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Lease operating expense | $ | 8,400 | $ | 7,382 | $ | 1,018 | 14 | % | ||||||||
Production taxes | $ | 1,058 | $ | 1,485 | $ | (427 | ) | (29 | )% | |||||||
Total | $ | 9,458 | $ | 8,867 | $ | 591 | 7 | % | ||||||||
Lease operating expense per BOE | $ | 25.18 | $ | 26.09 | $ | (0.91 | ) | (3 | )% |
26 |
For the six months ended June 30, 2023, lease operating expenses were $8.4 million or $25.18 per BOE, an increase of $1.0 million when compared to the $7.4 million or $26.09 per BOE for the six months ended June 30, 2022. Lease operating expense per BOE decreased as a result of increased efficiency from the integration of assets acquired in 2022. However, overall lease operating expense increased due to the increase in production period over period. For the six months ended June 30, 2023, production taxes were $1.1 million, a decrease of 0.4 million, or 29%, compared to the comparable period of 2022. This decrease was primarily attributable to the decrease in oil and natural gas and liquids revenues of 27% related to the decreases in commodity prices discussed above.
Depreciation, Depletion and Amortization. Our DD&A rate for the six months ended June 30, 2023, was $13.99 per BOE, compared to $13.97 per BOE for the six months ended June 30, 2022. Our DD&A rate can fluctuate because of acquisitions, changes in drilling and completion costs, impairments, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated future development costs to develop reserves.
General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the six months ended June 30, 2023 and 2022:
Six months ended June 30, | Change | |||||||||||||||
2023 | 2022 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Compensation and benefits | $ | 2,517 | $ | 1,818 | $ | 699 | 38 | % | ||||||||
Stock-based compensation | 1,334 | 2,109 | (775 | ) | (37 | )% | ||||||||||
Professional fees, insurance and other | 2,289 | 1,661 | 628 | 38 | % | |||||||||||
Total | $ | 6,140 | $ | 5,588 | $ | 552 | 10 | % |
General and administrative expenses increased by $0.6 million during the six-month period ended June 30, 2023, as compared to the prior year period. The increase was primarily attributable to an increase in compensation and benefits of $0.7 million due to the addition of seven employees added in the last half of 2022 and the first half of 2023. Professional fees, insurance and other expenses increased $0.6 million, primarily due to increased consulting, accounting, legal and insurance expenses related to the acquisition of properties in January 2022. Stock-based compensation decreased $0.8 million due to the amortization of stock-based compensation awards granted to employees and directors in January 2022, which were in connection with new directors and officers appointed in connection with the January 2022 acquisition.
Non-Operating Income (Expense). Presented below is a comparison of our non-operating income (expense) for the three months ended June 2023 and 2022:
Six months ended June 30, | Change | |||||||||||||||
2023 | 2022 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Commodity derivative gain (loss), net | $ | 1,208 | $ | (8,969 | ) | $ | 10,177 | 113 | % | |||||||
Marketable equity securities gain (loss) | (16 | ) | (40 | ) | 24 | 60 | % | |||||||||
Other income (expense), net | (6 | ) | (6 | ) | - | - | % | |||||||||
Interest, net | (558 | ) | (108 | ) | (450 | ) | (417 | )% | ||||||||
Total non-operating income (expense) | $ | 628 | $ | (9,123 | ) | $ | 9,751 | 107 | % |
Commodity derivative gain (loss), net is the result of changes in derivative fair values associated with fluctuations in forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. For the six months ended June 30, 2023, we recognized gains on commodity derivative contracts of $1.2 million for contracts that we assumed in the acquisition, as wells as, contracts we added during the period. See Note 7 Commodity Derivatives in the notes to the condensed consolidated financial statements.
Loss on marketable equity securities represents the change in fair value of our investment in Anfield Energy. For the threesix months ended SeptemberJune 30, 2022,2023, we recognized an unrealized loss on marketable equity securities of $45$16 thousand as compared to a loss of $6$40 thousand for the comparable period of 2021.
Impairment and loss on real estate held for sale for the three months ended September 30, 2022 is related to impairment we recorded as the result of a reduction in the price we expect to receive for our 13-acre land parcel in Riverton, Wyoming, which is classified as held for sale. For the three months ended September 30, 2021 the $141 thousand of impairment and loss on real estate held for sale represents a realized loss on the sale of a building in Riverton, Wyoming, which was sold in August 2021.
Interest, net, primarily represents the interest related to our Credit Facility with Firstbank Southwest. On July 27, 2022, we borrowed $10.7 million associated with our acquisition of East Texas properties from ETXENERGY, LLC. The balance outstanding on the Credit Facility as of September 30, 2022 was $12.5 million. See Note 6-Debt in the notes to the condensed consolidated financial statements.
Comparison of our Statements of Operations for the Nine Months Ended September 30, 2022 and 2021
For the nine months ended September 30, 2022, we recorded net income of $851 thousand, which was primarily due to operating income of $3.9 million associated with increases in production from the properties acquired in January and July 2022 and increases in commodity prices. Also, we had a discrete income tax benefit of $2.4 million related to the release of a portion of the Company’s previously established valuation allowance to offset deferred tax liabilities arising from the January 5, 2022 transaction. Partially offsetting these items were losses on our commodity derivative contracts of $4.9 million. For the nine months ended September 30, 2021, we recorded a net loss of $288 thousand. In the following sections we discuss our revenue, operating expenses and non-operating income for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
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, 2022 and 2021:
Nine months ended September 30, | Change | |||||||||||||||
2022 | 2021 | Amount | Percent | |||||||||||||
(in thousands except average prices and production quantities) | ||||||||||||||||
Revenue: | ||||||||||||||||
Oil | $ | 28,146 | $ | 4,232 | $ | 23,914 | 565 | % | ||||||||
Natural gas and liquids | 6,005 | 419 | 5,586 | 1,333 | % | |||||||||||
Gathering fee | 27 | - | 27 | 100 | % | |||||||||||
Total | $ | 34,178 | $ | 4,651 | $ | 29,527 | 635 | % | ||||||||
Production quantities: | ||||||||||||||||
Oil (Bbls) | 294,095 | 70,298 | 223,797 | 318 | % | |||||||||||
Natural gas and liquids (Mcfe) | 900,310 | 125,629 | 864,681 | 688 | % | |||||||||||
BOE | 444,147 | 91,236 | 352,911 | 387 | % | |||||||||||
BOE per day | 1,627 | 334 | 1,293 | |||||||||||||
Average sales prices: | ||||||||||||||||
Oil (Bbls) | $ | 95.70 | $ | 60.20 | $ | 35.50 | 59 | % | ||||||||
Natural gas and liquids (Mcfe) | $ | 6.67 | $ | 3.34 | $ | 3.33 | 100 | % | ||||||||
BOE | $ | 76.89 | $ | 50.98 | $ | 25.91 | 51 | % |
The increase in our oil and gas revenue of $29.5 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, was due primarily to an increase in oil production of 318% and an increase in natural gas and liquids production of 688%. The realized price received for our oil production increased 59% and the realized price received for our natural gas production increased 100%. The increase in oil and natural gas and liquids production is primarily related to production for the properties acquired in January and July 2022. The increase in crude oil and natural gas and liquids prices is primarily due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia. Additionally, prices increased from 2021 due to stronger demand for crude oil on a global basis as the world recovered from government mandated lockdowns which began in mid-March 2020 and continued into 2021, which were put in place to reduce the spread of COVID-19.
For the nine months ended September 30, 2022, we produced 444,147 BOE, or an average of 1,627 BOE per day, as compared to 91,236 BOE or 334 BOE per day, during the comparable period in 2021; however, the production mix shifted to become slightly less oil weighted in 2022, due to the acquisitions completed in January and July 2022 of operated properties with relatively more natural gas production. During the nine months ended September 30, 2022, our BOE production mix was 66% oil and 34% natural gas and liquids compared to 77% oil and 23% natural gas and liquids in the comparable period of 2021.
Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the nine months ended September 30, 2022 and 2021:
Nine months ended September 30, | Change | |||||||||||||||
2022 | 2021 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Lease operating expense | $ | 12,732 | $ | 1,631 | $ | 11,101 | 681 | % | ||||||||
Production taxes | $ | 2,302 | $ | 343 | $ | 1,959 | 571 | % | ||||||||
Total | $ | 15,034 | $ | 1,974 | $ | 13,060 | 662 | % |
For the nine months ended September 30, 2022, lease operating expenses were $12.7 million or $28.67 per BOE, an increase of $11.1 million when compared to the $1.6 million or $17.88 per BOE for the nine months ended September 30, 2021. The increase in lease operating expense was due to increased activity as a result of the properties acquired in January and July 2022. Lease operating expense includes expense workovers, which for the nine months ended September 30, 2022 were $6.84 per BOE. The expensed workovers were primarily in our West Texas region where we were required to perform mechanical integrity tests on shut-in wells. During the nine months ended September 30, 2022, we also experienced significant cost increases for services and materials, including tubing, and rental equipment.
For the nine months ended September 30, 2022, production taxes were $2.3 million, an increase of $2.0 million, or 571%, compared to the comparable period of 2021. This increase was attributable to the increase in oil revenues of 565% related to the increases in production from properties acquired in January and July 2022 and the increase in pricing as discussed above.
Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) rate for the nine months ended September 30, 2022, was $15.72 per BOE, compared to $4.55 per BOE for the nine months ended September 30, 2021. The increase in the DD&A rate was related to the acquisition of properties in January 2022 and July 2022. Our DD&A rate can fluctuate because of acquisitions, changes in drilling and completion costs, impairments, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated costs to drill and complete proved undeveloped reserves.
General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the nine months ended September 30, 2022 and 2021:
Nine months ended September 30, | Change | |||||||||||||||
2022 | 2021 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Compensation and benefits | $ | 3,017 | $ | 860 | $ | 2,157 | 251 | % | ||||||||
Stock-based compensation | 2,594 | 310 | 2,284 | 737 | % | |||||||||||
Professional fees, insurance and other | 2,685 | 1,063 | 1,622 | 153 | % | |||||||||||
Total | $ | 8,296 | $ | 2,233 | $ | 6,063 | 272 | % |
General and administrative expenses increased by $6.1 million during the nine-month period ended September 30, 2022, as compared to the prior year period. The increase was primarily attributable to an increase of $2.3 million in stock-based compensation related to the amortization of stock-based compensation awards granted to employees and directors in January 2022, which were in connection with new directors and officers appointed as a result of the January 2022 acquisition. Compensation and benefits increased $2.2 million due to the addition of 36 employees as of September 30, 2022, when compared to September 30, 2021, relating to new employees acquired in the January 2022 acquisition and employees hired subsequently to manage the acquired properties. Professional fees, insurance and other expenses increased $1.6 million, primarily due to increases in consulting, accounting, legal and insurance expenses related to the acquisition of properties in January 2022.
Non-Operating Income (Expense). Presented below is a comparison of our non-operating income (expense) for the nine months ended September 2022 and 2021:
Nine months ended September 30, | Change | |||||||||||||||
2022 | 2021 | Amount | Percent | |||||||||||||
(in thousands) | ||||||||||||||||
Commodity derivative loss, net | $ | (4,944 | ) | $ | (235 | ) | $ | (4,709 | ) | * | % | |||||
Marketable equity securities (loss) gain | (85 | ) | 67 | (152 | ) | (227 | )% | |||||||||
Impairment and loss on real estate held for sale | (75 | ) | (141 | ) | 66 | 47 | % | |||||||||
Other (expense) income, net | (8 | ) | 49 | (57 | ) | (116 | )% | |||||||||
Interest expense, net | (295 | ) | (57 | ) | (238 | ) | (418 | )% | ||||||||
Total other non-operating expense | $ | (5,407 | ) | $ | (317 | ) | $ | (5,090 | ) | * | % |
Commodity derivative loss is the result of changes in derivative fair values associated with fluctuations in forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. For the nine months ended September 30, 2022, we recognized losses on commodity derivative contracts we assumed in the January 2022 acquisition, as wells as, contracts we added during the period of $4.9 million. See Note 7 Commodity Derivatives in the notes to the condensed consolidated financial statements.
Loss on marketable equity securities represents the change in fair value of our investment in Anfield Energy. For the nine months ended September 30, 2022, we recognized an unrealized loss on marketable equity securities of $85 thousand as compared to a gain of $67 thousand for the comparable period of 2021.
Impairment and loss on real estate held for sale for the nine months ended September 30, 2022 is related to impairment we recorded as a result of a reduction in the price we expect to receive for our 13-acre land parcel in Riverton, Wyoming, which is classified as held for sale. The $141 thousand of impairment and loss on real estate held for sale for the nine months ended September 30, 2021 represents a realized loss on the sale of a building in Riverton, Wyoming, which was sold in August 2021.
Interest, net, represents the interest related to our Credit Facilitycredit facility with Firstbank Southwest. On July 26, 2022, weWe had $12.0 million borrowed $10.7on the credit facility at June 30, 2023 compared to $4.0 million borrowed on the facility at June 30, 2022. During the six months ended June 30, 2023, the interest rate on the Credit Facility in orderincreased to facilitate our acquisitionan average of 8.7% compared to the East Texas assets from ETXENERGY, LLC. The balance outstanding onaverage rate during the Credit Facility as of Septembersix months ended June 30, 2022 was $12.5 million.of 4.5%. See Note 6-Debt in the notes to the condensed consolidated financial statements.
Liquidity and Capital Resources
Based on the current commodity price environment, we believe we have sufficient liquidity and capital resources to execute our business plan while continuing to meet our current financial obligations. We continue to manage our commitments in order to maintain flexibility with regard to our activity level and capital expenditures.
We do not anticipate operating any drill rigs within the next 12 months or performing any developmental or exploratory drilling except on a limited basis in some of our non-operated properties. We will incur approximate $0.2 million on lease commitments and approximately $1.0 million on interest expense assuming no material changes to interest rates over the next 12 months. Our capital budget is typically comprised of return to production workovers, repairs and maintenance, plugging and abandonment costs, and similar activities to support our asset base. We view some of these investments as discretionary for which we can control both the timing and amount of these expenditures. Other activities, such as some repairs and maintenance and plugging activities, may be required from time to time by regulatory bodies. While we do not have an approved budget for 2024, we anticipate any such expenditures would be sourced primarily by operating cash flows. In the event that our operating cash flows are not sufficient to fund these expenditures, we have access to our credit facility and equity markets if such a need arises.
Sources of Cash
For the ninesix months ended SeptemberJune 30, 2022,2023, we funded our capital expenditures primarily with cash on hand and cash flows from operating activities and borrowings underactivities. If during the Credit Agreement (defined and discussed below). On July 26, 2022, we entered into a letter agreement with Firstbank Southwest, the administrative agentsecond half of our Credit Agreement, whereby we increased the borrowing base under the Credit Agreement from $15 million to $20 million. On July 27, 2022, in connection with the closing of the ETXENERGY Acquisition, we borrowed $10.7 million under the Credit Agreement. During the nine months ended September 30, 2022, we have borrowed a total of $15.2 million on our Credit Facility and repaid $2.7 million. As of September 30, 2022, we had a balance of $12.5 million and available borrowing capacity of $7.5 million under the Credit Agreement. As of November 8, 2022, the total amount outstanding on the Credit Agreement is $12.5 million.
In April 2022 we sold the Wildhorse waterflood unit in Osage County, Oklahoma. Net proceeds from the sale were $1.2 million.
We expect that2023, cash flows from operating activities will beare not sufficient to fund our planned capital expenditures for the next 12 months. However,and operations, we may also use borrowings under our Credit Facilitycredit facility or raise funds through new equity offerings or from other sources of financing. If we raise additional funds through the issuance of equity, the percentage ownership offinancing and re-evaluate our current stockholders could be diluted.capital spend program as economic conditions warrant. Additionally, we may enter into carrying cost and sharing arrangements with third parties for certain development programs. All of our sources of liquidity can be affected by the generalchanges in economic conditions, of the broader economy,rising interest rate, changes in debt and equity markets, force majeure events, fluctuations in commodity prices, operating costs, tax law changes, and volumes produced, all of which would affect us and our industry.
We have no control over the market prices for oil and gas, although we may be able to influence the amount of our realized revenues from oil and gas through the use of commodity derivative contracts as part of our commodity price risk management program. Commodity derivative contracts may limit the prices we receive from our oil and gas sales if oil and gas prices rise substantially over the price established by the commodity derivative contract. See Note 7- Commodity Derivatives in Part I, Item 1 of this report for additional information about our oil and gas commodity derivative contracts currently in place and the timing of the settlement of those contracts.
Credit Agreement
On January 5, 2022, we entered into a five-yearfour-year credit agreement with Firstbank Southwest as administrative agent, which provides for a revolving line of credit which had an initialwith a borrowing base of $15$20 million, and a maximum credit amount of $100 million (the “Credit Agreement”). On July 26, 2022, in anticipation of closing the ETXENERGY Acquisition our borrowing base was increased from $15 million to $20 million. Under the Credit Agreement, revolving loans may be borrowed, repaid and re-borrowed until January 5, 2026, when all outstanding amounts must be repaid. The Credit Agreement contains customary indemnification requirements, representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries. In addition, the Credit Agreement contains financial covenants, tested quarterly, that limit our ratio of total debt to EBITDAX (as defined in the Credit Agreement) to 3:1 and require itsour ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at 1:1 or higher. We were in compliance with all financial and non-financial covenants as of SeptemberJune 30, 2022, and through the filing of this report.2023. Please refer to Note 6 - Debt in Part I, Item 1 of this report for additional discussion.
The borrowing base is redetermined semi-annually on or about April 1 and October 1 of each year during the five-yearfour-year term of the Credit agreement. At the April 2023 redetermination we reaffirmed the borrowing base. The next borrowing base redetermination date is scheduled for AprilOctober 1, 2023. Our borrowing base can be adjusted as a result of changes in commodity prices, acquisitions or divestitures of proved properties, or financing activities, all as provided for in the Credit Agreement.
Cash flows provided by our operating activities, proceeds received from divestitures of properties, capital markets activities, and our capital expenditures, including acquisitions, all impact the amount we borrow under our revolving Credit Agreement. A total of $3.5 million was borrowed under the Credit Agreement immediately upon the entry into such Credit Agreement on January 5, 2022. The $3.5 million was immediately used to repay $3.3 million of debt assumed as part of the acquisition of the Acquired Assets. Since the acquisition of the Acquired Assets through September 30, 2022, we have borrowed an additional $11.7 million and repaid $2.7 million under the Credit Agreement. The amount outstanding on the Credit Agreement as of November 8, 2022,June 30, 2023, was $12.5$12.0 million.
Uses of Cash
We use cash for the acquisition and development of oil and gas properties and for the payment of operating and general and administrative costs, settlements of commodity derivative contracts, debt obligations including interest, share repurchases, and payment of dividends. Expenditures for the acquisition and development of oil and gas properties are the primary use of our capital resources. During the ninesix months ended SeptemberJune 30, 2022,2023, we spent approximately $18.5$2.4 million on capital expenditures and acquisitions.expenditures.
The amount and allocation of our future capital expenditures will depend upon a number of factors, including our cash flows from operating, investing, and financing activities, our ability to execute our development program, and the number and size of acquisitions that we complete. In addition, the impact of oil and gas, prices on investment opportunities, the availability of capital, tax law changes, and the timing and results of our development activities may lead to changes in funding requirements for future development. We periodically review our capital expenditure budget to assess if changes are necessary based on current and projected cash flows, acquisition and divestiture activities, and other factors. Our 20222023 capital program is expected to be approximately $20$5.0 million. We will continue to monitor the economic environment through the remainder of the year and adjust our activity level as warranted.
Cash Flows
The following table summarizes our cash flows for the ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:
Nine months ended September 30, | Six months ended June 30, | |||||||||||||||||||||||
2022 | 2021 | Change | 2023 | 2022 | Change | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Net cash provided by (used in): | ||||||||||||||||||||||||
Operating activities | $ | 8,497 | $ | (19 | ) | $ | 8,516 | $ | 1,409 | $ | 3,662 | $ | (2,253 | ) | ||||||||||
Investing activities | (17,108 | ) | (1,002 | ) | (16,106 | ) | (2,775 | ) | (5,170 | ) | 2,395 | |||||||||||||
Financing activities | 7,282 | 5,122 | 2,160 | (1,870 | ) | (447 | ) | (1,423 | ) |
Operating Activities. Cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20222023 was $8.5 million. Cash$1.4 million as compared to cash provided by operating activities of $3.7 million for the comparable period in 2022. The decrease in cash provided by operating activities is mainly attributable to a reduction in cash receipts for revenues whichas a result of a decrease in the prices we received for our oil and natural gas production and an increase in lease operating expenses. The increase in lease operating expense is primarily due to higher production volumes, as lease operating expense on a BOE basis decreased period over period. These reductions in operating cash flows were partially offset by settlements ofdecreases in cash paid to settle commodity derivative contracts and increases in payments for operating and general and administrative expenses.contracts.
Investing Activities. Cash used in investing activities for the ninesix months ended SeptemberJune 30, 2022,2023, was $17.1 million.$2.8 million as compared to $5.2 million for the comparable period in 2022. The primary use of cash in our investing activities for the ninesix months ended SeptemberJune 30, 2022,2023, was the acquisition of the East Texas assets from ETXENERGY, LLC of $10.9 million and capital expenditures related to returning idle wells to production on assets acquired during the period of $5.2 million.and improvements to our gathering system in East Texas.
Financing Activities. Cash provided byused in financing activities for the ninesix months ended SeptemberJune 30, 2022,2023, was $7.3 million.$1.9 million as compared to $0.4 million for the comparable period in 2022. The cash provided byused in financing activities during the ninesix months ended SeptemberJune 30, 2022,2023, was primarily attributable to net borrowings on our Credit Facility of $9.2 million, which was partially offset by cash dividends paid of $1.2 million, paid to common stockholders, cash paid to settle taxes on the vesting of share-based compensation awards of $0.3$0.2 million, cash paid for the repurchase of shares of 0.2 million and principal payments on our insurance premium finance note payable of $0.4 million and cash proceeds of $0.2 million received from the exercise of warrants.$0.3 million. Cash provided byused in financing activities during the ninesix months ended SeptemberJune 30, 2021, mainly represents2022, represented cash dividends paid of $0.6 million, cash paid to settle taxes on the vesting share-based compensation awards of $0.3 million, and payments of principal on our insurance premium finance note of $0.2 million, which were partially offset by borrowings, net of repayments and fees under our credit facility of $0.5 million and proceeds received on the exercise of $5.3 million from the salestock warrants of 1.1 million shares of common stock.$0.2 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosuredisclosure.
As of SeptemberJune 30, 2022, we2023, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the results of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls were not effective as of SeptemberJune 30, 20222023 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Such determination was made in part on material weaknesses in our internal control over financial reporting as of December 31, 2021,2022, as discussed below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the SEC on March 28, 2022,April 13, 2023, in connection with our assessment of the effectiveness of our internal control over financial reporting at the end of our last fiscal year, management identified the following material weaknesses in our internal control over financial reporting as of December 31, 20212022 and is in the process of remediating such material weaknesses as of SeptemberJune 30, 2022:2023:
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Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting.
Except as disclosed below there were no changes in our internal control over financial reporting during the threesix months ended SeptemberJune 30, 2022,2023, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting, except that beginning in January 2022 and continuing through November 8, 2022, we have added four additional experienced accounting personnel, including a controller and an assistant controller and have implemented a new accounting system. We have also engaged a third-party consulting firm that specializes in risk assessment, documentation of policies and procedures and testing of controls to assist in the design, implementation and testing of our internal controls, which may help remediate the material weakness related to inadequate segregation of duties as discussed above.reporting.
During the quarter ended June 30, 2023, we contracted for an interim Corporate Controller and on July 24, 2023, we hired a Corporate Controller to supervise the day-to-day accounting function. In addition, we have made efforts to improve the documentation of review for control activities with a review component to include review notes and documented approval by the reviewer. In addition, we have begun evaluating accounting systems for conversion. The accounting system we select will have ITGCs that are designed effectively by the software provider and independently tested.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.
Prior litigation which has been settled to date, is described in, and incorporated by reference in, this “Item 1. Legal Proceedings” of this Quarterly Report on Form 10-Q from, Note 8-Commitments, Contingencies and Related-Party Transactions-Litigation in the Notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.
Item 1A. Risk Factors.
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the SEC on March 28, 2022,April 13, 2023, under the heading ���“Item 1A. Risk Factors”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 supplement the risk factors included in the Annual Report.
Our industrystock repurchases are discretionary and even if effected, they may not achieve the broader US economy have experienced higher than expected inflationary pressures in the first three quarters of 2022, related to continued supply chain disruptions, labor shortages and geopolitical instability. Should these conditions persist our business, results of operations and cash flows could be materially and adversely affected.desired objectives.
The first three quartersOn April 26, 2023, the Board of 2022 have seen significant increasesDirectors of the Company authorized and approved a share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock. Subject to any future extensions, the repurchase program is scheduled to expire on June 30, 2024. Under the stock repurchase program, shares may be repurchased from time to time in the costsopen market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of certain materials, including steel, sandboth the Company and fuel, asits stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. During the three months ended June 30, 2023, the Company paid $241 thousand for the repurchase of 163,300 shares at a resultweighted average price of availability constraints, supply chain disruption, increased demand, labor shortages associated with$1.48 per share in open market transactions. The program does not obligate the Company to acquire a fully employed US labor force, high inflation, interest rates and other factors. Supply and demand fundamentals have been further aggravated by disruptions in global energy supply caused by multiple geopolitical events, including the ongoing conflict between Russia and Ukraine. Recent supply chain constraints and inflationary pressures may continue to adversely impact our operating costs and may negatively impact our ability to procure materials and equipment in a timely and cost-effective manner, if at all, which could result in reduced margins and production delays and, as a result, our business, financial condition, resultsminimum amount of operations and cash flows could be materially and adversely affected.shares.
There can be no assurance that any repurchases pursuant to our stock repurchase program will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchase such shares. The conflict in Ukraineamounts and relatedtiming of the repurchases may also be influenced by general market conditions, regulatory developments (including recent legislative actions which, subject to certain conditions, may impose an excise tax of 1% on our stock repurchases) and the prevailing price volatility and geopolitical instability could negatively impacttrading volumes of our business.common stock. If our financial condition deteriorates or we decide to use our cash for other purposes, we may suspend repurchase activity at any time.
In late February 2022, Russia launched significant military action against Ukraine. The conflict has caused, and could intensify, volatility in natural gas, oil and NGL prices, and the extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time. We believe that the increase in crude oil prices during 2022 has partially been due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia. Any such volatility and disruptions may also magnify the impact of other risks described under “Risk Factors” in Item 1A of our 2021 Annual Report on Form 10-K.
Our Board of Directors has determined to suspend our quarterly cash dividend.
On April 13, 2022, August 5, 2022, November 7, 2022, February 9, 2023 and May 18, 2023, the Company’s Board of Directors approved the declaration and payment of quarterly cash dividends of $0.0225 per share of common stock. Our Board of Directors, at its sole discretion, determines the amount of the quarterly dividends to be distributed to our shareholders, if any, based on consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including future acquisitions and divestitures. Consequently, our dividend levels may fluctuate. On August 9, 2023, the Board of Directors determined it appropriate to suspend dividend payments, with the associated future capital resources being allocated towards the Company’s share repurchase program and repayments of the outstanding balance on our credit facility. The Company’sBoard of Directors may or may not reinstate future dividend payments in the future, the amount and frequency of which will be determined at the sole discretion of the Board. To the extent that the dividend is not reinstated in the future, only appreciation of the price of our common stock, which may not occur, will provide a return to our stockholders.
We may enter into strategic transactions in the future which may result in a material change in our operations could be disrupted by natural and/or human causes beyond itsa change of control.
The Company’s operations are subjectIn the future, we or our majority stockholders, may enter into transactions with, or undertake transactions with, parties seeking to disruption from natural merge and/or human causes beyond its control, including risks from hurricanes, severe storms, floods, heat waves, other forms of severe weather, wildfires, ambient temperature increases, sea level rise, war, accidents, civil unrest, political events, fires, earthquakes, system failures, cyber threats, terrorist acts and epidemic acquire us and/or pandemic diseasesour operations. While neither we, nor our majority stockholders have entered into any such asagreements or understandings to date, in the COVID-19 pandemic, some of which may be impacted by climate change and any of whichevent that we or our majority stockholders do enter into such a transaction or transactions in the future, it could result in suspensiona change in our business focus, the acquisition of significant amounts of our outstanding common stock, or a change in our majority stockholders. We and our majority stockholders have not entered into any agreements relating to any strategic transaction involving the Company as of the date of this filing and may never enter into such agreement(s) in the future. Any future strategic transaction involving the Company or its operations or harm to people or the natural environment, any of which couldmay have a material adverse effect on the Company’sour operations, cash flows, results of operations, or financial condition.prospects, plan of operations, the listing of our common stock on the Nasdaq Capital Market, our officers, directors and majority stockholders, and the value of our securities.
Increasing attentionWe have written down, and may in the future be forced to environmental, social,further write-down, material portions of our assets due to low oil and governance (ESG) matters may impact our business. natural gas prices.
The full cost method of accounting is used for oil and gas acquisition, exploration, development and production activities. Under the full cost method, all costs associated with the acquisition, exploration, and development of oil and natural gas properties are capitalized and accumulated in a country-wide cost center. This includes any internal costs that are directly related to development and exploration activities, but does not include any costs related to production, general corporate overhead, or similar activities. Proceeds received from disposals are credited against accumulated cost, except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production method, based on proved oil and natural gas reserves. Excluded from amounts subject to depreciation, depletion, and amortization are costs associated with unevaluated properties.
Increasing attentionUnder the full cost method, net capitalized costs are limited to ESG matters, including thosethe lower of (a) unamortized cost reduced by the related net deferred tax liability and asset retirement obligations, and (b) the cost center ceiling. The cost center ceiling is defined as the sum of (i) estimated future net revenue, discounted at 10% per annum, from proved reserves, based on unescalated costs, adjusted for contract provisions, any financial derivatives qualifying as accounting hedges and asset retirement obligations, and unescalated oil and natural gas prices during the period, (ii) the cost of properties not being amortized, and (iii) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to climate changetax assets directly attributable to the natural gas and sustainability, increasing societal, investorcrude oil properties. If the net book value reduced by the related net deferred income tax liability and legislative pressure on companies to address ESG matters, and potential customer use of substitutes to our products may resultasset retirement obligations exceeds the cost center ceiling limitation, a non-cash impairment charge is required in increased costs, reduced demand for our products, reduced profits, increased investigations and litigation or threats thereof, negative impacts on our stock price and access to capital markets, and damage to our reputation. Increasing attention to climate change, for example, may resultthe period in demand shifts for our hydrocarbon products and additional governmental investigations and private litigation, or threats thereof, againstwhich the Company.impairment occurs.
Economic uncertainty may affectWe perform a quarterly ceiling test for our accessonly oil and natural gas cost center, which is the United States. During 2022 we did not record a ceiling test write-down. The ceiling test incorporates assumptions regarding pricing and discount rates over which we have no influence in the determination of present value. In arriving at the ceiling test for the year ended December 31, 2022, we used an average price applicable to capital and/or increaseour properties of $93.67 per barrel for oil and $6.36 per Mcfe for natural gas, based on average prices per barrel of oil and per Mcfe of natural gas at the costsfirst day of such capital.each month of the 12-month period prior to the end of the reporting period, to compute the future cash flows of each of the producing properties at that date.
Global economic conditions continueThrough the period ended June 30, 2023, no ceiling test write-down of our oil and gas assets was necessary. However, we expect to be volatilerecord a write-down of our oil and uncertaingas properties in the third quarter of 2023 due to among other things, consumer confidencelower commodity prices used in future economic conditions, fearsthe calculation of recessionthe ceiling test as higher third quarter 2022 realized prices will be removed from the ceiling calculation and trade wars,replaced with lower third quarter 2023 commodity prices. Depending on actual commodity prices, estimated price differentials, lease operating costs, revisions to reserve estimates, and the price of energy, fluctuating interest rates, the availability and cost of consumer credit, the availabilityamount and timing of government stimulus programs, levels of unemployment, increased inflation, and tax rates. These conditions remain unpredictable and create uncertainties about our abilitycapital expenditures, the write-down could be approximately $3 million to raise capital$4 million in the future. In the event required capital becomes unavailablethird quarter of 2023. Additional write-downs could be incurred in the fourth quarter of 2023.
Material future write-downs or more costly, it couldimpairments of our oil and gas properties may have a material adverse effect on our business, results of operations, andassets and/or our financial condition.
A sale of a substantial number of registered shares of common could cause the price of our common stock to decline and make it harder for us to sell equity in the future.
We have registered the resale of 19,905,736 shares of common stock pursuant to a Form S-3 Registration Statement, which shares of common stock represent approximately 77.5% of our outstanding shares of common stock. Such shares of common stock may be resold in the public market immediately without restriction. The registered shares represent a significant number of shares of our common stock, and if sold in the market all at once or at about the same time, could significantly depress the market price of our common stock during the period the registration statement remains effective and could also affect our ability to raise equity capital in the future at a time and price that we deem reasonable or appropriate.
Our hedging activities have in the past and may in the future prevent us from benefiting fully from increases in oil and gas prices and may expose us to other risks, including counterparty risk.
We use derivative instruments to hedge the impact of fluctuations in oil and gas prices on our results of operations and cash flows. We have in the past, and to the extent that we continue to engage in hedging activities to protect ourselves against commodity price declines, we may in the future, be prevented from fully realizing the benefits of increases in oil and/or gas prices above the prices established by our hedging contracts. For the three and nine months ended September 30, 2022, we had a total net derivative loss on oil and gas contracts of $4.0 million and $4.9 million, respectively. See Note 7 Commodity Derivates to the footnotes to the unaudited financial statements included herein under “Part I - Financial Information” – “Item 1. Financial Statements”. Our hedging activities may expose us to the risk of financial loss in certain circumstances, including instances in which the counterparties to our hedging contracts fail to perform under the contracts. Finally, we are subject to risks associated with the adoption of derivatives legislation and regulations related to derivative contracts which if adopted, could have an adverse impact on our ability to hedge risks associated with our business. If regulations adopted in the future require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, hedging transactions in the future would become more expensive than we experienced in the past. Our hedges have in the past and may in the future result in losses and reduce the amount of revenue we would otherwise obtain upon the sale of oil and gas and may also increase our margins and decrease our net revenues.
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 $13.92 per share and as low as $2.67 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:
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.
Our Certificate of Incorporation provides for indemnification of officers and directors at our expense and limits their liability, which may result in a major cost to us and hurt the interests of our stockholders because corporate resources may be expended for the benefit of officers or directors.
Our Certificate of Incorporation provides for indemnification as follows: “To the fullest extent permitted by applicable law, as the same exists or may hereafter be amended, the [Company] shall indemnify and hold harmless each person who is or was made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”) by reason of the fact that he or she is or was a director or officer of the [Company] or, while a director or officer of the [Company], is or was serving at the request of the [Company] as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, other enterprise or nonprofit entity, including service with respect to an employee benefit plan (an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent, or in any other capacity while serving as a director, officer, employee or agent, against all liability and loss suffered and expenses (including, without limitation, attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid in settlement) reasonably incurred by such indemnitee in connection with such proceeding. The [Company] shall to the fullest extent not prohibited by applicable law pay the expenses (including attorneys’ fees) incurred by an indemnitee in defending or otherwise participating in any proceeding in advance of its final disposition; provided, however, that, to the extent required by applicable law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking, by or on behalf of the indemnitee, to repay all amounts so advanced if it shall ultimately be determined that the indemnitee is not entitled to be indemnified under [the Certificate of Incorporation] or otherwise.”
Our obligation to indemnify our officers and directors may discourage stockholders from bringing a lawsuit against our officers or directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against our officers and directors, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against our officers and directors pursuant to these indemnification provisions.
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity,condition, either of which factors is likely to materially reducemay cause the market and price for our shares.
Our Certificate of Incorporation contains a specific provision that limits the liabilityvalue of our directors for monetary damagessecurities to the Company and the Company’s stockholders and requires us, under certain circumstances, to indemnify officers, directors and employees.decline in value.
The limitation of monetary liability against our directors, officers and employees under Delaware law and the existence of indemnification rights to them may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our Certificate of Incorporation contains a specific provision that limits the liability of our directors for monetary damages to the Company and the Company’s stockholders, including as a result of a breach of their fiduciary duties, except to the extent such exception from liability is not permitted under Delaware General Corporation Law. We also have contractual indemnification obligations under our employment and engagement agreements with our executive officers and directors, as well as pursuant to indemnification agreements. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against our directors and officers, which the Company may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against our directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers, even though such actions, if successful, might otherwise benefit us and our stockholders.
Anti-takeover provisions may impede the acquisition of the Company.
Certain provisions of the Delaware General Corporation Law (DGCL) have anti-takeover effects and may inhibit a non-negotiated merger or other business combination, notwithstanding the fact that our Certificate of Incorporation provides that we are not subject to Section 203 of the DGCL, which relates to certain restrictions on business combinations with interested stockholders. These provisions are intended to encourage any person interested in acquiring the Company to negotiate with, and to obtain the approval of, our directors, in connection with such a transaction. As a result, certain of these provisions may discourage a future acquisition of the Company, including an acquisition in which the stockholders might otherwise receive a premium for their shares. In addition, we can also authorize “blank check” preferred stock, which could be issued by our Board of Directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock.
Anti-takeover provisions in our Certificate of Incorporation and our Amended and Restated Bylaws, as well as provisions of Delaware law, might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Our Certificate of Incorporation and Amended and Restated Bylaws and Delaware law contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or delay attempts by our stockholders to replace or remove our management. Our corporate governance documents include provisions:
Any provision of our Certificate of Incorporation or Amended and Restated Bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Our Certificate of Incorporation contains exclusive forum provisions that may discourage lawsuits against us and our directors and officers.
Our Certificate of Incorporation provides that unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware, will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim for breach of a fiduciary duty owed by any current or former director, officer, employee or stockholder of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our Certificate of Incorporation or Bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine.
The choice of forum provision in our Certificate of Incorporation does not waive our compliance with our obligations under the federal securities laws and the rules and regulations thereunder. Moreover, the provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act or by the Securities Act. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts with respect to suits brought to enforce a duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, both state and federal courts have jurisdiction to entertain claims under the Securities Act.
Notwithstanding the above, to prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our Certificate of Incorporation provides that unless the Company consents, the U.S. federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. However, there is uncertainty as to whether a court would enforce such a provision. While the Delaware courts have determined that choice of forum provisions of the type included in our Certificate of Incorporation are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in our exclusive forum provision. In such instance, to the extent applicable, we would expect to vigorously assert the validity and enforceability of our exclusive forum provision. This may require additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These exclusive forum provisions may limit the ability of the Company’s stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with the Company or the Company’s directors or officers, which may discourage such lawsuits against the Company and the Company’s directors and officers. Alternatively, if a court were to find one or more of these exclusive forum provisions inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions or forums, which could materially and adversely affect our business, financial condition, or results of operations.
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 SeptemberJune 30, 2022,2023, and from the period from OctoberJuly 1, 2022,2023, to the filing date of this Report.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth share repurchase activity for the respective periods:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||||
April 1 – April 30, 2023 | — | $ | — | — | $ | — | ||||||||||
May 1 - May 31, 2023 | 65,400 | $ | 1.42 | 65,400 | $ | 4,907,348 | ||||||||||
June 1 – June 30, 2023 | 97,900 | $ | 1.51 | 97,900 | 4,759,207 | |||||||||||
Total | 163,300 | $ | — | 163,300 | $ | 4,759,207 |
(1) On April 26, 2023, the Board of Directors of the Company authorized and approved a share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock. Subject to any future extensions, the repurchase program is scheduled to expire on June 30, 2024, when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when the program is discontinued by the Company. Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program is funded using the Company’s working capital. The program does not obligate the Company to acquire a minimum amount of shares.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
The Current Report on Form 8-K filed by the Company with the SEC on June 5, 2023, mistakenly discussed the grant to Mr. Mark Zajac, the then newly appointed Chief Financial Officer (CFO) and Principal Financial and Accounting Officer of the Company, of 100,000 restricted stock units of the Company (the “RSUs”) under the Company’s 2022 Equity Incentive Plan, with such RSUs vesting to Mr. Zajac at the rate of 1/2 of such RSUs on each of June 1, 2024 and 2025, provided he is still employed by the Company on such dates.
The Board actually approved the grant of 100,000 shares of Restricted Stock to Mr. Zajac, instead of RSUs, which shares of Restricted Stock had identical vesting terms as the RSUs discussed above and the references to RSUs in the Form 8-K were in error.
On August 9, 2023, the Board of Directors determined that it was appropriate to suspend dividend payments moving forward, with the associated future capital resources being allocated towards the Company’s share repurchase program and repayments of the outstanding balance on our credit facility. The Board of Directors may or may not reinstate future dividend payments in the future, the amount and frequency of which will be determined at the sole discretion of the Board. To the extent that the dividend is not reinstated in the future, only appreciation of the price of our common stock, which may not occur, will provide a return to our stockholders.
Item 6. Exhibits
Exhibit No. | Description | Form | File No. | Exhibit | Filing Date | Filed / Furnished Herewith | ||||||
10.1† | Offer Letter dated June 1, 2023, by and between U.S. Energy Corp. and Mark Zajac | 8-K | 000-06814 | 10.2 | 6/16/2023 | |||||||
10.2† | Form of U.S. Energy Corp. Form of Restricted Stock Grant Agreement (2022 Equity Incentive Plan) (1) | S-8 | 333-267267 | 4.3 | 9/2/2022 | |||||||
10.3† | Separation and Release Agreement, dated July 31, 2023, by and between U.S. Energy Corp. and Donald A. Kessel | 8-K | 000-06814 | 10.1 | 8/01/2023 | |||||||
16.1 | Letter from Plante & Moran, PLLC, dated June 15, 2023 | 8-K | 000-06814 | 16.1 | 6/16/2023 | |||||||
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | X | ||||||||||
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | X | ||||||||||
32.1♦ | Certification of Chief Executive Officer under Rule 13a-14(b) | X | ||||||||||
32.2♦ | Certification of Chief Financial Officer under Rule 13a-14(b) | X | ||||||||||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||
101.SCH* | Inline XBRL Schema Document | X | ||||||||||
101.CAL* | Inline XBRL Calculation Linkbase Document | X | ||||||||||
101.DEF* | Inline XBRL Definition Linkbase Document | X | ||||||||||
101.LAB* | Inline XBRL Label Linkbase Document | X | ||||||||||
101.PRE* | Inline XBRL Presentation Linkbase Document | X | ||||||||||
104* | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set | X |
* | Filed herewith. |
† | Exhibit constitutes a management contract or compensatory plan or agreement. |
♦ | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
U.S. ENERGY CORP. | ||
Date: | By: | /s/ Ryan L. Smith |
RYAN L. SMITH, Chief Executive Officer | ||
Date: August 14, 2023 | By: | /s/ Mark L. Zajac |
MARK L. ZAJAC, Chief Financial Officer |