U.S. Energy (USEG) - 2020 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, cash flows, and detailed notes on accounting policies and key financial areas Condensed Consolidated Balance Sheets (unaudited) Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (in thousands) | Percentage Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | :------------------ | | Total Assets | $9,690 | $13,467 | $(3,777) | -28.05% | | Total Liabilities | $2,092 | $2,257 | $(165) | -7.31% | | Total Shareholders' Equity | $5,598 | $9,210 | $(3,612) | -39.22% | | Cash and equivalents | $777 | $1,532 | $(755) | -49.28% | | Net oil and natural gas properties | $7,057 | $8,454 | $(1,397) | -16.52% | - The company's total assets decreased by $3,777 thousand, or 28.05%, from December 31, 2019, to June 30, 2020, primarily driven by a decrease in cash and equivalents and net oil and natural gas properties[13][14] Condensed Consolidated Statements of Operations (unaudited) Statements of Operations - Three Months Ended June 30 (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Change (in thousands) | Percentage Change | | :-------------------------------- | :------------------------------------ | :------------------------------------ | :-------------------- | :------------------ | | Total Revenue | $189 | $1,872 | $(1,683) | -89.80% | | Operating Loss | $(2,417) | $(199) | $(2,218) | 1114.57% | | Net (Loss) Income | $(3,651) | $20 | $(3,671) | -18355.00% | | Basic and Diluted Loss Per Share | $(2.68) | $(0.05) | $(2.63) | 5260.00% | Statements of Operations - Six Months Ended June 30 (in thousands) | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Change (in thousands) | Percentage Change | | :-------------------------------- | :---------------------------------- | :---------------------------------- | :-------------------- | :------------------ | | Total Revenue | $1,112 | $3,433 | $(2,321) | -67.61% | | Operating Loss | $(2,653) | $(219) | $(2,434) | 1111.42% | | Net (Loss) Income | $(3,957) | $35 | $(3,992) | -11405.71% | | Basic and Diluted Loss Per Share | $(3.01) | $(0.11) | $(2.90) | 2636.36% | - The company experienced a significant decline in total revenue and a substantial increase in net loss for both the three and six months ended June 30, 2020, primarily due to lower oil and natural gas prices and impairment charges[16] Condensed Consolidated Statements of Changes in Shareholders' Equity (unaudited) Changes in Shareholders' Equity (in thousands) | Metric | December 31, 2019 (in thousands) | June 30, 2020 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------------------- | :--------------------------- | :-------------------- | | Total Shareholders' Equity | $9,210 | $5,598 | $(3,612) | | Accumulated Deficit | $(127,679) | $(131,636) | $(3,957) | | Shares Issued in Acquisition | - | 59,498 | 59,498 | | Share-based Compensation | - | $106 | $106 | - Shareholders' equity decreased by $3,612 thousand, primarily driven by a net loss of $3,957 thousand for the six months ended June 30, 2020. The company issued 59,498 shares for the acquisition of New Horizon Resources and recognized $106 thousand in share-based compensation[18] Condensed Consolidated Statements of Cash Flows (unaudited) Cash Flow Activities (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------------------------ | :------------------------------------ | :-------------------- | | Net cash used in operating activities | $(470) | $(179) | $(291) | | Net cash used in investing activities | $(134) | $(201) | $67 | | Net cash used in financing activities | $(152) | $(1,076) | $924 | | Net decrease in cash and equivalents | $(755) | $(1,456) | $701 | | Cash and equivalents, end of period | $777 | $884 | $(107) | - Cash used in operating activities increased by $291 thousand, while cash used in financing activities significantly decreased by $924 thousand, primarily due to the repayment of the credit facility in the prior year. Overall, the net decrease in cash and equivalents was $755 thousand for the six months ended June 30, 2020[20] Notes to Condensed Consolidated Financial Statements 1. Organization, Operations and Significant Accounting Policies - U.S. Energy Corp. is an oil and natural gas acquisition, exploration, and development company. The financial statements are prepared in accordance with GAAP and SEC interim reporting rules, with certain disclosures condensed or omitted[24][25] - On January 6, 2020, the Company completed a one-for-ten reverse stock split, with all financial statements adjusted retrospectively[27] - As of June 30, 2020, the Company had $0.8 million in cash and $1.3 million in working capital, including $725 thousand from real estate held for sale. Management believes existing cash and resources, including expected proceeds from asset sales, will fund operations for the next twelve months, despite significant declines in commodity prices[28] - The Company adopted ASU No. 2018-13 on January 1, 2020, which changed fair value measurement disclosures for warrants, removing process disclosures and adding quantitative information on unobservable inputs[32] 2. Acquisition of New Horizon Resources - On March 1, 2020, the Company acquired New Horizon Resources, gaining operated producing properties in North Dakota, consisting of nine gross wells (five net wells) and approximately 1,300 net acres[33] Acquisition Consideration and Assets (in thousands) | Consideration/Assets | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Fair value of net assets acquired | $362 | | Cash consideration | $150 | | Issuance of common stock (59,498 shares) | $240 | | Cash acquired | $(28) | | Total fair value of consideration transferred | $362 | - For the six months ended June 30, 2020, New Horizon properties contributed $33 thousand in revenues and $69 thousand in lease operating expenses[34] 3. Real Estate Held for Sale - The Company decided to sell its 14-acre tract with a 30,400 sq ft office building in Riverton, Wyoming, which previously served as its corporate headquarters[35] Real Estate Held for Sale Metrics (in thousands) | Metric | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Pre-impairment carrying value | $1,376 | | Estimated net proceeds | $725 | | Loss recognized on real estate held for sale | $651 | - A loss of $651 thousand was recognized to adjust the property's value to its estimated net proceeds of $725 thousand[37] 4. Revenue Recognition - Revenues are derived from oil and natural gas sales, with payments received one to three months after delivery. Variances between estimated and actual revenue are insignificant[38] - The Company reports gross revenue from well operators before production taxes and transportation costs, with production taxes reported separately and transportation costs in lease operating expense[41] Revenue by Geographic Area (in thousands) | Geographic Area | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :---------------- | :------------------------------------ | :------------------------------------ | :---------------------------------- | :---------------------------------- | | North Dakota | $125 | $679 | $663 | $1,252 | | Texas | $64 | $1,193 | $449 | $2,181 | | Total Revenue | $189 | $1,872 | $1,112 | $3,433 | - Negative natural gas and liquids revenue for Q2 2020 was due to an over-accrual and negative realized prices[44] Revenue Concentration by Operator | Operator | 2020 Revenue Concentration | 2019 Revenue Concentration | | :---------------- | :------------------------- | :------------------------- | | CML Exploration LLC | 37% | 52% | | Zavanna LLC | 44% | 29% | 5. Leases - The Company adopted ASC 842 on January 1, 2019, recording a $228 thousand right-of-use asset and a $252 thousand lease liability for its Denver office operating lease[46] Lease Balances (in thousands) | Lease Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Right of use asset balance | $154 | $179 | | Total lease liability | $173 | $200 | Lease Costs and Sublease Income (in thousands) | Lease Cost Type | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------ | :------------------------------------ | :------------------------------------ | :---------------------------------- | :---------------------------------- | | Total lease costs | $12 | $21 | $28 | $42 | | Sublease income | $(11) | $- | $(16) | $- | - The Company subleased its Denver office starting March 2020, generating sublease income. The weighted average discount rate for leases is 8.75%[48][49][50] Future Lease Commitments (in thousands) | Future Lease Commitments | Amount (in thousands) | | :----------------------- | :-------------------- | | Remainder of 2020 | $37 | | 2021 | $74 | | 2022 | $76 | | 2023 | $6 | | Total lease payments | $193 | | Less: imputed interest | $(20) | | Total lease liability | $173 | Riverton Office Building Lease Maturities (in thousands) | Riverton Office Building Lease Maturities | Amount (in thousands) | | :---------------------------------------- | :-------------------- | | Remainder of 2020 | $80 | | 2021 | $161 | | 2022 | $165 | | 2023 | $169 | | 2024 | $163 | | Remaining through June 2029 | $695 | | Total lease maturities | $1,433 | 6. Oil and Natural Gas Production Activities - The Company recorded a $1.8 million ceiling test write-down of its oil and gas properties for the three months ended June 30, 2020, due to reduced crude oil prices and the performance of a South Texas well[54] - The ceiling test calculation as of June 30, 2020, used $47.17 per barrel for oil and $2.07 per MMbtu for natural gas, with a 10% discount factor[53] - An additional $2.1 million reclassification to the depletable base of the full cost pool was recorded due to a reduction in the value of certain unevaluated acreage[54] 7. Debt - In December 2017, APEG II exchanged $4.5 million of outstanding borrowings for 581,927 shares of common stock, representing approximately 42% of the Company's outstanding common stock as of June 30, 2020[55] - The credit facility was fully repaid on March 1, 2019, and terminated on July 30, 2019. Interest expense for the six months ended June 30, 2019, was $20 thousand, with a weighted average interest rate of 8.75%[56] 8. Write-Off of Deposit - The Company made a $250,000 option payment and an additional $124,000 to CETA in 2017-2018 for an option to acquire shares or lease properties. As of June 30, 2020, $225,000 has been received, and an allowance for the remaining $75,000 due from CETA has been established due to collection uncertainty[57] 9. Commitments, Contingencies and Related-Party Transactions - The Company was involved in litigation with APEG II (its largest shareholder) and its former CEO, David Veltri, regarding control of company funds and management termination[58][61][66] - The Texas Federal Court ordered APEG to return Company funds, less the outstanding credit facility balance, resulting in the Company receiving approximately $850 thousand[62] - The Colorado Federal Court granted injunctive relief against Mr. Veltri for continuing to act as CEO without authorization and appointed a temporary custodian, C. Randel Lewis, to resolve board deadlock[69][70] - Both the Texas and Colorado litigations were dismissed in July and May 2020, respectively, with the Company expecting all related matters to be formally dismissed in August 2020[65][71] 10. Preferred Stock - The Company issued 50,000 shares of Series A Convertible Preferred Stock to Mt. Emmons Mining Company (MEM) for $2 million in 2016, with a liquidation preference increasing by quarterly dividends of 12.25% per annum[73] - Each share of Preferred Stock is convertible into 1.33 shares of common stock, totaling 79,334 shares as of June 30, 2020, after accounting for the reverse stock split[73] - Preferred Stock is senior to common stock regarding dividend and liquidation rights, and holders have approval rights on specified matters and the right to demand repurchase upon a change of control[75] 11. Shareholders' Equity - In December 2016, the Company issued warrants to purchase 100,000 shares of common stock at an exercise price of $20.05 per share (adjusted to $11.30 due to anti-dilution provisions). The warrants are classified as liabilities due to a redemption option in a 'Fundamental Transaction'[76] Warrant Fair Value and Revaluation (in thousands) | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------- | :----------------------------- | :------------------------------- | | Fair value of warrants | $193 | $73 | | Warrant revaluation (loss) gain (6 months) | $(120) | $242 | - Total stock-based compensation expense related to stock options was $0 for the six months ended June 30, 2020, compared to $26 thousand in 2019, as all stock options had vested[78] - In January 2020, the Company granted 48,000 restricted shares to the CEO and 28,000 to Board members, resulting in $106 thousand in stock compensation expense for the six months ended June 30, 2020, with $266 thousand unrecognized[81] 12. Asset Retirement Obligations - The Company has AROs for future plugging and abandonment of proved properties, recorded at fair value with a corresponding increase in asset carrying amount[82] Asset Retirement Obligations (in thousands) | Metric | Six Months Ended June 30, 2020 (in thousands) | Year Ended December 31, 2019 (in thousands) | | :------------------------------------ | :------------------------------------ | :---------------------------------- | | Balance, beginning of period | $819 | $939 | | Liabilities incurred for acquisition of New Horizon wells | $163 | $- | | Balance, end of period | $985 | $819 | - AROs increased by $163 thousand due to liabilities incurred from the acquisition of New Horizon wells[84] 13. Income Taxes - The Company's effective tax rate for the three and six months ended June 30, 2020 and 2019, was 0%[85] - A full valuation allowance is maintained against all Deferred Tax Assets (DTAs) due to uncertainty of realization, resulting in no recorded DTAs as of June 30, 2020[87] - The Company is analyzing the CARES Act but expects no material impact on its tax position[89] 14. Earnings (Loss) Per Share - Basic and diluted net loss per common share are calculated by dividing net loss attributable to common shareholders by the weighted-average common shares outstanding[90] Earnings (Loss) Per Share Data (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss applicable to common shareholders (in thousands) | $(3,754) | $(71) | $(4,160) | $(143) | | Basic and Diluted Loss Per Share | $(2.68) | $(0.05) | $(3.01) | $(0.11) | | Basic and Diluted Weighted Average Common Shares Outstanding (in thousands) | 1,399 | 1,341 | 1,380 | 1,341 | - All potentially dilutive securities (stock options, restricted stock, warrants, Series A preferred stock) were anti-dilutive and excluded from diluted EPS calculations due to the net loss[90][93] 15. Fair Value Measurements - Fair value measurements are categorized into a hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[94][95][96] - Warrants are classified as Level 3 liabilities and valued using a Lattice model, with fair values of $193 thousand at June 30, 2020, and $73 thousand at December 31, 2019. Key inputs include volatility, probability of down-round events, and risk-free interest rates[97][99] - Marketable equity securities (investment in Anfield) are classified as Level 1 due to quoted market prices on the TSX Venture Exchange[100] - Oil and gas properties and real estate assets held for sale are valued on a non-recurring basis using Level 3 inputs, such as estimated future discounted cash flows, production, prices, operating costs, and capitalization rates[101][102] 16. Subsequent Events Update - On July 22, 2020, the Company sold 1,210,455 shares of Anfield Energy Inc. for approximately $45 thousand, retaining 2,420,910 shares which it expects to sell in Q3 2020[105] - On July 30, 2020, the Company filed a Notice of Voluntary Dismissal in its lawsuit against former CEO David Veltri, expecting all Texas Litigation matters to be dismissed in August 2020[106] - In July 2020, the Company received an arbitration request from a former employee for breach of employment agreement. The Company has accrued $100 thousand for its insurance deductible, believing the insurance carrier will settle the claim[107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial condition and operational results, covering COVID-19 impacts, legal proceedings, accounting policies, and analysis of revenue, expenses, liquidity, and cash flows General Overview - U.S. Energy Corp. is an independent energy company focused on acquiring and developing oil and natural gas properties in South Texas and the Williston Basin in North Dakota[110] - The Company operates under a non-operator business model, relying on partners for drilling, completion, production, and marketing of oil and natural gas[111] Recent Developments - On July 22, 2020, the Company sold 1,210,455 common shares of Anfield Energy Inc. for approximately $45 thousand and expects to sell the remaining 2,420,910 shares during Q3 2020[112] Impacts of COVID-19 Pandemic and Effect on Economic Environment - The COVID-19 pandemic led to a drastic decline in global demand and an oversupply of crude oil, causing spot and future prices to fall to historic lows in Q2 2020[113] - Operators in North Dakota significantly decreased drilling and completion activity and shut in or curtailed production, impacting the Company's revenues[113] - The Company recorded a $1.8 million ceiling test write-down at June 30, 2020, due to lower crude oil prices affecting proved reserve values. Further write-downs are likely if depressed prices continue[114] Legal Proceedings - Litigation with APEG II and former CEO David Veltri is expected to be formally dismissed in August 2020, following voluntary dismissals filed by both parties in July 2020[116] - In July 2020, the Company received an arbitration request from a former employee for breach of employment agreement and has accrued $100 thousand for its insurance deductible[117] Critical Accounting Policies and Estimates - The preparation of financial statements requires management to make assumptions and estimates that affect reported amounts, with actual results potentially differing under various conditions[118] Recently Issued Accounting Standards - Information on recently issued accounting standards and adoption plans is detailed in Note 1 of the financial statements[119] Results of Operations Comparison of our Statements of Operations for the Three Months Ended June 30, 2020 and 2019 Statements of Operations Comparison - Three Months Ended June 30 (in thousands, except per share and price data) | Metric | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (in thousands) | Percent Change | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------------- | | Total Revenue | $189 | $1,872 | $(1,683) | -90% | | Oil Production (Bbls) | 11,710 | 29,386 | (17,676) | -60% | | Gas Production (Mcfe) | 13,124 | 60,141 | (47,017) | -78% | | Average Oil Price (Bbls) | $17.18 | $59.89 | $(42.73) | -71% | | Average Gas Price (Mcfe) | $(0.95) | $1.86 | $(2.82) | -151% | | BOE Production | 13,897 | 39,410 | (25,513) | -65% | - Total revenue decreased by 90% due to a 60% decrease in oil production and a 71% decrease in realized oil prices, primarily caused by reduced demand from the COVID-19 pandemic and operators shutting in North Dakota production[122][123] Production Costs Comparison - Three Months Ended June 30 (in thousands) | Production Costs | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (in thousands) | Percent Change | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------------- | | Production taxes | $13 | $118 | $(105) | -89% | | Lease operating expense | $333 | $471 | $(138) | -29% | | Total Production Costs | $346 | $589 | $(243) | -41% | - Production taxes decreased by 89% due to lower oil revenues, and lease operating expenses decreased by 29% due to production shut-ins and cost-cutting measures[125] - DD&A rate increased to $6.45 per BOE from $4.98 per BOE, impacted by a $2.1 million reclassification of unevaluated properties and reduced reserve quantities[126] - An impairment of $1.8 million was recorded for oil and natural gas properties due to the net capitalized cost exceeding the full cost ceiling limitation[127] G&A Expenses Comparison - Three Months Ended June 30 (in thousands) | G&A Expenses | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (in thousands) | Percent Change | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------------- | | Total G&A Expenses | $367 | $1,280 | $(913) | -71% | | Professional fees, insurance and other | $71 | $1,064 | $(993) | -91% | | Compensation and benefits | $296 | $188 | $108 | 57% | - General and administrative expenses decreased by 71%, primarily due to a $931 thousand reduction in legal fees (including removal of $250 thousand for litigation settlement accruals), partially offset by a $108 thousand increase in compensation and benefits from stock-based awards[128] Non-Operating Items Comparison - Three Months Ended June 30 (in thousands) | Non-Operating Items | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (in thousands) | Percent Change | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------------- | | Total other (expense) income | $(1,234) | $219 | $(1,453) | -663% | | Loss on real estate held for sale | $(651) | $- | $(651) | N/A% | | Impairment of real estate | $(403) | $- | $(403) | N/A% | | Warrant revaluation (loss) gain | $(114) | $234 | $(348) | -149% | | Unrealized loss on marketable equity securities | $(46) | $(8) | $(38) | -475% | - Non-operating expense increased significantly due to a $651 thousand loss on real estate held for sale, a $403 thousand impairment of other real estate, and a $114 thousand warrant revaluation loss[129][130][132] Comparison of our Statements of Operations for the Six Months Ended June 30, 2020 and 2019 Statements of Operations Comparison - Six Months Ended June 30 (in thousands, except per share and price data) | Metric | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (in thousands) | Percent Change | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------------- | | Total Revenue | $1,112 | $3,433 | $(2,321) | -68% | | Oil Production (Bbls) | 32,014 | 54,739 | (22,725) | -42% | | Gas Production (Mcfe) | 53,437 | 113,402 | (59,965) | -53% | | Average Oil Price (Bbls) | $32.99 | $58.00 | $(25.02) | -43% | | Average Gas Price (Mcfe) | $1.04 | $2.28 | $(1.24) | -54% | | BOE Production | 40,920 | 73,639 | (32,719) | -44% | - Total revenue decreased by 68% for the six months, driven by a 42% decrease in oil production and a 43% decrease in realized oil prices, primarily due to the COVID-19 pandemic and production shut-ins in North Dakota[136][137] Production Costs Comparison - Six Months Ended June 30 (in thousands) | Production Costs | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (in thousands) | Percent Change | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------------- | | Production taxes | $80 | $216 | $(136) | -63% | | Lease operating expense | $742 | $938 | $(196) | -21% | | Total Production Costs | $822 | $1,154 | $(332) | -29% | - Production taxes decreased by 63% due to lower oil revenues, and lease operating expenses decreased by 21% due to production shut-ins and cost-cutting measures[139] - DD&A rate was $4.76 per BOE, slightly lower than $4.87 per BOE in 2019, impacted by a $2.1 million reclassification of unevaluated properties and reduced reserve quantities[140] - An impairment of $1.8 million was recorded for oil and natural gas properties due to the net capitalized cost exceeding the full cost ceiling limitation[141] G&A Expenses Comparison - Six Months Ended June 30 (in thousands) | G&A Expenses | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (in thousands) | Percent Change | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------------- | | Total G&A Expenses | $939 | $2,128 | $(1,189) | -56% | | Professional fees, insurance and other | $420 | $1,620 | $(1,200) | -74% | | Compensation and benefits | $519 | $480 | $39 | 8% | - General and administrative expenses decreased by 56%, primarily due to a $1,232 thousand reduction in legal fees (including removal of $250 thousand for litigation settlement accruals), partially offset by a $39 thousand increase in compensation and benefits from stock-based awards[142] Non-Operating Items Comparison - Six Months Ended June 30 (in thousands) | Non-Operating Items | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | Change (in thousands) | Percent Change | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------------- | | Total other (expense) income | $(1,304) | $254 | $(1,558) | -613% | | Loss on real estate held for sale | $(651) | $- | $(651) | N/A% | | Impairment of real estate | $(403) | $- | $(403) | N/A% | | Warrant revaluation (loss) gain | $(120) | $242 | $(362) | -150% | | Unrealized (loss) gain on marketable equity securities | $(121) | $5 | $(126) | -2,520% | - Non-operating expense increased significantly due to a $651 thousand loss on real estate held for sale, a $403 thousand impairment of other real estate, and a $120 thousand warrant revaluation loss[144][145][147] Non-GAAP Financial Measures- Adjusted EBITDAX - Adjusted EBITDAX is a non-GAAP measure used to evaluate performance, excluding items like DDA, impairment, stock-based compensation, unrealized gains/losses, and interest expense[150][151] Adjusted EBITDAX (Non-GAAP) (in thousands) | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Income (loss) from continuing operations (GAAP) | $(3,957) | $35 | | Adjusted EBITDAX (Non-GAAP) | $(550) | $204 | - Adjusted EBITDAX decreased from a gain of $204 thousand in 2019 to a loss of $550 thousand in 2020, reflecting the operational challenges and impairments[152] Liquidity and Capital Resources Liquidity and Capital Resources Metrics (in thousands) | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (in thousands) | | :-------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Cash and equivalents | $777 | $1,532 | $(755) | | Working capital | $1,343 | $1,470 | $(127) | | Total assets | $9,690 | $13,467 | $(3,777) | | Total shareholders' equity | $5,598 | $9,210 | $(3,612) | | Current ratio | 2.7 to 1.0 | 2.2 to 1.0 | N/A | - Working capital decreased by $127 thousand, primarily due to cash used in operating activities and the New Horizon acquisition, partially offset by the reclassification of real estate held for sale[154] - The Company had $777 thousand in cash and equivalents as of June 30, 2020, and $783 thousand as of August 7, 2020[155] - Lower crude oil prices, which remained historically low in Q2 2020, negatively impact revenues and may lead to additional ceiling test write-downs. The Company currently lacks commodity derivative contracts[156][157] - The Company is actively pursuing the sale of its Riverton, Wyoming office building, with an estimated realizable value between $700 thousand and $900 thousand[158] - Potential financing alternatives for 2020 include refinancing credit facilities, selling oil and natural gas assets, or issuing common stock[160] Cash Flows Cash Flow Activities Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Change (in thousands) | | :-------------------- | :------------------------------------ | :------------------------------------ | :-------------------- | | Operating activities | $(470) | $(179) | $(291) | | Investing activities | $(134) | $(201) | $67 | | Financing activities | $(152) | $(1,076) | $924 | - Cash used in operating activities increased by $291 thousand due to decreased revenues, partially offset by reduced operating expenses and changes in working capital[162] - Cash used in investing activities decreased by $67 thousand, with the primary use in 2020 being the $122 thousand net cash for the New Horizon acquisition[163] - Cash used in financing activities significantly decreased by $924 thousand, mainly due to the repayment of the credit facility in 2019, compared to smaller repayments on insurance premium notes and the New Horizon credit facility in 2020[164] Off-Balance Sheet Arrangements - The Company has not participated in transactions generating relationships with unconsolidated entities or special purpose entities (SPEs) for off-balance sheet arrangements during the reporting periods[165][166] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, U.S. Energy Corp. is exempt from providing quantitative and qualitative disclosures about market risk - The Company is exempt from providing quantitative and qualitative disclosures about market risk as a smaller reporting company[167] Item 4. Controls and Procedures This section addresses the effectiveness of disclosure controls and internal control over financial reporting, highlighting identified material weaknesses and remediation efforts Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. - As of June 30, 2020, the CEO and CFO determined that the Company's disclosure controls and procedures were not effective[170] - Material weaknesses in internal control over financial reporting include inadequate segregation of duties due to limited accounting staff and inadequate controls over physical and logical access to IT systems[171][174] Changes in Internal Control over Financial Reporting. - There were no changes to the internal control over financial reporting during the three months ended June 30, 2020, that materially affected or are reasonably likely to materially affect the system of controls[172] - The Company has designed and is implementing a remediation plan to strengthen internal controls and improve disclosure controls and procedures[173] Part II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to the detailed discussion of legal proceedings, including litigation with APEG II and former CEO David Veltri, as outlined in the financial statement notes - Legal proceedings involving APEG II and former CEO David Veltri are detailed in Note 9 of the financial statements[176] Item 1A. Risk Factors As a smaller reporting company, U.S. Energy Corp. is exempt from providing a separate discussion of risk factors in this quarterly report - The Company is exempt from providing risk factor information as a smaller reporting company[177] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company reported no unregistered sales of equity securities or use of proceeds during the reporting period - No unregistered sales of equity securities or use of proceeds occurred[178] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the reporting period - No defaults upon senior securities were applicable[178] Item 4. Mine Safety Disclosures The Company reported no mine safety disclosures during the reporting period - Mine safety disclosures were not applicable[179] Item 5. Other Information The Company reported no other information requiring disclosure under this item - No other information was applicable[180] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents, agreements, and certifications - The exhibits include various corporate documents such as Amended and Restated Articles of Incorporation, Bylaws, Certificate of Designation for Series A Convertible Preferred Stock, Common Stock Purchase Warrant, and several stock compensation and incentive plans[182][183] - Key agreements listed are the Mt. Emmons Mining Company Acquisition Agreement, Series A Convertible Preferred Stock Purchase Agreement, Investor Rights Agreement, and the Exchange Agreement with APEG Energy II, L.P.[182][183][184] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act are also included[184] Signatures The report is duly signed by Ryan L. Smith, Chief Executive Officer and Chief Financial Officer, on August 14, 2020 - The report was signed by Ryan L. Smith, Chief Executive Officer and Chief Financial Officer, on August 14, 2020[188]