U.S. Energy (USEG) - 2020 Q4 - Annual Report

Part I Business The company is an independent energy firm acquiring and developing oil and gas properties, recently expanding into operated assets - The company is an independent energy company focused on the acquisition and development of oil and natural gas properties, primarily operating through a non-operator model but expanded into operated properties in 2020[43][44] Key Operational and Reserve Data (as of Dec 31, 2020) | Metric | Value | | :--- | :--- | | Estimated Proved Reserves | 1,255,236 BOE (78% oil) | | Standardized Measure Value | $8.6 million | | Gross / Net Acres | 90,136 / 6,064 | | Gross / Net Producing Wells | 134 / 30.7 | | Average Net Production (2020) | 218 BOE per day | - In 2020, the company acquired operated properties in the Williston Basin, Permian Basin, Powder River Basin, and Gulf Coast, which represented 42.6% of the PV-10 value of its reserves at year-end[49] - The company's business strategy focuses on disciplined capital deployment, growing production by performing workovers on operated idle wells, and continuously evaluating strategic acquisition opportunities[91][94] - In February 2021, the company raised net proceeds of $5.3 million from an underwritten stock offering and in March 2021, it converted ~$413,000 of debt to equity and hedged 100 barrels of crude oil per day at $61.90[111][112][114] Risk Factors The company faces significant risks from commodity price volatility, capital needs, operational hazards, and regulatory changes - The business is highly sensitive to volatile oil and gas prices, with the COVID-19 pandemic causing a drastic decline in demand and prices, adversely affecting revenues[119][124][126] - The company may need to raise additional capital for future acquisitions and operations, and failure to do so could force a scale-back of the business plan[116][117] - Material weaknesses in internal control over financial reporting were identified as of December 31, 2020, related to inadequate segregation of duties[194][195][196] - The company is subject to the full cost accounting "ceiling test," which resulted in a $2.9 million non-cash write-down of oil and gas properties in 2020[189][192] - The company's common stock may be delisted from The Nasdaq Capital Market if it fails to meet continued listing requirements, such as a minimum $1.00 stock price[215] - Operations are subject to extensive environmental regulations that can restrict activities and impose significant compliance costs and liabilities[203][204][209] Unresolved Staff Comments The company reports no unresolved staff comments - None[234] Properties The company's proved reserves increased due to acquisitions, while 2020 production declined due to shut-ins and natural declines Proved Oil and Natural Gas Reserves (BOE) | Year | Proved Developed | Proved Non-producing | Total Proved Reserves | | :--- | :--- | :--- | :--- | | 2020 | 1,150,368 | 104,868 | 1,255,236 | | 2019 | 995,720 | 0 | 995,720 | | 2018 | 874,260 | 0 | 874,260 | Annual Production Volumes | Year | Oil (Bbls) | Natural Gas (Mcfe) | Total (BOE) | Average (BOE/day) | | :--- | :--- | :--- | :--- | :--- | | 2020 | 60,469 | 116,082 | 79,816 | 218 | | 2019 | 110,090 | 209,518 | 145,010 | 397 | | 2018 | 75,003 | 286,692 | 122,785 | 336 | - The company did not participate in any development or exploratory drilling activities in 2020[247] - As of December 31, 2020, the company held 90,136 gross (6,064 net) acres, with the majority being developed and held by production[251] - The company is in the process of selling a 30,400 square-foot office building and an adjacent 14-acre tract in Riverton, Wyoming[252] Legal Proceedings The company is contesting an arbitration claim from its former CEO and has resolved prior litigation with a major shareholder - In July 2020, former CEO David Veltri filed a request for arbitration, claiming breach of his employment agreement, which the company is vigorously contesting[423] - From February 2019 to August 2020, the company was involved in litigation with former CEO David Veltri and its largest shareholder, APEG II, which has since been dismissed[424] Mine Safety Disclosures This item is not applicable to the company - Not applicable[260] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ, no dividends are planned, and all Series A preferred stock was redeemed in 2020 - The company's common stock is traded on the NASDAQ Capital Market under the symbol "USEG"[262] - The company did not pay cash dividends in fiscal 2020 or 2019 and does not intend to in the foreseeable future[265] - On December 31, 2020, the company redeemed all 50,000 outstanding shares of Series A preferred stock by paying $2.0 million in cash and issuing 328,000 shares of common stock[267] Selected Financial Data This item is not required for smaller reporting companies - This Item is not required for smaller reporting companies[268] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue and production fell sharply in 2020, leading to a significant net loss, though liquidity improved via financing activities Comparison of Operations (2020 vs. 2019) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $2,330 | $6,573 | -65% | | Total Operating Expenses | $7,700 | $7,363 | +5% | | Operating Loss | ($5,370) | ($790) | +580% | | Net Loss | ($6,439) | ($550) | +1071% | - The 65% decrease in revenue was caused by a 45% decrease in production quantities and a 37% decrease in the average oil sales price[293] - The company recorded a $2.9 million impairment of oil and natural gas properties in 2020 due to the full cost ceiling limitation[298] - General and administrative expenses decreased by 40% to $2.6 million, mainly due to a $1.7 million reduction in professional fees[298] Cash Flow Summary (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by Operating Activities | ($717) | $638 | | Net cash used in Investing Activities | ($1,109) | ($281) | | Net cash provided by (used in) Financing Activities | $3,148 | ($1,165) | - Working capital surplus increased by $1.0 million to $2.5 million at year-end 2020, primarily due to $4.5 million in proceeds from common stock offerings[309] Financial Statements and Supplementary Data This section presents audited financial statements, with the auditor's report highlighting three critical audit matters - The independent auditor, Plante & Moran, PLLC, issued an unqualified opinion on the financial statements[343] - The audit identified three critical audit matters: 1) Impact of proved reserve estimates on property valuation, 2) Assessment of unevaluated properties, and 3) Accounting for property acquisitions[349][352][354] Consolidated Balance Sheet Highlights (as of Dec 31, in thousands) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Cash and equivalents | $2,854 | $1,532 | | Net oil and natural gas properties | $7,438 | $8,454 | | Total Assets | $12,363 | $13,467 | | Total Liabilities | $3,796 | $2,257 | | Total Shareholders' Equity | $8,567 | $9,210 | - Supplemental disclosures show a standardized measure of discounted future net cash flows from proved reserves of $8.6 million at year-end 2020, down from $10.3 million at year-end 2019[470] - Subsequent to year-end, the company completed a $5.3 million stock offering, converted $413k in debt to equity, and entered a new hedging contract[472][473][475][476] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[322] Controls and Procedures Management concluded disclosure controls were ineffective due to two material weaknesses in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2020[324] - Two material weaknesses were identified in internal control over financial reporting: 1) Inadequate segregation of duties due to limited staff, and 2) Inadequate segregation of duties for system access[327] - As a smaller reporting company, an attestation report from the independent registered public accounting firm is not included[330] Other Information The company reports no other information under this item - None[331] Part III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item will be incorporated by reference from the company's 2021 Proxy Statement[335] Executive Compensation Information is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item will be incorporated by reference from the company's 2021 Proxy Statement[336] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item will be incorporated by reference from the company's 2021 Proxy Statement[337] Certain Relationships and Related Transactions, and Director Independence Information is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item will be incorporated by reference from the company's 2021 Proxy Statement[338] Principal Accounting Fees and Services Information is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item will be incorporated by reference from the company's 2021 Proxy Statement[339] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements from Item 8 and all exhibits filed with or incorporated into the Form 10-K - This section lists the financial statements contained in Item 8 and all exhibits filed with the report[478][479] - Filed exhibits include the Consent of the Independent Registered Public Accounting Firm and the Consent of the Reserve Engineer[479] - The Reserve Report Summary from Don Jacks, PE is filed as Exhibit 99.1[479] Form 10-K Summary The company reports no summary under this item - None[483]