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, is referred to as the “Company” in these Notes to Unaudited
Condensed Consolidated Financial Statements) was incorporated in the State of Wyoming on January 26, 1966. The Company’s
principal business activities are focused on the acquisition, exploration and development of oil and natural gas properties in
the United States.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements are presented in accordance with U.S. generally accepted accounting
principles (“GAAP”) and have been prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote
disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and
regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for
a fair presentation of the consolidated financial statements have been included.
For
further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2019, as filed with the SEC on March 30, 2020. Our financial condition as of September 30,
2020, and operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the financial
condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2020.
Reverse
Stock Split
On
January 6, 2020, the Company completed a one-for-ten reverse stock split (the “Reverse Stock Split”) with respect
to the Company’s outstanding common stock. For purposes of presentation, the unaudited condensed consolidated financial
statements and footnotes have been adjusted for the number of post-split shares as if the split had occurred at the beginning
of earliest period presented.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates include oil and natural gas
reserves that are used in the calculation of depreciation, depletion, amortization and impairment of the carrying value of evaluated
oil and natural gas properties; realizability of unevaluated properties; production and commodity price estimates used to record
accrued oil and natural gas sales receivables; valuation of warrant instruments; valuation of assets acquired and liabilities
assumed in acquisitions and the cost of future asset retirement obligations. The Company evaluates its estimates on an on-going
basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable.
Due to inherent uncertainties, including the future prices of oil and natural gas, these estimates could change in the near term
and such changes could be material.
Principles
of Consolidation
The
accompanying financial statements include the accounts of U.S. Energy Corp. and its wholly-owned subsidiaries Energy One LLC (“Energy
One”) and New Horizon Resources LLC (“New Horizon”). All inter-company balances and transactions have been eliminated
in consolidation.
Recently
Adopted Accounting Pronouncements
Fair
Value Measurements. In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements. The ASU amends the
disclosure requirements in Topic 820, Fair Value Measurements. The amendments in this ASU are effective for all entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. As a result of the Company’s
adoption of this ASU on January 1, 2020, the fair value measurement disclosures for the warrants, which are the Company’s
only Level 3 fair value measurement changed. The Company removed the disclosure of the processes for measuring the warrants and
added quantitative information of the significant unobservable inputs used to develop the valuation of the warrants.
2.
ACQUISITIONS
New
Horizon Resources
On
March 1, 2020, the Company acquired all the issued and outstanding equity interests of New Horizon. Its assets include acreage
and operated producing properties in North Dakota (the “New Horizon Properties”). The Company accounted for the acquisition
of the New Horizon Properties as a business combination. The consideration paid at closing consisted of 59,498 shares of the Company’s
restricted common stock, $150,000 in cash and the assumption of certain liabilities (the “New Horizon Acquisition”).
The New Horizon Acquisition gives the Company operated properties in its core area of operations. The New Horizon Properties consist
of nine gross wells (five net wells), and approximately 1,300 net acres located primarily in McKenzie and Divide Counties, North
Dakota, which are 100% held by production and average a 63% working interest.
|
|
Amount
|
|
|
|
(in thousands)
|
|
Fair value of net assets:
|
|
|
|
|
Proved oil and natural gas properties
|
|
$
|
564
|
|
Other current assets
|
|
|
14
|
|
Other long-term assets
|
|
|
58
|
|
Total assets acquired
|
|
|
636
|
|
Asset retirement obligations
|
|
|
(163
|
)
|
Current payables
|
|
|
(50
|
)
|
Credit facility
|
|
|
(61
|
)
|
Net assets acquired
|
|
$
|
362
|
|
Fair value of consideration paid for net assets:
|
|
|
|
|
Cash consideration
|
|
$
|
150
|
|
Issuance of common stock (59,498 shares at $4.04 per share)
|
|
|
240
|
|
Cash acquired
|
|
|
(28
|
)
|
Total fair value of consideration transferred
|
|
$
|
362
|
|
For
the nine months ended September 30, 2020, the Company recorded revenues of approximately $69 thousand, and lease operating and
workover expenses of approximately $131 thousand related to the New Horizon Properties. Assuming that the acquisition of the New
Horizon properties had occurred on January 1, 2019, the Company would have recorded revenues of $100 thousand and expenses of
$153 thousand for the nine months ended September 30, 2020, and revenues of $192 thousand and expenses of $258 thousand for the
nine months ended September 30, 2019. These results are not necessarily indicative of the results that would have occurred had
the Company completed the acquisition on the date indicated, or that will be attained in the future. Subsequent to the closing
of the New Horizon Acquisition, the Company repaid the outstanding liabilities assumed at closing.
FieldPoint
Petroleum
On September 25, 2020, the Company acquired
certain oil and gas properties primarily located in Lea County, New Mexico and Converse County, Wyoming. The properties
were acquired from FieldPoint Petroleum Corporation (“FieldPoint”) pursuant to FieldPoint’s Chapter 7
bankruptcy process (the “FieldPoint Properties”). The Company accounted for the acquisition of the FieldPoint Properties
as an asset acquisition. Total cash paid for the FieldPoint Properties as of September 30, 2020, was $529 thousand, which includes
the purchase price of $500 thousand and transaction costs of $29 thousand. In addition, the Company accrued $80 thousand for unpaid
transaction costs and recorded asset retirement obligations of $236 thousand for the assets acquired. Substantially all of
the value of the FieldPoint Proerties acquired consists of mature proved developed producing reserves. Following is a summary
of the amounts recorded for the assets acquired:
|
|
Amount
|
|
|
|
(in thousands)
|
|
Amounts incurred:
|
|
|
|
|
Cash consideration
|
|
$
|
500
|
|
Transaction costs
|
|
|
109
|
|
Total
|
|
$
|
609
|
|
|
|
|
|
|
Asset retirement obligations
|
|
$
|
(236
|
)
|
3.
REAL ESTATE HELD FOR SALE
The
Company owns a 14-acre tract in Riverton, Wyoming with a two-story, 30,400 square foot office building. The building served as
the Company’s corporate headquarters until 2015 and is currently being leased to government agencies and other non-affiliated
companies. In 2020 the Company made the decision to sell the land and building and began a process to determine the price at which
it would list the property for sale. The process included obtaining an appraisal, analyzing operating statements for the building,
reviewing capitalization rates and consulting a large national commercial real estate company. The Company determined that the
realizable value of the building was in the range of $700 thousand to $900 thousand. A special committee of the board of directors
was formed to evaluate the sales process and is exploring all available options to sell the land and building and will ultimately
recommend any action to the Board of Directors regarding any potential sale. During the three months ended September 30, 2020
the Company entered into an agreement with a large national commercial broker to sell the building. Following are the pre-impairment
carrying amounts of the land and building at September 30, 2020, the estimated net proceeds, and a calculation of the loss recognized
as a component of other income and expense in the unaudited condensed consolidated statement of operations.
|
|
Amount
|
|
|
|
(in thousands)
|
|
Pre-impairment carrying value of real estate held for sale:
|
|
|
|
|
Building
|
|
$
|
720
|
|
Building improvements
|
|
|
276
|
|
Land
|
|
|
380
|
|
Total
|
|
|
1,376
|
|
|
|
|
|
|
Fair value of real estate held for sale:
|
|
|
|
|
Estimated sales price
|
|
$
|
800
|
|
Estimated cost to sell
|
|
|
(75
|
)
|
Estimated net proceeds
|
|
$
|
725
|
|
|
|
|
|
|
Loss recognized on real estate assets held for sale
|
|
$
|
651
|
|
4.
REVENUE RECOGNITION
The
Company’s revenues are derived from its interest in the sales of oil and natural gas production. Prior to the acquisition
of New Horizon, which was completed on March 1, 2020, and the acquisition of FieldPoint Petroleum, which was completed on September
25, 2020 all sales of oil and natural gas were made under contracts that third-party operators of oil and natural gas wells have
negotiated with customers. The Company receives payments from the sale of oil and natural gas production between one to three
months after delivery. At the end of each period when the performance obligation is satisfied, the variable consideration can
be reasonably estimated and amounts due from customers are accrued in oil and natural gas sales receivable in the unaudited condensed
consolidated balance sheets. Variances between the Company’s estimated revenue and actual payments are recorded in the
month the payment is received; however, differences have been and are insignificant. 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 does not disclose the values of unsatisfied performance obligations under its contracts with customers as it applies the
practical exemption in accordance with ASC 606. The exemption applies to variable consideration that is recognized as control
of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future
volumes are wholly unsatisfied, and disclosure of the transaction price allocated to the remaining performance obligations is
not required.
The
Company’s oil and natural gas production is typically sold at delivery points to various purchasers under contract terms
that are common in the oil and natural gas industry. Regardless of the contract type, the terms of these contracts compensate
the well operators for the value of the oil and natural gas at specified prices, and then the well operators remit payment to
the Company for its share in the value of the oil and natural gas sold.
Generally,
the Company reports revenue as the gross amount received from the well operators before taking into account production taxes and
transportation costs. Production taxes are reported separately, and transportation costs are included in lease operating expense
in the accompanying condensed consolidated statements of operations. The revenues and costs in the condensed consolidated financial
statements were reported gross for the three and nine months ended September 30, 2020, as the gross amounts were known.
The
following table presents our disaggregated revenue by major source and geographic area for the three and nine months ended September
30, 2020 and 2019.
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
270
|
|
|
$
|
564
|
|
|
$
|
901
|
|
|
$
|
1,723
|
|
Natural gas and liquids (1)
|
|
|
34
|
|
|
|
16
|
|
|
|
66
|
|
|
|
109
|
|
Total
|
|
$
|
304
|
|
|
$
|
580
|
|
|
$
|
967
|
|
|
$
|
1,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
92
|
|
|
$
|
1,007
|
|
|
$
|
517
|
|
|
$
|
3,023
|
|
Natural gas and liquids
|
|
|
5
|
|
|
|
46
|
|
|
|
29
|
|
|
|
211
|
|
Total
|
|
$
|
97
|
|
|
$
|
1,053
|
|
|
$
|
546
|
|
|
$
|
3,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
401
|
|
|
$
|
1,633
|
|
|
$
|
1,513
|
|
|
$
|
5,066
|
|
Significant
concentrations of credit risk
The
Company has exposure to credit risk in the event of nonpayment by joint interest operators and purchasers of the Company’s
oil and natural gas properties. During the nine-month periods ended September 30, 2020 and 2019, the joint interest operators
that accounted for 10% or more of the Company’s total oil and natural gas revenue for at least one of the periods presented
are as follows:
Operator
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CML Exploration LLC
|
|
|
32
|
%
|
|
|
54
|
%
|
Zavanna LLC
|
|
|
47
|
%
|
|
|
29
|
%
|
5.
LEASES
On
January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and recorded a $228 thousand right-of-use
asset and a $252 thousand lease liability representing the present value of minimum payment obligations associated with the Company’s
Denver office operating lease, which has non-cancellable terms in excess of one year. The Company does not have any financing
leases. The Company has elected the following practical expedients available under ASC 842: (i) excluding from the condensed consolidated
balance sheet leases with terms that are less than one year, (ii) for agreements that contain both lease and non-lease components,
combining these components together and accounting for them as a single lease, (iii) the package of practical expedients, which
allows the Company to avoid reassessing contracts that commenced prior to adoption that were properly evaluated under legacy GAAP,
and (iv) the policy election that eliminates the need for adjusting prior period comparable financial statements prepared under
legacy lease accounting guidance. As such, there was no required cumulative effect adjustment to accumulated deficit at January
1, 2019.
During
the three and nine months ended September 30, 2020 and 2019, the Company did not acquire any right-of-use assets or incur any
lease liabilities. The Company’s right-of-use assets and lease liabilities are recognized at their discounted present value
under the following captions in the unaudited condensed consolidated balance sheet at September 30, 2020 and December 31, 2019:
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
|
|
(in thousands)
|
|
Right of use asset balance
|
|
|
|
|
|
|
|
|
Operating lease
|
|
$
|
141
|
|
|
$
|
179
|
|
Lease liability balance
|
|
|
|
|
|
|
|
|
Short-term operating lease
|
|
$
|
63
|
|
|
$
|
58
|
|
Long-term operating lease
|
|
|
95
|
|
|
|
142
|
|
|
|
$
|
158
|
|
|
$
|
200
|
|
The
Company recognizes lease expense on a straight-line basis excluding short-term and variable lease payments, which are recognized
as incurred. Short-term lease costs represent payments for our Houston, Texas office lease, which has a lease term of one year.
Beginning in March 2020, the Company subleased its Denver, Colorado office and recognized sublease income.
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Operating lease cost
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
51
|
|
|
$
|
51
|
|
Short-term lease cost
|
|
|
6
|
|
|
|
4
|
|
|
|
16
|
|
|
|
11
|
|
Sublease income
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
-
|
|
Total lease costs
|
|
$
|
13
|
|
|
$
|
21
|
|
|
$
|
42
|
|
|
$
|
62
|
|
The
Company’s Denver office operating lease does not contain an implicit interest rate that can be readily determined. Therefore,
the Company used the incremental borrowing rate of 8.75% as established under the Company’s prior credit facility as the
discount rate.
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Weighted average lease term (years)
|
|
|
2.3
|
|
|
|
3.3
|
|
Weighted average discount rate
|
|
|
8.75
|
%
|
|
|
8.75
|
%
|
The
future minimum lease commitments as of September 30, 2020 are presented in the table below. Such commitments are reflected at
undiscounted values and are reconciled to the discounted present value on the unaudited condensed consolidated balance sheet as
follows:
|
|
Amount
|
|
Remainder of 2020
|
|
$
|
18
|
|
2021
|
|
|
75
|
|
2022
|
|
|
76
|
|
2023
|
|
|
6
|
|
Total lease payments
|
|
|
175
|
|
Less: imputed interest
|
|
|
(17
|
)
|
Total lease liability
|
|
$
|
158
|
|
As
discussed in Note 3- Real Estate Held for Sale, the Company owns a 14-acre tract in Riverton, Wyoming with a two-story,
30,400 square foot office building. The Company recognized a loss on real estate held for sale related to the building and land
during the nine months ended September 30, 2020 of $651 thousand. The building will not be depreciated while it is held for sale.
The net capitalized cost of the building and the land subject to operating leases at September 30, 2020 and December 31, 2019
are as follows:
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
|
|
(in thousands)
|
|
Building subject to operating leases
|
|
$
|
4,654
|
|
|
$
|
4,654
|
|
Land
|
|
|
380
|
|
|
|
380
|
|
Less: accumulated depreciation
|
|
|
(3,658
|
)
|
|
|
(3,599
|
)
|
Loss on real estate held for sale
|
|
|
(651
|
)
|
|
|
-
|
|
Building subject to operating leases, net
|
|
$
|
725
|
|
|
$
|
1,435
|
|
The
future lease maturities of the Company’s operating leases as of September 30, 2020 are presented in the table below. Such
maturities are reflected at undiscounted values to be received on an annual basis.
|
|
Amount
|
|
|
|
(in thousands)
|
|
Remainder of 2020
|
|
$
|
40
|
|
2021
|
|
|
161
|
|
2022
|
|
|
165
|
|
2023
|
|
|
169
|
|
2024
|
|
|
163
|
|
Remaining through June 2029
|
|
|
695
|
|
Total lease maturities
|
|
$
|
1,393
|
|
The
Company recognized the following loss on rental property related to its Riverton, Wyoming office building for the three and nine
months ended September 30, 2020 and 2019:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Operating lease income
|
|
$
|
51
|
|
|
$
|
54
|
|
|
$
|
161
|
|
|
$
|
150
|
|
Operating lease expense
|
|
|
(56
|
)
|
|
|
(34
|
)
|
|
|
(143
|
)
|
|
|
(99
|
)
|
Depreciation
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
(58
|
)
|
|
|
(90
|
)
|
Rental property loss, net
|
|
$
|
(5
|
)
|
|
$
|
(16
|
)
|
|
$
|
(40
|
)
|
|
$
|
(39
|
)
|
6.
OIL AND NATURAL GAS PRODUCTION ACTIVITIES
Ceiling
Test and Impairment
The
reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no influence
in the determination of present value. In the calculation of the ceiling test as of September 30, 2020, the Company used $43.40
per barrel for oil and $1.97 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%.
The
Company recorded ceiling test write-downs of its oil and natural gas properties of $1.1 million and $2.9 million during the three
and nine month periods ended September 30, 2020, respectively, due to a reduction in the value of proved oil and natural gas reserves
primarily as a result of a decrease in crude oil prices and the performance of a South Texas well drilled in the prior year. In
addition, the Company evaluated its unevaluated property and recorded a reclassification to the depletable base of the full cost
pool of $2.1 million during the nine months ended September 30, 2020 related to a reduction in value of certain of its acreage.
7.
DEBT
On
September 24, 2020, the Company entered into a $375 thousand secured promissory note with APEG Energy II LP, which entity Patrick
E. Duke, a director of the Company, has shared voting power and shared investment power over (“APEG II”) (the “Note”).
The Note accrues interest at 10% per annum and matures on September 24, 2021. The Note is secured by the Company’s wholly
owned subsidiary, Energy One’s oil and natural gas producing properties. In the event that the Note is repaid prior to the
maturity date there is a prepayment penalty of 10% of the principal amount of the Note less accrued interest. At September 30,
2020, APEG II held approximately 40% of the Company’s outstanding common stock.
On
December 27, 2017, the Company entered into an exchange agreement (“Exchange Agreement”) by and among U.S. Energy
Corp., its wholly owned subsidiary Energy One and APEG II, pursuant to which, on the terms and subject to the conditions of the
Exchange Agreement, APEG II exchanged $4.5 million of outstanding borrowings under the Company’s credit facility for 581,927
newly-issued shares of common stock of the Company, par value $0.01 per share, with an exchange price of $7.67, which represented
a 1.3% premium over the 30-day volume weighted average price of the Company’s common stock on September 20, 2017 (the “Exchange
Shares”). Accrued, unpaid interest on the credit facility held by APEG II was paid in cash at the closing of the transaction.
The
credit facility was fully repaid on March 1, 2019 and on July 30, 2019, matured and was terminated. Borrowings under the credit
facility were secured by Energy One’s oil and natural gas producing properties. Interest expense for the nine months ended
September 30, 2019 was $20 thousand, including the amortization of debt issuance costs of $7 thousand. The weighted average interest
rate on the credit facility was 8.75% for the period until maturity in 2019.
8.
WRITE-OFF OF DEPOSIT
In
December 2017, the Company entered into a Letter of Intent (“LOI”) with Clean Energy Technology Association, Inc.
(“CETA”) to purchase an option to acquire 50 shares of CETA, or lease certain oil and natural gas properties inside
an area of mutual interest. The Company made a $250,000 option payment, which was refundable in the event that the Company and
CETA were unable to complete the transaction by August 1, 2018. In 2018, the Company paid an additional $124,000 to CETA. In September
2019, the Company issued CETA a demand letter requesting return of the amounts deposited. As of September 30, 2020, the Company
has received six payments from CETA totaling $250,000. While the Company is pursuing collection of $50,000 of the remaining deposit,
the Company has established an allowance of the amount due from CETA at September 30, 2020, due to the uncertainty of collection.
See Note 9-Commitments, Contingencies and Related-Party Transactions.
9.
COMMITMENTS, CONTINGENCIES AND RELATED-PARTY TRANSACTIONS
Litigation
Arbitration
of Employment Claim.
In
July 2020, the Company received a request for arbitration from its former Chief Executive Officer claiming that the Company breached
his employment agreement. The Company intends to vigorously contest this matter and believes these claims are without merit. The
employment agreement requires that any disputes be submitted to binding arbitration. The Company has insurance for these types
of claims and has reported the request for arbitration to its insurance carrier. The Company believes it is probable that it will
incur future defense costs in this matter and has accrued $100 thousand at September 30, 2020, representing the amount of the
Company’s responsibility for costs under the insurance policy.
As
of September 30, 2020 all litigation as described below involving the Company, its former Chief Executive Officer, David Veltri
and APEG II and its general partner, APEG Energy II, GP (together with APEG II, “APEG”) has been dismissed. As of
September 30, 2020, APEG II held approximately 40% of the Company’s outstanding common stock, is the holder of its secured
promissory note and was the secured lender under the Company’s credit facility, prior to its maturity on July 30, 2019.
APEG
II Litigation
On
February 14, 2019, the Company’s board of directors (the Board”) (only one member of which remained on the Board following
the Company’s 2019 Annual Meeting of Shareholders held on December 10, 2019) received a letter from APEG II urging the Company
to establish a seven-person, independent board of directors, establish a corporate business plan and reduce its corporate general
and administrative expenses. APEG II is the Company’s largest shareholder, owning approximately 40% of its outstanding common
stock, and, as of September 30, 2020, was the secured lender under its secured promissory note.
On
February 25, 2019, APEG II provided an access termination notice to the Company’s bank under its collateral documents, which
resulted in all of the funds held in the collateral accounts, which totaled approximately $1.8 million, being wired to APEG II
on March 1, 2019. On March 1, 2019, David Veltri, the Company’s former Chief Executive Officer and President, filed a lawsuit
against APEG II in the Company’s name (the “Texas Litigation”) in the District Court of Harris County Texas,
190th Judicial District (the “Texas State Court”). The Texas State Court granted the motion for a temporary
restraining order (“TRO”) and ordered APEG to return immediately the approximate $1.8 million in cash previously wired
to APEG II.
On
March 4, 2019, APEG II filed an emergency motion with the U.S. District Court for the Southern District of Texas (the “Texas
Federal Court”) in order to remove the Texas Litigation from the Texas State Court to the Texas Federal Court and to stay
or modify the TRO. Following a hearing on March 4, 2019, the Texas Federal Court vacated the TRO and the Court ordered APEG to
return the Company’s funds, less the outstanding balance due to APEG II under the credit facility of approximately $937
thousand, resulting in the Company receiving approximately $850 thousand.
On
February 25, 2019, the Company’s Board held a meeting at which it voted to terminate Mr. Veltri for cause as Chief Executive
Officer and President as a result of using Company funds outside of his authority and other reasons. Mr. Veltri, along with John
Hoffman, a former Board member, called into question whether or not such action was properly taken at the Board meeting. On March
8, 2019, the Company’s Audit Committee intervened in the Texas Litigation by filing an emergency motion (the “AC Motion”).
The AC Motion requested that the Texas Federal Court order that all of the Company’s funds and matters be placed under the
control of its Chief Financial Officer and that control of these functions be removed from its former Chief Executive Officer,
who had been terminated by the Board on February 25, 2019.
On
March 12, 2019, the Texas Federal Court granted the AC Motion, ordering that any disbursement made by the Company must be approved
in writing by the Audit Committee in advance. Additionally, the Texas Federal Court ordered that the Company’s Chief Financial
Officer must be appointed as the sole signatory on all of the Company’s bank accounts.
On
July 30, 2020, the Company, filed a Notice of Voluntary Dismissal of its lawsuit against Mr. Veltri. All matters related to the
Texas litigation were dismissed in August 2020.
Litigation
with Former Chief Executive Officer
In
connection with the above described litigation with APEG II, APEG II then initiated a second lawsuit on March 18, 2019 as a shareholder
derivative action in Colorado against Mr. Veltri, as a result of his refusal to recognize the Board’s decision to terminate
him for cause (the “Colorado Litigation”). The Company was named as a nominal defendant in the Colorado Litigation.
The APEG II complaint in the Colorado Litigation alleged that Mr. Veltri’s employment was terminated by the Board and sought
an injunction and temporary restraining order against Mr. Veltri to prevent him from continuing to act as the Company’s
Chief Executive Officer, President and Chairman.
On
April 30, 2019, the Audit Committee took over the control of the defense of the Company, prosecution of its claims against APEG
II, and filed third-party claims on behalf of the Company against Mr. Veltri and Mr. Hoffman, at the time a director of the Company,
asserting that Mr. Veltri was responsible for any damages that APEG II claimed, including attorneys’ fees, and that Mr.
Veltri and Mr. Hoffman should be removed from the Board. On May 22, 2019, the Company and APEG II entered into a settlement agreement
with Mr. Hoffman, pursuant to which Mr. Hoffman agreed to resign from the Board and committees thereof, and the Company agreed
to pay up to $50,000 of his legal fees incurred. Further, the Company released Mr. Hoffman from any claims related to the Texas
Litigation, APEG II released the Company from any claims that may have been caused by Mr. Hoffman, and Mr. Hoffman released the
Company from any and all claims he may have had against the Company and its Board.
In
the Colorado Litigation, the United States District Court for the District of Colorado (“the Colorado Federal Court”)
granted interim preliminary injunctive relief to APEG II against Mr. Veltri, holding that Mr. Veltri, without authorization, continued
to hold himself out to be, and continued to act as, the Company’s President and Chief Executive Officer. Pursuant to the
Order, Mr. Veltri was preliminarily enjoined from acting as, or holding himself out to be, the Company’s President and/or
Chief Executive Officer, pending a trial on the merits. Ryan L. Smith, the Company’s Chief Financial Officer at the time,
was appointed temporary custodian of the Company with the charge to act as the Company’s Interim Chief Executive Officer.
On
May 30, 2019, the Colorado Federal Court issued a subsequent order (the “Second Order”), appointing C. Randel Lewis
as custodian of the Company pursuant to the Wyoming Business Corporation Act and to take over for Mr. Smith in acting as the Company’s
Interim Chief Executive Officer and to serve on the Board as Chairman. The Second Order noted that the primary purpose of having
Mr. Lewis serve as custodian was to resolve the Board deadlock regarding Mr. Veltri’s termination. Pursuant to the Second
Order, Mr. Lewis, as custodian, was ordered to act in place of the Board to appoint one independent director to replace Mr. Hoffman.
On June 13, 2019, Mr. Lewis appointed Catherine J. Boggs to serve as an independent director until the 2019 annual meeting of
the Company’s shareholders, which was held on December 10, 2019. Following such annual meeting, the Board appointed Ryan
L. Smith to serve as the Company’s Chief Executive Officer, replacing Mr. Lewis in that role. Following the annual meeting,
the Colorado Federal Court also discharged Mr. Lewis from serving as custodian, Interim Chief Executive Officer and as a member
of the Board.
On
May 20, 2020, the Colorado Litigation was dismissed.
10.
PREFERRED STOCK
The
Company’s articles of incorporation authorize the issuance of up to 100,000 shares of preferred stock, $0.01 par value.
Shares of preferred stock may be issued with such dividend, liquidation, voting and conversion features as may be determined by
the Board without shareholder approval. The Company has designated 50,000 shares of Series P preferred stock of which none are
outstanding.
On
February 12, 2016, the Company issued 50,000 shares of then newly designated Series A Convertible Preferred Stock (the “Preferred
Stock”) to Mt. Emmons Mining Company (“MEM”), a subsidiary of Freeport McMoRan,. The Preferred Stock was issued
in connection with the disposition of the Company’s mining segment, whereby MEM acquired the property and replaced the Company
as permittee and operator of a water treatment plant (the “Acquisition Agreement”). The Preferred Stock was issued
at a value of $40 per share for an aggregate of $2 million. The Preferred Stock liquidation preference, initially $2 million,
increases by quarterly dividends of 12.25% per annum (the “Adjusted Liquidation Preference”). At the option of the
holder, each share of Preferred Stock may initially be converted into 1.33 shares of common stock (the “Conversion Rate”)
for an aggregate of 66,667 shares. The Conversion Rate is subject to anti-dilution adjustments for stock splits, stock dividends
and certain reorganization events and to price-based anti-dilution protections. At September 30, 2020 and December 31, 2019, the
aggregate number of shares of common stock issuable upon conversion is 79,334 shares, which is the maximum number of shares issuable
upon conversion.
The
Preferred Stock is senior to other classes or series of shares of the Company with respect to dividend rights and rights upon
liquidation. No dividend or distribution will be declared or paid on junior stock, including the Company’s common stock,
(1) unless approved by the holders of Preferred Stock and (2) unless and until a like dividend has been declared and paid on the
Preferred Stock on an as-converted basis. The Preferred Stock does not vote with the Company’s common stock on an as-converted
basis on matters put before the Company’s shareholders. However, the holders of the Preferred Stock have the right to approve
specified matters as set forth in the certificate of designation and have the right to require the Company to repurchase the Preferred
Stock in the event of a change of control, which has not been triggered as of September 30, 2020. Concurrent with entry into the
Acquisition Agreement and the Series A Purchase Agreement, the Company and MEM entered into an Investor Rights Agreement, which
provides MEM rights to certain information and Board observer rights. MEM has agreed that it, along with its affiliates, will
not acquire more than 16.86% of the Company’s issued and outstanding shares of common stock.
11.
SHAREHOLDERS’ EQUITY
Warrants
In
December 2016, the Company completed a registered direct offering of 100,000 shares of common stock at a net gross price of $15.00
per share. Concurrently, the investors received warrants to purchase 100,000 shares of common stock of the Company at an exercise
price of $20.05 per share, for a period of five years from the final closing date of June 21, 2017. The warrants include anti-dilution
rights. The total net proceeds received by the Company were approximately $1.32 million. The fair value of the warrants upon issuance
was $1.24 million, with the remaining $0.08 million being attributed to common stock. On September 29, 2020, the Company received
proceeds of $565 thousand related to the exercise of warrants to purchase 50,000 shares of common stock. The warrants have been
classified as liabilities due to features in the warrant agreement that give the warrant holder an option to require the Company
to redeem the warrant at a calculated fair value in the event of a “Fundamental Transaction,” as defined in the warrant
agreement. The fair value of the warrants was $137 thousand and $73 thousand at September 30, 2020 and December 31, 2019, respectively
Pursuant
to the original warrant agreement, as a result of common stock issuances made during the year ended December 31, 2018, the warrant
exercise price was reduced from $20.50 to $11.30 per share. The warrant exercise price was further reduced to $5.25 as a result
of the registered direct offering of 315,810 shares of common stock which was completed on October 2, 2020 (See Note 16 Subsequent
Events).
Stock
Options
From
time to time, the Company may grant stock options under its incentive plan covering shares of common stock to employees of the
Company. Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock
underlying the option. These awards typically expire ten years from the grant date.
Total
stock-based compensation expense related to stock options was $0 and $26 thousand for the nine months ended September 30, 2020
and 2019, respectively. As of September 30, 2020, all stock options had vested. During the nine months ended September 30, 2020
and 2019, no stock options were granted, exercised, or forfeited. During the nine months ended September 30, 2020 stock options
to purchase 166 shares expired. Presented below is information about stock options outstanding and exercisable as of September
30, 2020 and December 31, 2019. All shares and prices per share have been adjusted for the Reverse Stock Split.
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding
|
|
|
31,367
|
|
|
$
|
64.78
|
|
|
|
31,533
|
|
|
$
|
66.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable
|
|
|
31,367
|
|
|
$
|
64.78
|
|
|
|
31,533
|
|
|
$
|
66.04
|
|
The
following table summarizes information for stock options outstanding and for stock options exercisable at September 30, 2020:
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
Exercise Price
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
Number of
|
|
|
Range
|
|
|
Average
Exercise
|
|
|
Contractual
Term
|
|
|
Number of
|
|
|
Average
Exercise
|
|
Shares
|
|
|
Low
|
|
|
High
|
|
|
Price
|
|
|
(years)
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,500
|
|
|
$
|
7.03
|
|
|
$
|
11.60
|
|
|
$
|
10.00
|
|
|
|
7.3
|
|
|
|
16,500
|
|
|
$
|
10.00
|
|
|
10,622
|
|
|
|
90.00
|
|
|
|
124.80
|
|
|
|
106.20
|
|
|
|
3.6
|
|
|
|
10,622
|
|
|
|
106.20
|
|
|
2,913
|
|
|
|
139.20
|
|
|
|
171.00
|
|
|
|
147.39
|
|
|
|
1.7
|
|
|
|
2,913
|
|
|
|
147.39
|
|
|
1,332
|
|
|
|
226.20
|
|
|
|
251.40
|
|
|
|
232.48
|
|
|
|
3.2
|
|
|
|
1,332
|
|
|
|
232.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,367
|
|
|
$
|
7.20
|
|
|
$
|
251.40
|
|
|
$
|
64.78
|
|
|
|
5.2
|
|
|
|
31,367
|
|
|
$
|
64.78
|
|
In
January 2020, the Company granted 48,000 restricted shares to the Company’s Chief Executive Officer, of which 24,000 shares
vest after one year and 24,000 vest after two years. In addition, the Company granted a total of 28,000 restricted shares to members
of the Board, which vest on January 28, 2021. For the nine months ended September 30, 2020, the Company recognized $170 thousand
in stock compensation expense related to these restricted stock grants. At September 30, 2020, the unrecognized expense related
to the restricted stock grants was $202 thousand.
12.
ASSET RETIREMENT OBLIGATIONS
The
Company has asset retirement obligations (“AROs”) associated with the future plugging and abandonment of proved properties.
Initially, the fair value of a liability for an ARO is recorded in the period in which the ARO is incurred with a corresponding
increase in the carrying amount of the related asset. The liability is accreted to its present value each period and the capitalized
cost is depleted over the life of the related asset. If the liability is settled for an amount other than the recorded amount,
an adjustment to the full-cost pool is recognized. The Company had no assets that are restricted for the purpose of settling AROs.
In
the fair value calculation for the ARO there are numerous assumptions and judgments, including the ultimate retirement cost, inflation
factors, credit-adjusted risk-free discount rates, timing of retirement and changes in legal, regulatory, environmental, and political
environments. To the extent future revisions to assumptions and judgments impact the present value of the existing ARO, a corresponding
adjustment is made to the oil and natural gas property balance.
The
following is a reconciliation of the changes in the Company’s liabilities for asset retirement obligations as of September
30, 2020 and December 31, 2019:
|
|
Nine Months Ended
September 30, 2020
|
|
|
Year Ended
December 31, 2019
|
|
|
|
(in thousands)
|
|
Balance, beginning of year
|
|
$
|
819
|
|
|
$
|
939
|
|
Accretion
|
|
|
23
|
|
|
|
22
|
|
Sold/Plugged
|
|
|
(12
|
)
|
|
|
(130
|
)
|
New drilled wells
|
|
|
-
|
|
|
|
2
|
|
Change in discount rate
|
|
|
-
|
|
|
|
(14
|
)
|
Liabilities incurred for acquisition of New Horizon wells
|
|
|
163
|
|
|
|
-
|
|
Liabilities incurred for acquisition of FieldPoint wells
|
|
|
236
|
|
|
|
-
|
|
Balance, end of period
|
|
$
|
1,229
|
|
|
$
|
819
|
|
13.
INCOME TAXES
The
Company estimated the applicable effective tax rate expected for the full fiscal year. The Company’s effective tax rate
used to estimate income taxes on a current year-to-date basis is 0% for both the three and nine months ended September 30, 2020
and 2019.
In
December 2017, the Company paid down debt through the issuance of common stock. This issuance represented a 49.3% ownership change
in the Company. See Note 7-Debt. This change in ownership, combined with other equity events, triggered loss limitations
under Internal Revenue Code Section 382. As a result, the Company wrote-off a total of $32.2 million of gross deferred tax assets
through December 31, 2018. Since the Company maintains a valuation allowance against these tax assets, there was no impact to
the condensed consolidated statements of operations.
Deferred
tax assets (“DTAs”) are recognized for the expected future tax consequences of temporary differences between the financial
reporting and tax basis of assets and liabilities and for operating losses and tax credit carryforwards. We review our DTAs and
valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulative
results in recent years. Consistent with the position at December 31, 2019, the Company maintains a full valuation allowance recorded
against all DTAs. The Company, therefore, had no recorded DTAs as of September 30, 2020. We anticipate that we will continue to
record a valuation allowance against our DTAs in all jurisdictions until such time as we are able to determine that it is “more-likely-than-not”
that those DTAs will be realized.
The
Company recognizes, measures, and discloses uncertain tax positions whereby tax positions must meet a “more-likely-than-not”
threshold to be recognized. During the three and nine months ended September 30, 2020 and 2019, no adjustments were recognized
for uncertain tax positions.
On
March 27, 2020, President Trump signed into U.S. federal law the Coronavirus Aid Relief and Economic Security Act (the “CARES
Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected
by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating
to refundable payroll tax credits, deferment of employer side social security payments, net operating loss (“NOL”)
carryback periods, alternative minimum tax (“AMT”) credit refunds, modifications to the net interest deduction limitations
and technical corrections to tax depreciation methods for qualified improvement property. In particular, the CARES Act (i) eliminates
the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019
or 2020, (ii) increases the net interest expense deduction limit to 50% of adjusted taxable income from 30% for tax years beginning
January 1, 2019 and 2020 and (iv) allows taxpayers with AMT credits to claim a refund in 2020 for the entire amount of the credit
instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act of
2017. The Company is in the process of analyzing the different aspects of the CARES Act to quantify the impact of these provisions
on the Company’s income taxes but expects that there will be no material impact from the CARES Act to the Company’s
tax position.
14.
EARNINGS (LOSS) PER SHARE
Basic
net loss per common share is calculated by dividing net loss attributable to common shareholders by the weighted-average number
of common shares outstanding for the respective period. Diluted net loss per common share is calculated by dividing adjusted net
loss by the diluted weighted average number of common shares outstanding, which includes the effect of potentially dilutive securities.
Potentially dilutive securities for this calculation consist of stock options and warrants, which are measured using the treasury
stock method, the conversion feature of the Series A Convertible Preferred Stock, and unvested shares of restricted common stock.
When the Company recognizes a net loss attributable to common shareholders, as was the case for the three and nine-month periods
ended September 30, 2020 and 2019, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation
of dilutive net loss per common share.
The
following table sets forth the calculation of basic and diluted net loss per share.
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands except per share data)
|
|
Net loss
|
|
$
|
(1,713
|
)
|
|
$
|
(281
|
)
|
|
$
|
(5,670
|
)
|
|
$
|
(246
|
)
|
Accrued dividend on Series A preferred stock
|
|
|
(107
|
)
|
|
|
(95
|
)
|
|
|
(310
|
)
|
|
|
(273
|
)
|
Loss applicable to common shareholders
|
|
$
|
(1,820
|
)
|
|
$
|
(376
|
)
|
|
$
|
(5,980
|
)
|
|
$
|
(519
|
)
|
Basic weighted average common shares outstanding
|
|
|
1,400
|
|
|
|
1,341
|
|
|
|
1,387
|
|
|
|
1,341
|
|
Dilutive effect of potentially dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average common shares outstanding
|
|
|
1,400
|
|
|
|
1,341
|
|
|
|
1,387
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(1.30
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
(0.39
|
)
|
Diluted net loss per share
|
|
$
|
(1.30
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
(0.39
|
)
|
The
following table presents the weighted-average common share equivalents excluded from the calculation of diluted loss per share
due to their anti-dilutive effect:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Stock options
|
|
|
32
|
|
|
|
32
|
|
|
|
32
|
|
|
|
32
|
|
Restricted stock
|
|
|
76
|
|
|
|
-
|
|
|
|
69
|
|
|
|
-
|
|
Warrants
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Series A preferred stock
|
|
|
79
|
|
|
|
79
|
|
|
|
79
|
|
|
|
79
|
|
Total
|
|
|
287
|
|
|
|
211
|
|
|
|
280
|
|
|
|
211
|
|
15.
FAIR VALUE MEASUREMENTS
The
Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon
the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted
prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure
fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value
measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular
input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability,
and may affect the valuation of the assets and liabilities and their placement within the hierarchy level. The three levels of
inputs that may be used to measure fair value are defined as:
Level
1 - Quoted prices for identical assets and liabilities traded in active exchange markets.
Level
2 - Observable inputs other than Level 1 that are directly or indirectly observable for the asset or liability, including quoted
prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities inactive
markets, or other observable inputs that can be corroborated by observable market data.
Level
3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair
value requires significant management judgment or estimation.
Warrant
Valuation
The
warrants contain a dilutive issuance and other provisions that cause the warrants to be accounted for as a liability. Such warrant
instruments are initially recorded and valued as a Level 3 liability and are accounted for at fair value with changes in fair
value reported in earnings. There were no changes in the methodology to value the warrants. The Company worked with a third-party
valuation expert to estimate the value of the warrants at September 30, 2020 and December 31, 2019 using a Lattice model, with
the following observable and unobservable inputs:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
Number of warrants outstanding
|
|
|
50,000
|
|
|
|
100,000
|
|
Expiration date
|
|
|
June 21, 2022
|
|
|
|
June 21, 2022
|
|
Exercise price
|
|
$
|
5.25
|
|
|
$
|
11.30
|
|
Beginning share price
|
|
$
|
5.00
|
|
|
$
|
3.00
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Average volatility rate (1)
|
|
|
115
|
%
|
|
|
80
|
%
|
Probability of down-round event (2)
|
|
|
50
|
%
|
|
|
25
|
%
|
Risk free interest rate
|
|
|
0.13
|
%
|
|
|
1.59
|
%
|
(1)
|
The
average volatility represents the Company’s 2-year volatility measurement, the observed volatility of our peer group
over a similar period, and the stock market volatility as of the valuation date.
|
(2)
|
Represents
the estimated probability of a future down-round event during the remaining term of the warrants.
|
At
September 30, 2020, the Company used the average value calculated by the Lattice model of $137 thousand with a range from $135
thousand to $ 143 thousand. At December 31, 2019, the Company used the average value of $73 thousand with a range from $60 thousand
to $120 thousand. An increase in any of the inputs would cause an increase in the fair value of the warrants. Likewise, a decrease
in any input would cause a decrease in the fair value of the warrants.
Marketable
Equity Securities Valuation
The
fair value of marketable equity securities is based on quoted market prices obtained from independent pricing services. The Company
acquired its investment in Anfield Energy, Inc. (“Anfield”) as consideration for sales of certain mining operations.
Anfield is traded on the TSX Venture Exchange, an active market under the trading symbol AEC:TSXV and has been classified as Level
1. On July 22, 2020, the Company entered into a share purchase agreement to sell 1,210,455 common shares of the Company’s
holdings in Anfield for approximately $45 thousand. Following the sale, the Company owns 2,420,910 shares in Anfield.
Other
Assets and Liabilities
The
Company evaluates the fair value on a non-recurring basis of properties acquired in business combinations. The fair value of the
oil and gas properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production
which we reasonably expect, and estimated prices adjusted for differentials. Unobservable inputs include estimated future oil
and natural gas production, prices, operating and development costs, and a discount rate of 10%, all Level 3 inputs within the
fair value hierarchy.
The
Company evaluates the fair value on a non-recurring basis of its Riverton, Wyoming real estate assets when circumstances indicate
that the value has been impaired. The change in the economic environment due to the COVID-19 pandemic and the property’s
remote location has caused a lack of relevant comparable sales to use as a basis for estimating fair value. At June 30, 2020,
the Company estimated the fair value of the real estate based upon the expected annual net operating income of the building, estimated
capitalization rates for properties in rural areas and values for vacant land based on comparable sales, all Level 3 inputs within
the fair value hierarchy.
The
carrying value of financial instruments included in current assets and current liabilities approximate fair value due to the short-term
nature of those instruments.
Recurring
Fair Value Measurements
Recurring
measurements of the fair value of assets and liabilities as of September 30, 2020 and December 31, 2019 are as follows:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Equity Securities
|
|
$
|
109
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
109
|
|
|
$
|
307
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
137
|
|
|
$
|
137
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
73
|
|
|
$
|
73
|
|
The
following table presents a reconciliation of our Level 3 warrants measured at fair value
|
|
Nine Months Ended September 30, 2020
|
|
|
Year Ended December 31, 2019
|
|
|
|
(in thousands)
|
|
Fair value liabilities of Level 3 instruments beginning of period
|
|
$
|
73
|
|
|
$
|
425
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain) on warrant valuation
|
|
|
64
|
|
|
|
(352
|
)
|
|
|
|
-
|
|
|
|
|
|
Fair value liabilities of Level 3 instruments end of period
|
|
$
|
137
|
|
|
$
|
73
|
|
16.
SUBSEQUENT EVENTS
Registered
Direct Offering
On October 2, 2020, we closed a registered
direct offering of 315,810 shares of our common stock, at $5.25 per share, for aggregate gross proceeds of approximately $1,658,000,
before deducting the placement agent fees and related offering expenses. The net proceeds from the offering were approximately
$1,523,500. The Offering was the result of a Securities Purchase Agreement
(the “Purchase Agreement”) the Company had entered into on September 30, 2020 with certain institutional investors
(the “Purchasers”) The Purchase Agreement contains customary representations and warranties and agreements of the Company
and the Purchasers, and customary indemnification rights and obligations of the parties. Until the twelve month anniversary of
the closing of the Offering, the Company is required to offer each of the Purchasers the right to participate in an amount up to
50% of any subsequent financing transaction undertaken by the Company at the offering price of the subsequent financing transaction.
Additionally, each of the officers and directors of the Company pursuant to lock-up agreements agreed not to sell or transfer any
of the Company securities which they hold, subject to certain exceptions, during the 180-day period following the closing of the
Offering.
Acquisition
of Newbridge Properties
On
November 9, 2020, the Company, through its wholly-owned subsidiary New Horizon entered into a Purchase and Sale Agreement (“PSA”)
to acquire certain assets from Newbridge Resources LLC (“Newbridge”). The transaction, which is subject to customary
closing conditions, is expected to close during the fourth quarter of 2020. The assets include acreage and operated producing
properties in Liberty County, Texas (the “Newbridge Properties”). The Newbridge Properties also consist of approximately
680 net acres located primarily in Liberty County, Texas which are 100% held by production, and which average a 100% working interest
and 86% net revenue interest. The consideration payable by the Company for the Newbridge Properties will consist of $250,000 in
shares of U.S. Energy restricted common stock (the “Newbridge Acquisition” and the “Purchase Price”).
The number of shares issuable will equal the Purchase Price divided by the lesser (i.e., the calculation which results in the
greatest number of shares) of (a) the closing sales price of the Company’s common stock as traded on The NASDAQ Capital
Market on the day prior to the closing; and (b) the volume weighted average price of the Company’s common stock, as traded
on The NASDAQ Capital Market, for the 15 trading days immediately prior to the closing date of the PSA. The effective date of
the Acquisition will be November 1, 2020.
Underwritten Offering
On November 16, 2020, we closed an underwritten
offering of an aggregate of 1,150,000 shares of our common stock at a public offering price of $3.00 per share. The net proceeds
to the Company from the offering, after deducting the underwriting discount, the underwriters’ fees and expenses and our
estimated offering expenses, are expected to be approximately $3.0 million. We intend to use the net proceeds from this offering
for general corporate purposes, capital expenditures, working capital, and potential acquisitions of oil and gas properties.