UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2022
	or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _____________ to _____________________

Commission File Number 000-06814

(Exact Name of Registrant as Specified in its Charter)

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

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

(303) 993-3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol(s)		Name of each exchange on which registered
Common stock, par value $0.01		USEG		NASDAQ Stock Market LLC (Nasdaq Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☒		Smaller reporting company ☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

The registrant had 24,923,812 shares of its common stock, par value $0.01 per share, outstanding as of May 10, 2022.

TABLE OF CONTENTS

		Page
Cautionary Note About Forward-Looking Statements		3

Part I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets (unaudited)	4
	Condensed Consolidated Statements of Operations (unaudited)	5
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)	6
	Condensed Consolidated Statements of Cash Flows (unaudited)	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

Part II.	OTHER INFORMATION	29

Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31

Signatures		33

Cautionary Statement About Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report” or “Form 10-Q”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are forward-looking statements.

Examples of forward-looking statements in this Report include:

	●	planned capital expenditures for oil and natural gas exploration and environmental compliance;

	●	potential drilling locations and available spacing units, and possible changes in spacing rules;

	●	cash expected to be available for capital expenditures and to satisfy other obligations;

	●	recovered volumes and values of oil and natural gas approximating third-party estimates;

	●	anticipated changes in oil and natural gas production;

	●	drilling and completion activities and opportunities;

	●	timing of drilling additional wells and performing other exploration and development projects;

	●	expected spacing and the number of wells to be drilled with our oil and natural gas industry partners;

	●	when payout-based milestones or similar thresholds will be reached for the purposes of our agreements with our partners;

	●	expected working and net revenue interests, and costs of wells, relating to the drilling programs with our partners;

	●	actual decline rates for producing wells;

	●	future cash flows, expenses and borrowings;

	●	pursuit of potential acquisition opportunities;

	●	economic downturns (including as a result of COVID-19) wars and increased in inflation and possible recessions caused thereby;

	●	the effects of global pandemics, such as COVID-19 on our operations, properties, the market for oil and gas, and the demand for oil and gas;

	●	our expected financial position;

	●	our expected future overhead reductions;

	●	our ability to become an operator of oil and natural gas properties;

	●	our ability to raise additional financing and acquire attractive oil and natural gas properties; and

	●	other plans and objectives for future operations.

These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” “up to,” and similar terms and phrases. Though we believe that the expectations reflected in these statements are reasonable, they involve certain assumptions, risks and uncertainties. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, under and incorporated by reference in, “Risk Factors”, below, the risks discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

All forward-looking statements speak only at the date of the filing of this Report. We do not undertake any obligation to update or revise publicly any forward-looking statements except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31, 2022			December 31, 2021

ASSETS
Current assets:
Cash and equivalents	$	1,447		$	4,422
Oil and natural gas sales receivable		4,270			933
Marketable equity securities		272			191
Prepaid and other current assets		771			179
Real estate assets held for sale, net of selling costs		250			250

Total current assets		7,010			5,975

Oil and natural gas properties under full cost method:
Unevaluated properties		1,584			1,588
Evaluated properties		183,495			95,088
Less accumulated depreciation, depletion, amortization and impairment		(89,841	)		(88,195	)

Net oil and natural gas properties		95,238			8,481

Pending acquisition		-			2,767
Cash calls		1,456			-
Property and equipment, net		488			188
Right-of-use asset		95			120
Deferred tax asset		228			-
Other assets		503			132

Total assets	$	105,018		$	17,663

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	4,913		$	1,447
Accrued compensation and benefits		173			1,162
Commodity derivative liability-current		6,478			-
Asset retirement obligations-current		1,352			-
Premium finance note		535			-
Warrant liability		-			19
Current lease obligation		104			114

Total current liabilities		13,555			2,742

Credit facility		3,500			-
Commodity derivative liability-noncurrent		1,867			-
Asset retirement obligations- noncurrent		9,938			1,461
Other long-term liabilities		7			25

Total liabilities		28,867			4,228

Commitments and contingencies (Note 8)		-			-

Shareholders’ equity:
Common stock, $0.01 par value; unlimited shares authorized; 24,923,812 and 4,676,301 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively		249			47
Additional paid-in capital		215,174			149,276
Accumulated deficit		(139,272	)		(135,888	)

Total shareholders’ equity		76,151			13,435

Total liabilities and shareholders’ equity	$	105,018		$	17,663

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

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(In thousands, except share and per share amounts)

	2022			2021

Revenue:
Oil	$	7,833		$	1,132
Natural gas and liquids		1,039			79

Total revenue		8,872			1,211

Operating expenses:
Lease operating expense		2,735			568
Production taxes		572			79
Depreciation, depletion, accretion and amortization		1,886			119
General and administrative expenses		2,946			734

Total operating expenses		8,139			1,500

Operating income (loss)		733			(289	)

Other non-operating income (expense):
Commodity derivative (loss) gain		(6,837	)		107
Marketable equity securities gain		81			50
Warrant revaluation loss		-			(20	)
Rental property gain, net		-			17
Other income		-			25
Interest expense, net		(50	)		(52	)
Total other (expense) income		(6,806	)		127

Net loss before income taxes		(6,073	)		(162	)
Income tax benefit		2,689			-
Net loss	$	(3,384	)	$	(162	)

Basic and diluted weighted average shares outstanding		23,717,240			3,923,730
Basic and diluted net loss per share	$	(0.14	)	$	(0.04	)

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

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands, except share amounts)

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

Balances, December 31, 2020		3,317,893		$	33		$	142,652		$	(134,118	)	$	8,567
Issuance of shares in underwritten offering, net of offering costs of $488		1,131,600			11			5,272			-			5,283
Issuance of shares for related party secured note payable conversion		97,962			1			437			-			438
Issuance of shares for settlement of related party legal costs		90,846			1			405			-			406
Issuance of shares upon vesting of restricted stock awards		47,000			1			(1	)		-			-
Shares withheld to settle tax withholding obligations for restricted stock awards		(9,000	)		-			(38	)		-			(38	)
Stock-based compensation		-			-			79			-			79
Net loss		-			-			-			(162	)		(162	)

Balances, March 31, 2021		4,676,301		$	47		$	148,806		$	(134,280	)	$	14,573

Balances, December 31, 2021		4,676,301		$	47		$	149,276		$	(135,888	)	$	13,435
Shares issued for acquired properties		19,905,736			199			64,495						64,694
Stock-based compensation		-			-			1,500						1,500
Shares issued upon vesting of restricted stock awards		373,500			4			(4	)		-			-
Shares withheld to settle tax withholding obligations for restricted stock awards		(81,725	)		(1	)		(306	)		-			(307	)
Exercise of warrants		50,000			-			213			-			213
Net loss		-			-			-			(3,384	)		(3,384	)

Balances, March 31, 2022		24,923,812		$	249		$	215,174		$	(139,272	)	$	76,151

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

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands)

	2022			2021

Cash flows from operating activities:
Net loss	$	(3,384	)	$	(162	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion, accretion, and amortization		1,886			119
Deferred income taxes		(2,689	)		-
Unrealized loss (gain) on commodity derivatives		5,193			(109	)
Loss (gain) on marketable equity securities		(81	)		(50	)
Amortization of debt issuance costs		10			-
Loss on warrant revaluation		-			20
Loss on related party debt conversion and settlement of legal costs		-			76
Stock-based compensation		1,500			79
Right of use asset amortization		24			20
Changes in operating assets and liabilities:
Decrease (increase) in:
Oil and natural gas sales receivable		(3,337	)		(47	)
Other assets		(212	)		(35	)
Increase (decrease) in:
Accounts payable and accrued liabilities		2,594			(227	)
Accrued compensation and benefits		(990	)		(206	)
Payments on operating lease liability		(27	)		(14	)

Net cash provided by (used in) operating activities		487			(536	)

Cash flows from investing activities:
Acquisition of properties		(783	)		-
Oil and natural gas capital expenditures		(855	)		(376	)
Expenditures for cash calls		(1,456	)		-
Property and equipment expenditures		(159	)		-
Proceeds from sale of oil and gas properties		-			30
Payment received on note receivable		-			20

Net cash used in investing activities		(3,253	)		(326	)

Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs		-			5,283
Borrowings on credit facility, net		3,828			-
Repayment of debt		(3,847	)		-
Repayments of insurance premium finance note payable		(78	)		-
Exercise of warrant		195			-
Shares withheld to settle tax withholding obligations for restricted stock awards		(307	)		(39	)

Net cash (used in) provided by financing activities		(209	)		5,244

Net (decrease) increase in cash and equivalents		(2,975	)		4,382

Cash and equivalents, beginning of period		4,422			2,854

Cash and equivalents, end of period	$	1,447		$	7,236

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Please see Note-14- Supplemental Disclosures of Cash Flow Information.

U.S. ENERGY CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Operations

U.S. Energy Corp. (collectively with its wholly-owned subsidiaries, Energy One LLC (“Energy One”) and New Horizon Resources, LLC, 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, 2021, as filed with the SEC on March 28, 2022. Our financial condition as of March 31, 2022, and operating results for the three months ended March 31, 2022, are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2022.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include oil and natural gas reserves that are used in the calculation of depreciation, depletion, amortization and impairment of the carrying value of evaluated oil and natural gas properties; realizability of unevaluated properties; production and commodity price estimates used to record accrued oil and natural gas sales receivables; futures prices of commodities used in the valuation of commodity derivative contracts; 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.

Industry Segment and Geographic Information

The Company operates in the exploration and production segment of the oil and gas industry, onshore in the United States. The Company reports as a single industry segment.

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.

2. ACQUISITIONS

On January 5, 2022 (the “Closing Date”), the Company closed the acquisitions contemplated by three separate Purchase and Sale Agreements (the “Purchase Agreements” and the “Closing”), entered into by the Company on October 4, 2021, with each of (a) Lubbock Energy Partners LLC (“Lubbock”); (b) Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC (collectively, “Banner”), and (c) Synergy Offshore LLC (“Synergy”, and collectively with Lubbock and Banner, (the “Sellers”). Pursuant to the Purchase Agreements, the Company acquired certain oil and gas properties from the Sellers, representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, Eagle Ford, and Mid-Continent. The acquisition also included certain wells, contracts, technical data, records, personal property and hydrocarbons associated with the acquired assets (collectively with the oil and gas properties acquired, the “Acquired Assets”).

The Company accounted for the acquisition of the Acquired Assets as an asset acquisition. The purchase price for the Acquired Assets was (a) $125,000 in cash and 6,568,828 shares of our common stock, as to Lubbock; (b) $1,000,000 in cash, the assumption of $3.3 million of debt, and 6,790,524 shares of common stock, as well as the novation of certain hedges which had a mark to market loss of approximately $3.1 million as of the Closing Date, as to Banner; and (c) $125,000 in cash and 6,546,384 shares of common stock, as to Synergy. The aggregate purchase price under all the Purchase Agreements was $67.4 million, representing $1.25 million in cash, the value of 19,905,736 shares of our common stock on the Closing Date of $64.7 million and purchase price adjustments on the Closing Date of $1.4 million. In addition, we assumed various liabilities, including the repayment of $3.3 million in debt, as well as a derivative liability from the novation of the hedges discussed above of $3.1 million, suspense accounts and asset retirement obligations.

	Amount
	(in thousands)
Amounts incurred:
Cash	$	1,250
Value of 19,905,736 shares issued		64,694
Purchase price adjustments		1,497
Transaction costs		1,267
Total consideration paid		68,708

Debt assumed		3,347
Commodity derivative liabilities assumed		3,152
Suspense accounts assumed		1,276
Employee obligations assumed		100
Asset retirement obligations assumed		9,614
Deferred tax liabilities		2,460
Total liabilities assumed		19,949

Total consideration paid and liabilities assumed	$	88,657

Allocation to acquired assets:
Proved oil and gas properties		87,037
Oil inventory in tanks		1,286
Vehicles		165
Deposit account		169

Total allocation to acquired assets	$	88,657

3. REVENUE RECOGNITION

The Company’s operated oil production is sold at the delivery point specified in the contract. The Company collects an agreed-upon index price, net of pricing differentials. The purchaser takes custody, title and risk of loss of the oil at the delivery point; therefore, control passes at the delivery point. The Company recognizes revenue at the net price received when control transfers to the purchaser. Natural gas and natural gas liquid (“NGL”) are sold at the lease location, which is generally when control of the natural gas and NGL transfers to the purchaser, and revenue is recognized as the amount received from the purchaser.

The Company does not disclose the values of unsatisfied performance obligations under its contracts with customers as it applies the practical exemption in accordance with Accounting Standards Codification (ASC) 606. The exemption applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to the remaining performance obligations is not required.

The Company reports revenue as the gross amount received from the well operators before taking into account production taxes and transportation costs. Production taxes are reported separately, and transportation costs are included in lease operating expense in the accompanying unaudited condensed consolidated statements of operations. The revenue and costs in the consolidated statements of operations were reported gross for the three months ended March 31, 2022 and 2021, as the gross amounts were known.

The Company’s non-operated revenues are derived from its interest in the sales of oil and natural gas production. The sales of oil and natural gas are made under contracts that operators of the wells have negotiated with third-party customers. The Company receives payment from the sale of oil and natural gas production between one to three months after delivery. At the end of each period when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in oil and natural gas sales receivable in the consolidated balance sheets. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received; however, differences have been and are insignificant. Accordingly, the variable consideration is not constrained. As a non-operator of its oil and natural gas properties, the Company records its share of the revenues and expenses based upon the information provided by the operators within the revenue statements.

The Company’s 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.

The Company disaggregates revenues from its share of revenue from the sale of oil and natural gas and liquids by region. The Company’s revenues in its Rockies, West Texas, South Texas Gulf Coast and Mid- Continent regions for the three months ended March 31, 2022 and 2021, are presented in the following table:

SCHEDULE OF DISAGGREGATED REVENUE

	2022		2021
	Three months ended March 31,
	2022		2021
	(in thousands)
Revenue:
Rockies
Oil	$	3,391	$	522
Natural gas and liquids		193		79
Total		3,584		601

South Texas
Oil		1,636		192
Natural gas and liquids		139		15
Total		1,775		207

West Texas
Oil		1,428		177
Natural gas and liquids		62		3
Total		1,490		180

Gulf Coast
Oil		717		249
Natural gas and liquids		4		-
Total		721		249

Mid-Continent ⁽¹⁾
Oil ⁽¹⁾		759		(8	)
Natural gas and liquids ⁽¹⁾		543		(18	)
Total ⁽¹⁾		1,302		(26	)

Combined Total	$	8,872	$	1,211

(1)

Negative amounts represent adjustments for the three months ended March 31, 2021, of estimated accruals to actual revenues received from non-operated properties in Oklahoma.

Significant concentrations of credit risk

The Company has exposure to credit risk in the event of non-payment of oil and natural gas receivables by purchasers of its operated oil and natural gas properties and the joint interest operators of the Company’s non-operated oil and natural gas properties. The following table presents the purchasers that accounted for 10% or more of the Company’s total oil and natural gas revenue for at least one of the periods presented:

Operator	2022			2021
Purchaser A		25	%		-
Purchaser B		16	%		-
Purchaser C		15	%		-
Purchaser D		6	%		39	%
Purchaser E		3	%		10	%

4. LEASES

During the three months ended March 31, 2021, the Company acquired right-of-use assets and operating lease liability of $82 thousand associated with entering into a non-cancellable, long-term lease agreement for office space in Houston, Texas. The Company’s right-of-use assets and lease liabilities are recognized at their discounted present value under the following captions in the consolidated balance sheets at March 31, 2022 and December 31, 2021:

SCHEDULE OF CONSOLIDATED BALANCE SHEET

	March 31, 2022		December 31, 2021
	(in thousands)
Right of use asset balance
Operating lease	$	95	$	120
Lease liability balance
Short-term operating lease	$	104	$	114
Long-term operating lease		2		19
Total operating leases	$	106	$	133

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, prior to February 2021, when the Company entered into a new 25-month lease for its Houston office. Beginning in March 2020, the Company subleased its Denver, Colorado office and recognizes sublease income as a reduction of rent expense. Following are the amounts recognized as components of rental expense for the three months ended March 31, 2022 and 2021:

SCHEDULE OF LEASE COSTS

	2022			2021
	Three Months ended March 31,
	2022			2021
	(in thousands)
Operating lease cost	$	31			24
Short-term lease cost		2			4

Sublease income		(16	)		(16	)
Total lease costs	$	17		$	12

The Company’s Denver and Houston office operating leases do not contain implicit interest rates that can be readily determined; therefore, the Company used the incremental borrowing rates in effect at the time the Company entered into the leases.

SCHEDULE OF WEIGHTED AVERAGE LEASE

	As of March 31,
	2022			2021
	(in thousands)
Weighted average lease term (years)		0.9			1.9
Weighted average discount rate		9.26	%		9.26	%

The future minimum lease commitments as of March 31, 2022 are presented in the table below in thousands. Such commitments are reflected at undiscounted values and are reconciled to the discounted present value on the consolidated balance sheet as follows:

	Amount
Remainder of 2022	$	92
2023		18
Total lease payments		110
Less: imputed interest		(4	)
Total lease liability	$	106

In August 2021, the Company sold its 14-acre tract in Riverton, Wyoming with a two-story, 30,400 square foot office building. The Company recognized, rental property income, net of rental operating expenses of $17 thousand related to its Riverton, Wyoming office building for the three months ended March 31, 2021.

5. OIL AND NATURAL GAS PRODUCTION ACTIVITIES

Divestitures

During the three months ended March 31, 2022, there were no divestitures of oil and gas properties. During the three months ended March 31, 2021, the Company sold approximately 12 acres of undeveloped acreage in Midland County, Texas for approximately $30 thousand.

Ceiling Test and Impairment

The Company did not record a ceiling test write-down of its oil and natural gas properties during the three months ended March 31, 2022 or 2021. The reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In the calculation of the ceiling test as of March 31, 2022, the Company used $75.24 per barrel for oil and $4.09 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%.

6. DEBT

On January 5, 2022, the Company entered into a five-year credit agreement (“Credit Agreement”) with Firstbank Southwest (“Firstbank”) as administrative agent for one or more lenders (the “Lenders”), which provides for a revolving line of credit with an initial borrowing base of $15 million, and a maximum credit amount of $100 million. Under the Credit Agreement, revolving loans may be borrowed, repaid and re-borrowed until January 5, 2026, when all outstanding amounts must be repaid. Interest on the outstanding amounts under the Credit Agreement will accrue at an interest rate equal to (a) the greatest of (i) the prime rate in effect on such day, and (b) the Federal Funds rate in effect on such day (as determined in the Credit Agreement) plus 0.50%, and an applicable margin that ranges between 0.25% to 1.25% depending on utilization of the amount of the borrowing base (the “Applicable Margin”). During the three months ended March 31, 2022, the interest rate was 4.25% per annum and the Company recorded interest expense of $36 thousand.

The Credit Agreement contains various restrictive covenants and compliance requirements, which include, among other things: (i) maintenance of certain financial ratios, as defined in the Credit Agreement tested quarterly, that limit the Company’s ratio of total debt to EBITDAX (as defined in the Credit Agreement) to 3:1 and require its ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at 1:1 or higher; (ii) a restriction on the payment of cash dividends (subject to certain limited rights to declare and pay dividends as long as no event of default has occurred and certain financial ratios are met); (iii) limits on the incurrence of additional indebtedness; (iv) a prohibition on the entry into commodity swap contracts exceeding a specified percentage of our expected production; and (v) restrictions on the disposition of assets. As of March 31, 2022, we were in compliance with all covenants related to our Credit Agreement.

A total of $3.5 million was borrowed under the Credit Agreement immediately upon the entry into such Credit Agreement on January 5, 2022. The $3.5 million was immediately used to repay $3.3 million of debt assumed as part of the acquisition of the Acquired Assets. On March 10, 2022, we borrowed an additional $0.5 million for working capital needs, which was repaid on March 28, 2022. The amount outstanding on the Credit Agreement as of March 31, 2022, was $3.5 million.

On March 4, 2021, the Company closed a Debt Conversion Agreement (the “Conversion Agreement”) with APEG Energy II, L.P. (“APEG II”), which entity Patrick E. Duke, a former director of the Company, has shared voting power and shared investment power over. The Conversion Agreement was related to a $375,000 related party secured note payable the Company borrowed from APEG II on September 24, 2020 (the “Note”). The Note accrued interest at 10% per annum and had a maturity date of September 24, 2021. The Note was secured by the Company’s wholly-owned subsidiary, Energy One’s oil and natural gas producing properties. Under the terms of the Note, the Company may repay the Note prior to maturity, however, in the event of a prepayment of the Note, the Company was required to pay APEG II the amount of interest which would have accrued through maturity (at 10% per annum). Pursuant to the Conversion Agreement, the Company converted the related party secured note payable of $375,000 and accrued interest to the date of the Note’s September 24, 2021 maturity of $37,500 by issuing 97,962 shares of unregistered common stock with a value on the date of the Conversion Agreement of $438,000. The difference of $25,500 between the value of the shares issued and the $412,500 amount of the Note and accrued interest through the date of maturity is recorded as interest expense, net, in the condensed consolidated statements of operations.

7. COMMODITY DERIVATIVES

The Company’s results of operations and cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of its exposure to price volatility from producing crude oil, and natural gas the Company enters into commodity derivative contracts to protect against price declines in future periods. The Company does not enter into derivative contracts for speculative purposes. The Company has not elected to designate the derivative contracts as cash flow hedges; therefore, the instruments do not qualify for hedge accounting. Accordingly, changes in the fair value of the derivative contracts are recorded in the unaudited condensed consolidated statements of operations and are included in cash flows from operating activities in the condensed consolidated statement of cash flows.

On January 5, 2022, the Company and NextEra Energy Marketing LLC (“NextEra”) entered into an International Swap Dealers Association, Inc. Master Agreement and Schedule (the “Master Agreement”), facilitating the Company to enter into derivative contracts to manage the risk associated with its business relating to commodity prices. The Company’s obligations to NextEra under the Master Agreement are secured by the collateral which secures the loans under the Credit Agreement on a pari passu and pro rata basis with the principal of such loans. The structure of the derivative contacts may include swaps, caps, floors, collars, locks, forwards and options.

The Company’s entry into and the obligations of the Company under the Master Agreement were required conditions to the Closing of the Banner Purchase Agreement, pursuant to which the Company was required to assume and novate certain hedges of Banner which had a mark to market loss of approximately $3.1 million as of the Closing Date. In addition, on January 12, 2022, the Company entered into additional Nymex WTI crude oil commodity derivative contracts with NextEra for 2022 and 2023 production. As of March 31, 2022, the Company had commodity derivative contracts outstanding through the fourth quarter of 2023 as summarized in the tables below:

	Collars						Fixed Price Swaps
	Quantity						Quantity
Commodity/ Index/	Crude oil-(Bbls) Natural		Weighted Average Prices				Crude oil- (Bbls) Natural		Weighted Average
Maturity Period	Gas-(Mmbtu)		Floors		Ceilings		Gas-(Mmbtu)		Price

NYMEX WTI
Crude Oil 2022 Contracts:
Second quarter 2022		74,500	$	60.05	$	80.66		9,000	$	49.99
Third quarter 2022		73,400	$	59.97	$	80.54		9,000	$	49.99
Fourth quarter 2022		71,800	$	59.86	$	80.34		9,000	$	49.99
Total Remaining 2022		219,700	$	59.96	$	80.52		27,000	$	49.99

Crude Oil 2023 Contracts:
First quarter 2023		66,200	$	57.73	$	76.00		6,000	$	59.20
Second quarter 2023		53,500	$	60.00	$	81.04		6,000	$	59.20
Third quarter 2023		52,600	$	60.00	$	81.04		-	$	-
Fourth quarter 2023		51,200	$	60.00	$	81.04		-	$	-
Total 2023		223,500	$	59.33	$	79.55		12,000	$	59.20

NYMEX Henry Hub
Natural Gas 2022 Contracts:
Second quarter 2022		-	$	-	$	-		60,000	$	2.96
Third quarter 2022		-	$	-	$	-		60,000	$	2.96
Fourth quarter 2022		-	$	-	$	-		60,000	$	2.96
Total remaining 2022		-	$	-	$	-		180,000	$	2.96

Natural Gas 2023 Contracts:
First quarter 2023		-	$	-	$	-

SEC Form 10-Q filed by U.S. Energy Corp.