UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number 000-06814

U.S. ENERGY CORP.

(Exact Name of Registrant as Specified in its Charter)

950 S. Cherry St., Suite 1515, Denver CO 80246Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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 [X] 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 and post such files). YES [X] 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.

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 [X]

The registrant had 13,405,8381,399,754 shares of its common stock, par value $0.01, outstanding as of November 12, 2019.May 6, 2020.

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

U.S. ENERGY CORP. AND SUBSIDIARYSUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

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

U.S. ENERGY CORP. AND SUBSIDIARYSUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(In thousands, except share and per share amounts)

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

U.S. ENERGY CORP. AND SUBSIDIARYSUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHSTHREE MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2020 and 2019 AND 2018

(in thousands, except share amounts)

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

U.S. ENERGY CORP. AND SUBSIDIARYSUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2020 AND 2019 AND 2018

(in thousands)

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

U.S. ENERGY CORP. AND SUBSIDIARYSUBSIDIARIES

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 subsidiary, Energy One LLC,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 inon 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, 2018.2019. Our financial condition as of September 30, 2019,March 31, 2020, and operating results for the three and nine months ended September 30, 2019,March 31, 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, 2019.2020.

Reverse Stock Split

On January 6, 2020, the Company completed a one-for-ten reverse stock split (the “Reverse Split”) with respect to the Company’s 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.

Liquidity and Going ConcernResources

As of September 30, 2019,Commodity prices have declined significantly since early March 2020. While the Company hadexpects to experience a decrease in its oil and natural gas revenue, it believes that its existing cash of $1.4 million,and capital resources and its forecasted low overhead costs going forward have given it the ability to continue as a working capital surplus of $1.7 milliongoing concern and an accumulated deficit of $127.4 million. At November 12, 2019, the Company had a cash balance of $1.7 million and accounts payable of approximately $6.5 million. During 2019, the Company has instituted measures to preserve liquidity by reducing the use of third-party contractors, cutting corporate overhead and eliminating other general and administrative costs.

However, our liquidity is affected to a large degree by commodity prices, which have fluctuated significantly during recent years. Currently, the Company does not have any commodity derivative contracts in place to protectexpects that it in the event of a downturn in commodity prices. In addition, as described inNote 8-Commitments, Contingencies and Related-Party Transactions the costs associated with the ongoing litigation during 2019 have been a significant use of the Company’s existing cash. Continued excessive legal fees associated with litigation could impair the Company’s liquidity profile. These factors raise substantial doubt about the Company’s abilitywill be able to fund operations for the next twelve months and continue as a going concern. The accompanying condensed consolidated financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty.months.

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 business combinations 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 subsidiary Energy One LLC (“Energy One”).subsidiaries. All inter-company balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation of the accompanying financial statements.

Adopted and Recently IssuedAdopted Accounting Pronouncements

Leases.In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,Leases (Topic 842),followed by other related ASUs that targeted improvements and additional practical expedient options (collectively “ASU 2016-02”). The standard requires lessees to recognize right-of-use assets and lease payment liabilities on the balance sheet for leases representing the Company’s right to use the underlying assets for the lease term. Each lease that is recognized in the balance sheet will be classified as either finance or operating, with such classification affecting the pattern and classification of expense recognition in the condensed consolidated statements of operations and presentation within the condensed consolidated statements of cash flow.

The Company evaluated the impacts of ASU 2016-02, which included an analysis of contracts for office leases. As a non-operator of oil and natural gas properties, the Company is not subject to drilling rig agreements, well completion agreements, water handling agreements, or other contracts that include potential lease components. In addition, the scope of ASU 2016-02 does not apply to leases used in the exploration or use of minerals, oil, natural gas or other similar non-regenerative resources. SeeNote 3-Leasesfor additional information regarding the Company’s adoption of this standard including policy elections and the impact to the condensed consolidated financial statements at September 30, 2019.

Financial instruments with characteristics of liabilities and equity. On July 13, 2017, the FASB issued a two-part ASU No. 2017-11, I. Accounting for Certain Financials Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interest with a Scope Exception. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company assessed the new standard as it relates to warrants issued by the Company in December 2016, which contain a down round feature. The Company determined through an assessment of the warrants in relation toASC 815-40, Derivatives and Hedging-Contracts in Entity’s Own Equity, that there were other provisions in the warrant agreement that precluded equity classification, including an option of the holder to receive the calculated fair value of the warrant from the Company in cash in the event of a “Fundamental Transaction,” as defined in the warrant agreement. Therefore, the Company will continue to classify the warrants as liabilities with changes in fair value recorded in other income in the condensed consolidated statement of operations in the period

of the change .

Fair Value Measurements.Measurements.In August 2018, the FASB issued 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. The Company plans to adoptadopted this ASU as of January 1, 2020. The Company isadoption resulted in a change to the disclosures for the valuation process of assessing the impact the adoption of this ASU will have on itsLevel 3 fair value disclosures.measurements.

2. ACQUISITION OF NEW HORIZON RESOURCES

On March 1, 2020, The Company acquired all of the issued and outstanding equity interests of New Horizon Resources LLC (“New Horizon”). Its assets include acreage and operated producing properties in North Dakota (the “Properties”). The consideration paid at closing consisted of 59,498 shares of the Company’s common stock, $150,000 in cash and the assumption of certain liabilities (the “Acquisition”). The Acquisition gives the Company operated properties in its core area of operations. The 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, average a 63% working interest and produced approximately 30 net barrels of oil equivalent per day (88% oil) for the six-month period ended December 31, 2019.

For the three months ended March 31, 2020, the Company recorded revenues of approximately $6 thousand and lease operating expenses of approximately $4 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 $32 thousand and expenses of $25 thousand for the three months ended March 31, 2020, and revenues of $60 thousand and expenses of $21 thousand for the three months ended March 31, 2019. These results are not indicative of the results that would have occurred had the Company completed the acquisition on the date indicated, or that would be attained in the future. Subsequent to the closing of the acquisition the Company repaid the outstanding balance on the credit facility and the credit facility was closed.

3. REVENUE RECOGNITION

The Company’s revenues are derived from its interest in the sales of oil and natural gas production. ThePrior to the acquisition of New Horizon, which was completed on March 1, 2020, all of the sales of oil and natural gas arewere made under contracts that third-party operators of oil and natural gas wells have negotiated with 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 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, 2019,March 31, 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, 2019March 31, 2020 and 2018.2019.

3.4. LEASES

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach. Results for the reporting periods beginning January 1, 2019 are presented in accordance with ASC 842, while prior period amounts are reported in accordance with FASB ASC Topic 840-Leases. On January 1, 2019, the Companyapproach 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 ourthe Company’s Denver office operating lease, which has non-cancellable terms in excess of one year. We doThe 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 ninethree months ended September 30,March 31, 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 onunder the following captions in the unaudited condensed consolidated balance sheet at September 30, 2019, of $191 thousandMarch 31, 2020 and $214 thousand, respectively.December 31, 2019:

The Company recognizes lease expense on a straight linestraight-line basis excluding short-term and variable lease payments which are recognized as incurred. Short-term lease costs represent payments for our Houston office lease, which has a lease term of one year. Beginning in March 2020, the Company subleased its Denver office and recognized sublease income.

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.

The future minimum lease commitments as of September 30, 2019March 31, 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:

The Company owns a 14-acre tract in Riverton, Wyoming with a two-story, 30,400 square foot office building, which served as the Company’s corporate headquarters until the Companyit relocated its corporate headquartersto Denver, Colorado in 2015. Currently, the building’s eight office suites are rented to non-affiliates and government agencies under operating leases with varying terms from month-to-month to twelve years. The building is included in property and equipment, net on our condensed consolidated balance sheet. The net capitalized cost of the building subject to operating leases at September 30,March 31, 2020 and December 31, 2019 is as follows:

The future lease maturities of the Company’s operating leases as of September 30, 2019March 31, 2020 are presented in the table below. Such maturities are reflected at undiscounted values to be received on an annual basis.

The Company recognized the following operating lease income related to its Riverton, Wyoming office building for the three and nine months ended September 30, 2019March 31, 2020 and 2018:2019:

4. COMMODITY PRICE RISK DERIVATIVES

Energy One from time to time enters into commodity price derivative contracts (“economic hedges”). The derivative contracts are typically priced based on West Texas Intermediate (“WTI”) quoted prices for crude oil and Henry Hub quoted prices for natural gas. U.S. Energy Corp. guarantees Energy One’s obligations under economic hedges. The objective of utilizing the economic hedges is to reduce the effect of price changes on a portion of the Company’s future oil production, achieve more predictable cash flows in an environment of volatile oil and natural gas prices and to manage the Company’s exposure to commodity price risk. The use of these derivative instruments limits the downside risk of adverse price movements. However, there is a risk that such use may limit the Company’s ability to benefit from favorable price movements. Energy One may, from time to time, add incremental derivatives to hedge additional production, restructure existing derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize the current value of its existing positions. The Company does not engage in speculative derivative activities or derivative trading activities, nor does it use derivatives with leveraged features. As of and during the three and nine-month periods ended September 30, 2019, the Company did not have any commodity price derivatives. The following table presents the Company’s realized and unrealized derivative gains and losses for the three and nine-month periods ended September 30, 2019 and 2018:

5. OIL AND NATURAL GAS PRODUCTION ACTIVITIES

In May 2019, the Company exchanged approximately 905 leasehold acres of the Georgetown formation and deeper rights in Dimmit and Zavala counties for working interests in certain wells that were drilled by CML Exploration in the first half of 2019. The effective date of the exchange was March 1, 2019.

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, 2019,March 31, 2020, the Company used $61.45$55.77 per barrel for oil and $3.02$2.30 per 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%.

There was no impairment for the nine-monththree-month periods ended September 30,March 31, 2020 and 2019 and 2018 of the Company’s oil and natural gas properties. Impairment charges in previous years are generally the result of declines in the price of oil and natural gas, additional capitalized well costs and changes in production.

6. DEBT

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 LLC (“Energy One”) and APEG Energy II, L.P. (“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 5,819,270581,927 newly-issued shares of common stock of the Company, par value $0.01 per share, with an exchange price of $0.767,$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. As of September 30, 2019,At March 31, 2020, APEG II held approximately 43%42% of the Company’s outstanding common stock.

As of September 30, 2019, there were no outstanding borrowings under the credit facility. At December 31, 2018, outstanding borrowings under the credit facility were $937 thousand. The credit facility was fully repaid in full on March 1, 2019 and the credit facility matured on July 30, 2019.2019, matured and was terminated. Borrowings under the credit facility were secured by Energy One’s oil and natural gas producing properties. Interest expense on the credit facility for the three months ended September 30, 2018 was $24 thousand, including amortization of debt issuance costs of $3 thousand. Interest expense on the credit facility for the nine months ended September 30,March 31, 2019 and 2018 was $20 thousand, and $83 thousand, respectively, including the amortization of debt issuance costs of $7 thousand and $10 thousand, respectively.thousand. The weighted average interest rate on the credit facility was 8.75% for the nine-month period ended September 30, 2019 and for both the three and nine-month period ended September 30, 2018.

Pursuant to the terms of the credit facility, Energy One was required to comply with customary affirmative covenants and with certain negative covenants. The principal negative financial covenants did not permit (i) the Proved Developed Producing Coverage Ratio to be less than 1.2 to 1; and (ii) the current ratio to be less than 1.0 to 1.0. Additionally, the credit facility prohibited or limited Energy One’s ability to incur additional debt, pay cash dividends and other restricted payments, sell assets, enter into transactions with affiliates, and to merge or consolidate with another company. U.S. Energy Corp. was a guarantor of Energy One’s obligations under the credit facility. U.S. Energy Corp. and Energy One are currentlyuntil maturity in 2019. APEG II is involved in litigation with APEG IIthe Company and its general partner, APEG Energy II, GP (together with APEG II, “APEG”). Seeformer Chief Executive Officer, as described inNote 8-Commitments, Contingencies and Related-Party Transactions.Transactions.

7. WRITE-OFF OF DEPOSIT

In December 2017, the Company entered into a letterLetter of intentIntent (“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 thousand$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 February 2018, the Company paid an additional $124 thousand$124,000 to CETA. In September 2019, the Company issued CETA a demand letter requesting return of the amounts deposited. As of November 12, 2019March 31, 2020, the Company has received twofour payments from CETA totaling $100 thousand.$200,000. In April 2020, the Company received another payment from CETA in the amount of $25,000. While the Company is pursuing collection of $75,000 of the remaining deposit, the Company has established an allowance forof the remaining amount due from CETA of $274 thousand at September 30, 2019March 31, 2020, due to the uncertainty of collection. SeeNote 8-Commitments, Contingencies and Related-Party Transactions.

8. COMMITMENTS, CONTINGENCIES AND RELATED-PARTY TRANSACTIONS

Litigation

APEG II and its general partner, APEG Energy II, GP (together with APEG II, “APEG”), are involved in litigation with the Company and its former Chief Executive Officer, David Veltri, as described below. As of March 31, 2020, APEG II holdsheld approximately 43%42% of the Company’s outstanding common stock and was itsthe secured lender, prior to the maturity on July 30, 2019 of aunder the Company’s credit facility the Company had with APEG II.facility. The costs associated with the ongoingpending litigation have beenwere a significant use of the Company’s existing cash. Whilecash during 2019, but the Company has historically funded all litigation costs out of operating cash flow, continued excessive legal fees associated with litigation could impairbelieves the Company’s liquidity profile and ability to fund significant drilling obligations.expenditures are substantially complete.

APEG II Litigation

On February 14, 2019, the Company’s Board of Directors (the Board”) (only one member of which remains on the Board following the Company’s 2019 Annual Meeting of Shareholders held on December 10, 2019) received a letter from APEG II the largest shareholder of the Company and, at that time, the Company’s secured lender under the credit facility, urging the Company to work with APEG II and other shareholders to establish a seven-person, independent board of directors, establish a corporate business plan and reduce the Company’sits corporate general and administrative expenses. APEG II is the Company’s largest shareholder, owning approximately 42% of its outstanding common stock, and, as of December 31, 2018, was the secured lender under its credit facility, which the Company repaid in full as discussed below.

On February 25, 2019, APEG II provided an access termination notice to the Company’s bank under its collateral documents, and the bank confirmed to the Company that access to its collateral accounts was terminated. On February 26, 2019, APEG II provided account disposition instructions to the Company’s subsidiary’s bank instructing the bank to deliver to APEG IIwhich resulted in all of the funds held in the collateral accounts, which totaled $1,794,294. The funds wereapproximately $1.8 million, being wired by the bank to APEG II on March 1, 2019.

On March 1, 2019, David Veltri, ourthe Company’s former Chief Executive Officer and President, filed a lawsuit against APEG II in the Company’s name (the “Texas Litigation”) by filing an Original Petition and Application for Temporary Restraining Order, Temporary Injunction, Permanent Injunction, and Appointment of Receiver, Case No. 2019-15528 (the “Action”), in the District Court of Harris County Texas, 190th190^th Judicial District (the “State“Texas State Court”), naming APEG II and its general partner as defendants.. The Texas State Court granted the motion for a temporary restraining order (“TRO”) and ordered APEG to return immediately the $1,794,294approximate $1.8 million in cash previously wired to APEG II.

On March 4, 2019, APEG II filed a Notice of Removal and an Emergency Motion to Stay or Modify State Court Temporary Restraining Order inemergency motion with the United StatesU.S. District Court for the SothernSouthern District of Texas Houston Division, Case No. 4:19-cv-00754 (the “Texas Federal Court”), in order to remove the Texas Litigation from the Texas State Court to the Texas Federal District Court and to stay or modify the TRO. Following a hearing on March 4, 2019, the Texas Federal Court vacated the TRO. On March 7, 2019, at the continued hearing on emergency motions,TRO and the Court ordered APEG II to return ourthe Company’s funds, less the outstanding balance due to APEG II under the credit facility of $936,620,approximately $937 thousand, and the Company received back $857,674.approximately $850 thousand.

On February 25, 2019, the Company’s Board held a meeting at which it voted to terminate for cause Mr. Veltri from his positionfor cause as Chief Executive Officer and President as a result of using Company funds in excessoutside of and inconsistent with, certainhis authority granted by the Board and other reasons. Mr. Veltri, along with John Hoffman, a former Board member, of the Board, called into question whether or not such action was properly taken at the Board meeting. On March 8, 2019, the Company’s Audit Committee as an official committee of the Board, represented by independent counsel retained by the Audit Committee, intervened by filing in the Texas Litigation by filing an Emergency Motion of the Official Audit Committee of the Board of U.S. Energy Requesting Company Protections Necessary for Releasing Funds Pending Internal Investigationemergency motion (the “AC Motion”). The AC Motion requested that the Texas Federal Court order that all of the Company’s funds financial, and monetary matters be placed under the control of the Company’sour Chief Financial Officer and that control of these functions be removed from the Company’sour former Chief Executive Officer, who the Audit Committee believed had been properly terminated by theour Board on February 25, 2019.

On March 12, 2019, the Texas Federal Court granted the AC Motion, and issued an additional Management Order, ordering that any disbursement made by the Company must be approved in writing by the Audit Committee in advance. Additionally, the Management Order statedTexas 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.

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, the Company’s former Chief Executive Officer, Chairman of the Board, and President, 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, Civil Action No. 1:19-cv-00801 before the United States District Court for the District of Colorado (the “Colorado Federal Court”), filed on March 18, 2019.

Litigation. The APEG II complaint in the Colorado Litigation alleged that Mr. Veltri’s employment was terminated by the Board of Directors 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, which he claimed he was entitled to continue doing. Mr. Veltri currently remains a member of the Board of Directors of the Company.Chairman.

Meanwhile, APEG II asserted claims against the Company directly in the Texas Litigation, while in roughly the same period, counsel for Mr. Veltri withdrew from the Texas Litigation, leaving the Company without counsel with respect to the claims asserted in the Company’s name and the APEG II claims asserted against the Company in the Texas Litigation. The Texas Federal Court ordered the Audit Committee to identify counsel to represent or act in the name of the Company in the Texas Litigation on or byOn April 30, 2019. On that date,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 JohnMr. Hoffman, at the time a director of the Company, asserting that Mr. Veltri was responsible for any damages that APEG II claims, including attorneys’ fees, and that Mr. Veltri and Mr. Hoffman should be removed from the Board of Directors in accordance with the laws of the State of Wyoming.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 of Directors and committees thereof, and the Company agreed to pay up to $50,000 of Mr. Hoffman’shis legal fees incurred with respect to the Texas Litigation.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 and two of the Company’s current directors from any and all claims Mr. Hoffmanhe may have.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 entered an order on May 16, 2019 (the “Order”Court”) grantinggranted 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.Officer, pending a trial on the merits. Ryan Smith, the Company’s Chief Financial Officer ofat the Company,time, was appointed temporary Custodiancustodian of the Company with the charge to act as the Company’s interimInterim Chief Executive Officer.

On May 30, 2019, and following briefing by the parties to the Colorado Litigation, the Colorado Federal Court issued a subsequent order (the “Second Order”), appointing C. Randel Lewis as Custodiancustodian of the Company pursuant to the Wyoming Business Corporation Act and to take over for Mr. Smith in acting as the Company’s interimInterim Chief Executive Officer and to serve on the Board of Directors as Chairman. As noted in the Second Order, two of the Company’s Board members had moved in the Board meeting on February 25, 2019 to terminate Mr. Veltri as President and Chief Executive Officer for cause by a vote of two to one. However, there was a dispute among the Board members as to whether the Board meeting was properly called and whether Mr. Veltri should have been allowed to vote on his own termination. The outcome of the vote on Mr. Veltri’s termination was in dispute as Mr. Veltri contended that he should have voted on his termination, and had he voted, Mr. Veltri would have voted against his own termination, thus creating a board deadlock preventing his termination. Specifically, Mr. Veltri contended the Board, which consisted of four members at that time, remained deadlocked on the issue, which prompted APEG II to file the above-mentioned suit against Mr. Veltri to have him removed as the Company’s President and Chief Executive Officer. The Second Order noted that the primary purpose of having Mr. Lewis serve as Custodiancustodian was to resolve the aforementioned Board deadlock.deadlock regarding Mr. Veltri’s termination. Pursuant to the Second Order, Mr. Lewis, as Custodian,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 next2019 annual meeting of the Company’s shareholders.shareholders, which was held on December 10, 2019. Following such annual meeting, the Board of Directors isappointed Ryan Smith to vote on a newserve as the Company’s Chief Executive Officer, to replacereplacing Mr. Lewis in that role, androle. Following the annual meeting, the Colorado Federal Court also discharged Mr. Lewis will be discharged from serving as the Company’s Custodian, interimcustodian, Interim Chief Executive Officer and as a member of the Board. Unless otherwise ruled by the Colorado Federal Court, the tenure of the replacement Chief Executive Officer may last only so long as it takes the Colorado Federal Court to resolve the disputes in the Colorado Litigation.

Following the issuance of the Second Order, the Audit Committee of the Company, which had been continuing its investigation into Mr. Veltri’s actions while he served as President and Chief Executive Officer, engaged an independent accounting firm to conduct a forensic accounting of the Company’s books and records in an effort to determine whether certain of Mr. Veltri’s actions regarding his use of Company funds was appropriate and authorized. See “Audit Committee Investigation” below. Following the completion of such investigation, the Audit Committee met on June 21, 2019 and voted unanimously to recommend to the Board to reaffirm its termination of Mr. Veltri for cause by ratifying its prior actions at the Board meeting on February 25, 2019. The Board, which following the issuance of the Second Order was reconstituted with all five members as required by the Company’s bylaws and the Second Order, met on August 5, 2019 and received a report from the Audit Committee. Following such report, the Board approved and ratified the termination of Mr. Veltri as President and Chief Executive Officer for cause.

On September 18, 2019, APEG II filed a motion for voluntary dismissal with the Colorado Federal Court seeking to dismiss the Colorado Litigation, to discharge Randel Lewis as Custodian and interim Chief Executive Officer and a director of the Company, and reimbursement of its expenses and attorneys’ fees that it incurred in connection with the Colorado Litigation. In its motion for dismissal, APEG II stated that its claims (i) to request a declaratory judgment that Mr. Veltri was validly terminated as Chief Executive Officer and President of the Company by the Board of Directors on February 25, 2019 and (ii) to request an injunction enjoining Mr. Veltri from acting as the Chief Executive Officer and President of the Company have both been addressed and are now moot. On October 16, 2019, Mr. Veltri filed a response to the motion for dismissal. In his response, Mr. Veltri argued that APEG II’s motion for dismissal should be denied by the Colorado Federal Court because (i) the Company should continue to operate under the guidance of the independent Custodian pending the outcome of a trial on the merits of the action, (ii) until the Custodian provides the Company with all of the relief set forth in the Second Order, the claims in the Colorado Litigation are not moot and the action should not be dismissed, (iii) the other Company shareholders’ interests will otherwise be negatively impacted if the Custodian is prematurely dismissed as the Company would be left without a Chief Executive Officer to run the Company’s business, the Board of Directors would again become a four-member Board of Directors subject to deadlock, and there would be no one to ensure the annual meeting of shareholders occurs, and (iv) APEG II should not be entitled to any attorneys’ fees. On October 29, 2019, APEG II filed a reply in support of its motion for dismissal, in which APEG II reasserted its position that its claims have been rendered moot as a result of actions taken by the Company in response to APEG’s claims. APEG modified its request that the Custodian be discharged immediately and agreed to delay its request to discharge the Custodian until the Company’s shareholders elect a director to replace the Custodian and the Board selects a Chief Executive Officer to replace the Custodian as interim Chief Executive Order. As of November 12, 2019, the Colorado Federal Court had not yet ruled on APEG II’s motion for dismissal.

Both the Texas Litigation and the Colorado Litigation currently remain pending.

Audit Committee Investigation

Following the termination of the Company’s former Chief Executive Officer, President and Chairman of the BoardMr. Veltri on February 25, 2019, the Company’s independent auditors, Plante & Moran PLLC, informed the Audit Committee that the auditors had found at least one instance of irregularities in the submission and payment of expense reports with respect to the Company’s former Chief Executive Officer. The Company’s Audit Committee engaged independent legal counsel, which subsequently engaged an independent accounting firm to conduct a forensic accounting investigation of the Company’s expense reporting system in relation to issues raised by the Company’s independent auditors regarding potential financial improprieties related to expense reports, including examining expense reports and third-party expenditures made by or through the Company’s former Chief Executive Officer or his staff. The investigation was expanded into a forensic investigation of the integrity of the Company’s computer-based record keepingrecord-keeping after Mr. Veltri and Mr. Hoffman managed to reset the security codes to give them complete control of the Company’s books and records temporarily and exclude ourthe Company’s other officersemployees’, members of management’s, other officer’s and directors from accessingdirector’s ability to access those records during that period, which further raised concerns with respect to material weaknesses in the Company’s internal control over financial reporting. The scope of the forensic accounting and investigation covered the period from January 1, 2017 through March 31, 2019. The Company’s Audit Committee has taken certain steps in response to the forensic accounting investigation. SeePart I, Item 4. Controls and Procedures—Changes in Internal Control Over Financial Reporting—Management’s Remediation Plan.

The forensic accounting investigation was completed on June 13, 2019 and resulted in the finding of a number of irregularities and reimbursements for personal expenses or expenses that were unrelated to furthering the Company’s business. An expense report was submitted in October 2018 that included $1,537 for the registration of a vehicle owned by an affiliated entity of Mr. Hoffman, as well as insurance premiums for the vehicle totaling $813. Mr. Hoffman repaid the Company in full for such amounts in connection with his resignation and settlement agreement with the Company in May 2019. It is possible that these payments by the Company on behalf of Mr. Hoffman could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002. However, the Company has not made a determination as of the date hereof if such payments resulted in a violation of that provision.   If, however, it is determined these payments violated the prohibitions of Section 402, the Company could be subject to investigation and/or litigation that could involve significant time and costs and may not be resolved favorably. The Company is unable to predict the extent of its ultimate liability with respect to these payments. The costs and other effects of any future litigation, government investigations, legal and administrative cases and proceedings, settlements, judgments and investigations, claims and changes in this matter could have a material adverse effect on the Company’s financial condition and operating results.

In addition, the investigation found that the former Chief Executive Officer, David Veltri, had expense reports that consistently lacked detailed receipts and descriptions of the business purpose of each expense. The expense reimbursements did not go through a review process or require Board approval or approval from any other employee, as the Company did not have in place any expense report policy or other process for pre-approving expenses prior to incurring such expense. Mr. Veltri was the sole signatory on the Company’s bank accounts and effectively had sole authority to approve his own expense reports when he provided reimbursement checks to himself and controlled all funds of the Company.

The forensic accounting investigation and the Company’sour internal investigation also identified numerous expense items on Mr. Veltri’s expense reports that appeared to be personal in nature, or lacked adequate documentation showing that such expense was for legitimate business purposes. These expense items totaled at least $81,014, of which $32,194 was incurred during the year ended December 31, 2017, $34,203 was incurred during the year ended December 31, 2018 and $14,617 was incurred during 2019 prior to Mr. Veltri’s termination. The Company has reclassified the entire $81,014 reimbursed to Mr. Veltri as additional compensation and taxable income. In addition, the Company has accrued payroll taxes payable on the additional compensation, however, the Company has not accrued penalties and interest that may be assessed because the amount of such penalties and interest cannot be reasonably determined.

The report also indicated that Mr. Veltri used the Company’s vendors for his own personal benefit. Mr. Veltri bypassed the Company’s accounts payable process by paying third-party vendors personally through expense reports and then approved his own expense reports, which limited the visibility of the payments and review by the Company’s accounting personnel. Mr. Veltri personally obtained reimbursements for several charges incurred by a consultant hired by the Company, which consultant potentially had a conflict of interest with the Company. The reimbursements totaled $2,710, and such reimbursements were highly unusual since the consultant included its expenses directly on its own invoices. The independent accounting firm conducting the forensic accounting investigation called into question other payments made to the consultant because of the vagueness of the work descriptions and project details provided by the consultant, and the independent accounting firm questioned Mr. Veltri’s judgment and the legitimacy of the services provided by the consultant for which the Company paid a total of $38,774. The forensic investigation revealed that Mr. Veltri may have made personal loans to the owners of the consulting firm, which indicates that a conflict of interest existed between Mr. Veltri’s personal interests and the Company’s best interests.

Mr. Veltri also incurred $47,156 in third-party professional fees in connection with a potential transaction with a company controlled by a former Board member, which transaction and related expenses in evaluating the potential transaction were not approved by the Board. The professional fees when incurred were treated as unevaluated prospect cost and included in unproved oil and gas properties. At December 31, 2018, the total amount of the fees was impaired and transferred to the full cost pool.pool in 2018.

Mr. Veltri also entered into an agreement to acquire some oil and natural gas properties for which the Board authorized $250,000, which amount was fully refundable, subject to the funds being held in escrow pending the closing of the acquisition. Mr. Veltri wired the funds directly into the seller’s account, rather than escrowing such funds, and also paid the seller an additional amount of $124,328, which amount was not authorized by the Board, as well as $40,578 for professional services. The transaction never closed. TheAs of May 6, 2020, the Company is currently seeking a refundhas received refunds totaling $225,000 of such funds from the seller, who as of November 12, 2019 has made two partial payments totaling $100,000.seller. While the Company is pursuing collection of $75,000 of the remaining deposit, the Company has established an allowance forof the remaining $274,328amount due from the sellerCETA at March 31, 2020, due to the uncertainty of collection of the deposit. SeeNote 7-Write-off of Deposit.collection.

9. 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 of Directors without shareholder approval. The Company is authorized to issue 50,000 shares of Series P preferred stock in connection with a shareholder rights plan that expired in 2011, and no shares of Series P preferred stock are outstanding.2011.

On February 12, 2016, the Company issued 50,000 shares of newly designated Series A Convertible Preferred Stock (the “Series A Preferred“Preferred Stock”) to Mt. Emmons Mining Company (“MEM”), a subsidiary of Freeport McMoRan, pursuant to that certain Series A Convertible Preferred Stock Purchase Agreement (the “Series A Purchase Agreement”). The Series A 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 Series A Preferred Stock was issued at $40 per share for an aggregate $2.0$2 million. The Series A Preferred Stock liquidation preference, initially $2.0$2 million, increases by quarterly dividends of 12.25% per annum (the “Adjusted Liquidation Preference”). At the option of the holder, each share of Series A Preferred Stock may initially be converted into 13.331.33 shares of the Company’s $0.01 par value common stock (the “Conversion Rate”) for an aggregate of 666,66766,667 shares. This Conversion Rate reflects the effect of the Reverse Stock Split. 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, 2019March 31, 2020 and December 31, 2018,2019, after taking into account the effect of the Reverse Stock Split, the aggregate number of shares of common stock issuable upon conversion of the Series A Preferred Stock was 793,349is 79,334 shares, which is the maximum number of shares of common stock issuable upon conversion.

The Series A 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 Series A Preferred Stock and (2) unless and until a like dividend has been declared and paid on the Series A Preferred Stock on an as-converted basis. The Series A 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 Series A 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 Series A Preferred Stock in connection withthe event of a change of control.control, which has not been triggered as of March 31, 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. In addition, MEM has the right to demand registration under the Securities Act of 1933, as amended, of the shares of common stock issuable upon conversion of the Series A Preferred Stock.Stock

10. SHAREHOLDERS’ EQUITY

At-the-Market Offering

In January 2018, the Company entered into a common stock sales agreement with a financial institution pursuant to which the Company could offer and sell, through the sales agent, common stock representing an aggregate offering price of up to $2.5 million through an at-the-market continuous offering program. During the nine months ended September 30, 2018, the Company issued 1,288,537 shares of common stock at an average price of $1.41 for total net proceeds before offering expenses of approximately $1,817 thousand. Offering expenses, including broker fees and legal costs related to the at-the-market offering totaled $151 thousand. In January 2019, the Company terminated the at-the-market offering.

Warrants

In December 2016, the Company completed a registered direct offering of 1,000,000100,000 shares of common stock at a net gross price of $1.50$15.00 per share. Concurrently, the investors received warrants to purchase 1,000,000100,000 shares of common stock of the Company at an exercise price of $2.05$20.05 per share, subject to adjustment, for a period of five years from closing.the final closing date of June 21, 2017. 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 $80 thousand$0.08 million being attributed to 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 $206$79 thousand and $425$73 thousand at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively

Pursuant to the warrant agreement, the warrant exercise price was reduced from $2.05 to $1.13 per share asAs a result of common stock issuances made during the three-month periodyear ended MarchDecember 31, 2018.2018, the warrant exercise price was reduced from $20.50 to $11.30 per share pursuant to the original warrant agreement.

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.

For both the nine months ended September 30, 2019 and 2018, totalTotal stock-based compensation expense related to stock options was $39 thousand.$0 and $13 thousand for the three months ended March 31, 2020 and 2019, respectively. As of September 30, 2019, there was $6 thousand of unrecognized expense related to unvestedMarch 31, 2020, all stock options which will be recognized as stock-based compensation expense through November 2019. Forhad vested. During the ninethree months ended September 30,March 31, 2020 and 2019, no stock options were granted, exercised, expired or expired. As the result of an employee termination during the period, 5,000 unvested stock options were forfeited. For the nine months ended September 30, 2018, no stock options were granted, exercised or forfeited, however, 69,225 stock options expired during the period. Presented below is information about stock options outstanding and exercisable as of September 30, 2019March 31, 2020 and December 31, 2018:2019. All shares and prices per share have been adjusted for the Reverse Stock Split.

The following table summarizes information for stock options outstanding and for stock options exercisable at September 30, 2019:March 31, 2020: