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,~~June 30, 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~~

000-06814

(Exact Name of Registrant as Specified in its Charter)

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

~~675 Bering Dr~~1616 S. Voss Rd., Suite ~~390~~725, 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~~August 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 (unaudited)	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	2830
Item 4.	Controls and Procedures	2830

Part II.	OTHER INFORMATION	2932

Item 1.	Legal Proceedings	2932
Item 1A.	Risk Factors	2932
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3036
Item 3.	Defaults Upon Senior Securities	3036
Item 4.	Mine Safety Disclosures	3036
Item 5.	Other Information	3036
Item 6.	Exhibits	3136

Signatures		3337

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			June 30, 2022			December 31, 2021

ASSETS
Current assets:
Cash and equivalents	$	1,447		$	4,422		$	2,467		$	4,422
Oil and natural gas sales receivable		4,270			933			6,131			933
Marketable equity securities		272			191			150			191
Prepaid and other current assets		771			179			897			179
Real estate assets held for sale, net of selling costs		250			250			250			250

Total current assets		7,010			5,975			9,895			5,975

Oil and natural gas properties under full cost method:
Unevaluated properties		1,584			1,588			1,584			1,588
Evaluated properties		183,495			95,088			187,116			95,088
Less accumulated depreciation, depletion, amortization and impairment		(89,841	)		(88,195	)		(92,145	)		(88,195	)

Net oil and natural gas properties		95,238			8,481			96,555			8,481

Pending acquisition		-			2,767			592			2,767
Cash calls		1,456			-
Property and equipment, net		488			188			589			188
Right-of-use asset		95			120			997			120
Deferred tax asset		228			-
Other assets		503			132			348			132

Total assets	$	105,018		$	17,663		$	108,976		$	17,663

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	4,913		$	1,447		$	6,921		$	1,447
Accrued compensation and benefits		173			1,162			487			1,162
Commodity derivative liability-current		6,478			-			6,325			-
Asset retirement obligations-current		1,352			-			1,845			-
Premium finance note		535			-			377			-
Warrant liability		-			19			-			19
Current lease obligation		104			114			157			114

Total current liabilities		13,555			2,742			16,112			2,742

Credit facility		3,500			-			4,000			-
Commodity derivative liability-noncurrent		1,867			-			1,308			-
Asset retirement obligations- noncurrent		9,938			1,461			10,366			1,461
Lease obligation- non-current								880			19
Other long-term liabilities		7			25			6			6

Total liabilities		28,867			4,228			32,672			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
Common stock, $0.01 par value; unlimited shares authorized; 24,923,812 and 4,676,301 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively								249			47
Additional paid-in capital		215,174			149,276			215,783			149,276
Accumulated deficit		(139,272	)		(135,888	)		(139,728	)		(135,888	)

Total shareholders’ equity		76,151			13,435			76,304			13,435

Total liabilities and shareholders’ equity	$	105,018		$	17,663		$	108,976		$	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 AND SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2022 AND 2021

(In thousands, except share and per share amounts)

							2022			2021			2022			2021
							Three Months Ended						Six Months Ended
							June 30,						June 30,
	2022			2021			2022			2021			2022			2021

Revenue:
Oil	$	7,833		$	1,132		$	11,334		$	1,507		$	19,167		$	2,639
Natural gas and liquids		1,039			79			2,146			149			3,185			228

Total revenue		8,872			1,211			13,480			1,656			22,352			2,867

Operating expenses:
Lease operating expense		2,735			568
Lease operating expenses								4,646			477			7,382			1,045
Production taxes		572			79			913			131			1,485			210
Depreciation, depletion, accretion and amortization		1,886			119			2,571			146			4,457			264
General and administrative expenses		2,946			734			2,642			812			5,588			1,547

Total operating expenses		8,139			1,500			10,772			1,566			18,912			3,066

Operating income (loss)		733			(289	)		2,708			90			3,440			(199	)

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
Commodity derivative loss								(2,132	)		(317	)		(8,969	)		(210	)
Marketable equity securities gain (loss)								(121	)		23			(40	)		73
Other income (expense), net								(5	)		3			(6	)		25
Interest, net								(60	)		(6	)		(108	)		(58	)
Total other non-operating expense								(2,318	)		(297	)		(9,123	)		(170	)

Net loss before income taxes		(6,073	)		(162	)	$	390		$	(207	)	$	(5,683	)	$	(369	)
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	)
Income tax (expense) benefit								(268	)		-			2,421			-	)
Net income (loss)							$	122		$	(207	)	$	(3,262	)	$	(369	)
Basic weighted shares outstanding								24,923,812			4,676,301			24,323,859			4,304,612
Diluted weighted shares outstanding								25,265,180			4,676,301			24,323,859			4,304,612
Basic earnings (loss) per share							$	0.00		$	(0.04	)	$	(0.13	)	$	(0.09	)
Diluted earnings (loss) per share							$	0.00		$	(0.04	)	$	(0.13	)	$	(0.09	)

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~~SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2022 AND 2021

(in thousands, except share amounts)

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

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

Balances, March 31, 2021		4,676,301		$	47		$	148,806		$	(134,280	)	$	14,573			4,676,301		$	47		$	148,806		$	(134,280	)	$	14,573
Stock-based compensation																	-			-			116			-			116
Net loss																	-			-			-			(207	)		(207	)
Balances, June 30, 2021																	4,676,301			47			148,922			(134,487	)	$	14,482

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

Balances, March 31, 2022		24,923,812		$	249		$	215,174		$	(139,272	)	$	76,151			24,923,812		$	249		$	215,174		$	(139,272	)	$	76,151
Cash dividends, $0.02 per share																										(578	)		(578	)
Stock-based compensation																							609						609
Net income																	-			-			-			122			122
Balances, June 30, 2022																	24,923,812		$	249		$	215,783			(139,728	)		76,304

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~~SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2022 AND 2021

(in thousands)

	2022			2021			2022			2021

Cash flows from operating activities:
Net loss	$	(3,384	)	$	(162	)	$	(3,262	)	$	(369	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion, accretion, and amortization		1,886			119			4,457			264
Deferred income taxes		(2,689	)		-			(2,460	)		-
Unrealized loss (gain) on commodity derivatives		5,193			(109	)		4,482			170
Loss (gain) on marketable equity securities		(81	)		(50	)		40			(73	)
Amortization of debt issuance costs		10			-			20			-
Loss on warrant revaluation		-			20			-			24
Loss on related party debt conversion and settlement of legal costs		-			76			-			76
Stock-based compensation		1,500			79			2,109			195
Right of use asset amortization		24			20			75			42
Changes in operating assets and liabilities:
Decrease (increase) in:
Oil and natural gas sales receivable		(3,337	)		(47	)		(5,198	)		(208	)
Other assets		(212	)		(35	)		(192	)		(39	)
Increase (decrease) in:
Accounts payable and accrued liabilities		2,594			(227	)		4,315			(509	)
Accrued compensation and benefits		(990	)		(206	)		(675	)		(125	)
Payments on operating lease liability		(27	)		(14	)		(49	)		(39	)

Net cash provided by (used in) operating activities		487			(536	)		3,662			(591	)

Cash flows from investing activities:
Acquisition of properties		(783	)		-
Acquisition of proved properties								(4,383	)		-
Oil and natural gas capital expenditures		(855	)		(376	)		(1,131	)		(904	)
Expenditures for cash calls		(1,456	)		-
Expenditures for pending acquisition								(592	)		-
Property and equipment expenditures		(159	)		-			(295	)		(23	)
Proceeds from sale of oil and gas properties		-			30			1,231			30
Payment received on note receivable		-			20			-			20

Net cash used in investing activities		(3,253	)		(326	)		(5,170	)		(877	)

Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs		-			5,283			-			5,283
Borrowings on credit facility, net		3,828			-
Borrowings on credit facility								4,500			-
Repayment of debt		(3,847	)		-			(3,847	)		-
Payment of fees for credit facility								(174	)		-
Repayments of insurance premium finance note payable		(78	)		-			(236	)		(48	)
Exercise of warrant		195			-			195			-
Shares withheld to settle tax withholding obligations for restricted stock awards		(307	)		(39	)		(307	)		(39	)

Dividend paid								(578	)		-
Net cash (used in) provided by financing activities		(209	)		5,244			(447	)		5,196

Net (decrease) increase in cash and equivalents		(2,975	)		4,382			(1,955	)		3,728

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

Cash and equivalents, end of period	$	1,447		$	7,236		$	2,467		$	6,582

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. And recently reincorporated to Delaware, as discussed below. The Company’s principal business activities are focused on the acquisition, exploration and development of oil and natural gas properties in the United States. Effective on August 3, 2022, the Company changed its state of incorporation from the State of Wyoming to the State of Delaware (the “Reincorporation”) by means of a Plan of Conversion, effective August 3, 2022 (the “Plan of Conversion”). The Reincorporation, including the Plan of Conversion, was submitted to a vote of, and approved by, the Company’s stockholders at the Company’s 2022 Annual Meeting of Stockholders held on June 21, 2022. The Reincorporation was accomplished by filing: (i) an Application for Certificate of Transfer with the Secretary of State of the State of Wyoming (the “Wyoming Certificate of Transfer”); (ii) a Certificate of Conversion with the Secretary of State of the State of Delaware (the “Delaware Certificate of Conversion”); and (iii) a Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Delaware Certificate of Incorporation”). In connection with the Reincorporation, the Company’s Board of Directors adopted new amended and restated bylaws in the form attached to the Plan of Conversion, which are as were set forth in the Definitive Proxy Statement (the “Delaware Bylaws”).

The Reincorporation did not result in any change in headquarters, business, jobs, management, location of any of the offices or facilities, number of employees, assets, liabilities or net worth (other than as a result of the costs incident to the Reincorporation) of the Company. The resulting Delaware corporation (“U.S. Energy-Delaware”) (i) is deemed to be the same entity as the Company as incorporated in Wyoming (“U.S. Energy-Wyoming”) for all purposes under Wyoming and Delaware law, (ii) continues to have all of the rights, privileges, and powers of U.S. Energy-Wyoming, (iii) continues to possess all of the properties of U.S. Energy-Wyoming, and (iv) continues to have all of the debts, liabilities, and duties of U.S. Energy-Wyoming.

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,~~June 30, 2022, and operating results for the three and six months ended ~~March 31,~~June 30, 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”)~~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) $125,000in cash and 6,568,828shares of our common stock, as to Lubbock; (b) $1,000,000in cash, the assumption of $3.3million of debt, and 6,790,524shares of common stock, as well as the novation of certain hedges which had a mark to market loss of approximately $3.1million as of the Closing Date, as to Banner; and (c) $125,000in cash and 6,546,384shares of common stock, as to Synergy. The aggregate purchase price under all the Purchase Agreements was $67.4million, representing $1.25million in cash, the value of 19,905,736shares of our common stock on the Closing Date of $64.7million and purchase price adjustments on the Closing Date of $1.4million. In addition, we assumed various liabilities, including the repayment of $3.3million in debt, as well as a derivative liability from the novation of the hedges discussed above of $3.1million, suspense accounts and asset retirement obligations.

SUMMARY OF AMOUNTS INCURRED FOR ASSETS ACQUIRED

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

Debt assumed		3,347		3,347
Commodity derivative liabilities assumed		3,152		3,152
Suspense accounts assumed		1,276		1,276
Employee obligations assumed		100		100
Asset retirement obligations assumed		9,614		9,855
Deferred tax liabilities		2,460		2,460
Total liabilities assumed		19,949		20,190

Total consideration paid and liabilities assumed	$	88,657	$	88,898

Allocation to acquired assets:
Proved oil and gas properties		87,037		87,278
Oil inventory in tanks		1,286		1,286
Vehicles		165		165
Deposit account		169		169

Total allocation to acquired assets	$	88,657	$	88,898

Liberty County, Texas Acquisition

On May 3, 2022, the Company acquired operated oil and gas producing properties in Liberty County, Texas, adjacent to its existing assets in the area, for $1.0 million in an all-cash transaction. The effective date of the transaction was April 1, 2022. The assets include approximately 1,022 acres, which are 100% held by production, a gas pipeline and associated infrastructure. In addition, the Company assumed suspense accounts of $0.2 million and asset retirement obligations of $0.5 million. The Company accounted for the acquisition as an asset acquisition.

East Texas Acquisition

On June 29, 2022, the Company entered into a Purchase and Sale Agreement (the “PSA”) with ETXENERGY, LLC. to acquire approximately 16,600 net acres and certain wells and gathering systems located in Henderson and Anderson Counties, Texas (the “East Texas Assets”). The initial base purchase price for the East Texas Assets was $11.8 million in cash. A total of $590 thousand of the purchase price was paid by the Company as a deposit towards the purchase price and $2 thousand of transaction costs were incurred related to the East Texas Assets. A total of $592 thousand is recorded under the caption Pending Acquisition in the condensed consolidated balance sheet at June 30, 2022. The acquisition of the East Texas Assets closed on July 27, 2022. See Note 15- Subsequent Events.

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 and six months ended ~~March 31,~~June 30, 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 and six months ended ~~March 31,~~June 30, 2022 and 2021, are presented in the following table:

SCHEDULE OF DISAGGREGATED REVENUE

	2022		2021			2022		2021		2022		2021
	Three months ended March 31,					Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021			2022		2021		2022		2021
	(in thousands)					(in thousands)
Revenue:
Rockies
Oil	$	3,391	$	522		$	4,587	$	792	$	7,978	$	1,314
Natural gas and liquids		193		79			343		69		536		148
Total		3,584		601		$	4,930	$	861	$	8,514	$	1,462

South Texas
Oil		1,636		192		$	2,176	$	211	$	3,812	$	403
Natural gas and liquids		139		15			254		13		393		28
Total		1,775		207		$	2,430	$	224	$	4,205	$	431

West Texas
Oil		1,428		177		$	1,404	$	224	$	2,832	$	401
Natural gas and liquids		62		3			111		67		173		70
Total		1,490		180		$	1,515	$	291	$	3,005	$	471

Gulf Coast
Oil		717		249		$	1,243	$	277	$	1,960	$	526
Natural gas and liquids		4		-			110		-		114		-
Total		721		249		$	1,353	$	277	$	2,074	$	526

Mid-Continent ⁽¹⁾
Oil ⁽¹⁾		759		(8	)
Natural gas and liquids ⁽¹⁾		543		(18	)
Total ⁽¹⁾		1,302		(26	)
Oil						$	1,825	$	3	$	2,584	$	(6	)
Natural gas and liquids							1,427		-		1,970		(17	)
Total						$	3,252	$	3	$	4,554	$	(23	)

Combined Total	$	8,872	$	1,211		$	13,480	$	1,656	$	22,352	$	2,867

(1)

Negative amounts represent adjustments for the ~~three~~six months ended ~~March 31,~~June 30, 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:

SCHEDULE OF ~~SIGNIFICANT CONCENTRATIONS OF CREDIT RISK~~REVENUE FROM PURCHASERS

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

	Six Months Ended June 30,
Purchaser	2022			2021
Purchaser A		23	%		29	%
Purchaser B		22	%		-
Purchaser C		7	%		37	%
Purchaser D		2	%		10	%

4. LEASES

During the ~~three~~six months ended ~~March 31, 2021,~~June 30, 2022, the Company acquired right-of-use assets and operating lease ~~liability~~liabilities of $82953 thousand associated with entering into a 67-month 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,~~June 30, 2022 and December 31, 2021:

SCHEDULE OF CONSOLIDATED BALANCE SHEET

	March 31, 2022		December 31, 2021		June 30, 2022		December 31, 2021
	(in thousands)				(in thousands)
Right of use asset balance
Operating lease	$	95	$	120	$	997	$	120
Lease liability balance
Short-term operating lease	$	104	$	114	$	157	$	114
Long-term operating lease		2		19		880		19
Total operating leases	$	106	$	133	$	1,037	$	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 office space in Golden, Colorado and our Houston, Texas office lease, prior to February ~~2021, when~~2021. In May 2022, the Company entered into a new 2567-month lease for additional office space in Houston, Texas. The Company subleases its ~~Houston office. Beginning in March 2020, the Company subleased its~~former 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 and six months ended ~~March 31,~~June 30, 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

	2022			2021			2022			2021
	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
	(in thousands)
Operating lease cost	$	69		$	27		$	100		$	51
Short-term lease cost		2			12			4			18
Sublease income		(17	)		(16	)		(33	)		(32	)
Total lease costs	$	54		$	23		$	71		$	37

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,						As of June 30,
	2022			2021			2022			2021
	(in thousands)						(in thousands)
Weighted average lease term (years)		0.9			1.9			5.1			1.7
Weighted average discount rate		9.26	%		9.26	%		4.6	%		9.26	%

The future minimum lease commitments as of ~~March 31,~~June 30, 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:

SCHEDULE OF FUTURE MINIMUM LEASE COMMITMENTS

	Amount			Amount
Remainder of 2022	$	92		$	78
2023		18			225
2024					213
2025					218
2026					224
2027					210
Total lease payments		110			1,168
Less: imputed interest		(4	)		(131	)
Total lease liability	$	106		$	1,037

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 $176 thousand and $23 thousand related to its Riverton, Wyoming office building for the three and six months ended ~~March 31, 2021.~~June 30, 2021, respectively.

5. OIL AND NATURAL GAS PRODUCTION ACTIVITIES

Divestitures

During the ~~three~~six months ended ~~March 31,~~June 30, 2022, ~~there~~the Company divested of the Wildhorse Waterflood Unit in Osage County, Oklahoma, which was part of the Acquired Assets acquired on January 5, 2022. Net proceeds from sale of the waterflood unit were ~~no divestitures of oil and gas properties.~~$1.2 million. During the ~~three~~six months ended ~~March 31,~~June 30, 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~~six months ended ~~March 31,~~June 30, 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,~~June 30, 2022, the Company used $~~75.24~~85.78 per barrel for oil and $~~4.09~~5.13 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 1010%%.

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 $15million, and a maximum credit amount of $100million. 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 weighted average interest rate on the Credit Agreement for the three and six months ended ~~March 31,~~June 30, 2022, ~~the interest rate~~ was ~~4.25~~%4.7% and 4.5% per annum, ~~and the~~respectively. The Company ~~recorded~~recognized interest expense inclusive of amortization of debt issuance costs on the Credit Agreement for the three and six months ended June 30, 2022 of $3656 ~~thousand.~~thousand and $100 thousand, respectively.

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,~~June 30, 2022, ~~we were~~the Company was in compliance with all covenants related to ~~our~~the Credit Agreement.

A total of $3.5million was borrowed under the Credit Agreement immediately upon the entry into such Credit Agreement on January 5, 2022. The ~~$3.5~~$3.5 million was immediately used to repay $3.3million of debt assumed as part of the acquisition of the Acquired Assets. ~~On March 10,~~Since the acquisition of the Acquired Assets through June 30, 2022, wethe Company borrowed an additional $~~0.5~~ 1.0million for working capital needs ~~which was~~and repaid ~~on March 28, 2022.~~$0.5 million. The amount outstanding on the Credit Agreement as of ~~March 31,~~June 30, 2022, was $~~3.5~~ 4.0million.

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 1010%% 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 1010%% 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,~~June 30, 2022, the Company had commodity derivative contracts outstanding through the fourth quarter of 2023 as summarized in the tables below:

SCHEDULE OF COMMODITY DERIVATIVE CONTRACTS

	Collars						Fixed Price Swaps				Collars						Fixed Price Swaps
	Quantity						Quantity				Quantity						Quantity
Commodity/ Index/	Crude oil-(Bbls) Natural		Weighted Average Prices				Crude oil- (Bbls) Natural		Weighted Average		Crude Oil-(Bbls) Natural		Weighted Average Prices				Crude Oil- (Bbls) Natural		Weighted Average
Maturity Period	Gas-(Mmbtu)		Floors		Ceilings		Gas-(Mmbtu)		Price		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		73,400	$	59.97	$	80.54		9,000	$	49.99
Fourth quarter 2022		71,800	$	59.86	$	80.34		9,000	$	49.99		71,800	$	59.86	$	80.34		9,000	$	49.99
Total Remaining 2022		219,700	$	59.96	$	80.52		27,000	$	49.99		145,200	$	59.92	$	80.44		18,000	$	49.99

Crude Oil 2023 Contracts:
First quarter 2023		66,200	$	57.73	$	76.00		6,000	$	59.20		66,200	$	57.73	$	76.00		6,000	$	59.20
Second quarter 2023		53,500	$	60.00	$	81.04		6,000	$	59.20		53,500	$	60.00	$	81.04		6,000	$	59.20
Third quarter 2023		52,600	$	60.00	$	81.04		-	$	-		52,600	$	60.00	$	81.04		-	$	-
Fourth quarter 2023		51,200	$	60.00	$	81.04		-	$	-		51,200	$	60.00	$	81.04		-	$	-
Total 2023		223,500	$	59.33	$	79.55		12,000	$	59.20		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		-	$	-	$	-		60,000	$	2.96
Fourth quarter 2022		-	$	-	$	-		60,000	$	2.96		-	$	-	$	-		60,000	$	2.96
Total remaining 2022		-	$	-	$	-		180,000	$	2.96		-	$	-	$	-		120,000	$	2.96

Natural Gas 2023 Contracts:
First quarter 2023		-	$	-	$	-		60,000	$	2.96		-	$	-	$	-		60,000	$	2.96

The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets by category:

SCHEDULE OF FAIR VALUE OF COMMODITY DERIVATIVE CONTRACTS

March 31,
2022

December 31,
2021

(in thousands)
Derivative liabilities:
Current liabilities $ 6,478 $ -
Non-current liabilities 1,867 -
Total derivative liabilities $ 8,344 $ -

	June 30, 2022		December 31, 2021
	(in thousands)
Derivative liabilities:
Current liabilities	$	6,325	$	-
Non-current liabilities		1,308		-
Total derivative liabilities	$	7,633	$	-

As of ~~March 31,~~June 30, 2022, all commodity derivative contracts held by the Company were subject to master netting arrangements with its counterparty. The terms of the Company’s derivative agreements provide for offsetting of amounts payable or receivable between it and the counterparty for contracts that settle on the same date. The Company’s agreements also provide that in the event of an early termination, the counterparty has the right to offset amounts owed or owing under that and any other agreement. The Company’s accounting policy is to offset positions that settle on the same date with the same counterparty.

The following table summarizes the commodity components of the derivative settlement gain (loss) as well as the components of the net derivative loss line-item presentation in the accompanying condensed consolidated statement of operations:

SCHEDULE OF DERIVATIVE SETTLEMENT GAIN LOSS

	2022			2021			2022			2021			2022			2021
	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021			2022			2021
	(in thousands)						(in thousands)
Derivative settlement gain (loss)				$
Derivative settlement losses:
Oil contracts	$	(1,547	)		(2	)	$	(2,590	)	$	(38	)	$	(4,137	)	$	(40	)
Gas contracts		(97	)		-			(239	)		-			(350	)		-
Total net derivative settlement gain (loss)	$	(1,644	)	$	(2	)
Total derivative settlement losses							$	(2,829	)	$	(38	)	$	(4,487	)	$	(40	)

Total net derivative gain (loss)				$

Total net derivative loss:
Oil contracts	$	(6,296	)		107		$	(2,068	)		(317	)	$	(8,364	)		(210	)
Gas contracts		(541	)		-			(64	)		-			(605	)		-
Total net derivative gain (loss)	$	(6,837	)	$	107
Total net derivative loss							$	(2,132	)		(317	)	$	(8,969	)	$	(210	)

8. COMMITMENTS, CONTINGENCIES AND RELATED-PARTY TRANSACTIONS

Litigation

In July 2020, the Company received a request for arbitration from its former Chief Executive Officer, David Veltri claiming that it breached his employment agreement. The Company settled the litigation in December 2021 by paying Mr. Veltri and his attorneys $750 thousand, of which $375 thousand was reimbursed by the Company’s insurance carrier. Total amounts incurred by the Company related to the litigation was $427 thousand.

APEG II Litigation

From February 2019 until August 2020, the Company was involved in litigation with its former Chief Executive Officer, David Veltri, and at the time its largest shareholder, APEG II and APEG II’s general partner, APEG Energy II, GP (together with APEG II, “APEG”). In addition, Patrick E. Duke, a former director of the Company, had shared voting and shared investment power over APEG. The litigation arose as a result of a vote at the February 25, 2019 board of directors meeting to terminate Mr. Veltri for using Company funds outside of his authority and for other reasons (the “Texas Litigation”). In a separate lawsuit, APEG initiated a shareholder derivative action in Colorado against Mr. Veltri due to his refusal to recognize the Board’s decision to terminate him (the “Colorado Litigation”). The Company was named as a nominal defendant in the Colorado Litigation. The Colorado litigation was dismissed in May 2020 and the Texas Litigation was dismissed in August 2020. On March 4, 2021, the Company issued 90,846 shares of unregistered common stock, which had a value on the date of issuance of $406thousand, to APEG in reimbursement of APEG’s legal costs in the Colorado and Texas Litigation.

9. SHAREHOLDERS’ EQUITY

~~Warrants~~

~~In December 2016, the Company completed a registered direct offering of~~ ~~100,000~~ ~~shares of common stock at a net gross price of $15.00~~ ~~per share. Concurrently, the investors received warrants to purchase~~ ~~100,000~~ ~~shares of common stock of the Company at an exercise price of $20.05~~ ~~per share, for a period of five years from the final closing date of June 21, 2017. The warrants include anti-dilution rights. The total net proceeds received by the Company were approximately $1.32~~ ~~million. The fair value of the warrants upon issuance were $1.24~~ ~~million, with the remaining $0.08~~ ~~million being attributed to common stock. On September 29, 2020, the Company received proceeds of $565~~ ~~thousand related to the exercise of warrants to purchase~~ ~~50,000~~ ~~shares of common stock and on March 9, 2022, the Company received proceeds of $195~~ ~~thousand related to the exercise of the remaining~~ ~~50,000~~ ~~warrants.~~

~~Pursuant to the original warrant agreement, as a result of common stock issuances at various prices, the warrant exercise price was reduced from its original $20.50~~ ~~exercise price to the floor price of $3.92, which was the exercise price of the warrants when the remaining~~ ~~50,000~~ ~~warrants were exercised in March 2022.~~

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 the three and six months ended ~~March 31,~~June 30, 2022 and 2021, there was 0 compensation expense related to stock options. As of December 31, 2019, all stock options had vested. NaN stock options were granted or exercised during the ~~three~~six months ended ~~March 31,~~June 30, 2022 or 2021. Stock options to purchase 750 shares expired during the ~~three~~six months ended ~~March 31,~~June 30, 2022. NaN stock options expired during the ~~three~~six months ended ~~March 31,~~June 30, 2021. Presented below is information about stock options outstanding and exercisable as of ~~March 31,~~June 30, 2022, and December 31, 2021:

SCHEDULE OF STOCK OPTIONS ACTIVITY

March 31, 2022 December 31, 2021
Shares Price Shares Price

Stock options outstanding and exercisable 30,285 $ 60.11 31,035 $ 62.79

	June 30, 2022				December 31, 2021
		Shares		Price		Shares		Price

Stock options outstanding and exercisable		30,285	$	60.11		31,035	$	62.79

The following table summarizes information for stock options outstanding and for stock options exercisable at ~~March 31,~~June 30, 2022. All shares and prices per share have been adjusted for a one share-for-ten shares reverse stock split that took effect on January 6, 2020:

SCHEDULE OF STOCK OPTIONS OUTSTANDING AND EXERCISABLE

Options Outstanding	Options Outstanding									Options Exercisable				Options Outstanding									Options Exercisable
		Exercise				Weighted		Remaining				Weighted			Exercise				Weighted		Remaining				Weighted
Number of	Number of	Price Range				Average Exercise		Contractual Term		Number of		Average Exercise		Number of	Price Range				Average Exercise		Contractual Term		Number of		Average Exercise
Shares	Shares	Low		High		Price		(years)		Shares		Price		Shares	Low		High		Price		(years)		Shares		Price

	16,500	$	7.20	$	11.60	$	10.00		5.5		16,500	$	10.00	16,500	$	7.20	$	11.60	$	10.00		5.3		16,500	$	10.00
	10,622		90.00		124.80		106.20		2.1		10,622		106.20	10,622		90.00		124.80		106.20		1.8		10,622		106.20
	2,163		139.20		139.20		139.20		0.3		2,163		139.20	2,163		139.20		139.20		139.20		0.1		2,163		139.20
	1,000		226.20		226.20		232.48		2.5		1,000		232.48	1,000		226.20		226.20		226.20		2.2		1,000		232.48

	30,285	$	7.20	$	226.20	$	60.11		3.8		30,285	$	60.11	30,285	$	7.20	$	226.20	$	60.11		3.6		30,285	$	60.11

Restricted Stock

The Company grants restricted stock under its incentive plan covering shares of common stock to employees and directors of the Company. The restricted stock awards are time-based awards and are amortized ratably over the requisite service period. Restricted stock vests ratably on each anniversary following the grant date provided the grantee is employed on the vesting date. Restricted stock granted to employees, when vested are net settled through the issuance of shares, net of the number of shares required to pay withholding taxes.

1615

The following table presents the changes in non-vested time-based restricted stock awards to all employees and directors for the ~~three~~six months ended ~~March 31,~~June 30, 2022:

SCHEDULE OF NON-VESTED TIME-BASED RESTRICTED STOCK AWARDS

	Shares			Weighted-Avg. Grant Date Fair Value per Share		Shares			Weighted-Avg. Grant Date Fair Value per Share

Non-vested restricted stock as of December 31, 2021		174,000		$	4.75		174,000		$	4.75
Granted		986,500		$	3.70		986,500		$	3.70
Vested		(373,500	)	$	4.02		(373,500	)	$	4.02
Non-vested as of March 31, 2022		787,000		$	3.78
Non-vested as of June 30, 2022							787,000		$	3.78

~~For~~The following table presents the ~~three months ended March 31, 2022 and 2021, the Company recognized $1.5~~ ~~million and $~~79 ~~thousand, respectively of~~ stock compensation expense related to restricted stock ~~grants.~~ grants for the three and six months ended June 30, 2022 and 2021:

SCHEDULE OF STOCK COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK GRANTS

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
		(in thousands)

Stock compensation expense	$	609	$	116	$	2,109	$	195

Total compensation cost related to non-vested time-based awards and not yet recognized in the Company’s condensed consolidated statements of operations as of ~~March 31,~~June 30, 2022, was $~~2.6~~1.8 million. This cost is expected to be recognized over a weighted average period of ~~one year~~2.3. years.

10. ASSET RETIREMENT OBLIGATIONS

The Company has asset retirement obligations (“AROs”) associated with the future plugging and abandonment of proved properties. Initially, the fair value of a liability for an ARO is recorded in the period in which the ARO is incurred with a corresponding increase in the carrying amount of the related asset. The liability is accreted to its present value each period and the capitalized cost is depleted over the life of the related asset. If the liability is settled for an amount other than the recorded amount, an adjustment to the full-cost pool is recognized. The Company had no assets that are restricted for the purpose of settling AROs.

~~On January 5, 2022, the~~The Company ~~closed on an acquisition of assets and~~ recorded ~~an additional~~ $9.6 million of ARO related to the assets acquired in the January 5, 2022 acquisition and $0.5 million of ARO in the May 3, 2022 acquisition of Liberty County, Texas assets. See Note 2- Acquisitions.

In the fair value calculation for the ARO there are numerous assumptions and judgments, including the ultimate retirement cost, inflation factors, credit-adjusted risk-free discount rates, timing of retirement and changes in legal, regulatory, environmental, and political environments. To the extent future revisions to assumptions and judgments impact the present value of the existing ARO, a corresponding adjustment is made to the oil and natural gas property balance.

The following is a reconciliation of the changes in the Company’s liabilities for asset retirement obligations as of ~~March 31,~~June 30, 2022 and December 31, 2021:

SCHEDULE OF ASSET RETIREMENT OBLIGATIONS

	March 31, 2022		December 31, 2021			June 30, 2022			December 31, 2021
	(in thousands)					(in thousands)
Balance, beginning of year	$	1,461	$	1,408		$	1,461		$	1,408
Acquired		9,614		45			10,334			45
Life revisions							131			-
Sold/Plugged		-		(70	)		(163	)		(70	)
Accretion		215		78			448			78
Balance, end of period	$	11,290	$	1,461		$	12,211		$	1,461

1716

11. INCOME TAXES

The Company’s tax provision or benefit from income taxes for interim periods is generally determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Each quarter the Company updates its estimate of the annual effective tax rate and makes a year-to-date adjustment to the provision. However, for the six months ended June 30, 2022, the estimated annual effective tax rate presented a distorted amount of expense in relation to the year-to-date results. As such, the Company has determined the tax benefit for the six months ended June 30, 2022 on an actual year-to-date basis instead of applying the estimated annual effective tax rate. The Company’s effective tax rate was approximately ~~44.3~~45.5%% and ~~0.0~~0.0%% for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively. The primary difference in the Company’s effective tax rate and the statutory rate for the ~~three~~six months ended ~~March 31,~~June 30, 2022 related to the movement in the valuation allowance against the Company’s net deferred tax assets.

The Company’s income tax benefit for the ~~three~~six months ended ~~March 31,~~June 30, 2022 includes a discrete income tax benefit of $2.4 million related to the release of a portion of the Company’s previously established valuation allowance to offset deferred tax liabilities arising from the January 5, 2022 transaction.

Deferred taxes are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets, liabilities, net operating losses and tax credit carry-forwards. We review our deferred tax assets (“DTAs”) and valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulative results in recent years. The January 5, 2022 transaction triggered an ~~IRC~~Internal Revenue Code (IRC) Section 382 ownership change, and therefore placed additional limitations on the Company’s pre-transaction ~~NOL~~net operating loss (NOL) and other tax attributes. As such, the Company is projecting that as of December 31, 2022 it will not have sufficient DTAs available to offset the expected future taxable income that will be generated by the realization of the Company’s deferred tax liabilities. The DTA as of March 31, 2022 is expected to reverse during 2022.

The Company recognizes, measures, and discloses uncertain tax positions whereby tax positions must meet a “more-likely-than-not” threshold to be recognized. During the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, no adjustments were recognized for uncertain tax positions.

12. ~~LOSS~~NET INCOME (LOSS) PER SHARE

Basic net ~~loss~~income (loss) per common share is calculated by dividing net ~~loss~~income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the respective period. Diluted net ~~loss~~income (loss) per common share is calculated by dividing adjusted net ~~loss~~income (loss) by the diluted weighted average number of common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist of stock options and warrants, which are measured using the treasury stock method, ~~the conversion feature of the Series A Preferred Stock prior to redemption,~~ and unvested shares of restricted common stock. When the Company recognizes a net loss, as was the case for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and the three and six months ended June 30, 2021, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of dilutive net loss per common share.

The following table sets forth the calculation of basic and diluted net ~~loss~~income (loss) per share for the three and six months ended ~~March 31,~~June 30, 2022 and 2021:

SCHEDULE OF BASIC AND DILUTED NET LOSS PER SHARE

2022 2021
Three Months Ended March 31,
2022 2021
(in thousands except per share data)
Net loss applicable to common shareholders $ (3,384 ) $ (162 )

Basic weighted-average common shares outstanding 23,717 3,924
Dilutive effect of potentially dilutive securities - -
Diluted weighted-average common shares outstanding 23,717 3,924

Basic net loss per share $ (0.14 ) $ (0.04 )
Diluted net loss per share $ (0.14 ) $ (0.04 )

	2022		2021			2022			2021
	Three Months Ended June 30,					Six Months Ended June 30,
	2022		2021			2022			2021
	(in thousands except per share data)
Net income (loss)	$	122	$	(207	)	$	(3,262	)	$	(369	)
							��
Basic weighted average common shares outstanding		24,924		4,676			24,324			4,305
Dilutive effect of potentially dilutive securities		341		-			-			-
Diluted weighted average common shares outstanding		25,265		4,676			24,324			4,305

Basic net income (loss) per share	$	0.00	$	(0.04	)	$	(0.13	)	$	(0.09	)
Diluted net income (loss) per share	$	0.00	$	(0.04	)	$	(0.13	)	$	(0.09	)

For the three and six months ended ~~March 31,~~June 30, 2022 and 2021, potentially dilutive securities excluded from the calculation of weighted average shares because they were anti-dilutive are as follows:

SCHEDULE OF ANTI-DILUTIVE WEIGHTED AVERAGE SHARES

					Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021		2022		2021
	(in thousands)				(in thousands)
Stock options		30		31		30		31		30		31
Unvested shares of restricted stock		787		139		-		174		787		150
Warrants		-		50		-		50		-		50
Total		817		220		30		255		817		231

13. FAIR VALUE MEASUREMENTS

The Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the hierarchy level. The three levels of inputs that may be used to measure fair value are defined as:

Level 1 - Quoted prices for identical assets and liabilities traded in active exchange markets.

Level 2 - Observable inputs other than Level 1 that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or other observable inputs that can be corroborated by observable market data.

Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Recurring Fair Value Measurements

Commodity Derivative Instruments

We measure the fair value of commodity derivative contracts using an income valuation technique based on the contract price of the underlying positions, crude oil forward curves, discount rates, and Company or counterparty non-performance risk. The fixed-price swaps and collar derivative contracts are included in Level 2. The fair value of commodity derivative contracts and their presentation in our condensed consolidated balance sheet as of June 30, 2022 are presented below:

SCHEDULE OF RECURRING MEASUREMENTS OF FAIR VALUE OF ASSETS AND LIABILITIES

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total Fair Value			Effect Of Netting			Net Fair Value Presented in the Condensed Consolidated Balance Sheet			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total Fair Value			Effect Of Netting			Net Fair Value Presented in the Condensed Consolidated Balance Sheet
(in thousands)
Assets
Current:
Commodity derivatives	$	-	$	411		$	-	$	411		$	(411	)	$	-		$	-	$	430		$	-	$	430		$	(430	)	$	-
Non-current:
Commodity derivatives	$	-	$	930		$	-	$	930		$	(930	)	$	-		$	-	$	644		$	-	$	644		$	(644	)	$	-

Liabilities
Current:
Commodity derivatives	$	-	$	(6,888	)	$	-	$	(6,888	)	$	411		$	(6,478	)	$	-	$	(6,755	)	$	-	$	(6,755	)	$	430		$	(6,325	)
Non-current:
Commodity derivatives	$	-	$	(2,796	)	$	-	$	(2,796	)	$	930		$	(1,867	)	$	-	$	(1,952	)	$	-	$	(1,952	)	$	644		$	(1,308	)

Net derivative instruments	$	-	$	(8,344	)	$	-	$	(8,344	)	$	-		$	(8,344	)	$	-	$	(7,633	)	$	-	$	(7,633	)	$	-		$	(7,633	)

Marketable Equity Securities

We measure the fair value of marketable equity securities based on quoted market prices obtained from independent pricing services. The Company has an investment in the marketable equity securities of Anfield Energy (“Anfield”), which it acquired as consideration for sales of certain mining operations. Anfield is traded in an active market under the trading symbol AEC:TSXV and has been classified as Level 1.

SCHEDULE OF INVESTMENT IN THE MARKETABLE EQUITY SECURITIES

	March 31,		December 31,		June 30,		December 31,
	2022		2021		2022		2021
Current assets:
Marketable equity securities
Number of shares owned		2,421,180		2,421,180		2,421,180		2,421,180
Quoted market price	$	0.11217	$	0.07874	$	0.06213	$	0.07874

Fair value of marketable equity securities	$	271,572	$	190,641	$	150,417	$	190,641

Nonrecurring Fair Value Measurements

Asset Retirement Obligations

The Company measures the fair value of asset retirement obligations as of the date a well is acquired, or the date a well begins drilling, or the date the Company revises its ARO assumptions using a discounted cash flow method based on unobservable inputs inincluding estimates of the ~~market~~costs to abandon and the timing of when the Company will ultimately abandon the asset. These estimates are based on engineering estimates and estimated reserve life and therefore are designated as Level 3 within the valuation hierarchy See Note 10- Asset Retirement Obligations.

Other Assets and Liabilities

The Company evaluates the fair value on a non-recurring basis of properties acquired in asset acquisitions. The fair value of the oil and gas properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production which we reasonably expect, and estimated prices adjusted for differentials. Unobservable inputs include estimated future oil and natural gas production, prices, operating and development costs, and a discount rate of 10%, all Level 3 inputs within the fair value hierarchy.

The carrying value of financial instruments included in current assets and current liabilities approximate fair value due to the short-term nature of those instruments. The carrying value of the amounts borrowed under the Credit Agreement approximate fair value because the interest on the Credit Agreement is at a floating rate.

14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

SCHEDULE OF SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

	2022			2021		2022			2021
	Three Months Ended March 31,					Six Months Ended June 30,
	2022			2021		2022			2021
	(in thousands)					(in thousands)
Cash paid for interest	$	(36	)	$	-	$	(86	)	$	(3	)

Investing activities:
Change in capital expenditure accruals	$	166		$	108		453			256
Change in accrual for acquisition costs		(546	)		-		(546	)		-
Common stock issued for acquisition of properties		64,694			-		64,694			-
Assumption of commodity derivative liability in acquisition of properties		3,152			-		3,152			-
Assumption of debt in acquisition of properties		3,347			-		3,347			-
Assumption of suspense accounts in acquisition of properties		1,276			-		1,276			-
Addition of operating lease liability and right of use asset		-			82		953			82
Asset retirement obligations		9,614			44		10,302			44
Financing activities:
Issuance of stock for conversion of related party secured note payable and accrued interest		-			438		-			438
Issuance of stock for settlement of related party legal costs		-			406		-			406
Financing of insurance premiums with note payable	$	588		$	223		588			223

15. SUBSEQUENT EVENTS

Acquisition of East Texas Properties

On ~~April 5,~~July 27, 2022, the Company ~~sold~~closed on the ~~Wildhorse Waterflood Unit~~acquisition of certain oil and natural gas producing properties from ETXENERGY, LLC totaling approximately 16,600 acres in ~~Osage County, Oklahoma which it~~Henderson and Anderson Counties, Texas for the initial purchase price of $11.9 million in cash (the “ETXENERGY Acquisition”). The Company financed the ETXENERGY Acquisition with $1.2 million of cash on hand and borrowings under its existing Credit Facility of $10.7 million. The asset acquired ~~on January 5, 2022. The effective date of the sale was March 1, 2022. Proceeds from the sale of~~also include certain wells, pipelines, contracts technical data, records, personal property and hydrocarbons associated with the properties, ~~were $1.4~~ ~~million.~~including two pipeline gathering systems and related infrastructure. In addition, the Company assumed various liabilities including suspense accounts and asset retirement obligations. The Company is currently evaluating certain accounting and valuation considerations for the ETXENERGY Acquisition.

On ~~May 2,~~July 26, 2022, the Company, ~~paid~~in anticipation of the closing of the ETXENERGY Acquisition entered into a ~~cash dividend~~letter agreement with FirstBank Southwest, the administrative agent of its existing Credit Agreement, whereby it increased the borrowing base under the Credit Agreement from $~~0.0225~~15 ~~per share~~million to ~~shareholders~~$20 million. On July 27, 2022, in connection with the closing of ~~record~~the ETXENERGY Acquisition, the Company borrowed $10.7 million on ~~April 15, 2022.~~the Credit Agreement. On August 4, 2022, the Company repaid $0.4 million on the Credit Agreement. The total amount outstanding on the Credit Agreement as of ~~the dividend including fees was~~August 10, 2022 is $~~578~~14.3 ~~thousand.~~million.

On ~~May 3,~~July 15, 2022, the Company’s Board of Directors approved a quarterly dividend of $0.0225 per share of common stock outstanding. The ~~Company acquired operated oil and gas producing properties in Liberty County, Texas, adjacent~~dividend will be paid on August 22, 2022, to ~~its existing assets in the area, for $1.0~~ ~~million in an all-cash transaction. The effective date~~stockholders of record as of the ~~transaction is April 1,~~close of business on August 8, 2022. ~~The assets include approximately~~ ~~1,022~~ ~~acres, which are 100% held by production, a gas pipeline and associated infrastructure.~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 28, 2022 (the “Annual Report”).

Certain abbreviations and oil and gas industry terms used throughout this Report are described and defined in greater detail under “Glossary of Oil and Natural Gas Terms” on page 43 of our Annual Report.

Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated financial statements included above under “Part I - Financial Information” – “Item 1. Financial Statements”.

In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the industries in which we operate in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.

Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “U.S. Energy”, and “U.S. Energy Corp.” refer specifically to U.S. Energy Corp. and its consolidated subsidiaries

In addition, unless the context otherwise requires and for the purposes of this report only:

●	“Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons;

●	“BOE” refers to barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids, to six Mcf of natural gas;

●	“Bopd” refers to barrels of oil day;

●	“Mcf” refers to a thousand cubic feet of natural gas;

●	“Mcfe” means 1,000 cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas ~~liquids~~liquids;

●	“NGL” refers to natural gas liquids;

●	“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;

●	“SEC” or the “Commission” refers to the United States Securities and Exchange Commission;

●	“Securities Act” refers to the Securities Act of 1933, as amended; and

●	“WTI” means West Texas Intermediate.

Where You Can Find Other Information

We file annual, quarterly, and current reports, proxy statements and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC like us at https://www.sec.gov (our filings can be found at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000101594) and on the “Investors – SEC Filings” page of our website at https://usnrg.com. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.

Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

	●	General Overview. A general overview of the Company and our operations.

	●	Recent Developments. Discussion of recent developments affecting the Company and our operations.

	●	Plan of Operations and Strategy. Discussion of our strategy moving forward and how we plan to seek to increase stockholder value.

	●	Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

	●	Results of Operations. An analysis of our financial results comparing the three and six months ended ~~March 31,~~June 30, 2022 and 2021.

	●	Liquidity and Capital Resources. A discussion of our financial condition, including descriptions of balance sheet information and cash flows.

General Overview

U.S. Energy Corp. - is a ~~Wyoming~~Delaware corporation, originally organized in ~~1966.~~Wyoming in 1966, and recently reincorporated to Delaware, as discussed below. We are an independent energy company focused on the acquisition and development of oil and natural gas producing properties in the continental United States. Our business activities are currently focused in West Texas, South Texas, the Gulf Coast, the Rockies and mid-continent.

Our strategic objective is to be a consolidator of high-quality producing assets in the United States with the potential to optimize production and generate free cashflow through low-risk development projects on existing assets, while maintaining an attractive shareholder returns program. We are committed to Environmental, Social, and Governance (ESG) stewardship and being a leader in reducing our carbon footprint in the areas in which we operate.

On August 3, 2022, the Company changed its state of incorporation from the State of Wyoming to the State of Delaware (the “Reincorporation”) by means of a Plan of Conversion, effective August 3, 2022 (the “Plan of Conversion”). The Reincorporation, including the Plan of Conversion, was submitted to a vote of, and approved by, the Company’s stockholders at the Company’s 2022 Annual Meeting of Stockholders held on June 21, 2022 (the “2022 Annual Meeting”), as set forth in the Company definitive proxy statement on Schedule 14A as filed with the Securities and Exchange Commission on April 29, 2022 (the “Definitive Proxy Statement”).

The Reincorporation was accomplished by filing: (i) an Application for Certificate of Transfer with the Secretary of State of the State of Wyoming (the “Wyoming Certificate of Transfer”); (ii) a Certificate of Conversion with the Secretary of State of the State of Delaware (the “Delaware Certificate of Conversion”); and (iii) a Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Delaware Certificate of Incorporation”). In connection with the Reincorporation, the Company’s Board of Directors adopted new amended and restated bylaws in the form attached to the Plan of Conversion, which are as were set forth in the Definitive Proxy Statement (the “Delaware Bylaws”).

Upon the effectiveness of the Reincorporation on August 3, 2022:

	●	The Company’s affairs ceased to be governed by the Wyoming Business Corporation Act and the Company’s Wyoming articles of incorporation and bylaws, in each case as in effect immediately prior to the Reincorporation, and the Company’s affairs became governed by the Delaware General Corporation Law, the Delaware Certificate of Incorporation, and the Delaware Bylaws;

	●	The resulting Delaware corporation (“U.S. Energy-Delaware”) (i) is deemed to be the same entity as the Company as incorporated in Wyoming (“U.S. Energy-Wyoming”) for all purposes under Wyoming and Delaware law, (ii) continues to have all of the rights, privileges, and powers of U.S. Energy-Wyoming, (iii) continues to possess all of the properties of U.S. Energy-Wyoming, and (iv) continues to have all of the debts, liabilities, and duties of U.S. Energy-Wyoming;

	●	Each (i) issued and outstanding share of common stock. $0.01 par value per share, of U.S. Energy-Wyoming automatically became an issued and outstanding share of common stock, par value $0.01 per share, of U.S. Energy-Delaware, (ii) option exercisable for common stock of U.S. Energy-Wyoming automatically became an equivalent option exercisable for shares of common stock of U.S. Energy-Delaware, (iii) warrant or other right to acquire shares of common stock U.S. Energy-Wyoming automatically became an equivalent warrant or other right to acquire shares of common stock of U.S. Energy-Delaware, and (iv) outstanding certificate representing shares of U.S. Energy-Wyoming common stock shall be deemed an equivalent certificate representing shares of U.S. Energy-Delaware common stock;

	●	All employee benefit, stock option plans and incentive plans of U.S. Energy-Wyoming continue to be employee benefit, stock option plans and incentive plans of U.S. Energy-Delaware; and

	●	Each director and officer of U.S. Energy-Wyoming continues to hold his or her respective office with U.S. Energy-Delaware.

Certain rights of the Company’s stockholders changed as a result of the Reincorporation, and such changes are described in greater detail in the Definitive Proxy Statement under the section entitled “Proposal 6: Approval of the Reincorporation of U.S. Energy Corp. From a Wyoming Corporation to a Delaware Corporation”.

The Reincorporation did not affect the trading of the Company’s shares of common stock on the Nasdaq Capital Market in any respect. The Company believes that the Reincorporation did not affect any of the Company’s material contracts with any third parties, and that the Company’s rights and obligations under such material contractual arrangements will continue to be rights and obligations of the Company after the Reincorporation. The Reincorporation did not result in any change in headquarters, business, jobs, management, location of any of the offices or facilities, number of employees, assets, liabilities or net worth (other than as a result of the costs incident to the Reincorporation) of the Company.

Recent Developments

Acquisition of Properties

On ~~January 5,~~July 27, 2022, ~~(the “Closing Date”),~~ we closed on the ~~acquisitions contemplated by three separate Purchase and Sale Agreements (as amended to date, the “Purchase Agreements”), previously entered into by the Company on October 4, 2021, with each~~acquisition 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, we acquired~~ certain oil and natural gas producing properties from ETXENERGY, LLC totaling approximately 16,600 acres in Henderson and Anderson Counties, Texas for the ~~Sellers, representing a diversified, portfolio~~initial purchase price of ~~primarily operated, producing, oil-weighted assets located across~~$11.9 million in cash (the “ETXENERGY Acquisition”). The Company financed the ~~Rockies, West Texas, Eagle Ford,~~ETXENERGY Acquisition with $1.2 million of cash on hand and ~~Mid-Continent.~~borrowings under its existing Credit Facility of $10.7 million. The ~~acquisition~~asset acquired also ~~included~~include certain wells, pipelines, contracts technical data, records, personal property and hydrocarbons associated with the ~~acquired assets (collectively with the oil~~properties, including two pipeline gathering systems and ~~gas properties acquired, the “Acquired Assets”).~~related infrastructure.

~~The Company accounted for the acquisition~~On July 26, 2022, in anticipation of the ~~Acquired Assets as an asset acquisition. The purchase price for~~closing of the ~~Acquired Assets was (a) $125,000 in cash and 6,568,828 shares~~ETXENERGY Acquisition we entered into a letter agreement with FirstBank Southwest, the administrative agent of our ~~common stock, as~~existing Credit Agreement, whereby we increased the borrowing base under the Credit Agreement from $15 million to ~~Lubbock; (b) $1,000,000~~$20 million. On July 27, 2022, in ~~cash,~~connection with the ~~repayment~~closing of ~~$3.3~~the ETXENERGY Acquisition, we borrowed $10.7 million ~~in liabilities which were~~on the Credit Agreement. On August 4, 2022 we repaid ~~with funds borrowed under a new credit agreement with Firstbank Southwest and 6,790,524 shares of common stock, as well as~~$0.4 million on the ~~novation of certain hedges which had a mark to market loss of approximately $3.1 million~~Credit Agreement. The total amount outstanding on the Credit Agreement 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 $1.25 million in cash, 19,905,736 shares of common stock (the “PSA Shares”), the repayment of $3.3 million in debt, as well as the novation of the hedges discussed above.August 10, 2022, is $14.7 million.

Plan of Operations and Strategy

Continuing through 2022 and beyond, we intend to seek additional opportunities in the oil and natural gas sector, including but not limited to further acquisition of assets, participation with current and new industry partners in their exploration and development projects, acquisition of existing companies, and the purchase of oil and natural gas producing assets. ~~In addition, we plan to grow production by performing workovers on operated idle wells acquired in January 2022 to return them back to production.~~

Key elements of our business strategy include:

	●	Deploy our Capital in a Conservative and Strategic Manner and Review Opportunities to Bolster our Liquidity. In the current industry environment, maintaining liquidity is critical. Therefore, we will be highly selective in the projects we evaluate and will review opportunities to bolster our liquidity and financial position through various means.

	●	Evaluate and Pursue Value-Enhancing Transactions. We will continuously evaluate strategic alternative opportunities that we believe will enhance shareholder value.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is detailed in Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Annual Report on Form 10-K filed with the SEC on March 28, 2022.

Recently Issued Accounting Standards

We do not believe that any recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our Condensed Consolidated Financial Statements or related disclosures.

Results of Operations

Comparison of our Statements of Operations for the Three Months Ended ~~March 31,~~June 30, 2022 and 2021

For the three months ended ~~March 31,~~June 30, 2022, we recorded a net ~~loss~~income of ~~$3.4 million,~~$122 thousand, which was ~~primarily~~ due to operating income of $2.7 million, primarily as a result of the assets acquired in January 2022. Partially offsetting our operating income, were losses on our commodity derivative contracts during the period of ~~$6.8~~$2.1 million. For the three months ended ~~March 31,~~June 30, 2021, we recorded a net loss of ~~$162~~$207 thousand. In the following sections we discuss our revenue, operating expenses and non-operating income for the three months ended ~~March 31,~~June 30, 2022, compared to the three months ended ~~March 31,~~June 30, 2021.

Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the three months ended ~~March 31,~~June 30, 2022 and 2021:

	Three months ended March 31,				Change					Three months ended June 30,				Change
	2022		2021		Amount		Percent			2022		2021		Amount		Percent
	(in thousands except average prices and production quantities)									(in thousands except average prices and production quantities)
Revenue:
Oil	$	7,833	$	1,132	$	6,701		592	%	$	11,334	$	1,507	$	9,827		652	%
Natural gas and liquids		1,039		79		960		1,215	%		2,146		149		1,997		1,340	%

Total	$	8,872	$	1,211	$	7,661		633	%	$	13,480	$	1,656	$	11,824		714	%

Production quantities:
Oil (Bbls)		90,821		21,872		68,409		313	%		107,845		24,077		83,768		348	%
Natural gas and liquids (Mcfe)		179,343		24,195		155,148		641	%		326,308		47,979		278,329		580	%
BOE		120,712		25,905		94,807		366	%		162,230		32,073		130,157		406	%

Average sales prices:
Oil (Bbls)	$	86.25	$	51.74	$	34.51		67	%	$	105.09	$	62.59	$	42.50		68	%
Natural gas and liquids (Mcfe)		5.79		3.27		2.52		77	%		6.58		3.10		3.48		112	%
BOE	$	73.50	$	46.74	$	26.76		57	%	$	83.09	$	51.62	$	31.47		61	%

The increase in our oil and gas revenue of ~~$7.7~~$11.8 million for the three months ended ~~March 31,~~June 30, 2022, as compared to the three months ended ~~March 31,~~June 30, 2021, was due primarily to an increase in oil production of ~~313%~~348% and an increase in the realized price received for our oil production of ~~67%~~68%. The increase in oil production is primarily related to production for the properties acquired in January 2022, which added 64,407 barrels to our production for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. Additionally, production in our legacy assets increased by 4,543 barrels as the result of workovers at our Gulf Coast, Texas properties to return idle wells to production.2022. The increase in crude oil prices is primarily due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia. Additionally, prices increased from 2021 due to stronger demand for crude oil on a global basis as the world recovered from government mandated lockdowns which began in mid-March 2020 and continued into 2021, which were put in place to reduce the spread of COVID-19.

For the three months ended ~~March 31,~~June 30, 2022, we produced ~~120,712~~162,230 BOE, or an average of ~~1,341~~1,783 BOE per day, as compared to ~~25,905~~32,073 BOE or ~~288~~352 BOE per day during the comparable period in 2021; however, the production mix shifted to become slightly less oil weighted in 2022, due to the acquisition in January 2022 of operated properties with relatively more natural gas production. During the three months ended ~~March 31,~~June 30, 2022, our BOE production mix was ~~75%~~66% oil and ~~25%~~34% natural gas and liquids compared to ~~84%~~75% oil and ~~16%~~25% natural gas and liquids in the comparable period of 2021.

Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the three months ended ~~March 31,~~June 30, 2022 and 2021:

Three months ended
March 31, Change
2022 2021 Amount Percent
(in thousands)
Production taxes $ 572 $ 79 $ 493 624 %
Lease operating expense 2,735 568 2,167 382 %

Total $ 3,307 $ 647 $ 2,660 411 %

	Three months ended June 30,				Change
	2022		2021		Amount		Percent
	(in thousands)
Lease operating expense	$	4,646		477		4,169		874	%
Production taxes	$	913	$	131	$	782		597	%

Total	$	5,559	$	608	$	4,951		814	%

For the three months ended March 31, 2022, production taxes were $572 thousand an increase of $493 thousand, or 624%, compared to the comparable period of 2021. This increase was primarily attributable to the increase in oil revenues of 592% related to the increases in production from properties acquired in January 2022 and the increase in pricing as discussed above. For the three months ended March 31,June 30, 2022, lease operating expenses were ~~$2.7~~$4.6 million or ~~$22.65~~$28.63 per BOE, an increase of ~~$2.2~~$4.2 million when compared to the ~~$568~~$477 thousand or ~~$21.93~~$14.87 per BOE for the three months ended ~~March 31,~~June 30, 2021. The increase in lease operating expense was due to increased activity as the result of the properties acquired in January 2022. For the three months ended June 30, 2022, production taxes were $913 thousand, an increase of $782 thousand, or 597%, compared to the comparable period of 2021. This increase was primarily attributable to the increase in oil revenues of 652% related to the increases in production from properties acquired in January 2022 and the increase in pricing as discussed above.

Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) rate for the three months ended ~~March 31,~~June 30, 2022, was ~~$15.62~~$15.84 per BOE, compared to ~~$4.59~~$4.55 per BOE for the three months ended ~~March 31,~~June 30, 2021. The increase in the DD&A rate was related to the acquisition of properties in January 2022. Our DD&A rate can fluctuate because of acquisitions, changes in drilling and completion costs, impairments, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated costs to drill and complete proved undeveloped reserves.

General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the three months ended ~~March 31,~~June 30, 2022 and 2021:

	Three months ended March 31,				Change					Three months ended June 30,				Change
	2022		2021		Amount		Percent			2022		2021		Amount		Percent
	(in thousands)									(in thousands)
Compensation and benefits, including directors’ fees	$	629	$	260	$	369		142	%	$	1,189	$	294	$	895		304	%
Stock-based compensation		1,500		79		1,421		1,798	%		609		116		493		425	%
Professional fees, insurance and other		817		396		421		106	%		844		402		442		110	%

Total	$	2,946	$	735	$	2,211		301	%	$	2,642	$	812	$	1,830		225	%

General and administrative expenses increased by ~~$2.2~~$1.8 million during the three-month period ended ~~March 31,~~June 30, 2022, as compared to the prior year period. The increase was primarily attributable to an increase of ~~$1.4~~$0.9 million related compensation and benefits including director fees. Compensation and benefits expense increased due to the addition of 36 employees as of June 30, 2022, compared to June 30, 2021. Stock-based compensation increased $0.5 million due to the amortization of stock-based compensation awards granted to employees and directors ~~during the period,~~in January 2022, which were mainly in connection with new directors and officers appointed in connection with the January 2022 acquisition. ~~Compensation expenses also increased $0.4 million related to the addition of 21 employees during the three months ended March 31, 2022.~~ Professional fees, Insurance and other expenses increased $0.4 million, primarily due to increased consulting, accounting, legal and insurance expenses related to the acquisition of properties in January 2022.

Non-Operating Income (Expense). Presented below is a comparison of our non-operating income (expense) for the three months ended ~~March 2021~~June 2022 and ~~2020:~~2021:

Three months ended
March 31, Change
2022 2021 Amount Percent
(in thousands)
Commodity derivative (loss) gain, net $ (6,837 ) $ 107 $ (6,944 ) -6,590 %
Gain on marketable equity securities 81 50 31 62 %
Warrant revaluation loss - (20 ) 20 100 %
Rental property gain, net - 17 (17 ) -100 %
Other income - 25 (25 ) -100 %
Interest, net (50 ) (52 ) 2 4 %

Total other (expense) income $ (6,806 ) $ 127 $ (6,933 ) -5,461 %

	Three months ended June 30,						Change
	2022			2021			Amount			Percent
	(in thousands)
Commodity derivative loss, net	$	(2,132	)	$	(317	)	$	(1,815	)		-573	%
Marketable equity securities (loss) gain		(121	)		23			(144	)		-626	%
Other (expense) income, net		(5	)		3			(8	)		-267	%
Interest expense, net		(60	)		(6	)		(54	)		-900	%

Total non-operating expense	$	(2,318	)	$	(297	)	$	(2,021	)		-680	%

Commodity derivative ~~(loss) gain,~~loss, net is the result of changes in derivative fair values associated with fluctuations in forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. For the three months ended ~~March 31,~~June 30, 2022, we recognized losses on commodity derivative contracts of ~~$6.9~~$2.1 million for contracts that we assumed in the January 2022 acquisition, as well as contracts we added during the period. See Note 7 Commodity Derivatives in the notes to the condensed consolidated financial statements.

Loss on marketable equity securities represents the change in fair value of our investment in Anfield Energy. For the three months ended June 30, 2022, we recognized an unrealized loss on marketable equity securities of $121 thousand as compared to a gain of $23 thousand for the comparable period of 2021.

Interest, net, represents the interest related to our Credit Facility with Firstbank Southwest. We had $4.0 million borrowed on the Credit Facility at June 30, 2022. In addition, during the three months ended June 30, 2022, we incurred interest on our note payable for the financing of insurance premiums. The balance payable on our insurance premium finance note is $0.4 million at June 30, 2022. See Note 6-Debt in the notes to the condensed consolidated financial statements.

Comparison of our Statements of Operations for the Six Months Ended June 30, 2022 and 2021

For the six months ended June 30, 2022, we recorded a net loss of $3.3 million, which was primarily due to losses on our commodity derivative contracts of $9.0 million during the period. Operating income of $3.4 million primarily from the properties acquired in January 2022, partially offset the losses on commodity derivative contracts. For the six months ended June 30, 2021, we recorded a net loss of $369 thousand. In the following sections we discuss our revenue, operating expenses and non-operating income for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the six months ended June 30, 2022 and 2021:

	Six months ended June 30,				Change
	2022		2021		Amount		Percent
	(in thousands except average prices and production quantities)
Revenue:
Oil	$	19,167	$	2,639	$	9,827		652	%
Natural gas and liquids		3,185		228		1,997		1,340	%

Total	$	22,352	$	2,867	$	11,824		714	%

Production quantities:
Oil (Bbls)		198,666		45,949		152,717		332	%
Natural gas and liquids (Mcfe)		505,651		72,173		433,478		601	%
BOE		282,942		57,978		224,964		388	%

Average sales prices:
Oil (Bbls)	$	96.48	$	57.43	$	39.05		68	%
Natural gas and liquids (Mcfe)	$	6.30	$	3.16	$	6.46		204	%
BOE	$	79.00	$	49.44	$	30.56		62	%

The increase in our oil and gas revenue of $11.8 million for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, was due primarily to an increase in oil production of 348% and an increase in the realized price received for our oil production of 68%. The increase in oil production is primarily related to production for the properties acquired in January 2022. The increase in crude oil prices is primarily due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia. Additionally, prices increased from 2021 due to stronger demand for crude oil on a global basis as the world recovered from government mandated lockdowns which began in mid-March 2020 and continued into 2021, which were put in place to reduce the spread of COVID-19.

For the six months ended June 30, 2022, we produced 282,942 BOE, or an average of 1,563 BOE per day, as compared to 57,978 BOE or 320 BOE per day, during the comparable period in 2021; however, the production mix shifted to become slightly less oil weighted in 2022, due to the acquisition in January 2022 of operated properties with relatively more natural gas production. During the six months ended June 30, 2022, our BOE production mix was 70% oil and 30% natural gas and liquids compared to 79% oil and 21% natural gas and liquids in the comparable period of 2021.

Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the six months ended June 30, 2022 and 2021:

	Six months ended June 30,				Change
	2022		2021		Amount		Percent
	(in thousands)
Lease operating expense	$	7,382	$	1,045	$	6,337		606	%
Production taxes	$	1,485	$	210	$	1,275		607	%

Total	$	8,867	$	1,255	$	7,612		607	%

For the six months ended June 30, 2022, lease operating expenses were $7.4 million or $26.09 per BOE, an increase of $6.3 million when compared to the $1.0 million or $18.02 per BOE for the six months ended June 30, 2021. The increase in lease operating expense was due to increased activity as the result of the properties acquired in January 2022. For the six months ended June 30, 2022, production taxes were $1.5 million, an increase of $1.3 million, or 607%, compared to the comparable period of 2021. This increase was primarily attributable to the increase in oil revenues of 652% related to the increases in production from properties acquired in January 2022 and the increase in pricing as discussed above.

Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) rate for the six months ended June 30, 2022, was $15.75 per BOE, compared to $4.55 per BOE for the six months ended June 30, 2021. The increase in the DD&A rate was related to the acquisition of properties in January 2022. Our DD&A rate can fluctuate because of acquisitions, changes in drilling and completion costs, impairments, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated costs to drill and complete proved undeveloped reserves.

General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the six months ended June 30, 2022 and 2021:

	Six months ended June 30,				Change
	2022		2021		Amount		Percent
	(in thousands)
Compensation and benefits, including directors’ fees	$	1,818	$	554	$	1,264		228	%
Stock-based compensation		2,109		195		1,914		982	%
Professional fees, insurance and other		1,661		798		863		108	%

Total	$	5,588	$	1,547	$	4,041		261	%

General and administrative expenses increased by $4.0 million during the six-month period ended June 30, 2022, as compared to the prior year period. The increase was primarily attributable to an increase of $1.9 million in stock-based compensation due to the amortization of stock-based compensation awards granted to employees and directors in January 2022, which were in connection with new directors and officers appointed in connection with the January 2022 acquisition. Compensation and benefits including director fees increased $1.3 million due to the addition of 36 employees as of June 30, 2022, when compared to June 2021. Professional fees, insurance and other expenses increased $0.9 million, primarily due to increased consulting, accounting, legal and insurance expenses related to the acquisition of properties in January 2022.

Non-Operating Income (Expense). Presented below is a comparison of our non-operating income (expense) for the three months ended June 2022 and 2021:

	Six months ended June 30,						Change
	2022			2021			Amount			Percent
	(in thousands)
Commodity derivative loss, net	$	(8,969	)	$	(210	)	$	(8,759	)		(4171	)%
Marketable equity securities (loss) gain		(40	)		73			(113	)		(155	)%
Other (expense) income, net		(6	)		25			(32	)		(128	)%
Interest expense, net		(108	)		(58	)		(50	)		(86	)%

Total non-operating expense	$	(9,123	)	$	(170	)	$	(8,954	)		(5,267	)%

Commodity derivative loss, net is the result of changes in derivative fair values associated with fluctuations in forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. For the six months ended June 30, 2022, we recognized losses on commodity derivative contracts of $9.0 million for contracts that we assumed in the acquisition, as wells as, contracts we added during the period. See Note 7 Commodity Derivatives in the notes to the condensed consolidated financial statements.

~~Gain~~Loss on marketable equity securities represents the change in fair value of our investment in Anfield Energy. For the ~~three~~six months ended ~~March 31,~~June 30, 2022, we recognized an unrealized ~~gain~~loss on marketable equity securities of ~~$81~~$40 thousand as compared to a gain of ~~$50~~$73 thousand for the comparable period of 2021.

For the three months ended March 31, 2021, we recognized a warrant revaluation loss of $20 thousand. The loss for the three months ended March 31, 2021 was attributable to an increase in the value of our common stock during the period. During the three months ended March 31, 2022 the remaining 50,000 warrants were exercised.

Rental property gain, net represents the rental income in excess of rental expenses on the building we owned in Riverton, Wyoming. On August 31, 2021, we sold the Riverton, Wyoming office building. During the three months ending March 31, 2021, we recognized a gain on rental property of $17 thousand.

Interest, net, represents the interest related to our ~~new credit facility~~Credit Facility with Firstbank Southwest. We had ~~$3.5~~$4.0 million borrowed on the credit facility at ~~March 31, 2022 and at May 10,~~June 30, 2022. In addition, during the six months ended June 30, 2022, we ~~entered into a~~incurred interest on our note payable for ~~payment~~the financing of insurance ~~premiums during the three months ended March 31, 2022.~~premiums. The balance payable on our insurance premium finance note is ~~$0.5~~$0.4 million at ~~March 31,~~June 30, 2022. In the prior year interest expense was primarily due to a related party secured note payable with APEG II. During the three months ended March 31, 2021, we entered into a Debt Conversion Agreement with APEG II. Pursuant to the agreement we repaid the note and accrued interest to the maturity date by issuing 97,962 shares of common stock. See Note 6-Debtin the notes to the condensed consolidated financial statements.

Liquidity and Capital Resources

Based on the current commodity price environment, we believe we have sufficient liquidity and capital resources to execute our business plan while continuing to meet our current financial obligations. We continue to manage our commitments in order to maintain flexibility with regard to our activity level and capital expenditures.

Sources of Cash

For the ~~three~~six months ended ~~March 31,~~June 30, 2022, we funded our capital expenditures primarily with cash flows from operating ~~activities and~~activities. During the period we borrowed $0.5 million on our Credit Facility, which as of June 30, 2022 had a balance borrowed of $4.0 million. On July 26, 2022, we entered into a letter agreement with Firstbank Southwest, the administrative agent of our Credit Agreement, whereby we increased the borrowing base under the Credit Agreement from $15 million to $20 million. On July 27, 2022, in connection with the closing of the ETXENERGY Acquisition, we borrowed $10.7 million under the Credit Agreement. On August 4, 2022, we repaid $0.4 million on the Credit Agreement. The total amount outstanding on the Credit Agreement as of August 10, 2022 is $14.3 million.

In April 2022 we sold the Wildhorse waterflood unit in Osage County, Oklahoma. Net proceeds from the sale were $1.2 million.

We expect that ~~to continue for the remainder of 2022. Although we expect~~ cash flows tofrom operating activities will be sufficient to fund our planned capital expenditures ~~and operations,~~for the next 12 months. However, we may also use borrowings under our ~~credit facility~~Credit Facility or raise funds through new equity offerings or from other sources of financing. If we raise additional funds through the issuance of equity, the percentage ownership of our current stockholders could be diluted. Additionally, we may enter into carrying cost and sharing arrangements with third parties for certain development programs. All of our sources of liquidity can be affected by the general conditions of the broader economy, force majeure events, fluctuations in commodity prices, operating costs, tax law changes, and volumes produced, all of which would affect us and our industry.

We have no control over the market prices for oil and gas, although we may be able to influence the amount of our realized revenues from oil and gas through the use of commodity derivative contracts as part of our commodity price risk management program. Commodity derivative contracts may limit the prices we receive from our oil and gas sales if oil and gas prices rise substantially over the price established by the commodity derivative contract. See Note 7- Commodity Derivatives in Part I, Item 1 of this report for additional information about our oil and gas commodity derivative contracts currently in place and the timing of the settlement of those contracts.

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Credit Agreement

On January 5, 2022, we entered into a five-year credit agreement with Firstbank Southwest as administrative agent, which provides for a revolving line of credit ~~with~~which had an initial borrowing base of $15 million, and a maximum credit amount of $100 million (the “Credit Agreement”). On July 26, 2022, in anticipation of closing the ETXENERGY Acquisition our borrowing base was increased from $15 million to $20 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. The Credit Agreement contains customary indemnification requirements, representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries. In addition, the Credit Agreement contains financial covenants, tested quarterly, that limit our 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. We were in compliance with all financial and non-financial covenants as of ~~March 31,~~June 30, 2022, and through the filing of this report. Please refer to Note 6 - Debt in Part I, Item 1 of this report for additional discussion.

The borrowing base is redetermined semi-annually on or about April 1 and October 1 of each year during the five-year term of the Credit agreement. The next borrowing base redetermination date is scheduled for October 1, 2022. Our borrowing base can be adjusted as a result of changes in commodity prices, acquisitions or divestitures of proved properties, or financing activities, all as provided for in the Credit Agreement.

Cash flows provided by our operating activities, proceeds received from divestitures of properties, capital markets activities, and our capital expenditures, including acquisitions, all impact the amount we borrow under our revolving 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. Since the acquisition of the Acquired Assets through June 30, 2022, we have borrowed $1.0 million and repaid $0.5 million on the Credit Agreement. On ~~March 10,~~July 26, 2022 we borrowed an additional ~~$0.5~~$10.7 million, ~~for working capital needs,~~ which was used for the ETXENERGY Acquisition and on August 4, 2022, repaid ~~on March 28, 2022.~~$0.4 million. The amount outstanding on the Credit Agreement as of ~~March 31,~~August 10, 2022, was ~~$3.5~~$14.3 million.

Uses of Cash

We use cash for the acquisition and development of oil and gas properties and for the payment of operating and general and administrative costs, settlements of commodity derivative contracts, debt obligations, including interest and payment of dividends. Expenditures for the acquisition and development of oil and gas properties are the primary use of our capital resources. During the ~~three~~six months ended ~~March 31,~~June 30, 2022, we spent approximately ~~$3.2~~$6.5 million on capital ~~expenditures.~~expenditures and acquisitions.

The amount and allocation of our future capital expenditures will depend upon a number of factors, including our cash flows from operating, investing, and financing activities, our ability to execute our development program, and the number and size of acquisitions that we complete. In addition, the impact of oil and gas, prices on investment opportunities, the availability of capital, tax law changes, and the timing and results of our development activities may lead to changes in funding requirements for future development. We periodically review our capital expenditure budget to assess if changes are necessary based on current and projected cash flows, acquisition and divestiture activities, and other factors. Our 2022 capital program is expected to be approximately ~~$12 million.~~$20 million of which we have spent approximately $17 million through August 10, 2022. We will continue to monitor the economic environment through the remainder of the year and adjust our activity level as warranted.

Cash Flows

The following table summarizes our cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021:

	Three months ended March 31,									Six months ended June 30,
	2022			2021			Change			2022			2021			Change
	(in thousands)									(in thousands)
Net cash provided by (used in):
Operating activities	$	487		$	(536	)	$	1,023		$	3,662		$	(591	)	$	4,253
Investing activities		(3,253	)		(326	)		(2,927	)		(5,170	)		(877	)		(4,293	)
Financing activities		(209	)		5,244			(5,453	)		(447	)		5,196			(5,643	)

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Operating Activities. Cash provided by operating activities for the ~~three~~six months ended ~~March 31,~~June 30, 2022 was ~~$0.5~~$3.7 million as compared to cash used in operating activities ~~$0.5~~of $0.6 million for the comparable period in 2021. The increase in cash provided by operating activities is mainly attributable to cash receipts for revenues, which were partially offset by settlements of commodity derivative contracts and increases in payments for operating and general and administrative expenses.

Investing Activities. Cash used in investing activities for the ~~three~~six months ended ~~March 31,~~June 30, 2022, was ~~$3.3~~$5.2 million as compared to ~~$0.3~~$0.9 million for the comparable period in 2021. The primary use of cash in our investing activities for the ~~three~~six months ended ~~March 31,~~June 30, 2022, was the capital expenditures related to returning idle wells to production on assets acquired during the ~~period.~~period and acquisitions of oil and gas producing properties.

Financing Activities. Cash used in financing activities for the ~~three~~six months ended ~~March 31,~~June 30, 2022, was ~~$0.2~~$0.4 million as compared to cash provided by financing activities of $5.2 million for the comparable period in 2021. The cash used in financing activities during the ~~three~~six months ended ~~March 31,~~June 30, 2022, was primarily attributable to a cash dividend of $0.6 million paid to common stockholders, cash paid to settle taxes on share-based compensation of ~~$307 thousand~~$0.3 million and payments on our insurance premium finance note payable of ~~$78 thousand,~~$0.2 million, which were partially offset by net borrowings under our Credit Agreement of $0.5 million and cash proceeds of ~~$195 thousand~~$0.2 million received from the exercise of warrants. Cash provided by financing activities during the ~~three~~six months ended ~~March 31,~~June 30, 2021, ~~represent~~represents cash received from the sale of 1.1 million shares of common stock of $5.3 million.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We are required to maintain disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure

As of ~~March 31,~~June 30, 2022, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the results of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls were not effective as of ~~March 31,~~June 30, 2022 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Such determination was made in part on material weaknesses in our internal control over financial reporting as of December 31, 2021, as discussed below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 28, 2022, in connection with our assessment of the effectiveness of our internal control over financial reporting at the end of our last fiscal year, management identified the following material weaknesses in our internal control over financial reporting as of December 31, 2021 and is in the process of remediating such material weaknesses as of ~~March 31,~~June 30, 2022:

●

We had inadequate segregation of duties as a result of limited accounting staff and resources, which may impact our ability to prevent or detect material errors in our consolidated financial statements.

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	●	We had inadequate segregation of duties related to logical access to our accounting systems, which may affect our ability to prevent or detect material errors in the recorded transactions.
	●	We did not have adequate controls to ensure the accuracy of the disclosures related to the accounting for and valuation of the acquisition completed subsequent to year end.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting.

~~Beginning~~Except as disclosed below there were no changes in our internal control over financial reporting during the three months ended June 30, 2022, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting, except that beginning in January 2022 and continuing through ~~March~~August 10, 2022, we have added ~~three~~four additional experienced accounting personnel, including a controller and an assistant controller and have implemented a new accounting system. We ~~are~~have also ~~working towards segregation~~engaged a third-party consulting firm that specializes in risk assessment, documentation of ~~duties~~policies and procedures and testing of controls to assist in the design, implementation and testing of our internal controls, which may help remediate the material weakness related to inadequate segregation of duties as discussed above.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

Prior litigation which has been settled to date, is described in, and incorporated by reference in, this “Item 1. Legal Proceedings” of this Quarterly Report on Form 10-Q from, Note 8-Commitments, Contingencies and Related-Party Transactions-Litigation in the Notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 28, 2022, under the heading “Item 1A. Risk Factors”, which are incorporated by reference herein, except as discussed below, and investors should review the risks provided in the Annual Report and below, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Annual Report, under “Item 1A. Risk Factors”, and below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.

The following risk factors supplement the risk factors included in the Annual Report.

Our industry and the broader US economy have experienced higher than expected inflationary pressures in the first and second quarters of 2022, related to continued supply chain disruptions, labor shortages and geopolitical instability. Should these conditions persist our business, results of operations and cash flows could be materially and adversely affected.

The first and second quarters of 2022 have seen significant increases in the costs of certain materials, including steel, sand and fuel, as a result of availability constraints, supply chain disruption, increased demand, labor shortages associated with a fully employed US labor force, high inflation and other factors. Supply and demand fundamentals have been further aggravated by disruptions in global energy supply caused by multiple geopolitical events, including the ongoing conflict between Russia and Ukraine. Recent supply chain constraints and inflationary pressures may continue to adversely impact our operating costs and may negatively impact our ability to procure materials and equipment in a timely and cost-effective manner, if at all, which could result in reduced margins and production delays and, as a result, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

The conflict in Ukraine and related price volatility and geopolitical instability could negatively impact our business.

In late February 2022, Russia launched significant military action against Ukraine. The conflict has caused, and could intensify, volatility in natural gas, oil and NGL prices, and the extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time. We believe that the increase in crude oil prices during the first half of 2022 has partially been due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia. Any such volatility and disruptions may also magnify the impact of other risks described under “Risk Factors” in Item 1A of our 2021 Annual Report on Form 10-K.

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The Company’s operations could be disrupted by natural or human causes beyond its control.

The Company’s operations are subject to disruption from natural or human causes beyond its control, including risks from hurricanes, severe storms, floods, heat waves, other forms of severe weather, wildfires, ambient temperature increases, sea level rise, war, accidents, civil unrest, political events, fires, earthquakes, system failures, cyber threats, terrorist acts and epidemic or pandemic diseases such as the COVID-19 pandemic, some of which may be impacted by climate change and any of which could result in suspension of operations or harm to people or the natural environment, any of which could have a material adverse effect on the Company’s results of operations or financial condition.

Increasing attention to environmental, social, and governance (ESG) matters may impact our business. 

Increasing attention to ESG matters, including those related to climate change and sustainability, increasing societal, investor and legislative pressure on companies to address ESG matters, and potential customer use of substitutes to our products may result in increased costs, reduced demand for our products, reduced profits, increased investigations and litigation or threats thereof, negative impacts on our stock price and access to capital markets, and damage to our reputation. Increasing attention to climate change, for example, may result in demand shifts for our hydrocarbon products and additional governmental investigations and private litigation, or threats thereof, against the Company.

Economic uncertainty may affect our access to capital and/or increase the costs of such capital.

Global economic conditions continue to be volatile and uncertain due to, among other things, consumer confidence in future economic conditions, fears of recession and trade wars, the price of energy, fluctuating interest rates, the availability and cost of consumer credit, the availability and timing of government stimulus programs, levels of unemployment, increased inflation, and tax rates. These conditions remain unpredictable and create uncertainties about our ability to raise capital in the future. In the event required capital becomes unavailable in the future, or more costly, it could have a material adverse effect on our business, results of operations, and financial condition.

A sale of a substantial number of registered shares of common could cause the price of our common stock to decline and make it harder for us to sell equity in the future.

We have registered the resale of 19,905,736 shares of common stock pursuant to a Form S-3 Registration Statement, which shares of common stock represent approximately 77.5% of our outstanding shares of common stock. Such shares of common stock may be resold in the public market immediately without restriction. The registered shares represent a significant number of shares of our common stock, and if sold in the market all at once or at about the same time, could significantly depress the market price of our common stock during the period the registration statement remains effective and could also affect our ability to raise equity capital in the future at a time and price that we deem reasonable or appropriate.

Our stock price has historically been and is likely to continue to be, volatile.

Our stock is traded on The Nasdaq Capital Market under the symbol “USEG”. During the last 52 weeks, our common stock has traded as high as $13.92 per share and as low as $2.91 per share. We expect our common stock will continue to be subject to wide fluctuations as a result of a variety of factors, including factors beyond our control. These factors include:

	●	price volatility in the oil and natural gas commodities markets;
	●	variations in our drilling, recompletion and operating activity;
	●	relatively small amounts of our common stock trading on any given day;
	●	additions or departures of key personnel;
	●	legislative and regulatory changes; and
	●	changes in the national and global economic outlook.

The stock market has recently experienced significant price and volume fluctuations, and oil and natural gas prices have declined significantly. These fluctuations have particularly affected the market prices of securities of oil and natural gas companies like ours.

Our Certificate of Incorporation provides for indemnification of officers and directors at our expense and limits their liability, which may result in a major cost to us and hurt the interests of our stockholders because corporate resources may be expended for the benefit of officers or directors.

Our Certificate of Incorporation provides for indemnification as follows: “To the fullest extent permitted by applicable law, as the same exists or may hereafter be amended, the [Company] shall indemnify and hold harmless each person who is or was made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”) by reason of the fact that he or she is or was a director or officer of the [Company] or, while a director or officer of the [Company], is or was serving at the request of the [Company] as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, other enterprise or nonprofit entity, including service with respect to an employee benefit plan (an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent, or in any other capacity while serving as a director, officer, employee or agent, against all liability and loss suffered and expenses (including, without limitation, attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid in settlement) reasonably incurred by such indemnitee in connection with such proceeding. The [Company] shall to the fullest extent not prohibited by applicable law pay the expenses (including attorneys’ fees) incurred by an indemnitee in defending or otherwise participating in any proceeding in advance of its final disposition; provided, however, that, to the extent required by applicable law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking, by or on behalf of the indemnitee, to repay all amounts so advanced if it shall ultimately be determined that the indemnitee is not entitled to be indemnified under [the Certificate of Incorporation] or otherwise.”

Our obligation to indemnify our officers and directors may discourage stockholders from bringing a lawsuit against our officers or directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against our officers and directors, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against our officers and directors pursuant to these indemnification provisions.

We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially reduce the market and price for our shares.

Our Certificate of Incorporation contains a specific provision that limits the liability of our directors for monetary damages to the Company and the Company’s stockholders and requires us, under certain circumstances, to indemnify officers, directors and employees.

The limitation of monetary liability against our directors, officers and employees under Delaware law and the existence of indemnification rights to them may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.

Our Certificate of Incorporation contains a specific provision that limits the liability of our directors for monetary damages to the Company and the Company’s stockholders, including as a result of a breach of their fiduciary duties, except to the extent such exception from liability is not permitted under Delaware General Corporation Law. We also have contractual indemnification obligations under our employment and engagement agreements with our executive officers and directors, as well as pursuant to indemnification agreements. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against our directors and officers, which the Company may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against our directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers, even though such actions, if successful, might otherwise benefit us and our stockholders.

Anti-takeover provisions may impede the acquisition of the Company.

Certain provisions of the Delaware General Corporation Law (DGCL) have anti-takeover effects and may inhibit a non-negotiated merger or other business combination, notwithstanding the fact that our Certificate of Incorporation provides that we are not subject to Section 203 of the DGCL, which relates to certain restrictions on business combinations with interested stockholders. These provisions are intended to encourage any person interested in acquiring the Company to negotiate with, and to obtain the approval of, our directors, in connection with such a transaction. As a result, certain of these provisions may discourage a future acquisition of the Company, including an acquisition in which the stockholders might otherwise receive a premium for their shares. In addition, we can also authorize “blank check” preferred stock, which could be issued by our Board of Directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock.

Anti-takeover provisions in our Certificate of Incorporation and our Amended and Restated Bylaws, as well as provisions of Delaware law, might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our Certificate of Incorporation and Amended and Restated Bylaws and Delaware law contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or delay attempts by our stockholders to replace or remove our management. Our corporate governance documents include provisions:

	●	a classified board of directors, as a result of which our board of directors is divided into three classes, with each class serving for staggered three-year terms;

	●	the removal of directors only for cause;

	●	requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors;

	●	authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock; and

	●	limiting the liability of, and providing indemnification to, our directors and officers.

Any provision of our Certificate of Incorporation or Amended and Restated Bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

Our Certificate of Incorporation contains exclusive forum provisions that may discourage lawsuits against us and our directors and officers.

Our Certificate of Incorporation provides that unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware, will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim for breach of a fiduciary duty owed by any current or former director, officer, employee or stockholder of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our Certificate of Incorporation or Bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine.

The choice of forum provision in our Certificate of Incorporation does not waive our compliance with our obligations under the federal securities laws and the rules and regulations thereunder. Moreover, the provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act or by the Securities Act. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts with respect to suits brought to enforce a duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, both state and federal courts have jurisdiction to entertain claims under the Securities Act.

Notwithstanding the above, to prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our Certificate of Incorporation provides that unless the Company consents, the U.S. federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. However, there is uncertainty as to whether a court would enforce such a provision. While the Delaware courts have determined that choice of forum provisions of the type included in our Certificate of Incorporation are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in our exclusive forum provision. In such instance, to the extent applicable, we would expect to vigorously assert the validity and enforceability of our exclusive forum provision. This may require additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.

These exclusive forum provisions may limit the ability of the Company’s stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with the Company or the Company’s directors or officers, which may discourage such lawsuits against the Company and the Company’s directors and officers. Alternatively, if a court were to find one or more of these exclusive forum provisions inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions or forums, which could materially and adversely affect our business, financial condition, or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Sales of Unregistered Securities

There have been no sales of unregistered securities during the quarter ended ~~March 31,~~June 30, 2022, and from the period from ~~April~~July 1, 2022, to the filing date of this ~~Report, which have not previously been disclosed in a Current Report on Form 8-K, except as set forth below:~~Report.

On March 11, 2022, a holder of warrants exercised warrants to purchase 50,000 shares of common stock with an exercise price of $3.92 per share, we received proceeds of $195 thousand and issued 50,000 shares of common stock.

~~We claim an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, for the above issuance in connection with the exercise.~~

~~Purchases of Equity Securities by the Issuer and Affiliated Purchasers~~

Under our Amended and Restated 2021 Equity Performance and Incentive Plan, the Company may permit an employee to satisfy minimum statutory federal, state and local tax withholding obligations arising from equity awards, including fully-vested and restricted stock awards, to elect to have the Company withhold otherwise deliverable restricted stock to satisfy such tax withholding obligation. The following table provides information with respect to shares withheld by the Company to satisfy these obligations to the extent permitted by the Company and requested by employees. These repurchases were not part of any publicly announced stock repurchase program.

Period No. of
Shares Average
Price

January 1 – January 31, 2022 81,725 $ 3.76
February 1 – February 28, 2022 - $ -
March 1 – March 31, 2021 - $ -

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits

Incorporated by Reference
Exhibit
No. Description Form File No. Exhibit
Filing Date
Filed/Furnished
Herewith
2.1+ Purchase and Sale Agreement between among Lubbock Energy Partners, LLC, as seller, and U.S. Energy Corp., as purchaser, dated as of October 4, 2021 8-K 000-06814 2.1 10/4/2021
2.2+ Purchase and Sale Agreement between among Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC, as sellers, and U.S. Energy Corp., as purchaser, dated as of October 4, 2021 8-K 000-06814 2.2 10/4/2021
2.3+ Purchase and Sale Agreement between among Synergy Offshore, LLC, as seller, and U.S. Energy Corp., as purchaser, dated as of October 4, 2021 8-K 000-06814 2.3 10/4/2021
2.4 First Amendment to Purchase and Sale Agreements between Lubbock Energy Partners, LLC; Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC; Synergy Offshore, LLC, and U.S. Energy Corp., dated as of October 25, 2021 8-K 000-06814 2.4 10/27/2021
3.1 Amended and Restated Bylaws of U.S. Energy Corp. 8-K 000-06814 3.1 1/10/2022
10.1 Registration Rights Agreement dated January 5, 2022, by and between U.S. Energy Corp., Banner Oil & Gas, LLC, Woodford Petroleum, LLC, Llano Energy LLC, Lubbock Energy Partners LLC and Synergy Offshore LLC 8-K 000-06814 10.1 1/10/2022
10.2 Nominating and Voting Agreement dated January 5, 2022, by and between U.S. Energy Corp., Banner Oil & Gas, LLC, Woodford Petroleum, LLC, Llano Energy LLC, Lubbock Energy Partners LLC and Synergy Offshore LLC 8-K 000-06814 10.2 1/10/2022
10.3 Contribution Agreement dated January 5, 2022, by and between U.S. Energy Corp., Banner Oil & Gas, LLC, Woodford Petroleum, LLC, Llano Energy LLC, Lubbock Energy Partners LLC and Synergy Offshore LLC 8-K 000-06814 10.3 1/10/2022
10.4+ Farmout Agreement dated January 5, 2022, by and between U.S. Energy Corp. and Synergy Offshore LLC 8-K 000-06814 10.4 1/10/2022
10.5+ Transition Services Agreement dated January 5, 2022, by and between Banner Oil & Gas, LLC and U.S. Energy Corp. 8-K 000-06814 10.5 1/10/2022
10.6 Credit Agreement dated as of January 5, 2022, among U.S. Energy Corp., as borrower, Firstbank Southwest, as Administrative Agent and the Lenders party thereto 8-K 000-06814 10.6 1/10/2022
10.7 Note dated January 5, 2022 in connection with January 5, 2022, Credit Agreement 8-K 000-06814 10.7 1/10/2022
10.8 Unconditional Guaranty dated January 5, 2022, by and between Firstbank Southwest and Energy One LLC, New Horizon Resources LLC and BOG – OSAGE, LLC 8-K 000-06814 10.8 1/10/2022
10.9+ Security Agreement dated January 5, 2022, by and between U.S. Energy Corp., Energy One LLC, New Horizon Resources LLC and BOG – OSAGE, LLC and Firstbank Southwest 8-K 000-06814 10.9 1/10/2022
10.10 Intercreditor Agreement dated January 5, 2022, by and between Nextera Energy Marketing, LLC, each Swap Counterparty thereto, U.S. Energy Corp. and Firstbank Southwest 8-K 000-06814 10.10 1/10/2022

10.11

ISDA 2002 Master Agreement between Nextera Energy Marketing, LLC and U.S. Energy Corp., and related Schedule and form of Guaranty.

8-K

000-06814

10.11

1/10/2022

10.12†

Form of U.S. Energy Corp. Notice of Restricted Stock Grant and Restricted Stock Grant Agreement (2021 Equity Incentive Plan)(officer and employee awards – January 2022)

8-K

000-06814

10.12

1/21/2022

10.13†

Form of U.S. Energy Corp. Notice of Restricted Stock Grant and Restricted Stock Grant Agreement (2021 Equity Incentive Plan)(non-executive director awards – January 2022)

8-K

000-06814

10.13

1/21/2022

Incorporated by Reference

Exhibit No.

Description

Form

File No.

Exhibit

Filing Date

Filed/Furnished Herewith

3.1

Certificate of Conversion, filed with the Secretary of State of Delaware and effective August 3, 2022

8-K

000-06814

3.1

8/4/2022

3.2

Certificate of Incorporation of U.S. Energy Corp, Delaware, filed with the Secretary of State of Delaware and effective, August 3, 2022

8-K

000-06814

3.2

8/4/2022

3.3

Amended and Restated Bylaws of U.S. Energy Corp, Delaware, effective August 3, 2022

8-K

000-06814

3.3

8/4/2022

3.4

Wyoming Certificate of Transfer, effective August 3, 2022

8-K

000-06814

3.4

8/4/2022

10.1†

May 5, 2022 Employment Agreement between U.S. Energy Corp. and Ryan L. Smith

8-K

000-06814

10.1

5/5/2022

10.2†

U.S. Energy Corp. 2022 Equity Incentive Plan

8-K

000-06814

10.1

6/21/2022

10.3#

Purchase and Sale Agreement dated June 29, 2020, by and among U.S. Energy Corp, as Buyer, and ETXENERGY, LLC, as Seller.

8-K

000-06814

10.1

6/30/2022

10.4

Borrowing Base Increase Letter Agreement dated July 26, 2022, between U.S. Energy Corp. and Firstbank Southwest, as Administrative Agent

8-K

000-06814

10.3

7/28/2022

31.1*

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1♦

Certification of Chief Executive Officer and Chief Financial Officer under Rule 13a-14(b)

99.1

Plan of Conversion of U.S. Energy Corp. (a Wyoming corporation) to U.S. Energy Corp. (a Delaware corporation), dated July 27, 2022 and effective August 3, 2022

8-K

000-06814

99.1

8/4/2022

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH*

XBRL Schema Document

101.CAL*

XBRL Calculation Linkbase Document

101.DEF*

XBRL Definition Linkbase Document

101.LAB*

XBRL Label Linkbase Document

101.PRE*

XBRL Presentation Linkbase Document

104*

Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set

*	Filed herewith.

†	Exhibit constitutes a management contract or compensatory plan or agreement.

♦	Furnished herewith.

+# Certain schedules, exhibits, annexes, and ~~exhibits~~similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request; provided, however, that U.S. Energy Corp. may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so ~~furnished.~~furnished

3236

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	U.S. ENERGY CORP.

Date: ~~May 12,~~August 11, 2022	By:	/s/ Ryan L. Smith
		RYAN L. SMITH, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)

3337

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

Period	No. of Shares		Average Price

January 1 – January 31, 2022		81,725	$	3.76
February 1 – February 28, 2022		-	$	-
March 1 – March 31, 2021		-	$	-