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 June 30, 2023

	or

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

	For the transition period from _____________ to _____________________

Commission File Number 000-06814

(Exact Name of Registrant as Specified in its Charter)

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

1616 S. Voss Road, Suite 725, Houston, Texas		77057
(Address of principal executive offices)		(Zip Code)

(346) 509-8734

(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 25,506,570 shares of its common stock, par value $0.01 per share, outstanding as of August 14, 2023.

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 Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29

Part II.	OTHER INFORMATION	30

Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32

Signatures		33

CAUTIONARY STATEMENT REGARDING 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, wars and increased inflation and interest rates, and possible recessions caused thereby;
	●	the effects of global pandemics 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, 2022, and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC” or the “Commission”). Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above.

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)

	June 30, 2023			December 31, 2022

ASSETS
Current assets:
Cash and equivalents	$	1,175		$	4,411
Oil and natural gas sales receivable		2,714			3,193
Marketable equity securities		91			107
Other current assets		973			558
Commodity derivative asset-current		8			-
Real estate assets held for sale, net of selling costs		175			175

Total current assets		5,136			8,444

Oil and natural gas properties under full cost method:
Unevaluated properties		1,584			1,584
Evaluated properties		205,463			203,144
Less accumulated depreciation, depletion and amortization		(101,391	)		(96,725	)

Net oil and natural gas properties		105,656			108,003

Property and equipment, net		913			651
Right-of-use asset		773			868
Other assets		330			354

Total assets	$	112,808		$	118,320

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	8,464		$	7,832
Accrued compensation and benefits		611			1,111
Commodity derivative liability-current		-			1,694
Asset retirement obligations-current		668			668
Current lease obligation		176			189

Total current liabilities		9,919			11,494

Credit facility		12,000			12,000
Asset retirement obligations- noncurrent		15,226			14,774
Long-term lease obligation, net of current portion		704			794
Deferred tax liability		610			898
Other noncurrent liabilities		6			6

Total liabilities		38,465			39,966

Commitments and contingencies (Note 8)		-			-

Shareholders’ equity:
Common stock, $0.01 par value; 245,000,000 shares authorized; 25,071,372 and 25,023,812 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		251			250
Additional paid-in capital		217,632			216,690
Accumulated deficit		(143,540	)		(138,586	)

Total shareholders’ equity		74,343			78,354

Total liabilities and shareholders’ equity	$	112,808		$	118,320

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 JUNE 30, 2023 AND 2022

(In thousands, except share and per share amounts)

	2023			2022			2023			2022
	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022

Revenue:
Oil	$	7,028		$	11,334		$	14,124		$	19,167
Natural gas and liquids		950			2,146			2,127			3,185
Total revenue		7,978			13,480			16,251			22,352

Operating expenses:
Lease operating expenses		3,877			4,646			8,400			7,382
Production taxes		538			913			1,058			1,485
Depreciation, depletion, accretion and amortization		2,896			2,571			5,313			4,457
General and administrative expenses		3,368			2,642			6,140			5,588
Total operating expenses		10,679			10,772			20,911			18,912

Operating income (loss)		(2,701	)		2,708			(4,660	)		3,440

Other non-operating income (expense):
Commodity derivative gain (loss)		288			(2,132	)		1,208			(8,969	)
Marketable equity securities loss		(16	)		(121	)		(16	)		(40	)
Other expense, net		(6	)		(5	)		(6	)		(6	)
Interest expense, net		(289	)		(60	)		(558	)		(108	)
Total other non-operating income (expense)		(23	)		(2,318	)		628			(9,123	)

Net income (loss) before income taxes	$	(2,724	)	$	390		$	(4,032	)	$	(5,683	)
Income tax (expense) benefit		209			(268	)		270			2,421
Net income (loss)	$	(2,515	)	$	122		$	(3,762	)	$	(3,262	)
Basic weighted shares outstanding		25,186,797			24,923,812			25,182,704			24,323,859
Diluted weighted shares outstanding		25,186,797			25,265,180			25,182,704			24,323,859
Basic earnings (loss) per share	$	(0.10	)	$	0.00		$	(0.15	)	$	(0.13	)
Diluted earnings (loss) per share	$	(0.10	)	$	0.00		$	(0.15	)	$	(0.13	)

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 SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(in thousands, except share amounts)

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

Balances, December 31, 2021		4,676,301		$	47		$	149,276		$	(135,888	)	$	13,435
Shares issued for acquired properties		19,905,736			199			64,495						64,694
Stock-based compensation		-			-			1,500						1,500
Shares issued upon vesting of restricted stock awards		373,500			4			(4	)		-			-
Shares withheld to settle tax withholding obligations for restricted stock awards		(81,725	)		(1	)		(306	)		-			(307	)
Exercise of warrants		50,000			-			213			-			213
Net loss		-			-			-			(3,384	)		(3,384	)
Balances, March 31, 2022		24,923,812		$	249		$	215,174		$	(139,272	)	$	76,151
Cash dividends, $0.0225 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

Balances, December 31, 2022		25,023,812		$	250		$	216,690		$	(138,586	)	$	78,354
Stock-based compensation		-			-			727			-			727
Shares issued upon vesting of restricted stock awards		273,000			3			(3	)		-			-
Shares withheld to settle tax withholding obligations for restricted stock awards		(62,140	)		(1	)		(149	)		-			(150	)
Cash dividends $0.0225 per share											(596	)		(596	)
Net loss		-			-			-			(1,247	)		(1,247	)
Balances, March 31, 2023		25,234,672		$	252		$	217,265		$	(140,429	)	$	77,088
Balances		25,234,672		$	252		$	217,265		$	(140,429	)	$	77,088
Stock-based compensation		-			-			607			-			607
Cash dividends, $0.0225 per share		-			-			-			(596	)		(596	)
Cash dividends, per share		-			-			-			(596	)		(596	)
Share repurchases		(163,300	)		(1	)		(240	)					(241	)
Net loss		-			-			-			(2,515	)		(2,515	)
Balances, June 30, 2023		25,071,372		$	251		$	217,632		$	(143,540	)	$	74,343
Balances		25,071,372		$	251		$	217,632		$	(143,540	)	$	74,343

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 SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(in thousands)

	2023			2022

Cash flows from operating activities:
Net loss	$	(3,762	)	$	(3,262	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion, accretion, and amortization		5,313			4,457
Deferred income taxes		(288	)		(2,460	)
Total commodity derivative (gains) losses, net		(1,208	)		8,969
Commodity derivative settlements paid		(494	)		(4,487	)
Loss on marketable equity securities		16			40
Amortization of debt issuance costs		24			20
Stock-based compensation		1,334			2,109
Right of use asset amortization		95			75
Changes in operating assets and liabilities:
Oil and natural gas sales receivable		479			(5,198	)
Other assets		240			(192	)
Accounts payable and accrued liabilities		314			4,315
Accrued compensation and benefits		(500	)		(675	)
Payments on operating lease liability		(102	)		(49	)
Payments on asset retirement obligations		(52	)		-

Net cash provided by operating activities		1,409			3,662

Cash flows from investing activities:
Acquisition of proved properties		-			(4,383	)
Oil and natural gas capital expenditures		(2,402	)		(1,131	)
Expenditures for pending acquisitions		-			(592	)
Property and equipment expenditures		(373	)		(295	)
Proceeds from sale of oil and gas properties		-			1,231

Net cash used in investing activities		(2,775	)		(5,170	)

Cash flows from financing activities:
Borrowings on credit facility		-			4,500
Repayment of debt		-			(3,847	)
Payment of fees for credit facility		-			(174	)
Repayments of insurance premium finance note payable		(286	)		(236	)
Exercise of warrant		-			195
Shares withheld to settle tax withholding obligations for restricted stock awards		(151	)		(307	)
Dividends paid		(1,192	)		(578	)
Repurchases of common stock		(241	)		-

Net cash used in financing activities		(1,870	)		(447	)

Net decrease in cash and equivalents		(3,236	)		(1,955	)

Cash and equivalents, beginning of period		4,411			4,422

Cash and equivalents, end of period	$	1,175		$	2,467

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Please see Note-15- 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 (“New Horizon Resources”), referred to as the “Company” in these Notes to Unaudited Condensed Consolidated Financial Statements) is incorporated in the State of Delaware. The Company’s principal business activities are focused on the acquisition and development of onshore oil and natural gas properties in the United States, which the Company considers a single operating segment. Our principal properties and operations are in the Rockies region (Montana, Wyoming and North Dakota), the Mid-Continent (Oklahoma, Kansas and North and East Texas), and the West Texas, South Texas, and Gulf Coast regions.

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 condensed 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, 2022, as filed with the SEC on April 13, 2023. Our financial condition as of June 30, 2023, and operating results for the three and six months ended June 30, 2023, 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, 2023.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of oil and gas properties acquired, 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; future prices of commodities used in the valuation of commodity derivative contracts; and the cost and timing 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.

Recently Adopted Accounting Standards

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 to Topic 326, Financial Instruments-Credit Losses, as amended by other related ASUs that provided targeted improvements. The standard changes the impairment model for trade receivables and other financial assets measured at amortized cost. This ASU requires the use of a new forward-looking “expected loss” model compared to the previous “incurred loss” model, resulting in accelerated recognition of credit losses. This ASU primarily applies to the Company’s accounts receivable balances, of which the majority are received within a short-term period of one to three months. The Company monitors the credit quality of its counterparties through review of collections, credit ratings, and other analyses. The Company develops its estimated allowance for credit losses primarily using an aging method and analyses of historical loss rates as well as consideration of current and future conditions that could impact its counterparties’ credit quality and liquidity. The adoption and implementation of this ASU did not have a material impact on the Company’s financial statements.

Principles of Consolidation

The accompanying financial statements have been prepared in conformity with GAAP and include the accounts of U.S. Energy Corp. and its wholly-owned subsidiaries Energy One and New Horizon Resources. U.S. Energy Corp. accounts for its share of oil and gas exploration and production activities, in which it has a direct working interest, by reporting its proportionate share of assets, liabilities, revenues, costs, and cash flows within the relevant lines on the balance sheets, statements of operations, and statements of cash flows. All inter-company balances and transactions have been eliminated in consolidation.

2. ACQUISITIONS

January 2022 Acquisition

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

The Company accounted for the acquisition of the Acquired Assets as an asset acquisition. The purchase price for the Acquired Assets was (a) $125,000 in cash and 6,568,828 shares of our common stock, as to Lubbock; (b) $1,000,000 in cash, the assumption of $3.3 million of debt, and 6,790,524 shares of common stock, as well as the novation of certain hedges which had a mark to market loss of approximately $3.1 million as of the Closing Date, as to Banner; and (c) $125,000 in cash and 6,546,384 shares of common stock, as to Synergy. The aggregate purchase price under all the Purchase Agreements was $66.4 million, representing $1.25 million in cash, the value of 19,905,736 shares of our common stock on the Closing Date of $64.7 million and purchase price adjustments of $0.5 million. In addition, we assumed various liabilities, including the repayment of $3.3 million in debt, as well as a derivative liability from the novation of the hedges discussed above of $3.1 million, suspense accounts and asset retirement obligations.

	Amount
	(in thousands)
Amounts incurred as of the Closing Date:
Cash	$	1,250
Value of 19,905,736 shares issued		64,694
Purchase price adjustments		487
Transaction costs		1,267
Total consideration paid		67,698

Debt assumed		3,347
Commodity derivative liabilities assumed		3,152
Suspense accounts assumed		1,276
Employee obligations assumed		100
Asset retirement obligations assumed		9,614
Deferred tax liabilities		2,819
Total liabilities assumed		20,308

Total consideration paid and liabilities assumed	$	88,006

Allocation to acquired assets:
Proved oil and gas properties⁽¹⁾		87,672
Vehicles		165
Deposit account		169

Total allocation to acquired assets	$	88,006

⁽¹⁾

Included in the above purchase price adjustments is settlement for oil in temporary storage in tank batteries at the leases. The Company does not separately account for oil in temporary storage until the oil is sold and title transfers to the purchaser. Consistent with the Company’s accounting policy and reporting of similar transactions this amount was recorded within Evaluated Properties on the Company’s condensed consolidated balance sheet.

Liberty County, Texas Acquisition

On May 3, 2022, the Company acquired certain 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 July 27, 2022, the Company closed a purchase and sale agreement for the acquisition of properties from ETXENERGY, LLC (“ETXENERGY”). The properties are located in Henderson and Anderson Counties, Texas (the “East Texas Assets”). The properties consist of approximately 16,600 net acres, all of which are held by production and certain wells and gathering systems. The initial purchase price for the East Texas Assets was $11.9 million in cash. The effective date of the acquisition of the East Texas Assets was June 1, 2022. The Company accounted for the acquisition as an asset acquisition.

	Amount
	(in thousands)
Amounts incurred as of the closing date:
Cash	$	11,875
Purchase price adjustments		(1,048	)
Transaction costs		63
Total consideration paid		10,890

Suspense accounts assumed		380
Asset retirement obligations assumed		1,689
Total liabilities assumed		2,069

Total consideration paid and liabilities assumed	$	12,959

Allocation to acquired assets:
Proved oil and gas properties	$	12,959

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 does not separately account for oil in temporary storage at the site of production prior to its transfer to the purchaser. 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 its proportionate share of the gross amount received from the purchasers before taking into account transportation costs. Production taxes are reported separately, and transportation costs are included in lease operating expense in the accompanying condensed consolidated statements of operations.

The 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. 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. 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 expected to be, 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 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 and Gulf Coast, and Mid-Continent regions for the three and six months ended June 30, 2023 and 2022, are presented in the following table:

SCHEDULE OF DISAGGREGATED REVENUE

	2023		2022		2023		2022
	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(in thousands)
Revenue:
Rockies
Oil	$	2,470	$	4,587	$	4,808	$	7,978
Natural gas and liquids		128		343		216		536
Total	$	2,598	$	4,930	$	5,024	$	8,514

West Texas, South Texas, and Gulf Coast
Oil	$	3,022	$	4,823	$	5,978	$	8,604
Natural gas and liquids		112		475		321		680
Total	$	3,134	$	5,298	$	6,299	$	9,284

Mid-Continent
Oil	$	1,536	$	1,825	$	3,338	$	2,584
Natural gas and liquids		710		1,427		1,590		1,970
Total	$	2,246	$	3,252	$	4,928	$	4,554

Combined Total	$	7,978	$	13,480	$	16,251	$	22,352

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:

	2023			2022
	Six Months Ended June 30,
	2023			2022
Purchaser A		23	%		23	%
Purchaser B		18	%		22	%
Concentration risk percentage		18	%		22	%

4. LEASES

The Company’s operating lease right-of-use assets and lease liabilities are recognized at their discounted present value under the following captions in the condensed consolidated balance sheets at June 30, 2023 and December 31, 2022:

SCHEDULE OF CONSOLIDATED BALANCE SHEET

	June 30, 2023		December 31, 2022
	(in thousands)
Right-of-use assets	$	773	$	868
Lease liabilities
Current lease obligation	$	176	$	189
Long-term lease obligation		704		794
Total lease liabilities	$	880	$	983

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 cost represents payments for office leases with original terms less than one year. Beginning in March 2020, the Company subleased its Denver, Colorado office and recognized sublease income as a reduction of rent expense. The term of the sublease was through the term of the Company’s Denver office lease, which terminated on January 31, 2023. Following are the amounts recognized as components of rental expense for the three and six months ended June 30, 2023 and 2022:

SCHEDULE OF LEASE COSTS

	2023		2022			2023		2022
	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023		2022
	(in thousands)
Operating lease cost	$	49	$	69		$	114	$	100
Short-term lease cost		184		2			453		4
Sublease income		-		(17	)		-		(33	)
Total lease costs	$	233	$	54		$	567	$	71

The Company’s Houston office operating lease does 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 June 30,
	2023			2022
	(in thousands)
Weighted average lease term (years)		4.4			5.1
Weighted average discount rate		4.25	%		4.60	%

Maturity of operating lease liabilities with terms of one year or more as of June 30, 2023 are presented in the following table:

	June 30, 2023
	(in thousands)
2023	$	105
2024		213
2025		218
2026		224
2027		210
Total lease payments	$	970
Less: imputed interest		(90	)
Total lease liability	$	880

5. OIL AND NATURAL GAS PRODUCTION ACTIVITIES

Divestitures

During the six months ended June 30, 2023 there were no divestitures of oil and gas properties. During the six months ended June 30, 2022, 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 the sale of the Wildhorse Waterflood Unit were $1.2 million. In addition, in December 2022, the Company sold its approximately 30% interest in two non-operated wells in Zavala County, Texas and associated acreage of approximately 4,500 acres for $1.1 million. The proceeds from divestitures are recorded as reductions in the full cost pool.

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