NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
and Operations
U.S.
Energy Corp. (collectively with its wholly owned subsidiaries, is referred to as the “Company” in these Notes to Unaudited
Condensed Consolidated Financial Statements) was incorporated in the State of Wyoming on January 26, 1966. The Company’s
principal business activities are focused on the acquisition, exploration and development of oil and natural gas properties in
the United States.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements are presented in accordance with U.S. generally accepted accounting
principles (“GAAP”) and have been prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote
disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and
regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for
a fair presentation of the consolidated financial statements have been included.
For
further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2019. Our financial condition as of March 31, 2020, and operating results for the three months
ended March 31, 2020, are not necessarily indicative of the financial condition and results of operations that may be expected
for any future interim period or for the year ending December 31, 2020.
Reverse
Stock Split
On
January 6, 2020, the Company completed a one-for-ten reverse stock split (the “Reverse Split”) with respect to the
Company’s common stock. For purposes of presentation, the unaudited condensed consolidated financial statements and footnotes
have been adjusted for the number of post-split shares as if the split had occurred at the beginning of earliest period presented.
Liquidity
and Resources
Commodity
prices have declined significantly since early March 2020. While the Company expects to experience a decrease in its oil and natural
gas revenue, it believes that its existing cash and capital resources and its forecasted low overhead costs going forward have
given it the ability to continue as a going concern and the Company expects that it will be able to fund operations for the next
twelve months.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates include oil and natural gas
reserves that are used in the calculation of depreciation, depletion, amortization and impairment of the carrying value of evaluated
oil and natural gas properties; realizability of unevaluated properties; production and commodity price estimates used to record
accrued oil and natural gas sales receivables; valuation of warrant instruments; valuation of assets acquired and liabilities
assumed in business combinations and the cost of future asset retirement obligations. The Company evaluates its estimates on an
on-going basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable.
Due to inherent uncertainties, including the future prices of oil and natural gas, these estimates could change in the near term
and such changes could be material.
Principles
of Consolidation
The
accompanying financial statements include the accounts of U.S. Energy Corp. and its wholly owned subsidiaries. All inter-company
balances and transactions have been eliminated in consolidation.
Recently
Adopted Accounting Pronouncements
Fair
Value Measurements. In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurements. The ASU amends the disclosure requirements in Topic 820, Fair Value Measurements. The
amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. The Company adopted this ASU as of January 1, 2020. The adoption resulted in a change to the disclosures
for the valuation process of Level 3 fair value measurements.
2.
ACQUISITION OF NEW HORIZON RESOURCES
On
March 1, 2020, The Company acquired all of the issued and outstanding equity interests of New Horizon Resources LLC (“New
Horizon”). Its assets include acreage and operated producing properties in North Dakota (the “Properties”).
The consideration paid at closing consisted of 59,498 shares of the Company’s common stock, $150,000 in cash and the assumption
of certain liabilities (the “Acquisition”). The Acquisition gives the Company operated properties in its core area
of operations. The Properties consist of nine gross wells (five net wells), and approximately 1,300 net acres located primarily
in McKenzie and Divide Counties, North Dakota, which are 100% held by production, average a 63% working interest and produced
approximately 30 net barrels of oil equivalent per day (88% oil) for the six-month period ended December 31, 2019.
|
|
Amount
|
|
|
|
(in thousands)
|
|
Fair value of net assets:
|
|
|
|
|
Proved
oil and natural gas properties
|
|
$
|
564
|
|
Other current assets
|
|
|
14
|
|
Other
long-term assets
|
|
|
58
|
|
Total assets acquired
|
|
|
636
|
|
Asset retirement
obligations
|
|
|
(163
|
)
|
Current payables
|
|
|
(50
|
)
|
Credit
facility
|
|
|
(61
|
)
|
Net assets acquired
|
|
$
|
362
|
|
Fair value of consideration
paid for net assets:
|
|
|
|
|
Cash consideration
|
|
$
|
150
|
|
Issuance of common stock (59,498 shares
at $4.04 per share)
|
|
|
240
|
|
Cash acquired
|
|
|
(28
|
)
|
Total fair value
of consideration transferred
|
|
$
|
362
|
|
For
the three months ended March 31, 2020, the Company recorded revenues of approximately $6 thousand and lease operating expenses
of approximately $4 thousand related to the New Horizon properties. Assuming that the acquisition of the New Horizon properties
had occurred on January 1, 2019, the Company would have recorded revenues of $32 thousand and expenses of $25 thousand for the
three months ended March 31, 2020, and revenues of $60 thousand and expenses of $21 thousand for the three months ended March
31, 2019. These results are not indicative of the results that would have occurred had the Company completed the acquisition on
the date indicated, or that would be attained in the future. Subsequent to the closing of the acquisition the Company repaid the
outstanding balance on the credit facility and the credit facility was closed.
3.
REVENUE RECOGNITION
The
Company’s revenues are derived from its interest in the sales of oil and natural gas production. Prior to the acquisition
of New Horizon, which was completed on March 1, 2020, all of the sales of oil and natural gas were made under contracts that third-party
operators of oil and natural gas wells have negotiated with customers. The Company receives payment from the sale of oil and natural
gas production between one to three months after delivery. At the end of each period when the performance obligation is satisfied,
the variable consideration can be reasonably estimated and amounts due from customers are accrued in oil and natural gas sales
receivable in the consolidated balance sheets. Variances between the Company’s estimated revenue and actual payments are
recorded in the month the payment is received; however, differences have been and are insignificant. Accordingly, the variable
consideration is not constrained. As a non-operator of its oil and natural gas properties, the Company records its share of the
revenues and expenses based upon the information provided by the operators within the revenue statements.
The
Company does not disclose the values of unsatisfied performance obligations under its contracts with customers as it applies the
practical exemption in accordance with ASC 606. The exemption applies to variable consideration that is recognized as control
of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future
volumes are wholly unsatisfied, and disclosure of the transaction price allocated to the remaining performance obligations is
not required.
The
Company’s oil and natural gas production is typically sold at delivery points to various purchasers under contract terms
that are common in the oil and natural gas industry. Regardless of the contract type, the terms of these contracts compensate
the well operators for the value of the oil and natural gas at specified prices, and then the well operators remit payment to
the Company for its share in the value of the oil and natural gas sold.
Generally,
the Company reports revenue as the gross amount received from the well operators before taking into account production taxes and
transportation costs. Production taxes are reported separately, and transportation costs are included in lease operating expense
in the accompanying condensed consolidated statements of operations. The revenues and costs in the condensed consolidated financial
statements were reported gross for the three months ended March 31, 2020, as the gross amounts were known.
The
following table presents our disaggregated revenue by major source and geographic area for the three months ended March 31, 2020
and 2019.
|
|
Three
Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Revenue:
|
|
|
|
North
Dakota
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
489
|
|
|
$
|
522
|
|
Natural
gas and liquids
|
|
|
49
|
|
|
|
51
|
|
Total
|
|
$
|
538
|
|
|
$
|
573
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
366
|
|
|
$
|
893
|
|
Natural
gas and liquids
|
|
|
19
|
|
|
|
95
|
|
Total
|
|
$
|
385
|
|
|
$
|
988
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
923
|
|
|
$
|
1,561
|
|
4.
LEASES
On
January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and recorded a $228 thousand right-of-use
asset and a $252 thousand lease liability representing the present value of minimum payment obligations associated with the Company’s
Denver office operating lease, which has non-cancellable terms in excess of one year. The Company does not have any financing
leases. The Company has elected the following practical expedients available under ASC 842 (i) excluding from the condensed consolidated
balance sheet leases with terms that are less than one year, (ii) for agreements that contain both lease and non-lease components,
combining these components together and accounting for them as a single lease, (iii) the package of practical expedients, which
allows the Company to avoid reassessing contracts that commenced prior to adoption that were properly evaluated under legacy GAAP,
and (iv) the policy election that eliminates the need for adjusting prior period comparable financial statements prepared under
legacy lease accounting guidance. As such, there was no required cumulative effect adjustment to accumulated deficit at January
1, 2019.
During
the three months ended March 31, 2020 and 2019, the Company did not acquire any right-of-use assets or incur any lease liabilities.
The Company’s right-of-use assets and lease liabilities are recognized at their discounted present value under the following
captions in the unaudited condensed consolidated balance sheet at March 31, 2020 and December 31, 2019:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
|
(in thousands)
|
|
Right of use asset balance
|
|
|
|
|
|
|
Operating
lease
|
|
$
|
167
|
|
|
$
|
179
|
|
Lease liability balance
|
|
|
|
|
|
|
|
|
Short-term operating lease
|
|
$
|
59
|
|
|
$
|
58
|
|
Long-term operating
lease
|
|
|
127
|
|
|
|
142
|
|
|
|
$
|
186
|
|
|
$
|
200
|
|
The
Company recognizes lease expense on a straight-line basis excluding short-term and variable lease payments which are recognized
as incurred. Short-term lease costs represent payments for our Houston office lease, which has a lease term of one year. Beginning
in March 2020, the Company subleased its Denver office and recognized sublease income.
|
|
Three
Months Ended
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
17
|
|
|
$
|
17
|
|
Short-term lease cost
|
|
|
4
|
|
|
|
4
|
|
Sublease income
|
|
|
(5
|
)
|
|
|
-
|
|
Total
lease cost
|
|
|
16
|
|
|
$
|
21
|
|
The
Company’s Denver office operating lease does not contain an implicit interest rate that can be readily determined. Therefore,
the Company used the incremental borrowing rate of 8.75% as established under the Company’s prior credit facility as the
discount rate.
|
|
Three
Months Ended
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Weighted average lease term (years)
|
|
|
2.8
|
|
|
|
3.8
|
|
Weighted average discount rate
|
|
$
|
8.75
|
%
|
|
|
8.75
|
%
|
The
future minimum lease commitments as of March 31, 2020 are presented in the table below. Such commitments are reflected at undiscounted
values and are reconciled to the discounted present value on the unaudited condensed consolidated balance sheet as follows:
|
|
Amount
|
|
|
|
|
(in
thousands)
|
|
Remainder of 2020
|
|
$
|
55
|
|
2021
|
|
|
75
|
|
2022
|
|
|
76
|
|
2023
|
|
|
6
|
|
Total lease payments
|
|
$
|
212
|
|
Less: imputed
interest
|
|
|
(26
|
)
|
Total lease liability
|
|
$
|
186
|
|
The
Company owns a 14-acre tract in Riverton, Wyoming with a two-story, 30,400 square foot office building, which served as the Company’s
corporate headquarters until it relocated to Denver, Colorado in 2015. Currently, the building’s eight office suites are
rented to non-affiliates and government agencies under operating leases with varying terms from month-to-month to twelve years.
The building is included in property and equipment, net on our condensed consolidated balance sheet. The net capitalized cost
of the building subject to operating leases at March 31, 2020 and December 31, 2019 is as follows:
|
|
March
31,
2020
|
|
|
December
31,
2019
|
|
|
|
(in thousands)
|
|
Building subject to operating
leases
|
|
$
|
4,012
|
|
|
$
|
4,012
|
|
Less: accumulated
depreciation
|
|
|
(3,269
|
)
|
|
|
(3,244
|
)
|
Building subject
to operating leases, net
|
|
$
|
743
|
|
|
$
|
768
|
|
The
future lease maturities of the Company’s operating leases as of March 31, 2020 are presented in the table below. Such maturities
are reflected at undiscounted values to be received on an annual basis.
|
|
Amount
|
|
|
|
(in
thousands)
|
|
Remainder
of 2020
|
|
$
|
119
|
|
2021
|
|
|
161
|
|
2022
|
|
|
165
|
|
2023
|
|
|
169
|
|
2024
|
|
|
163
|
|
Remaining
through June 2029
|
|
|
695
|
|
Total
lease maturities
|
|
$
|
1,472
|
|
The
Company recognized the following operating lease income related to its Riverton, Wyoming office building for the three months
ended March 31, 2020 and 2019:
|
|
Three
Months Ended
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Operating lease income
|
|
$
|
56
|
|
|
$
|
48
|
|
5.
OIL AND NATURAL GAS PRODUCTION ACTIVITIES
Ceiling
Test and Impairment
The
reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no influence
in the determination of present value. In the calculation of the ceiling test as of March 31, 2020, the Company used $55.77 per
barrel for oil and $2.30 per MMbtu for natural gas (as further adjusted for property, specific gravity, quality, local markets
and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used
was 10%.
There
was no impairment for the three-month periods ended March 31, 2020 and 2019 of the Company’s oil and natural gas properties.
Impairment charges in previous years are generally the result of declines in the price of oil and natural gas, additional capitalized
well costs and changes in production.
6.
DEBT
On
December 27, 2017, the Company entered into an exchange agreement (“Exchange Agreement”) by and among U.S. Energy
Corp., its wholly owned subsidiary, Energy One LLC (“Energy One”) and APEG Energy II, L.P. (“APEG II”),
pursuant to which, on the terms and subject to the conditions of the Exchange Agreement, APEG II exchanged $4.5 million of outstanding
borrowings under the Company’s credit facility for 581,927 newly-issued shares of common stock of the Company, par value
$0.01 per share, with an exchange price of $7.67, which represented a 1.3% premium over the 30-day volume weighted average price
of the Company’s common stock on September 20, 2017 (the “Exchange Shares”). Accrued, unpaid interest on the
credit facility held by APEG II was paid in cash at the closing of the transaction. At March 31, 2020, APEG II held approximately
42% of the Company’s outstanding common stock.
The
credit facility was fully repaid on March 1, 2019 and on July 30, 2019, matured and was terminated. Borrowings under the credit
facility were secured by Energy One’s oil and natural gas producing properties. Interest expense for the three months ended
March 31, 2019 was $20 thousand, including the amortization of debt issuance costs of $7 thousand. The weighted average interest
rate on the credit facility was 8.75% for the period until maturity in 2019. APEG II is involved in litigation with the Company
and its former Chief Executive Officer, as described in Note 8-Commitments, Contingencies and Related-Party Transactions.
7.
WRITE-OFF OF DEPOSIT
In
December 2017, the Company entered into a Letter of Intent (“LOI”) with Clean Energy Technology Association, Inc.
(“CETA”) to purchase an option to acquire 50 shares of CETA, or lease certain oil and natural gas properties inside
an area of mutual interest. The Company made a $250,000 option payment, which was refundable in the event that the Company and
CETA were unable to complete the transaction by August 1, 2018. In 2018, the Company paid an additional $124,000 to CETA. In September
2019, the Company issued CETA a demand letter requesting return of the amounts deposited. As of March 31, 2020, the Company has
received four payments from CETA totaling $200,000. In April 2020, the Company received another payment from CETA in the amount
of $25,000. While the Company is pursuing collection of $75,000 of the remaining deposit, the Company has established an allowance
of the amount due from CETA at March 31, 2020, due to the uncertainty of collection. See Note 8-Commitments, Contingencies
and Related-Party Transactions.
8.
COMMITMENTS, CONTINGENCIES AND RELATED-PARTY TRANSACTIONS
Litigation
APEG
II and its general partner, APEG Energy II, GP (together with APEG II, “APEG”) are involved in litigation with the
Company and its former Chief Executive Officer, David Veltri, as described below. As of March 31, 2020, APEG II held approximately
42% of the Company’s outstanding common stock and was the secured lender, prior to the maturity on July 30, 2019 under the
Company’s credit facility. The costs associated with the pending litigation were a significant use of existing cash during
2019, but the Company believes the expenditures are substantially complete.
APEG
II Litigation
On
February 14, 2019, the Company’s Board of Directors (the Board”) (only one member of which remains on the Board following
the Company’s 2019 Annual Meeting of Shareholders held on December 10, 2019) received a letter from APEG II urging the Company
to establish a seven-person, independent board of directors, establish a corporate business plan and reduce its corporate general
and administrative expenses. APEG II is the Company’s largest shareholder, owning approximately 42% of its outstanding common
stock, and, as of December 31, 2018, was the secured lender under its credit facility, which the Company repaid in full as discussed
below.
On
February 25, 2019, APEG II provided an access termination notice to the Company’s bank under its collateral documents, which
resulted in all of the funds held in the collateral accounts, which totaled approximately $1.8 million, being wired to APEG II
on March 1, 2019. On March 1, 2019, David Veltri, the Company’s former Chief Executive Officer and President, filed a lawsuit
against APEG II in the Company’s name (the “Texas Litigation”) in the District Court of Harris County Texas,
190th Judicial District (the “Texas State Court”). The Texas State Court granted the motion for a temporary
restraining order (“TRO”) and ordered APEG to return immediately the approximate $1.8 million in cash previously wired
to APEG II.
On
March 4, 2019, APEG II filed an emergency motion with the U.S. District Court for the Southern District of Texas (the “Texas
Federal Court”) in order to remove the Texas Litigation from the Texas State Court to the Texas Federal Court and to stay
or modify the TRO. Following a hearing on March 4, 2019, the Texas Federal Court vacated the TRO and the Court ordered APEG to
return the Company’s funds, less the outstanding balance due to APEG II under the credit facility of approximately $937
thousand, and the Company received approximately $850 thousand.
On
February 25, 2019, the Company’s Board held a meeting at which it voted to terminate Mr. Veltri for cause as Chief Executive
Officer and President as a result of using Company funds outside of his authority and other reasons. Mr. Veltri, along with John
Hoffman, a former Board member, called into question whether or not such action was properly taken at the Board meeting. On March
8, 2019, the Company’s Audit Committee intervened in the Texas Litigation by filing an emergency motion (the “AC Motion”).
The AC Motion requested that the Texas Federal Court order that all of the Company’s funds and matters be placed under the
control of our Chief Financial Officer and that control of these functions be removed from our former Chief Executive Officer,
who had been terminated by our Board on February 25, 2019.
On
March 12, 2019, the Texas Federal Court granted the AC Motion, ordering that any disbursement made by the Company must be approved
in writing by the Audit Committee in advance. Additionally, the Texas Federal Court ordered that the Company’s Chief Financial
Officer must be appointed as the sole signatory on all of the Company’s bank accounts.
Litigation
with Former Chief Executive Officer
In
connection with the above described litigation with APEG II, APEG II then initiated a second lawsuit on March 18, 2019 as a shareholder
derivative action in Colorado against Mr. Veltri, as a result of his refusal to recognize the Board’s decision to terminate
him for cause (the “Colorado Litigation”). The Company was named as a nominal defendant in the Colorado Litigation.
The APEG II complaint in the Colorado Litigation alleged that Mr. Veltri’s employment was terminated by the Board and sought
an injunction and temporary restraining order against Mr. Veltri to prevent him from continuing to act as the Company’s
Chief Executive Officer, President and Chairman.
On
April 30, 2019, the Audit Committee took over the control of the defense of the Company, prosecution of its claims against APEG
II, and filed third-party claims on behalf of the Company against Mr. Veltri and Mr. Hoffman, at the time a director of the Company,
asserting that Mr. Veltri was responsible for any damages that APEG II claims, including attorneys’ fees, and that Mr. Veltri
and Mr. Hoffman should be removed from the Board. On May 22, 2019, the Company and APEG II entered into a settlement agreement
with Mr. Hoffman, pursuant to which Mr. Hoffman agreed to resign from the Board and committees thereof, and the Company agreed
to pay up to $50,000 of his legal fees incurred. Further, the Company released Mr. Hoffman from any claims related to the Texas
Litigation, APEG II released the Company from any claims that may have been caused by Mr. Hoffman, and Mr. Hoffman released the
Company from any and all claims he may have had against the Company and its Board.
In
the Colorado Litigation, the United States District Court for the District of Colorado (“the Colorado Federal Court”)
granted interim preliminary injunctive relief to APEG II against Mr. Veltri, holding that Mr. Veltri, without authorization, continued
to hold himself out to be, and continued to act as, the Company’s President and Chief Executive Officer. Pursuant to the
Order, Mr. Veltri was preliminarily enjoined from acting as, or holding himself out to be, the Company’s President and/or
Chief Executive Officer, pending a trial on the merits. Ryan Smith, the Company’s Chief Financial Officer at the time, was
appointed temporary custodian of the Company with the charge to act as the Company’s Interim Chief Executive Officer.
On
May 30, 2019, the Colorado Federal Court issued a subsequent order (the “Second Order”), appointing C. Randel Lewis
as custodian of the Company pursuant to the Wyoming Business Corporation Act and to take over for Mr. Smith in acting as the Company’s
Interim Chief Executive Officer and to serve on the Board as Chairman. The Second Order noted that the primary purpose of having
Mr. Lewis serve as custodian was to resolve the Board deadlock regarding Mr. Veltri’s termination. Pursuant to the Second
Order, Mr. Lewis, as custodian, was ordered to act in place of the Board to appoint one independent director to replace Mr. Hoffman.
On June 13, 2019, Mr. Lewis appointed Catherine J. Boggs to serve as an independent director until the 2019 annual meeting of
the Company’s shareholders, which was held on December 10, 2019. Following such annual meeting, the Board appointed Ryan
Smith to serve as the Company’s Chief Executive Officer, replacing Mr. Lewis in that role. Following the annual meeting,
the Colorado Federal Court also discharged Mr. Lewis from serving as custodian, Interim Chief Executive Officer and as a member
of the Board.
Both
the Texas Litigation and the Colorado Litigation currently remain pending.
Audit
Committee Investigation
Following
the termination of Mr. Veltri on February 25, 2019, the Company’s independent auditors, Plante & Moran PLLC, informed
the Audit Committee that the auditors had found irregularities in the submission and payment of expense reports with respect to
the Company’s former Chief Executive Officer. The Audit Committee engaged independent legal counsel, which subsequently
engaged an independent accounting firm to conduct a forensic accounting investigation of the Company’s expense reporting
system in relation to issues raised by the Company’s auditors regarding potential financial improprieties related to expense
reports, including examining expense reports and third-party expenditures made by or through the Company’s former Chief
Executive Officer or his staff. The investigation was expanded into a forensic investigation of the integrity of the Company’s
computer-based record-keeping after Mr. Veltri and Mr. Hoffman managed to reset the security codes to give them complete control
of the Company’s books and records temporarily and exclude the Company’s other employees’, members of management’s,
other officer’s and director’s ability to access those records during that period, which further raised concerns with
respect to material weaknesses in the Company’s internal control over financial reporting. The scope of the forensic accounting
investigation covered the period from January 1, 2017 through March 31, 2019.
The
forensic accounting investigation and our internal investigation also identified numerous expense items on Mr. Veltri’s
expense reports that appeared to be personal in nature, or lacked adequate documentation showing that such expense was for legitimate
business purposes. These expense items totaled at least $81,014, of which $32,194 was incurred during the year ended December
31, 2017, $34,203 was incurred during the year ended December 31, 2018 and $14,617 was incurred during 2019 prior to Mr. Veltri’s
termination. The Company reclassified the entire $81,014 reimbursed to Mr. Veltri as additional compensation and taxable income.
The
report also indicated that Mr. Veltri used the Company’s vendors for his own personal benefit. Mr. Veltri bypassed the Company’s
accounts payable process by paying third-party vendors personally through expense reports and then approved his own expense reports,
which limited the visibility of the payments and review by the Company’s accounting personnel.
Mr.
Veltri also incurred $47,156 in third-party professional fees in connection with a potential transaction with a company controlled
by a former Board member, which transaction and related expenses in evaluating the potential transaction were not approved by
the Board. The total amount of the fees was impaired and transferred to the full cost pool in 2018.
Mr.
Veltri also entered into an agreement to acquire some oil and natural gas properties for which the Board authorized $250,000,
which amount was fully refundable, subject to the funds being held in escrow pending the closing of the acquisition. Mr. Veltri
wired the funds directly into the seller’s account, rather than escrowing such funds, and also paid the seller an additional
$124,328, which amount was not authorized by the Board, as well as $40,578 for professional services. The transaction never closed.
As of May 6, 2020, the Company has received refunds totaling $225,000 of such funds from the seller. While the Company is pursuing
collection of $75,000 of the remaining deposit, the Company has established an allowance of the amount due from CETA at March
31, 2020, due to the uncertainty of collection.
9.
PREFERRED STOCK
The
Company’s articles of incorporation authorize the issuance of up to 100,000 shares of preferred stock, $0.01 par value.
Shares of preferred stock may be issued with such dividend, liquidation, voting and conversion features as may be determined by
the Board of Directors without shareholder approval. The Company is authorized to issue 50,000 shares of Series P preferred stock
in connection with a shareholder rights plan that expired in 2011.
On
February 12, 2016, the Company issued 50,000 shares of newly designated Series A Convertible Preferred Stock (the “Preferred
Stock”) to Mt. Emmons Mining Company (“MEM”), a subsidiary of Freeport McMoRan, pursuant to that certain Series
A Convertible Preferred Stock Purchase Agreement (the “Series A Purchase Agreement”). The Preferred Stock was issued
in connection with the disposition of the Company’s mining segment, whereby MEM acquired the property and replaced the Company
as permittee and operator of a water treatment plant (the “Acquisition Agreement”). The Preferred Stock was issued
at $40 per share for an aggregate $2 million. The Preferred Stock liquidation preference, initially $2 million, increases by quarterly
dividends of 12.25% per annum (the “Adjusted Liquidation Preference”). At the option of the holder, each share of
Preferred Stock may initially be converted into 1.33 shares of the Company’s $0.01 par value common stock (the “Conversion
Rate”) for an aggregate of 66,667 shares. This Conversion Rate reflects the effect of the Reverse Stock Split. The Conversion
Rate is subject to anti-dilution adjustments for stock splits, stock dividends and certain reorganization events and to price-based
anti-dilution protections. At March 31, 2020 and December 31, 2019, after taking into account the effect of the Reverse Stock
Split, the aggregate number of shares of common stock issuable upon conversion is 79,334 shares, which is the maximum number of
shares issuable upon conversion.
The
Preferred Stock is senior to other classes or series of shares of the Company with respect to dividend rights and rights upon
liquidation. No dividend or distribution will be declared or paid on junior stock, including the Company’s common stock,
(1) unless approved by the holders of Preferred Stock and (2) unless and until a like dividend has been declared and paid on the
Preferred Stock on an as-converted basis. The Preferred Stock does not vote with the Company’s common stock on an as-converted
basis on matters put before the Company’s shareholders. However, the holders of the Preferred Stock have the right to approve
specified matters as set forth in the certificate of designation and have the right to require the Company to repurchase the Preferred
Stock in the event of a change of control, which has not been triggered as of March 31, 2020. Concurrent with entry into the Acquisition
Agreement and the Series A Purchase Agreement, the Company and MEM entered into an Investor Rights Agreement, which provides MEM
rights to certain information and Board observer rights. MEM has agreed that it, along with its affiliates, will not acquire more
than 16.86% of the Company’s issued and outstanding shares of common stock. In addition, MEM has the right to demand registration
under the Securities Act of 1933, as amended, of the shares of common stock issuable upon conversion of the Preferred Stock
10.
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, subject to adjustment, for a period of five years from the final closing date of June 21, 2017. The
total net proceeds received by the Company were approximately $1.32 million. The fair value of the warrants upon issuance was
$1.24 million, with the remaining $0.08 million being attributed to common stock. The warrants have been classified as liabilities
due to features in the warrant agreement that give the warrant holder an option to require the Company to redeem the warrant at
a calculated fair value in the event of a “Fundamental Transaction,” as defined in the warrant agreement. The fair
value of the warrants was $79 thousand and $73 thousand at March 31, 2020 and December 31, 2019, respectively
As
a result of common stock issuances made during the year ended December 31, 2018, the warrant exercise price was reduced from $20.50
to $11.30 per share pursuant to the original warrant agreement.
Stock
Options
From
time to time, the Company may grant stock options under its incentive plan covering shares of common stock to employees of the
Company. Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock
underlying the option. These awards typically expire ten years from the grant date.
Total
stock-based compensation expense related to stock options was $0 and $13 thousand for the three months ended March 31, 2020 and
2019, respectively. As of March 31, 2020, all stock options had vested. During the three months ended March 31, 2020 and 2019,
no stock options were granted, exercised, expired or forfeited. Presented below is information about stock options outstanding
and exercisable as of March 31, 2020 and December 31, 2019. All shares and prices per share have been adjusted for the Reverse
Stock Split.
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
|
Shares
|
|
|
Price
(1)
|
|
|
Shares
|
|
|
Price
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding
|
|
|
31,533
|
|
|
$
|
66.04
|
|
|
|
31,533
|
|
|
$
|
66.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
exercisable
|
|
|
31,533
|
|
|
$
|
66.04
|
|
|
|
31,533
|
|
|
$
|
66.04
|
|
|
(1)
|
Represents
the weighted average price.
|
The
following table summarizes information for stock options outstanding and for stock options exercisable at March 31, 2020:
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
Exercise
Price
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Weighted
|
|
Number
of
|
|
|
Range
|
|
|
Average
Exercise
|
|
|
Contractual
Term
|
|
|
Number
of
|
|
|
Average
Exercise
|
|
Shares
|
|
|
Low
|
|
|
High
|
|
|
Price
|
|
|
(years)
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,500
|
|
|
$
|
7.20
|
|
|
$
|
11.60
|
|
|
$
|
10.00
|
|
|
|
7.5
|
|
|
|
16,500
|
|
|
$
|
10.00
|
|
|
10,622
|
|
|
|
90.00
|
|
|
|
124.80
|
|
|
|
106.20
|
|
|
|
4.0
|
|
|
|
10,622
|
|
|
|
106.20
|
|
|
2,913
|
|
|
|
139.20
|
|
|
|
171.00
|
|
|
|
147.39
|
|
|
|
2.2
|
|
|
|
2,913
|
|
|
|
147.39
|
|
|
1,498
|
|
|
|
226.20
|
|
|
|
302.40
|
|
|
|
240.23
|
|
|
|
3.3
|
|
|
|
1,498
|
|
|
|
240.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,533
|
|
|
$
|
7.20
|
|
|
$
|
302.40
|
|
|
$
|
66.04
|
|
|
|
5.7
|
|
|
|
31,533
|
|
|
$
|
66.04
|
|
In
January 2020, the Company granted 48,000 restricted shares to the Company’s Chief Executive Officer, of which 24,000 shares
vest after one year and 24,000 vest after two years. In addition, the Company granted a total of 28,000 restricted shares to members
of the board of directors which vest on January 28, 2021. For the three months ended March 31, 2020, the Company recognized $42
thousand in stock compensation expense related to these restricted stock grants. At March 31, 2020, the unrecognized expense related
to these restricted stock grants was $329 thousand.
11.
ASSET RETIREMENT OBLIGATIONS
The
Company has asset retirement obligations (“ARO”) associated with the future plugging and abandonment of proved properties.
Initially, the fair value of a liability for an ARO is recorded in the period in which the ARO is incurred with a corresponding
increase in the carrying amount of the related asset. The liability is accreted to its present value each period and the capitalized
cost is depleted over the life of the related asset. If the liability is settled for an amount other than the recorded amount,
an adjustment to the full-cost pool is recognized. The Company had no assets that are restricted for the purpose of settling AROs.
In
the fair value calculation for the ARO there are numerous assumptions and judgments including the ultimate retirement cost, inflation
factors, credit-adjusted risk-free discount rates, timing of retirement and changes in legal, regulatory, environmental and political
environments. To the extent future revisions to assumptions and judgments impact the present value of the existing ARO, a corresponding
adjustment is made to the oil and natural gas property balance.
The
following is a reconciliation of the changes in the Company’s liabilities for asset retirement obligations as of March 31,
2020 and December 31, 2019:
|
|
Three
Months Ended
March
31, 2020
|
|
|
Year
Ended
December
31, 2019
|
|
|
|
|
(in thousands)
|
|
Balance, beginning of year
|
|
$
|
819
|
|
|
$
|
939
|
|
Accretion
|
|
|
6
|
|
|
|
22
|
|
Sold/Plugged
|
|
|
-
|
|
|
|
(130
|
)
|
New drilled wells
|
|
|
-
|
|
|
|
2
|
|
Change in discount rate
|
|
|
-
|
|
|
|
(14
|
)
|
Liabilities incurred
for acquisition of New Horizon wells
|
|
|
163
|
|
|
|
-
|
|
Balance, end of period
|
|
$
|
988
|
|
|
$
|
819
|
|
12.
INCOME TAXES
The
Company estimated the applicable effective tax rate expected for the full fiscal year. The Company’s effective tax rate
used to estimate income taxes on a current year-to-date basis is 0% for both the three months ended March 31, 2020 and 2019.
In
December 2017, the Company paid down debt through the issuance of common stock. This issuance represented a 49.3% ownership change
in the Company. See Note 6-Debt. This change in ownership, combined with other equity events, triggered loss limitations
under Internal Revenue Code (“I.R.C.”) Section 382. As a result, the Company wrote-off a total of $32.2 million of
gross deferred tax assets through December 31, 2018. Since the Company maintains a valuation allowance against these tax assets
there was no impact to the condensed consolidated statements of operations.
Deferred
tax assets (“DTAs”) are recognized for the expected future tax consequences of temporary differences between the financial
reporting and tax basis of assets and liabilities and for operating losses and tax credit carry forwards. We review our DTAs and
valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulative
results in recent years. Consistent with the position at December 31, 2019, the Company maintains a full valuation allowance recorded
against all DTAs. The Company, therefore, had no recorded DTAs as of March 31, 2020. We anticipate that we will continue to record
a valuation allowance against our DTAs in all jurisdictions until such time as we are able to determine that it is “more-likely-than-not”
that those DTAs will be realized.
The
Company recognizes, measures, and discloses uncertain tax positions whereby tax positions must meet a “more-likely-than-not”
threshold to be recognized. During the three months ended March 31, 2020 and 2019, no adjustments were recognized for uncertain
tax positions.
On
March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and
health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy.
The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side
social security payments, net operating loss carryback periods, alternative minimum tax credit (“AMT”) refunds, modifications
to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.
In particular, the CARES Act, (i) eliminates the 80% of taxable income limitation by allowing corporate entities to fully utilize
NOLs to offset taxable income in 2018, 2019 or 2020, (ii) increases the net interest expense deduction limit to 50% of adjusted
taxable income from 30% for tax years beginning January 1, 2019 and 2020 and (iv) allows taxpayers with AMT credits to claim a
refund in 2020 for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as
originally enacted by the Tax Cuts and Jobs Act in 2017. The Company is in the process of analyzing the different aspects of the
CARES Act to quantify the impact of these provisions on the Company’s income taxes but expects that there will be no material
impact from the CARES Act to the Company’s tax position.
13.
EARNINGS (LOSS) PER SHARE
Basic
net loss per common share is calculated by dividing net loss attributable to common shareholders by the weighted-average number
of common shares outstanding for the respective period. Diluted net loss per common share is calculated by dividing adjusted net
loss by the diluted weighted average number of common shares outstanding, which includes the effect of potentially dilutive securities.
Potentially dilutive securities for this calculation consist of stock options and warrants, which are measured using the treasury
stock method, the conversion feature of the Series A Preferred Stock, and unvested shares of restricted common stock. When the
Company recognizes a net loss attributable to common shareholders, as was the case for the three-month periods ended March 31,
2020 and 2019, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of dilutive
net loss per common share.
The
following table sets forth the calculation of basic and diluted net loss per share.
|
|
Three
Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands except per
share data)
|
|
Net income (loss)
|
|
$
|
(306
|
)
|
|
$
|
15
|
|
Accrued dividend
on Series A Preferred Stock
|
|
|
(100
|
)
|
|
|
(87
|
)
|
Net loss applicable
to common shareholders
|
|
$
|
(406
|
)
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
1,360
|
|
|
|
1,341
|
|
Dilutive effect
of potentially dilutive securities
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted-average
common shares outstanding
|
|
|
1.360
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.30
|
)
|
|
$
|
(0.05
|
)
|
Diluted net loss per share
|
|
$
|
(0.30
|
)
|
|
$
|
(0.05
|
)
|
The
following table presents the weighted-average common share equivalents excluded from the calculation of diluted earnings per share
due to their anti-dilutive effect:
|
|
Three
Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in
thousands)
|
|
Stock
options
|
|
|
32
|
|
|
|
32
|
|
Restricted
stock
|
|
|
53
|
|
|
|
-
|
|
Warrants
|
|
|
100
|
|
|
|
100
|
|
Series
A preferred stock
|
|
|
79
|
|
|
|
79
|
|
Total
|
|
|
264
|
|
|
|
211
|
|
14.
SIGNIFICANT CONCENTRATIONS
The
Company has exposure to credit risk in the event of nonpayment by joint interest operators and purchasers of the Company’s
oil and natural gas properties. During the three-month periods ended March 31, 2020 and 2019, the joint interest operators that
accounted for 10% or more of the Company’s total oil and natural gas revenue for at least one of the periods presented are
as follows:
Operator
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CML Exploration, LLC
|
|
|
52
|
%
|
|
|
47
|
%
|
Zavanna, LLC
|
|
|
31
|
%
|
|
|
27
|
%
|
Crimson Exploration Operating, Inc.
|
|
|
7
|
%
|
|
|
13
|
%
|
15.
FAIR VALUE MEASUREMENTS
The
Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon
the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted
prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure
fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value
measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular
input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability,
and may affect the valuation of the assets and liabilities and their placement within the hierarchy level. The three levels of
inputs that may be used to measure fair value are defined as:
Level
1 - Quoted prices for identical assets and liabilities traded in active exchange markets.
Level
2 - Observable inputs other than Level 1 that are directly or indirectly observable for the asset or liability, including quoted
prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities inactive
markets, or other observable inputs that can be corroborated by observable market data.
Level
3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair
value requires significant management judgment or estimation.
The
following is a description of the valuation methodologies used for complex financial instruments measured at fair value:
Warrant
Valuation Methodologies
The
warrants contain a dilutive issuance and other provisions that cause the warrants to be accounted for as a liability. Such warrant
instruments are initially recorded and valued as a Level 3 liability and are accounted for at fair value with changes in fair
value reported in earnings. There were no changes in the methodology to value the warrants. The Company worked with a third-party
valuation expert to estimate the value of the warrants at March 31, 2020 and December 31, 2019 using a Lattice model, with the
following assumptions:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
Number of warrants outstanding
|
|
|
100,000
|
|
|
|
100,000
|
|
Expiration date
|
|
|
June
21, 2022
|
|
|
|
June
21, 2022
|
|
Exercise price
|
|
$
|
11.30
|
|
|
$
|
11.30
|
|
Stock price
|
|
$
|
3.10
|
|
|
$
|
3.00
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Average volatility rate
|
|
|
90
|
%
|
|
|
80
|
%
|
Risk free interest rate
|
|
|
.25
|
%
|
|
|
1.59
|
%
|
An
increase in any of the variables would cause an increase in the fair value of the warrants. Likewise, a decrease in any variable
would cause a decrease in the value of the warrants. At March 31, 2020 and December 31, 2019, the fair value of the warrants was
$79 thousand and $73 thousand, respectively.
Marketable
Equity Securities Valuation Methodologies
The
fair value of marketable equity securities is 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 on the TSX Venture Exchange, an active market under the trading symbol
AEC:TSXV and has been classified as Level 1.
|
|
As
of
March 31,
2020
|
|
Number of shares owned
|
|
|
3,631,365
|
|
Quoted market price
|
|
$
|
0.064
|
|
|
|
|
|
|
Fair value
|
|
$
|
230,614
|
|
Other
Financial Assets and Liabilities
The
Company evaluates the fair value on a non-recurring basis of properties acquired in business combinations. The fair value of the
oil and gas properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production
which we reasonably expect, and estimated prices adjusted for differentials. Unobservable inputs include estimated future oil
and natural gas production, prices, operating and development costs, and a discount rate of 10%, all Level 3 inputs within the
fair value hierarchy.
The
carrying value of financial instruments included in current assets and current liabilities approximate fair value due to the short-term
nature of those instruments.
Recurring
Fair Value Measurements
Recurring
measurements of the fair value of assets and liabilities as of March 31, 2020 and December 31, 2019 are as follows:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Equity Securities
|
|
$
|
231
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
231
|
|
|
$
|
307
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79
|
|
|
$
|
79
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
73
|
|
|
$
|
73
|
|
The
following table presents a reconciliation of our Level 3 warrants measured at fair value
|
|
Three
Months Ended March 31, 2020
|
|
|
Year
Ended December 31,
2019
|
|
|
|
(in thousands)
|
|
Fair value liabilities of Level 3 instruments
beginning of period
|
|
$
|
73
|
|
|
$
|
425
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain) on warrant valuation
|
|
|
6
|
|
|
|
(352
|
)
|
|
|
|
-
|
|
|
|
|
|
Fair value
liabilities of Level 3 instruments end of period
|
|
$
|
79
|
|
|
$
|
73
|
|
16.
SUBSEQUENT EVENTS
Decline
in crude oil prices
Beginning
in early March 2020 and continuing through May 6, 2020, the NYMEX WTI crude oil price has decreased significantly. Currently,
we do not have any commodity derivative contracts in place to mitigate the effect of lower commodity prices on our revenues. Lower
oil and natural gas prices not only decrease our revenues, but an extended decline in oil or gas prices may materially and adversely
affect our future business, financial position, cash flows, results of operations, liquidity, ability to finance planned capital
expenditures and the oil and natural gas reserves that we can economically produce.
Lower
crude prices could also affect the realizability of the Company’s oil and gas properties. In the calculation of the ceiling
test as of March 31, 2020, the Company used $55.77 per barrel for oil and $2.30 per mcf for natural gas (as further adjusted for
differentials related to property, specific gravity, quality, local markets and distance from markets) to compute the future cash
flows of the Company’s producing properties. The discount factor used was 10%. These prices represent the average of first
day of the month prices for oil and natural gas for each month in the twelve-month period ended March 31, 2020. If current depressed
prices continue, it is likely that the Company will experience ceiling test write-downs in 2020 as higher prices from last year
and the first three months of 2020 used in the calculation of the average price are replaced with current lower pricing. To determine
the possible effect of lower prices on the ceiling test, the Company re-ran the reserves as of March 31, 2020 using the May 6,
2020 forward strip price as further adjusted for differentials. As of May 6, 2020, the WTI front month price for crude oil was
$23.82 and the 12-month strip price was $29.21. The Company determined that by using the forward strip prices the Company would
have incurred a ceiling test write-down of approximately $1.0 million as of March 31, 2020.
COVID-19
In
early March 2020, there was a global outbreak of COVID-19 that has resulted in changes in global supply and demand of certain
mineral and energy products including crude oil. These changes, including a potential economic downturn and any potential resulting
direct and indirect negative impact to the Company cannot be determined, but they could have a prospective material impact to
the Company’s operations, cash flows, and liquidity.