NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND OPERATIONS OF THE COMPANY
Lucas Energy Inc. is an independent oil and gas company engaged in the development and acquisition of onshore properties in Texas. The Company’s main operations are primarily located in the Eagle Ford and Austin Chalk trends in Wilson and Gonzales counties and in the Eaglebine, Buda, and Glen Rose formations in Madison and Leon counties.
Our corporate headquarters is in Houston, Texas and our field operation is located in Gonzales, Texas where we manage the Company’s well operations.
NOTE 2 – LIQUIDITY
At March 31, 2013, the Company’s total current liabilities of $6.5 million exceeded its total current assets of $1.7 million, resulting in a working capital deficit of $4.8 million. At March 31, 2012, the Company had a working deficit of $31.5 million. The $26.7 million deficit reduction is primarily related to the relinquishment of a $22.0 million non-recourse senior secured promissory note with Nordic (see Part I, Item 3 “Legal Proceedings”) and an overall reduction of current liabilities.
The primary sources of cash for Lucas during 2013 fiscal year were funds generated from operations, proceeds from the sale of oil and gas properties, proceeds from the issuance of units consisting of shares of our common stock and warrants to purchase shares of our common stock and the exercise of warrants.
The Company believes its undeveloped acreage and ability to access the capital markets in both equity and debt provides a sufficient means to conduct its current operations, meet its contractual obligations and undertake a forward outlook on future development of its current fields.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of Lucas Energy include the accounts of its wholly-owned subsidiary, LEI Alcalde Holdings, LLC. On August 16, 2012, Lucas Energy created the wholly-owned subsidiary LEI Alcalde Holdings, LLC to distinguish our investment in a Gonzales county building bought on November 21, 2011. All intercompany accounts and transactions have been eliminated.
Use of Estimates and Reclassifications
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.
Lucas' consolidated financial statements are based on a number of significant estimates, including oil and natural gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and natural gas properties, and timing and costs associated with its asset retirement obligations, as well as those related to the fair value of stock options, stock warrants and stock issued for services. While we believe that our estimates and assumptions used in preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and financial instruments which mature within three months of the date of purchase.
Restricted Cash
As of March 31, 2013 and 2012, the Company had no restricted cash.
Allowance for Doubtful Accounts
Accounts receivable consist of uncollaterized oil and natural gas revenues due under normal trade terms. Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. There was no allowance recorded as of March, 31, 2013 or 2012.
Concentration of Credit Risk
Accounts receivable are recorded at invoiced amount and generally do not bear interest. The Company’s accounts receivables are concentrated among entities engaged in the energy industry within the U.S. and include operating revenue from our producing wells. The Company periodically assesses the financial condition of these entities and institutions and considers any possible credit risk to be minimal.
Although we believe that we are not dependent upon any one purchaser, our marketing arrangement with Enterprise Crude Oil, LLC accounted for almost all of our revenues for the year ended March 31, 2013 and GulfMark Energy Inc. accounted for approximately 69% in 2012. Lucas Energy has alternative purchasers readily available at competitive market prices if there is disruption in services or other events that cause us to search for other ways to sell our production.
Marketable Securities
Lucas reports its short-term investments and other marketable securities at fair value in accordance with Accounting Standards Codification (ASC) Topic 825 “Financial Instruments.” As of March 31, 2013 and 2012, the Company did not have any material investments in marketable securities.
Fair Value of Financial Instruments
As of March 31, 2013 and 2012, the fair value of Lucas' cash, accounts receivable, accounts payable, note receivable and note payable approximate carrying values because of the short-term maturity of these instruments.
The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with property, plant and equipment. Significant Level 3 inputs used in the calculation of asset retirement obligations include plugging costs and reserve lives. A reconciliation of the Company's asset retirement obligations is presented in “Note 5 – Asset Retirement Obligations”.
Oil and Natural Gas Properties, Full Cost Method
Lucas uses the full cost method of accounting for oil and natural gas producing activities. Costs to acquire mineral interests in oil and natural gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized.
Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities, are capitalized as oil and natural gas property costs on a country-by-country basis. Costs not subject to amortization consist of unproved properties that are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. Lucas assesses overall values of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred. Impairment of unproved properties is assessed based on management's intention with regard to future development of individually significant properties and the ability of Lucas to obtain funds to finance their programs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.
Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves. If it is determined that the relationship is significantly altered, the corresponding gain or loss will be recognized in the consolidated statements of operations.
Costs of oil and natural gas properties are amortized using the units of production method. Amortization expense calculated per equivalent physical unit of production amounted to $40.51 and $33.68 per barrel of oil equivalent for the years ended March 31, 2013 and 2012, respectively.
Ceiling Test
In applying the full cost method, Lucas performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “estimated present value” of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense. During the years ended March 31, 2013 and 2012, no impairment of oil and natural gas properties was recorded.
Other Property and Equipment
Property and equipment are stated at cost and consist primarily of a building, furniture and computer equipment. Depreciation is computed on a straight-line basis over the estimated useful lives.
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and accrued tax liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Lucas has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements as of March 31, 2013 and 2012. The Company’s policy is to classify assessments, if any, for tax related interest expense and penalties as interest expense.
Earnings per Share of Common Stock
Basic and diluted net income per share calculations are calculated on the basis of the weighted average number of shares of the Company's common stock (Common Shares) outstanding during the year. Purchases of treasury stock reduce the outstanding shares commencing on the date that the stock is purchased. Common stock equivalents are excluded from the calculation when a loss is incurred as their effect would be anti-dilutive.
Stock options to purchase 819,668 Common Shares at an average exercise price of $1.55 per share and warrants to purchase 3,893,636 Common Shares at an average exercise price of $2.65 per share were outstanding at March 31, 2013.
Stock options to purchase 456,000 Common Shares at an average exercise price of $2.88 per share and warrants to purchase 2,966,136 Common Shares at an average exercise price of $2.67 per share were outstanding at March 31, 2012. During the year ended March 31, 2012, Lucas issued 2,000 shares of Series A Convertible Preferred Stock. During the year ended March 31, 2012, Lucas issued 2,824 shares of Series B Convertible Preferred Stock for interests in oil and natural gas properties. Each share of the Series A and Series B Convertible Preferred Stock shares is convertible into an aggregate of 1,000 shares of the Company’s common stock and have no liquidation preference and no maturity date. During the year ended March 31, 2013, the holder of the Company’s Series B Preferred Stock converted their 2,824 shares into 2,824,000 Common Shares.
Using the treasury stock method, had the Company had net income, approximately 216,668 Common Shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share calculation for the year ended March 31, 2013.
Share-Based Compensation
In accordance with the provisions of the Stock Compensation Topic of the ASC (ASC Topic 718), Lucas measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award over the vesting period.
Revenue and Cost Recognition
Lucas recognizes oil and natural gas revenue under the sales method of accounting for its interests in producing wells as crude oil and natural gas is produced and sold from those wells. Costs associated with production are expensed in the period incurred.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, which amends the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification. The amendments clarify the FASB's intent about the application of existing fair value measurement requirements and change certain principles or requirements for measuring fair value or disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual fiscal periods beginning after December 15, 2011.
The adoption of ASU 2011-04 did not have a material impact on the Company’s financial statements.
NOTE 4 – PROPERTY AND EQUIPMENT
Oil and Natural Gas Properties
All of Lucas' oil and natural gas properties are located in the United States. Costs being amortized at March 31, 2013 and 2012 are as follows:
|
|
|
At March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Proved leasehold costs
|
|
$
|
10,002,828
|
|
|
$
|
35,454,781
|
|
|
Costs of wells and development
|
|
|
33,961,775
|
|
|
|
29,858,429
|
|
|
Capitalized asset retirement costs
|
|
|
745,197
|
|
|
|
927,165
|
|
|
Total oil & natural gas properties
|
|
|
44,709,800
|
|
|
|
66,240,375
|
|
|
Accumulated depreciation and depletion
|
|
|
(9,077,997
|
)
|
|
|
(5,625,961
|
)
|
|
Net Capitalized Costs
|
|
$
|
35,631,803
|
|
|
$
|
60,614,414
|
|
The following table sets forth the changes in the total cost of oil and natural gas properties at March 31, for each of the two years in the period ended March 31, 2013:
|
|
|
2013
|
|
|
2012
|
|
|
Balance at beginning of period
|
|
$
|
66,240,375
|
|
|
$
|
24,650,840
|
|
|
Acquisitions using cash
|
|
|
116,700
|
|
|
|
2,094,161
|
|
|
Other capitalized costs
|
|
|
4,782,327
|
|
|
|
12,354,246
|
|
|
Sale proceeds
|
|
|
(4,069,948
|
)
|
|
|
(4,183,745
|
)
|
|
Assumption of note payable
|
|
|
450,000
|
|
|
|
22,000,000
|
|
|
Acquisitions using shares
|
|
|
-
|
|
|
|
8,703,354
|
|
|
Relinquish of note receivable
|
|
|
470,812
|
|
|
|
-
|
|
|
Relinquish of note payable
|
|
|
(269,163
|
)
|
|
|
-
|
|
|
Relinquishment of Nordic note
|
|
|
(22,829,333
|
)
|
|
|
-
|
|
|
Other non-cash transactions
|
|
|
(181,970
|
)
|
|
|
621,519
|
|
|
Balance at end of period
|
|
$
|
44,709,800
|
|
|
$
|
66,240,375
|
|
Other capitalized costs include title related expenses and tangible and intangible drilling costs.
Acquisition of Oil and Natural Gas Properties
Fiscal Year 2013.
During the year ended March 31, 2013, the Company purchased various oil and natural gas properties and equipment for $1,037,512. As part of the acquisitions, we entered into a $450,000 Note Payable, paid $116,700 in cash, and extinguished a Note Receivable for $470,812.
Fiscal Year 2012.
During the year ended March 31, 2012, Lucas acquired various oil and natural gas properties and equipment at an aggregate net cost of $45,151,761 including $22,000,000 with a note payable, $14,448,407 cash, 2,824 shares of Lucas’ preferred stock series B valued at $5,166,754, respectively, and 150,000 shares of Lucas' common stock valued at $441,000 ($2.94 per share based upon the closing price of the Company’s common stock on the date of agreement).
On October 13, 2011, Lucas entered into a purchase and sale agreement with Nordic Oil USA I, LLLP (“Nordic”), whereby effective July 1, 2011, Lucas purchased all of Nordic’s right, title and interest in certain oil, gas and mineral leases located in Gonzales, Karnes and Wilson Counties, Texas. The transaction officially closed on November 18, 2011. Lucas agreed to pay Nordic $22 million, payable in the form of a senior secured promissory note (with recourse only to the properties acquired), which accrued interest at the rate of 6% per annum (the “Note”), the payment of which was secured by a Deed of Trust, Security Agreement, Financing Statement and Assignment of Production on the property acquired (the “Deed of Trust”). Lucas failed to pay the Note when it was due on November 17, 2012, and the parties were unable to come to terms on a settlement of the debt. Subsequently in December 2012, Nordic filed a lawsuit against Lucas pursuant to which Nordic made claims for the payment of damages in connection with liens attached to the property, the proceeds from alleged wrongful assignments of the property acquired in the transaction, pre-and-post judgment interest, a foreclosure and sale of the property, plus attorney’s fees in the amount of 10% of the principal and interest then owing on the note, and sought damages for breach of contract and attorney’s fees. On March 29, 2013, and effective March 31, 2013 (the “Effective Date”), Lucas entered into a Settlement and Release Agreement with Nordic (the “Settlement Agreement”), pursuant to which the parties agreed to cancel and terminate the purchase and sale agreement, Lucas agreed to:
|
|
·
|
Pay Nordic an aggregate of $1,125,000 as follows:
|
|
|
o
|
$250,000 upon the parties entry into the Settlement Agreement (which has been paid to date);
|
|
|
o
|
$250,000 on or before April 1, 2013 (which has been paid to date);
|
|
|
o
|
$500,000 on or before June 1, 2013 (which has been paid to date); and
|
|
|
o
|
$125,000 on or before September 30, 2013,
|
|
|
|
provided that if Lucas fails to pay any amounts when due, Nordic is able to file an agreed judgment with the court stipulating that Lucas agrees that the amount owed pursuant to the schedule above is immediately due and payable together with 5% interest;
|
|
|
·
|
To assign certain of the properties acquired back to Nordic (free of certain liens and encumbrances), together with any rights in the Interests owned by any current or former officers or directors of Lucas; and
|
|
|
·
|
To complete certain field work on the properties at Lucas’ sole expense, which has been performed and has an immaterial effect.
|
Additionally, the parties agreed to mutually release each other and each other’s affiliates and assigns from all claims, causes of actions, damages and liabilities relating to any events which occurred prior to the Effective Date, whether as a result of the purchase of the properties, the Note or otherwise, and to further indemnify each other from any claims associated therewith. Finally, Nordic agreed to dismiss the Lawsuit with prejudice five business days after Lucas has made the final payment required as discussed above.
On October 13, 2011, Lucas entered into a purchase agreement with a company, with an effective date of July 1, 2011. The intent of this transaction was to acquire all of the company’s interests in properties owned by Nordic, in consideration for 2,000 shares of designated Series A Convertible Preferred Stock of the Company, each of which shares are convertible into an aggregate of 1,000 shares of the Company’s common stock. The discounted fair value of the transaction was $3.8 million, due to the six-month holding period during which the holder of the Series A Convertible Preferred Stock is not allowed to sell the shares of the Company’s common stock when converted, and other restrictions. The Series A Convertible Preferred Stock contains a provision that limits the amount of common shares that the holder can own at any time upon conversion to an aggregate of 4.99% of the Company’s then issued and outstanding shares of common stock. Lucas subsequently filed a lawsuit against the company who received the Series A Convertible Preferred Stock seeking among other things, the return and cancellation of such Series A Convertible Preferred Stock due to the fact that Lucas did not receive valid consideration for such shares and such shares were not validly issued (see “Note 11. Subsequent Events”).
On December 29, 2011, Lucas entered into a purchase and sale agreement with Hall Phoenix Energy, LLC (Hall Phoenix), with an effective date of December 1, 2011, to purchase all of Hall Phoenix’s interests in certain oil, natural gas and mineral leases, rights and assets located in Leon, Madison and Wilson counties, Texas. Pursuant to the transaction, Lucas agreed to pay as consideration 2,824 shares of Series B Convertible Preferred Stock of the Company, each of which shares are convertible into an aggregate of 1,000 shares of the Company’s common stock. The Series B Convertible Preferred Stock contains a provision that limited the amount of common shares that the holder can own at any time upon conversion to an aggregate of 9.99% of Company’s then issued and outstanding shares of common stock. During the year ended March 31, 2013, Hall Phoenix exercised their right of conversion and converted all their Series B Convertible Preferred Stock into 2,824,000 shares of the Company’s common stock.
Sale of Oil and Gas Properties
Fiscal Year 2013.
During the year ended March 31, 2013, the Company sold several oil and natural gas properties with aggregate gross proceeds of $4,069,948, of which $269,163 was offset by a Note Payable due from a previous purchase transaction. All oil and natural gas property sale proceeds were treated as a reduction in the full cost pool with no gain or loss recorded on the sales.
On November 21, 2012, the Company entered into a Purchase Agreement with Sundown Energy, LP to sell the Company’s 0.77% net royalty interest in the oil and natural gas properties located on approximately 52 acres of land within the Baker Deforest Unit, located in Gonzales and Dewitt counties, Texas, including the Baker Deforest Unit #1H, #2H, #3H, #4H and #12H wells. The purchaser paid $4.0 million in cash in connection with the sale, excluding any adjusted purchase amounts. The closing occurred on December 19, 2012, but was effective as of October 1, 2012.
Fiscal Year 2012.
During the year ended March 31, 2012, Lucas sold various oil and natural gas properties and equipment for aggregate gross proceeds of approximately $4,183,745, of which $3,683,745 was paid in cash. Lucas received a $500,000 note receivable for the sale of certain properties. All oil and natural gas property sale proceeds were treated as a reduction in the full cost pool with no gain or loss recorded on the sales. Such sales included the transactions discussed below.
In September 2011, Lucas entered into several joint venture agreements to drill new Austin Chalk horizontal wells. Under the agreements, the counterparty purchased a working interest in the well operated by Lucas. Proceeds from the sale of the partial working interest were approximately $100,100 and were recorded as a reduction in the full cost pool.
In October 2011, Lucas entered into a purchase and sale agreement with Nordic Oil USA 2, LLLP (Nordic 2), with an effective date of February 1, 2011, to sell to Nordic 2 all of Lucas’ interests in certain oil, natural gas and mineral leases located in McKinley County, New Mexico for $4 million in cash. Net proceeds to the Company from the sale were approximately $3.6 million after deducting commissions. As a portion of the transaction, Nordic 2 returned a cash deposit for property acquisition of $0.5 million. The proceeds from this sale were recorded as a $3.1 million reduction in the full cost pool with no gain or loss recorded from the sale, and a $0.5 million reduction in Other Assets. The Company acquired the properties in January 2011 in a purchase transaction for $2.5 million, which included a deposit of $0.5 million. Nordic 2 acquired, among other things, the rights to the $0.5 million deposit. No revenues or expenses were derived from Lucas relating to these properties since the properties were acquired in January 2011.
On December 1, 2011, Lucas entered into an asset sale agreement with a company to sell certain underperforming wells. Lucas received as consideration $100,000 in cash and a $500,000 secured promissory note. The proceeds from the sale were recorded as a reduction in the full cost pool with no gain or loss recorded on the sale. The note bears interest at 6% per annum with monthly installments of $7,300, including accrued interest, through 2018. Relinquishment of the note receivable occurred on August 1, 2012, when Lucas repurchased certain properties plus one additional property from the company for $470,812, the remaining balance of the note receivable.
Other Property and Equipment
On November 21, 2011, Lucas entered into a purchase agreement for a building in Gonzales County for $450,000 to be used as office space. Pursuant to the agreement, the Company agreed to pay $325,000 in the form of a promissory note to be repaid in monthly installments. The final payment was paid on May 1, 2012. The note bears an interest rate of 8% per annum and is collateralized by the property. On March 21, 2013 Lucas entered into an agreement to sell the building for $325,000, which resulted in an impairment loss of $123,513. Payment on the building is due August 22, 2013. As of March 31, 2013, the building was still recognized in Other Property and Equipment.
NOTE 5 – ASSET RETIREMENT OBLIGATIONS
Lucas records the fair value of a liability for asset retirement obligations (“ARO”) in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. Lucas accrues an abandonment liability associated with its oil and natural gas wells when those assets are placed in service. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at Lucas’ credit-adjusted risk-free interest rate. No market risk premium has been included in Lucas’ calculation of the ARO balance.
The following table presents the reconciliation of the beginning and ending aggregate carrying amounts of long-term legal obligations associated with the future retirement of oil and natural gas properties for the years ended March 31, 2013 and 2012:
|
|
|
2013
|
|
|
2012
|
|
|
Carrying amount at beginning of year
|
|
$
|
1,075,152
|
|
|
$
|
409,112
|
|
|
Liabilities incurred
|
|
|
228,918
|
|
|
|
207,131
|
|
|
Liabilities settled
|
|
|
(27,337
|
)
|
|
|
(53,263
|
)
|
|
Accretion
|
|
|
59,649
|
|
|
|
44,521
|
|
|
Revisions
|
|
|
39,162
|
|
|
|
518,357
|
|
|
Reduction for sale of oil and natural gas property
|
|
|
(450,050
|
)
|
|
|
(50,706
|
)
|
|
Carrying amount at end of year
|
|
$
|
925,494
|
|
|
$
|
1,075,152
|
|
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Minimum Commitments
At March 31, 2013, total minimum commitments were as follows:
|
|
|
|
|
|
Years Ended March 31,
|
|
|
Contractual Obligations
|
|
Total
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
Thereafter
|
|
|
Non-Cancelable Operating Leases
|
|
$
|
187,532
|
|
|
$
|
75,911
|
|
|
$
|
78,477
|
|
|
$
|
33,144
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Legal Proceedings.
There are currently various suits and claims pending against Lucas that have arisen in the ordinary course of Lucas’ business, including contract disputes and title disputes. While the ultimate outcome and impact on Lucas cannot be predicted with certainty, management believes that the resolution of these suits and claims will not, individually or in the aggregate, have a material adverse effect on Lucas’ consolidated financial position, results of operations or cash flow. Lucas records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
NOTE 7 – INCOME TAXES
The Company recorded provision for income taxes of $39,161 and $0 for the years ended March 31, 2013 and March 31, 2012, respectively.
|
|
|
2013
|
|
|
|
|
2012
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8,161
|
|
|
|
|
$
|
-
|
|
|
State
|
|
|
31,000
|
|
|
|
|
|
-
|
|
|
|
|
|
39,161
|
|
|
|
|
|
-
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
|
|
-
|
|
|
State
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Total
|
|
$
|
39,161
|
|
|
|
|
$
|
-
|
|
The following is a reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rate to income from continuing operations before income taxes for the two years ended March 31, 2013:
|
|
|
2013
|
|
|
2012
|
|
|
Computed at expected tax rates (34%)
|
|
$
|
(2,297,148
|
)
|
|
$
|
(2,584,504
|
)
|
|
Meals and entertainment
|
|
|
10,938
|
|
|
|
4,774
|
|
|
State Income tax net of FIT benefit
|
|
|
20,460
|
|
|
|
-
|
|
|
Percentage depletion
|
|
|
-
|
|
|
|
-
|
|
|
Return to accrual true-up
|
|
|
(3,000
|
)
|
|
|
(116,829
|
)
|
|
Change in valuation allowance
|
|
|
2,307,911
|
|
|
|
2,696,559
|
|
|
Total
|
|
$
|
39,161
|
|
|
$
|
-
|
|
Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:
|
|
|
2013
|
|
|
2012
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating tax loss carryforwards
|
|
$
|
10,049,197
|
|
|
$
|
9,406,667
|
|
|
Gain on sale of oil and gas properties
|
|
|
6,303,421
|
|
|
|
4,262,969
|
|
|
Depletion
|
|
|
1,562,341
|
|
|
|
899,552
|
|
|
Unrealized net loss on available-for-sale securities
|
|
|
123,954
|
|
|
|
123,954
|
|
|
Share-based compensation
|
|
|
201,729
|
|
|
|
25,105
|
|
|
Accrued compensation
|
|
|
208,313
|
|
|
|
-
|
|
|
Tax Credit
|
|
|
8,161
|
|
|
|
-
|
|
|
Total deferred tax assets
|
|
|
18,457,116
|
|
|
|
14,718,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible drilling costs
|
|
|
(8,661,765
|
)
|
|
|
(7,288,433
|
)
|
|
Depreciation
|
|
|
(2,020,555
|
)
|
|
|
(1,964,289
|
)
|
|
Other
|
|
|
(2,066
|
)
|
|
|
(706
|
)
|
|
Total deferred tax liabilities
|
|
|
(10,684,386
|
)
|
|
|
(9,253,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
7,772,730
|
|
|
|
5,464,819
|
|
|
Less: Valuation allowance
|
|
|
(7,772,730
|
)
|
|
|
(5,464,819
|
)
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
At March 31, 2013, Lucas had estimated net operating loss carry-forwards for federal and state income tax purposes of approximately $ 29.6 million which will begin to expire, if not previously used, beginning in the year 2029.
The above estimates are based upon management’s decisions concerning certain elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly.
The Company files income tax returns for federal and state purposes. Management believes that with few exceptions, the Company is not subject to examination by United States tax authorities for tax periods prior to 2008.
NOTE 8 – STOCKHOLDERS’ EQUITY
Common Stock
The following summarizes Lucas’ common stock activity for each of the two years ended March 31, 2013:
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
Amount (a)
|
|
|
Per Share
|
|
|
Shares
|
|
|
Treasury
|
|
|
Outstanding
|
|
|
Balance at March 31, 2011
|
|
|
|
|
|
|
|
|
16,727,713
|
|
|
|
(36,900
|
)
|
|
|
16,690,813
|
|
|
Series C Warrants Exercise
|
|
$
|
5,760,374
|
|
|
$
|
2.29
|
|
|
|
2,510,506
|
|
|
|
-
|
|
|
|
2,510,506
|
|
|
Property Acquisitions
|
|
|
441,000
|
|
|
|
2.94
|
|
|
|
150,000
|
|
|
|
-
|
|
|
|
150,000
|
|
|
Share-Based Compensation
|
|
|
136,118
|
|
|
|
1.99
|
|
|
|
68,438
|
|
|
|
-
|
|
|
|
68,438
|
|
|
Retirement of Accrued Liability
|
|
|
498,750
|
|
|
|
3.99
|
|
|
|
125,000
|
|
|
|
-
|
|
|
|
125,000
|
|
|
Balance at March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
19,581,657
|
|
|
|
(36,900
|
)
|
|
|
19,544,757
|
|
|
Unit Offering
|
|
$
|
6,826,740
|
|
|
$
|
1.82
|
|
|
|
3,750,000
|
|
|
|
-
|
|
|
|
3,750,000
|
|
|
Warrants Exercised
|
|
|
412,501
|
|
|
|
1.00
|
|
|
|
412,501
|
|
|
|
-
|
|
|
|
412,501
|
|
|
Share-Based Compensation
|
|
|
320,869
|
|
|
|
1.75
|
|
|
|
183,249
|
|
|
|
-
|
|
|
|
183,249
|
|
|
Conversion of Preferred
|
|
|
-
|
|
|
|
-
|
|
|
|
2,824,000
|
|
|
|
-
|
|
|
|
2,824,000
|
|
|
Balance at March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
26,751,407
|
|
|
|
(36,900
|
)
|
|
|
26,714,507
|
|
(a) Net proceeds or fair market value on grant date, as applicable.
Fiscal Year 2013.
In April 2012, the Company sold an aggregate of 2,950,000 units at $2.00 each, with each unit consisting of one share of Company common stock and 0.35 of a warrant to purchase one share of the Company's common stock at an exercise price of $2.30 per share in a registered direct offering. A total of 2,950,000 shares and 1,032,500 warrants were sold in connection with the offering. The Company received an aggregate of $5,900,000 (or $2.00 per unit) in gross funding and approximately $5,518,000 (or $1.87 per unit) in net proceeds after paying commissions and other expenses associated with the offering. In September 2012, the Company sold an aggregate of 800,000 units at $1.65 each, with each unit consisting of one share of Company common stock and 0.25 of a warrant to purchase one share of the Company’s common stock at an exercise price of $2.00 per share in a registered direct offering. A total of 800,000 shares and 200,000 warrants were sold in connection with the offering. The Company received an aggregate of $1,320,000 (or $1.65 per unit) in gross funding and approximately $1,308,000 (or $1.64 per unit) in net proceeds after paying related expenses associated with the offering. The Company used the net proceeds of the offerings to pay down expenses related to drilling, lease operating and workover activities; and for general corporate purposes, including general and administrative expenses. The Company did not pay any commissions in connection with the offerings. During the year ended March 31, 2013, 412,501 warrants with an exercise price of $1.00 per share were exercised for total consideration of $412,501 and 412,501 shares of common stock were issued to the warrant holders. See Note 9 – Share-Based Compensation for information on common stock activity related to Share-Based Compensation, including shares granted to the Board of Directors, officers, employees and consultants.
Fiscal Year 2012.
During the year ended March 31, 2012, Series C Warrants were exercised for 2,510,506 shares of common stock. The exercise price of the Series C Warrants was $2.48 per share. The per share price of $2.29 shown in the above tabulation was net of commissions paid to the placement agent, see "Warrants" below for additional information. Common stock issuances for property acquisitions and share-based compensation are recorded at the grant date fair value of the shares on the date of issuance. See Note 4 – Property and Equipment for information on common stock issuances related to property acquisitions. See Note 9 – Share-Based Compensation for information on common stock activity related to Share-Based Compensation, including shares granted to the Board of Directors, officers, employees and consultants.
Preferred Stock
The following summarizes Lucas’ preferred shares activity for each of the two years ended March 31, 2013:
|
|
|
Preferred Shares
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at March 31, 2011
|
|
|
-
|
|
|
$
|
-
|
|
|
Issuances for Property Acquisitions:
|
|
|
|
|
|
|
Series A convertible
|
|
|
2,000
|
|
|
|
3,095,600
|
|
|
Series B convertible
|
|
|
2,824
|
|
|
|
5,166,754
|
|
|
Balance at March 31, 2012
|
|
|
4,824
|
|
|
$
|
8,262,354
|
|
|
Conversion to Common Stock:
|
|
|
|
|
|
|
|
|
|
Series B convertible
|
|
|
(2,824
|
)
|
|
|
(5,166,754
|
)
|
|
Balance at March 31, 2013
|
|
|
2,000
|
|
|
$
|
3,095,600
|
|
Preferred stock issuances for property acquisitions are recorded at the fair value of the shares on the date of issuance. Each share of the Series A and Series B Convertible Preferred Stock shares are convertible into an aggregate of 1,000 shares of the Company’s common stock and have no liquidation preference and no maturity date. The Series B Preferred Stock has dividends rights when and if declared by the Company on an “if converted” basis.
Treasury Stock
Lucas did not repurchase any shares of its common stock during the two years ended March 31, 2013. The shares previously purchased are held by Lucas’ transfer agent as Treasury Stock, and the shares are treated as issued, but not outstanding, at March 31, 2013 and 2012. The shares are recorded at a cost of $49,159.
Warrant
The following summarizes Lucas’ warrant activity for each of the two years ended March 31, 2013:
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
Outstanding at Beginning of Year
|
|
|
2,966,136
|
|
|
$
|
2.67
|
|
|
|
5,476,642
|
|
|
$
|
2.67
|
|
|
Issued
|
|
|
1,345,001
|
|
|
|
2.30
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(5,000
|
)
|
|
|
1.00
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(412,501
|
)
|
|
|
1.00
|
|
|
|
(2,510,506
|
)
|
|
|
2.51
|
|
|
Outstanding at End of Year
|
|
|
3,893,636
|
|
|
$
|
2.65
|
|
|
|
2,966,136
|
|
|
$
|
2.67
|
|
During the year ended March 31, 2013, the Company issued 1,232,500 warrants and reissued 112,501 warrants to warrant holders in connection with purchased securities. In April 2012, the Company sold an aggregate of 2,950,000 units at $2.00 each, with each unit consisting of one share of Company common stock and 0.35 of a warrant to purchase one share of the Company's common stock at an exercise price of $2.30 per share in a registered direct offering. A total of 2,950,000 shares and 1,032,500 warrants were sold in connection with the offering. The Company received an aggregate of $5,900,000 (or $2.00 per unit) in gross funding and approximately $5,518,000 (or $1.87 per unit) in net proceeds after paying commissions and other expenses associated with the offering. In September 2012, the Company sold an aggregate of 800,000 units at $1.65 each, with each unit consisting of one share of Company common stock and 0.25 of a warrant to purchase one share of the Company’s common stock at an exercise price of $2.00 per share in a registered direct offering. A total of 800,000 shares and 200,000 warrants were sold in connection with the offering. The Company received an aggregate of $1,320,000 (or $1.65 per unit) in gross funding and approximately $1,308,000 (or $1.64 per unit) in net proceeds after paying related expenses associated with the offering. The Company used the net proceeds of the offerings to pay down expenses related to drilling, lease operating and workover activities; and for general corporate purposes, including general and administrative expenses. The Company did not pay any commissions in connection with the offerings.
During the year ended March 31, 2013, 412,501 warrants with an exercise price of $1.00 per share were exercised and 5,000 warrants with an exercise price of $1.00 per share expired. These warrants were originally issued to the warrant holders in connection with the purchase of units in a private equity placement in September 2009. These warrants had an expiration date of August 31, 2012. At March 31, 2013, all of the September 2009 warrants had been exercised or expired.
During the year ended March 31, 2012, the Company did not issue any warrants, and none of the Company’s outstanding warrants expired.
In July 2011, in an effort to secure the funding for the capital expenditure program for the Company’s fiscal year and to avoid the unpredictable nature of the financial market, the Company incentivized the institutional investors who purchased securities in the Company's December 2010 offering to exercise the Series C Warrants they purchased as part of the offering by entering into an amendment to the original Series C Warrant Agreement on July 18, 2011 (the “Amendment Agreement”). The expiration date for the Series C Warrants was August 3, 2011. Without changing the expiration date, the Amendment Agreement required the investors to immediately exercise 25% of the Series C Warrants they held and the Company to lower the exercise price of the Series C Warrants to $2.48 per share from the original exercise price of $2.62 per share. Pursuant to the Series C Warrant Agreement, as amended, the investors were required to exercise all of their remaining Series C Warrants if the closing bid price of the Company's stock was higher than the amended exercise price on August 3, 2011. Since the closing bid price on that date for the Company's stock was $2.51, all remaining Series C Warrants were exercised. Net proceeds to the Company from exercises of all of the 2,510,506 Series C Warrants were approximately $5.8 million after deducting commissions paid to the placement agent. The Company used the net proceeds for general corporate purposes, including the funding of capital expenditures. Based on the Black Scholes option pricing model, the change in the exercise price resulted in an increase of $293,275 in the aggregate value of the Series C Warrants. Pursuant to the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification (ASC Topic 718), the Company recorded the increase as a non-operating expense in Other Income (Expense) in the Consolidated Statements of Operations and recorded the same amount in Additional Paid in Capital in the Consolidated Balance Sheets.
At March 31, 2013, the outstanding warrants had no intrinsic value.
NOTE 9 – SHARE-BASED COMPENSATION
Common Stock
During the annual shareholder meeting held on March 31, 2012, Company shareholders approved the Lucas Energy, Inc. Long Term Incentive Plan (“2012 Incentive Plan”) providing for the Company to issue up to 1,500,000 shares of common stock to officers, directors, employees, contractors and consultants for services provided to the Company. The Company registered shares to be issued under the Incentive Plan in a Form S-8 filed with the SEC in April 2012. At March 31, 2013, 565,240 shares remained available for issuance under the 2012 Incentive Plan.
During the annual shareholder meeting held on March 30, 2010, Company shareholders approved the Lucas Energy, Inc. Long Term Incentive Plan (“2010 Incentive Plan”) providing for the Company to issue up to 900,000 shares of common stock to officers, directors, employees, contractors and consultants for services provided to the Company. The Company registered shares to be issued under the Incentive Plan in a Form S-8 filed with the SEC in April 2010. At March 31, 2012, 194,518 shares remained available for issuance under the Incentive Plan.
Fiscal Year 2013.
For the year ended March 31, 2013, the Company awarded 89,768 shares of its common stock with an aggregate grant date fair value of $160,082, which were valued based on the trading value of Lucas’ common stock on the dates of grant, according to the employment agreements with certain officers and other managerial personnel. The stock compensation expense recognized for the awards of these shares was $101,741 of which $58,341 was accrued in common stock payable. The Company also awarded 93,481 shares of its common stock with an aggregate grant date fair value of $160,787, which were valued based on the trading value of Lucas’ common stock on the dates of grant to certain officers and other managerial personnel as fiscal year 2012 bonus. The stock compensation expense recognized for the awards was accrued in bonus payable.
Fiscal Year 2012.
For the year ended March 31, 2012, the Company awarded 68,438 shares of its common stock with an aggregate grant date fair value of $136,118, which were valued based on the trading value of Lucas’ common stock on the dates of grant. The shares were awarded according to the employment agreements with certain officers and other managerial personnel. The stock compensation expense recognized for the awards of these shares was $220,549 of which $84,431 was accrued in common stock payable.
Stock Options
The following summarizes Lucas’ stock option activity for each of the two years ended March 31, 2013:
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
Weighted
Average
Grant Price
|
|
|
|
|
|
Weighted
Average
Grant Price
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
Stock Options
|
|
|
Stock Options
|
|
|
Outstanding at Beginning of Period
|
|
|
456,000
|
|
|
$
|
2.88
|
|
|
|
256,000
|
|
|
$
|
1.99
|
|
|
Granted
|
|
|
747,668
|
|
|
|
1.50
|
|
|
|
200,000
|
|
|
|
4.05
|
|
|
Expired
|
|
|
(384,000
|
)
|
|
|
3.04
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at End of Period
|
|
|
819,668
|
|
|
$
|
1.55
|
|
|
|
456,000
|
|
|
$
|
2.88
|
|
Lucas granted stock options to purchase shares of common stock during the year ended March 31, 2013 to an officer, directors and several employees as employee based compensation. An officer was granted stock options to purchase 250,000 shares of common stock valued at approximately $243,030, directors were granted stock options to purchase 216,668 shares of common stock valued at approximately $104,629, several employees were granted stock options to purchase 206,000 shares of common stock valued at approximately $198,439 and a consultant was granted stock options to purchase 75,000 shares of common stock valued at approximately $69,265.
Compensation expense related to 250,000 stock options granted to an officer during the year ended March 31, 2013 was $24,659. Of the 250,000 options 50,000 vested immediately, 150,000 vest 33% on each of the first three anniversary dates of the grant, and 50,000 vest on the second anniversary of a different grant date, and all of the options have a five year exercise period. The exercise prices for the options equal the closing price of the Company stock on the grant dates. All grants were valued at fair value on the date of grant based on the market value of Lucas’ common stock using the Black Scholes option pricing model with the following weighted average assumptions used; dividend yield of 0.00%; expected volatility of 104.69%; risk-free interest rate of .38% and expected term of two years.
Compensation expense related to stock options granted to directors during the year ended March 31, 2013 was $32,426. The 216,668 options vested at the rate of 1/12 of such options per month over the period from January 2013 to December 2013 and have a two year exercise period. The exercise prices for the options equal the closing price of the Company stock on the grant dates. All grants were valued at fair value on the date of grant based on the market value of Lucas’ common stock using the Black Scholes option pricing model with the following weighted average assumptions; dividend yield of 0.00%; expected volatility of 90.08%; risk-free interest rate of .26% and expected term of 1.5 years.
Compensation expense related to stock options granted to several employees during the year ended March 31, 2013 was $24,102. The 206,000 options vest 25% of the grants on each of the first four anniversary dates and have a five year exercise period. The exercise prices for the options equal the closing price of the Company stock on the grant dates. All grants were valued at fair value on the date of grant based on the market value of Lucas’ common stock using the Black Scholes option pricing model with the following weighted average assumptions; dividend yield of 0.00%; expected volatility of 94.72%; risk-free interest rate of .49% and expected term of three years.
Compensation expense related to stock options granted to a consultant during the year ended March 31, 2013 was $2,309. The 75,000 options vest 25% on each of the first four anniversary dates and have a five year exercise period. The exercise prices for the options equals the closing price of the Company stock on the grant dates. All grants were valued at fair value on the date of grant based on the market value of Lucas’ common stock using the Black Scholes option pricing model with the following weighted average assumptions used for grants; dividend yield of 0.00%; expected volatility of 93.52%; risk-free interest rate of .40% and expected term of three years.
During the year ended March 31, 2013, Lucas had 384,000 options cancelled (including 200,000 options granted during fiscal 2012) due to the departure of William Sawyer, the previous Chief Executive Officer of the Company, and Andrew Lai, the previous Chief Financial Officer of the Company. According to William Sawyer’s severance package the Company cancelled his options in exchange for $200,000, which resulted in a modification of the stock options and immediate recognition of $339,742 of unamortized compensation expense plus an additional $83,657 for the difference between the fair value of the options on the modification date and the purchase price of $200,000.
Compensation expense related to stock granted during the year ended March 31, 2013 and March 31, 2012 was $575,812 and $203,443, respectively.
Options outstanding and exercisable at March 31, 2013 and March 31, 2012 had an intrinsic value of $39,000 and $132,480, respectively. The intrinsic value is based upon the difference between the market price of Lucas’s common stock on the date of exercise and the grant price of the stock options.
At March 31, 2013, unrecognized compensation expense related to non-vested stock options totaled $239,430. This unrecognized expense is expected to be amortized to expense on a straight-line basis over a weighted average period of 3.18 years.
Options outstanding and exercisable as of March 31, 2013:
|
Exercise
|
|
Remaining
|
|
Options
|
|
Options
|
|
Price
|
|
Life (Yrs)
|
|
Outstanding
|
|
Exercisable
|
|
$2.07
|
|
2.52
|
|
72,000
|
|
72,000
|
|
$1.74
|
|
4.59
|
|
150,000
|
|
50,000
|
|
$1.63
|
|
4.57
|
|
206,000
|
|
-
|
|
$1.15
|
|
1.17
|
|
216,668
|
|
66,672
|
|
$1.61
|
|
4.78
|
|
50,000
|
|
-
|
|
$1.58
|
|
4.59
|
|
125,000
|
|
-
|
|
|
|
Total
|
|
819,668
|
|
188,672
|
NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for interest and income taxes was as follows for the years ended March 31, 2013 and 2012:
|
|
|
2013
|
|
|
2012
|
|
|
Interest
|
|
$
|
36,843
|
|
|
$
|
16,008
|
|
|
Income taxes
|
|
|
74,011
|
|
|
|
-
|
|
Non-cash investing and financing activities for the years ended March 31, 2013 and 2012 included the following:
|
|
|
2013
|
|
|
2012
|
|
|
Issuance of note payable for the purchase of certain
|
|
|
|
|
|
|
|
oil and gas properties
|
|
|
450,000
|
|
|
|
22,000,000
|
|
|
Issuance of note payable for the purchase of certain
|
|
|
|
|
|
|
|
|
|
other property, plant and equipment
|
|
|
-
|
|
|
|
45,000
|
|
|
Issuance of preferred stock for the purchase of
|
|
|
|
|
|
|
|
|
|
certain oil and gas properties
|
|
|
-
|
|
|
|
8,262,354
|
|
|
Issuance of common stock for the purchase of
|
|
|
|
|
|
|
|
|
|
certain oil and gas properties
|
|
|
-
|
|
|
|
441,000
|
|
|
Note receivable for the sale of certain oil and
|
|
|
|
|
|
|
|
|
|
gas properties
|
|
|
-
|
|
|
|
486,727
|
|
|
Increase (Decrease) in asset retirement obligations
|
|
|
(181,970
|
)
|
|
|
621,519
|
|
|
Receivable extinguished for oil and gas properties
|
|
|
470,812
|
|
|
|
-
|
|
|
Note Payable extinguished for oil and gas properties
|
|
|
(23,098,496
|
)
|
|
|
-
|
|
NOTE 11 – SUBSEQUENT EVENTS
On April 4, 2013, the Company entered into a loan agreement with various lenders (the “Loan Agreement”) for an aggregate amount of $2,750,000 (“Tranche A”) to be used for general working capital. The lenders included entities beneficially owned by our directors, Ken Daraie (which entity loaned us $2,000,000) and W. Andrew Krusen, Jr. (which entities loaned us $250,000), as well as an unrelated third party which loaned the Company $500,000.
Effective May 31, 2013 the Company borrowed additional funds totaling $500,000 under a substantially similar Loan Agreement (“Tranche B”) with third party lenders.
Both, the Tranche A and Tranche B loans were evidenced by promissory notes (herein the “Notes”). The Tranche A and Tranche B loans bear interest of 14% per annum. The maturity for Tranche A is due and payable on or before October 4, 2013 and Tranche B is due and payable on or before April 4, 2014. The Notes can be prepaid at any time without penalty. In the event of default, the Notes will accrue interest at the rate of 17% per annum. The note holders were each granted a pro rata portion of warrants to purchase 325,000 shares of the Company’s common stock. The warrants have an exercise price of $1.50 per share, a term of five years and cashless exercise rights in the event the shares issuable upon exercise of the warrants are not registered with the Securities and Exchange Commission.
The Company must comply with certain standard covenants in connection with the Loan Agreement, including the requirement to continue to have its common stock listed on the NYSE MKT (or any equivalent replacement exchange), and the requirement to continue to comply with the filing requirements of the Securities Exchange Act of 1934, as amended. The Loan Agreement also includes that any proceeds received by the Company through any future funding activities or through the sale of oil and gas properties or interests is required to first be applied to the repayment of the Notes. The repayment of the Notes is secured by a first priority security interest in one hundred (100) barrels of oil per day of net production from the Company’s owned and operated oil and gas properties, and all payments and proceeds associated therewith.
On April 8, 2013, the Company entered into a Settlement Agreement with Seidler Oil & Gas, L.P. (“Seidler”) on a lawsuit claiming a refund on previous investments with Lucas Energy. The Company settled the outstanding balance and paid Seidler $1.3 million plus legal fees. Seidler released the Company, its current and past officers, directors and agents from associated claims and Seidler agreed to dismiss the previously filed lawsuit with prejudice. In addition, certain private investors also agreed to release the Company, Seidler, and their respective past and present affiliates from any and all claims.
The Company filed a lawsuit against the holder of the Company’s 2,000 outstanding shares of Series A Convertible Preferred Stock in the District Court of Harris County, Texas, on May 9, 2013, seeking a declaratory judgment that the 2,000 shares of Series A Convertible Preferred Stock should be cancelled, injunctive relief prohibiting the holder from selling or transferring the Series A Convertible Preferred Stock, and attorney’s fees. The outcome of the litigation matter cannot be determined at this time with any reasonable certainty.
Supplemental Oil and Gas Disclosures (Unaudited)
The following disclosures for the Company are made in accordance with authoritative guidance regarding disclosures about oil and natural gas producing activities. Users of this information should be aware that the process of estimating quantities of "proved," "proved developed," and "proved undeveloped" crude oil, natural gas liquids and natural gas reserves is complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. Although reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures.
Proved reserves represent estimated quantities of crude oil, natural gas liquids and natural gas that geoscience and engineering data can estimate, with reasonable certainty, to be economically producible from a given day forward from known reservoirs under economic conditions, operating methods and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.
Proved developed reserves are proved reserves expected to be recovered under operating methods being utilized at the time the estimates were made, through wells and equipment in place or if the cost of any required equipment is relatively minor compared to the cost of a new well.
Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Estimates for proved undeveloped reserves are not attributed to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.
On March 29, 2013, the Company entered into a settlement with Nordic on its previous purchase and sale agreement, dated October 13, 2011, of certain oil, natural gas, and mineral leases located in Gonzales, Karnes, and Wilson counties in Texas. The transaction settled and terminated the outstanding $22 million senior secured promissory note due to Nordic for certain assets of the Company, and resulted in the return to Nordic of ownership of the previously acquired assets. Some of these assets were included in the 2012 reserve report, therefore both the Proved Developed and the Proved Undeveloped reserves were negatively affected for the current year ending March 31, 2013 as a result of the settlement, the Company’s liabilities also decreased by $22 million in connection with the cancellation of the note.
PROVED RESERVE SUMMARY
All of the Company's reserves are located in the United States. The following tables sets forth Lucas’ net proved reserves, including proved developed and proved undeveloped reserves, at March 31
st
for each of the three years in the period ended March 31, 2013, and the changes in the net proved reserves for each of the three years in the period ended March 31, 2013, as estimated by the international petroleum consulting firm Forrest A. Garb & Associates, Inc.:
|
|
|
March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Crude Oil (Bbls)
|
|
|
|
|
|
|
|
|
|
|
Net proved reserves at beginning of year
|
|
|
7,023,520
|
|
|
|
2,768,200
|
|
|
|
1,970,230
|
|
|
Revisions of previous estimates
|
|
|
(1,980,284
|
)
|
|
|
(313,810
|
)
|
|
|
(575,988
|
)
|
|
Purchases in place
|
|
|
14,050
|
|
|
|
1,193,746
|
|
|
|
284,155
|
|
|
Extensions, discoveries and other additions
|
|
|
1,908,362
|
|
|
|
3,456,560
|
|
|
|
1,464,040
|
|
|
Sales in place
|
|
|
(1,750,278
|
)
|
|
|
(26,710
|
)
|
|
|
(336,550
|
)
|
|
Production
|
|
|
(84,227
|
)
|
|
|
(54,466
|
)
|
|
|
(37,687
|
)
|
|
Net proved reserves at end of year
|
|
|
5,131,143
|
|
|
|
7,023,520
|
|
|
|
2,768,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas (Mcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proved reserves at beginning of year
|
|
|
10,722,480
|
|
|
|
843,250
|
|
|
|
31,170
|
|
|
Revisions of previous estimates
|
|
|
(8,721,436
|
)
|
|
|
194,160
|
|
|
|
37,187
|
|
|
Purchases in place
|
|
|
-
|
|
|
|
-
|
|
|
|
126,200
|
|
|
Extensions, discoveries and other additions
|
|
|
1,336,108
|
|
|
|
9,699,630
|
|
|
|
657,430
|
|
|
Sales in place
|
|
|
(685,027
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Production
|
|
|
(9,236
|
)
|
|
|
(14,560
|
)
|
|
|
(8,737
|
)
|
|
Net proved reserves at end of year
|
|
|
2,644,889
|
|
|
|
10,722,480
|
|
|
|
843,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil Equivalents (Boe)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proved reserves at beginning of year
|
|
|
8,810,600
|
|
|
|
2,908,742
|
|
|
|
1,975,425
|
|
|
Revisions of previous estimates
|
|
|
(3,433,857
|
)
|
|
|
(281,450
|
)
|
|
|
(569,790
|
)
|
|
Purchases in place
|
|
|
14,050
|
|
|
|
1,193,746
|
|
|
|
305,188
|
|
|
Extensions, discoveries and other additions
|
|
|
2,131,047
|
|
|
|
5,073,165
|
|
|
|
1,573,612
|
|
|
Sales in place
|
|
|
(1,864,449
|
)
|
|
|
(26,710
|
)
|
|
|
(336,550
|
)
|
|
Production
|
|
|
(85,766
|
)
|
|
|
(56,893
|
)
|
|
|
(39,143
|
)
|
|
Net proved reserves at end of year
|
|
|
5,571,625
|
|
|
|
8,810,600
|
|
|
|
2,908,742
|
|
RESERVES
During the year ended March 31, 2013, Lucas adjusted its reserves approximately 3.2 million BOE of proved reserves primarily due to: the settlement and termination of the Nordic transaction that occurred in October 2011, adjustments on our undeveloped acreage in the Eagle Ford and Austin Chalk formations, and adjustments to our oil to gas ratios.
During the year ended March 31, 2012, Lucas added 1.6 million BOE of proved reserves primarily in the Eagle Ford and Austin Chalk formations. Approximately 93% of the reserve additions were crude oil. Sales in place of 0.3 million BOE were primarily related to farmouts of the Eagle Ford formation. See Note 4.
The following table sets forth Lucas’ proved developed and proved undeveloped reserves at March 31, 2013, 2012, and 2011:
|
|
|
At March 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Proved Developed Reserves
|
|
|
|
|
|
|
Crude Oil (Bbls)
|
251,243
|
|
402,360
|
|
106,960
|
|
Natural Gas (Mcf)
|
-
|
|
-
|
|
73,820
|
|
|
Oil Equivalents (Boe)
|
251,243
|
|
402,360
|
|
119,263
|
|
|
|
|
|
|
|
|
|
Proved Undeveloped Reserves
|
|
|
|
|
|
|
Crude Oil (Bbls)
|
4,879,900
|
|
6,621,156
|
|
2,661,240
|
|
Natural Gas (Mcf)
|
2,642,894
|
|
10,722,480
|
|
769,430
|
|
|
Oil Equivalents (Boe)
|
5,320,382
|
|
8,408,236
|
|
2,789,478
|
|
|
|
|
|
|
|
|
|
Proved Reserves
|
|
|
|
|
|
|
Crude Oil (Bbls)
|
5,131,143
|
|
7,023,516
|
|
2,768,200
|
|
Natural Gas (Mcf)
|
2,642,894
|
|
10,722,480
|
|
843,250
|
|
|
Oil Equivalents (Boe)
|
5,571,625
|
|
8,810,596
|
|
2,908,742
|
|
|
|
|
|
|
|
|
|
Probable Undeveloped Reserves
|
|
|
|
|
|
|
Crude Oil (Bbls)
|
1,438,059
|
|
-
|
|
1,334,800
|
|
Natural Gas (Mcf)
|
1,378,143
|
|
-
|
|
809,630
|
|
|
Oil Equivalents (Boe)
|
1,667,750
|
|
-
|
|
1,469,738
|
*The Company engaged Forrest Garb & Associates, an independent reserve engineering firm, to provide a reserve report on the Company’s properties. The reserve report has been included as an exhibit to the financial statements.
For the year ended March 31, 2013, total proved undeveloped reserves (PUDs) decreased by 3.1 million BOE to 5.3 million BOE. The proved undeveloped reserve reductions were primarily due to our settlement and termination of the Nordic transaction (see “Item 3. Legal Proceedings”), additional Eagle Ford wells, and revised oil and gas ratios. We had no proved developed non-producing BOE and we did not transfer any proved undeveloped reserves to proved developed reserves during the fiscal year ended March 31, 2013.
Lucas does not have a material amount of reserves that have remained undeveloped for five years or more. In addition, our plan is to convert our PUD balance as of March 31, 2013 to proved developed reserves within five years or prior to the end of fiscal year 2018.
Our reserves concentrate mainly in the Eagle Ford, Austin Chalk, Buda and Glen Rose formations. At March 31, 2013, Lucas’ proved reserves for the Eagle Ford and Austin Chalk formations were 5.2 million BOE, or 95%, and 0.3 million BOE, or 5%, of the total proved developed and undeveloped reserves of 5.6 million BOE.
The following table sets forth Lucas’ net reserves in BOE by reserve category and by formation at March 31, 2013 and 2012:
|
|
|
|
|
Proved
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
|
|
|
|
|
Proved Developed
|
|
Non-Producing
|
|
Proved Undeveloped
|
|
Total Proved
|
|
Eagle Ford
|
|
|
|
|
|
|
|
|
|
At March 31, 2013
|
25,867
|
|
-
|
|
3,504,803
|
|
3,530,670
|
|
|
At March 31, 2012
|
195,432
|
|
-
|
|
3,877,769
|
|
4,073,201
|
|
|
|
|
|
|
|
|
|
|
|
Austin Chalk
|
|
|
|
|
|
|
|
|
|
At March 31, 2013
|
215,108
|
|
-
|
|
1,500,134
|
|
1,715,242
|
|
|
At March 31, 2012
|
170,209
|
|
-
|
|
2,290,064
|
|
2,460,273
|
|
|
|
|
|
|
|
|
|
|
|
Buda & Glen Rose
|
|
|
|
|
|
|
|
|
|
At March 31, 2013
|
541
|
|
-
|
|
315,449
|
|
315,990
|
|
|
At March 31, 2012
|
21,296
|
|
-
|
|
2,240,403
|
|
2,261,699
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
At March 31, 2013
|
9,723
|
|
-
|
|
-
|
|
9,723
|
|
|
At March 31, 2012
|
15,423
|
|
-
|
|
-
|
|
15,423
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
At March 31, 2013
|
251,239
|
|
-
|
|
5,320,386
|
|
5,571,625
|
|
|
At March 31, 2012
|
402,360
|
|
-
|
|
8,408,236
|
|
8,810,596
|
Capitalized Costs Relating to Oil and Natural Gas Producing Activities
. The following table sets forth the capitalized costs relating to Lucas’ crude oil and natural gas producing activities at March 31, 2013 and 2012:
|
|
|
At March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Proved leasehold costs
|
|
$
|
10,002,828
|
|
|
$
|
35,454,781
|
|
|
Costs of wells and development
|
|
|
33,961,775
|
|
|
|
29,858,429
|
|
|
Capitalized asset retirement costs
|
|
|
745,197
|
|
|
|
927,165
|
|
|
Total cost of oil and gas properties
|
|
|
44,709,800
|
|
|
|
66,240,375
|
|
|
Accumulated depreciation and depletion
|
|
|
(9,077,997
|
)
|
|
|
(5,625,961
|
)
|
|
Net Capitalized Costs
|
|
$
|
35,631,803
|
|
|
$
|
60,614,414
|
|
Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development Activities
. The following table sets forth the costs incurred in Lucas’ oil and natural gas property acquisition, exploration and development activities for the years ended March 31, 2013 and 2012:
|
|
|
2013
|
|
|
2012
|
|
|
Acquisition of properties
|
|
|
|
|
|
|
|
Proved
|
|
$
|
116,700
|
|
|
$
|
32,797,515
|
|
|
Unproved
|
|
|
-
|
|
|
|
-
|
|
|
Exploration costs
|
|
|
-
|
|
|
|
-
|
|
|
Development costs
|
|
|
4,782,327
|
|
|
|
12,354,246
|
|
|
Total
|
|
$
|
4,899,027
|
|
|
$
|
45,151,761
|
|
Results of Operations for Oil and Natural Gas Producing Activities
. The following table sets forth the results of operations for oil and natural gas producing activities for the years ended March 31, 2013 and 2012:
|
|
|
2013
|
|
|
2012
|
|
|
Crude oil and natural gas revenues
|
|
$
|
8,247,084
|
|
|
$
|
5,258,461
|
|
|
Production costs
|
|
|
(4,192,223
|
)
|
|
|
(4,605,979
|
)
|
|
Depreciation and depletion
|
|
|
(3,452,036
|
)
|
|
|
(1,916,242
|
)
|
|
Results of operations for producing activities,
|
|
|
|
|
|
|
|
|
|
excluding corporate overhead and interest costs
|
|
$
|
602,825
|
|
|
$
|
(1,263,760
|
)
|
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves.
The following information has been developed utilizing procedures prescribed by ASC Topic 932 and based on crude oil and natural gas reserves and production volumes estimated by the independent petroleum consultants of Lucas. The estimates were based on a 12-month average for commodity prices for the years ended March 31, 2013 and 2012. The following information may be useful for certain comparison purposes, but should not be solely relied upon in evaluating Lucas or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of Lucas.
The future cash flows presented below are based on cost rates and statutory income tax rates in existence as of the date of the projections and average prices over the preceding twelve months. It is expected that material revisions to some estimates of crude oil and natural gas reserves may occur in the future, development and production of the reserves may occur in periods other than those assumed, and actual prices realized and costs incurred may vary significantly from those used.
Management does not rely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable and possible as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated.
The following table sets forth the standardized measure of discounted future net cash flows from projected production of Lucas’ oil and natural gas reserves as of March 31, 2013 and 2012:
|
|
|
At March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Future cash inflows
|
|
$
|
546,811,370
|
|
|
$
|
688,709,390
|
|
|
Future production costs
|
|
|
(80,809,010
|
)
|
|
|
(107,064,090
|
)
|
|
Future development costs
|
|
|
(177,353,400
|
)
|
|
|
(300,395,000
|
)
|
|
Future income taxes
|
|
|
(75,034,354
|
)
|
|
|
(72,444,823
|
)
|
|
Future net cash flows
|
|
|
213,614,606
|
|
|
|
208,805,477
|
|
|
Discount to present value at 10% annual rate
|
|
|
(115,462,563
|
)
|
|
|
(133,420,621
|
)
|
|
Standardized measure of discounted future net
|
|
|
|
|
|
|
|
|
|
cash flows relating to proved oil and gas
|
|
|
|
|
|
|
|
|
|
reserves
|
|
$
|
98,152,043
|
|
|
$
|
75,384,856
|
|
Changes in Standardized Measure of Discounted Future Net Cash Flows.
The following table sets forth the changes in the standardized measure of discounted future net cash flows at March 31, for each of the two years in the period ended March 31, 2013:
|
|
|
2013
|
|
|
2012
|
|
|
Standardized measure, beginning of year
|
|
$
|
75,384,856
|
|
|
$
|
42,724,817
|
|
|
Crude oil and natural gas sales, net of production costs
|
|
|
(4,054,861
|
)
|
|
|
(1,059,860
|
)
|
|
Net changes in prices and production costs
|
|
|
81,109,584
|
|
|
|
(9,255,307
|
)
|
|
Extensions, discoveries, additions and improved recovery
|
|
|
50,696,971
|
|
|
|
41,658,210
|
|
|
Changes in estimated future development costs
|
|
|
72,652,500
|
|
|
|
(12,435,000
|
)
|
|
Development costs incurred
|
|
|
15,848,464
|
|
|
|
2,410,000
|
|
|
Revisions of previous quantity estimates
|
|
|
(180,722,311
|
)
|
|
|
(5,465,785
|
)
|
|
Accretion of discount
|
|
|
10,434,472
|
|
|
|
5,648,786
|
|
|
Net change in income taxes
|
|
|
(5,507,907
|
)
|
|
|
(15,196,819
|
)
|
|
Purchases of reserves in place
|
|
|
519,924
|
|
|
|
22,710,732
|
|
|
Sales of reserves in place
|
|
|
(23,115,750
|
)
|
|
|
(998,050
|
)
|
|
Change in timing of estimated future production
|
|
|
4,906,101
|
|
|
|
4,643,132
|
|
|
Standardized measure, end of year
|
|
$
|
98,152,043
|
|
|
$
|
75,384,856
|
|
