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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2013

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

For the transition period from          to          

Commission File Number 001-32942

EVOLUTION PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

2500 CityWest Blvd., Suite 1300, Houston, Texas 77042

(Address of principal executive offices and zip code)

(713) 935-0122

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: x No: o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: x No: o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes: o No: x

The number of shares outstanding of the registrant’s common stock, par value $0.001, as of January 31, 2014, was 32,394,999.

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EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES

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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Evolution Petroleum Corporation and Subsidiaries

Consolidated Condensed Balance Sheets

(Unaudited)

See accompanying notes to consolidated condensed financial statements.

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Evolution Petroleum Corporation and Subsidiaries

Consolidated Condensed Statements of Operations

(Unaudited)

* General and administrative expenses for the three months ended December 31, 2013 and 2012 included non-cash stock-based compensation expense of $316,422 and $393,579, respectively.  For the corresponding six month period’s non-cash stock-based compensation expense was $689,860 and $747,369, respectively.

** Restructuring charges for the three months and six months ended December 31, 2013 included non-cash stock-based compensation expense of $376,365.

See accompanying notes to consolidated condensed financial statements.

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Evolution Petroleum Corporation and Subsidiaries

Consolidated Condensed Statements of Cash Flows

(Unaudited)

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Evolution Petroleum Corporation and Subsidiaries

Consolidated Condensed Statements of Cash Flows

(Unaudited)

Our supplemental disclosures of cash flow information for the six months ended December 31, 2013 and 2012 are as follows:

See accompanying notes to consolidated condensed financial statements.

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Evolution Petroleum Corporation and Subsidiaries

Consolidated Condensed Statement of Changes in Stockholders’ Equity

For the Six Months Ended December 31, 2013

(Unaudited)

* Includes $376,365 of stock compensation reflected in restructuring charges.

See accompanying notes to consolidated condensed financial statements.

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Note 1 — Organization and Basis of Preparation

Nature of Operations.  Evolution Petroleum Corporation (“EPM”) and its subsidiaries (the “Company”, “we”, “our” or “us”), is an independent petroleum company headquartered in Houston, Texas and incorporated under the laws of the State of Nevada.  We are engaged primarily in the exploitation, development and re-development of known oil and gas resources for the production of crude oil and natural gas, utilizing conventional, specialized and proprietary technology to increase production, ultimate recoveries, or both.

Interim Financial Statements.  The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the appropriate rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  All adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been included.  The interim financial information and notes hereto should be read in conjunction with the Company’s 2013 Annual Report on Form 10-K for the fiscal year ended June 30, 2013, as filed with the SEC. The results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year.

Principles of Consolidation and Reporting.  Our consolidated financial statements include the accounts of EPM and its wholly-owned subsidiaries: NGS Sub Corp and its wholly owned subsidiary, Tertiaire Resources Company, Evolution Operating Co., Inc. Evolution Petroleum OK, Inc. and NGS Technologies, Inc. and its three wholly owned subsidiaries.  All significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements for the previous period may include certain reclassifications that were made to conform to the current presentation.  Such reclassifications have no impact on previously reported loss or stockholders’ equity.

Use of Estimates.  The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Significant estimates include reserve quantities and estimated future cash flows associated with proved reserves, which significantly impact depletion expense and potential impairments of oil and natural gas properties, income taxes and the valuation of deferred tax assets, stock-based compensation and commitments and contingencies.  We analyze our estimates based on historical experience and various other assumptions that we believe to be reasonable. 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.

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Note 2 — Property and Equipment

As of December 31, 2013 and June 30, 2013 our oil and natural gas properties and other property and equipment consisted of the following:

Unproved property not subject to amortization consists of unevaluated acreage of $4.2 million and $4.1 million as of December 31, 2013 and June 30, 2013, respectively, for our properties in the Mississippi Lime in Oklahoma.  Our evaluation of impairment of unproved properties occurs, at a minimum, on a quarterly basis.  During the six months ended December 31, 2013 and the corresponding 2012 period, no impairments have been recorded.

Note 3 — Joint Interest Agreement

Effective April 17, 2012, a wholly owned subsidiary of the Company entered into definitive agreements with Orion Exploration Partners, LLC (“Orion”) to acquire and develop interests in oil and gas leases, associated surface rights and related assets located in the Mississippian Lime formation in Kay County in North Central Oklahoma. Our participation in this joint venture is reflected on our December 31, 2013 and June 30, 2013 balance sheets by the items below.

Note 4 — Asset Retirement Obligations

Our asset retirement obligations represent the estimated present value of the amount we will incur to plug, abandon and remediate our producing properties at the end of their productive lives in accordance with applicable laws. The following are reconciliations of the beginning and ending asset retirement obligation balances:

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Note 5 — Stockholders’ Equity

Common Stock

During the six months ended December 31, 2013 we issued (i) 1,008,657 shares of our common stock upon the exercise of incentive stock options (ISOs), receiving cash proceeds totaling $2.1 million, and (ii) 2,622,723 of our common shares upon cashless exercises of nonqualified stock options (NQSOs) and incentive warrants, all being exercised on a net basis, except for 50,956 of previously acquired shares owned by option holders that were swapped in payment of the exercise price.  The weighted average cost of these swapped shares was $12.14.

Additional paid-in capital increased $4.2 million, due to $1.1 million of stock compensation amortization ($0.4 million of which in the restructuring charge), $2.8 million from the exercise of stock options and warrants listed in (i) and (ii) above, and $0.4 million from tax benefits associated with stock compensation (i.e. windfall tax benefit).

Additional paid-in capital decreased by $2.8 million, due to the retirement of 801,889 shares of treasury stock acquired in previous fiscal years at a cost of approximately $1 million, and our purchase of 144,462 shares of Treasury Stock from employees and directors at a cost of $12.09 per share or $1.7 million.  93,506 of such shares were in satisfaction of payroll tax liabilities from exercises and restricted stock vestings (requiring cash outlays by us) and 50,956 shares were received from option holders in “swap” cashless stock option exercises, using stock previously owned by the option holder.  These acquisitions reduced the number of our common shares outstanding by 946,351 shares.

In December 2013 retained earnings were reduced by the $3.2 million of cash dividends we made to our common shareholders as the result of a common stock dividend policy approved by the Board of Directors in November 2013.  Since we expect the windfall tax benefit created by the recent exercise of warrants and NQSOs will drive our tax earnings and profits account into a deficit at June 30, 2014, all cash dividends on common shares paid in December 2013 will be treated for tax purposes as a return of capital and not as dividend income to the shareholder.

Recovery of Stockholder Short Swing Profit

In September 2013, an executive officer of the Company paid $6,850 to the Company, representing the disgorgement of short swing profits under Section 16(b) under the Exchange Act. The amount was recorded as additional paid-in capital.

Series A Cumulative Perpetual Preferred Stock

At December 31, 2013, there were 317,319 shares of the Company’s 8.5% Series A Cumulative (perpetual) Preferred Stock outstanding.  The Series A Cumulative Preferred Stock has a liquidation preference of $25.00 per share and cannot be converted into our common stock.  There are no sinking fund or redemption rights available to holders thereof.  Optional redemption can only be made by us on or after July 1, 2014 for the stated liquidation value of $25.00 per share plus accrued dividends, or earlier by an acquirer under a change of control at a redemption price of $25.25 per share.  With respect to dividend rights and rights upon our liquidation, winding-up or dissolution, the Series A Preferred Stock ranks senior to our common shareholders, but subordinate to any of our existing and future debt.  Dividends on the Series A Cumulative Preferred Stock accrue and accumulate at a fixed rate of 8.5% per annum on the $25.00 per share liquidation preference, payable monthly at $0.177083 per share, as, if and when declared by our Board of Directors.

During the six months ended December 31, 2013  we paid $337,151 of cash dividends to holders of our Series A Preferred Stock.  Since we expect the windfall tax benefit created by the recent exercise of warrants and NQSOs will drive our tax earnings and profits account into a deficit at June 30, 2014, cash dividends for the six months ended December 31, 2013 will be treated for tax purposes as a return of capital and not as dividend income to the shareholder.

Note 6 — Stock-Based Incentive Plan

We may grant option awards to purchase common stock (the “Stock Options”), restricted common stock awards (“Restricted Stock”), and unrestricted fully vested common stock, to employees, directors, and consultants of the Company and its subsidiaries under the Natural Gas Systems Inc. 2003 Stock Plan (the “2003 Stock Plan”) and the Evolution Petroleum Corporation Amended and Restated 2004 Stock Plan (the “2004 Stock Plan” or together, the “EPM Stock Plans”).  Option awards for the purchase of 600,000 shares of common stock were issued under the 2003 Stock Plan.  The 2004 Stock Plan authorized the issuance of 6,500,000 shares of common stock.  No further shares are available for grant under the 2003 Stock Plan and 784,438 shares remain available for grant under the 2004 Stock Plan as of December 31, 2013.

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We have also granted common stock warrants, as authorized by the Board of Directors, to employees in lieu of cash bonuses or as incentive awards to reward previous service or provide incentives to individuals to acquire a proprietary interest in our success and to remain in our service (the “Incentive Warrants”).  These Incentive Warrants have similar characteristics of the Stock Options.  A total of 1,037,500 Incentive Warrants have been issued, with Board of Directors approval, outside of the EPM Stock Plans.  We have not issued Incentive Warrants since the listing of our shares on the NYSE MKT (formerly, the American Stock Exchange) in July 2006.

Stock Options and Incentive Warrants

For the six months ended December 31, 2013 and 2012, stock-based compensation expense was $- and $26,274, respectively.  As of August 31, 2012 all compensation costs attributable to Stock Options and Incentive Warrants had been recognized.

No Stock Options or Incentive Warrants have been granted since August 2008.

The following summary presents information regarding outstanding Stock Options and Incentive Warrants as of December 31, 2013, and the changes during the fiscal year:

(1) Based upon the difference between the market price of our common stock on the last trading date of the period ($12.34 as of December 31, 2013) and the Stock Option or Incentive Warrant exercise price of in-the-money Stock Options and Incentive Warrants.

There were 4,069,815 Stock Options and Warrants exercised during the six months ended December 31, 2013 with an aggregate intrinsic value of $41,247,805.

During the six months ended December 31, 2012 there were 18,922 Stock Options and Incentive Warrants that vested with a total grant date fair value of $46,359 and no unvested Stock Options and Incentive Warrants remained.

Restricted Stock

Stock-based compensation expense related to Restricted Stock grants for the three months ended December 31, 2013 and 2012 was $316,422 and $393,579, respectively.  For the six months ended December 31, 2013 and 2012, such compensation expense was $689,860 and $747,369, respectively.  See Note 12 — Restructuring, for stock compensation included in Restructuring Charge for the six months ended December 31, 2013.

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The following table sets forth the Restricted Stock transactions for the six months ended December 31, 2013:

At December 31, 2013, unrecognized stock compensation expense related to Restricted Stock grants totaled $1,359,862.  Such unrecognized expense will be recognized over a weighted average period of 1.8 years.

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Note 7 — Fair Value Measurement

Accounting guidelines for measuring fair value establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement.

The three levels are defined as follows:

Level 1 — Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

Level 2 — Other inputs that are observable directly or indirectly such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 — Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.

Fair Value of Financial Instruments.  The Company’s other financial instruments consist of cash and cash equivalents, certificates of deposit, receivables and payables. The carrying amounts of cash and cash equivalents, receivables and payables approximate fair value due to the highly liquid or short-term nature of these instruments.

Other Fair Value Measurements.  The initial measurement of asset retirement obligations at fair value is calculated using discounted future cash flows of internally estimated costs. Significant Level 3 inputs used in the calculation of asset retirement obligations include the costs of plugging and abandoning wells, surface restoration and reserve lives. Subsequent to initial recognition, revisions to estimated asset retirement obligations are made when changes occur for input values, which we review quarterly.

Note 8 — Income Taxes

We file a consolidated federal income tax return in the United States and various combined and separate filings in several state and local jurisdictions.

There were no FIN 48 unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the six months ended December 31, 2013.  We believe we have appropriate support for the income tax positions taken and to be taken on our tax returns and that the accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company’s federal and state income tax returns are open to audit under the statute of limitations for the years ending June 30, 2009 through June 30, 2012.

Our effective tax rate for any period may differ from the statutory federal rate due to (i) our state income tax liability in Louisiana; (ii) stock-based compensation expense related to qualified incentive stock option awards (“ISO awards”), which creates a permanent tax difference for financial reporting, as these types of awards, if certain conditions are met, are not deductible for federal tax purposes; and (iii) statutory percentage depletion, which may create a permanent tax difference for financial reporting.

Our estimated annual income tax rate used to determine income tax expense for the six months ended December 31, 2013 does not include the utilization of statutory depletion deductions in excess of basis carried over from previous years that had driven our book tax rate well below statutory rates during the three months ended September 30, 2013.  Instead our tax benefits were changed significantly during November and December 2013 when our employees, officers and directors exercised more than 4 million of 4.8 million stock options and incentive warrants, resulting in approximately $31.2 million of tax deductions (“Option Deductions”) available to us resulting in a tax impacted benefit of approximately $10.6 million assuming a 34% statutory rate.  On a financial reporting basis this is expected to result in a tax benefit associated with stock compensation (i.e. windfall tax benefit) to the extent of expected cash income taxes payable generated in fiscal year 2014.  The remainder of the Option Deductions result in an unbenefitted net operating loss associated with stock compensation to benefit future fiscal years.  To the extent the Option Deductions cause a net operating loss, no deferred tax asset is recorded under the rules of ASC 718.  The Option Deductions will be recorded as a reduction in current income taxes payable each year and an increase in equity to the extent cash taxes payable are reduced to zero. 

Because the Option Deductions are expected to reduce taxable income to zero for the year ended June 30, 2014, percentage depletion is no longer available for the current year, thus negating the beneficial rate reduction for the percentage depletion in excess of basis.  Percentage depletion that is no longer expected to be deductible in 2014, will be carried forward to future years.  The

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Option Deductions will only impact reported earnings by increasing the projected effective tax rate closer to the statutory rate in those years affected by the Option Deductions due to percentage depletion in excess of basis deduction being delayed and carried forward.  Our effective annual tax rate estimated as December 31, 2013 was impacted by this postponement of depletion in excess of basis.  Our estimated annual income tax rate used to determine income tax expense for the three months ended September 30, 2013 included the utilization of statutory depletion deductions carried over from previous years resulting in a higher than normal rate benefit from depletion in excess of basis which has been reversed in the current fiscal quarter.

We recognized income tax expense of $724,543 and $1,814,717 for the six months ended December 31, 2013 and 2012, respectively, with corresponding effective rates of 41% and 37%.

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Note 9 — Net Income Per Share

The following table sets forth the computation of basic and diluted income per share:

Outstanding potentially dilutive securities as of December 31, 2013 were as follows:

Outstanding potentially dilutive securities as of December 31, 2012 were as follows: