Evolution Petroleum 2015 Q2 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2014
 
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)
 
Nevada
 
41-1781991
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
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: ý 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: ý 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. 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes: o No: ý
 
The number of shares outstanding of the registrant’s common stock, par value $0.001, as of February 2, 2015, was 32,860,087.



EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



1

Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Evolution Petroleum Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited) 


 
December 31,
2014
 
June 30,
2014
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
22,523,164

 
$
23,940,514

Receivables
2,924,570

 
1,457,212

Deferred tax asset
159,624

 
159,624

Prepaid expenses and other current assets
677,756

 
747,453

Total current assets
26,285,114

 
26,304,803

Oil and natural gas property and equipment, net (full-cost method of accounting)
38,536,733

 
37,822,070

Other property and equipment, net
333,001

 
424,827

Total property and equipment
38,869,734

 
38,246,897

Other assets
578,405

 
464,052

Total assets
$
65,733,253

 
$
65,015,752

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
4,821,014

 
$
441,722

State and federal income taxes payable
45,392

 

Accrued liabilities and other
811,821

 
2,558,004

Total current liabilities
5,678,227

 
2,999,726

Long term liabilities
 

 
 

Deferred income taxes
10,553,861

 
9,897,272

Asset retirement obligations
727,124

 
205,512

Deferred rent
27,148

 
35,720

Total liabilities
16,986,360

 
13,138,230

Commitments and contingencies (Note 15)


 


Stockholders’ equity
 

 
 

Preferred stock, par value $0.001; 5,000,000 shares authorized:8.5% Series A Cumulative Preferred Stock, 1,000,000 shares designated, 317,319 shares issued and outstanding at December 31, 2014 and June 30, 2014 with a liquidation preference of $7,932,975 ($25.00 per share)
317

 
317

Common stock; par value $0.001; 100,000,000 shares authorized: issued and outstanding 32,860,087 shares and 32,615,646 as of December 31, 2014 and June 30, 2014, respectively
32,860

 
32,615

Additional paid-in capital
36,035,076

 
34,632,377

Retained earnings
12,678,640

 
17,212,213

Total stockholders’ equity
48,746,893

 
51,877,522

Total liabilities and stockholders’ equity
$
65,733,253

 
$
65,015,752

 

See accompanying notes to consolidated condensed financial statements.

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Table of Contents

Evolution Petroleum Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited)
 
 
Three Months Ended 
 December 31,
 
Six Months Ended 
 December 31,
 
2014
 
2013
 
2014
 
2013
Revenues
 

 
 

 
 

 
 

Delhi field
$
7,644,831

 
$
4,130,236

 
$
11,513,433

 
$
8,560,047

Artificial lift technology
63,236

 
189,894

 
179,092

 
331,985

Other properties

 
72,159

 
20,369

 
133,956

Total revenues
7,708,067

 
4,392,289

 
11,712,894

 
9,025,988

Operating costs
 

 
 

 
 

 
 

Production costs - Delhi Field
2,817,866

 

 
2,817,866

 

Production costs - artificial lift technology
191,553

 
153,221

 
388,913

 
316,970

Production costs - other properties
9,390

 
83,309

 
97,412

 
337,810

Depreciation, depletion and amortization
917,757

 
327,168

 
1,287,107

 
636,841

Accretion of discount on asset retirement obligations
8,137

 
12,418

 
12,773

 
25,346

General and administrative expenses *
1,606,501

 
2,642,082

 
3,111,094

 
4,571,033

Restructuring charges **
(5,431
)
 
1,332,186

 
(5,431
)
 
1,332,186

Total operating costs
5,545,773

 
4,550,384

 
7,709,734

 
7,220,186

Income (loss) from operations
2,162,294

 
(158,095
)
 
4,003,160

 
1,805,802

Other
 

 
 

 
 

 
 

Interest income
7,662

 
7,701

 
20,425

 
15,404

Interest (expense)
(12,159
)
 
(16,582
)
 
(30,619
)
 
(33,095
)
Income (loss) before income taxes
2,157,797

 
(166,976
)
 
3,992,966

 
1,788,111

Income tax provision
917,879

 
241,907

 
1,624,038

 
724,543

Net income (loss) attributable to the Company
$
1,239,918

 
$
(408,883
)
 
$
2,368,928

 
$
1,063,568

Dividends on preferred stock
168,576

 
168,576

 
337,151

 
337,151

Net income (loss) available to common stockholders
$
1,071,342

 
$
(577,459
)
 
$
2,031,777

 
$
726,417

Earnings (loss) per common share
 
 
 
 
 
 
 
Basic
$
0.03

 
$
(0.02
)
 
$
0.06

 
$
0.03

Diluted
$
0.03

 
$
(0.02
)
 
$
0.06

 
$
0.02

Weighted average number of common shares
 

 
 

 
 

 
 

Basic
32,825,631

 
30,063,676

 
32,754,016

 
29,335,498

Diluted
32,947,280

 
30,063,676

 
32,884,754

 
32,377,918

 
* General and administrative expenses for the three months ended December 31, 2014 and 2013 included non-cash stock-based compensation expense of $245,020 and $316,422, respectively. For the corresponding six month periods, non-cash stock-based compensation expense was $488,357 and $689,860, respectively. 

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

See accompanying notes to consolidated condensed financial statements.


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Table of Contents

Evolution Petroleum Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended 
 December 31,
 
2014
 
2013
Cash flows from operating activities
 

 
 

Net income attributable to the Company
$
2,368,928

 
$
1,063,568

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation, depletion and amortization
1,311,425

 
657,265

Stock-based compensation
488,357

 
689,860

Stock-based compensation related to restructuring

 
376,365

Accretion of discount on asset retirement obligations
12,773

 
25,346

Settlements of asset retirement obligations
(220,522
)
 
(57,247
)
Deferred income taxes
656,589

 
329,667

Deferred rent
(8,574
)
 
(8,574
)
Changes in operating assets and liabilities:
 

 
 

Receivables from oil and natural gas sales
(1,454,866
)
 
135,292

Receivables from income taxes and other
(12,492
)
 
(11,170
)
Due from joint interest partner

 
4,687

Prepaid expenses and other current assets
69,697

 
(367,426
)
Accounts payable and accrued expenses
1,384,201

 
222,968

Income taxes payable
45,392

 
(233,548
)
Net cash provided by operating activities
4,640,908

 
2,827,053

Cash flows from investing activities
 

 
 

Proceeds from asset sales
389,166

 
544,442

Capital expenditures for oil and natural gas properties
(1,136
)
 
(856,943
)
Capital expenditures for other property and equipment
(311,075
)
 
(9,637
)
Other assets
(84,341
)
 
(5,957
)
Net cash used in investing activities
(7,386
)
 
(328,095
)
Cash flows from financing activities
 

 
 

Proceeds on exercise of stock options
51,600

 
2,141,500

Cash dividends to preferred stockholders
(337,151
)
 
(337,151
)
Cash dividends to common stockholders
(6,565,350
)
 
(3,205,135
)
Acquisitions of treasury stock
(58,660
)
 
(1,127,801
)
Tax benefits related to stock-based compensation
921,581

 
386,976

Maturity of certificate of deposit

 
250,000

Recovery of short swing profits
(62,958
)
 

Deferred loan costs
66

 
6,850

Net cash used in financing activities
(6,050,872
)
 
(1,884,761
)
Net increase (decrease) in cash and cash equivalents
(1,417,350
)
 
614,197

Cash and cash equivalents, beginning of period
23,940,514

 
24,928,585

Cash and cash equivalents, end of period
$
22,523,164

 
$
25,542,782


Supplemental disclosures of cash flow information:
Six Months Ended 
 December 31,
 
2014
 
2013
Income taxes paid
$
100,000

 
$
755,564

Non-cash transactions:
 

 
 

Change in accounts payable used to acquire property and equipment
1,410,420

 
(223,846
)
Oil and natural gas property costs incurred through recognition of asset retirement obligations
562,482

 
48,988

Previously acquired Company common shares swapped by holders to pay stock option exercise price

 
618,606

 
See accompanying notes to consolidated condensed financial statements.

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Table of Contents

Evolution Petroleum Corporation and Subsidiaries
Consolidated Condensed Statement of Changes in Stockholders' Equity
For the Six Months Ended December 31, 2014
(Unaudited)

 
Preferred
 
Common Stock
 
 
 
 
 
 
 
 
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Total
Stockholders'
Equity
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Balance, June 30, 2014
317,319

 
$
317

 
32,615,646

 
$
32,615

 
$
34,632,377

 
$
17,212,213

 
$

 
$
51,877,522

Issuance of restricted common stock

 

 
213,466

 
214

 
(148
)
 

 

 
66

Exercise of stock options

 

 
37,000

 
37

 
51,563

 

 

 
51,600

Acquisitions of treasury stock

 

 
(6,025
)
 

 

 

 
(58,660
)
 
(58,660
)
Retirements of treasury stock

 

 

 
(6
)
 
(58,654
)
 

 
58,660

 

Stock-based compensation

 

 

 

 
488,357

 

 

 
488,357

Tax benefits related to stock-based compensation

 

 

 

 
921,581

 

 

 
921,581

Net income attributable to the Company

 

 

 

 

 
2,368,928

 

 
2,368,928

Common stock cash dividends

 

 

 

 

 
(6,565,350
)
 

 
(6,565,350
)
Preferred stock cash dividends

 

 

 

 

 
(337,151
)
 

 
(337,151
)
Balance, December 31, 2014
317,319

 
$
317

 
32,860,087

 
$
32,860

 
$
36,035,076

 
$
12,678,640

 
$

 
$
48,746,893



 See accompanying notes to consolidated condensed financial statements.


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Table of Contents
Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements




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 development of incremental oil and gas reserves within known oil and gas resources for our shareholders and customers utilizing conventional and proprietary technology.
 
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 2014 Annual Report on Form 10-K for the fiscal year ended June 30, 2014, 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. All significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements for the previous year include certain reclassifications that were made to conform to the current presentation. Such reclassifications have no impact on previously reported net income 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.

New Accounting Pronouncement.  In June 2014, the FASB issued FASB Accounting Standards Update No. 2014-12 “Compensation-Stock Compensation (Topic 718) : Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”).

The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.

The amendment in this update is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.

 

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Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements


Note 2 — Receivables

As of December 31, 2014 and June 30, 2014 our receivables consisted of the following:

 
December 31,
2014
 
June 30,
2014
Receivables from oil and gas sales
$
2,198,912

 
$
1,456,146

Receivable from suspended overriding royalty interest (a)
712,100

 

Other
13,558

 
1,066

Receivables
$
2,924,570

 
$
1,457,212


(a) In connection with the lawsuit between the Company and Denbury Resources, Inc. ("Denbury") regarding the provisions of the May 8, 2006 Purchase and Sale Agreements, Denbury has unilaterally suspended payments related to 2.891545% of our overriding royalty interest ("ORRI") in the Delhi Holt Bryant Unit effective November 1, 2014. Accordingly, rather than remitting our usual 7.405201% ORRI and royalty payment, which Denbury has been paying the Company since 2006, Denbury arbitrarily applied a 2.891545% reduction for two months of ORRI by reducing their payment to the Company for December 2014 sales without the Company's consent. Such amounts are being held in suspense by Denbury pending resolution of the litigation. The Company's position is that Denbury has no legal basis for applying such a reduction and withholding our funds. [See Note 15 - Commitments and Contingencies.]


Note 3 — Prepaid Expenses and Other Current Assets

As of December 31, 2014 and June 30, 2014 our prepaid expenses and other current assets consisted of the following:

 
December 31,
2014
 
June 30,
2014
Prepaid insurance
$
155,827

 
$
169,288

Equipment inventory
28,898

 
85,888

Prepaid other
34,320

 
42,800

Retainers and deposits
26,978

 
29,478

Prepaid federal and Louisiana income taxes
431,733

 
419,999

Prepaid expenses and other current assets
$
677,756

 
$
747,453




Note 4 — Property and Equipment
 
As of December 31, 2014 and June 30, 2014 our oil and natural gas properties and other property and equipment consisted of the following:
 
December 31,
2014
 
June 30,
2014
Oil and natural gas properties
 

 
 

Property costs subject to amortization
$
48,812,257

 
$
47,166,282

Less: Accumulated depreciation, depletion, and amortization
(10,275,524
)
 
(9,344,212
)
Oil and natural gas properties, net
$
38,536,733

 
$
37,822,070

Other property and equipment
 

 
 

Furniture, fixtures and office equipment, at cost
$
286,820

 
$
343,178

Artificial lift technology equipment, at cost
595,877

 
377,943

Less: Accumulated depreciation
(549,696
)
 
(296,294
)
Other property and equipment, net
$
333,001

 
$
424,827

 

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Table of Contents
Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements


During the six months ended ended December 31, 2014, we incurred $217,934 of costs related to the installation of our artificial lift technology on the remaining two wells of a five-well program for a third-party customer. Under the contract for these installations, we fund the majority of the incremental equipment and installation costs and will receive 25% of the net profits from production, as defined, for as long as the technology remains in the wells. We are depreciating these costs using a method and a life which approximates the timing and amounts of our expected net revenues from the wells. During the six months ended December 31, 2014, we recorded additional depreciation of $267,326 to expense the unrecovered installation costs of artificial lift equipment, net of estimated residual salvage value, which have been removed or are planned to be removed from three wells of a third-party customer.

Note 5 Other Assets

As of December 31, 2014 and June 30, 2014 our other assets consisted of the following:

 
December 31,
2014
 
June 30,
2014
Trademarks
$
43,333

 
$
40,928

Patent costs
387,528

 
305,592

Less: Accumulated amortization of patent costs
(35,678
)
 
(27,050
)
Deferred loan costs
305,961

 
243,003

Less: Accumulated amortization of deferred loan costs
(122,739
)
 
(98,421
)
Other assets, net
$
578,405

 
$
464,052



Note 6 Accrued Liabilities and Other
 
As of December 31, 2014 and June 30, 2014 our other current liabilities consisted of the following:
 
December 31,
2014
 
June 30,
2014
Accrued incentive and other compensation
$
557,516

 
$
1,358,653

Accrued restructuring charges

 
530,412

Officer retirement costs
41,954

 
288,258

Asset retirement obligations due within one year
10,219

 
146,703

Accrued royalties
78,530

 
89,179

Accrued franchise taxes
74,414

 
87,575

Other accrued liabilities
49,188

 
57,224

Accrued liabilities and other
$
811,821

 
$
2,558,004

 
Note 7 — Restructuring
 
On November 1, 2013, we undertook an initiative to refocus our business to GARP® development that resulted in an
adjustment of our workforce with less emphasis on oil and gas operations and greater emphasis on sales and marketing. In exchange for severance and non-compete agreements with the terminated employees, we recorded a restructuring charge of approximately $1,332,186 representing $376,365 of stock-based compensation from the accelerated vesting of equity awards and $955,821 of severance compensation and benefits to be paid during the twelve months ended December 31, 2014.  Our disposition of the accrued restructuring charges is as follows:


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Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements


Type of Cost
Balance at
December 31,
2013
 
Payments
 
Adjustment to Cost
 
December 31, 2014
Salary continuation liability
$
615,721

 
$
(615,721
)
 
$

 
$

Incentive compensation costs
185,525

 
(185,525
)
 

 

Other benefit costs and employer taxes
154,575

 
(110,144
)
 
(44,431
)
 

Accrued restructuring charges
$
955,821

 
$
(911,390
)
 
$
(44,431
)
 
$



Note 8 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 is a
reconciliation of the beginning and ending asset retirement obligations for the six months ended December 31, 2014, and for the year ended June 30, 2014:
 
December 31,
2014
 
June 30,
2014
Asset retirement obligations — beginning of period
$
352,215

 
$
615,551

Liabilities sold
(52,526
)
 
(48,273
)
Liabilities incurred (a)
562,485

 

Liabilities settled
(137,604
)
 
(323,665
)
Accretion of discount
12,773

 
41,626

Revision of previous estimates

 
66,976

Less obligations due within one year
(10,219
)
 
(146,703
)
Asset retirement obligations — end of period
$
727,124

 
$
205,512

 
(a) Liabilities incurred during the period relate to our share of the the estimated abandonment costs of the wells and facilities in the Delhi Field subsequent to the reversion of our working interest.

Note 9— Stockholders’ Equity

 Common Stock
 
Commencing in December 2013, the Board of Directors initiated a quarterly cash dividend on our common stock at a quarterly rate of $0.10 per share. During the six months ended December 31, 2014, the Company declared two quarterly dividends and paid $6,565,350 to our common shareholders. 


For the six months ended December 31, 2014, the Board of Directors authorized the issuance of 144,468 shares of restricted common stock from the 2004 Stock Plan to all employees as a long-term incentive award. In addition, the Board authorized the issuance of 43,258 shares of restricted common stock to various employees for incentive compensation purposes and issued 25,740 shares of restricted common stock as compensation to the Company's directors. See Note 10 - Stock-Based Incentive Plan.

 Series A Cumulative Perpetual Preferred Stock
 
At December 31, 2014, there were 317,319 shares of the Company’s 8.5% Series A Cumulative (perpetual) Preferred Stock outstanding.  The Series A Cumulative Preferred Stock cannot be converted into our common stock and there are no sinking fund or redemption rights available to the 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.  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

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Table of Contents
Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements


share, as, if and when declared by our Board of Directors through its Dividend Committee. We paid dividends of $337,151 and $337,151 to holders of our Series A Preferred Stock during the six months ended December 31, 2014 and 2013, respectively.

Expected Tax Treatment of Dividends

For the fiscal year ended June 30, 2014, cash dividends on preferred and common stock were treated for tax purposes as a return of capital to our shareholders. Based on our current projections for the fiscal year ending June 30, 2015, we expect preferred dividends will be treated as qualified dividend income and that a portion of our cash dividends on common stock will be treated as a return of capital and the remainder as qualified dividend income. We will make a preliminary determination regarding the tax treatment of dividends for the current fiscal year when we report this information to recipients. As a result of the difference between our June 30 fiscal year and the calendar year basis of our dividend reporting requirements, it is possible that we will be required to amend these reports when our final taxable income for the fiscal year is determined, as this will potentially affect the tax status of our dividends. 

Note 10— 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 under the Evolution Petroleum Corporation Amended and Restated 2004 Stock Plan (the "Plan"). The Plan authorizes the issuance of 6,500,000 shares of common stock and 542,529 shares remain available for grant as of December 31, 2014.
 
Stock Options

No Stock Options have been granted since August 2008 and all compensation costs attributable to Stock Options have been recognized in prior periods.

The following summary presents information regarding outstanding Stock Options as of December 31, 2014, and the changes during the fiscal year:
 
Number of Stock
Options
and Incentive
Warrants
 
Weighted Average
Exercise Price
 
Aggregate
Intrinsic Value
(1)
 
Weighted
Average
Remaining
Contractual
Term (in
years)
Stock Options outstanding at July 1, 2014
178,061

 
$
2.08

 
 

 
 
Exercised
(37,000
)
 
1.39

 
 

 
 
Stock Options outstanding at December 31, 2014
141,061

 
2.25

 
$
729,991

 
1.3
Vested or expected to vest at December 31, 2014
141,061

 
2.25

 
729,991

 
1.3
Exercisable at December 31, 2014
141,061

 
$
2.25

 
$
729,991

 
1.3

(1) Based upon the difference between the market price of our common stock on the last trading date of the period ($7.43 as of December 31, 2014) and the Stock Option exercise price of in-the-money Stock Options.

Restricted Stock and Contingent Restricted Stock

Prior to August 28, 2014 all restricted stock grants contained a four-year vesting period based solely on service. Restricted stock which vests based solely on service is valued at the fair market value on the date of grant and amortized over the service period.

During the six months ended December 31, 2014, the Company awarded grants of both restricted stock and contingent restricted stock as part of its long-term incentive plan. Such grants, which expire after four years if unvested, contain service-based, performance-based and market-based vesting provisions. The common shares underlying the restricted stock grants were issued on the date of grant, whereas the contingent restricted stock will be issued only upon the attainment of specified performance-based or market-based vesting provisions.


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Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements


Performance-based grants vest upon the attainment of earnings, revenue and other operational goals and require that the recipient remain an employee of the Company upon vesting. The Company recognizes compensation expense for performance-based awards ratably over the expected vesting period when it is deemed probable, for accounting purposes, that the performance criteria will be achieved. The expected vesting period may be deemed to be shorter than the remainder of the four year term. As of December 31, 2014, the Company does not consider the vesting of these performance-based grants to be probable and no compensation expense has been recognized.

Market-based awards entitle employees to vest in a fixed number of shares when the three-year trailing total return on the Company’s common stock exceeds the corresponding total returns of various quartiles of companies comprising the SIG Exploration and Production Index (NASDAQ EPX) during defined measurement periods. The fair value and expected vesting period of these awards were determined using a Monte Carlo simulation based on the historical volatility of the Company's total return compared to the historical volatilities of the other companies in the index. Fair values for these market-based awards ranged from $4.26 to $8.40 with expected vesting periods of 3.30 to 2.55 years, based on the various quartiles of comparative market performance. Compensation expense for market-based awards is recognized over the expected vesting period using the straight-line method, so long as the award holder remains an employee of the Company. Total compensation expense is based on the fair value of the awards at the date of grant and is independent of vesting or expiration of the awards, except for termination of service.

The following table sets forth the Restricted Stock transactions for the six months ended December 31, 2014:
 
Number of
Restricted
Shares
 
Weighted
Average
Grant-Date
Fair Value
 
Unamortized Compensation Expense at December 31, 2014 (1)
 
Weighted Average Remaining Amortization Period (Years)
Unvested at July 1, 2014
140,067

 
$
8.70

 
 
 
 
Service-based awards granted
100,910

 
9.53

 
 
 
 
Performance-based awards granted
76,642

 
10.05

 
 
 
 
Market-based awards granted
35,914

 
7.59

 
 
 
 
Vested
(64,536
)
 
8.59

 
 
 
 
Forfeited

 

 
 
 
 
Unvested at December 31, 2014
288,997

 
$
9.23

 
$
1,749,848

 
2.6

(1) Excludes $770,252 of potential future compensation expense for performance-based awards for which vesting is not considered probable at this time for accounting purposes.

The following table summarizes Contingent Restricted Stock activity:
 
Number of
Restricted
Stock Units
 
Weighted
Average
Grant-Date
Fair Value
 
Unamortized Compensation Expense at December 31, 2014 (1)
 
Weighted Average Remaining Amortization Period (Years)
Unvested at July 1, 2014

 

 
 
 
 
Performance-based awards granted
38,325

 
$
10.05

 
 
 
 
Market-based awards granted
17,961

 
4.26

 
 
 
 
Unvested at December 31, 2014
56,286

 
$
8.20

 
$
68,507

 
3.0
 
(1) Excludes $385,166 of potential future compensation expense for performance-based awards for which vesting is not considered probable at this time for accounting purposes.

Stock-based compensation expense related to Restricted Stock and Contingent Restricted Stock grants for the three months ended December 31, 2014 and 2013 was $245,020 and $316,422, respectively. Stock-based compensation expense related to Restricted Stock and Contingent Restricted Stock grants for the Stock-based compensation expense related to Restricted Stock and Contingent Restricted Stock grants six months ended December 31, 2014 and 2013 was $488,357 and $689,860, respectively. See Note 7 – Restructuring, for stock compensation included in Restructuring Charges for the six months ended December 31, 2013.

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Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements



Note 11 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 12 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 unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the six months ended December 31, 2014.  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, 2010 through June 30, 2014.
 
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.
 
We recognized income tax expense of $1,624,038 and $724,543 for the six months ended December 31, 2014 and 2013, respectively, with corresponding effective rates of 40.7% and 40.5%.
 

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Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements


Note 13 — Net Income (Loss) Per Share
 
The following table sets forth the computation of basic and diluted income (loss) per share:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2014
 
2013
 
2014
 
2013
Numerator
 

 
 

 
 

 
 

Net income (loss) available to common shareholders
$
1,071,342

 
$
(577,459
)
 
$
2,031,777

 
$
726,417

Denominator
 

 
 

 
 

 
 

Weighted average number of common shares — Basic
32,825,631

 
30,063,676

 
32,754,016

 
29,335,498

Effect of dilutive securities:
 

 
 

 
 

 
 

   Contingent restricted stock grants
6,432

 

 
1,785

 

   Stock options
115,217

 

 
128,953

 
3,042,420

Weighted average number of common shares and dilutive potential common shares used in diluted EPS
32,947,280

 
30,063,676

 
32,884,754

 
32,377,918

 
 
 
 
 
 
 
 
Net income (loss) per common share — Basic
$
0.03

 
$
(0.02
)
 
$
0.06

 
$
0.03

Net income (loss) per common share — Diluted
$
0.03

 
$
(0.02
)
 
$
0.06

 
$
0.02

 
Outstanding potentially dilutive securities as of December 31, 2014 were as follows:
Outstanding Potential Dilutive Securities
Weighted
Average
Exercise Price
 
At
December 31,
2014
Contingent restricted stock grants

 
56,286

Stock options
$
2.25

 
141,061

 
$
1.61

 
197,347

 
Outstanding potentially dilutive securities as of December 31, 2013 were as follows:
Outstanding Potential Dilutive Securities
Weighted
Average
Exercise Price
 
At
December 31,
2013
Stock options
$
2.01

 
753,005

 
Note 14 — Unsecured Revolving Credit Agreement
 
On February 29, 2012, Evolution Petroleum Corporation entered into a Credit Agreement (the “Credit Agreement”) with Texas Capital Bank, N.A. (the “Lender”).  The Credit Agreement provides us with a revolving credit facility (the “facility”) in an amount up to $50,000,000 with availability governed by an Initial Borrowing Base of $5,000,000.  A portion of the facility not in excess of $1,000,000 is available for the issuance of letters of credit.
 
The facility is unsecured and has a term of four years, expiring on February 29, 2016.  Our subsidiaries guarantee the Company’s obligations under the facility.  We may use the proceeds of any loans under the facility for the acquisition and development of oil and gas properties, as defined in the facility, the issuance of letters of credit, and for working capital and general corporate purposes.
 
Semi-annually, the borrowing base and a monthly reduction amount are re-determined from our reserve reports.  Requests by the Company to increase the $5,000,000 initial amount are subject to the Lender’s credit approval process, and are also limited to 25% of the value of our oil and gas properties, as defined.
 
At our option, borrowings under the facility bear interest at a rate of either (i) an Adjusted LIBOR rate (LIBOR rate divided by the remainder of 1 less the Lender’s Regulation D reserve requirement), or (ii) an adjusted Base Rate equal to the greater of the Lender’s prime rate or the sum of 0.50% and the Federal Funds Rate. A maximum of three LIBOR based loans can be outstanding at any time.  Allowed loan interest periods are one, two, three and six months.  LIBOR interest is payable at

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Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements


the end of the interest period except for six-month loans for which accrued interest is payable at three months and at end of term.  Base Rate interest is payable monthly.  Letters of credit bear fees reflecting 3.5% per annum rate applied to their principal amounts and are due when transacted.  The maximum term of letters of credit is one year.
 
A commitment fee of 0.50% per annum accrues on unutilized availability and is payable quarterly.  We are responsible for certain administrative expenses of the Lender over the life of the Credit Agreement as well as $50,000 in loan costs incurred upon closing.
 
The Credit Agreement also contains financial covenants including a requirement that we maintain a current ratio of not less than 1.5 to 1; a ratio of total funded Indebtedness to EBITDA of not more than 2.5 to 1, and a ratio of EBITDA to interest expense of not less than 3 to 1.  The agreement specifies certain customary covenants, including restrictions on the Company and its subsidiaries from pledging their assets, incurring defined Indebtedness outside of the facility other that permitted indebtedness, and it restricts certain asset sales.  Payments of dividends for the Series A Preferred are only restricted by the EBITDA to interest coverage ratio, wherein Series A dividends are a 1X deduction from EBITDA (as opposed to a 3:1 requirement if dividends were treated as interest expense).  The Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the Lender may declare all amounts outstanding under the Credit Agreement, if any, to be immediately due and payable.
 
As of December 31, 2014, the Company had no borrowings and no outstanding letters of credit issued under the facility, resulting in an available borrowing base capacity of $5,000,000, and we are in compliance with all the covenants of the Credit Agreement. During May 2014, the Credit Agreement was amended to permit the payment of cash dividends on common stock if no borrowings are outstanding at the time of such payment.
 
In connection with this agreement we incurred $179,468 of debt issuance costs, which have been capitalized in Other Assets and are being amortized on a straight-line basis over the term of the agreement. The unamortized balance in debt issuance costs related to the Credit Agreement was $56,729 as of December 31, 2014. The Company is in discussions with the Lender to replace the unsecured Credit Agreement with an expanded secured facility. As of December 31, 2014, the Company had incurred approximately $126,493 in legal and title costs related to this proposed agreement, which are also capitalized in Other Assets.

Note 15 — Commitments and Contingencies
 
We are subject to various claims and contingencies in the normal course of business. In addition, from time to time, we receive communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which we operate. At a minimum we disclose such matters if we believe it is reasonably possible that a future event or events will confirm a loss through impairment of an asset or the incurrence of a liability. We accrue a loss if we believe it is probable that a future event or events will confirm a loss and we can reasonably estimate such loss and we do not accrue future legal costs related to that loss. Furthermore, we will disclose any matter that is unasserted if we consider it probable that a claim will be asserted and there is a reasonable possibility that the outcome will be unfavorable. We expense legal defense costs as they are incurred.

The Company and its wholly owned subsidiary are defendants in a lawsuit brought by John C. McCarthy et al in the fifth District Court of Richland Parish, Louisiana in July 2011. The plaintiffs alleged, among other claims, that we fraudulently and wrongfully purchased plaintiffs’ income royalty rights in the Delhi Field Unit in the Holt-Bryant Reservoir in May 2006. The plaintiffs are seeking cancellation of the transaction and monetary damages. On March 29, 2012, the Fifth District Court dismissed the case against the Company and our wholly owned subsidiary NGS Sub Corp. The Court found that plaintiffs had “no cause of action” under Louisiana law, assuming that the Plaintiffs’ claims were valid on their face. Plaintiffs filed an appeal and the Louisiana Second Circuit Court of Appeal affirmed the dismissal, but allowed the plaintiffs to amend their petition to state a different possible cause of action. The plaintiffs amended their claim and re-filed with the district court. We subsequently filed a second motion pleading “no cause of action,” with which the district court again agreed and dismissed the plaintiffs’ case on September 23, 2013. Plaintiffs again filed an appeal in November 2013. In October 2014, the appellate court reversed the district court. We subsequently filed for a rehearing which was denied. We now have filed Application for Writ of Review in the Louisiana Supreme Court in which we have asked the Louisiana Supreme Court to reverse the appellate court and reinstate the trial court judgment dismissing Plaintiffs’ case. Amicus Curiae Briefs have been filed in support of the Writ Application by the Louisiana Oil & Gas Association, the Louisiana Mid-Continent Oil and Gas Association and the American Association of Professional Landmen.


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Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements


As previously reported, on August 23, 2012, we and our wholly-owned subsidiary, NGS Sub Corp., and Robert S. Herlin, our Chief Executive Officer, were served with a lawsuit filed in federal court by James H. and Kristy S. Jones (the “Jones lawsuit”) in the Western District Court of the Monroe Division, Louisiana. The plaintiffs allege primarily that we (defendants) wrongfully purchased the plaintiffs’ 0.048119 overriding royalty interest in the Delhi Unit in January 2006 by failing to divulge the existence of an alleged previous agreement to develop the Delhi Field for EOR. The plaintiffs are seeking rescission of the assignment of the overriding royalty interest and monetary damages. We believe that the claims are without merit and are not timely, and we are vigorously defending against the claims. We filed a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b) (6) on April 1, 2013. On September 17, 2013, the federal court in the Western District Court of the Monroe Division, Louisiana, dismissed a portion of the claims and allowed the plaintiffs to pursue the remaining portion of the claims. Our motion to dismiss was for lack of cause of action, assuming that the plaintiffs' claims were valid on their face. On September 25, 2013, plaintiff Jones filed a motion to alter or amend the September 17, 2013 judgment. On December 27, 2013, the court denied said plaintiffs’ motion, and on January 21, 2014, we filed a motion to reconsider the nondismissal of the remaining claims, which was denied. The Court has entered a Scheduling Order setting trial of the case for the week of June 15, 2015. Counsel has advised us that, based on information developed to date, the risk of loss in this matter is remote.

On December 13, 2013, we and our wholly-owned subsidiaries, Tertiaire Resources Company and NGS Sub. Corp., filed a lawsuit in the 133rd Judicial District Court of Harris County, Texas, against Denbury Onshore, LLC (“Denbury”) alleging breaches of certain 2006 agreements between the parties regarding the Delhi Field in Richland Parish, Louisiana. The specific allegations include improperly charging the payout account for capital expenditures and costs of capital, failure to adhere to preferential rights to participate in acquisitions within the defined area of mutual interest, breach of the promises to assume environmental liabilities and fully indemnify us from such costs, and other breaches. We are seeking declaration of the validity of the 2006 agreements and recovery of damages and attorneys’ fees. Denbury subsequently filed counterclaims, including the assertion that we owed Denbury additional revenue interests pursuant to the 2006 agreements and that our transfer of the reversionary interests from our wholly owned subsidiary to our parent corporation and subsequently to another wholly-owned subsidiary were not timely noticed to Denbury. The Company disagrees with and is vigorously defending against Denbury's counterclaims.

On January 26, 2015, Denbury withheld and suspended 2.891545% of our overriding royalty revenue interest in the field for the months of November and December 2014. This unilateral suspension of a portion of our overriding royalties by the operator was made without consultation with the Company and, we believe, is without legal basis. Accordingly, the Company will continue to aggressively defend its property using all legal remedies and rights available to us. If we are required to forfeit some or all this disputed interest to Denbury, then our future reserves, value of reserves and revenues would be negatively impacted.

On December 3, 2013, our wholly owned subsidiary, NGS Sub Corp., was served with a lawsuit filed in the 8th Judicial District Court of Winn Parish, Louisiana by Cecil M. Brooks and Brandon Hawkins, residents of Louisiana, alleging that in 2006 a former subsidiary of NGS Sub Corp. improperly disposed of water from an off-lease well into a well located on the plaintiffs’ lands in Winn Parish. The plaintiffs requested monetary damages and other relief. NGS Sub Corp. divested its ownership of the property in question along with its ownership of the subsidiary in 2008 to a third party. The district court granted our exception of no right of action and dismissed Brooks' claims against NGS Sub Corp. We have denied and are vigorously defending all claims by Mr. Hawkins.

 
Lease Commitments.  We have a non-cancelable operating lease for office space that expires on August 1, 2016. Future minimum lease commitments as of December 31, 2014 under this operating lease are as follows: 
For the twelve months ended December 31,
 
2015
$
159,011

2016
92,756

Total
$
251,767

 
Rent expense for the three months ended December 31, 2014 and 2013 was $43,776 and $44,759, respectively. Rent expense for the six months ended December 31, 2014 and 2013 was $87,551 and $86,667, respectively.
 

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Evolution Petroleum Corporation And Consolidated Subsidiaries
 Notes to Unaudited Consolidated Condensed Financial Statements


Employment Contracts.  We have entered into employment agreements with two of the Company's senior executives. The employment contracts provide for severance payments in the event of termination by the Company for any reason other than cause or permanent disability, or in the event of a constructive termination, as defined. The agreements provide for the payment of base pay and certain medical and disability benefits for periods ranging from six months to one year after termination.  The total contingent obligation under the employment contracts as of December 31, 2014 is approximately $473,000.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto contained herein and in our Annual Report on Form 10-K for the year ended June 30, 2014 (the “Form 10-K”), along with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Form 10-K.  Any terms used but not defined herein have the same meaning given to them in the Form 10-K.
 
This Form 10-Q and the information referenced herein contain forward-looking statements within the meaning of the Private Securities Litigations Reform Act of 1995, Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934. The words “plan,” “expect,” “project,” “estimate,” “assume,” “believe,” “anticipate,” “intend,” “budget,” “forecast,” “predict” and other similar expressions are intended to identify forward-looking statements. These statements appear in a number of places and include statements regarding our plans, beliefs or current expectations, including the plans, beliefs and expectations of our officers and directors. When considering any forward-looking statement, you should keep in mind the risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil and natural gas, operating risks and other risk factors as described in our 2014 Annual Report on Form 10-K for the year ended June 30, 2014 as filed with the Securities and Exchange Commission. Furthermore, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages. All forward-looking statements attributable to Evolution Petroleum Corporation are expressly qualified in their entirety by this cautionary statement.
 
We use the terms, “EPM,” “Company,” “we,” “us” and “our” to refer to Evolution Petroleum Corporation and its wholly owned subsidiaries.

Executive Overview
 
General

We are engaged primarily in the development of incremental oil and gas reserves within known oil and gas resources for our shareholders and customers utilizing conventional and proprietary technology. We are focused on increasing underlying asset values on a per share basis. In doing so, we depend on a conservative capital structure, allowing us to maintain control of our assets for the benefit of our shareholders, and a substantial stock ownership by our directors, officers and staff. By policy, every employee and director maintains a beneficial ownership in our common stock.

Our strategy is to grow the value of our Delhi asset to maximize the value realized by our shareholders while commercializing our patented GARP® artificial lift technology for recovering incremental oil and gas reserves in mature fields.

We expect to fund our fiscal 2015 capital program from working capital and net cash flows from our properties.
 
Highlights for our Second Quarter Fiscal 2015 and Project Update

"Q2-15" & "current quarter" is the three months ended December 31, 2014, the company's 2nd quarter of fiscal 2015.

"Q1-15" & "prior quarter" is the three months ended September 30, 2014, the company's 1st quarter of fiscal 2015.

"Q2-14" & "year-ago quarter" is the three months ended December 31, 2013, the company's 2nd quarter of fiscal 2014.
 
Operations


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Effective on November 1, 2014, the Company earned its 23.9% reversionary working interest and associated 19.036% net revenue interest in the Delhi Field. In addition to increased revenues, we are now paying our proportionate share of capital expenditures and lease operating expenses incurred going forward from November 1, 2014 in the field.

For Q2-15, the Company earned $1.1 million of net income, or $0.03 per diluted common share, a 286% increase from the year-ago quarter and a 12% increase from the prior quarter. The year-ago quarter had a net loss of $0.6 million primarily due to $2.1 million of non-recurring expenses associated with a restructuring charge and expenses associated with derivative exercises and subsequent stock sale. The current quarter income was positively affected by two months of increased net revenues from Delhi, offset by corresponding lease operating expenses and DD&A expense from Delhi, along with increased estimated income tax expense.

Current quarter revenues were $7.7 million, a 76% increase from the year-ago quarter and a 93% increase from the prior quarter. The sequential increase was due to two months of net revenues associated with the reversion of our working interest ownership in the Delhi field, partially offset by lower realized commodity prices in the quarter.

Delhi production averaged 1,187 net barrels of oil per day (“BOPD”), a 156% increase from the year-ago quarter, and a 179% increase from the prior quarter. The sequential increase in volumes is due to the additional volumes associated with the working interest ownership in the Delhi field. Gross production in the field averaged 5,892 BOPD during the current quarter.

Realized crude oil prices received in Q2-15 decreased 28% to approximately $70 per barrel from $97 per barrel in the year-ago quarter, and decreased 29% from $99 per barrel in the prior quarter.

We remain debt-free, while distributing $3.3 million of cash dividends to our common stock shareholders during the current quarter.
Projects
Additional property and project information is included under Item 1. Business, Item 2. Properties, Notes to the Financial Statements and Exhibit 99.4 of our Form 10-K for the year ended June 30, 2014.
Delhi Field - Enhanced Oil Recovery Project

Gross production at Delhi in the second quarter of fiscal 2015 averaged 5,892 BOPD, a decrease of 6% from the year-ago quarter, and a 3% increase from prior quarter. Net production averaged 1,187 BOPD, a 156% increase from the year-ago quarter, and a 179% increase from the prior quarter. Gross production was impacted by the loss of one producing well due to down hole issues, and a replacement well has been redrilled and placed into production in January 2015. As a result of our working interest reversion taking effect on November 1, 2014, our total net revenue interest in the field has more than tripled from 7.41% to 26.44%, inclusive of all of our mineral interest ownership in Delhi. With the reversion, we now bear the corresponding working interest capital commitments to further develop the project and field, including necessary plugging and abandonment projects. In the quarter ending December 31, 2014, our net share of the joint interest billed capital expenditures was approximately $1.5 million and our net share of lease operating expenses was approximately $2.8 million, of which $1.7 million is related to CO2 purchases and CO2 transportation expenses. Under our contract with the operator, purchased CO2 is priced at 1% of the oil price per thousand cubic feet (“Mcf”) plus transportation costs of $0.20 per Mcf.

The operator of the Delhi field, a subsidiary of Denbury Resources, Inc. ("Denbury"), has stated that the plans to install a gas plant to recover methane and natural gas liquids from the recycled gas stream remains on their capital projects schedule with a target installation date of calendar year 2016.     

On January 26, 2015, Denbury withheld and suspended 2.891545% of our overriding royalty revenue interest in the field for the months of November and December 2014. This unilateral suspension of a portion of our overriding royalties by the operator was made without consultation with the Company and, we believe, is without legal basis. Accordingly, the Company will continue to aggressively defend its property using all legal remedies and rights available to us. If we are required to forfeit some or all this disputed interest to Denbury, then our future reserves, value of reserves and revenues would be negatively impacted.


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GARP® - Artificial Lift Technology

During the current quarter, we completed the last of an initial five-well package of GARP® installations for a third party operator. We have seen positive production responses from four of the five GARP® wells under this agreement. One well was not successful and the equipment was removed and used in a subsequent installation. However, due to operating costs, low commodity prices and a low net-back from gas processing under the customer’s pre-existing gas sales contract, our 25% net profits interest has resulted in minimal service fee revenues to date. Given the current low commodity price environment, the Company and the operator have mutually agreed to not proceed with the remaining five wells contemplated by this contract, and any future installations are expected to be subject to a new fixed price agreement.

Artificial lift financial results continue to be adversely affected by unplanned workover expenses on our Company-operated wells, which temporarily suspended production for significant portions of the current quarter and substantially reduced GARP® revenues in the period.
We are presently working on two additional GARP® patents that will address the following issues:
Wells with inadequate gas supply;
Solids settling on down-hole equipment;
Additional gas and solid separation.

In the interim, the GARP® marketing and business development efforts continue and include participation in oil field service and industry trade shows and one-on-one meetings with E&P operators of all sizes.
Other Properties
    
In October 2014, we closed on the sale of all of our remaining mineral interests and assets in the Mississippi Lime project for cash proceeds of approximately $389,000, net of customary closing adjustments. This transaction completes the process of divesting of all of our non-core oil and gas properties.

Liquidity and Capital Resources
 
We had $22.5 million and $23.9 million in cash and cash equivalents at December 31, 2014 and June 30, 2014, respectively. In addition, we have $5.0 million of availability under a revolving credit facility at period end.

During the six months ended December 31, 2014, we financed our operations with cash generated from operations and cash on hand. At December 31, 2014, our working capital was $20.6 million, compared to working capital of $23.3 million at June 30, 2014.  The $2.7 million working capital decrease is primarily due to a $4.4 million increase in accounts payable reflecting post-reversion Delhi Field operating expenses and capital expenditures, partially offset by $1.8 million of lower accrued liabilities principally attributable to incentive compensation, restructuring and officer retirement accrual declines.
 
Cash Flows from Operating Activities
 
For the six months ended December 31, 2014, cash flows provided by operating activities were $4.6 million, which included a very slight impact from changes in other working capital items.  Of the $4.6 million provided, approximately $2.4 million was due to net income, and approximately $2.2 million was attributable to non-cash expenses.
 
For the six months ended December 31, 2013, cash flows provided by operating activities were $2.8 million, reflecting $3.1 million provided by operations before $0.3 million was used by working capital. Of the $3.1 million provided before working capital changes, $1.1 million was due to net income, which reflects a $1.3 million restructuring charge, and $0.7 million was attributable to other non-cash expenses.
 
Cash Flows from Investing Activities
 
Investing activities for the six months ended December 31, 2014 used $7,400 of cash, consisting primarily of capital expenditures of approximately $311,000 for primarily artificial lift technology and $84,000 for GARP® patent costs, partially offset by $389,165 of proceeds received for the sale of properties in the Mississippi Lime project.
 

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Table of Contents

Cash paid for oil and gas capital expenditures during the six months ended December 31, 2013 was $0.9 million. Development activities were predominantly for our GARP® wells in Giddings and additional testing in the Hendrickson well in the Mississippi Lime project. We received approximately $0.5 million of additional proceeds from asset sales, including $0.4 million for the sale of our South Texas properties.

Cash Flows from Financing Activities
 
In the six months ended December 31, 2014, we used $6.1 million in cash for financing activities principally consisting of cash outflows of $6.6 million for common stock dividend payments and $0.3 million for preferred dividend payments, offset partially by $0.9 million of cash provided by tax benefits related to stock-based compensation.

During the six months ended December 31, 2013, we used $1.9 million in cash for financing activities, including cash inflows of $2.1 million from stock option exercise proceeds and $0.4 million of windfall tax benefits, which was more than offset by cash outflows of $3.2 million for common dividends, $0.3 million for preferred dividends and $1.1 million for treasury stock purchases related to incentive stock warrant and stock option exercises and restricted stock vestings.
Capital Budget
Delhi Field
               With the operator's determination that reversion of our 23.9% working interest and 19.036% net revenue interest in Delhi occurred effective November 1, 2014, we began funding our share of capital expenditures in the field. In the quarter ending December 31, 2014, our net share of the joint interest billed capital expenditures was approximately $1.5 million.

               Projected capital expenditures over the next two fiscal years are currently expected to total approximately $25-35 million net to our working interest. The timing and actual amount of this spending is primarily dependent on the pace of project development by the operator and project economics based on current and forward looking oil prices. Of this total, approximately $24 million is for the gas processing plant and the balance is for continued development of the CO2 project. We expect these costs to be incurred over portions of the next two fiscal years, although these development plans are subject to review and deferral by either partner. Total spending based on proved reserves in the reserve report, net to our interest, is currently forecast to be approximately $45 million over the next four years, which includes the projects above plus further expansion of the CO2 flood patterns. We expect that cash flows from all our interests in the Delhi field will be in excess of the net capital expenditures required, subject to commodity prices that we realize.
GARP® - Artificial Lift Technology
Based on our current marketing and business plans, we expect that our capital requirements for artificial lift technology operations will be relatively minor over the next fiscal year.
Liquidity Outlook
Our liquidity is highly dependent on the realized prices we receive for the oil, natural gas and natural gas liquids we produce. Commodity prices are market driven and historically volatile, and they are likely to continue to be volatile. As a result, our future revenues, cash flow, profitability, access to capital and future rate of growth is heavily influenced by the prices received for our production. Liquidity could also be affected by any adverse litigation outcome.
Funding for our anticipated capital expenditures over the next two fiscal years is expected to be met from cash flows from operations and current working capital. Our preference is to remain debt free, but we also have access to an unsecured revolving line of credit and have plans to convert this line into a senior secured facility with significantly higher borrowing capacity, to use as needed. This facility is intended primarily to provide a standby source of liquidity to meet future capital expenditures at Delhi or other future capital needs or acquisition opportunities.
Payment of free cash flow in excess of our operating and capital requirements through cash dividends on our common stock remains a priority of our financial strategy, and it is our long term goal to increase our dividends over time as appropriate. The Board of Directors and management instituted this strategy over a year ago due to our belief that high commodity prices at the time limited attractive oil and gas investment opportunities.. However, due to the potential to pursue other opportunities at discounted prices during the current industry downturn combined with the anticipated cost of building and installing the Delhi recycle gas processing plant during calendar 2015 and 2016 and Denbury's recent suspension of a portion of our overriding royalty interest revenues at Delhi, the Dividend Committee and the Board of Directors believes it is prudent to adjust the current dividend rate from $0.40 per share annually to $0.20 per share annually, effective in quarter ending March 31, 2015. The reduction in the dividend rate will allow the Company to conserve cash for additional financial flexibility to pursue opportunities while continuing to reward shareholders with a yield near 2.5% at current stock price levels.

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Table of Contents

Results of Operations
 
Three month periods ended December 31, 2014 and 2013
 
The following table sets forth certain financial information with respect to our oil and natural gas operations:
 
Three Months Ended December 31,
 
 
 
 
 
2014
 
2013
 
Variance
 
Variance %
Delhi field:
 
 
 
 
 
 
 
Crude oil revenues
$
7,644,831

 
$
4,130,236

 
$
3,514,595

 
85.1
 %
Crude oil volumes (Bbl)
109,200

 
42,673

 
66,527

 
155.9
 %
Average price per Bbl
$
70.01

 
$
96.79

 
$
(26.78
)
 
(27.7
)%
 
 
 
 
 
 
 
 
  Delhi field production costs
$
2,817,866

 
$

 
$
2,817,866

 
 
  Delhi field production costs per BOE
$
25.80

 
$

 
$
25.80

 
 
 
 
 
 
 
 
 
 
Artificial lift technology:
 
 
 
 
 
 
 
  Crude oil revenues
$
42,039

 
$
143,326

 
$
(101,287
)
 
(70.7
)%
  NGL revenues
11,028

 
25,430

 
(14,402
)
 
(56.6
)%
  Natural gas revenues
7,365

 
21,138

 
(13,773
)
 
(65.2
)%
  Service revenue
2,804

 

 
2,804

 
 
  Total revenues
$
63,236

 
$
189,894

 
$
(126,658
)
 
(66.7
)%
 
 
 
 
 
 
 
 
  Crude oil volumes (Bbl)
563

 
1,471

 
(908
)
 
(61.7
)%
  NGL volumes (Bbl)
411

 
834

 
(423
)
 
(50.7
)%
  Natural gas volumes (Mcf)
2,413

 
6,590

 
(4,177
)
 
(63.4
)%
  Equivalent volumes (BOE)
1,376

 
3,403

 
(2,027
)
 
(59.6
)%
 
 
 
 
 
 
 
 
  Crude oil price per Bbl
$
74.67

 
$
97.43

 
$
(22.76
)
 
(23.4
)%
  NGL price per Bbl
$
26.83

 
$
30.49

 
$
(3.66
)
 
(12.0
)%
  Natural gas price per Mcf
$
3.05

 
$
3.21

 
$
(0.16
)
 
(5.0
)%
    Equivalent price per BOE
$
43.92

 
$
55.80

 
$
(11.88
)
 
(21.3
)%
 
 
 
 
 
 
 
 
  Artificial lift production costs (a)
$
191,553

 
$
153,231

 
$
38,322

 
25.0
 %
  Artificial lift production costs per BOE
$
139.21

 
$
45.03

 
$
94.18

 
209.1
 %
 
 
 
 
 
 
 
 
Other properties:
 
 
 
 
 
 
 
  Revenues
$

 
$
72,159

 
$
(72,159
)
 
(100.0
)%
  Equivalent volumes (BOE)

 
822

 
(822
)
 
(100.0
)%
  Equivalent price per BOE
$

 
$
87.78

 
$
(87.78
)
 
(100.0
)%
 
 
 
 
 
 
 
 
  Production costs
$
9,390

 
$
83,309

 
$
(73,919
)
 
(88.7
)%
  Production costs per BOE
$

 
$
101.35

 
$
(101.35
)
 
(100.0
)%
 
 
 
 
 
 
 
 
Combined:
 
 
 
 
 
 
 
Oil and gas DD&A (b)
$
701,543

 
$
318,946

 
$
382,597

 
120.0
 %
Oil and gas DD&A per BOE
$
6.34

 
$
6.80

 
$
(0.46
)
 
(6.8
)%

(a) Includes workover costs of approximately $134,000 and $35,000, for the three months ended December 31, 2014 and 2013, respectively.
(b) Excludes depreciation of artificial lift technology equipment, office equipment, furniture and fixtures, and other assets of $216,214 and $8,222, for the three months ended December 31, 2014 and 2013, respectively.



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Table of Contents

Net Income (Loss) Available to Common Shareholders.  For the three months ended December 31, 2014, we generated net income to common shareholders of $1.1 million, or $0.03 per diluted share, on total revenues of $7.7 million. This compares to a net loss of $0.58 million, or $0.02 per diluted share, on total revenues of $4.4 million for the year-ago quarter.  The earnings increase is due to increased Delhi oil revenues together with lower G&A and restructuring expenses, partially offset by Delhi production costs, higher DD&A expense and increased income tax expense.  Additional details of the components of net income are explained in greater detail below.
 
Delhi Field. Revenues increased 85% to $7.6 million as a result of a 156% increase in production volumes from the year-ago quarter, partially offset by a 28% decline in realized crude oil prices from $96.79 per barrel to $70.01 per barrel. Lease operating expenses for the current quarter were $2.8 million, of which $1.7 million is related to CO2 purchases and CO2 transportation expenses, compared to no production costs in the year-ago quarter as those revenues were derived solely from our mineral and overriding royalty interests, which bore no operating expenses. Under our contract with the operator, purchased CO2 is priced at 1% of the oil price per Mcf plus $0.20 per Mcf transportation costs. Accordingly, such costs will be reduced in the future if oil prices remain at lower price levels.

Artificial Lift Technology. Revenues decreased 67% to $63,000 reflecting a 60% volume decrease, primarily as a result of workovers on the Philip DL #1 and Selected Lands #2 wells, together with a 21% decrease in the realized price per BOE, from $55.80 to $43.92 BOE. In the current quarter we recorded $2,800 of service fee revenue from the GARP® installations for a third-party customer. These wells have not contributed meaningful net profits to the Company in the current quarter due to low commodity prices, poor netback contracts for gas processing and higher workover costs. Artificial lift production costs were $192,000 for the current quarter, a 25% increase from $153,000 in the year-ago quarter, and include $134,000 in costs for the aforementioned workovers, which were necessary in recovering proved reserves.

Other Properties. We have divested all of our non-core oil and gas properties, therefore there are no revenues to report in the current quarter. The prior year-ago quarter had $72,000 of revenues. The production costs from the prior year-ago quarter were high as a result of workover costs in South Texas and high water production in the Mississippi Lime project. With the sale of the remaining interests in our Mississippi Lime properties in the current quarter, this divestiture process is now completed.

General and Administrative Expenses (“G&A”).  G&A expenses decreased $1.0 million, or 39%, to $1.6 million during the three months ended December 31, 2014 from $2.6 million in the year-ago quarter, primarily due to lower personnel-related costs as a result of our December 2013 restructuring and $0.8 million of one-time expenses primarily associated with exercises of derivatives in the year-ago quarter partially offset by recent staff additions for accounting and GARP®. In addition, $1.3 million of restructuring expense was recorded in the year-ago quarter primarily reflecting $0.9 million of termination benefits and $0.4 million non-cash charge for accelerated restricted stock vesting for terminated employees. See Note 7 — Restructuring.

Depletion & Amortization Expense (“DD&A”).  DD&A increased $591,000, or 181% to $918,000 for the current quarter compared to $327,000 for the year-ago quarter. Amortization of our full cost oil and gas property cost pool increased by $383,000 on increased volumes of 136% due to reversionary working interest in Delhi field, offset by a lower rate per BOE ($6.34 in the current quarter versus $6.80 per BOE in the year-ago quarter). Depreciation expense for other property and equipment increased $208,000 principally due to $192,000 additional depreciation recorded during the current quarter to reflect the impairment of GARP® equipment installations on two wells of a third party customer.




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Table of Contents

Six month periods ended December 31, 2014 and 2013
 
The following table sets forth certain financial information with respect to our oil and natural gas operations:
 
Six Months Ended December 31,
 
 
 
 
 
2014
 
2013
 
Variance
 
Variance %
Delhi field:
 
 
 
 
 
 
 
Crude oil revenues
$
11,513,433

 
$
8,560,047

 
$
2,953,386

 
34.5
 %
Crude oil volumes (Bbl)
148,294

 
82,952

 
65,342

 
78.8
 %
Average price per Bbl
$
77.64

 
$
103.19

 
$
(25.55
)
 
(24.8
)%
 
 
 
 
 
 
 
 
  Delhi field production costs
$
2,817,866

 
$

 
$
2,817,866

 
 
  Delhi field production costs per BOE
$
19.00

 
$

 
$
19.00

 
 
 
 
 
 
 
 
 
 
Artificial lift technology:
 
 
 
 
 
 
 
  Crude oil revenues
$
117,019

 
$
245,199

 
$
(128,180
)
 
(52.3
)%
  NGL revenues
33,255

 
48,626

 
(15,371
)
 
(31.6
)%
  Natural gas revenues
22,917

 
38,160

 
(15,243
)
 
(39.9
)%
  Service revenue
5,901

 

 
5,901

 
 
  Total revenues
$
179,092

 
$
331,985

 
$
(152,893
)
 
(46.1
)%
 
 
 
 
 
 
 
 
  Crude oil volumes (Bbl)
1,335

 
2,417

 
(1,082
)
 
(44.8
)%
  NGL volumes (Bbl)
1,155

 
1,602

 
(447
)
 
(27.9
)%
  Natural gas volumes (Mcf)
6,852

 
12,479

 
(5,627
)
 
(45.1
)%
  Equivalent volumes (BOE)
3,632

 
6,099

 
(2,467
)
 
(40.4
)%
 
 
 
 
 
 
 
 
  Crude oil price per Bbl
$87.65
 
$101.45
 
$
(13.80
)
 
(13.6
)%
  NGL price per Bbl
$28.79
 
$30.35
 
$
(1.56
)
 
(5.1
)%
  Natural gas price per Mcf
$3.34
 
$3.06
 
$
0.28

 
9.2
 %
    Equivalent price per BOE
$47.68
 
$54.43
 
$
(6.75
)
 
(12.4
)%
 
 
 
 
 
 
 
 
  Artificial lift production costs (a)
$
388,913

 
$
316,970

 
$
71,943

 
22.7
 %
  Artificial lift production costs per BOE
$
107.08

 
$
51.97

 
$
55.11

 
106.0
 %
 
 
 
 
 
 
 
 
Other properties:
 
 
 
 
 
 
 
  Revenues
$
20,369

 
$
133,956

 
$
(113,587
)
 
(84.8
)%
  Equivalent volumes (BOE)
285

 
1,490

 
(1,205
)
 
(80.9
)%
  Equivalent price per BOE
$
71.47

 
$
89.90

 
$
(18.43
)
 
(20.5
)%
 
 
 
 
 
 
 
 
  Production costs
$
97,412

 
$
337,810

 
$
(240,398
)
 
(71.2
)%
  Production costs per BOE
$
341.80

 
$
226.72

 
$
115.08

 
50.8
 %
 
 
 
 
 
 
 
 
Combined:
 
 
 
 
 
 
 
Oil and gas DD&A (b)
$
961,703

 
$
620,698

 
$
341,005

 
54.9
 %
Oil and gas DD&A per BOE
$
6.32

 
$
6.86

 
$
(0.54
)
 
(7.9
)%

(a) Includes workover costs of approximately $283,000 and $77,000, for the six months ended December 31, 2014 and 2013, respectively.
(b) Excludes depreciation of artificial lift technology equipment, office equipment, furniture and fixtures, and other assets of $325,404 and $16,143, for the six months ended December 31, 2014 and 2013, respectively.

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Table of Contents

Net Income Available to Common Shareholders.  For the six months ended December 31, 2014, we generated net income to common shareholders of $2.0 million, or $0.06 per diluted share, on total revenues of $11.7 million. This compares to net income of $0.7 million, or $0.02 per diluted share, on total revenues of $9.0 million for the corresponding year-ago period.  The earnings increase is primarily due to higher Delhi revenues together with lower G&A and restructuring expenses, offset by Delhi production costs and increased DD&A and income tax expenses. Additional details of the components of net income are explained in greater detail below.
 
Delhi Field. Revenues increased 35% to $11.5 million as a result of a 79% increase in production volumes from the corresponding year-ago period, partially offset by a 25% decline in realized crude oil prices, from $103.19 per barrel to $77.64 per barrel. Lease operating expenses for the six months ended December 31, 2014 were $2.8 million, of which $1.7 million is related to CO2 purchases and CO2 transportation expenses, compared to no production costs in the corresponding year-ago period as those revenues were derived solely from our mineral and overriding royalty interests, which bear no operating expenses. Under our contract with the operator, purchased CO2 is priced at 1% of the oil price per Mcf plus $0.20 per Mcf transportation costs. Accordingly, such costs will be reduced in the future if oil prices remain at lower price levels.

Artificial Lift Technology. Revenues decreased 46% to $179,000 reflecting a 40% volume decrease, primarily as a result of workovers on the Philip DL #1 and Selected Lands #2 wells, together with a 12% decrease in the realized price per BOE, from $54.43 per barrel to $47.68 per barrel. We recorded $2,800 of service revenue from GARP® installations for a third-party customer. These wells did not contribute meaningful net profits to the Company in the six months ended December 31, 2014. Artificial lift production costs were $389,000, which included $283,000 in costs for the aforementioned workovers, which were necessary in recovering proved reserves.

Other Properties. The Company has been divesting its non-core oil and gas properties since 2013, and revenues from these properties have correspondingly decreased to $20,000 compared to $134,000 in the corresponding year-ago period. The production costs from the prior year were high as a result primarily from workover costs in South Texas and high water production in the Mississippi Lime. With the sale of the remaining interests in our Mississippi Lime properties in the current quarter, this divestiture process is completed.

General and Administrative Expenses (“G&A”).  G&A expenses decreased $1.5 million, or 32%, to $3.1 million during the six months ended December 31, 2014 from $4.6 million in the corresponding year-ago period primarily due to $0.8 million of non-recurring year-ago quarter expense primarily related to stock option exercises, lower personnel-related costs as a result of our December 2013 restructuring, partially offset by recent staff additions for accounting and GARP®. In addition, $1.3 million of restructuring expense was recorded in the year-ago period primarily reflecting $0.9 million of termination benefits and $0.4 million non-cash charge for accelerated restricted stock vesting for terminated employees. See Note 7 - Restructuring.

Depletion & Amortization Expense (“DD&A”).  DD&A increased $650,000, or 102%, to $1.3 million for the six months ended December 31, 2014 compared to $0.6 million for the corresponding year-ago period. Amortization of our full cost oil and gas property cost pool increased by $341,000 on 68% higher volumes due to the earning of our reversionary working interest in the Delhi field in November 2014, offset by a lower rate per BOE ($6.32 versus $6.86 per BOE in the year-ago period). Depreciation expense for other property and equipment increased $305,000 principally due to $268,000 additional depreciation recorded to reflect the impairment of GARP® equipment installations on three wells of a third party customer.

Other Economic Factors

Inflation.  Although the general inflation rate in the United States, as measured by the Consumer Price Index and the Producer Price Index, has been relatively low in recent years, the oil and gas industry has experienced unusually volatile price movements in commodity prices, vendor goods and oilfield services.  Prices for drilling and oilfield services, oilfield equipment, tubulars, labor, expertise and other services greatly impact our production costs and capital expenditures.  During fiscal 2014, we saw modest increases in certain oil field services and materials compared to the prior fiscal year.  During fiscal 2015 to date, we have not seen material changes in costs.  Product prices, operating costs and development costs may not always move in tandem.
 
Known Trends and Uncertainties.  General worldwide economic conditions continue to be uncertain and volatile.  Concerns over uncertain future economic growth are affecting numerous industries, companies, as well as consumers, which impact demand for crude oil and natural gas.  We have recently seen significant declines in crude oil prices and are uncertain if this downward price pressure will continue. If such lower crude oil prices persist, our revenues and cash flow going forward will be adversely impacted.  In addition, the reversion of our working interest in the Delhi Field will increase both our revenues and lease operating expenses. This will reduce the extraordinary net margins that have historically resulted from our mineral and overriding royalty interests at Delhi.

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Table of Contents


Seasonality.  Our business is generally not directly seasonal, except for instances when weather conditions may adversely affect access to our properties or delivery of our petroleum products.  Although we do not generally modify our production for changes in market demand, we do experience seasonality in the product prices we receive, driven by summer cooling and driving, winter heating, and extremes in seasonal weather including hurricanes that may substantially affect oil and natural gas production and imports.

Off Balance Sheet Arrangements
 
The Company has no off-balance sheet arrangements to report during the quarter ending December 31, 2014.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
Information about market risks for the three months ended December 31, 2014, did not change materially from the disclosures in Item 7A of our Annual Report on Form 10-K for the year ended June 30, 2014.
Commodity Price Risk

Our most significant market risk is the pricing for crude oil, natural gas and NGLs. All of such prices have declined significantly during the three months ended December 31, 2014. We expect energy prices to remain volatile and unpredictable. If energy prices decline further significantly, revenues and cash flow would significantly decline. In addition, a non-cash write-down of our oil and gas properties could be required under full cost accounting rules if future oil and gas commodity prices sustained a significant decline. Prices also affect the amount of cash flow available for capital expenditures and dividends, and our ability to borrow and raise additional capital, as, if and when needed. Our general philosophy is not to hedge our commodity price risk. If we choose, we could hedge a portion of our projected oil and natural gas production through a variety of financial and physical arrangements intended to support oil and natural gas prices at targeted levels and to manage our exposure to price fluctuations. We presently do not hold or issue derivative instruments for hedging or speculative purposes.

Interest Rate Risk
 
We currently have only a small exposure to changes in interest rates. Changes in interest rates affect the interest earned on our cash and cash equivalents.  Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes.
  
ITEM 4. CONTROLS AND PROCEDURES
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to this Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
 
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(c) and 15d-15(e)) as of the end of the quarter covered by this report.  In designing and evaluating our disclosure controls and procedures, our management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2014 our disclosure controls and procedures are effective in ensuring that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
 
Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, during the quarter ended December 31, 2014 we have determined there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

24

Table of Contents

PART II - OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
We are involved in certain legal proceedings that are described in Part I. Item 3. “Legal Proceedings” and Note 15 — Commitments and Contingencies under Part II. Item 8. “Financial Statements” in our 2014 Annual Report. Material developments in the status of those proceedings during the quarter ended December 31, 2014 are described in Part I. Item 1. "Financial Information" under Note 15 — Commitments and Contingencies in this Quarterly Report. We believe that the ultimate liability, if any, with respect to these claims and legal actions will not have a material effect on our financial position or on our results of operations.

ITEM 1A. RISK FACTORS
 
Our Annual Report on Form 10-K for the year ended June 30, 2014 includes a detailed discussion of our risk factors. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2014.
 
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended December 31, 2014, the Company did not sell any equity securities that were not registered under the Securities Act.

Issuer Purchases of Equity Securities

During the quarter ended December 31, 2014, the Company received shares of common stock from employees of the Company to pay their share of payroll taxes arising from vestings of restricted stock and/or exercises of stock options. The acquisition cost per share reflected the weighted-average market price of the Company’s shares of capital stock at the dates of exercise or restricted stock vesting.
Period
 
(a) Total Number of
Shares (or Units)
Purchased
 
(b) Average Price
Paid per Share (or
Units)
 
(c) Total Number of Shares
(or Units) Purchased as Part
of Publicly Announced Plans
or Programs
 
(d) Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
Month of October 2014
 
99 shares of Common Stock
 
$
9.17

 
Not applicable
 
Not applicable
Month of November 2014
 
none
 
 
 
Not applicable
 
Not applicable
Month of December 2014
 
297 shares of Common Stock
 
$
7.75

 
Not applicable
 
Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
Not applicable.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5. OTHER INFORMATION
 
None.


25

Table of Contents

ITEM 6. EXHIBITS
 
A.            Exhibits
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1
 
Certification of Chief Executive Officer pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document


26

Table of Contents

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
EVOLUTION PETROLEUM CORPORATION
(Registrant)
 
 
 
 
By:
/s/ RANDALL D. KEYS
 
 
 
Randall D. Keys
 
 
 
President and Chief Financial Officer
 
 
 
Principal Financial Officer and
 
 
 
Principal Accounting Officer
 
 
 
Date: February 6, 2015
 
 


27
Exhibit 31.1 2015 Q2


EXHIBIT 31.1
 
CERTIFICATION
 
I, Robert S. Herlin, Chief Executive Officer of Evolution Petroleum Corporation, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Evolution Petroleum Corporation;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: February 6, 2015
 
/s / ROBERT S. HERLIN
 
 
Robert S. Herlin
 
 
Chief Executive Officer



Exhibit 31.2 2015 Q2


EXHIBIT 31.2
 
CERTIFICATION
 
I, Randall D. Keys, President and Chief Financial Officer of Evolution Petroleum Corporation, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Evolution Petroleum Corporation;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: February 6, 2015
 
/s / RANDALL D. KEYS
 
 
Randall D. Keys
 
 
President and Chief Financial Officer



Exhibit 32.1 2015 Q2


EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned, Robert S. Herlin, Chief Executive Officer of Evolution Petroleum Corporation (the “Company”), certifies in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2014 (the “Report”) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to his knowledge, that:
 
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
IN WITNESS WHEREOF, the undersigned has executed this certification as of the 6th day of February, 2015.
 
 
 
/s/ ROBERT S. HERLIN
 
 
Robert S. Herlin
 
 
Chief Executive Officer
 
A signed original of this written statement required by Section 906 has been provided to Evolution Petroleum Corporation and will be retained by Evolution Petroleum Corporation and furnished to the Securities and Exchange Commission or its staff upon request.  The foregoing certificate is being furnished to the Securities and Exchange Commission as an exhibit to this Form 10-Q and shall not be considered filed as part of the Form 10-Q.



Exhibit 32.2 2015 Q2


EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned, Randall D. Keys, President and Chief Financial Officer of Evolution Petroleum Corporation (the “Company”), certifies in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2014 (the “Report”) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to his knowledge, that:
 
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
IN WITNESS WHEREOF, the undersigned has executed this certification as of the 6th day of February, 2015.
 
 
 
/s / RANDALL D. KEYS
 
 
Randall D. Keys
 
 
President and Chief Financial Officer
 
A signed original of this written statement required by Section 906 has been provided to Evolution Petroleum Corporation and will be retained by Evolution Petroleum Corporation and furnished to the Securities and Exchange Commission or its staff upon request.  The foregoing certificate is being furnished to the Securities and Exchange Commission as an exhibit to this Form 10-Q and shall not be considered filed as part of the Form 10-Q.