10-K 1 lucas10k033113.htm lucas10k033113.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended March 31, 2013
or
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 1-32508
 
LUCAS ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
20-2660243
(State of other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

3550 Timmons Lane, Suite 1550, Houston, Texas  77027
(Address of principal executive offices)                      (Zip code)
 
Registrant's telephone number, including area code: 713-528-1881
 
Securities registered pursuant to Section 12(b) of the Act:   
Title of each class
Name of each exchange on which registered
Common Stock, $0.001 par value
NYSE MKT
 
Securities registered pursuant to Section 12(g) of the Act:   None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yeso   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o   No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x     No  o
 
Indicate by check mark  if disclosure of delinquent filers pursuant to Item 405 of  Regulation  S-K  is not contained herein, and will not be contained,  to the best of the registrant's knowledge, in definitive proxy or information statements incorporated  by  reference in Part III of this  Form 10-K or any amendment to this Form 10-K 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 definitions of "large accelerated filer", "accelerated filer", "non-accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
 
       Large accelerated filer o
        Accelerated filer o
   Non-accelerated filer o
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x
 
Common Stock aggregate market value held by non-affiliates as of the registrant's most recently completed second fiscal quarter, September 30, 2012: $49,073,432.
 
There were 26,734,232 shares of the registrant's common stock outstanding as of June 17, 2013.

Documents incorporated by reference: none.
 
 

 

TABLE OF CONTENTS
   
Page
 
PART I
 
ITEM 1.
Business
3
 
General
3
 
Industry Segments
4
 
Operations and Oil and Natural Gas Properties
4
 
Marketing
5
 
Competition
5
 
Regulation
5
 
Insurance Matters
6
 
Other Matters
6
 
Available Information
8
ITEM 1A.
Risk Factors. 
8
ITEM 2.
Properties.
17
 
   Oil and Natural Gas – Activities, Production and Reserves
 
ITEM 3.
Legal Proceedings.
19
ITEM 4.
Mine Safety Disclosures.
20
 
 
PART II
 
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
21
ITEM 6.
Selected Financial Data.
25
ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
26
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
34
ITEM 8.
Financial Statements and Supplementary Data.
35
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
64
ITEM 9A.
Controls and Procedures.
64
ITEM 9B.
Other Information.
65
 
 
PART III
 
ITEM 10.
Directors, Executive Officers and Corporation Governance.
66
ITEM 11.
Executive Compensation.
74
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
79
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
81
ITEM 14.
Principal Accounting Fees and Services.
83
 
 
PART IV
 
ITEM 15.
Exhibits, Financial Statement Schedules.
84
     
 
SIGNATURES
 
 
 
 
 

 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 

 This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  These forward-looking statements are generally located in the material set forth under the headings “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business”, “Properties” but may be found in other locations as well. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, among others,

 
·
our growth strategies;
 
·
anticipated trends in our business;
 
·
our ability to make or integrate acquisitions;
 
·
our liquidity and ability to finance our exploration, acquisition and development strategies;
 
·
market conditions in the oil and gas industry;
 
·
the timing, cost and procedure for proposed acquisitions;
 
·
the impact of government regulation;
 
·
estimates regarding future net revenues from oil and natural gas reserves and the present value thereof;
 
·
the outcome of and/or negative perceptions associated with legal proceedings;
 
·
planned capital expenditures (including the amount and nature thereof);
 
·
increases in oil and gas production;
 
·
the number of wells we anticipate drilling in the future;
 
·
estimates, plans and projections relating to acquired properties;
 
·
the number of potential drilling locations; and
 
·
our financial position, business strategy and other plans and objectives for future operations.
 

We identify forward-looking statements by use of terms such as “may,” “will,” “expect,” “anticipate,” “estimate,” “hope,” “plan,” “believe,” “predict,” “envision,” “intend,” “will,” “continue,” “potential,” “should,” “confident,” “could” and similar words and expressions, although some forward-looking statements may be expressed differently. You should be aware that our actual results could differ materially from those contained in the forward-looking statements. You should consider carefully the statements under the “Risk Factors” section of this report and other sections of this report which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements, and the following factors:

 
·
the possibility that our acquisitions may involve unexpected costs;
 
·
the volatility in commodity prices for oil and gas;
 
·
the accuracy of internally estimated proved reserves;
 
·
the presence or recoverability of estimated oil and gas reserves;
 
·
the ability to replace oil and gas reserves;
 
·
the availability and costs of drilling rigs and other oilfield services;
 
·
environmental risks; exploration and development risks;
 
·
competition;
 
·
the inability to realize expected value from acquisitions;
 
·
the ability of our management team to execute its plans to meet its goals; and
 
·
other economic, competitive, governmental, legislative, regulatory, geopolitical and technological factors that may negatively impact our businesses, operations and pricing.

Forward-looking statements speak only as of the date of this report or the date of any document incorporated by reference in this report. Except to the extent required by applicable law or regulation, we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 
2

 
PART I
 

 
ITEM 1.  BUSINESS.

General
 
Lucas Energy, Inc., a Nevada corporation, is an independent oil and natural gas company based in Houston, Texas with a field office in Gonzales, Texas. Lucas Energy, Inc. (herein the "Company," "Lucas," "Lucas Energy," or "we") is engaged in the acquisition and development of crude oil and natural gas from various known productive geological formations, including the Austin Chalk, Eagle Ford and Buda formations, primarily in Gonzales, Wilson, Karnes and Atascosa counties south of the city of San Antonio; and the Eaglebine, Buda, and Glen Rose formations in Leon and Madison counties north of the city of Houston, Texas.  Incorporated in Nevada in December 2003 under the name Panorama Investments Corp., the Company changed its name to Lucas Energy, Inc. effective June 9, 2006.

The Company's strategy is to increase shareholder value by developing its significant acreage positions in the Eagle Ford, Austin Chalk, Eaglebine, Buda and Glen Rose oil bearing formations through a committed development program, effective management and efficiency of its current operations, being opportunistic in industry cycles and trends, and building a strong balance sheet.  Below are key points of our strategy:
 
 
·
Development of current asset base. The Austin Chalk has contributed to most of our production in the past year, including over 90% of our producing wells.  We are planning to develop and execute a drilling program beginning in the second half of 2013 (our 2014 fiscal year), which include the Austin Chalk, Buda/Glen Rose, and the Eagle Ford areas.  The magnitude of the opportunity and associated drilling costs will require external sources of capital.  We expect to utilize some combination of debt and equity in conjunction with operating cash flow to fund this development.  Dependent upon varying factors such as joint ownership, size of lease and other asset specific conditions, the Company may also utilize joint interest participation partners or other forms of partnering.
 
·
Ongoing fieldwide evaluation and optimization. Our strategy is to be cost efficient and manage our operations with sound judgment and excellence.   We pride ourselves with considering technological advancements to enhance our operations.  This process should enhance production results and also lead to lower operating costs on a per barrel basis.
 
·
Maintain a strong balance sheet.  Through its extensive asset base, the Company is focused to leverage its current balance sheet and maximize value with an appropriate and flexible capital structure program.
 
·
Execution of our business plan.  We will conduct the affairs of the Company with the objective of maintaining positive cash flow, managing all essentials of our cost structure, drilling and operating programs, and our corporate general and administrative costs.  We have made great strides with this approach by recently eliminating overburdened operating costs and legal impediments to move forward in becoming a contributing player in our core areas.
 
At March 31, 2013, the Company had leasehold interests (working interests) in approximately 21,462 gross acres, or 15,898 net acres.  The Company’s total net developed and undeveloped acreage as measured from the surface to the base of the Austin Chalk formation was approximately 15,490 net acres.  In deeper formations, the Company has approximately 4,510 net acres in the Eagle Ford oil window and 3,441 net acres in the Eaglebine, Buda and Glen Rose oil bearing formations.

At the end of March 2013, Lucas was producing approximately 203 net barrels of oil equivalent per day (BOEPD) from 55 active well bores, of which 18 wells accounted for more than 80% of our production.  The ratio between the gross and net production varies due to varied working interests and net revenue interests in each well.  An affiliate of Marathon Oil Corporation operates the only two Eagle Ford horizontal wells in our Gonzales leases, of which we have a 15% working interest on each well.  Our -production sales totaled 85,766 barrels of oil equivalent, net to our interest, for the fiscal year ended March 31, 2013.
 
At March 31, 2013, Lucas Energy's total estimated net proved reserves were 5.6 million barrels of oil equivalent (BOE), of which 5.1 million barrels (BBLs) were crude oil reserves, and 2.6  billion cubic feet (BCF) were natural gas reserves (see Item 8 Financial Statements and Supplementary Data).
 
 
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As of March 31, 2013, Lucas employed 8 full-time employees.  We also utilized over 10 contractors on an "as-needed" basis to carry out various functions of the Company, including but not limited to field operations, land administration, corporate activity and information technology maintenance.

Industry Segments

            Lucas Energy's operations are all crude oil and natural gas exploration and production related.  

Operations and Oil and Gas Properties

We operate in known productive areas which minimizes our geological risk.  Our holdings are found in a broad area of current industry activity in Gonzales, Wilson, Karnes, Atascosa, Leon and Madison counties in Texas.  We concentrate on three vertically adjoining formations in Gonzales, Wilson, Karnes and Atascosa counties: the Austin Chalk, Eagle Ford and Buda formations, listed in the order of increasing depth measuring from the land surface. The development of the Eagle Ford as a high potential producing zone has heightened industry interest and success.  Lucas Energy’s acreage position is in the oil window of the Eagle Ford trend.  In 2010, the Company sold 85% of its working interest in its Eagle Ford acreage in Gonzales county, Texas to Hilcorp Resources, LLC (now Marathon Resources EF, LLC); and in 2011 the Company sold 50% of its working interest in its Wilson county Eagle Ford acreage to Marathon Oil Company.  In December 2011, we acquired 3,745 net acres in Leon and Madison counties, Texas and thereby expanded our holdings of the Eagle Ford trend.  We concentrate in several formations in Madison and Leon counties, Texas: the Eaglebine, Buda, and Glen Rose which have productive zones surrounding our acreage.

Austin Chalk

The Company’s original activity started in Gonzales County by acquiring existing shut-in and stripper wells and improving production from those wells. Most of the wells had produced from the Austin Chalk. The Austin Chalk is a dense limestone, varying in thickness along its trend from approximately 200 feet to more than 800 feet. It produces by virtue of localized fractures within the formation.

Eagle Ford

Drilling activities by other operators and the improvement in horizontal drilling, well stimulation, and completion technologies, have brought the Eagle Ford play to prominence as one of the foremost plays in the United States today.
 
On Lucas’ leases, the Eagle Ford is a porous limestone with organic shale matter.  The Eagle Ford formation directly underlies the Austin Chalk formation and is believed to be the primary source of oil and natural gas produced from the Austin Chalk. Reservoir thickness in the area of the Company’s leases varies from approximately 60 feet to 80 feet.
 
Eaglebine

The Eaglebine is so named because the Eagle Ford formation overlies the Woodbine formation. This is a continuation of the Eagle Ford trend that is productive from south Texas to the east north of Houston, Texas.  The Woodbine formation is best known as the prolific reservoir in the famous East Texas Oil Field. There has been increased interest and activity in the Eaglebine formation in the Leon, Houston, and Madison county areas.  There is established production from horizontal and vertical wells surrounding Lucas’ holdings and numerous permits for additional wells have been filed for additional exploratory and development drilling.

Glen Rose

The Glen Rose limestone is a deeper formation below the Buda, around 11,000 feet in our acreage.  Its thickness varies from approximately 100 feet to more than 300 feet in this area. The Glen Rose has several prolific zones that produce from natural fractures and matrix porosity and is prospective across this whole area. There are a number of Glen Rose wells with cumulative production of more than 100,000 barrels of oil and associated natural gas adjacent to our leases.

 
4

 
Buda

The Buda limestone underlies the Eagle Ford formation separated by a 10 foot to 20 foot inorganic shale barrier. Its thickness varies from approximately 100 feet to more than 150 feet in this area. The Buda produces from natural fractures and matrix porosity and is prospective across this whole area. There are a number of Buda wells with cumulative production of more than 100,000 barrels of oil.

Marketing

We operate exclusively in the onshore United States oil and natural gas trends. Crude oil production sales are to gatherers and marketers with national reputations. Our sales are made on a month-to-month basis, and title transfer occurs when the oil is loaded onto the purchaser’s truck.  Crude oil prices realized from production sales are indexed to published posted refinery prices, and to published crude indexes with adjustments on a contract basis.

Our natural gas production is associated gas resulting from crude oil production and is currently very nominal.  We expect that as we drill our proved undeveloped opportunities, the Company would have an increase in production of natural gas and natural gas liquids.

Although we believe that we are not dependent upon any one purchaser, our marketing arrangement with Enterprise Crude Oil, LLC accounted for almost all of our revenues for the year ended March 31, 2013 and GulfMark Energy Inc. accounted for approximately 69% in 2012.  Lucas Energy has alternative purchasers readily available at competitive market prices if there is disruption in services or other events that cause us to search for other ways to sell our production.

We actively manage our crude oil inventory in field tanks and have engaged a marketing company to negotiate our crude and natural gas contracts.

Competition

We are in direct competition for properties with numerous oil and natural gas companies and partnerships exploring various areas of Texas and elsewhere.  Many competitors are large, well-known oil and natural gas and/or energy companies, although no single entity dominates the industry.  Many of our competitors possess greater financial and personnel resources, enabling them to identify and acquire more economically desirable energy producing properties and drilling prospects than us. Additionally, there is competition from other fuel choices to supply the energy needs of consumers and industry.  

Regulation

Lucas Energy's operations are subject to various types of regulation at the federal, state and local levels. These regulations include requiring permits for the drilling of wells; maintaining hazard prevention, health and safety plans; submitting notification and receiving permits related to the presence, use and release of certain materials incidental to oil and natural gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface plugging and abandonment of wells and the transporting of production. Lucas Energy's operations are also subject to various conservation matters, including the number of wells which may be drilled in a unit, and the unitization or pooling of oil and natural gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration, while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally limiting the venting or flaring of natural gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to possibly limit the amounts of oil and natural gas Lucas can produce from its wells and to limit the number of wells or the locations at which Lucas Energy can drill.

 
5

 
In the United States, legislation affecting the oil and natural gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments and agencies issue recommended new and extensive rules and regulations binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. These laws and regulations have a significant impact on oil and natural gas drilling, natural gas processing plants and production activities, increasing the cost of doing business and, consequently, affect profitability. Insomuch as new legislation affecting the oil and natural gas industry is common-place and existing laws and regulations are frequently amended or reinterpreted, Lucas Energy may be unable to predict the future cost or impact of complying with these laws and regulations. The Company considers the cost of environmental protection a necessary and manageable part of its business. It has been able to plan for and comply with new environmental initiatives without materially altering its operating strategies.

Insurance Matters

We maintain insurance coverage which we believe is reasonable per the standards of the oil and natural gas industry.  It is common for companies in this industry to not insure fully against all risks associated with their operations either because such insurance is unavailable or because premium costs are considered prohibitive. A material loss not fully covered by insurance could have an adverse effect on our financial position, results of operations or cash flows. We maintain insurance at industry customary levels to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of certain prohibited substances into the environment. Such insurance might not cover the complete amount of such a claim and would not cover fines or penalties for a violation of an environmental law.

Other Matters

Environmental.  Our exploration, development, and production of oil and natural gas, including our operation of saltwater injection and disposal wells, are subject to various federal, state and local environmental laws and regulations. Such laws and regulations can increase the costs of planning, designing, installing and operating oil, natural gas, and disposal wells. Our domestic activities are subject to a variety of environmental laws and regulations, including but not limited to, the Oil Pollution Act of 1990 (OPA), the Clean Water Act (CWA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Resource Conservation and Recovery Act (RCRA), the Clean Air Act (CAA), and the Safe Drinking Water Act (SDWA), as well as state regulations promulgated under comparable state statutes. We are also subject to regulations governing the handling, transportation, storage, and disposal of naturally occurring radioactive materials that are found in our oil and gas operations. Civil and criminal fines and penalties may be imposed for non-compliance with these environmental laws and regulations. Additionally, these laws and regulations require the acquisition of permits or other governmental authorizations before undertaking certain activities, limit or prohibit other activities because of protected areas or species, and impose substantial liabilities for cleanup of pollution.
 
Under the OPA, a release of oil into water or other areas designated by the statute could result in the Company being held responsible for the costs of remediating such a release, certain OPA specified damages, and natural resource damages. The extent of that liability could be extensive, as set forth in the statute, depending on the nature of the release. A release of oil in harmful quantities or other materials into water or other specified areas could also result in the company being held responsible under the CWA for the costs of remediation, and civil and criminal fines and penalties.
 
CERCLA and comparable state statutes, also known as "Superfund" laws, can impose joint and several and retroactive liability, without regard to fault or the legality of the original conduct, on certain classes of persons for the release of a "hazardous substance" into the environment. In practice, cleanup costs are usually allocated among various responsible parties. Potentially liable parties include site owners or operators, past owners or operators under certain conditions, and entities that arrange for the disposal or treatment of, or transport hazardous substances found at the site. Although CERCLA, as amended, currently exempts petroleum, including but not limited to, crude oil, natural gas and natural gas liquids, from the definition of hazardous substance, our operations may involve the use or handling of other materials that may be classified as hazardous substances under CERCLA. Furthermore, there can be no assurance that the exemption will be preserved in future amendments of the act, if any.

 
6

 
RCRA and comparable state and local requirements impose standards for the management, including treatment, storage, and disposal, of both hazardous and non-hazardous solid wastes. We generate hazardous and non-hazardous solid waste in connection with our routine operations. From time to time, proposals have been made that would reclassify certain oil and natural gas wastes, including wastes generated during drilling, production and pipeline operations, as "hazardous wastes" under RCRA, which would make such solid wastes subject to much more stringent handling, transportation, storage, disposal, and clean-up requirements. This development could have a significant impact on our operating costs. While state laws vary on this issue, state initiatives to further regulate oil and natural gas wastes could have a similar impact. Because oil and natural gas exploration and production, and possibly other activities, have been conducted at some of our properties by previous owners and operators, materials from these operations remain on some of the properties and in some instances, require remediation. In addition, in certain instances, we have agreed to indemnify sellers of producing properties from which we have acquired reserves against certain liabilities for environmental claims associated with such properties. While we do not believe that costs to be incurred by us for compliance and remediating previously or currently owned or operated properties will be material, there can be no guarantee that such costs will not result in material expenditures.
 
Additionally, in the course of our routine oil and natural gas operations, surface spills and leaks, including casing leaks, of oil or other materials occur, and we incur costs for waste handling and environmental compliance. Moreover, we are able to control directly the operations of only those wells for which we act as the operator. Management believes that the Company is in substantial compliance with applicable environmental laws and regulations.

In response to liabilities associated with these activities, accruals are established when reasonable estimates are possible. Such accruals would primarily include estimated costs associated with remediation. Lucas Energy has used discounting to present value in determining its accrued liabilities for environmental remediation or well closure, but no material claims for possible recovery from third party insurers or other parties related to environmental costs have been recognized in the Company’s financial statements. We adjust the accruals when new remediation responsibilities are discovered and probable costs become estimable, or when current remediation estimates must be adjusted to reflect new information.

            We do not anticipate being required in the near future to expend amounts that are material in relation to our total capital expenditures program by reason of environmental laws and regulations, but inasmuch as such laws and regulations are frequently changed, we are unable to predict the ultimate cost of compliance. There can be no assurance that more stringent laws and regulations protecting the environment will not be adopted or that we will not otherwise incur material expenses in connection with environmental laws and regulations in the future.

Occupational Health and Safety. Lucas Energy is also subject to laws and regulations concerning occupational safety and health. Due to the continued changes in these laws and regulations, and the judicial construction of many of them, The Company is unable to predict with any reasonable degree of certainty its future costs of complying with these laws and regulations. Lucas Energy considers the cost of safety and health compliance a necessary and manageable part of its business. Lucas Energy has been able to plan for and comply with new initiatives without materially altering its operating strategies.
 
Taxation.  The operations of the Company, as is the case in the petroleum industry generally, are significantly affected by federal tax laws. Federal, as well as state, tax laws have many provisions applicable to corporations which could affect the future tax liabilities of the Company.
 
Commitments and Contingencies.  Lucas Energy is liable for future restoration and abandonment costs associated with its oil and gas properties. These costs include future site restoration, post closure and other environmental exit costs. The costs of future restoration and well abandonment have not been determined in detail. State regulations require operators to post bonds that assure that well sites will be properly plugged and abandoned. Lucas Energy operates only in Texas which requires a security bond based on the number of wells it operates. Management views this as a necessary requirement for operations and does not believe that these costs will have a material adverse effect on its financial position as a result of this requirement.
 

 
 
7

 
Available Information

Our website address is http://www.lucasenergy.com.  The information on, or that may be accessed through, our website is not incorporated by reference into this report and should not be considered a part of this report.  You can access our filings of Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after such reports have been filed with the United States Securities and Exchange Commission (SEC).  In addition, you can access our proxy statements, our Code of Business Conduct and Ethics, Nominating and Corporate Governance Committee Charter, Audit Committee Charter, and Compensation Committee Charter.

Our fiscal year ends on the last day of March of each year.  We refer to the twelve-month periods ended March 31, 2013 and March 31, 2012 as our 2013 fiscal year and 2012 fiscal year, respectively.

ITEM 1A.   RISK FACTORS.

Our business and operations are subject to many risks.  The risks described below may not be the only risks we face, as our business and operations may also be subject to risks that we do not yet know of, or that we currently believe are immaterial.  If any of the events or circumstances described below actually occurs, our business, financial condition, results of operations or cash flow could be materially and adversely affected and the trading price of our common stock could decline.  The following risk factors should be read in conjunction with the other information contained herein, including the consolidated financial statements and the related notes.  Unless the context requires otherwise, "we," "us" and "our" refer to Lucas Energy, Inc. and its subsidiary. In addition, please read “Cautionary Note Regarding Forward-Looking Statements” in this filing, where we describe additional uncertainties associated with our business and the forward-looking statements included or incorporated by reference in this filing.
 
Our securities should only be purchased by persons who can afford to lose their entire investment in us. You should carefully consider the following risk factors and other information in this filing before deciding to become a holder of our securities. If any of the following risks actually occur, our business and financial results could be negatively affected to a significant extent.

Risks Relating to Our Business

Crude oil and natural gas prices are highly volatile in general and low prices will negatively affect our financial results.

Our revenues, operating results, profitability, cash flow, future rate of growth and ability to borrow funds or obtain additional capital, as well as the carrying value of our oil and natural gas properties, are substantially dependent upon prevailing prices of crude oil and natural gas. Lower crude oil and natural gas prices also may reduce the amount of crude oil and natural gas that we can produce economically. Historically, the markets for crude oil and natural gas have been very volatile, and such markets are likely to continue to be volatile in the future.  Prices for oil and natural gas fluctuate widely in response to a variety of factors beyond our control, such as:

·
overall U.S. and global economic conditions;
·
weather conditions and natural disasters;
·
seasonal variations in oil and natural gas prices;
·
price and availability of alternative fuels;
·
technological advances affecting oil and natural gas production and consumption;
·
consumer demand;
·
domestic and foreign supply of oil and natural gas;
·
variations in levels of production;
·
regional price differentials and quality differentials of oil and natural gas; price and quantity of foreign imports of oil, NGLs and natural gas;
·
the completion of large domestic or international exploration and production projects.
·
restrictions on exportation of our oil and natural gas;
·
the availability of refining capacity;
·
the impact of energy conservation efforts;
 
 
 
8

 
 
 
·
political conditions in or affecting other oil producing and natural gas producing countries, including the current conflicts in the Middle East and conditions in South America and Russia; and
·
domestic and foreign governmental regulations, actions and taxes.
 
 
Further, oil and natural gas prices do not necessarily fluctuate in direct relation to each other. Our revenue, profitability, and cash flow depend upon the prices of supply and demand for oil and natural gas, and a drop in prices can significantly affect our financial results and impede our growth. In particular, declines in commodity prices may:
 
 
·
negatively impact the value of our reserves, because declines in oil and natural gas prices would reduce the value and amount of oil and natural gas that we can produce economically;
·
reduce the amount of cash flow available for capital expenditures, repayment of indebtedness, and other corporate purposes; and
·
limit our ability to borrow money or raise additional capital.

We require financing to execute our business plan and fund capital program requirements.

We believe that our anticipated cash flow from operations, possible proceeds from sales of properties and funding provided by leveraging our capital structure, will be sufficient to meet our working capital and operating needs for approximately the next twelve months. However, to continue growth and to fund our business and expansion plans, we will require additional financing. The amount of capital available to us is limited, and may not be sufficient to enable us to fully execute our growth plans without additional fund raising. Additional financing may be required to meet our desired growth and strategic objectives and to provide more working capital for expanding our development and marketing capabilities and to achieve our ultimate plan of expansion and a larger scale of operations.  Moving forward, we hope to pursue third party capital in form of debt, equity or some combination of the two for certain funding requirements. There can be no assurance that we will be successful in obtaining additional financing on attractive terms, if at all.

On May 16, 2013 we filed a Registration Statement on Form S-3 (Reg. No. 333-188663), which allows us the ability to sell up to $10 million in securities from time to time in the future, including common stock, preferred stock, debt securities, warrants and/or units consisting of any of the above.  On May 24, 2013, the Registration Statement was declared effective by the SEC; provided that as of the date of the filing of this report, no securities have been sold under the Registration Statement and we do not have any immediate plans to sell any securities under the Registration Statement.

We currently have no committed source of additional cash funding as of the date of this report.

We do not intend to pay cash dividends to our shareholders.

We do not currently intend to pay cash dividends on our common stock and do not anticipate paying any cash dividends at any time in the foreseeable future. At present, we will follow a policy of retaining all of our earnings, if any, to finance development and expansion of our business.

We face intense competition.

We are in direct competition for properties with numerous oil and natural gas companies, drilling and income programs and partnerships exploring various areas of Texas.  Many competitors are large, well-known energy companies, although no single entity dominates the industry.  Many of our competitors possess greater financial and personnel resources enabling them to identify and acquire more economically desirable energy producing properties and drilling prospects than us.  Additionally, there is competition from other fuel choices to supply the energy needs of consumers and industry.  Management believes that a viable marketplace exists for smaller producers of natural gas and crude oil.

 
9

 
We currently owe funds under outstanding promissory notes.

On April 4, 2013 and May 31, 2013, the Company entered into loan transactions (see “Item 8 – Note 12. Subsequent Events” of the financial statements attached hereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results Of Operations” with various lenders, including certain related parties (as described below under “Item 13. Certain Relationships and Related Transactions, and Director Independence”) pursuant to loan agreements (the “Loan Agreements”) to which the lenders loaned the Company an aggregate of $3,250,000, with a loan of $2,750,000 being made on April 4, 2013 (“Tranche A”) and the second loan for $500,000 being made on May 31, 2013 (“Tranche B”).  The proceeds of the loans were used for general working capital and to pay amounts owed to Nordic.  The Tranche A and Tranche B lenders included entities beneficially owned by our directors, Ken Daraie (which entity loaned us $2,000,000) and W. Andrew Krusen, Jr. (which entity loaned us $250,000), as well as unrelated third parties which loaned the Company $1,000,000.

The Tranche A and Tranche B loans bear interest of 14% per annum.  The maturity for Tranche A is due and payable on or before October 4, 2013 and Tranche B is due and payable on or before April 4, 2014.  The Company agreed to comply with certain standard covenants in connection with the Loan Agreement, including the requirement to continue to have its common stock listed on the NYSE MKT (or any equivalent replacement exchange), and the requirement to continue to comply with the filing requirements of the Securities Exchange Act of 1934, as amended.  Additionally, pursuant to the Loan Agreement, any proceeds received by the Company through any future funding activities or through the sale of oil and gas properties or interests is required to first be applied to the repayment of the notes issued in connection with the Loan Agreements.  The repayment of the notes is secured by a first priority security interest in one hundred (100) barrels of oil per day of net production from the Company’s owned and operated oil and gas properties, and all payments and proceeds associated therewith.  Additionally, the lenders were granted an aggregate of 325,000 warrants to purchase shares of the Company’s common stock at an exercise price of $1.50 per share in connection with the loans.

As of the date of this report, the Tranche A and Tranche B loans are still outstanding and there is no assurance we would have the cash to repay either loan.  In such case, the lenders may seek to secure their interest pursuant to the aforementioned rights.  Consequently, the value of our securities may decline in value.

If we acquire crude oil and natural gas properties in the future, our failure to fully identify existing and potential problems, to accurately estimate reserves, production rates or costs, or to effectively integrate the acquired properties into our operations could materially and adversely affect our business, financial condition and results of operations.

From time to time, we seek to acquire crude oil and natural gas properties.  Although we perform reviews of properties to be acquired in a manner that we believe is duly diligent and consistent with industry practices, reviews of records and properties may not necessarily reveal existing or potential problems, and may not permit us to become sufficiently familiar with the properties in order to fully assess their deficiencies and potential.  Even when problems with a property are identified, we may assume environmental and other risks and liabilities in connection with acquired properties pursuant to the acquisition agreements.  Moreover, there are numerous uncertainties inherent in estimating quantities of crude oil and natural gas reserves (as discussed further below), actual future production rates and associated costs with respect to acquired properties.  Actual reserves, production rates and costs may vary substantially from those assumed in our estimates.  There can be no assurance that we will be able to locate or make suitable acquisitions on acceptable terms or that future acquisitions will be effectively and profitably integrated into the Company. Acquisitions involve risks that could divert management resources and/or result in the possible loss of key employees and customers of the acquired operations. For the reasons above, among others, an acquisition may have a material and adverse effect on our business and results of operations, particularly during the periods in which the operations of the acquired properties are being integrated into our ongoing operations or if we are unable to effectively integrate the acquired properties into our ongoing operations.

We depend significantly upon the continued involvement of our present management.

Our success depends to a significant degree upon the involvement of our management, who are in charge of our strategic planning and operations. We may need to attract and retain additional talented individuals in order to carry out our business objectives.  The competition for such persons could be intense and there are no assurances that these individuals will be available to us.

 
10

 
Our business is subject to extensive regulation.

As many of our activities are subject to federal, state and local regulation, and as these rules are subject to constant change or amendment, there can be no assurance that our operations will not be adversely affected by new or different government regulations, laws or court decisions applicable to our operations.

Government regulation and liability for environmental matters may adversely affect our business and results of operations.

Crude oil and natural gas operations are subject to extensive federal, state and local government regulations, which may be changed from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of crude oil and natural gas wells below actual production capacity in order to conserve supplies of crude oil and natural gas. There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation and disposal of crude oil and natural gas, byproducts thereof and other substances and materials produced or used in connection with crude oil and natural gas operations. In addition, we may inherit liability for environmental damages caused by previous owners of property we purchase or lease. As a result, we may incur substantial liabilities to third parties or governmental entities. The implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on us.
 
Future increases in our tax obligations; either due to increases in taxes on energy products, energy service companies and exploration activities or reductions in currently available federal income tax deductions with respect to oil and natural gas exploration and development, may adversely affect our results of operations and increase our operating expenses.
 
Federal, state and local governments have jurisdiction in areas where we operate and impose taxes on the oil and natural gas products we sell.  There are constant discussions by federal, state and local officials concerning a variety of energy tax proposals, some of which, if passed, would add or increase taxes on energy products, service companies and exploration activities.  Additionally, the current administration has proposed legislation that would, if enacted into law, make significant changes to federal tax laws, including the elimination of certain key United States federal income tax incentives currently available to oil and natural gas exploration and production companies. These proposed changes include, but are not limited to:  (1) the repeal of the percentage depletion allowance for oil and natural gas properties, (2) the elimination of current deductions for intangible drilling and development costs, (3) the elimination of the deduction for certain domestic production activities, and (4) an extension of the amortization period for certain geological and geophysical expenditures.  It is unclear whether any such changes will be enacted into law or how soon any such changes could become effective in the event they were enacted into law.  The passage of any legislation as a result of these proposals or any other changes in U.S. federal income tax laws could eliminate or increase the taxes that we are required to pay and consequently adversely affect our results of operations and/or increase our operating expenses.
 
 
 

 
 
11

 
The crude oil and natural gas reserves we report in our SEC filings are estimates and may prove to be inaccurate.

There are numerous uncertainties inherent in estimating crude oil and natural gas reserves and their estimated values. The reserves we report in our filings with the SEC now and in the future will only be estimates and such estimates may prove to be inaccurate because of these uncertainties. Reservoir engineering is a subjective and inexact process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable crude oil and natural gas reserves depend upon a number of variable factors, such as historical production from the area compared with production from other producing areas and assumptions concerning effects of regulations by governmental agencies, future crude oil and natural gas prices, future operating costs, severance and excise taxes, development costs and work-over and remedial costs. Some or all of these assumptions may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of crude oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers but at different times may vary substantially. Accordingly, reserve estimates may be subject to downward or upward adjustment. Actual production, revenue and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.

Additionally, “probable” and “possible reserve estimates” (which the SEC began allowing effective January 1, 2010), which estimates are considered unproved reserves and as such, the SEC views such estimates to be inherently unreliable, may be misunderstood or seen as misleading to investors that are not “experts” in the oil or natural gas industry. Unless the shareholder has such expertise, the shareholder should not place undue reliance on these estimates. Except as required by applicable law, we undertake no duty to update this information and do not intend to update this information.
 
Crude oil and natural gas development, re-completion of wells from one reservoir to another reservoir, restoring wells to production and exploration, drilling and completing new wells are speculative activities and involve numerous risks and substantial and uncertain costs.

Our growth will be materially dependent upon the success of our future development program. Even considering our business philosophy to avoid wildcat wells, drilling for crude oil and natural gas and reworking existing wells involves numerous risks, including the risk that no commercially productive crude oil or natural gas reservoirs will be encountered. The cost of exploration, drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors beyond our control, including: unexpected drilling conditions; pressure or irregularities in formations; equipment failures or accidents; inability to obtain leases on economic terms, where applicable; adverse weather conditions and natural disasters; compliance with governmental requirements; and shortages or delays in the availability of drilling rigs or crews and the delivery of equipment. Furthermore, we cannot provide investors with any assurance that we will be able to obtain rights to additional producing properties in the future and/or that any properties we obtain rights to will contain commercially exploitable quantities of oil and/or gas.
   
Drilling or reworking is a highly speculative activity. Even when fully and correctly utilized, modern well completion techniques such as hydraulic fracturing and horizontal drilling do not guarantee that we will find crude oil and/or natural gas in our wells. Hydraulic fracturing involves pumping a fluid with or without particulates into a formation at high pressure, thereby creating fractures in the rock and leaving the particulates in the fractures to ensure that the fractures remain open, thereby potentially increasing the ability of the reservoir to produce oil or natural gas. Horizontal drilling involves drilling horizontally out from an existing vertical well bore, thereby potentially increasing the area and reach of the well bore that is in contact with the reservoir. Our future drilling activities may not be successful and, if unsuccessful, such failure would have an adverse effect on our future results of operations and financial condition. We cannot assure our shareholders that our overall drilling success rate or our drilling success rate for activities within a particular geographic area will not decline. We may identify and develop prospects through a number of methods, some of which do not include lateral drilling or hydraulic fracturing, and some of which may be unproven. The drilling and results for these prospects may be particularly uncertain. Our drilling schedule may vary from our capital budget. The final determination with respect to the drilling of any scheduled or budgeted prospects will be dependent on a number of factors, including, but not limited to: the results of previous development efforts and the acquisition, review and analysis of data; the availability of sufficient capital resources to us and the other participants, if any, for the drilling of the prospects; the approval of the prospects by other participants, if any, after additional data has been compiled; economic and industry conditions at the time of drilling, including prevailing and anticipated prices for crude oil and natural gas and the availability of drilling rigs and crews; our financial resources and results; the availability of leases and permits on reasonable terms for the prospects; and the success of our drilling technology.
  
 
 
 
12

 
We cannot assure our shareholders that these projects can be successfully developed or that the wells discussed will, if drilled, encounter reservoirs of commercially productive crude oil or natural gas. There are numerous uncertainties in estimating quantities of proved reserves, including many factors beyond our control. If we are unable to find commercially exploitable quantities of oil and natural gas in any properties we may acquire in the future, and/or we are unable to commercially extract such quantities we may find in any properties we may acquire in the future, the value of our securities may decline in value.

Because of the inherent dangers involved in oil and gas exploration, there is a risk that we may incur liability or damages as we conduct our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.

The oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, spills, pollution, releases of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be liable for environmental damages caused by previous owners of property purchased and leased by us in the future. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for the purchase of properties and/or property interests, exploration, development or acquisitions or result in the loss of our properties and/or force us to expend substantial monies in connection with litigation or settlements. As such, there can be no assurance that any insurance we currently maintain or that we obtain in the future will be adequate to cover any losses or liabilities. We cannot predict the availability of insurance or the availability of insurance at premium levels that justify our purchase. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial condition and operations. We may elect to self-insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations, which could lead to any investment in us declining in value or becoming worthless.
 
We incur certain costs to comply with government regulations, particularly regulations relating to environmental protection and safety, and could incur even greater costs in the future.

Our exploration, production and marketing operations are regulated extensively at the federal, state and local levels and are subject to interruption or termination by governmental and regulatory authorities based on environmental or other considerations.  Moreover, we have incurred and will continue to incur costs in our efforts to comply with the requirements of environmental, safety and other regulations.  Further, the regulatory environment in the oil and natural gas industry could change in ways that we cannot predict and that might substantially increase our costs of compliance and, in turn, materially and adversely affect our business, results of operations and financial condition.

Specifically, as an owner or lessee and operator of crude oil and natural gas properties, we are subject to various federal, state, local and foreign regulations relating to the discharge of materials into, and the protection of, the environment.  These regulations may, among other things, impose liability on us for the cost of pollution cleanup resulting from operations, subject us to liability for pollution damages and require suspension or cessation of operations in affected areas.  Moreover, we are subject to the United States (U.S.) Environmental Protection Agency's (U.S. EPA) rule requiring annual reporting of greenhouse gas (GHG) emissions.  Changes in, or additions to, these regulations could lead to increased operating and compliance costs and, in turn, materially and adversely affect our business, results of operations and financial condition.
 
 

 
 
13

 
We are aware of the increasing focus of local, state, national and international regulatory bodies on GHG emissions and climate change issues.  In addition to the U.S. EPA's rule requiring annual reporting of GHG emissions, we are also aware of legislation proposed by U.S. lawmakers to reduce GHG emissions.

Additionally, there have been various proposals to regulate hydraulic fracturing at the federal level.  Currently, the regulation of hydraulic fracturing is primarily conducted at the state level through permitting and other compliance requirements.  Any new federal regulations that may be imposed on hydraulic fracturing could result in additional permitting and disclosure requirements (such as the reporting and public disclosure of the chemical additives used in the fracturing process) and in additional operating restrictions.  In addition to the possible federal regulation of hydraulic fracturing, some states and local governments have considered imposing various conditions and restrictions on drilling and completion operations, including requirements regarding casing and cementing of wells, testing of nearby water wells, restrictions on the access to and usage of water and restrictions on the type of chemical additives that may be used in hydraulic fracturing operations.  Such federal and state permitting and disclosure requirements and operating restrictions and conditions could lead to operational delays and increased operating and compliance costs and, moreover, could delay or effectively prevent the development of crude oil and natural gas from formations which would not be economically viable without the use of hydraulic fracturing.  

We will continue to monitor and assess any new policies, legislation, regulations and treaties in the areas where we operate to determine the impact on our operations and take appropriate actions, where necessary.  We are unable to predict the timing, scope and effect of any currently proposed or future laws, regulations or treaties, but the direct and indirect costs of such laws, regulations and treaties (if enacted) could materially and adversely affect our business, results of operations and financial condition.
 
Our officers and directors have limited liability, and we are required in certain instances to indemnify our officers and directors for breaches of their fiduciary duties.
 
            We have adopted provisions in our Articles of Incorporation and Bylaws which limit the liability of our officers and directors and provide for indemnification by us of our officers and directors to the full extent permitted by Nevada corporate law. Our articles generally provide that our officers and directors shall have no personal liability to us or our shareholders for monetary damages for breaches of their fiduciary duties as directors, except for breaches of their duties of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, acts involving unlawful payment of dividends or unlawful stock purchases or redemptions, or any transaction from which a director derives an improper personal benefit. Such provisions substantially limit our shareholders' ability to hold officers and directors liable for breaches of fiduciary duty, and may require us to indemnify our officers and directors.

Risks Relating to Our Outstanding Securities

If the holders of our outstanding convertible securities and warrants sell a large number of shares all at once or in blocks after converting such convertible securities and exercising such warrants, or the holders of our registered shares sell a large number of shares, the trading value of our shares could decline in value.
 
We currently have Series B Warrants outstanding to purchase an aggregate of 2,510,506 shares of common stock which have an exercise price of $2.86 per share; outstanding warrants to purchase 150,630 shares of common stock held by our placement agent in our December 2010 unit offering, which have an exercise price of $2.98 per share; outstanding warrants to purchase 1,032,500 shares of common stock sold in April 2012, which have an exercise price of $2.30 per share; outstanding warrants to purchase 200,000 shares of common stock sold in September 2012, which have an exercise price of $1.65 per share; and outstanding warrants to purchase 325,000 shares of our common stock at an exercise price of $1.50 per share, which were issued in connection with our April and May 2013 loan agreements.  The trading price of our common stock has fluctuated between $2.50 and $1.10 per share during the last 52 weeks.

We currently have 2,000 shares of Series A Convertible Preferred Stock (herein the “Preferred Stock Shares”), which convert on a 1,000-for-one basis into shares of our common stock at the option of the holders thereof.  Additionally, although the Preferred Stock Shares may not be converted if such conversion would cause the holder thereof to own more than 4.99% of our outstanding common stock, this restriction does not prevent the holder from converting some of the Preferred Stock Shares, selling those shares and then converting the rest of its holdings, while still staying below the 4.99% limit. In this way, the holder could sell more than this limit while never actually holding more shares than this limit allows. As of the date of this report, if the 2,000 outstanding Preferred Stock Shares were converted into common stock and sold (subject to the ownership limitations set forth above) an additional 2,000,000 shares of common stock of the Company or approximately 7% of the Company’s currently outstanding shares, would be issued and outstanding.
  
 
 
 
14

 
We have 26,734,232 shares of common stock issued and outstanding as of the date of this report.  As a result, the exercise of outstanding warrants (including, but not limited to warrants which have an exercise price substantially below the current trading price of our common stock) or conversion of shares of the Series A Convertible Preferred Stock in the future and the subsequent resale of such shares of common stock (which shares of common stock issuable upon exercise of the Series B Warrants, the placement agent warrants and the warrants sold in our April and September 2012 offerings, will be eligible for immediate resale, and which shares of common stock issuable upon conversion of the Series A Preferred Stock and exercise of the warrants issued in April and May 2013, will be eligible for immediate resale subject to the terms and conditions of Rule 144) may cause dilution to existing shareholders and cause the market price of our securities to decline in value.  Additionally, the common stock issuable upon exercise of the warrants or conversion of the Preferred Stock Shares may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company's stock in the market than there is demand for that stock. When this happens the price of the company's stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. Finally, the offer or sale of large numbers of shares of common stock in the future, including those shares previously registered in our registration statements and prospectus supplements, and/or in connection with future registration statements or prospectus supplements may cause the market price of our securities to decline in value.
  
Nevada law and our Articles of Incorporation authorize us to issue shares of stock which shares may cause substantial dilution to our existing shareholders.
 
We have authorized capital stock consisting of 100,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares of preferred stock, $0.001 par value per share. As of June 17, 2013, we have 26,734,232 shares of common stock outstanding and 2,000 Preferred Stock Shares issued and outstanding, each convertible into 1,000 shares of our common stock. As a result, our Board of Directors has the ability to issue a large number of additional shares of common stock without shareholder approval, subject to the requirements of the NYSE MKT Equities Exchange (which generally require shareholder approval for any transactions which would result in the issuance of more than 20% of our then outstanding shares of common stock or voting rights representing over 20% of our then outstanding shares of stock), which if issued could cause substantial dilution to our then shareholders.  Shares of additional preferred stock may also be issued by our Board of Directors without shareholder approval, with voting powers and such preferences and relative, participating, optional or other special rights and powers as determined by our Board of Directors, which may be greater than the shares of common stock currently outstanding.  As a result, shares of preferred stock may be issued by our Board of Directors which cause the holders to have majority voting power over our shares, provide the holders of the preferred stock the right to convert the shares of preferred stock they hold into shares of our common stock, which may cause substantial dilution to our then common stock shareholders and/or have other rights and preferences greater than those of our common stock shareholders. Investors should keep in mind that the Board of Directors has the authority to issue additional shares of common stock and preferred stock, which could cause substantial dilution to our existing shareholders.  Additionally, the dilutive effect of any preferred stock which we may issue may be exacerbated given the fact that such preferred stock may have super voting rights and/or other rights or preferences which could provide the preferred shareholders with substantial voting control over us subsequent to the date of this report and/or give those holders the power to prevent or cause a change in control.  As a result, the issuance of shares of common stock and/or Preferred Stock may cause the value of our securities to decrease and/or become worthless.

Shareholders may be diluted significantly through our efforts to obtain financing and/or satisfy obligations through the issuance of additional shares of our common stock.

On May 16, 2013 we filed a Registration Statement on Form S-3 (Reg. No. 333-188663), which allows us the ability to sell up to $10 million in securities from time to time in the future, including common stock, preferred stock, debt securities, warrants and/or units consisting of any of the above.  On May 24, 2013, the Registration Statement was declared effective by the SEC; provided that as of the date of the filing of this report, no securities have been sold under the Registration Statement and we do not have any immediate plans to sell any securities under the Registration Statement.
 
 
 

 
 
15

 
We currently have no committed source of financing. Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock. Our Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock (subject to NYSE MKT Equities Exchange rules which limit among other things, the number of shares we can issue without shareholder approval to no more than 20% of our outstanding shares of common stock). These actions will result in dilution of the ownership interests of existing shareholders, and that dilution may be material.
 
If persons engage in short sales of our common stock, including sales of shares to be issued upon exercise of our outstanding warrants, the price of our common stock may decline.

Selling short is a technique used by a stockholder to take advantage of an anticipated decline in the price of a security. In addition, holders of options and warrants will sometimes sell short knowing they can, in effect, cover through the exercise of an option or warrant, thus locking in a profit. A significant number of short sales or a large volume of other sales within a relatively short period of time can create downward pressure on the market price of a security. Further sales of common stock issued upon exercise of our outstanding warrants could cause even greater declines in the price of our common stock due to the number of additional shares available in the market upon such exercise, which could encourage short sales that could further undermine the value of our common stock. Shareholders could, therefore, experience a decline in the values of their investment as a result of short sales of our common stock.
   
The market price for our common stock may be volatile, and our shareholders may not be able to sell our stock at a favorable price or at all.
 
Many factors could cause the market price of our common stock to rise and fall, including:  actual or anticipated variations in our quarterly results of operations; changes in market valuations of companies in our industry; changes in expectations of future financial performance; fluctuations in stock market prices and volumes; issuances of dilutive common stock or other securities in the future; the addition or departure of key personnel; announcements by us or our competitors of acquisitions, investments or strategic alliances; and the increase or decline in the price of oil and natural gas.

It is possible that the proceeds from sales of our common stock may not equal or exceed the prices our shareholders paid for it plus the costs and fees of making the sales.  

We face potential liability in the event we do not satisfy the current public information requirements of Rule 144(c) of the Securities Act of 1933, as amended, prior to the date the Series B Warrants and shares of common stock issuable upon exercise thereof have been sold by the holders thereof or have expired.

Pursuant to an Amendment Agreement entered into with the Series B Warrant holders, we agreed that if at any time prior to the date that all of the Series B Warrants and any shares of common stock issuable upon exercise of such warrants are sold by the holders thereof, we fail to satisfy the current public information requirement of Rule 144(c) of the Securities Act of 1933, as amended (a “Public Information Failure”), as partial relief for the damages to any holder of warrants, we would pay the holders, based on their pro rata ownership of non-exercised and non-expired warrants on the first day of a Public Information Failure, an aggregate of $80,000 for the first thirty calendar days that there is a Public Information Failure (pro-rated for a period of less than thirty days) and an amount in cash equal to one and one-half percent (1.5%) of the aggregate Black Scholes Value (as defined in the warrants) of such holder’s non-exercised and non-expired warrants on the sixty-first (61st) calendar day after the Public Information Failure (covering the 31st to 60th calendar days) and on every thirtieth day (pro-rated for periods totaling less than thirty days) thereafter until the earlier of (i) the date such Public Information Failure is cured; (ii) such time that such public information is no longer required pursuant to Rule 144; and (iii) the expiration date of the warrants.  Additionally, upon the occurrence of any Public Information Failure during the 12 months prior to the expiration of any warrant, the expiration date of such warrant will be automatically extended for one day for each day that a Public Information Failure occurs and is continuing.  As such, in the event of the occurrence of a Public Information Failure, we will face liability and penalties.
 
 

 
 
16

 
We incur significant costs as a result of operating as a fully reporting publicly traded company and our management is required to devote substantial time to compliance initiatives.
 
We incur significant legal, accounting and other expenses in connection with our status as a fully reporting public company. Specifically, we are required to prepare and file annual, quarterly and current reports, proxy statements and other information with the SEC.  Additionally, our officers, directors and significant shareholders are required to file Form 3, 4 and 5’s and Schedule 13D/G’s with the SEC disclosing their ownership of the Company and changes in such ownership.  Furthermore, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and rules subsequently implemented by the SEC have imposed various new requirements on public companies, including requiring changes in corporate governance practices.  In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. The costs and expenses of compliance with SEC rules and our filing obligations with the SEC, or our identification of deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, could materially adversely affect our results of operations or cause the market price of our stock to decline in value.

ITEM 2.        PROPERTIES.
 
Areas of Activities
 
Lucas Energy, Inc. has oil and natural gas interests, and operates oil and natural gas properties only in the onshore Texas area.  All of the Company’s operations and leasehold interests are in known prolific oil prone trends which extend from South Texas along the border with Mexico to the Northeast area towards the Louisiana-Texas state line north of Beaumont, Texas.  The oil and natural gas properties owned by the Company are in five major reservoir areas of interest:  the Eagle Ford shale, Austin Chalk, Eaglebine, Buda and Glen Rose zones.
 
 
Eagle Ford & Austin Chalk Area
 
The core properties of Lucas Energy are in an area of the Austin Chalk and Eagle Ford trends south, and southeast of San Antonio, Texas.  Lucas has approximately 14,518 gross acres with approximately 4,510 net acres of Eagle Ford in this core area.  Current production from approximately 55 wells operated by the Company is from the Austin Chalk, Buda, and Edwards formations.  Non-operated production from the Eagle Ford formation includes two (2) wells operated by an affiliate of Marathon Oil Company.  These Eagle Ford properties are located within Atascosa, Gonzales, Karnes, Frio, and Wilson counties, Texas.  This core area accounts for almost all of the production and most of the workover operations during fiscal year 2013.
 
 
Eaglebine Area
 
During the third quarter of fiscal year 2012, the Company acquired oil and natural gas leasehold interests in the Eaglebine portion of the Eagle Ford trend.  Lucas acquired working interests in approximately 3,700 net acres in Leon and Madison counties in Texas in the buyout of an affiliate of Hall Financial Group of Dallas, Texas.  The Company operated one well in that area which was completed in the Dexter formation.  Although there are multiple formations of interest in this area north of Houston, Texas, the Eaglebine has become an area of interest.  The Eaglebine is a series of formations that include the Eagle Ford on top of the Woodbine.  Other common named intervals in this series are the Dexter and the Subclarksville.
 
 
Buda & Glen Rose Area
 
The Buda and Glen Rose areas have become another key formation of interest in Madison County.  Recent activity has focused on vertical integration in these zones and has provided additional opportunities to exploit based on recent technological advancement and techniques.  The Company’s leases are contiguous to other successful operators and we expect to expand our presence in this area.  Porous interval thickness of the Glen Rose ranges from 125 to 300 feet in our leasehold area.  We currently do not have producing Glen Rose in our properties.  We have approximately 3,400 net acres in Madison and Leon counties.
 
 
 
 
 
17

 
 
A recap of the acreage held by Lucas is shown below as of March 31, 2013:
 
   
Acres
State of Texas
 
Gross Acreage - Surface Area
21,462
     
Net Acreage by Formation Below Surface
 
 
Austin Chalk
15,490
 
Below Austin Chalk
7,951

Production of Crude Oil and Natural Gas

The Company produced oil and natural gas from 55 wells in seven Texas counties, as of the year ended March 31, 2013.  However, most of the production was from 18 wells which produced over half of the production.  Over 98% of our production is oil and we operate over 95% of our producing wells.  As we develop our properties, we may see the opportunity to increase our natural gas and natural gas liquids production.  Below are well statistics.

   
 At March 31,
   
 2013
 
 2012
 Crude oil wells, Texas:
     
 
 Gross
  55.0
 
   56.0
 
 Net
  37.9
 
   37.7
 Natural gas wells, Texas:
     
 
 Gross
      -
 
      1.0
 
 Net
       -
 
       0.9

Crude oil sales have increased over the last three years from 37,687 BBLs of oil as of the year ended March 31, 2011 to 84,227 BBLs of oil as of the year ended March 31, 2013.  The second and third quarter of 2013 accounted for the highest producing quarters of the year as it carried a portion of the production from the Baker DeForest Unit sold in December 2012 (see “Item 8 – Note 4 Property and Equipment” for additional information). The following summarizes our net production for the fiscal years ended 2013, 2012, and 2011:

     
2013
 
2012
 
2011
 Production sales:
     
 
   
 
Crude oil (Barrels or Bbls)
 
 84,227
 
 54,466
 
 37,687
 
Natural gas (Thousand cubic feet or Mcf)
 
 9,236
 
 14,560
 
 8,737
 
 Total (barrels oil equivalent or BOE) (1)
 
 85,766
 
 56,892
 
 39,143
               
(1) Oil equivalents are determined under the relative energy content method by using a ratio of 6.0 Mmbtu to 1.0 Bbl of oil.

Oil and Natural Gas Reserves

Reserve Information.  For estimates of Lucas' net proved producing reserves of crude oil and natural gas, as well as discussion of Lucas' proved and probable undeveloped reserves, see "Item 8. Financial Statements and Supplementary Data."
 
At March 31, 2013, Lucas' total estimated proved reserves were 5.6 million BOE of which 5.1 million BBLs were crude oil reserves, and 2.6 BCF were natural gas reserves (see “Item 8. Financial Statements and Supplementary Data”).
 
Internal Controls.  The preparation of our reserve estimates is in accordance with our prescribed  procedures that include verification of input data into a reserve forecasting and economic software, as well as management review.  Our reserve analysis includes but is not limited to the following:
 
 
18

 
 
 
·
Research of operators near our lease acreage.  Review operating and technological techniques, as well as reserve projections of such wells.
 
·
The review of internal reserve estimates by well and by area by a qualified petroleum engineer. A variance by well to the previous year-end reserve report is used as a tool in this process.
 
·
The discussion of any material reserve variances among management to ensure the best estimate of remaining reserves.
 
The Company retained several consultants which provided reserve estimates internally.  These consultants have extensive experience in their fields, including petroleum & reservoir engineering and geology.  They provided a comprehensive analysis of the reserves in our leases and have given management and our Third Party Engineers the necessary data to provide the support needed for our reserve estimates.
 
The Company retained Forrest A. Garb & Associates, Inc., licensed independent consulting engineers, to prepare estimates of our oil and gas reserves.    The technical person primarily responsible for audit of our reserve estimates at Forrest A. Garb & Associates, Inc. meets the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Forrest A. Garb & Associates, Inc. does not own an interest in our properties and is not employed on a contingent fee basis. Reserve estimates are imprecise and subjective, and may change at any time as additional information becomes available.  Furthermore, estimates of oil and gas reserves are projections based on engineering data.  There are uncertainties inherent in the interpretation of this data as well as the projection of future rates of production.  The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment.

ITEM 3.       LEGAL PROCEEDINGS.

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations, other than the below. We may become involved in material legal proceedings in the future.

On October 5, 2012, Knight Capital Americas LLC (as successor in interest to Knight Capital America, L.P. (“Knight”)), filed suit against the Company in the Supreme Court of the State of New York, County of New York (Index No. 157012/2012).  The Company previously engaged Knight as a broker/dealer in connection with a proposed fund raise.  The suit alleges causes of actions for breach of contract, unjust enrichment, breach of implied covenants, tortious interference and seeks declaratory relief in connection with the Company allegedly failing to pay Knight fees in connection with its right of first refusal to provide broker/dealer services in connection with a subsequently completed fund raise undertaken by the Company.  The Company is in the process of attempting to negotiate a settlement with Knight, provided that there can be no assurance that a settlement will be reached or if reached will be on favorable terms to the Company.

On October 13, 2011, Lucas entered into a purchase and sale agreement with Nordic Oil USA I, LLLP (“Nordic”), whereby effective July 1, 2011, Lucas purchased all of Nordic’s right, title and interest in certain oil, gas and mineral leases located in Gonzales, Karnes and Wilson Counties, Texas.  The transaction officially closed on November 18, 2011. Lucas agreed to pay Nordic $22 million, payable in the form of a senior secured promissory note (with recourse only to the properties acquired), which accrued interest at the rate of 6% per annum (the “Note”), the payment of which was secured by a Deed of Trust, Security Agreement, Financing Statement and Assignment of Production on the property acquired (the “Deed of Trust”).  Lucas failed to pay the note when it was due on November 17, 2012, and the parties were unable to come to terms on a settlement of the debt.  Subsequently in December 2012, Nordic filed a lawsuit against Lucas pursuant to which Nordic made claims for the payment of damages in connection with liens attached to the property, the proceeds from alleged wrongful assignments of the property acquired in the transaction, pre-and-post judgment interest, a foreclosure and sale of the property, plus attorney’s fees in the amount of 10% of the principal and interest then owing on the note (as allegedly allowed pursuant to the terms of the Note), and sought damages for breach of contract and attorney’s fees. On March 29, 2013, and effective March 31, 2013 (the “Effective Date”), Lucas entered into a Settlement and Release Agreement with Nordic (the “Settlement Agreement”), pursuant to which the parties agreed to settle and terminate the purchase and sale agreement, Lucas agreed to:
 
 
·
Pay Nordic an aggregate of $1,125,000 as follows:
 
 
o
 $250,000 upon the parties entry into the Settlement Agreement (which has been paid to date);
 
o
 $250,000 on or before April 1, 2013 (which has been paid to date);
 
o
 $500,000 on or before June 1, 2013 (which has been paid to date); and
 
o
 $125,000 on or before September 30, 2013,
 
   
provided that if Lucas fails to pay any amounts when due, Nordic is able to file an agreed judgment with the court stipulating that Lucas agrees that the amount owed pursuant to the schedule above is immediately due and payable together with 5% interest;
 
 
 
19

 


 
·
To assign certain properties to Nordic (free of certain liens and encumbrances), together with any rights in the Interests owned by any current or former officers or directors of Lucas; and
 
 
·
To complete certain field work on the properties at Lucas’ sole expense, which has been performed and has an immaterial effect.

Additionally, the parties agreed to mutually release each other and each other’s affiliates and assigns from all claims, causes of actions, damages and liabilities relating to any events which occurred prior to the Effective Date, whether as a result of the purchase of the properties, the note or otherwise, and to further indemnify each other from any claims associated therewith. Finally, Nordic agreed to dismiss the Lawsuit with prejudice five business days after Lucas has made the final payment required as discussed above.
 
On April 8, 2013, the Company entered into a Settlement Agreement with Seidler Oil & Gas, L.P. (“Seidler”) on a lawsuit claiming a refund on previous investments with Lucas Energy.  The Company settled the outstanding balance and paid Seidler $1.3 million plus legal fees.  Seidler released the Company, its current and past officers, directors and agents from associated claims and Seidler agreed to dismiss the previously filed lawsuit with prejudice. In addition, certain private investors also agreed to release the Company, Seidler, and their respective past and present affiliates from any and all claims.
 
The Company filed a lawsuit against the holder of the Company’s 2,000 outstanding shares of Series A Convertible Preferred Stock in the District Court of Harris County, Texas, on May 9, 2013, seeking a declaratory judgment that the 2,000 shares of Series A Convertible Preferred Stock should be cancelled, injunctive relief prohibiting the holder from selling or transferring the Series A Convertible Preferred Stock, and attorney’s fees.  The outcome of the litigation matter cannot be determined at this time with any reasonable certainty.
 
ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable. The Company does not have any mining operations.

 
 
 
 
 
 

 
 
20

 
PART II

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
 Market Information

Our common stock is quoted on the NYSE MKT under the symbol LEI.  Set forth in the table below are the quarterly high and low closing prices of our common stock for the past two fiscal years.

   
High
 
Low
2013
       
Quarter ended March 31, 2013
 
$1.71
 
$1.21
Quarter ended December 31, 2012
 
2.31
 
1.10
Quarter ended September 30, 2012
 
2.34
 
1.41
Quarter ended June 30, 2012
 
2.50
 
1.39
         
2012
       
Quarter ended March 31, 2012
 
$3.24
 
$2.20
Quarter ended December 31, 2011
 
2.68
 
1.04
Quarter ended September 30, 2011
 
3.30
 
1.27
Quarter ended June 30, 2011
 
4.65
 
2.40

Holders

As of June 17, 2013, there were approximately 150 record holders of Lucas' common stock.  As of June 17, 2013, there was also one record holder for the Series A Convertible Preferred Stock which issuance and the validity of such shares Lucas is currently in litigation regarding (see “Item 8 - Note 11. Subsequent Events”).  Our Series A Convertible Preferred Stock is not listed, traded or quoted on any market or exchange.

Description of Capital Stock

As of June 17, 2013, we had 26,734,232 shares of our common stock outstanding, 2,000 shares of our Series A Convertible Preferred Stock designated and outstanding and 3,000 shares of our Series B Convertible Preferred Stock designated, with no shares of Series B Convertible Preferred Stock outstanding.

Common Stock
 
Holders of our common stock: (i) are entitled to share ratably in all of our assets available for distribution upon liquidation, dissolution or winding up of our affairs; (ii) do not have preemptive, subscription or conversion rights, nor are there any redemption or sinking fund provisions applicable thereto; and (iii) are entitled to one vote per share on all matters on which stockholders may vote at all stockholder meetings.  Each shareholder is entitled to receive the dividends as may be declared by our directors out of funds legally available for dividends. Our directors are not obligated to declare a dividend. Any future dividends will be subject to the discretion of our directors and will depend upon, among other things, future earnings, the operating and financial condition of our Company, our capital requirements, general business conditions and other pertinent factors.

The presence of the persons entitled to vote a majority of the outstanding voting shares on a matter before the stockholders shall constitute the quorum necessary for the consideration of the matter at a stockholders’ meeting.

The vote of the holders of a majority of the shares entitled to vote on the matter and represented at a meeting at which a quorum is present shall constitute an act of the stockholders, except for the election of directors, who shall be appointed by a plurality of the shares entitled to vote at a meeting at which a quorum is present. The common stock does not have cumulative voting rights, which means that the holders of 51% of the common stock voting for election of directors can elect 100% of our directors if they choose to do so.

 
21

 
Our common stock is listed and traded on the NYSE MKT under the symbol “LEI”.

Preferred Stock

Subject to the terms contained in any designation of a series of Preferred Stock, the Board of Directors is expressly authorized, at any time and from time to time, to fix, by resolution or resolutions, the following provisions for shares of any class or classes of Preferred Stock of the Company:
 
 
(1)
The designation of such class or series, the number of shares to constitute such class or series which may be increased (but not below the number of shares of that class or series then outstanding) by a resolution of the Board of Directors;

 
(2)
Whether the shares of such class or series shall have voting rights, in addition to any voting rights provided by law, and if so, the terms of such voting rights;

 
(3)
The dividends, if any, payable on such class or series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, and the preference or relation which such dividends shall bear to the dividends payable on any share of stock of any other class or any other shares of the same class;
 
 
(4)
Whether the shares of such class or series shall be subject to redemption by the Company, and, if so, the times, prices and other conditions of such redemption or a formula to determine the times, prices and such other conditions;

 
(5)
The amount or amounts payable upon shares of such series upon, and the rights of the holders of such class or series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Company;

 
(6)
Whether the shares of such class or series shall be subject to the operation of a retirement or sinking fund, and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such class or series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof;
   
 
(7)
Whether the shares of such class or series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of the same class or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchanges;

 
(8)
The limitations and restrictions, if any, to be effective while any shares of such class or series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Company of the common stock or shares of stock of any other class or any other series of the same class;

 
(9)
The conditions or restrictions, if any, upon the creation of indebtedness of the Company or upon the issuance of any additional stock, including additional shares of such class or series or of any other series of the same class or of any other class;

 
(10)
The ranking (be it pari passu, junior or senior) of each class or series vis-à-vis any other class or series of any class of Preferred Stock as to the payment of dividends, the distribution of assets and all other matters;

 
(11)
Facts or events to be ascertained outside the Articles of Incorporation of the Company, or the resolution establishing the class or series of stock, upon which any rate, condition or time for payment of distributions on any class or series of stock is dependent and the manner by which the fact or event operates upon the rate, condition or time of payment; and

 
(12)
Any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions thereof, insofar as they are not inconsistent with the provisions of the Articles of Incorporation of the Company, as amended, to the full extent permitted by the laws of the State of Nevada.
 

 
 
22

 
The powers, preferences and relative, participating, optional and other special rights of each class or series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.

Series A and B Convertible Preferred Stock

The Series A Convertible Preferred Stock and Series B Convertible Preferred Stock have no voting rights, no liquidation rights and no redemption rights, but have conversion rights providing the holder thereof the right to convert each outstanding Series A and B Convertible Preferred Stock share into 1,000 shares of the Company's common stock. The Series A Convertible Preferred Stock contains a provision that limits the amount of common shares that the holder can own at any time upon conversion to an aggregate of 4.99% of the Company’s then issued and outstanding shares of common stock.  The Series B Convertible Preferred Stock contains a similar provision, limiting the amount of common shares that the holder can own upon any conversion to an aggregate of 9.99% of the Company’s then issued and outstanding shares of common stock.  The Series B Convertible Preferred Stock has dividend rights when and if cash dividends are declared by the Company on an “if converted” basis.  Additionally, the conversion rate of the Series A and B Convertible Preferred Stock adjusts automatically in connection with and in proportion to any dividends payable by the Company in common stock.


Dividend Policy

We have not declared or paid cash dividends, or made distributions in the past. We do not  anticipate  that  we will  pay  cash  dividends  or  make distributions  in the  foreseeable  future.  We currently intend to retain and reinvest future earnings to finance operations.  We may however declare and pay dividends in shares of our common stock in the future.

Equity Compensation Plan Information
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
Weighted-average exercise price of outstanding options, warrants and rights (b)
Number of securities available for future issuance under equity compensation plans (excluding those in column (a))
Equity compensation plans approved by the security holders
819,668
$1.55
759,758
Equity compensation plans not approved by the security holders
150,630
$2.98
 
-
Total
970,298
$1.77
759,758

(a)
Includes any compensation plan and individual compensation arrangement of the Company under which equity securities of the Company are authorized for issuance to employees, or non-employees including directors, consultants, advisors, vendors, customers, suppliers or lenders in exchange for consideration in the form of goods or services, as of March 31, 2013.
(b)
Includes the weighted average exercise price of outstanding options, warrants, and rights identified in (a).
 
 
23

 
Recent Sales of Unregistered Securities

Year Ended March 31, 2013

In July 2012, the holder of our Series B Convertible Preferred Stock converted 2,270 shares of such Series B Convertible Preferred Stock into 2,270,000 shares of our common stock.

We claim an exemption from registration afforded by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”), for the above conversion as the securities were exchanged by the Company with its existing security holder exclusively in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

In August 2012, Peter K. Grunebaum, our then director, exercised 14,000 warrants to purchase shares of the Company’s common stock for aggregate consideration of $14,000 or $1.00 per share and the Company issued Mr. Grunebaum 14,000 shares of restricted common stock.

The Company claims an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended since the foregoing issuance did not involve a public offering, the recipient took the securities for investment and not resale, the Company took appropriate measures to restrict transfer, and the recipient was a director of the Company.

In August 2012, Meson Capital Partners LP (“Meson LP”), which is an affiliate of Ryan J. Morris, who became our director effective October 1, 2012, purchased warrants to purchase 83,334 shares of common stock at an exercise price of $1.00 per share (the “Warrants”) for an aggregate of $25,000, or $0.30 per Warrant, from the Company’s Chairman, J. Fred Hofheinz, and Warrants to purchase an aggregate of 15,167 shares for an aggregate of $4,550, or $0.30 per Warrant, from Peter K. Grunebaum, a then member of the Company’s Board of Directors, in private transactions, which Warrants were subsequently exercised by Meson LP for an aggregate exercise price of $98,501.  The Company subsequently issued Meson LP an aggregate of 98,501 shares of restricted common stock.

In August 2012, Gulf Standard Energy Company, LLC, which is beneficially owned by W. Andrew Krusen, Jr., our director, exercised warrants to purchase 200,000 shares of common stock at an exercise price of $1.00 per share and was issued 200,000 shares of common stock.

The Company claims an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended since the foregoing issuances and transfers did not involve a public offering, the recipients took the securities for investment and not resale, the Company took appropriate measures to restrict transfer, and the recipients were “accredited investors”.

In September 2012, we cancelled 20,000 shares of our common stock as part of a settlement agreement with a shareholder, which shares were originally issued in error.

In September 2012, the holder of our Series B Convertible Preferred Stock converted 554 shares of such Series B Convertible Preferred Stock into 554,000 shares of our common stock.  As a result of this conversion, there are no shares of our Series B Convertible Preferred Stock outstanding.
 
We claim an exemption from registration afforded by Section 3(a)(9) of the Securities Act of 1933, as amended, for the above conversions as the securities were exchanged by the Company with its existing security holders exclusively in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.
 
 

 
 
24

 
Subsequent to the Year Ended March 31, 2013

Effective April 4, 2013, the Company entered into a Loan Agreement with various lenders, including related parties (see below under “Item 13.Certain Relationships and Related Transactions, and Director Independence”), pursuant to which such lenders loaned the Company an aggregate of $2,750,000 which was documented by Promissory Notes which accrue interest at the rate of 14% per annum, with such interest payable monthly in arrears (beginning June 1, 2013) and which are due and payable on October 4, 2013.  The Company granted each of the note holders their pro rata portion of five year warrants to purchase 275,000 shares of the Company’s common stock at an exercise price of $1.50 per share.

The Company claims an exemption from registration afforded by Section 4(2) of the Act since the foregoing sales and grants did not involve a public offering, the recipients took the securities for investment and not resale, the Company took appropriate measures to restrict transfer, and the recipients were “accredited investors”. No underwriters or agents were involved in the foregoing and the Company paid no underwriting discounts or commissions.

Effective May 31, 2013, the Company entered into a Loan Agreement with various lenders pursuant to which such lenders loaned the Company an aggregate of $500,000 which was documented by Promissory Notes which accrue interest at the rate of 14% per annum, with such interest payable monthly in arrears (beginning July 1, 2013) and which are due and payable on April 4, 2014.  The Company granted each of the note holders their pro rata portion of five year warrants to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.50 per share.

The Company claims an exemption from registration afforded by Section 4(2) of the Act since the foregoing sales and grants did not involve a public offering, the recipients took the securities for investment and not resale, the Company took appropriate measures to restrict transfer, and the recipients were “accredited investors”. No underwriters or agents were involved in the foregoing and the Company paid no underwriting discounts or commissions.

Use of Proceeds from Sale of Registered Securities

Our Registration Statement on Form S-3 (Reg. No. 333-188663) in connection with the sale by us of up to $10 million in securities (common stock, preferred stock, debt securities, warrants and units) was declared effective by the SEC on May 24, 2013. We have sold no securities pursuant to the Registration Statement to date and have no immediate plans to sell any securities.

ITEM 6.       SELECTED FINANCIAL DATA.

Not applicable.

 
25

 
ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General

The following is a discussion by management of its view of the Company’s business, financial condition, and corporate performance for the past year.  The purpose of this information is to give management’s recap of the past year, and to give an understanding of management’s current outlook for the near future.  This section is meant to be read in conjunction with “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Our fiscal year ends on the last day of March of the calendar year.  We refer to the twelve-month periods ended March 31, 2013 and March 31, 2012 as our 2013 fiscal year and 2012 fiscal year, respectively.

Overview

The ultimate goal of the management of Lucas is to maximize shareholder value.  We seek to accomplish this through various business activities and strategies identified in “Item 1. Business” and “Item 2. Properties” of this report.  Specific targets include: increasing production by developing our acreage, increasing profitability margins by evaluating and optimizing our production, leveraging our balance sheet, and executing our business plan to increase property values, reserves, and expanding our asset base.

Results for our 2013 fiscal year include the following:

 
·
production increase of 51% to 85,766 BOE’s;
 
·
net operating revenue of $8.2 million, an increase of 57% from the previous year; and
 
·
net loss of $6.8 million, or $0.27 per diluted share, compared to a net loss of $7.6 million last year, or $0.41 per diluted share.

We believe our strengths will help us successfully execute our ultimate goals.  We benefit from having asset-rich properties in core areas such as the Eagle Ford, one of the most active plays in the U.S.  The activity around our Eagle Ford assets has begun to define the tremendous opportunities we have in our leases.  The increasing number of wells drilled and the corresponding data available to us this year has enhanced our knowledge and as a result increased the opportunities shown in our reserve report.  In addition, leading operators in the Eagle Ford area have developed drilling and completion technologies that have significantly reduced production risk and decreased per unit drilling and completion costs.

We also benefit from the size and local knowledge of our operations.  Our size provides us with the opportunity to acquire smaller acreage blocks that may be less attractive to larger operators in the area.  We believe that our acquisition of these smaller blocks, if successful, will have a meaningful impact on our overall acreage position.

We benefit from having an experienced management team with proven acquisition, operating and financing capabilities. Mr. Anthony Schnur, our Chief Executive Officer, has over twenty years of extensive oil and gas and financial management experience.  He has developed strategic business plans, raised debt and equity capital, and provided asset management, cash flow forecasts, transaction modeling and development planning for both start-ups and special situations.  On three separate occasions Mr. Schnur has been asked to lead work-out/turn-around initiatives in the E&P space.  He is complemented by Mr. William J. Dale, our Chief Financial Officer, who has 17 years of oil and gas industry financial experience across corporate finance, treasury, strategic planning, and financial reporting, planning and analysis functions both at large global corporations as well as small, entrepreneurial oil and gas companies. He has dual Bachelor degrees in Accounting and Finance, an MBA from the University of Houston and is also a Texas Certified Public Accountant.  Functionally he crosses disciplinary lines from finance-planning-execution to operations assessment and acquisition evaluation and due diligence.  Further the Company has attracted new talent in its operations, reservoir analysis, land and accounting functions and it believes it has brought together a professional and dedicated team to deliver value to Lucas shareholders.

 
26

 
2013 Overview

In the 2013 fiscal year, we performed several workovers throughout our properties.  We had an average net production flow of 235 BOE for the year, with oil production contributing to most of our production.  By the end of the year, our production stabilized to an average of 203 net BOE per day and we reduced our operating costs dramatically with positive field results.  In 2013, although our revenues were higher than previous years, we still had a net loss for the year.  Therefore, in the fourth quarter of 2013, we implemented a cost reduction plan throughout the organization which we expect to maintain going forward.  Our strategy is to maintain our operating cost to an acceptable rate that will benefit the operating margin of the Company as we look to develop our current acreage.

Overview of Properties

During our 2013 fiscal year, the Company continued to acquire and purchase some additional Austin Chalk and Eagle Ford assets.  These transactions were done with minimal cash outlay and at prices which Lucas believes were under the current market.  We also managed to settle legal proceedings with Nordic on March 29, 2013 (see “Item 3. Legal Proceedings”).  The settlement provided for us to pay Nordic $1,125,000 in cash and to assign back to Nordic certain properties in Wilson and Gonzales counties which were acquired from Nordic in 2011 and Nordic to cancel a $22 million note which was previously due to Nordic.

The Company ended the 2013 fiscal year with approximately 4,510 net acres in the Eagle Ford reservoir and approximately 3,441 net acres in the Eaglebine, Buda, and Glen Rose trends.

Operations

The first half of 2013 carried over production from previous year for wells drilled in our acreage.  These wells were drilled in the Austin Chalk formation in Gonzales, Texas.  For fiscal year 2013, these wells contributed to approximately 50% of our total production.  Remaining production has been through an extensive workover program to extend and increase the life of our older wells.  Lucas’ objective for our current producing wells is to operate as efficient as possible, look for technological advancements to increase the life of the wells, evaluate the economic viability of these wells, and consider adding or redrilling our low producing assets. As new wells are drilled in our acreage, we expect to see workover costs diminish.  An increase in the drilling program of older leases could significantly reduce our lifting costs per BBL (barrel).

Reserves

Our estimated net proved crude oil and natural gas reserves at March 31, 2013 and 2012 were approximately 5.6 million BOE and 8.8 million BOE, respectively, a decrease of 3.2 million BOE or 37%.  Crude oil reserves decreased approximately 1.9 million BBLs to 5.1 million BBLs or 27% and natural gas reserves decreased 8.1 BCF to 2.6 BCF.  Using the average monthly crude oil price of $104.76 per BBL and natural gas price of $3.51 per thousand cubic feet (MCF) for the twelve months ended March 31, 2013, our estimated discounted future net cash flow (PV-10) before tax expenses for our proved reserves was approximately $132.6 million, an increase of $28.3 million or 27% from a year ago using the same SEC pricing and reserves methodology.  Oil and natural gas prices have historically been volatile and such volatility can have a significant impact on our estimates of proved reserves and the related PV-10 value.

During the fourth quarter of fiscal 2013, we had the opportunity to research and collect data from the development of surrounding properties by other operators.  As a result, we reported a net decrease of 3.2 million BOE or 37% from previous year mainly due to the Nordic settlement and termination of the $22 million note originally owed to Nordic (see “Item 3. Legal Proceedings”), the oil and natural gas recoveries in our areas have changed mainly from local operator’s technical efficiencies, our working interest in certain properties have changed, and oil recoveries around our Gonzales properties were greatly enhanced.

 
27

 
These reserves were determined in accordance with standard industry practices and SEC regulations by the licensed independent petroleum engineering firm of Forest A. Garb and Associates, Inc.  A large portion of the proved undeveloped crude oil reserves are associated with the Eagle Ford formation.  Although these hydrocarbon quantities have been determined in accordance with industry standards, they are prepared using the subjective judgments of the independent engineers, and may actually be more or less.

Crude Oil and Natural Gas Sales

During the year ended March 31, 2013, our crude oil sales volumes increased to 84,227 BBLs or 231BOPD from 54,466 BBLs, or 149 BOPD, a 55% increase over the previous fiscal year.  We exited the year producing 100% crude oil and a majority of our crude oil sale volumes came from Austin Chalk formation wells which we operate.  We operate over 95% of our producing wells, except two (2) wells producing from the Eagle Ford which is being operated by an affiliate of Marathon Oil Corporation.

On November 21, 2012, the Company entered into a Purchase Agreement with Sundown Energy, LP to sell the Company’s 0.77% net royalty interest in the oil and natural gas properties located on approximately 52 acres of land within the Baker Deforest Unit, located in Gonzales and Dewitt counties, Texas. The purchaser paid $4.0 million in cash in connection with the sale for certain wells contributing to our production in the third quarter of 2013. The closing occurred on December 19, 2012, but was effective as of October 1, 2012.  Over 90% of our gas production for the year was from the Baker Deforest sale, with only 10% contributing to our oil sales.

Major Expenditures

The table below sets out the major components of our operating and corporate expenditures for the years ended March 31, 2013 and 2012:
 
   
2013
   
2012
 
 Additions (Deductions) to Oil and Gas Properties (Capitalized)
           
 Acquisitions Using Cash
  $ 116,700     $ 2,094,161  
 Other Capitalized Costs (a)
    4,782,327       12,354,246  
 Subtotal
    4,899,027       14,448,407  
 Acquisitions Using Shares
    -       8,703,354  
 Issuance/Relinquishment of Nordic Note Payable (b)
    (22,829,333 )     22,000,000  
 Issuance/Relinquishment of Origin Note Payable (c)
    180,837       -  
 Issuance/Relinquishment of Origin Note Receivable (d)
    470,812       -  
 Other Non-Cash Acquisitions (Deductions) (e)
    (181,970 )     621,519  
 Total Additions (Deductions) to Oil and Gas Properties
    (17,460,627 )     45,773,280  
 Lease Operating Expenditures (Expensed)
    3,760,036       4,289,672  
 Severance and Property Taxes (Expensed)
    432,187       316,307  
    $ (13,268,404 )   $ 50,379,259  
                 
 General and Administrative Expense (Cash based)
  $ 5,421,220     $ 5,206,024  
 Share-Based Compensation (Non-Cash)
    677,553       423,992  
 Total General and Administrative Expense
  $ 6,098,773     $ 5,630,016  
 
 
 
(a)
Other capitalized costs include title related expenses and tangible and intangible drilling costs.
 
(b)
Issuance/Relinquishment of Nordic Note Payable relates to the $22.0 million non-recourse senior secured promissory note issued during October 2011 in connection with the Nordic acquisition.  This Note has been settled and is no longer part of our contingent liabilities (see “Item 3. Legal Proceedings”)
 
(c)
Issuance/Relinquishment of Origin Note Payable relates to the original purchase by the Company of properties from Origin for $50,000 cash and a note payable of $450,000 on October 30, 2012.  On May 23, 2012, the remaining $269,163 balance of the note (net $180,837) was subsequently relinquished through the sale of other properties to Origin from the Company.
 
 
 
 
28

 
 
 
 
(d)
Issuance/Relinquishment of Origin Note Receivable relates to sale of properties to Origin for a $500,000 note receivable on December 1, 2011.  On August 1, 2012, the Company repurchased certain properties plus one additional property from Origin for the $470,812 remaining balance of the note receivable.
 
(e)
Other non-cash acquisitions relate to the present value of the estimated asset retirement costs capitalized as part of the carrying amount of the long-lived asset.
 
Results of Operations
 
The following discussion and analysis of the results of operations for each of the two fiscal years in the period ended March 31, 2013 should be read in conjunction with the consolidated financial statements of Lucas Energy, Inc. and notes thereto (see “Item 8.  Financial Statements and Supplementary Data”).  As used below, the abbreviations "BBLs" stands for barrels, "MCF" for thousand cubic feet and "BOE" for barrels of oil equivalent (determined under the relative energy content method by using a ratio of 6.0 Mmbtu to 1.0 Bbl of oil).

We reported a net loss for the year ended March 31, 2013 of $6.8 million, or $0.27 per share.  For the year ended March 31, 2012, we reported a net loss of $7.6 million, or $0.41 per share. Our revenues increased by $3.0 million, or 57%, and our net loss decreased by $0.8 million.

Net Operating Revenues

The following table sets forth the revenue and production data for the years ended March 31, 2013 and 2012:
 
                     
%
 
   
2013
   
2012
   
Increase (Decrease)
   
Increase (Decrease)
 
Sale Volumes:
                       
Crude Oil (Bbls)
    84,227       54,466       29,761       55 %
Natural Gas (Mcf)
    9,236       14,560       (5,324 )     (37 %)
Total (Boe) (1)
    85,766       56,892       28,874       51 %
                                 
Crude Oil  (Bbls per day)
    231       149       82       55 %
Natural Gas (Mcf per day)
    25       40       (15 )     (38 %)
Total (Boe per day) (1)
    235       156       79       51 %
                                 
Average Sale Price:
                               
Crude Oil ($/Bbl)
  $ 97.59     $ 95.14     $ 2.45       3 %
Natural Gas ($/Mcf)
  $ 2.93     $ 5.25     $ (2.32 )     (44 %)
                                 
 
Operating Revenues:
                               
Crude Oil
  $ 8,219,984     $ 5,182,087     $ 3,037,897       59 %
Natural Gas
    27,100       76,374       (49,274 )     (65 %)
           Total Revenues
  $ 8,247,084     $ 5,258,461     $ 2,988,623       57 %
                                 

 
(1)
Oil equivalents are determined under the relative energy content method by using a ratio of 6.0 Mmbtu to 1.0 Bbl of oil.                     

Total crude oil and natural gas revenues for the year ended March 31, 2013 increased $3.0 million, or 57%, to $8.3 million from $5.3 million for the same period a year ago, due primarily to a favorable crude oil volume variance of $2.8 million and a favorable crude oil price variance of $0.2 million.  The increased crude oil volumes sold was due to higher production levels during the 2013 fiscal year as compared to the prior year which were attributable to production from several new wells drilled in the early part of 2012 and production from the Baker DeForest Unit sold in December 2012.

 
29

 
Operating and Other Expenses
 
                     
%
 
   
2013
   
2012
   
Increase (Decrease)
   
Increase (Decrease)
 
Lease Operating Expenses
  $ 3,760,036     $ 4,289,672     $ (529,636 )     (12 %)
Direct lease operating expense
    2,106,372       2,003,339       103,033       5 %
Workovers expense
    1,540,098       2,252,417       (712,319 )     (32 %)
Other
    113,566       33,916       79,650       235 %
Severance and Property Taxes
    432,187       316,307       115,880       37 %
Depreciation, Depletion,
                               
    Amortization and Accretion
    3,585,674       2,008,235       1,577,439       79 %
                                 
General and Administrative  (Cash based)
  $ 5,421,220     $ 5,206,024     $ 215,196       4 %
Share-Based Compensation (Non-Cash)
    677,553       423,992       253,561       60 %
 Total General and Administrative Expense
  $ 6,098,773     $ 5,630,016     $ 468,757       8 %
                                 
Interest Expense
  $ 1,367,844     $ 633,182     $ 734,662       116 %

Lease Operating Expenses.  Lease operating expenses can be divided into the following categories: costs to operate and maintain Lucas’ crude oil and natural gas wells, the cost of workovers and lease and well administrative expenses.  Operating and maintenance expenses include, among other things, pumping services, salt water disposal, equipment repair and maintenance, compression expense, lease upkeep and fuel and power.  Workovers are operations to restore or maintain production from existing wells.  Each of these categories of costs individually fluctuates from time to time as Lucas attempts to maintain and increase production while maintaining efficient, safe and environmentally responsible operations.  The costs of services charged to Lucas by vendors, fluctuate over time.

Lease operating expenses of $3.8 million for the year ended March 31, 2013 decreased $0.5 million, or 12%, from $4.3 million for the same period a year ago, primarily due to decreased expenses associated with a reduction of workover costs of $0.7 million in the last quarter of the year.   Generally, workover costs are incurred for increasing production and maintaining leases on certain properties.  In the first and second quarter of fiscal 2013, there was a considerable workover program started that increased production for the first part of the 2013 fiscal year.  In the fourth quarter of 2013, in order to maintain cash flows, we reduced our workover program and stabilized production.

Depreciation, Depletion, Amortization and Accretion (“DD&A”).  DD&A, related to proved oil and gas properties is calculated using the unit-of-production method.  Under Full Cost Accounting, the amortization base is comprised of the total capitalized costs and total future investment costs associated with all proved reserves.

DD&A expenses for the year ended March 31, 2013 increased $1.6 million, or 79%, to $3.6 million from $2.0 million for the same period a year ago.   The increase was primarily due to increased production of 27,760 BOE and a higher unit DD&A rate.  The unit DD&A rate increased to $40.51 per BOE from $33.68 per BOE was due primarily to an increase in the future investment costs associated with the Company's proved undeveloped reserves for the year ended March 31, 2013 as compared to the same period a year ago.


 
30

 
General and Administrative Expenses (excluding share-based compensation). General and administrative expenses (excluding share-based compensation) increased approximately $0.2 million or 4% for the year ended March 31, 2013 as compared to the prior year primarily due to an increase of $0.5 million of expenses related to employee based severance costs, an increase of $0.1 million of employee and consultant fees, offset by a decrease of $0.3 million related to the discount of options issued in the Company’s 2012 capital raise and $0.1 million decrease in professional fees, including investor relations and consultants.

Share-Based Compensation. Share-based compensation, which is included in General and Administrative expense in the Consolidated Statements of Operations increased approximately $0.2 million for the year ended March 31, 2013 as compared to the prior year primarily due to an increase in employee based stock option costs related to the severance of key individuals of $0.3 million, offset by a decrease in stock compensation of $0.1 million. Share-based compensation is utilized for the purpose of conserving cash resources for use in field development activities and operations.

Interest Expense.  Interest expense increased approximately $0.7 million primarily due to interest on the $22 million Nordic note that was settled and terminated in March 2013.  Interest expense for the note was $1.3 million for the current year.

Liquidity and Capital Resources
 
Working Capital

At March 31, 2013, the Company’s total current liabilities of $6.5 million exceeded its total current assets of $1.7 million, resulting in a working capital deficit of $4.8 million.  At March 31, 2012, the Company had a working deficit of $31.5 million.  The $26.7 million deficit reduction is primarily related to the relinquishment of a $22.0 million non-recourse senior secured promissory note with Nordic (see Part I, Item 3 “Legal Proceedings”) and an overall reduction of current liabilities.  

The primary sources of cash for Lucas during 2013 fiscal year were funds generated from operations, proceeds from the sale of oil and gas properties, proceeds from the issuance of units consisting of shares of our common stock and warrants to purchase shares of our common stock and the exercise of warrants.

The Company believes its undeveloped acreage and ability to access the capital markets in both equity and debt provides a sufficient means to conduct its current operations, meet its contractual obligations and undertake a forward outlook on future development of its current fields.

Cash Flows
 
   
Year Ended March 31,
 
   
2013
   
2012
 
Cash flows used in operating activities
  $ (1,814,640 )   $ (3,360,980 )
Cash flows used in investing activities
    (5,374,669 )     (3,873,065 )
Cash flows provided by financing activities
    6,956,021       5,446,916  
Net (decrease) increase in cash and cash equivalents
  $ (233,288 )   $ (1,787,129 )

The primary sources of cash for Lucas during the two-year period ended March 31, 2013 were funds generated from sales of crude oil and natural gas, proceeds from the sale of oil and gas properties and proceeds from sale of shares of the Company's common stock.  The primary uses of cash were funds used in operations, acquisitions of oil and gas properties and equipment, and repayments of debt.

Net cash used in operating activities was $1.8 million for the year ended March 31, 2013 as compared to net cash used in operating activities of $3.4 million for the same period a year ago. The decrease in net cash used in operating activities of $1.6 million primarily reflects an increase in revenues of $3.0 million and offset by a decrease in working capital and other current assets and liabilities of $4.6 million

Net cash used in investing activities was $5.4 million for the year ended March 31, 2013 as compared to net cash used by investing activities of $3.8 million for the same period a year ago.  The increase in net cash used in investing activities of $1.6 million is due primarily to an increase in additions of oil and gas properties and equipment of $1.1 million and an increase in proceeds from the sale of oil and gas properties of $0.4 million.

Net cash provided by financing activities of $6.9 million for the year ended March 31, 2013 as compared to net cash provided by financing activities of $5.4 million for the same period a year ago.  The increase in cash was mainly related to the issuances of new shares of our common stock of $1.4 million and proceeds for the exercises of warrants.

 
31

 
Financing

The primary sources of cash for Lucas during 2013 fiscal year were funds generated from operations, proceeds from the sale of oil and gas properties, proceeds from the issuance of units consisting of shares of our common stock and warrants to purchase shares of our common stock, and the exercise of warrants as further discussed below. The primary uses of cash were funds used in operations and for additions of oil and gas properties. Our cash balance decreased from $­­­­0.7 million to $0.5 million as of March 31, 2013 as compared to March 31, 2012.  At March 31, 2013, our total current liabilities of $6.5 million exceeded our total current assets of $1.7 million primarily due to the (1) $0.9 million settlement note issued to Nordic in connection with the settlement and termination of the Purchase and Sale Agreement dated October 13, 2011 (see “Item 3. Legal Proceedings”), (2) $1.3 million on advances from working interest owners on previous investments, which was returned to investors on April 8, 2013 (see “Item 3. Legal Proceedings”), (3) $3.7 million in payables associated with drilling and workover costs, and (4) $0.5 million in accrued employee compensation and revenues payable under joint venture agreements.

As of March 31, 2012, the Company carried a $22.0 million non-recourse senior secured promissory note on its balance sheet which was issued in November 2011 in connection with the Nordic acquisition, which was forgiven in March 2013 in connection with the Company’s entry into a settlement agreement with Nordic (see “Item 3. Legal Proceedings”).  In connection with the cancellation of the note, the Company and Nordic also cancelled the November 2011 acquisition agreement and consequently the Company’s oil and gas properties decreased from $66.2 million as of March 31, 2012 to $44.7 million as of March 31, 2013.

 In April 2012, the Company closed its registered direct offering of $5.9 million (approximately $5.5 million net, after deducting commissions and other expenses) of securities to certain institutional investors. In total, the Company sold 2.95 million units at a price of $2.00 per unit. Each unit consists of one share of the Company's common stock and 0.35 of a warrant to purchase one share of the Company's common stock. Each warrant can be exercised to purchase one share of the Company's common stock at an exercise price of $2.30 per share and will become exercisable after six months from the closing date of the offering and for a period of five years thereafter. A total of 2,950,000 shares and 1,032,500 warrants were sold in connection with the offering.  The Company used the net proceeds received from the offering to pay down expenses related to drilling, lease operating, and workover activities and for general corporate purposes, including general and administrative expenses.

In September 2012, the Company sold an aggregate of 800,000 units at $1.65 each, with each unit consisting of one share of Company common stock and 0.25 of a warrant to purchase one share of the Company’s common stock at an exercise price of $2.00 per share in a registered direct offering. A total of 800,000 shares and 200,000 warrants were sold in connection with the offering.  The Company received an aggregate of $1,320,000 (or $1.65 per unit) in gross funding and approximately $1,308,000 (or $1.64 per unit) in net proceeds after paying related expenses associated with the offering. The Company used the net proceeds of the offerings to pay down expenses related to drilling, lease operating and workover activities; and for general corporate purposes, including general and administrative expenses. The Company did not pay any commissions in connection with the offerings.

Effective April 4, 2013, the Company entered into a Loan Agreement with various lenders (the “April 2013 Loan Agreement”) pursuant to which such lenders loaned the Company an aggregate of $2,750,000 to be used for general working capital.  The lenders included entities beneficially owned by our directors, Ken Daraie (which entity loaned us $2,000,000) and W. Andrew Krusen, Jr. (which entities loaned us $250,000), as well as an unrelated third party which loaned the Company $500,000.

Effective May 31, 2013, the Company entered into a Loan Agreement with various lenders (the “May 2013 Loan Agreement” and together with the April 2013 Loan Agreement, the “Loan Agreements”), pursuant to which such lenders loaned the Company an aggregate of $500,000 to be used for general working capital and to pay amounts the Company owed to Nordic Oil USA I, LLLP ("Nordic”).  The lenders were third parties, unaffiliated with the Company, provided that one lender who previously loaned the Company funds in connection with the April 2013 Loan Agreement provided the Company an additional $300,000 loan in connection with the May  2013 Loan Agreement.  The Loan Agreement included substantially similar terms as the April 2013 Loan Agreement and was approved by the prior lenders in the April 2013 Loan Agreement, who also waived their right to be repaid from the proceeds from the loans.

 
32

 
The loans provided pursuant to the Loan Agreements were documented by Promissory Notes (the “Notes”) which accrue interest at the rate of 14% per annum, with such interest payable monthly in arrears (beginning June 1, 2013 in connection with the April 2013 Loan Agreement and July 1, 2013 in connection with the May 2013 Loan Agreement) and are due and payable on October 4, 2013 in connection with the May 2013 Loan Agreement and April 4, 2014 in connection with the May 2013 Loan Agreement.  The Notes can be prepaid at any time without penalty.  In the event any amounts are not paid when due under the Notes and/or in the event any event of default occurs and is continuing under the Notes, the Notes accrue interest at the rate of 17% per annum. The Note holders were each paid their pro rata portion of a commitment fee ($55,000 in connection with the April 2013 Loan Agreement and $15,000 in connection with the May 2013 Loan Agreement) and were each granted their pro rata portion of warrants to purchase 325,000 shares of the Company’s common stock which were evidenced by Common Stock Purchase Warrants (the “Warrants”).

During the year ended March 31, 2013, 412,501 warrants with an exercise price of $1.00 per share were exercised for total consideration of $412,501 and 412,501 shares of common stock were issued to the warrant holders.

Lucas plans to continue to focus a substantial portion of its capital expenditures in various known prolific and productive geological formations, including the Austin Chalk, Eagle Ford and Buda formations, primarily in Gonzales, Wilson, Karnes and Atascosa counties south of the city of San Antonio, Texas and in the Eaglebine, Buda, and Glen Rose formations in Madison and Leon counties north of the city of Houston, Texas.  Lucas expects capital expenditures to be greater than cash flow from operating activities for the 2013 fiscal year.  To cover the anticipated shortfall, our business plan includes establishing a reserve-based line of credit, initiate bank or private borrowings, and/or issue equity or debt offerings.

Off-Balance Sheet Arrangements
 
Lucas does not participate in financial transactions that generate relationships with unconsolidated entities or financial partnerships.  As of March 31, 2013, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates
 
Lucas prepares its financial statements and the accompanying notes in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes.  Lucas identifies certain accounting policies as critical based on, among other things, their impact on the portrayal of Lucas’ financial condition, results of operations or liquidity, and the degree of difficulty, subjectivity and complexity in their deployment.  Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown.  Management routinely discusses the development, selection and disclosure of each of the critical accounting policies.  Following is a discussion of Lucas’ most critical accounting policies:

Proved Oil and Natural Gas Reserves

Lucas’ independent petroleum consultants estimate proved oil and gas reserves, which directly impact financial accounting estimates, including depreciation, depletion and amortization.  Proved reserves represent estimated quantities of crude oil and condensate, natural gas liquids and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made.  The process of estimating quantities of proved oil and gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir.  The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions.  Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time.  For related discussion, see “Item 1A. Risk Factors."

 
33

 
Full Cost Accounting Method

Lucas uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized.

Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities are capitalized as oil and gas property costs on a country-by-country basis. Properties not subject to amortization consist of exploration and development costs, which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. Lucas assesses overall values of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred.  Impairment of unproved properties is assessed based on management's intention with regard to future development of individually significant properties and the ability of Lucas to obtain funds to finance their programs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Costs of oil and gas properties are amortized using the units of production method.  Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves. 

Full Cost Ceiling Test Limitation

In applying the full cost method, Lucas performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “estimated present value,” of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense.  

Share-Based Compensation

              In accounting for share-based compensation, judgments and estimates are made regarding, among other things, the appropriate valuation methodology to follow in valuing stock compensation awards and the related inputs required by those valuation methodologies.  Assumptions regarding expected volatility of Lucas’ common stock, the level of risk-free interest rates, expected dividend yields on Lucas’ stock, the expected term of the awards and other valuation inputs are subject to change.  Any such changes could result in different valuations and thus impact the amount of share-based compensation expense recognized in the Consolidated Statements of Operations.
 
Revenue Recognition

Lucas recognizes oil and natural gas revenue under the sales method of accounting for its interests in producing wells as crude oil and natural gas is produced and sold from those wells. Costs associated with production are expensed in the period incurred.  Crude oil produced but remaining as inventory in field tanks is not recorded in Lucas' financial statements.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 
34

 
ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated financial statements as of March 31, 2013 and 2012 and for the fiscal years ended March 31, 2013 and 2012 have been audited by Hein & Associates, LLP, an independent registered public accounting firm, and have been prepared in accordance with generally accepted accounting principles pursuant to Regulation S-X as promulgated by the SEC.  
 

 
INDEX TO THE FINANCIAL STATEMENTS
     
   
Page
Report of Independent Registered Public Accounting Firm
    
36
Consolidated Balance Sheet as of March 31, 2013 and 2012
    
37
Consolidated Statements of Operations for the years ended March 31, 2013 and 2012
    
38
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2013 and 2012
    
39
Consolidated Statements of Cash Flows for the years ended March 31, 2013 and 2012
    
40
Notes to Consolidated Financial Statements
    
41

 
 
 
 
 
 
 
 
 
 
 
 

 
 
35

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


 
To the Board of Directors
Lucas Energy, Inc.
Houston, Texas
 

We have audited the accompanying consolidated balance sheets of Lucas Energy, Inc. as of March 31, 2013 and 2012, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of Lucas Energy, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lucas Energy, Inc. as of March 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.


Hein & Associates, LLP
Houston, Texas

June 28, 2013
 
 
 
 
 
 
 
 
36

 

LUCAS ENERGY, INC.
 
CONSOLIDATED BALANCE SHEETS
 
   
 
   
 
 
At March 31,
 
2013
   
2012
 
ASSETS
 
Current Assets
           
Cash
  $ 450,691     $ 683,979  
Accounts Receivable
    832,801       1,416,819  
Inventories
    64,630       63,868  
Other Current Assets
    337,860       199,677  
Current Portion of Note Receivable
    -       60,157  
      Total
    1,685,982       2,424,500  
                 
Property and Equipment
               
Oil and Gas Properties (Full Cost Method)
    44,709,800       66,240,375  
Other Property and Equipment
    552,154       646,611  
Total Property and Equipment
    45,261,954       66,886,986  
Accumulated Depletion, Depreciation and Amortization
    (9,204,649 )     (5,716,989 )
      Total Property and Equipment, Net
    36,057,305       61,169,997  
Other Assets
    -       426,570  
                 
Total Assets
  $ 37,743,287     $ 64,021,067  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities
               
Accounts Payable
  $ 3,696,848     $ 8,605,490  
Common Stock Payable
    17,502       84,431  
Accrued Expenses
    501,809       1,062,763  
Accrued Interest
    -       623,333  
Advances From Working Interest Owners
    1,384,085       1,349,066  
Notes Payable
    875,000       22,000,000  
Asset Retirement Obligation, current
    73,621       90,000  
Current Portion of Long-Term Debt
    -       76,894  
Total
    6,548,865       33,891,977  
                 
Asset Retirement Obligation, net of current portion
    851,873       985,152  
Notes Payable, net of current portion
    -       25,489  
Commitments and Contingencies (see Note 6)
               
                 
Stockholders' Equity
               
Preferred Stock Series A, 2,000 Shares Authorized of
               
 $0.001 Par, 2,000 Shares issued and Outstanding
    3,095,600       3,095,600  
Preferred Stock Series B, 3,000 Shares Authorized of
               
 $0.001 Par,  No Shares issued and Outstanding and 2,824 Shares issued and Outstanding as of March 31, 2013 and 2012, respectively
    -       5,166,754  
Common Stock, 100,000,000 Shares Authorized of $0.001 Par,
               
26,751,407 Shares Issued and 26,714,507 Outstanding Shares
               
at March 31, 2013 and 19,581,657 Issued and 19,544,757
               
Outstanding Shares at March 31, 2012, respectively
    26,751       19,582  
Additional Paid in Capital
    48,970,509       35,791,345  
Accumulated Deficit
    (21,701,152 )     (14,905,673 )
Common Stock Held in Treasury, 36,900 Shares at cost
    (49,159 )     (49,159 )
        Total Stockholders' Equity
    30,342,549       29,118,449  
                 
Total Liabilities and Stockholders' Equity
  $ 37,743,287     $ 64,021,067  

The accompanying notes are an integral part of these consolidated financial statements.

 
37

 

LUCAS ENERGY, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
             
           
Year Ended March 31,
 
2013
 
2012
 
             
Net Operating Revenues
           
Crude Oil
  $ 8,219,984     $ 5,182,087  
Natural Gas
    27,100       76,374  
     Total
    8,247,084       5,258,461  
Operating Expenses
               
 Lease Operating Expenses
    3,760,036       4,289,672  
 Severance and Property Taxes
    432,187       316,307  
 Depreciation, Depletion,
               
      Amortization and Accretion
    3,585,674       2,008,235  
 General and Administrative
    6,098,773       5,630,016  
     Total
    13,876,670       12,244,230  
Operating Loss
    (5,629,586 )     (6,985,769 )
Other Income, Net
    241,112       17,469  
Interest Expense
    (1,367,844 )     (633,182 )
Loss Before Income Taxes
    (6,756,318 )     (7,601,482 )
Income Tax Provision
    (39,161 )     -  
Net Loss
  $ (6,795,479 )   $ (7,601,482 )
Net Loss Per Share
               
Basic  and Diluted
  $ (0.27 )   $ (0.41 )
                 
Weighted Average Number of
               
Common Shares Outstanding
               
Basic  and Diluted
    25,099,749       18,676,186  



The accompanying notes are an integral part of these consolidated financial statements.


 
38

 

 LUCAS ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
 
                                       
Common
 
   
Common Stock
   
Preferred Stock
   
Additional
         
Stock
   
Total
 
   
Number
   
Common
   
Number
   
Preferred
   
Paid In
   
Accumulated
   
Held in
   
Stockholders'
 
   
Of Shares
   
Stock
   
Of Shares
   
Stock
   
Capital
   
Deficit
   
Treasury
   
Equity
 
Balance at March 31, 2011
    16,727,713     $ 16,728       -     $ -     $ 28,461,239     $ (7,304,191 )   $ (49,159 )   $ 21,124,617  
Series A & B Preferred Shares issued for:
                                                 
Property Acquisitions
    -       -       4,824       8,262,354       -       -       -       8,262,354  
Common Shares issued for:
                                                         
Series C Warrants Exercise
                                                         
 and modification
    2,510,506       2,511       -       -       6,051,138       -       -       6,053,649  
Property Acquisitions
    150,000       150       -       -       440,850       -       -       441,000  
Share-Based Compensation
    68,438       68       -       -       136,050       -       -       136,118  
Accrued liability retirement
    125,000       125       -       -       498,625       -       -       498,750  
Amortization of stock options
    -       -       -       -       203,443       -       -       203,443  
Net loss
    -       -       -       -       -       (7,601,482 )     -       (7,601,482 )
Balance at March 31, 2012
    19,581,657       19,582       4,824       8,262,354       35,791,345       (14,905,673 )     (49,159 )     29,118,449  
Common Shares issued for:
                                                         
Unit Offering
    3,750,000       3,750       -       -       6,822,990       -       -       6,826,740  
Warrants Exercised
    412,501       412       -       -       412,089       -       -       412,501  
Share-Based Compensation
    183,249       183       -       -       320,686       -       -       320,869  
Conversion of Series B Preferred
    2,824,000       2,824       (2,824 )     (5,166,754 )     5,163,930       -       -       -  
Amortization of stock options
    -       -       -       -       575,812       -       -       575,812  
Modification of stock options
    -       -       -       -       (116,343 )     -       -       (116,343 )
Net loss
    -       -       -       -       -       (6,795,479 )     -       (6,795,479 )
Balances, March 31, 2013
    26,751,407     $ 26,751       2,000     $ 3,095,600     $ 48,970,509     $ (21,701,152 )   $ (49,159 )   $ 30,342,549  



The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
39

 


LUCAS ENERGY, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
 Year Ended March 31,
 
2013
 
2012
 
 Cash Flows from Operating Activities
           
 Net Loss
  $ (6,795,479 )   $ (7,601,482 )
 Adjustments to reconcile net losses to net cash provided by operating activities:
               
Depreciation, Depletion, Amortization and Accretion
    3,585,674       2,008,235  
Share-Based Compensation
    677,553       423,992  
Share-Based Compensation Related to Purchase of Stock Options
    83,657       -  
Non-Operating Expense Relating to Exercise of Warrants
    -       293,275  
Settlement of Debt
    (344,329 )     -  
Gain (loss) on property, plant and equipment
    2,065        -  
Impairment of property, plant and equipment
    123,513       -  
 Changes in Components of Working Capital and Other Assets
               
 Accounts Receivable
    584,018       (610,721 )
 Inventories
    (762 )     (63,868 )
 Prepaid Expenses and Other Current Assets
    (138,183 )     (46,884 )
 Accounts Payable, Accrued Expenses and Interest Payable
    371,402       1,187,694  
 Advances from Working Interest Owners
    35,019       991,667  
 Other Assets
    1,212       57,112  
 Net Cash Used in Operating Activities
    (1,814,640 )     (3,360,980 )
                 
 Investing Cash Flows
               
 Additions of Oil and Gas Properties
    (9,139,834 )     (7,841,671 )
 Additions of Other Property and Equipment
    (69,486 )     (228,412 )
 Proceeds from Sale of Oil and Gas Properties
    4,069,948       3,683,745  
 Payments Received on Notes Receivable
    14,703       13,273  
 Repayment of Note Payable
    (250,000 )      -  
 Deposit for Acquisition of Property, Plant and Equipment
    -       500,000  
 Net Cash Used in Investing Activities
    (5,374,669 )     (3,873,065 )
                 
 Financing Cash Flows
               
 Net Proceeds from Exercises of Warrants
    412,501       -  
 Net Proceeds from the Sale of Common Stock
    6,826,740       5,760,374  
 Repayment of Borrowings
    (283,220 )     (313,458 )
 Net Cash Provided by Financing Activities
    6,956,021       5,446,916  
                 
 Decrease in Cash and Cash Equivalents
    (233,288 )     (1,787,129 )
 Cash and Cash Equivalents at Beginning of the Year
    683,979       2,471,108  
 Cash and Cash Equivalents at End of the Year
  $ 450,691     $ 683,979  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
40

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 1 – ORGANIZATION AND OPERATIONS OF THE COMPANY

Lucas Energy Inc. is an independent oil and gas company engaged in the development and acquisition of onshore properties in Texas.  The Company’s main operations are primarily located in the Eagle Ford and Austin Chalk trends in Wilson and Gonzales counties and in the Eaglebine, Buda, and Glen Rose formations in Madison and Leon counties.

Our corporate headquarters is in Houston, Texas and our field operation is located in Gonzales, Texas where we manage the Company’s well operations.

NOTE 2 – LIQUIDITY

At March 31, 2013, the Company’s total current liabilities of $6.5 million exceeded its total current assets of $1.7 million, resulting in a working capital deficit of $4.8 million.  At March 31, 2012, the Company had a working deficit of $31.5 million.  The $26.7 million deficit reduction is primarily related to the relinquishment of a $22.0 million non-recourse senior secured promissory note with Nordic (see Part I, Item 3 “Legal Proceedings”) and an overall reduction of current liabilities. 

The primary sources of cash for Lucas during 2013 fiscal year were funds generated from operations, proceeds from the sale of oil and gas properties, proceeds from the issuance of units consisting of shares of our common stock and warrants to purchase shares of our common stock and the exercise of warrants.

The Company believes its undeveloped acreage and ability to access the capital markets in both equity and debt provides a sufficient means to conduct its current operations, meet its contractual obligations and undertake a forward outlook on future development of its current fields.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of Lucas Energy include the accounts of its wholly-owned subsidiary, LEI Alcalde Holdings, LLC. On August 16, 2012, Lucas Energy created the wholly-owned subsidiary LEI Alcalde Holdings, LLC to distinguish our investment in a Gonzales county building bought on November 21, 2011.  All intercompany accounts and transactions have been eliminated.

Use of Estimates and Reclassifications

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Lucas' consolidated financial statements are based on a number of significant estimates, including oil and natural gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and natural gas properties, and timing and costs associated with its asset retirement obligations, as well as those related to the fair value of stock options, stock warrants and stock issued for services.  While we believe that our estimates and assumptions used in preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and financial instruments which mature within three months of the date of purchase.

Restricted Cash

As of March 31, 2013 and 2012, the Company had no restricted cash.

 
41

 
Allowance for Doubtful Accounts

Accounts receivable consist of uncollaterized oil and natural gas revenues due under normal trade terms.  Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible.  There was no allowance recorded as of March, 31, 2013 or 2012.

Concentration of Credit Risk

Accounts receivable are recorded at invoiced amount and generally do not bear interest. The Company’s accounts receivables are concentrated among entities engaged in the energy industry within the U.S. and include operating revenue from our producing wells.  The Company periodically assesses the financial condition of these entities and institutions and considers any possible credit risk to be minimal.

Although we believe that we are not dependent upon any one purchaser, our marketing arrangement with Enterprise Crude Oil, LLC accounted for almost all of our revenues for the year ended March 31, 2013 and GulfMark Energy Inc. accounted for approximately 69% in 2012.  Lucas Energy has alternative purchasers readily available at competitive market prices if there is disruption in services or other events that cause us to search for other ways to sell our production.

 
 
 
 
 
 
 
 
 
 
 

 
 
42

 
Marketable Securities

Lucas reports its short-term investments and other marketable securities at fair value in accordance with Accounting Standards Codification (ASC) Topic 825 “Financial Instruments.”  As of March 31, 2013 and 2012, the Company did not have any material investments in marketable securities.

Fair Value of Financial Instruments

As of March 31, 2013 and 2012, the fair value of Lucas' cash, accounts receivable, accounts payable, note receivable and note payable approximate carrying values because of the short-term maturity of these instruments.

The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with property, plant and equipment.  Significant Level 3 inputs used in the calculation of asset retirement obligations include plugging costs and reserve lives.  A reconciliation of the Company's asset retirement obligations is presented in “Note 5 – Asset Retirement Obligations”.

Oil and Natural Gas Properties, Full Cost Method

Lucas uses the full cost method of accounting for oil and natural gas producing activities. Costs to acquire mineral interests in oil and natural gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized.

Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities, are capitalized as oil and natural gas property costs on a country-by-country basis. Costs not subject to amortization consist of unproved properties that are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. Lucas assesses overall values of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred.  Impairment of unproved properties is assessed based on management's intention with regard to future development of individually significant properties and the ability of Lucas to obtain funds to finance their programs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.

Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves.  If it is determined that the relationship is significantly altered, the corresponding gain or loss will be recognized in the consolidated statements of operations.  

Costs of oil and natural gas properties are amortized using the units of production method.   Amortization expense calculated per equivalent physical unit of production amounted to $40.51 and $33.68 per barrel of oil equivalent for the years ended March 31, 2013 and 2012, respectively.

Ceiling Test

In applying the full cost method, Lucas performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “estimated present value” of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense.  During the years ended March 31, 2013 and 2012, no impairment of oil and natural gas properties was recorded.

 
43

 

Other Property and Equipment

Property and equipment are stated at cost and consist primarily of a building, furniture and computer equipment.  Depreciation is computed on a straight-line basis over the estimated useful lives.

Income Taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and accrued tax liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Lucas has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements as of March 31, 2013 and 2012.  The Company’s policy is to classify assessments, if any, for tax related interest expense and penalties as interest expense.

Earnings per Share of Common Stock

Basic and diluted net income per share calculations are calculated on the basis of the weighted average number of shares of the Company's common stock (Common Shares) outstanding during the year.  Purchases of treasury stock reduce the outstanding shares commencing on the date that the stock is purchased.  Common stock equivalents are excluded from the calculation when a loss is incurred as their effect would be anti-dilutive.

Stock options to purchase 819,668 Common Shares at an average exercise price of $1.55 per share and warrants to purchase 3,893,636 Common Shares at an average exercise price of $2.65 per share were outstanding at March 31, 2013.

Stock options to purchase 456,000 Common Shares at an average exercise price of $2.88 per share and warrants to purchase 2,966,136 Common Shares at an average exercise price of $2.67 per share were outstanding at March 31, 2012.  During the year ended March 31, 2012, Lucas issued 2,000 shares of Series A Convertible Preferred Stock.  During the year ended March 31, 2012, Lucas issued 2,824 shares of Series B Convertible Preferred Stock for interests in oil and natural gas properties.  Each share of the Series A and Series B Convertible Preferred Stock shares is convertible into an aggregate of 1,000 shares of the Company’s common stock and have no liquidation preference and no maturity date. During the year ended March 31, 2013, the holder of the Company’s Series B Preferred Stock converted their 2,824 shares into 2,824,000 Common Shares.

Using the treasury stock method, had the Company had net income, approximately 216,668 Common Shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share calculation for the year ended March 31, 2013.

Share-Based Compensation

In accordance with the provisions of the Stock Compensation Topic of the ASC (ASC Topic 718), Lucas measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award over the vesting period.

Revenue and Cost Recognition

Lucas recognizes oil and natural gas revenue under the sales method of accounting for its interests in producing wells as crude oil and natural gas is produced and sold from those wells. Costs associated with production are expensed in the period incurred.

Recent Accounting Pronouncements
 
44

 

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, which amends the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification. The amendments clarify the FASB's intent about the application of existing fair value measurement requirements and change certain principles or requirements for measuring fair value or disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual fiscal periods beginning after December 15, 2011.

The adoption of ASU 2011-04 did not have a material impact on the Company’s financial statements.

NOTE 4 – PROPERTY AND EQUIPMENT

Oil and Natural Gas Properties

All of Lucas' oil and natural gas properties are located in the United States.  Costs being amortized at March 31, 2013 and 2012 are as follows:
 
   
At March 31,
 
   
2013
   
2012
 
 Proved leasehold costs
  $ 10,002,828     $ 35,454,781  
 Costs of wells and development
    33,961,775       29,858,429  
 Capitalized asset retirement costs
    745,197       927,165  
        Total oil & natural gas properties
    44,709,800       66,240,375  
 Accumulated depreciation and depletion
    (9,077,997 )     (5,625,961 )
    Net Capitalized Costs
  $ 35,631,803     $ 60,614,414  

The following table sets forth the changes in the total cost of oil and natural gas properties at March 31, for each of the two years in the period ended March 31, 2013:
   
2013
   
2012
 
 Balance at  beginning of period
  $ 66,240,375     $ 24,650,840  
Acquisitions using cash
    116,700       2,094,161  
Other capitalized costs
    4,782,327       12,354,246  
Sale proceeds
    (4,069,948 )     (4,183,745 )
Assumption of note payable
    450,000       22,000,000  
Acquisitions using shares
    -       8,703,354  
Relinquish of note receivable
    470,812       -  
Relinquish of note payable
    (269,163 )      -  
Relinquishment of Nordic note
    (22,829,333 )     -  
Other non-cash transactions
    (181,970 )     621,519  
 Balance at end of period
  $ 44,709,800     $ 66,240,375  

Other capitalized costs include title related expenses and tangible and intangible drilling costs.

 
45

 
Acquisition of Oil and Natural Gas Properties
 
Fiscal Year 2013.  During the year ended March 31, 2013, the Company purchased various oil and natural gas properties and equipment for $1,037,512.  As part of the acquisitions, we entered into a $450,000 Note Payable, paid $116,700 in cash, and extinguished a Note Receivable for $470,812.

Fiscal Year 2012.  During the year ended March 31, 2012, Lucas acquired various oil and natural gas properties and equipment at an aggregate net cost of $45,151,761 including $22,000,000 with a note payable, $14,448,407 cash, 2,824 shares of Lucas’ preferred stock series B valued at $5,166,754, respectively, and 150,000 shares of Lucas' common stock valued at $441,000 ($2.94 per share based upon the closing price of the Company’s common stock on the date of agreement).

On October 13, 2011, Lucas entered into a purchase and sale agreement with Nordic Oil USA I, LLLP (“Nordic”), whereby effective July 1, 2011, Lucas purchased all of Nordic’s right, title and interest in certain oil, gas and mineral leases located in Gonzales, Karnes and Wilson Counties, Texas.  The transaction officially closed on November 18, 2011. Lucas agreed to pay Nordic $22 million, payable in the form of a senior secured promissory note (with recourse only to the properties acquired), which accrued interest at the rate of 6% per annum (the “Note”), the payment of which was secured by a Deed of Trust, Security Agreement, Financing Statement and Assignment of Production on the property acquired (the “Deed of Trust”).  Lucas failed to pay the Note when it was due on November 17, 2012, and the parties were unable to come to terms on a settlement of the debt.  Subsequently in December 2012, Nordic filed a lawsuit against Lucas pursuant to which Nordic made claims for the payment of damages in connection with liens attached to the property, the proceeds from alleged wrongful assignments of the property acquired in the transaction, pre-and-post judgment interest, a foreclosure and sale of the property, plus attorney’s fees in the amount of 10% of the principal and interest then owing on the note, and sought damages for breach of contract and attorney’s fees. On March 29, 2013, and effective March 31, 2013 (the “Effective Date”), Lucas entered into a Settlement and Release Agreement with Nordic (the “Settlement Agreement”), pursuant to which the parties agreed to cancel and terminate the purchase and sale agreement, Lucas agreed to:

 
·
Pay Nordic an aggregate of $1,125,000 as follows:
 
 
o
 $250,000 upon the parties entry into the Settlement Agreement (which has been paid to date);
 
o
 $250,000 on or before April 1, 2013 (which has been paid to date);
 
o
 $500,000 on or before June 1, 2013 (which has been paid to date); and
 
o
 $125,000 on or before September 30, 2013,
 
   
provided that if Lucas fails to pay any amounts when due, Nordic is able to file an agreed judgment with the court stipulating that Lucas agrees that the amount owed pursuant to the schedule above is immediately due and payable together with 5% interest;
 
 
·
To assign certain of the properties acquired back to Nordic (free of certain liens and encumbrances), together with any rights in the Interests owned by any current or former officers or directors of Lucas; and
 
 
·
To complete certain field work on the properties at Lucas’ sole expense, which has been performed and has an immaterial effect.

Additionally, the parties agreed to mutually release each other and each other’s affiliates and assigns from all claims, causes of actions, damages and liabilities relating to any events which occurred prior to the Effective Date, whether as a result of the purchase of the properties, the Note or otherwise, and to further indemnify each other from any claims associated therewith. Finally, Nordic agreed to dismiss the Lawsuit with prejudice five business days after Lucas has made the final payment required as discussed above.

On October 13, 2011, Lucas entered into a purchase agreement with a company, with an effective date of July 1, 2011.  The intent of this transaction was to acquire all of the company’s interests in properties owned by Nordic, in consideration for 2,000 shares of designated Series A Convertible Preferred Stock of the Company, each of which shares are convertible into an aggregate of 1,000 shares of the Company’s common stock. The discounted fair value of the transaction was $3.8 million, due to the six-month holding period during which the holder of the Series A Convertible Preferred Stock is not allowed to sell the shares of the Company’s common stock when converted, and other restrictions. The Series A Convertible Preferred Stock contains a provision that limits the amount of common shares that the holder can own at any time upon conversion to an aggregate of 4.99% of the Company’s then issued and outstanding shares of common stock.  Lucas subsequently filed a lawsuit against the company who received the Series A Convertible Preferred Stock seeking among other things, the return and cancellation of such Series A Convertible Preferred Stock due to the fact that Lucas did not receive valid consideration for such shares and such shares were not validly issued (see “Note  11. Subsequent Events”).

 
46

 
On December 29, 2011, Lucas entered into a purchase and sale agreement with Hall Phoenix Energy, LLC (Hall Phoenix), with an effective date of December 1, 2011, to purchase all of Hall Phoenix’s interests in certain oil, natural gas and mineral leases, rights and assets located in Leon, Madison and Wilson counties, Texas.  Pursuant to the transaction, Lucas agreed to pay as consideration 2,824 shares of Series B Convertible Preferred Stock of the Company, each of which shares are convertible into an aggregate of 1,000 shares of the Company’s common stock.  The Series B Convertible Preferred Stock contains a provision that limited the amount of common shares that the holder can own at any time upon conversion to an aggregate of 9.99% of Company’s then issued and outstanding shares of common stock.  During the year ended March 31, 2013, Hall Phoenix exercised their right of conversion and converted all their Series B Convertible Preferred Stock into 2,824,000 shares of the Company’s common stock.

Sale of Oil and Gas Properties

Fiscal Year 2013.  During the year ended March 31, 2013, the Company sold several oil and natural gas properties with aggregate gross proceeds of $4,069,948, of which $269,163 was offset by a Note Payable due from a previous purchase transaction. All oil and natural gas property sale proceeds were treated as a reduction in the full cost pool with no gain or loss recorded on the sales.  
 
On November 21, 2012, the Company entered into a Purchase Agreement with Sundown Energy, LP to sell the Company’s 0.77% net royalty interest in the oil and natural gas properties located on approximately 52 acres of land within the Baker Deforest Unit, located in Gonzales and Dewitt counties, Texas, including the Baker Deforest Unit #1H, #2H, #3H, #4H and #12H wells. The purchaser paid $4.0 million in cash in connection with the sale, excluding any adjusted purchase amounts. The closing occurred on December 19, 2012, but was effective as of October 1, 2012.

Fiscal Year 2012.  During the year ended March 31, 2012, Lucas sold various oil and natural gas properties and equipment for aggregate gross proceeds of approximately $4,183,745, of which $3,683,745 was paid in cash. Lucas received a $500,000 note receivable for the sale of certain properties.  All oil and natural gas property sale proceeds were treated as a reduction in the full cost pool with no gain or loss recorded on the sales. Such sales included the transactions discussed below.

In September 2011, Lucas entered into several joint venture agreements to drill new Austin Chalk horizontal wells.  Under the agreements, the counterparty purchased a working interest in the well operated by Lucas.  Proceeds from the sale of the partial working interest were approximately $100,100 and were recorded as a reduction in the full cost pool.

In October 2011, Lucas entered into a purchase and sale agreement with Nordic Oil USA 2, LLLP (Nordic 2), with an effective date of February 1, 2011, to sell to Nordic 2 all of Lucas’ interests in certain oil, natural gas and mineral leases located in McKinley County, New Mexico for $4 million in cash.  Net proceeds to the Company from the sale were approximately $3.6 million after deducting commissions.  As a portion of the transaction, Nordic 2 returned a cash deposit for property acquisition of $0.5 million.  The proceeds from this sale were recorded as a $3.1 million reduction in the full cost pool with no gain or loss recorded from the sale, and a $0.5 million reduction in Other Assets. The Company acquired the properties in January 2011 in a purchase transaction for $2.5 million, which included a deposit of $0.5 million. Nordic 2 acquired, among other things, the rights to the $0.5 million deposit.  No revenues or expenses were derived from Lucas relating to these properties since the properties were acquired in January 2011.

On December 1, 2011, Lucas entered into an asset sale agreement with a company to sell certain underperforming wells. Lucas received as consideration $100,000 in cash and a $500,000 secured promissory note. The proceeds from the sale were recorded as a reduction in the full cost pool with no gain or loss recorded on the sale. The note bears interest at 6% per annum with monthly installments of $7,300, including accrued interest, through 2018.  Relinquishment of the note receivable occurred on August 1, 2012, when Lucas repurchased certain properties plus one additional property from the company for $470,812, the remaining balance of the note receivable.
 
 
 
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Other Property and Equipment

On November 21, 2011, Lucas entered into a purchase agreement for a building in Gonzales County for $450,000 to be used as office space.  Pursuant to the agreement, the Company agreed to pay $325,000 in the form of a promissory note to be repaid in monthly installments. The final payment was paid on May 1, 2012.  The note bears an interest rate of 8% per annum and is collateralized by the property.  On March 21, 2013 Lucas entered into an agreement to sell the building for $325,000, which resulted in an impairment loss of $123,513.  Payment on the building is due August 22, 2013.  As of March 31, 2013, the building was still recognized in Other Property and Equipment.

NOTE 5 – ASSET RETIREMENT OBLIGATIONS

Lucas records the fair value of a liability for asset retirement obligations (“ARO”) in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. Lucas accrues an abandonment liability associated with its oil and natural gas wells when those assets are placed in service. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at Lucas’ credit-adjusted risk-free interest rate. No market risk premium has been included in Lucas’ calculation of the ARO balance.

The following table presents the reconciliation of the beginning and ending aggregate carrying amounts of long-term legal obligations associated with the future retirement of oil and natural gas properties for the years ended March 31, 2013 and 2012:

   
2013
   
2012
 
Carrying amount at beginning of year
  $ 1,075,152     $ 409,112  
Liabilities incurred
    228,918       207,131  
Liabilities settled
    (27,337 )     (53,263 )
Accretion
    59,649       44,521  
Revisions
    39,162       518,357  
Reduction for sale of oil and natural gas property
    (450,050 )     (50,706 )
Carrying amount at end of year
  $ 925,494     $ 1,075,152  

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Minimum Commitments

At March 31, 2013, total minimum commitments were as follows:

         
Years Ended March 31,
 
 Contractual Obligations
 
Total
   
2014
   
2015
   
2016
   
2017
   
2018
   
Thereafter
 
 Non-Cancelable Operating Leases
  $ 187,532     $ 75,911     $ 78,477     $ 33,144     $ -     $ -     $ -  



 
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Legal Proceedings.  There are currently various suits and claims pending against Lucas that have arisen in the ordinary course of Lucas’ business, including contract disputes and title disputes.  While the ultimate outcome and impact on Lucas cannot be predicted with certainty, management believes that the resolution of these suits and claims will not, individually or in the aggregate, have a material adverse effect on Lucas’ consolidated financial position, results of operations or cash flow.  Lucas records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.

NOTE 7 – INCOME TAXES

The Company recorded provision for income taxes of $39,161 and $0 for the years ended March 31, 2013 and March 31, 2012, respectively.
   
2013
       
2012
 
 Current taxes:
               
 Federal
  $ 8,161         $ -  
 State
    31,000           -  
      39,161           -  
 Deferred taxes:
                   
 Federal
    -           -  
 State
    -           -  
      -           -  
 Total
  $ 39,161         $ -  

The following is a reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rate to income from continuing operations before income taxes for the two years ended March 31, 2013:

   
2013
   
2012
 
 Computed at expected tax rates (34%)
  $ (2,297,148 )   $ (2,584,504 )
 Meals and entertainment
    10,938       4,774  
 State Income tax net of FIT benefit
    20,460       -  
 Percentage depletion
    -       -  
 Return to accrual true-up
    (3,000 )     (116,829 )
 Change in valuation allowance
    2,307,911       2,696,559  
 Total
  $ 39,161     $ -  


 
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Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:

   
2013
   
2012
 
 Deferred tax assets:
           
      Net operating tax loss carryforwards
  $ 10,049,197     $ 9,406,667  
      Gain on sale of oil and gas properties
    6,303,421       4,262,969  
      Depletion
    1,562,341       899,552  
      Unrealized net loss on available-for-sale securities
    123,954       123,954  
      Share-based compensation
    201,729       25,105  
      Accrued compensation
    208,313       -  
      Tax Credit
    8,161       -  
   Total deferred tax assets
    18,457,116       14,718,247  
                 
 Deferred tax liabilities:
               
      Intangible drilling costs
    (8,661,765 )     (7,288,433 )
      Depreciation
    (2,020,555 )     (1,964,289 )
      Other
    (2,066 )     (706 )
   Total deferred tax liabilities
    (10,684,386 )     (9,253,428 )
                 
 Subtotal
    7,772,730       5,464,819  
 Less: Valuation allowance
    (7,772,730 )     (5,464,819 )
 Total
  $ -     $ -  

At March 31, 2013, Lucas had estimated net operating loss carry-forwards for federal and state income tax purposes of approximately $ 29.6 million which will begin to expire, if not previously used, beginning in the year 2029.

The above estimates are based upon management’s decisions concerning certain elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly.

The Company files income tax returns for federal and state purposes.  Management believes that with few exceptions, the Company is not subject to examination by United States tax authorities for tax periods prior to 2008.
 
50

 
NOTE 8 – STOCKHOLDERS’ EQUITY

Common Stock

The following summarizes Lucas’ common stock activity for each of the two years ended March 31, 2013:
         
Common Shares
 
         
Issued