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, 2014
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
 incorporation or organization)
 
(I.R.S. Employer
Identification No.)

3555 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, 2013: $28,700,886.
 
There were 33,399,615 shares of the registrant's common stock outstanding as of June 6, 2014.

Documents incorporated by reference: none.
 
 
 

 
 
June 2014
Dear Shareholders, 

Our fiscal year 2014 was marked by significant transition and transformation.  We believe that Lucas Energy continues to be an asset rich company with the potential to grow.  From an asset development standpoint, we followed a “Grow into Growth” strategy whereby we raised capital in smaller portions in an attempt to conduct limited (low cost) development operations to bolster our position in anticipation of raising less expensive capital.  From an operational standpoint this effort, while providing some incremental production, did not provide the increases we had hoped.

This brought about a strategic review resulting in a change in direction.  As previously discussed in prior press releases, the Company is actively reviewing a number of opportunities to accelerate development of Eagle Ford and other oil reserves.  These potential opportunities include, but are not limited to, strategic partnership(s), asset or corporate acquisitions, development funding and/or merger opportunities.

Regarding our Eagle Ford asset position, in 2010, Lucas Energy entered into a participation agreement with Hilcorp Energy LLP (now Marathon Resource EF, LLC (“Marathon”)) effective March 1, 2010, for a term of five years.  The agreement provides Marathon with an 85% interest in the oil, gas and mineral leases of our interest below the base of the Austin Chalk in Gonzales County (The Eagle Ford Shale resides immediately below the Chalk.)  Marathon, as well as Lucas Energy, has the right to propose up to three obligatory wells per year (“Obligation Wells”) and additional wells (over three per year) which would either require consent from both Lucas Energy and Marathon or be considered a well(s) necessary to drill in order to maintain lease rights (“Required Wells”).

Upon the proposing of a well, the other party has a 30-day period to “Consent” to drilling the well or elect to “Non-Consent” and not participate in the well.  The impact on Lucas Energy is that until the election is made, the Company is not certain whether we will require approximately $1.2 million for a 15% share or $8.0 million for a 100% share.  This disparity can make it difficult to raise funds for drilling.  Lucas Energy believes it has crafted a solution to address this issue and is now more confident in its ability to proceed.

 
 

 
Management is encouraged on several fronts.  First, our Eagle Ford reserves are increasing due to a combination of increased density of well locations while surrounding activity shows consistently improved results due to the advance in completion technology.  Second, this organization had to be torn down in order for it to be rebuilt.  While this takes time, and never goes as quickly as we would hope, Lucas Energy’s management team is now squarely focused on the asset development process as opposed to lawsuits, land, title and financial diligence and staff adjustments.  Third, as our most recent quarter illustrates, we have now arrived at our desired cost structure in that we are conducting our affairs in a cost effective manner planning for future growth.  Fourth, we believe that the development strategy is now more aligned with the need for greater certainty that potential investment groups desire.  And lastly we believe that all of this together creates a compelling growth story and an attractive opportunity for development funding and/or corporate combinations.

 
Sincerely yours,
 
Anthony “Tony” C. Schnur
Chief Executive Officer


Cautionary Information Regarding Forward-Looking Statements.

This letter includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward looking statements provide our current expectations, opinions, beliefs or forecasts of future events and performance.  A statement identified by the use of forward looking words including “may,” “expects,” “projects,” “anticipates,” “plans,” “believes,” “estimate,” “should,” and certain of the other foregoing statements may be deemed forward-looking statements.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, these statements involve risks and uncertainties that may cause actual future activities and results to be materially different from those suggested or described in this letter.  Investors are cautioned that any forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from those projected. The forward-looking statements in this letter are made as of the date hereof. The Company takes no obligation to update or correct its own forward-looking statements, except as required by law, or those prepared by third parties that are not paid for by the Company. The Company's SEC filings are available at http://www.sec.gov.

 
 

 
 
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. 
9
ITEM 2.
Properties.
27
ITEM 3.
Legal Proceedings.
30
ITEM 4.
Mine Safety Disclosures.
30
 
 
PART II
 
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
31
ITEM 6.
Selected Financial Data.
34
ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
35
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
45
ITEM 8.
Financial Statements and Supplementary Data.
45
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
46
ITEM 9A.
Controls and Procedures.
46
ITEM 9B.
Other Information.
47
 
 
PART III
 
ITEM 10.
Directors, Executive Officers and Corporation Governance.
48
ITEM 11.
Executive Compensation.
56
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
62
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
64
ITEM 14.
Principal Accounting Fees and Services.
66
 
 
PART IV
 
ITEM 15.
Exhibits, Financial Statement Schedules.
67
     
 
SIGNATURES
68

 
1

 

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”, and “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 which include, among others,

·  
our growth strategies;
·  
anticipated trends in our business;
·  
our ability to make or integrate acquisitions;
·  
our ability to repay outstanding loans and satisfy our outstanding liabilities;
·  
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;
·  
legal proceedings and/or the outcome of and/or negative perceptions associated therewith;
·  
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.

 
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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 and Karnes 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 primary value drivers are its Eagle Ford Shale reserves which must be developed to unlock the Company’s full potential.  The Company’s strategy has historically been to access modest sums of relatively-cheap capital to provide for limited development activity and to re-enter the capital markets upon an improvement in the Company’s financial condition.  However, general and capital market conditions have recently moved us toward a change in our approach.  Below are key points of our revised strategy:
 
·    
Repositioning.  Measures such as return on equity, liquidity and stock multiples have led us to conclude that the market, in general, views small-cap and mid-cap exploration and production companies as having greater potential than micro-caps.  We believe that companies of larger size and scope tend to have access to more favorable debt financing, receive greater analyst coverage, trade with greater liquidity and consequently, often have higher share prices; which are factors leading us to shift to a more aggressive posture toward growing our size moving forward.  Specifically, in December 2013, the Company stated that it is actively reviewing a number of opportunities for strategic partnerships, acquisitions, and mergers with a focus on development of reserves, increasing revenue and improving shareholder value.  We escalated these activities during the first quarter of calendar 2014 and engaged an investment banking firm to assist in that process and are actively discussing a number of potential transactions with the simple objective to create an entity of the necessary size and financial mass to develop the significant Eagle Ford reserves at our disposal.  We have not entered into any binding agreements to date and no definitive transactions are pending in connection with our planned strategic transaction.
 
·    
Execution of our business plan.  We will continue to conduct the affairs of the Company with the objective of generating positive cash flow while diligently 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 and administrative costs as well as legal impediments.  We have eliminated over 50% of the costs (on a four quarter annualized basis) from our organization and believe that we are now in a position to rebuild in a more efficient, cost controlled manner.
 
·    
Development of current asset base. The Austin Chalk has contributed to most of our production in the past, including over 90% of our production in fiscal 2014.  However, we are shifting our focus from the Austin Chalk to a sustained development program of our Eagle Ford reserves.  The magnitude of the opportunity and associated drilling costs will require external sources of capital, and we expect to continue to utilize combinations 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 partnerships.
 
At March 31, 2014, the Company had leasehold interests (working interests) in approximately 17,628 gross acres, or 13,314 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 12,049 net acres.  In deeper formations, the Company has approximately 3,929 net acres in the Eagle Ford oil window and 1,265 net acres in the Eaglebine, Buda and Glen Rose oil bearing formations.

For the year ending March 31, 2014, Lucas produced an average of approximately 146 net barrels of oil equivalent per day (BOEPD) from 32 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 two Eagle Ford horizontal wells in our Gonzales leases, of which we have a 15% working interest on each well.  Our production sales totaled 53,228 barrels of oil equivalent, net to our interest, for the fiscal year ended March 31, 2014.
 
 
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At March 31, 2014, Lucas Energy's total estimated net proved reserves were 5.6 million barrels of oil equivalent (BOE), of which 5.0 million barrels (BBLs) were crude oil reserves, and 3.3 billion cubic feet (BCF) were natural gas reserves (see “Item 8 Financial Statements and Supplementary Data” – “Supplemental Oil and Gas Disclosures (Unaudited)”).
 
As of March 31, 2014, Lucas employed 11 full-time employees.  We also utilized over six 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 we believe minimizes our geological risk.  Our holdings are found in a broad area of current industry activity in Gonzales, Wilson, Karnes, Leon and Madison Counties in Texas.  We concentrate on three vertically adjoining formations in Gonzales, Wilson and Karnes 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 acreage 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 Energy’s 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 northeast 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’s 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.

Currently, any 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.

We sell a significant portion of our oil and gas production to a relatively small number of customers.  For the year ended March 31, 2014, approximately 86% of our consolidated product revenues were attributable to three customers: Sunoco Refining and Marketing, Inc.; EDF Trading North America LLC.; and Enterprise Crude Oil LLC.  The remaining 14% was sold to Shell Trading (US) Company, our current and only customer as of March 31, 2014.  We are not dependent upon any one purchaser and have 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

Our 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, we 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. We are 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, we are unable to predict with any reasonable degree of certainty our future costs of complying with these laws and regulations. We consider the cost of safety and health compliance a necessary and manageable part of our business. We have been able to plan for and comply with new initiatives without materially altering our operating strategies.
 
Hydraulic Fracturing. Vast quantities of natural gas, natural gas liquids and oil deposits exist in deep shale and other unconventional formations. It is customary in our industry to recover these resources through the use of hydraulic fracturing, combined with horizontal drilling. Hydraulic fracturing is the process of creating or expanding cracks, or fractures, in deep underground formations using water, sand and other additives pumped under high pressure into the formation. As with the rest of the industry, we use hydraulic fracturing as a means to increase the productivity of almost every well that we drill and complete. These formations are generally geologically separated and isolated from fresh ground water supplies by thousands of feet of impermeable rock layers. We follow applicable legal requirements for groundwater protection in our operations that are subject to supervision by state and federal regulators (including the Bureau of Land Management (BLM) on federal acreage). Furthermore, our well construction practices require the installation of multiple layers of protective steel casing surrounded by cement that are specifically designed and installed to protect freshwater aquifers by preventing the migration of fracturing fluids into aquifers.

Injection rates and pressures are required to be monitored in real time at the surface during our hydraulic fracturing operations. Pressure is required to be monitored on both the injection string and the immediate annulus to the injection string. Hydraulic fracturing operations are required to be shut down if an abrupt change occurs to the injection pressure or annular pressure. These aspects of hydraulic fracturing operations are designed to prevent a pathway for the fracturing fluid to contact any aquifers during the hydraulic fracturing operations.

 
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Hydraulic fracture stimulation requires the use of water. We use fresh water or recycled produced water in our fracturing treatments in accordance with applicable water management plans and laws. Hydraulic fracturing is typically regulated by state oil and gas commissions. Some states have adopted, and other states are considering adopting, regulations that impose disclosure requirements on hydraulic fracturing operations. Some states, such as Texas, mandate disclosure of chemical additives used in hydraulic fracturing. The EPA also has commenced a study of the potential impacts of hydraulic fracturing activities on drinking water resources, with a progress report released in late 2012 and a final draft report expected to be released for public comment and peer review in late 2014. In addition, the BLM published a revised draft of proposed rules that would impose new requirements on hydraulic fracturing operations conducted on federal and tribal lands, including the disclosure of chemical additives used in hydraulic fracturing operations. EPA's guidance, the EPA's pending study, BLM's proposed rules, and other analyses by federal and state agencies to assess the impacts of hydraulic fracturing could each spur further action toward federal and/or state legislation and regulation of hydraulic fracturing activities.

Restrictions on hydraulic fracturing could make it prohibitive to conduct our operations, and also reduce the amount of oil, natural gas liquids and natural gas that we are ultimately able to produce in commercial quantities from our properties.

The Endangered Species Act. The Endangered Species Act (ESA) restricts activities that may affect areas that contain endangered or threatened species or their habitats. While some of our assets and lease acreage may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in substantial compliance with the ESA. However, the designation of previously unidentified endangered or threatened species in areas where we intend to conduct construction activity could materially limit or delay our plans.

Global Warming and Climate Change. Various state governments and regional organizations are considering enacting new legislation and promulgating new regulations governing or restricting the emission of greenhouse gases from stationary sources such as our equipment and operations. Legislative and regulatory proposals for restricting greenhouse gas emissions or otherwise addressing climate change could require us to incur additional operating costs and could adversely affect demand for the natural gas and oil that we sell. The potential increase in our operating costs could include new or increased costs to obtain permits, operate and maintain our equipment and facilities, install new emission controls on our equipment and facilities, acquire allowances to authorize our greenhouse gas emissions, pay taxes related to our greenhouse gas emissions and administer and manage a greenhouse gas emissions program.

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 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 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.

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 on our website http://www.lucasenergy.com, at “Investors” – “SEC Filings” – “All SEC Filings” and “Governance” - “Policies”.

Our fiscal year ends on the last day of March of each year.  We refer to the twelve-month periods ended March 31, 2014 and March 31, 2013 as our 2014 fiscal year and 2013 fiscal year, respectively.

 
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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

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

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;
·   
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.
 
 
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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 do not intend to pay cash dividends to our shareholders.

We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business.  We do not intend to pay cash dividends in the foreseeable future.  Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our Board of Directors.   As a result, only appreciation of the price of our common stock, which may not occur, will provide a return to our stockholders.

We may have difficulty managing growth in our business, which could have a material adverse effect on our business, financial condition and results of operations and our ability to execute our business plan in a timely fashion.
 
Because of our small size, growth in accordance with our business plans, if achieved, will place a significant strain on our financial, technical, operational and management resources.  If we expand our activities, development and production, and increase the number of projects we are evaluating or in which we participate, there will be additional demands on our financial, technical and management resources.  The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the inability to recruit and retain experienced managers, geoscientists, petroleum engineers and landmen could have a material adverse effect on our business, financial condition and results of operations and our ability to execute our business plan in a timely fashion.

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.

Our competitors may use superior technology and data resources that we may be unable to afford or that would require a costly investment by us in order to compete with them more effectively.
 
Our industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies and databases.  As our competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost.  In addition, many of our competitors will have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can.  We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us.  One or more of the technologies that we will use or that we may implement in the future may become obsolete, and we may be adversely affected.

 
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We currently owe significant funds under an outstanding promissory note, the repayment of which is secured by a first priority security interest in substantially all of our assets.

Effective on August 13, 2013, we entered into a Letter Loan Agreement with Louise H. Rogers, amended effective April 29, 2014 (the “Letter Loan”). In connection with the Letter Loan and a Promissory Note entered into in connection therewith, Ms. Rogers loaned the Company $7.5 million (the “Loan“). As amended, interest only payments were due on the Loan during the first six months of the term and interest only payments are due during the period from April 13, 2014 through September 13, 2014 (during which six month period interest will accrue at 15% per annum (compared to 12% per annum at all other times, except upon an event of default at which point the interest rate will increase to 18% per annum). Additionally, beginning on October 13, 2014, we will be required to pay the monthly amortization payments (which total approximately $205,000 to $226,000, depending on the due date), as well as additional principal amortization payments of approximately $266,000 every three months (beginning October 13, 2014, and ending on July 13, 2015) until maturity (August 15, 2015), with approximately $3.87 million due on maturity. Should we opt to prepay the loan prior to the maturity date, we are required to pay an exit fee equal to the advisory fees of approximately $15,000 per quarter that would have been due, had the note remained outstanding through maturity.  During the term of the loan we are required to make mandatory prepayments of the Loan in the event the collateral securing the Loan does not meet certain thresholds and coverage ratios (as described in greater detail in such Letter Loan).   The Letter Loan also provided the right for Ms. Rogers to designate an individual to attend and participate in the Company’s Board of Director’s meetings in a non-official capacity.  The Letter Loan includes customary events of default and positive and negative covenants for facilities of similar nature and size as the Letter Loan. The repayment of the Loan is secured by a security interest in substantially all of our assets which was evidenced by a Security Agreement and a Mortgage, Deed of Trust, Assignment, Security Agreement, Financing Statement and Fixture Filing.

As of the date of this report, the loan is still outstanding and there is no assurance we will have sufficient cash on hand to make the required interest or principal payments on the Loan and/or to repay the Loan when due.  In such case, the lender may seek to secure their interest pursuant to the aforementioned rights.  Consequently, the value of our securities may decline in value.

Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate.
 
Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs.  Permanent restrictions imposed to protect endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. Specifically, applicable laws protecting endangered species prohibit the harming of endangered or threatened species, provide for habitat protection, and impose stringent penalties for noncompliance.  The designation of previously unprotected species as threatened or endangered in areas where we operate could cause us to incur increased costs arising from species protection measures or could result in limitations, delays, or prohibitions on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves.

The derivatives legislation adopted by Congress, and implementation of that legislation by federal agencies, could have an adverse impact on our ability to hedge risks associated with our business.
 
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Dodd-Frank Act, which, among other things, sets forth the new framework for regulating certain derivative products including the commodity hedges of the type that we may elect to use, but many aspects of this law are subject to further rulemaking and will take effect over several years.  As a result, it is difficult to anticipate the overall impact of the Dodd-Frank Act on our ability or willingness to enter into and maintain such commodity hedges and the terms of such hedges.  There is a possibility that the Dodd-Frank Act could have a substantial and adverse impact on our ability to enter into and maintain these commodity hedges.  In particular, the Dodd-Frank Act could result in the implementation of position limits and additional regulatory requirements on derivative arrangements, which could include new margin, reporting and clearing requirements.  In addition, this legislation could have a substantial impact on our counterparties and may increase the cost of our derivative arrangements in the future. If these types of commodity hedges become unavailable or uneconomic, our commodity price risk could increase, which would increase the volatility of revenues and may decrease the amount of credit available to us.  Any limitations or changes in our use of derivative arrangements could also materially affect our future ability to conduct acquisitions.

 
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Our operations are substantially dependent on the availability of water.  Restrictions on our ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows.
 
Water is an essential component of deep shale oil and natural gas production during both the drilling and hydraulic fracturing, or fracking processes. Our operations could be adversely impacted if we are unable to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations. Currently, the quantity of water required in certain completion operations, such as hydraulic fracturing, and changing regulations governing usage may lead to water constraints and supply concerns (particularly in some parts of the country). According to the Lower Colorado River Authority, during 2011, Texas experienced the lowest inflows of water of any year in recorded history.  As a result, future availability of water from certain sources used in the past may be limited. Moreover, the imposition of new environmental initiatives and conditions could include restrictions on our ability to conduct certain operations such as hydraulic fracturing or disposal of waste, including, but not limited to, produced water, drilling fluids and other wastes associated with the exploration, development or production of oil and natural gas. The federal Clean Water Act, or CWA and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants, including produced waters and other oil and natural gas waste, into navigable waters or other regulated federal and state waters. Permits or other approvals must be obtained to discharge pollutants to regulated waters and to conduct construction activities in such waters and wetlands. Uncertainty regarding regulatory jurisdiction over wetlands and other regulated waters has, and will continue to, complicate and increase the cost of obtaining such permits or other approvals. The CWA and analogous state laws provide for civil, criminal and administrative penalties for any unauthorized discharges of pollutants and unauthorized discharges of reportable quantities of oil and other hazardous substances. Many state discharge regulations, and the Federal National Pollutant Discharge Elimination System General permits issued by the EPA, prohibit the discharge of produced water and sand, drilling fluids, drill cuttings and certain other substances related to the oil and natural gas industry into coastal waters. While generally exempt under federal programs, many state agencies have also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain permits for storm water discharges. In October 2011, the EPA announced its intention to develop federal pretreatment standards for wastewater discharges associated with hydraulic fracturing activities. If adopted, the pretreatment rules will require coalbed methane and shale gas operations to pretreat wastewater before transferring it to treatment facilities Some states have banned the treatment of fracturing wastewater at publicly owned treatment facilities. There has been recent nationwide concern over earthquakes associated with Class II underground injection control wells, a predominant storage method for crude oil and gas wastewater. It is likely that new rules and regulations will be developed to address these concerns, possibly eliminating access to Class II wells in certain locations, and increasing the cost of disposal in others. Finally, the EPA study noted above has focused and will continue to focus on various stages of water use in hydraulic fracturing operations. It is possible that, following the conclusion of the EPA’s study, the agency will move to more strictly regulate the use of water in hydraulic fracturing operations. While we cannot predict the impact that these changes may have on our business at this time, they may be material to our business, financial condition, and operations. Compliance with environmental regulations and permit requirements governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells or the disposal or recycling of water will increase our operating costs and may cause delays, interruptions or termination of our operations, the extent of which cannot be predicted. In addition, our inability to meet our water supply needs to conduct our completion operations may impact our business, and any such future laws and regulations could negatively affect our financial condition, results of operations and cash flows.

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.

 
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If we make any acquisitions or enter into any business combinations in the future, they may disrupt or have a negative impact on our business.
 
If we make acquisitions or enter into any business combinations in the future, funding permitting, of which there can be no assurance, we could have difficulty integrating the acquired companies’ assets, personnel and operations with our own. Additionally, acquisitions, mergers or business combinations we may enter into in the future could result in a change of control of the Company, and a change in the Board of Directors or officers of the Company.  In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition or completing a business combination, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions and business combinations are accompanied by a number of inherent risks, including, without limitation, the following:

the difficulty of integrating acquired companies, concepts and operations;

the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;

difficulties in maintaining uniform standards, controls, procedures and policies;

the potential impairment of relationships with employees and partners as a result of any integration of new management personnel;

the potential inability to manage an increased number of locations and employees;

our ability to successfully manage the companies and/or concepts acquired;

the failure to realize efficiencies, synergies and cost savings; or

the effect of any government regulations which relate to the business acquired.

Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition or business combination, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.

Any acquisition or business combination transaction we enter into in the future could cause substantial dilution to existing shareholders, result in one party having majority or significant control over the Company or result in a change in business focus of the Company.

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

We depend to a significant degree upon the involvement of our management, specifically, our Chief Executive Officer and director, Anthony C. Schnur, who is in charge of our strategic planning and operations. Our performance and success are dependent to a large extent on the efforts and continued employment of Mr. Schnur.  We do not believe that Mr. Schnur could be quickly replaced with personnel of equal experience and capabilities, and his successor(s) may not be as effective.  If Mr. Schnur or any of our other key personnel resign or become unable to continue in their present roles and if they are not adequately replaced, our business operations could be adversely affected.

We have an active Board of Directors that meets several times throughout the year and is intimately involved in our business and the determination of our operational strategies.  Members of our Board of Directors work closely with management to identify potential prospects, acquisitions and areas for further development.   If any of our directors resign or become unable to continue in their present role, it may be difficult to find replacements with the same knowledge and experience and as a result, our operations may be adversely affected.

 
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Certain of our undeveloped leasehold assets are subject to leases that will expire over the next several years unless production is established on units containing the acreage.

Leases on natural gas and oil properties typically have a term of three to five years, after which they expire unless, prior to expiration, a well is drilled and production of hydrocarbons in paying quantities is established. If our leases expire and we are unable to renew the leases, we will lose our right to develop the related properties. Although we seek to actively manage our undeveloped properties, our drilling plans for these areas are subject to change based upon various factors, including drilling results, natural gas and oil prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals.

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 which would 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.

 
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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 you have such expertise, you 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. Our overall drilling success rate and/or our drilling success rate for activities within a particular geographic area may decline in the future. 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.
  
 
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These projects may not be successfully developed and the wells discussed, if drilled, may not 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.
 
Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business, financial condition and results of operations.
 
The rate of production from our oil and natural gas properties will decline as our reserves are depleted. Our future oil and natural gas reserves and production and, therefore, our income and cash flow, are highly dependent on our success in (a) efficiently developing and exploiting our current reserves on properties owned by us or by other persons or entities and (b) economically finding or acquiring additional oil and natural gas properties.  In the future, we may have difficulty acquiring new properties.  During periods of low oil and/or natural gas prices, it will become more difficult to raise the capital necessary to finance expansion activities.  If we are unable to replace our production, our reserves will decrease, and our business, financial condition and results of operations would be adversely affected.

The unavailability or high cost of drilling rigs, completion equipment and services, supplies and personnel, including hydraulic fracturing equipment and personnel, could adversely affect our ability to establish and execute exploration and development plans within budget and on a timely basis, which could have a material adverse effect on our business, financial condition and results of operations.
 
Shortages or the high cost of drilling rigs, completion equipment and services, supplies or personnel could delay or adversely affect our operations.  When drilling activity in the United States increases, associated costs typically also increase, including those costs related to drilling rigs, equipment, supplies and personnel and the services and products of other vendors to the industry.  These costs may increase, and necessary equipment and services may become unavailable to us at economical prices.  Should this increase in costs occur, we may delay drilling activities, which may limit our ability to establish and replace reserves, or we may incur these higher costs, which may negatively affect our business, financial condition and results of operations.

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.

 
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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.

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.
 
Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

Hydraulic fracturing is a common practice that is used to stimulate production of hydrocarbons from tight formations. The process involves the injection of water, sand and chemicals under pressure into rock formations to fracture the surrounding rock and stimulate production. There has been increasing public controversy regarding hydraulic fracturing with regard to the transportation and use of fracturing fluids, impacts on drinking water supplies, use of waters, and the potential for impacts to surface water, groundwater, air quality and the environment generally. A number of lawsuits and enforcement actions have been initiated implicating hydraulic fracturing practices. Additional legislation or regulation could make it more difficult to perform hydraulic fracturing, cause operational delays, increase our operating costs or make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings. New legislation or regulations in the future could have the effect of prohibiting the use of hydraulic fracturing, which would prevent us from completing our wells as planned and would have a material adverse effect on production from our wells. If these legislative and regulatory initiatives cause a material delay or decrease in our drilling or hydraulic fracturing activities, our business and profitability could be materially impacted.

 
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Possible regulation related to global warming and climate change could have an adverse effect on our operations and demand for oil and gas.

Studies over recent years have indicated that emissions of certain gases may be contributing to warming of the Earth's atmosphere. In response to these studies, governments have begun adopting domestic and international climate change regulations that require reporting and reductions of the emission of greenhouse gases. Methane, a primary component of natural gas, and carbon dioxide, a by-product of the burning of oil, natural gas and refined petroleum products, are considered greenhouse gases. In the United States, at the state level, many states, either individually or through multistate regional initiatives, have begun implementing legal measures to reduce emissions of greenhouse gases, primarily through the planned development of emission inventories or regional greenhouse gas cap and trade programs or have begun considering adopting greenhouse gas regulatory programs. At the federal level, Congress has considered legislation that could establish a cap and trade system for restricting greenhouse gas emissions in the United States. The ultimate outcome of this federal legislative initiative remains uncertain. In addition to pending climate legislation, the EPA has issued greenhouse gas monitoring and reporting regulations. Beyond measuring and reporting, the EPA issued an “Endangerment Finding” under section 202(a) of the Clean Air Act, concluding that greenhouse gas pollution threatens the public health and welfare of current and future generations. The finding served as a first step to issuing regulations that require permits for and reductions in greenhouse gas emissions for certain facilities. Moreover, the EPA has begun regulating greenhouse gas emission from certain facilities pursuant to the Prevention of Significant Deterioration and Title V provisions of the Clean Air Act. In the courts, several decisions have been issued that may increase the risk of claims being filed by government entities and private parties against companies that have significant greenhouse gas emissions. Such cases may seek to challenge air emissions permits that greenhouse gas emitters apply for and seek to force emitters to reduce their emissions or seek damages for alleged climate change impacts to the environment, people, and property. Any existing or future laws or regulations that restrict or reduce emissions of greenhouse gases could require us to incur increased operating and compliance costs. In addition, such laws and regulations may adversely affect demand for the fossil fuels we produce, including by increasing the cost of combusting fossil fuels and by creating incentives for the use of alternative fuels and energy.

The lack of availability or high cost of drilling rigs, equipment, supplies, insurance, personnel and oilfield services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget.

Our industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies or qualified personnel. Due to our significant growth, among other things, we continue to experience a lack of resources and services. During these periods, the costs and delivery times of rigs, equipment and supplies tend to increase, in some cases substantially. In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases within a geographic area. If increasing levels of exploration and production result in response to strong prices of oil and natural gas, the demand for oilfield services will likely rise, and the costs of these services will likely increase, while the quality of these services may suffer. The future lack of availability or high cost of drilling rigs, as well as any future lack of availability or high costs of other equipment, supplies, insurance or qualified personnel, in the areas in which we operate could materially and adversely affect our business and results of operations.

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.

 
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We may incur additional indebtedness which could reduce our financial flexibility, increase interest expense and adversely impact our operations and our unit costs.
 
In the future, we may incur significant amounts of additional indebtedness in order to make acquisitions or to develop our properties.  Our level of indebtedness could affect our operations in several ways, including the following:
 
●  
a significant portion of our cash flows could be used to service our indebtedness;
 
●  
a high level of debt would increase our vulnerability to general adverse economic and industry conditions;
 
●  
any covenants contained in the agreements governing our outstanding indebtedness could limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments;
 
●  
a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, may be able to take advantage of opportunities that our indebtedness may prevent us from pursuing; and
 
●  
debt covenants to which we may agree may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry.

A high level of indebtedness increases the risk that we may default on our debt obligations.  We may not be able to generate sufficient cash flows to pay the principal or interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt.  If we do not have sufficient funds and are otherwise unable to arrange financing, we may have to sell significant assets or have a portion of our assets foreclosed upon which could have a material adverse effect on our business, financial condition and results of operations.

Our core properties are located in the Austin Chalk and Eagle Ford trends, making us vulnerable to risks associated with operating in one major geographic area.

Our core properties are located in the Austin Chalk and Eagle Ford trends south, and southeast of San Antonio, Texas. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production from wells caused by transportation capacity constraints, curtailment of production, availability of equipment, facilities, personnel or services, significant governmental regulation, natural disasters, adverse weather conditions, or interruption of transportation of oil or natural gas produced from the wells in this area. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and gas producing areas such as the ones we operate in, which may cause these conditions to occur with greater frequency or magnify the effect of these conditions. Due to the concentrated nature of our portfolio of properties, a number of our properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on our financial condition and results of operations.

Servicing our debt requires a significant amount of cash, which we may not have available when payments are due.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness,  will depend upon our future operating performance, which is subject to general economic and competitive conditions and to financial, business and other factors, many of which we cannot control. In the future, we may incur additional indebtedness in order to make future acquisitions or to develop our properties, including under our current liabilities. If we do not have sufficient funds on hand to pay our debt, we may be required to seek a waiver or amendment from our lenders, refinance our indebtedness, sell assets or sell additional securities. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able obtain such financing or complete such transactions on terms acceptable to us, or at all. In addition, we may not be able to consummate an asset sale to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due. Our failure to generate sufficient funds to pay our debts or to undertake any of these actions successfully could result in a default on our debt obligations, which would materially adversely affect our business, results of operations and financial condition.

 
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Acquired properties may not be worth what we pay due to uncertainties in evaluating recoverable reserves and other expected benefits, as well as potential liabilities.

Successful property acquisitions require an assessment of a number of factors beyond our control. These factors include estimates of recoverable reserves, exploration potential, future natural gas and oil prices, operating costs, production taxes and potential environmental and other liabilities. These assessments are complex and inherently imprecise. Our review of the properties we acquire may not reveal all existing or potential problems. In addition, our review may not allow us to fully assess the potential deficiencies of the properties. We do not inspect every well, and even when we inspect a well we may not discover structural, subsurface, or environmental problems that may exist or arise. There may be threatened or contemplated claims against the assets or businesses we acquire related to environmental, title, regulatory, tax, contract, litigation or other matters of which we are unaware, which could materially and adversely affect our production, revenues and results of operations. We may not be entitled to contractual indemnification for pre-closing liabilities, including environmental liabilities, and our contractual indemnification may not be effective. At times, we acquire interests in properties on an "as is" basis with limited representations and warranties and limited remedies for breaches of such representations and warranties. In addition, significant acquisitions can change the nature of our operations and business if the acquired properties have substantially different operating and geological characteristics or are in different geographic locations than our existing properties.

We have limited control over activities in properties we do not operate, which could reduce our production and revenues, affect the timing and amounts of capital requirements and potentially result in a dilution of our respective ownership interest in the event we are unable to make any required capital contributions.

We do not operate all of the properties in which we have an interest. As a result, we may have a limited ability to exercise influence over normal operating procedures, expenditures or future development of underlying properties and their associated costs. For all of the properties that are operated by others, we are dependent on their decisionmaking with respect to day-to-day operations over which we have little control. The failure of an operator of wells in which we have an interest to adequately perform operations, or an operator's breach of applicable agreements, could reduce production and revenues we receive from that well. The success and timing of our drilling and development activities on properties operated by others depend upon a number of factors outside of our control, including the timing and amount of capital expenditures, the available expertise and financial resources, the inclusion of other participants and the use of technology. Since we do not own the majority interest in many of the wells we do not operate, we may not be in a position to remove the operator in the event of poor performance.

Risks Relating to Our Outstanding Securities

If we are unable to regain compliance with NYSE MKT continued listing standards, our common stock may be delisted from the NYSE MKT equities market, which would likely cause the liquidity and market price of our common stock to decline.
 
Our common stock currently is listed on the NYSE MKT. The NYSE MKT will consider suspending dealings in, or delisting, securities of an issuer that does not meet its continued listing standards. If we cannot meet the NYSE MKT continued listing requirements, the NYSE MKT may delist our common stock, which could have an adverse impact on us and the liquidity and market price of our stock.
 
On February 28, 2014, we received notice from the NYSE MKT, indicating we were below certain of the NYSE MKT’s continued listing standards related to our existing financial resources or financial condition as set forth in Part 10 of the NYSE MKT Company Guide.  We were afforded the opportunity to submit a plan of compliance to the NYSE MKT, and on March 14, 2014, we submitted our plan to the NYSE MKT.  On March 31, 2014, the NYSE MKT notified us that it had accepted our plan of compliance and granted us a conditional extension until April 14, 2014, which has since been extended until July 31, 2014, by which date the Company is required to regain compliance with Section 1003(a)(iv) of the NYSE MKT Company Guide and/or demonstrate adequate progress to that end.  The Company will be subject to periodic review by the NYSE MKT during the extension period.  Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in us being delisted from the NYSE MKT.

 
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There is no assurance that we will continue to maintain compliance with NYSE MKT continued listing standards. Our business has been and may continue to be affected by worldwide macroeconomic factors, which include uncertainties in the credit and capital markets. External factors that affect our stock price, such as liquidity requirements of our investors, as well as our performance, could impact our market capitalization, revenue and operating results, which, in turn, affect our ability to comply with the NYSE MKT’s listing standards. The NYSE MKT has the ability to suspend trading in our common stock or remove our common stock from listing on the NYSE MKT if in the opinion of the exchange: (a) the financial condition and/or operating results of the Company appear to be unsatisfactory; or (b) it appears that the extent of public distribution or the aggregate market value of our common stock has become so reduced as to make further dealings on the exchange inadvisable; or (c) we have sold or otherwise disposed of our principal operating assets, or have ceased to be an operating company; or (d) we have failed to comply with our listing agreements with the exchange; or (e) any other event shall occur or any condition shall exist which makes further dealings on the exchange unwarranted.

If we are unable to satisfy the NYSE MKT criteria for continued listing and are unable to regain compliance during any applicable cure periods, our common stock would be subject to delisting. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock and reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing. In addition, delisting from the NYSE MKT might negatively impact our reputation and, as a consequence, our business.  Additionally, if we were delisted from the NYSE MKT and are not able to list our common stock on another national exchange we will no longer be eligible to use Form S-3 registration statements and will instead be required to file a Form S-1 registration statement for any primary or secondary offerings of our common stock, which would delay our ability to raise funds in the future, may limit the type of offerings of common stock we could undertake, and would increase the expenses of any offering, as, among other things, registration statements on Form S-1 are subject to SEC review and comments whereas take downs pursuant to a previously filed Form S-3 are not.

If we are delisted from the NYSE MKT, your ability to sell your shares of our common stock would also be limited by the penny stock restrictions, which could further limit the marketability of your shares.
 
If our common stock is delisted, it would come within the definition of “penny stock“ as defined in the Exchange Act and would be covered by Rule 15g-9 of the Exchange Act. That Rule imposes additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors. For transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, Rule 15g-9, if it were to become applicable, would affect the ability or willingness of broker-dealers to sell our securities, and accordingly would affect the ability of stockholders to sell their securities in the public market. These additional procedures could also limit our ability to raise additional capital in the future.

We currently have an illiquid and volatile market for our common stock, and the market for our common stock is and may remain illiquid and volatile in the future.
 
We currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic, illiquid and volatile in the future. Factors that could affect our stock price or result in fluctuations in the market price or trading volume of our common stock include:
 
our actual or anticipated operating and financial performance and drilling locations, including reserve estimates;
 
quarterly variations in the rate of growth of our financial indicators, such as net income/loss per share, net income/loss and cash flows, or those of companies that are perceived to be similar to us;
 
changes in revenue, cash flows or earnings estimates or publication of reports by equity research analysts;
 
speculation in the press or investment community;
 
public reaction to our press releases, announcements and filings with the SEC;
 
sales of our common stock by us or other shareholders, or the perception that such sales may occur;
 
the amount of our freely tradable common stock available in the public marketplace;
 
 
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general financial market conditions and oil and natural gas industry market conditions, including fluctuations in commodity prices;
 
the realization of any of the risk factors that we are subject to;
 
the recruitment or departure of key personnel;
 
commencement of, or involvement in, litigation;
 
the prices of oil and natural gas;
 
the success of our exploration and development operations, and the marketing of any oil and natural gas we produce;
 
changes in market valuations of companies similar to ours; and
 
domestic and international economic, legal and regulatory factors unrelated to our performance.

 Our common stock is listed on the NYSE MKT under the symbol “LEI.”  Our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.  Additionally, general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Due to the limited volume of our shares which trade, we believe that our stock prices (bid, ask and closing prices) may not be related to our actual value, and not reflect the actual value of our common stock. You should exercise caution before making an investment in us.
 
Additionally, as a result of the illiquidity of our common stock, investors may not be interested in owning our common stock because of the inability to acquire or sell a substantial block of our common stock at one time.  Such illiquidity could have an adverse effect on the market price of our common stock.  In addition, a shareholder may not be able to borrow funds using our common stock as collateral because lenders may be unwilling to accept the pledge of securities having such a limited market.  An active trading market for our common stock may not develop or, if one develops, may not be sustained.
 
A prolonged decline in the market price of our common stock could affect our ability to obtain additional financing which would adversely affect our operations.
 
Historically, we have relied on equity and debt financing as primary sources of financing. A prolonged decline in the market price of our common stock or a reduction in our accessibility to the global markets may result in our inability to secure additional financing which would have an adverse effect on our operations.

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 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; outstanding warrants to purchase 279,851 shares of our common stock at an exercise price of $1.35 per share, which were issued in connection with our August 2013 Letter Loan agreement; and outstanding warrants to purchase 1,666,666 shares of our common stock at an exercise price of $1.00 per share, which were issued in connection with our April 2014 offering.  The trading price of our common stock has fluctuated between $1.66 and $0.45 per share during the last 52 weeks.

 
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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 6% of the Company’s currently outstanding shares, would be issued and outstanding.
  
We have 33,399,615 shares of common stock issued and outstanding as of the date of this report.  As a result, the exercise of outstanding warrants 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, the warrants sold in our April and September 2012 offerings and the warrants sold in our April 2014 offering, 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, May and August 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.
  
The Warrants sold in our April 2014 offering have anti-dilution and other rights which could cause substantial dilution to shareholders of the Company.

The exercise price (initially $1.00 per share) and number of shares of common stock issuable upon exercise of the warrants sold in our April 2014 offering (initially 1,666,666 in aggregate) are automatically adjusted in the event of a forward or reverse stock split, our declaration of a stock dividend payable in shares of common stock or other securities or other property and reclassifications of common stock.  Additionally, upon the occurrence of any reorganization, recapitalization, reclassification, consolidation, merger, sale of all or substantially all of our assets or other transaction involving us (except for Company Combinations as described below) in which our common stock is converted into or exchanged for securities, cash or other property, we are required to make an appropriate provision (in form and substance satisfactory to the holders of the warrants) to ensure that the holders receive (or have the right to receive), in lieu of or in addition to (as the case may be) shares of common stock, the kind and amount of securities, cash or other property as may be issued or payable with respect to or in exchange for the number of shares of common stock immediately acquirable and receivable upon exercise of the warrants had such transaction not taken place.

The warrants also include anti-dilution rights, which provide that if at any time the warrants are outstanding, we issue or are deemed to have issued (which includes shares issuable upon exercise of warrants and options and conversion of convertible securities) for consideration less than the then current exercise price of the warrants, the exercise price of such warrants is automatically reduced (a) to the lowest price per share of consideration provided or deemed to have been provided for such securities, not to be deemed less than $0.01 per share, during the one year period following the closing date of the offering (April 21, 2014) and thereafter (b) to the product of (x) the exercise price then in effect, and (y) a fraction, the numerator of which is the number of shares of common stock outstanding immediately prior to such issuance plus the number of shares of common stock which the aggregate consideration received by us would purchase at the exercise price in effect immediately prior to such issuance, and the denominator of which is the number of shares of common stock outstanding immediately prior to such issuance plus the number of such additional shares of common stock issued.  Notwithstanding the above, no adjustment of the exercise price is required in connection with any issuances or deemed issuance of shares of common stock (1) to our officers, directors, consultants or employees pursuant to stock option or stock purchase plans or agreements on terms approved by our Board of Directors, subject to adjustment for all subdivisions and combinations; and (2) in connection with the re-negotiation, modification, extension or re-pricing of debt of the Company outstanding on the closing date, subject to the prior written approval of the holders of the warrants. Additionally, in the event we acquire ownership of another entity or a significant amount of assets from another person or entity by way of an asset purchase agreement, merger (pursuant to which we are the surviving entity and our common stock is not converted or exchanged), business combination or share exchange pursuant to which shares of our common stock or convertible securities (including options or warrants) are issued or granted by us as partial or sole consideration to the counterparty or counterparties in such transaction or series of transactions (a “Company Combination”), then and in such event, the exercise price of the warrants is automatically reduced, to the average of the highest bid and lowest asked prices of our common stock averaged over the thirty (30) business days after the closing of the Company Combination if such exercise price as adjusted is less than the exercise price in effect on the date such Company Combination Price is determined.

 
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The increase in number of shares issuable upon exercise of the warrants or decrease in the exercise price of such warrants, could, upon exercise of such warrants, cause significant dilution to existing shareholders and the sale of such shares issuable upon exercise of such warrants as adjusted could cause a decrease in the trading value of our common stock.

We may be forced to expend significant resources and pay significant costs and expenses associated with outstanding registration rights.

In connection with our entry into the April 2014 Securities Purchase Agreement, we provided the investors in the offering registration rights pursuant to a Registration Rights Agreement. Pursuant to the Registration Rights Agreement, the purchasers in the April 2014 Securities Purchase Agreement have demand and piggy-back registration rights. We could be forced to expend significant resources and pay significant costs and expenses, including filing fees, legal fees and accounting fees, in connection with our compliance with the terms, conditions and requirements of such Registration Rights Agreement.

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, 2014, we have 33,399,615 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 (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.

The employment agreement of our Chief Executive Officer includes certain provisions which may prevent or delay a change of control.

Effective November 1, 2012, we entered into an Employment Agreement with Anthony C. Schnur, our Chief Executive Officer and Interim Chief Financial Officer, which agreement was amended and restated effective December 12, 2012.  The agreement has a term of two years, expiring on October 31, 2014, provided that the agreement is automatically extended for additional one year terms, unless either party provides notice of their intent not to renew within the 30 day period prior to any automatic renewal date.  The Company agreed to pay Mr. Schnur a base annual salary of $310,000 during the term of the agreement, of which $290,000 is payable in cash and $20,000 is payable in shares of the Company’s common stock.  In the event the agreement is terminated by the Company for a reason other than cause (as described in the agreement) or by Mr. Schnur for good reason (as described in the agreement), Mr. Schnur is due in the form of a lump sum payment, the product of the base salary and bonus he was paid under the agreement for the prior 12 month period, provided that if such termination occurs six months before or 24 months following the occurrence of a Change of Control (as described in the agreement), Mr. Schnur is due 200% of the amount described above upon such termination.  The requirement to pay severance fees under the Employment Agreement may prevent or delay a change of control of the Company.

 
24

 
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.
 
On September 6, 2013, the Company closed a registered direct offering under the Registration Statement of $3,451,500 (approximately $3.2 million net, after deducting commissions and other expenses) of shares of common stock to certain institutional investors.  In total, the Company sold 2.95 million shares of common stock at a price of $1.17 per share
 
On April 21, 2014, the Company closed a registered direct offering under the Registration Statement of $2,000,000 (approximately $1.88 million net, after deducting commissions and other expenses) of units to certain institutional investors.  In total, the Company sold 3,333,332 units, each consisting of one share of common stock and 0.50 of one warrant to purchase one share of common stock (see “Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities” – “Recent Sales of Unregistered Securities”).

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 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 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. You could, therefore, experience a decline in the value of your 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.  

Substantial sales of our common stock, or the perception that such sales might occur, could depress the market price of our common stock.
 
We cannot predict whether future issuances of our common stock or resales in the open market will decrease the market price of our common stock. The impact of any such issuances or resales of our common stock on our market price may be increased as a result of the fact that our common stock is thinly, or infrequently, traded. The exercise of any options that we have or that we may grant to directors, executive officers and other employees in the future, the issuance of common stock in connection with acquisitions and other issuances of our common stock (including shares previously registered in our registration statements and prospectus supplements, and/or in connection with future registration statements or prospectus supplements) could have an adverse effect on the market price of our common stock. In addition, future issuances of our common stock may be dilutive to existing shareholders. Any sales of substantial amounts of our common stock in the public market, or the perception that such sales might occur, could lower the market price of our common stock.

 
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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.

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.

Securities analyst coverage or lack of coverage may have a negative impact on our common stock’s market price.
 
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If securities or industry analysts stop their coverage of us or additional securities and industry analysts fail to cover us in the future, the trading price for our common stock would be negatively impacted. If any analyst or analysts who cover us downgrade our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If any analyst or analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.

Due to the fact that our common stock is listed on the NYSE MKT, we are subject to financial and other reporting and corporate governance requirements which increase our cost and expenses.

We are currently required to file annual and quarterly information and other reports with the SEC that are specified in Sections 13 and 15(d) of the Exchange Act.  Additionally, due to the fact that our common stock is listed on the NYSE MKT, we are also subject to the requirements to maintain independent directors, comply with other corporate governance requirements and are required to pay annual listing and stock issuance fees. These obligations require a commitment of additional resources including, but not limited, to additional expenses, and may result in the diversion of our senior management’s time and attention from our day-to-day operations. These obligations increase our expenses and may make it more complicated or time consuming for us to undertake certain corporate actions due to the fact that we may require the approval of the NYSE MKT for such transactions and/or NYSE MKT rules may require us to obtain shareholder approval for such transactions.

 
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You may experience future dilution as a result of future equity offerings or other equity issuances.
 
We may in the future issue additional shares of our common stock or other securities convertible into or exchangeable for our common stock. We may not be able to sell shares or other securities in any other offering or other transactions at a price per share that is equal to or greater than the price per share paid by investors in this offering. The price per share at which we sell additional shares of our common stock or other securities convertible into or exchangeable for our common stock in future transactions may be higher or lower than the price per share in this offering.

ITEM 2.        PROPERTIES.
 
Areas of Activities
 
We have oil and natural gas interests, and operate 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 3,929 net acres of Eagle Ford in this core area.  Current production from approximately 29 wells operated by the Company is from the Austin Chalk, Buda, and Edwards formations.  Non-operated production from the Eagle Ford formation includes two wells operated by an affiliate of Marathon Oil Company and one well operated by Penn Virginia Corporation.  These Eagle Ford properties are located within Gonzales, Karnes and Wilson Counties, Texas.  This core area accounts for almost all of the production and most of the workover operations during fiscal year 2014.
 
Eaglebine Area
 
In 2012, the Company acquired oil and natural gas leasehold interests in the Eaglebine portion of the Eagle Ford trend.  Lucas controls working interests in approximately 1,100 net acres in Leon and Madison Counties in 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 1,265 net acres in Madison and Leon Counties.
 
 
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The following table summarizes our gross and net developed and undeveloped leasehold and mineral fee acreage at March 31, 2014.  Acreage in which our interest is limited to royalty and overriding royalty interests is excluded:

Acreage

 
Total
Developed(1)
Undeveloped(2)
 
 
Gross
Net
Gross
Net
Gross
Net
 
Austin Chalk
14,518
12,049
14,090
11,621
428
428
 
     *Includes Eagle Ford
 
3,929
 
233
 
3,696
 
Eaglebine/Buda & Glen Rose
   3,110
 1,265
      165
      153
   2,945
 1,112
 
Total
 17,628
 13,314
 14,255
 11,774
 3,373
1,540
 

* The Eagle Ford formation is below the Austin Chalk and represented separately in the above table.

(1) Developed acreage is the number of acres that are allocated or assignable to producing wells or wells capable of production.

(2) Undeveloped acreage is lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage includes proved reserves.

We believe we have satisfactory title, in all material respects, to substantially all of our producing properties in accordance with standards generally accepted in the oil and natural gas industry. Substantially all of our proved oil and natural gas properties are pledged as collateral for outstanding loans.

Total Net Undeveloped Acreage Expiration

In the event that production is not established or we take no action to extend or renew the terms of our leases, our net undeveloped acreage that will expire over the next three years as of March 31, 2014 is 1,912, 864 and 351 acres for the years ending March 31, 2015, 2016 and 2017, respectively.   We are currently in the process of renewing 1,170 acres of our fiscal year 2015 expiring acreage so that development can proceed on that acreage as scheduled.  We also plan to develop the 351 acres expiring in fiscal year 2017 prior to expiration.  Further, we will continue to evaluate any future expiring acreage, and if viable, we would expect to retain any of that acreage either through drilling activities, renewal of the expiring leases or through the exercise of extension options.

Production, Sales Price and Production Costs

The Company produced oil from 32 wells in seven Texas counties, as of the year ended March 31, 2014.  However, most of the production was from 18 wells which produced over half of the production.  Currently, 100% 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.

The following tables represent our total production, average sales prices and average production costs for the year ended March 31, 2014:

   
2014
   
2013
   
2012
 
 Net Operating Revenues:
 
 
   
 
   
 
 
Crude Oil
  $ 5,219,752     $ 8,219,984     $ 5,182,087  
Natural Gas
    -       27,100       76,374  
 Total Revenues
  $ 5,219,752     $ 8,247,084     $ 5,258,461  
                         
 Production sales:
                       
 Crude oil (Barrels or Bbls)
    53,228       84,227       54,466  
 Natural gas (Thousand cubic feet or Mcf)
    -       9,236       14,560  
 Total (barrels oil equivalent or Boe) (1)
    53,228       85,766       56,892  
 
  (1) Oil equivalents are determined under the relative energy content method by using a ratio of 6.0 Mcf to 1.0 Bbl of oil.
 
                         
 Average Sales Price:
                       
Crude Oil ($/Bbl)
  $ 98.06     $ 97.59     $ 95.14  
Natural Gas ($/Mcf)
  $ -     $ 2.93     $ 5.25  
                         
                         
Average Production Cost ($/Boe):
  $ 49.06     $ 48.88     $ 80.96  

 
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As of March 31, 2014, production from the Austin Chalk and Eagleville fields represent 100% of the Company’s total production, and these are the only fields that comprise 15% or more of our total proved reserves as of that date.  These production volumes are represented in the table below:
 
 
2014
2013
2012
Eagleville
     
Crude Oil (Bbls)
                   4,759
                     14,915
              9,390
Natural Gas (Mcf)
                     -
                     8,453
                3,706
       
Austin Chalk
     
Crude Oil (Bbls)
                   48,469
                   69,312
            45,076
Natural Gas (Mcf)
                        -
                   783
10,854
       

Well Summary

The following table presents our ownership in productive crude oil and natural gas wells at March 31, 2014. This summary includes crude oil wells in which we have a working interest:

   
 Gross
 
 Net
 Crude oil, Texas:
  32.0
 
   19.5
 Natural gas, Texas:
      -
 
            -
 
Total
 32.0
 
      19.5

Drilling Activity

We drilled wells or participated in the drilling of wells as indicated in the table below:
             
 
Net Wells Drilled - Texas
 
2014
2013
2012
 
Gross
Net
Gross
Net
Gross
Net
Development
           
Productive
      2
 1
      3
 1.1
      6
 3.8
Day
     -
   -
     -
   -
     -
   -
Exploratory
           
Productive
     -
   -
     -
   -
     -
   -
Day
     -
   -
     -
   -
     -
   -

 At March 31, 2014, we had no gross or net wells that were in the process of being drilled nor did we have any delivery commitments.

Oil and Natural Gas Reserves

Reserve Information.  For estimates of Lucas’s net proved producing reserves of crude oil and natural gas, as well as discussion of Lucas’s proved and probable undeveloped reserves, see “Item 8 Financial Statements and Supplementary Data” – “Supplemental Oil and Gas Disclosures (Unaudited)”.  At March 31, 2014, Lucas’s total estimated proved reserves were 5.6 million BOE of which 5.0 million BBLs were crude oil reserves, and 3.3 BCF were natural gas reserves.

Internal Controls.  Our Vice President of Asset Development is the technical person primarily responsible for our internal reserves estimation process (which are based upon the best available production, engineering and geologic data) and provides oversight of the annual audit of our year end reserves by our independent third party engineers. He has a Bachelor of Science degree in Petroleum Engineering with in excess of 10 years oil and gas experience, including in excess of five years as a reserves estimator and is a member of the Society of Petroleum Engineers.

 
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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:

• 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.
• SEC-compliant internal policies to determine and report proved reserves.
• The discussion of any material reserve variances among management to ensure the best estimate of remaining reserves.

Qualifications of Third Party Engineers.  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.  Within Forrest A. Garb & Associates, Inc., the technical person primarily responsible for auditing the estimates is Ms. Sandra W. Wall, Senior Vice President Petroleum Engineering.  Ms. Wall joined Forrest A. Garb & Associates, Inc. in August 2006 and previously worked for Texas Eastern Corp., Exploration and Production Division, and Transwestern Pipeline Company as a reservoir engineer and project manager.  She performed detailed reservoir and economic analyses for both onshore and offshore properties, ran 3D computer simulation studies for massive hydraulic fracturing, water floods, and CO2 floods, and coordinated the development of exploration projects.  Areas worked include onshore and offshore Gulf Coast, Alaska North Slope, Rocky Mountains, offshore California, offshore Australia, Indonesia and the North Sea.  Ms. Wall holds a Bachelors of Science degree in Petroleum Engineering from Texas A&M University, a Masters of Business Administration from Houston Baptist University and is a member of the Society of Petroleum Engineers.

Forrest A. Garb & Associates, Inc. is an independent firm and 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. A copy of the report issued by Forrest A. Garb & Associates, Inc. is filed with this report as Exhibit 99.1.

For more information regarding our oil and gas reserves, please refer to “Item 8 Financial Statements and Supplementary Data” – “Supplemental Oil and Gas Disclosures (Unaudited)”.
 
Office Lease

       Our corporate headquarters are located in approximately 5,100 square feet of office space at 3555 Timmons Lane, Suite 1550, Houston, Texas 77027.  We lease that space pursuant to a lease that expires on August 31, 2015 and that has a base monthly rent of approximately $6,200.
 
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 May 12, 2014, the Company entered into a Settlement Agreement with Patsy Crockett, As Guardian of the Person and Estate of Edna Elsie Gatlin, an incapacitated person, on a lawsuit regarding a dispute over the validity of a 300 acre lease in Gonzales County, Texas.  Per the Settlement Agreement, Lucas acquired a new one year lease on the property with a one year renewal option and paid $800 per acre for the aforementioned lease for a total payment of $235,784.  All filed claims from either party were then dismissed with prejudice.

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 case was dismissed in November 2013.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

 
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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
 
2014
           
Quarter ended March 31, 2014
  $ 1.21     $ 0.69  
Quarter ended December 31, 2013
    1.28       0.92  
Quarter ended September 30, 2013
    1.54       1.23  
Quarter ended June 30, 2013
    1.45       1.19  
                 
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  

Holders

As of June 6, 2014, there were approximately 154 record holders of Lucas’s common stock.  As of June 6, 2014, there was also one record holder for the Series A Convertible Preferred Stock.

Description of Capital Stock

As of June 6, 2014, we had 33,399,615 shares of our common stock outstanding, 2,000 shares of our Series A Convertible Preferred Stock designated and 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.

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

 
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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.

 
32

 
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 Convertible Preferred Stock

The Series A Convertible Preferred Stock has 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 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.  Additionally, the conversion rate of the Series A 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
914,468
$1.39
1,509,897
Equity compensation plans not approved by the security holders
150,630
$2.98
 
-
Total
1,065,098
$1.61
1,509,897

(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, 2014.
(b)  
Includes the weighted average exercise price of outstanding options, warrants, and rights identified in (a).

Recent Sales of Unregistered Securities

Year Ended March 31, 2014

On July 17, 2013, Meson Capital Partners LP (“Meson LP”), purchased 185,185 restricted shares of our common stock in a private transaction for consideration of $250,000 or $1.35 per share ($0.01 above the closing sales price of our common stock on July 17, 2013). Securities owned directly by Meson LP, are owned indirectly by Meson Capital Partners LLC ("Meson LLC") by virtue of it being the general partner of Meson LP and by Ryan J. Morris, a director of the Company, by virtue of his position as managing member of Meson LLC.

The Company claims an exemption from registration afforded by Section 4(2) and/or Rule 506 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 connection with the Company’s August 13, 2013 entry into the Letter Loan Agreement (as described below under “Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” – “Liquidity and Capital Resources” – “Financing”), the Company agreed to grant the administrator of the loan, a warrant to purchase up to 279,851 shares of the Company’s common stock at an exercise price of $1.35 per share.

 
33

 
We claim an exemption from registration pursuant to Section 4(2) and Rule 506 of the Securities Act of 1933, as amended since the forging grant and entry into the Letter Loan Agreement 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 connection with our entry into the Amended Letter Loan Agreement as described below under “Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” – “Liquidity and Capital Resources” – “Financing”, we agreed to issue the administrator of the loan 75,000 shares of our restricted common stock.

We claim an exemption from registration pursuant to Section 4(2) and Rule 506 of the Securities Act of 1933, as amended for the issuance, 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 an “accredited” investor.

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.
 
On September 6, 2013, pursuant to the terms of the Registration Statement, the Company closed a registered direct offering of $3,451,500 (approximately $3.2 million net, after deducting commissions and other expenses) of shares of common stock to certain institutional investors.  In total, the Company sold 2.95 million shares of common stock at a price of $1.17 per share. The Company used the funds raised in the offering to pay down expenses related to drilling, lease operating, workover activities and for general corporate purposes, including general and administrative expenses.
 
On April 21, 2014, pursuant to the terms of the Registration Statement, the Company closed a registered direct offering of $2,000,000 (approximately $1.88 million net, after deducting commissions and other expenses) of shares of common stock to certain institutional investors.  In total, the Company sold 3,333,332 shares of common stock (1,666,666 warrants to purchase shares of common stock and 1,666,666 shares of common stock issuable upon exercise of warrants). The Company used the funds raised in the offering to pay down expenses related to drilling, lease operating, workover activities and for general corporate purposes, including general and administrative expenses.

No payments for our expenses were made in either offering described above directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates. We used the net proceeds from the offerings as described in our final prospectuses filed with the SEC pursuant to Rule 424(b).
 
There has been no material change in the planned use of proceeds from our offerings as described in our final prospectuses filed with the SEC pursuant to Rule 424(b).
 
Issuer Purchases of Equity Securities
 
None.

ITEM 6.       SELECTED FINANCIAL DATA.

Not required under Regulation S-K for “smaller reporting companies.”
 
 
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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, 2014 and March 31, 2013 as our 2014 fiscal year and 2013 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.

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 has enhanced our knowledge of the Eagle Ford area.  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 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 in his career, Mr. Schnur has been asked to lead work-out/turn-around initiatives in the E&P space.  Further, the Company has attracted new talent in its operations, reservoir analysis, land and accounting functions and believes it has brought together a professional and dedicated team to deliver value to Lucas’s shareholders.
 
During our 2014 fiscal year, we performed several well cleanouts and workovers on our Austin Chalk properties in an effort to stabilize our rate of production; however, the incremental production from this program was insufficient to offset our steep production declines.  We had an average net production flow of 146 BOE for the year, with oil production contributing to most of our production, and our exit rate at the quarter end of the year was 132 net BOE per day.  Over the course of the year, we continued to significantly reduce our operating costs and general and administrative expenses, which declined 41% and 35%, respectively, and our overall operating expenses declined by approximately 37%.  Our strategy is to maintain our operating costs at an acceptable rate that will benefit the operating margin of the Company as we look to develop our current acreage, and we anticipate our annual general and administrative expenses to average approximately $3.0 million moving forward, an over 50% decrease from previous years.
 
In December 2013, we repositioned the Company’s prospects for future growth with the objective of expanding the scope of our operations and increasing our market capitalization.  Measures such as return on equity, liquidity and stock multiples have led us to conclude that the market rewards small-cap and mid-cap exploration and production companies with higher valuations than micro-caps.  We believe that if we can grow in scale in our specific geology, we will be able to spread fixed operating costs over a larger base of production and access more favorable financing terms.
 
 
35

 
The Company, as previously announced, continues to review opportunities to accelerate development of its five million barrels of proved Eagle Ford and other oil reserves.  These potential opportunities include, but are not limited to, strategic partnership(s), asset or corporate acquisitions, and/or merger opportunities.  Additionally, various financing alternatives are under review.
 
The future development of the Company’s reserves, specifically of the Eagle Ford Shale, is dependent on our ability to acquire the necessary funding.  The Company’s intent is to obtain the funding in one of two ways:  via a corporate transaction with another entity combined with the financing to recapitalize the new company, or by acquiring the necessary development funding on a stand-alone basis.  Lucas is actively discussing potential transactions (financings, acquisitions and mergers) which we believe, if finalized and completed, will provide the financial mass to develop the significant reserves at our disposal.
 
Due to our current reserve mix where just over 7% of the Company’s total Proved Reserves are producing, the most likely financial vehicles available to the Company are the raising of additional equity, or a mezzanine type debt facility.  Mezzanine debt is a loan facility which has embedded equity instruments, often warrants, to improve the expected return of the lender. This type of facility is common in the E&P sector due to the high capital requirements of a drilling program.  For example, we estimate an Eagle Ford well will cost $7 to $8 million to drill and the Company currently has $8.2 million in Proved Producing Reserves.  While we anticipate determining our future course in the near term, we have not entered into any binding agreements to date, and no definitive transactions are pending in connection with our planned strategic transaction.
 
Overview of Properties

At March 31, 2014, the Company had leasehold interests (working interests) in approximately 17,628 gross acres, or 13,314 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 12,049 net acres.  In deeper formations, the Company has approximately 3,929 net acres in the Eagle Ford oil window and 1,265 net acres in the Eaglebine, Buda and Glen Rose oil bearing formations.
 
At March 31, 2014, Lucas Energy's total estimated net proved reserves were 5.6 million barrels of oil equivalent (BOE), of which 5.0 million barrels (BBLs) were crude oil reserves, and 3.3 billion cubic feet (BCF) were natural gas reserves (see “Item 8 Financial Statements and Supplementary Data” – “Supplemental Oil and Gas Disclosures (Unaudited)”).  Approxiumately 97% of our proved reserves are undeveloped and will require significant capital expenditures to develop, as discussed above.
 
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 Karnes County, we own a 100% working interest in approximately 400 acres in the Eagle Ford.  We concentrate in several formations in Madison and Leon Counties, Texas: the Eaglebine, Buda, and Glen Rose which have productive zones surrounding our acreage.
 
Operations

Lucas’s objective for our current producing wells is to operate as efficiently as possible, look for technological advancements to increase the life of the wells, evaluate the economic viability of these wells, and consider adding or re-drilling our low producing assets.  In the first half of fiscal 2014, we completed four workovers and one lateral extension in the Austin Chalk.  We did not realize the full production potential from these wells however, and one of our larger existing wells was off-line for most of the fourth quarter and another large well was down earlier in the year.

 
36

 
For the year ending March 31, 2014, Lucas produced an average of approximately 146 net barrels of oil equivalent per day (BOEPD) from 32 active well bores, of which 18 wells accounted for more than 80% of our production.  The ratio between the gross and net production differs due to varied working interests and net revenue interests in each well.  An affiliate of Marathon Oil Corporation operates two Eagle Ford horizontal wells in our Gonzales leases, of which we have a 15% working interest on each well.  Our production sales totaled 53,228 barrels of oil equivalent, net to our interest, for the fiscal year ended March 31, 2014.
 
Reserves

Our estimated net proved crude oil and natural gas reserves at March 31, 2014 and 2013 were approximately 5.6 million BOE, respectively, for each year.  Although there was not a significant change in total proved reserves, crude oil reserves decreased slightly by approximately 0.1 million BBLs offset by an increase of natural gas reserves by approximately 0.7 BCF (or 0.1 BOE – barrel of equivalent).  Using the average monthly crude oil price of $96.17 per BBL and natural gas price of $3.47 per thousand cubic feet (MCF) for the twelve months ended March 31, 2014, our estimated discounted future net cash flow (PV-10) before tax expenses for our proved reserves was approximately $112.0 million, of which approximately $104.0 million are proved undeveloped reserves. Total reserve value at March 31, 2014 represents a decrease of approximately $20.6 million or 16% from a year ago using the same SEC pricing and reserves methodology.  The decrease can be attributed the use of higher average monthly crude oil prices of $104.76 and natural gas prices of $3.51 from the prior year.  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.

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 Sales

During the year ended March 31, 2014, our net crude oil sales volumes decreased to 53,228 BBLs or 146 BOPD from 84,227 BBLs, or 231 BOPD, a 37% decrease over the previous fiscal year.  The production decline is primarily related to the Company having a reduced property base due to the sale of the Baker DeForest property in October 2012 and the assignment of certain Company properties to Nordic Oil USA I, LLLP (“Nordic”) per a Settlement Agreement entered into with Nordic with an effective date of March 31, 2013, pursuant to which, among other things, we agreed to assign back to Nordic certain oil, gas and mineral leases located in Gonzales, Karnes and Wilson Counties, Texas which were purchased from Nordic in October 2011.  When compared to the prior period the reduced production from the property and assignment sales represented an approximately 12,000 BBLs production decline.  Additionally, in the prior reporting period, the Company had additional production decline of approximately 18,000 BBLs due to new drilling and lateral programs with higher front-end production when compared to the current period.  We entered and 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 three wells producing from the Eagle Ford for which two are being operated by an affiliate of Marathon Oil Corporation and one which is being operated by Penn Virginia Corporation.  


 
37

 
Major Expenditures

The table below sets out the major components of our operating and corporate expenditures for the years ended March 31, 2014 and 2013:

   
2014
   
2013
 
 Additions to Oil and Gas Properties (Capitalized)
           
 Acquisitions Using Cash
  $ 69,622     $ 116,700  
 Other Capitalized Costs (a)
    4,923,864       4,782,327  
 Subtotal
    4,993,486       4,899,027  
 Sales of Eaglebine Properties (b)
    (156,935 )     -  
 Issuance/Relinquishment of Nordic Note Payable (c)
    -       (22,829,333 )
 Issuance/Relinquishment of Origin Note Payable (d)
    -       180,837  
 Issuance/Relinquishment of Origin Note Receivable (e)
    -       470,812  
 Other Non-Cash Acquisitions (f)
    7,719       (181,970 )
 Total Additions (Deductions) to Oil and Gas Properties
    4,844,270       (17,460,627 )
 Lease Operating Expenditures (Expensed)
    2,217,029       3,760,036  
 Severance and Property Taxes (Expensed)
    394,372       432,187  
    $ 7,455,671     $ (13,268,404 )
                 
 General and Administrative Expense (Cash based)
  $ 3,544,603     $ 5,421,220  
 Share-Based Compensation (Non-Cash)
    413,711       677,553  
 Total General and Administrative Expense
  $ 3,958,314     $ 6,098,773  

(a)  
Other capitalized costs include title related expenses and tangible and intangible drilling costs.
(b)  
On March 31, 2014, the Company sold 156 acres of oil and natural gas properties with aggregate gross proceeds of $156,935 in Madison County, Texas.
(c)  
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.
(d)  
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.
(e)  
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.
(f)  
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, 2014 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 (1 million British Thermal Units) to 1.0 Bbl of oil).

We reported a net loss for the year ended March 31, 2014 of $4.7 million, or $0.16 per share.  For the year ended March 31, 2013, we reported a net loss of $6.8 million, or $0.27 per share. Although our revenues decreased by $3.0 million, or 37%, our net loss only decreased by $2.1 million or 31% for the year ended March 31, 2014, compared to the prior year’s period.

 
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Net Operating Revenues

The following table sets forth the revenue and production data for the years ended March 31, 2014 and 2013:
                     
%
 
   
2014
   
2013
   
Increase (Decrease)
   
Increase (Decrease)
 
Sale Volumes:
                       
Crude Oil (Bbls)
    53,228       84,227       (30,999 )     (37%)  
Natural Gas (Mcf)
    -       9,236       (9,236 )     (100%)  
Total (Boe) (1)
    53,228       85,766       (32,538 )     (38%)  
                                 
Crude Oil  (Bbls per day)
    146       231       (85 )     (37%)  
Natural Gas (Mcf per day)
    -       25       (25 )     (100%)  
Total (Boe per day) (1)
    146       235       (89 )     (38%)  
                                 
Average Sale Price:
                               
Crude Oil ($/Bbl)
  $ 98.06     $ 97.59     $ 0.47       0%  
Natural Gas ($/Mcf)
  $ -     $ 2.93     $ (2.93 )     (100%)  
                                 
 
Operating Revenues:
                               
Crude Oil
  $ 5,219,752     $ 8,219,984     $ (3,000,232 )     (36%)  
Natural Gas
    -       27,100       (27,100 )     (100%)  
           Total Revenues
  $ 5,219,752     $ 8,247,084     $ (3,027,332 )     (37%)  
                                 

(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, 2014 decreased $3.0 million, or 37%, to $5.2 million compared to $8.2 million for the same period a year ago due primarily to an unfavorable crude oil volume variance of $3.0 million. There was also a minimal favorable price variance, which had no significant impact, during the current period.  The production decline is primarily related to the Company having a reduced property base due to the sale of the Baker DeForest property in October 2012 and the assignment of certain Company properties back to Nordic per a Settlement Agreement just prior to the previous fiscal year end.  When compared to the prior period the reduced property base from the property and assignment sales represented an approximately $1.3 million decrease in production sales.  Additionally, in the prior reporting period, the Company had additional production sales of approximately $1.7 million due to new drilling and lateral programs with higher front-end production when compared to the current period.


 
39

 
Operating and Other Expenses

The following table sets forth operating and other expenses for the years ended March 31, 2014 and 2013:

               
Increase
   
%
 
   
2014
   
2013
   
(Decrease)
   
Incr(Decr)
 
Lease Operating Expenses
  $ 2,217,029     $ 3,760,036     $ (1,543,007 )     (41 %)
Direct lease operating expense
    953,777       2,106,372       (1,152,595 )     (55 %)
Workovers expense
    1,140,861       1,540,098       (399,237 )     (26 %)
Other
    122,391       113,566       8,825       8 %
Severance and Property Taxes
    394,372       432,187       (37,815 )     (9 %)
Depreciation, Depletion,
                               
    Amortization and Accretion
    2,189,721       3,585,674       (1,395,953 )     (39 %)
                                 
General and Administrative  (Cash based)
  $ 3,544,603     $ 5,421,220     $ (1,876,617 )     (35 %)
Share-Based Compensation (Non-Cash)
    413,711       677,553       (263,842 )     (39 %)
 Total General and Administrative Expense
  $ 3,958,314     $ 6,098,773     $ (2,140,459 )     (35 %)
                                 
Interest Expense
  $ 1,169,440     $ 1,367,844     $ (198,404 )     (15 %)
Other Expense (Income), Net
  $ (21,510 )   $ (241,112 )   $ (219,602 )     (91 %)
 
Lease Operating Expenses.  Lease operating expenses can be divided into the following categories: costs to operate and maintain Lucas’s 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 $2.2 million for the year ended March 31, 2014 decreased $1.5 million, or 41%, from $3.8 million for the same period a year ago, principally due to less production from prior period asset sales and assignments and a decline in direct lease operating and workover expenses from the Company’s expanding effort to improve operating efficiencies and maintain cash flow.

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, 2014 decreased $1.4 million, or 39%, to $2.2 million from $3.6 million for the same period a year ago.   The decrease was primarily due to decreased production of approximately 33,000 BOE and a lower unit DD&A rate.  The unit DD&A rate decreased to $35.94 per BOE in fiscal 2014 from $40.51 per BOE in fiscal 2013.

       General and Administrative Expenses (excluding share-based compensation). General and administrative expenses (excluding share-based compensation) decreased approximately $1.9 million or 35% for the year ended March 31, 2014 as compared to the prior year primarily due to a decrease in professional and legal fees of approximately $0.6 million and a $1.3 million reduction in employee wage expenses, severances and bonuses as well as less consulting, contracting and outsourcing expenses.  These decreases were primarily due to the Company performing functions related to these expenses internally as opposed to engaging outside support and the restructuring of employee responsibilities and duties within the Company to improve operational efficiencies.

Share-Based Compensation. Share-based compensation, which is included in General and Administrative expenses in the Consolidated Statements of Operations decreased approximately $0.3 million or 39% for the year ended March 31, 2014 as compared to the prior year primarily due to a decrease in employee based stock option and compensation costs. Share-based compensation is utilized for the purpose of conserving cash resources for use in field development activities and operations.

 
40

 
Interest Expense.  Interest expense for the year ended March 31, 2014 consisted of cash interest payments, amortization of discounts and deferred financing costs of approximately $1.2 million made in relation to the Notes issued in April 2013 and May 2013 and the Letter Loan entered into in August 2013 (described below under “Liquidity and Capital Resources” – “Financing”).  When compared to the same period a year ago, which primarily related to incurred interest expense of approximately $1.4 million on a note due to Nordic, there is a $0.2 million decrease.

Other Expense (Income), Net.  Other Expense (Income) for the year ended March 31, 2014, primarily consisted of approximately $100,000 in financing fees offset by approximately $118,000 in discounts from accounts payable settlements, approximately $2,000 in office space rental income from our Gonzales County office (which was sold during the period) and a $1,000 gain from the sale of old vehicles as compared to the same period a year ago which consisted of approximately $344,000 in discounts from accounts payable settlements, approximately $13,000 in rental income and $7,000 in interest income offset by approximately $124,000 impairment of our Gonzales County, Texas office building.

Liquidity and Capital Resources

Working Capital

At March 31, 2014, the Company’s Total Current Liabilities of $4.6 million exceeded its Total Current Assets of $1.6 million, resulting in a working capital deficit of approximately $3.0 million, while 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.  The $1.8 million reduction in the working capital deficit is primarily related to the Company effectively accessing the capital markets in connection with the sale of both equity and debt during the year ended March 31, 2014 (as described in greater detail below under “Financing”).  Subsequent to the year end, the Company also raised capital and amended its current loan agreement in an effort to maintain adequate cash flow entering the coming year.

On August 13, 2013, the Company secured a long-term loan for $7.5 million (described in greater detail below under “Financing”).  A portion of the funds raised in connection with the Loan were used to repay the $3.25 million in outstanding current Notes issued in April and May 2013 (described in greater detail below under “Financing”).

On September 6, 2013, the Company closed a registered direct offering of $3,451,500 (approximately $3.2 million net, after deducting commissions and other expenses) in shares of common stock to certain institutional investors. The Company used the funds raised in the offerings to pay down expenses related to lease operating, workover activities and for general corporate purposes, including general and administrative expenses and legal settlements.
 
On April 21, 2014, the Company closed a registered direct offering of $2,000,000 (approximately $1.88 million net, after deducting commissions and other expenses) of 3,333,332 units, each consisting of one share of common stock and 0.50 of one warrant to purchase one share of common stock at an exercise price of $1.00 per share to certain institutional investors.  The Company used the funds raised in the offering to pay down expenses related to lease operating, workover activities and for general corporate purposes, including general and administrative expenses.
 
On April 29, 2014 and effective March 14, 2014, the Company entered into an amended loan agreement, amending the terms of the Letter Loan Agreement, which had a balance of approximately $7.3 million as of March 14, 2014.  Pursuant to the amended long-term note, we restructured the repayment terms to defer monthly amortizing principal payments which began on March 13, 2014, during the period from April 13, 2014 through September 13, 2014 (described in greater detail below under “Financing”).

The Company believes its undeveloped acreage and continued 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.

 
41

 
Cash Flows

   
Year Ended March 31,
 
   
2014
   
2013
 
Cash flows used in operating activities
  $ (3,684,464 )   $ (1,814,640 )
Cash flows used in investing activities
    (5,409,608 )     (5,374,669 )
Cash flows provided by financing activities
    9,165,536       6,956,021  
Net increase (decrease) in cash and cash equivalents
  $ 71,464     $ (233,288 )

The primary sources of cash for Lucas during the two-year period ended March 31, 2014 were funds generated from sales of crude oil, proceeds from sale of shares of the Company's common stock and borrowings.  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 approximately $3.7 million for the year ended March 31, 2014 as compared to $1.8 million for the same period a year ago.  The increase in net cash used in operating activities of $1.9 million was due primarily to paying down all outstanding advances to working interest owners via a settlement with Seidler Oil & Gas L.P. for approximately $1.3 million, a decrease of $1.4 million in depreciation, depletion, amortization and accretion and paying down vendor payables of approximately $0.7 million which was offset by an approximately $0.1 million increase in changes to other components of working capital and a decrease of $2.1 million in net loss.

Net cash used in investing activities was approximately $5.4 million for both the years ended March 31, 2014 and 2013.  Although, there was not a significant change from the prior year, the Company had approximately $3.5 million less in additions to oil and gas properties during fiscal year 2014, which was offset by proceeds of approximately $4.0 million from the sale of oil and gas properties during fiscal year 2013 coupled with approximately $0.5 million in additional proceeds from oil and gas and other property and equipment sales during fiscal year 2014.

Net cash provided by financing activities was approximately $9.2 million for the year ended March 31, 2014 as compared to net cash provided by financing activities of $7.0 million for the same period a year ago.  The increase in net cash provided by financing activities was primarily related to approximately $7.3 million of loan and equity proceeds, net of repayments offset by repayment of borrowings and deferred financing costs, which were approximately $4.6 million from the current period when compared to equity sales and loan repayment amounts from the same period a year ago, as well as net proceeds from the exercise of warrants of $0.4 million.

Financing

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 chairman, Ken Daraie (which entity loaned us $2,000,000) and director, 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 under a settlement agreement.  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 May 2013 Loan Agreement included substantially similar terms as the April 2013 Loan Agreement and was approved by the prior lenders, who also waived their right to be repaid from the proceeds from the loans.

The loans provided pursuant to the Loan Agreements were documented by Promissory Notes (the “Notes”) which accrued 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 were due and payable on October 4, 2013 in connection with the April 2013 Loan Agreement and April 4, 2014 in connection with the May 2013 Loan Agreement.  The Notes could be prepaid at any time without penalty.  In the event any amounts were not paid when due under the Notes and/or in the event any event of default occurred and was continuing under the Notes, the Notes accrued 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”).

 
42

 
On July 17, 2013, Meson Capital Partners LP (which is indirectly beneficially owned by one of our directors, Ryan J. Morris), purchased 185,185 restricted shares of our common stock in a private transaction for consideration of $250,000 or $1.35 per share ($0.01 above the closing sales price of our common stock on July 17, 2013).

Effective on August 13, 2013, Lucas entered into a Letter Loan Agreement with Louise H. Rogers (the “Letter Loan”).  In connection with the Letter Loan and a Promissory Note entered into in connection therewith, Ms. Rogers loaned the Company $7.5 million (the “Loan”).  The Loan accrues interest at the rate of 12% per annum (18% upon the occurrence of an event of default), can be prepaid by Lucas at any time without penalty after November 13, 2013 and is due and payable on August 13, 2015, provided that $75,000 in interest only payments are due on the Loan during the first six months of the term (which have been escrowed by Lucas) and beginning on March 13, 2014, Lucas is required to make monthly amortization principal payments equivalent to the sum of fifty-percent of the Loan during months seven through twenty-four of the term.  The $450,000 escrow deposit for the first six months interest was recorded as restricted cash within the balance sheet, with no balance being recognized on the balance sheet as of March 31, 2014, as all escrowed interest had been paid.  Lucas is also required to make mandatory prepayments of the loan in the event the collateral securing the Loan does not meet certain thresholds and coverage ratios.  The repayment of the Loan is secured by a security interest in substantially all of Lucas’s assets which was evidenced by a Security Agreement and a Mortgage, Deed of Trust, Assignment, Security Agreement, Financing Statement and Fixture Filing. Lucas agreed to pay a $15,000 quarterly administrative fee in connection with the Loan and grant the administrator a warrant to purchase up to 279,851 shares of Lucas’s common stock at an exercise price of $1.35 per share and a term continuing until the earlier of (a) August 13, 2018; and (b) three years after the payment in full of the Loan.  A portion of the funds raised in connection with the Loan were used to repay the $3.25 million in outstanding Notes issued in April and May 2013 as described above.

On September 6, 2013, the Company closed a registered direct offering of $3,451,500 (approximately $3.2 million net, after deducting commissions and other expenses) of shares of common stock to certain institutional investors. In total, the Company sold 2.95 million shares of common stock at a price of $1.17 per share.
 
On April 21, 2014, pursuant to the terms of the Registration Statement, the Company closed a registered direct offering of $2,000,000 (approximately $1.88 million net, after deducting commissions and other expenses) of shares of common stock to certain institutional investors.  In total, the Company sold 3,333,332 units, each consisting of one share of common stock and 0.50 of one warrant to purchase one share of common stock. The Company used the funds raised in the offering to pay down expenses related to drilling, lease operating, workover activities and for general corporate purposes, including general and administrative expenses.
 
On April 29, 2014 and effective March 14, 2014, the Company entered into an Amended Loan Agreement and Restated Promissory Note on the Letter Loan note noted above, which had a balance of approximately $7.3 million as of March 14, 2014.  Pursuant to the Amended Loan Agreement, we restructured the repayment terms to defer monthly amortizing principal payments which began on March 13, 2014, during the period from April 13, 2014 through September 13, 2014, during which six month period interest on the Restated Promissory Note will accrue at 15% per annum (compared to 12% per annum under the terms of the original Letter Loan). Additionally, beginning on October 13, 2014, the interest rate of the Amended Note will return to 12% per annum and we will be required to pay the monthly amortization payments in accordance with the original repayment schedule (which total approximately $205,000 to $226,000, depending on the due date), as well as additional principal amortization payments of approximately $266,000 every three months (beginning October 13, 2014, and ending on July 13, 2015) until maturity, with approximately $3.87 million due on maturity, which maturity date remains August 13, 2015. We agreed to pay all legal expenses of the lender related to the amendments and agreed to (i) pay $25,000 and (ii) issue 75,000 shares of restricted common stock, to Robertson Global Credit, LLC (“Robertson”), the administrator of the Loan, as additional consideration for the modifications.  Should we opt to prepay the Amended Note prior to the maturity date, we are required to pay an exit fee equal to the advisory fees of approximately $15,000 per quarter that would have been due, had the note remained outstanding through maturity.

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, and Karnes 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 remainder of the 2015 fiscal year and into fiscal 2016.  To cover the anticipated shortfall, our business plan includes establishing a reserve-based line of credit, initiating bank or private borrowings, and/or issuing equity or debt offerings similar to the above; provided that the Company is also actively reviewing a number of opportunities for strategic partnership, acquisitions, and mergers with a focus on development of reserves, increasing revenue, and improving shareholder value as discussed above.

 
43

 
Off-Balance Sheet Arrangements
 
Lucas does not participate in financial transactions that generate relationships with unconsolidated entities or financial partnerships.  As of March 31, 2014, 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’s 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’s most critical accounting policies:

Proved Oil and Natural Gas Reserves

Lucas’s 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”.

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.  

 
44

 
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’s common stock, the level of risk-free interest rates, expected dividend yields on Lucas’s 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’s 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).

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated financial statements as of March 31, 2014 and 2013 and for the fiscal years ended March 31, 2014 and 2013 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.  
 

 
45

 

INDEX TO THE FINANCIAL STATEMENTS
     
   
Page
Report of Independent Registered Public Accounting Firm
    
F-2
Consolidated Balance Sheets as of March 31, 2014 and 2013
    
F-3
Consolidated Statements of Operations for the years ended March 31, 2014 and 2013
    
F-4
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2014 and 2013
    
F-5
Consolidated Statements of Cash Flows for the years ended March 31, 2014 and 2013
    
F-6
Notes to Consolidated Financial Statements
    
F-7


 
F-1

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

To the Board of Directors and Stockholders
Lucas Energy, Inc.
 
 
We have audited the accompanying consolidated balance sheets of Lucas Energy, Inc. as of March 31, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These consolidated 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 audit 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, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
 

 
/s/ Hein & Associates LLP
 
Hein & Associates LLP
 
 
Houston, Texas
June 27, 2014

 
F-2

 

LUCAS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS

             
At March 31,
 
2014
   
2013
 
             
ASSETS            
Cash
  $ 522,155     $ 450,691  
Accounts Receivable
    609,097       832,801  
Inventories
    112,677       64,630  
Other Current Assets
    342,787       337,860  
Total Current Assets
    1,586,716       1,685,982  
                 
 Property and Equipment                
Oil and Gas Properties (Full Cost Method)
    49,554,069       44,709,800  
Other Property and Equipment
    444,924       552,154  
Total Property and Equipment
    49,998,993       45,261,954  
Accumulated Depletion, Depreciation and Amortization
    (11,190,505 )     (9,204,649 )
      Total Property and Equipment, Net
    38,808,488       36,057,305  
Other Assets     343,273       -  
Total Assets   $ 40,738,477     $ 37,743,287  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current Liabilities
               
Accounts Payable
  $ 2,554,977     $ 3,696,848  
Common Stock Payable
    11,250       17,502  
Accrued Expenses
    286,629       501,809  
Advances From Working Interest Owners
    -       1,384,085  
Asset Retirement Obligation, current
    -       73,621  
Current Portion of Long-Term Notes Payable
    1,793,367       875,000  
Total Current Liabilities
    4,646,223       6,548,865  
                 
Asset Retirement Obligation     978,430       851,873  
Long-Term Notes Payable, net of current portion     5,430,144       -  
Commitments and Contingencies (see Note 7)                
                 
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  
Common Stock, 100,000,000 Shares Authorized of $0.001 Par,
               
30,018,081 Shares Issued and 29,981,181 Outstanding Shares
               
at March 31, 2014 and 26,751,407 Issued and 26,714,507
               
Outstanding Shares at March 31, 2013, respectively
    30,018       26,751  
Additional Paid in Capital
    52,995,987       48,970,509  
Accumulated Deficit
    (26,388,766 )     (21,701,152 )
Common Stock Held in Treasury, 36,900 Shares, at Cost
    (49,159 )     (49,159 )
        Total Stockholders' Equity
    29,683,680       30,342,549  
Total Liabilities and Stockholders' Equity
  $ 40,738,477     $ 37,743,287  


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

 
F-3

 

LUCAS ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

             
Year Ended March 31,
 
2014
   
2013
 
             
Operating Revenues
           
 Crude Oil
  $ 5,219,752     $ 8,219,984  
 Natural Gas
    -       27,100  
     Total Revenues
    5,219,752       8,247,084  
Operating Expenses
               
 Lease Operating Expenses
    2,217,029       3,760,036  
 Severance and Property Taxes
    394,372       432,187  
 Depreciation, Depletion,
               
      Amortization and Accretion
    2,189,721       3,585,674  
 General and Administrative
    3,958,314       6,098,773  
     Total Expenses
    8,759,436       13,876,670  
Operating Loss
    (3,539,684 )     (5,629,586 )
Other Expense (Income)
               
     Interest Expense
    1,169,440       1,367,844  
     Other Income, Net
    (21,510 )     (241,112 )
             Total Other Expenses
    1,147,930       1,126,732  
Loss Before Income Taxes
    (4,687,614 )     (6,756,318 )
     Income Tax Provision
    -       39,161  
Net Loss
  $ (4,687,614 )   $ (6,795,479 )
Net Loss Per Share
               
Basic and Diluted
  $ (0.16 )   $ (0.27 )
                 
Weighted Average Shares
               
Outstanding
               
  Basic and Diluted
    28,593,995       25,099,749  


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

 
F-4

 


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, 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 Offerings
    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 )
 Balance at March 31, 2013
    26,751,407     $ 26,751       2,000     $ 3,095,600     $ 48,970,509     $ (21,701,152 )   $ (49,159 )   $ 30,342,549  
 Common Shares issued for:
                                                               
 Unit Offerings
    3,135,185       3,135       -       -       3,299,922       -       -       3,303,057  
 Share-Based Compensation
    131,489       132       -       -       162,986       -       -       163,118  
 Amortization of stock options
    -       -       -       -       270,106       -       -       270,106  
 Discount on Notes
    -       -       -       -       292,464       -       -       292,464  
 Net loss
    -       -       -       -       -       (4,687,614 )     -       (4,687,614 )
 Balances at March 31, 2014
    30,018,081     $ 30,018       2,000     $ 3,095,600     $ 52,995,987     $ (26,388,766 )   $ (49,159 )   $ 29,683,680  

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



 
F-5

 

LUCAS ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

             
Year Ended March 31,
 
2014
   
2013
 
 Cash Flows from Operating Activities
           
 Net Loss
  $ (4,687,614 )   $ (6,795,479 )
 Adjustments to reconcile net losses to net cash used in operating activities:
               
Depreciation, Depletion, Amortization and Accretion
    2,189,721       3,585,674  
Share-Based Compensation
    413,711       677,553  
Share-Based Compensation Related to Purchase of Stock Options
    -       83,657  
Amortization of Discount on Notes
    207,157       -  
Amortization of Deferred Financing Costs
    228,065       -  
Settlement of Debt
    (118,620 )     (344,329 )
(Gain) Loss on Sale of Property and Equipment
    (1,000 )     2,065  
Impairment of Other Property
    -       123,513  
 Changes in Components of Working Capital and Other Assets
               
 Accounts Receivable
    223,704       584,018  
 Inventories
    (48,047 )     (762 )
 Other Current Assets
    (4,927 )     (138,183 )
 Accounts Payable and Accrued Expenses
    (702,529 )     371,402  
 Advances from Working Interest Owners
    (1,384,085 )     35,019  
 Other Assets
    -       1,212  
 Net Cash Used in Operating Activities
    (3,684,464 )     (1,814,640 )
                 
 Investing Cash Flows
               
 Additions of Oil and Gas Properties
    (5,662,026 )     (9,139,834 )
 Additions of Other Property and Equipment
    (230,517 )     (69,486 )
 Proceeds from Sale of Oil and Gas Properties
    156,935       4,069,948  
 Proceeds from Sale of Other Property and Equipment
    326,000       -  
 Payments Received on Notes Receivable
    -       14,703  
 Repayment of Note Payable
    -       (250,000 )
 Net Cash Used in Investing Activities
    (5,409,608 )     (5,374,669 )
                 
 Financing Cash Flows
               
 Net Proceeds from Exercises of Warrants
    -       412,501  
 Net Proceeds from the Sale of Common Stock
    3,303,057       6,826,740  
 Proceeds from Issuance of Notes Payable
    10,750,000       -  
 Deferred Financing Costs
    (571,338 )     -  
 Repayment of Borrowings
    (4,316,183 )     (283,220 )
 Net Cash Provided by Financing Activities
    9,165,536       6,956,021  
                 
 Increase in Cash
    71,464       (233,288 )
 Cash at Beginning of the Period
    450,691       683,979  
 Cash at End of the Period
  $ 522,155     $ 450,691  


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

 
F-6

 

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 are 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, 2014, the Company’s Total Current Liabilities of $4.6 million exceeded its Total Current Assets of $1.6 million, resulting in a working capital deficit of approximately $3.0 million, while 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.  The $1.8 million reduction in the working capital deficit is primarily related to the Company effectively accessing the capital markets in connection with the sale of both equity and debt during the year ended March 31, 2014.  Subsequent to year end, as described below the Company also raised capital and amended its current loan agreement in an effort to maintain adequate cash flow entering the coming year (see “Note 13. Subsequent Events”).

On August 13, 2013, the Company secured a long-term loan for $7.5 million.  A portion of the funds raised in connection with the Loan were used to repay the $3.25 million in outstanding current Notes issued in April and May 2013 (as defined and described in Note 6).

On September 6, 2013, the Company closed a registered direct offering of $3,451,500 (approximately $3.2 million net, after deducting commissions and other expenses) in shares of common stock to certain institutional investors. The Company used the funds raised in the offerings to pay down expenses related to lease operating, workover activities and for general corporate purposes, including general and administrative expenses and legal settlements.
 
On April 21, 2014, the Company closed a registered direct offering of $2,000,000 (approximately $1.88 million net, after deducting commissions and other expenses) of 3,333,332 units, each consisting of one share of common stock and 0.50 of one warrant to purchase one share of common stock at an exercise price of $1.00 per share to certain institutional investors (see “Note 13. Subsequent Events”).  The Company used the funds raised in the offering to pay down expenses related to lease operating, workover activities and for general corporate purposes, including general and administrative expenses.
 
On April 29, 2014 and effective March 14, 2014, the Company entered into an amended loan agreement on the long-term note noted above, which had a balance of approximately $7.3 million as of March 14, 2014.  Pursuant to the amended long-term note, we restructured the repayment terms to defer monthly amortizing principal payments which began on March 13, 2014, during the period from April 13, 2014 through September 13, 2014 (see “Note 13. Subsequent Events”).

The Company believes the value of its undeveloped acreage provides a continued ability to access the capital markets in both equity and debt, which 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.


 
F-7

 


Use of Estimates
 
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’s 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.  The Company maintains cash and cash equivalents in bank deposit accounts, which at times may exceed federally insured limits.  The Company has not experienced any losses in such accounts.  The Company had no cash equivalents at March 31, 2014 or 2013.

Restricted Cash

As of March 31, 2014 and 2013, the Company had no restricted cash.

Allowance for Doubtful Accounts

Accounts receivable consist of uncollaterized oil and natural gas revenues due under normal trade terms.  Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible.  There was no allowance recorded as of March 31, 2014 or 2013.

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.

We sell a significant portion of our oil and gas production to a relatively small number of customers.  For the year ended March 31, 2014, approximately 86% of our consolidated product revenues were attributable to three customers: Sunoco Refining and Marketing, Inc.; EDF Trading North America LLC.; and Enterprise Crude Oil LLC.  The remaining 14% was sold to Shell Trading (US) Company, our current and only customer as of March 31, 2014.  We are not dependent upon any one purchaser and have 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.

Fair Value of Financial Instruments

As of March 31, 2014 and 2013, the fair value of Lucas’s 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 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”.

 
F-8

 
 
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 $35.94 and $40.51 per barrel of oil equivalent for the years ended March 31, 2014 and 2013, 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, 2014 and 2013, no impairment of oil and natural gas properties was recorded.

Other Property and Equipment

Other property and equipment are stated at cost and consist primarily of a field office, 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, 2014 and 2013.  The Company’s policy is to classify assessments, if any, for tax related interest expense and penalties as interest expense.