UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
   FORM 10-Q
 
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
 [  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ___________
 
Commission File Number: 001-32508
 

LUCAS ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
98-0417780
(State or 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)
 
(713) 528-1881
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the 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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of each class
Number of Shares
Common Stock, par value $0.001 per share
19,515,826 (as of November 3, 2011)
 

 
 

 

LUCAS ENERGY, INC.

TABLE OF CONTENTS
 
    Page
PART I.
FINANCIAL INFORMATION
 
     
ITEM 1.
Financial Statements (Unaudited)
 
     
 
Condensed Consolidated Balance Sheets as of September 30, 2011 and March 31, 2011
3
     
 
Condensed Consolidated Statements of Operations for the three months ended September 30, 2011 and 2010 and the six months ended September 30, 2011 and 2010
4
     
 
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010
5
     
 
Notes to the Condensed Consolidated Financial Statements
6
     
     
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
     
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
20
     
ITEM 4.
Controls and Procedures
20
     
     
PART II.
OTHER INFORMATION
 
     
ITEM 1.
Legal Proceedings
21
     
ITEM 1A.
Risk Factors
21
     
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23
     
ITEM 6.
Exhibits
24
     
     
SIGNATURES
25
     
EXHIBIT INDEX
26
 
 
 

 
PART 1.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
LUCAS ENERGY, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
   
September 30,
   
March 31,
 
   
2011
   
2011
 
ASSETS
           
Current Assets
           
Cash
  $ 1,480,049     $ 2,471,108  
Accounts Receivable
    684,603       806,098  
Inventories
    66,268       -  
Other Current Assets
    115,136       152,793  
      Total
    2,346,056       3,429,999  
                 
Property, Plant and Equipment
               
Oil and Gas Properties (Full Cost Method)
    30,015,074       24,650,840  
Other Property, Plant and Equipment
    134,860       93,199  
Total Property, Plant and Equipment
    30,149,934       24,744,039  
Accumulated Depletion, Depreciation and Amortization
    (4,433,241 )     (3,753,275 )
      Total Property, Plant and Equipment, Net
    25,716,693       20,990,764  
Deposit for Acquisition of Oil and Gas Properties
    500,000       500,000  
Other Assets
    97,612       57,112  
                 
Total Assets
  $ 28,660,361     $ 24,977,875  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities
               
Accounts Payable
  $ 2,239,831     $ 2,236,917  
Common Stock Payable
    57,082       503,750  
Accrued Expenses
    560,784       255,239  
Advances From Working Interest Owners
    -       357,399  
Current Portion of Long-Term Debt
    32,944       30,727  
Total
    2,890,641       3,384,032  
                 
Asset Retirement Obligation
    428,012       409,112  
Note Payable
    40,420       60,114  
Commitments and Contingencies (see Note 9)
               
                 
Stockholders' Equity
               
Preferred Stock, 10,000,000 Shares Authorized of $0.001 Par,
 
No Shares Issued and Outstanding
    -       -  
Common Stock, 100,000,000 Shares Authorized of $0.001 Par,
 
19,537,786 Shares Issued and 19,500,886 Outstanding Shares
 
at September 30, 2011 and 16,727,713 Issued and 16,690,813
 
Outstanding Shares at March 31, 2011, respectively
    19,538       16,728  
Additional Paid in Capital
    35,617,298       28,461,239  
Accumulated Deficit
    (10,286,389 )     (7,304,191 )
Common Stock Held in Treasury, 36,900 Shares, at Cost
    (49,159 )     (49,159 )
        Total Stockholders' Equity
    25,301,288       21,124,617  
                 
Total Liabilities and Stockholders' Equity
  $ 28,660,361     $ 24,977,875  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
-3-

 
 
LUCAS ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net Operating Revenues
                       
Crude Oil
  $ 927,924     $ 936,849     $ 2,132,344     $ 1,514,389  
Natural Gas
    39,518       1,741       67,545       1,741  
     Total
    967,442       938,590       2,199,889       1,516,130  
Operating Expenses
                               
 Lease Operating Expenses
    1,033,286       309,090       1,634,769       619,197  
 Severance and Property Taxes
    59,749       50,473       119,524       88,774  
Depreciation, Depletion, Amortization
                         
     and Accretion
    290,933       352,183       698,866       564,292  
 General and Administrative
    1,386,663       763,781       2,431,377       1,358,197  
     Total
    2,770,631       1,475,527       4,884,536       2,630,460  
Operating Loss
    (1,803,189 )     (536,937 )     (2,684,647 )     (1,114,330 )
Other Income (Expense), Net
    (292,555 )     (7,810 )     (291,709 )     (22,660 )
Interest Expense
    (2,355 )     -       (5,842 )     (261,212 )
Loss Before Income Taxes
    (2,098,099 )     (544,747 )     (2,982,198 )     (1,398,202 )
Income Tax Provision
    -       -       -       -  
Net Loss
  $ (2,098,099 )   $ (544,747 )   $ (2,982,198 )   $ (1,398,202 )
                                 
Net Loss Per Share
                               
Basic and Diluted
  $ (0.11 )   $ (0.04 )   $ (0.17 )   $ (0.10 )
Average Number of Common Shares
                               
Basic and Diluted
    18,714,267       13,696,043       17,780,193       13,524,702  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
-4-

 

 LUCAS ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
             
   
Six Months Ended
 
   
September 30,
 
   
2011
   
2010
 
 Cash Flows from Operating Activities
           
 Reconciliation of Net Loss to
           
 Net Cash Provided by Operating Activities:
           
 Net Loss
  $ (2,982,198 )   $ (1,398,202 )
 Items Not Requiring Cash
               
 Depreciation, Depletion, Amortization and Accretion
    698,866       564,292  
 Share-Based Compensation
    217,551       86,340  
 Non-Operating Expense Relating to Exercise of Warrants
    293,277       -  
 Amortization of Deferred Financing Costs
    -       250,921  
 Unrealized Loss on Marketable Securities
    -       21,450  
  Other
    -       1,210  
 Changes in Components of Working Capital and Other Assets
               
 Accounts Receivable
    121,495       (290,124 )
 Inventories
    (66,268 )     -  
 Other Current Assets
    37,657       (34,444 )
 Accounts Payable and Accrued Expenses
    308,459       374,394  
 Advances from Working Interest Owners
    (357,399 )     (1,770,528 )
 Other Assets
    (40,500 )     (6,812 )
 Changes in Components of Working Capital
               
 Associated with Investing Activities
    (314,274 )     (499,769 )
 Net Cash Used in Operating Activities
    (2,083,334 )     (2,701,272 )
                 
 Investing Cash Flows
               
 Additions of Oil and Gas Properties
    (5,023,330 )     (7,052,736 )
 Additions of Other Property, Plant and Equipment
    (41,661 )     (51,549 )
 Proceeds from Sale of Oil and Gas Properties
    100,096       9,739,114  
 Other
    -       (31,210 )
 Changes in Components of Working Capital Associated with
               
 Investing Activities
    314,274       499,769  
 Net Cash Provided by (Used In) Investing Activities
    (4,650,621 )     3,103,388  
                 
 Financing Cash Flows
               
 Net Proceeds from Exercises of Warrants
    5,760,373       -  
 Net Proceeds from Sales of Common Stock
    -       1,369,811  
 Repayment of Borrowings
    (17,477 )     (2,150,000 )
 Net Cash Provided by (Used In) Financing Activities
    5,742,896       (780,189 )
                 
 Decrease in Cash and Cash Equivalents
    (991,059 )     (378,073 )
 Cash and Cash Equivalents at Beginning of the Period
    2,471,108       1,822,780  
 Cash and Cash Equivalents at End of the Period
  $ 1,480,049     $ 1,444,707  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
-5-

 
LUCAS ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
NOTE 1 - GENERAL
 
History. 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.

Basis of Presentation. The accompanying unaudited interim condensed consolidated financial statements of Lucas Energy, Inc., together with its subsidiary (collectively, Lucas or the Company) have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Lucas's annual report filed with the SEC on Form 10-K for the year ended March 31, 2011.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  Notes to the condensed consolidated financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year 2011 as reported in Form 10-K have been omitted.

Fiscal Year. The Company's fiscal year ends on the last day of March of the calendar year.  The Company refers to the twelve-month periods ended March 31, 2012 and 2011 as our 2012 and 2011 fiscal year, respectively.

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 condensed consolidated financial statements are based on a number of significant estimates, including oil and gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and gas properties, and timing and costs associated with its retirement obligations, as well as those related to the fair value of stock options, stock warrants and stock issued for services.

Reclassification. Certain reclassifications have been made to prior period financial statements to conform with the current presentation.

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.

Income Taxes.  Deferred 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 September 30, 2011. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as interest expense.

Concentration of Credit Risk.  Financial instruments that potentially subject Lucas to concentration of cash and credit risk consist of accounts receivable. Under Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, for the two-year period of January 1, 2011 through December 31, 2012, cash balances in noninterest-bearing transaction accounts at all FDIC-insured depository institutions are provided temporary unlimited deposit insurance coverage.  At September 30, 2011, cash balances in interest-bearing accounts totaled $4,800.

 
-6-

 
Accounts receivable are recorded at the invoiced amount and generally do not bear interest. Any allowance for doubtful accounts is based on management's estimate of the amount of probable losses due to the inability to collect from customers. As of September 30, 2011, no allowance for doubtful accounts has been recorded.

Fair Value of Financial Instruments.  As of September 30, 2011 and March 31, 2011, the fair value of Lucas's cash, accounts receivable, accounts payable and note payable approximate their carrying values because of the short-term maturity of these instruments.

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

Stock options to purchase 456,000 Common Shares at an average exercise price of $2.88 per share and warrants to purchase 2,966,136 Common Shares at an average exercise price of $2.67 per share were outstanding at September 30, 2011. Using the treasury stock method, had we had net income, approximately 70,400 Common Shares attributable to our outstanding warrants would have been included in the fully diluted earnings per share calculation for the periods ended September 30, 2011. There would not have been any Common Shares attributable to outstanding stock options included in the fully diluted earnings per share calculations as there was no net income.

Stock options to purchase 200,000 Common Shares at an average exercise price of $2.60 per share and warrants to purchase 3,135,500 Common Shares at an average exercise price of $7.72 per share were outstanding at September 30, 2010. Using the treasury stock method, had we had net income, approximately 49,700 Common Shares attributable to our outstanding warrants would have been included in the fully diluted earnings per share calculation for the periods ended September 30, 2010.

Subsequent Events. Lucas evaluated all transactions from September 30, 2011 through the financial statement issuance date for subsequent event disclosure. See Note 12.

Recent Accounting Pronouncements. In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, which amends the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification. The amendments clarify the FASB's intent about the application of existing fair value measurement requirements and change certain principles or requirements for measuring fair value or disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual fiscal periods beginning after December 15, 2011. The Company does not expect that the adoption of ASU 2011-04 will have a material impact on its financial statements.

NOTE 2 - MARKETABLE SECURITIES

At September 30, 2011 and March 31, 2011, Lucas held 3,300,000 shares of Bonanza Oil and Gas Inc. (Bonanza) common stock recorded at zero value.  During the six months ended September 30, 2010, pursuant to mark-to-market accounting, Lucas reported a non-cash unrealized loss on Bonanza common shares of $21,450.

NOTE 3 – OIL AND GAS PROPERTIES

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.  Properties not subject to amortization consist of acquisition, 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 and the corresponding costs are added to the capitalized costs subject to amortization.  Costs of oil and gas properties are amortized using the units of production method. Amortization expense calculated per equivalent physical unit of production amounted to $30.50 per barrel of oil equivalent (“BOE”) for the three months ended September 30, 2011, and was $25.40 per BOE for the three months ended September 30, 2010.  Amortization expense calculated per equivalent physical unit of production amounted to $30.47 per BOE for the six months ended September 30, 2011, and was $25.46 per BOE for the six months ended September 30, 2010.  Sales of oil and natural gas properties are accounted for as adjustments to the net full cost
 
 
-7-

 
pool and generally, no gain or loss is recognized.

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. As of September 30, 2011, no impairment of oil and gas properties was indicated.
 
All of Lucas's oil and gas properties are located in the United States.  Below are the components of Lucas's oil and gas properties recorded at cost as of September 30, 2011:
 
   
Amount
 
 Proved leasehold costs
  $ 7,110,772  
 Costs of wells and development
    21,800,706  
 Capitalized asset retirement costs
    305,646  
 Oil & gas properties
       
      not subject to amortization
    797,950  
        Total oil & gas properties
    30,015,074  
 Accumulated depreciation and depletion
    (4,371,272 )
    Net Capitalized Costs
  $ 25,643,802  
 
The following table sets forth the changes in the total cost of oil and gas properties during the six months ended September 30, 2011:

   
Amount
 
 Balance at  beginning of period
  $ 24,650,840  
 Acquisitions using cash
    416,001  
 Acquisitions using shares
    441,000  
 Tangible and Intangible Drilling Costs
       
 and Title Related Expenses
    4,607,329  
 Proceeds from Sale of Partial Interests
    (100,096 )
 Balance at end of period
  $ 30,015,074  
 
During the six months ended September 30, 2011, Lucas entered into a farm-out joint venture agreement to drill a new Austin Chalk horizontal well.  Under the agreement, the counterparty purchased a working interest in the well operated by Lucas.  Proceeds from the sale of the partial working interest were approximately $100,100 and were recorded as a reduction in the full cost pool.

On April 1, 2010, Lucas entered into a purchase and sale agreement with HilCorp Energy I, L.P. ("HilCorp") for the development of Lucas’s Eagle Ford Shale properties located in Gonzales County, Texas.  The agreement provided for HilCorp to acquire an undivided eighty-five (85%) working interest in all the formations below the Austin Chalk formation held by Lucas in Gonzales County, Texas.  During the six months ended September 30, 2010, Lucas received gross proceeds of approximately $10.1 million and net proceeds of approximately $8.9 million, after distribution to Lucas’s working interest participants of their proportionate share of proceeds totaling approximately $1.2 million. A final closing was also conducted pursuant to the agreement on March 31, 2011.  

 
-8-

 
In December 2010, Lucas entered into an agreement for the right to purchase, over time, as financing becomes available, up to an aggregate 77.5% interest in certain oil and gas properties and leases located in McKinley County, New Mexico for an aggregate price of $20.5 million, which included a deposit of $0.5 million towards the possible purchase of the interests. In January 2011, as part of the agreement, Lucas purchased an undivided 7.56% interest in the New Mexico properties for $2.0 million and paid the deposit of $0.5 million. Lucas did not purchase any additional interests and allowed the right to purchase additional interests to expire in April 2011, without exercising any further rights. In October 2011, the Company sold its interests in these properties and in the deposit. See Note 12 – Subsequent Events.

NOTE 4 – ASSET RETIREMENT OBLIGATIONS

The following table presents the reconciliation of the beginning and ending aggregate carrying amounts of long-term legal obligations associated with the retirement of oil and gas property, plant and equipment for the six-month periods ended September 30, 2011 and 2010.  Lucas did not have any short-term asset retirement obligations as of September 30, 2011.
 
   
Six Months Ended September 30,
 
   
2011
   
2010
 
Carrying amount at beginning of period
  $ 409,112     $ 327,412  
Liabilities incurred
    -       43,170  
Liabilities settled
    -       -  
Accretion
    18,900       12,000  
Revisions
    -       -  
Reduction for sale of oil and gas property
    -       -  
Carrying amount at end of period
  $ 428,012     $ 382,582  
 
NOTE 5 - REVOLVING LINE OF CREDIT AND LETTER OF CREDIT FACILITY

On May 5, 2010, Lucas terminated its credit facility with Amegy Bank and paid off the then outstanding balance of $2.15 million.  Lucas expensed the remaining unamortized deferred financing costs totaling $250,921 as interest expense during the six months ended September 30, 2010.

NOTE 6 – INCOME TAXES

The Company has estimated that its effective tax rate for U.S. purposes will be zero for the 2012 fiscal year and consequently, recorded no provision or benefit for income taxes for the six months ended September 30, 2011.

NOTE 7 – STOCKHOLDERS' EQUITY

Common Stock

The following summarizes Lucas's common stock activity during the six-month period ended September 30, 2011:

         
Common Shares
 
         
Issued
             
   
Amount
   
Per Share
   
Shares
   
Treasury
   
Outstanding
 
 Balance at March 31, 2011
                16,727,713       (36,900 )     16,690,813  
 Series C Warrants Exercised
  $ 5,760,373     $ 2.29       2,510,506       -       2,510,506  
 Property Acquisitions
    441,000       2.94       150,000       -       150,000  
 Share-Based Compensation
    562,500       3.76       149,567       -       149,567  
Balance at September 30, 2011
              19,537,786       (36,900 )     19,500,886  
                                         

The exercise price of the Series C Warrants was $2.48 per share. The per share price of $2.29 shown in the above tabulation was net of commissions paid to the placement agent, See "Warrants" below for additional information.  Common stock issuances for property acquisitions and share-based compensation are recorded at the grant date fair value of the shares on the date of issuance.  See Footnote 8 – Share-Based Compensation for information on common stock activity related to Share-Based Compensation, including shares granted to the board of directors, officers, employees and consultants. 
 
 
-9-

 
Warrants

During the six months ended September 30, 2011, the Company did not issue any warrants, and none of the Company’s outstanding warrants expired.  However, the Company's Series C Warrants were exercised as discussed below.

The following is a summary of the Company's outstanding warrants at September 30, 2011:

 Warrants
 
 Exercise
 
 Expiration
 
 Intrinsic Value
 
 Outstanding
 
 Price ($)
 
 Date
 
 at September 30, 2011
           305,000
 (1)
         1.00
 
August 31, 2012
 
 $91,500
 
           150,630
 (2)
         2.98
 
July 3, 2014
 
-
 
        2,510,506
 (3)
         2.86
 
July 6, 2016
 
-
 
        2,966,136
 
         2.67
     
 $91,500
 
               
               
(1)  
Warrants issued in connection with the sale of units in a private equity placement in September 2009.
(2)  
Placement agent warrants issued in connection with the sale of units in the Company's unit offering in December 2010. The warrants were not exercisable until July 4, 2011 and will remain exercisable until, and including, July 3, 2014.
(3)  
Series B Warrants issued in connection with the sale of units in the Company’s unit offering in December 2010. The Series B Warrants were not exercisable until July 4, 2011 and will remain exercisable until, and including, July 3, 2016.

At the beginning of the quarter ended September 30, 2011, in an effort to secure the funding for the capital expenditure program for the current fiscal year and to avoid the unpredictable nature of the financial market, the Company incentivized the institutional investors who purchased securities in the Company's December 2010 offering to exercise the Series C Warrants they purchased as part of the offering by entering into an amendment to the original Series C Warrant Agreement on July 18, 2011 (the "Amendment Agreement"). The expiration date for the Series C Warrants was August 3, 2011.  Without changing the expiration date, the Amendment Agreement required the investors to immediately exercise 25% of the Series C Warrants they held and the Company to lower the exercise price of the Series C Warrants to $2.48 per share from the original exercise price of $2.62 per share.  Pursuant to the Series C Warrant Agreement, as amended, the investors were required to exercise all of their remaining Series C Warrants if the closing bid price of the Company's stock was higher than the amended exercise price on August 3, 2011.  Since the closing bid price on that date for the Company's stock was $2.51, all remaining Series C Warrants were exercised.  Net proceeds to the Company from exercises of all of the 2,510,506 Series C Warrants were approximately $5.8 million after deducting commissions paid to the placement agent.  The Company used the net proceeds for general corporate purposes, including funding future capital expenditures.   Based on the Black Scholes option pricing model, the change in the exercise price resulted in an increase of $293,277 in the aggregate value of the Series C Warrants.  Pursuant to the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification (ASC Topic 718), the Company recorded the increase as a non-operating expense in Other Income (Expense) in the Condensed Consolidated Income Statement and recorded the same amount in Additional Paid-In Capital in the Condensed Consolidated Balance Sheet.

NOTE 8 – SHARE-BASED COMPENSATION

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

Common Stock

During the three months ended September 30, 2011, Lucas issued 5,025 shares of its common stock to an officer of the Company according to the officer's employment agreement. During the same period, Lucas accrued awards of shares of its common stock with an aggregate grant date fair value of $62,083 according to the employment agreements with certain managerial personnel.

 
-10-

 
During the three months ended June 30, 2011, Lucas issued 125,000 shares of its common stock, which were previously accrued for and valued at $498,750 as of March 31, 2011, to a business consultant for his services provided during the 2011 fiscal year.  During the same period, Lucas accrued awards of shares of its common stock with an aggregate grant date fair value of $63,750 according to the employment agreements with certain managerial personnel.  The total number of shares issued from the accrual was 19,542.  The shares were issued in July 2011.

All awards and issuances were valued at fair value on the date of grant based on the trading value of Lucas common stock.

Stock Options

None of the Company’s outstanding options expired, were exercised or forfeited during the six months ended September 30, 2011 or 2010.

The following table sets forth stock option activity for the three-month and six-month periods ended September 30, 2011 and 2010:

   
Three Months Ended
   
Three Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
         
Weighted
         
Weighted
 
   
Number of
   
Average
   
Number of
   
Average
 
   
Stock Options
   
Grant Price
   
Stock Options
   
Grant Price
 
 Outstanding at June 30
    456,000     $ 2.88       200,000     $ 2.60  
 Granted
    -       -       -       -  
 Outstanding at September 30
    456,000     $ 2.88       200,000     $ 2.60  
                                 
 Exercisable at September 30
    96,000     $ 2.00       150,000     $ 2.60  
                                 
   
Six Months Ended
   
Six Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
           
Weighted
           
Weighted
 
   
Number of
   
Average
   
Number of
   
Average
 
   
Stock Options
   
Grant Price
   
Stock Options
   
Grant Price
 
 Outstanding at March 31
    256,000     $ 1.96       200,000     $ 2.60  
 Granted
    200,000       4.05       -       -  
 Outstanding at September 30
    456,000     $ 2.88       200,000     $ 2.60  
                                 
 Exercisable at September 30
    96,000     $ 2.00       150,000     $ 2.60  

During the quarter ended June 30, 2011, Lucas granted 200,000 stock options to an officer valued at approximately $604,000. Lucas did not grant any stock options during the three months ended September 30, 2011 and the six months ended September 30, 2010. The grant date fair values of the stock options are amortized and recognized as compensation expenses over the service period.

Compensation expense related to stock options granted during the three-month period and six-month period ended September 30, 2011 was $50,860 and $101,718, respectively. The options have a 5 year exercise period and vest 25% on each of the first four anniversary dates.  The exercise prices for the options equal the closing price of the Company stock on the grant dates.  All issuances were valued at fair value on the date of grant based on the market value of Lucas’ common stock using the Black Scholes option pricing model with the following weighted average assumptions used for grants; dividend yield of 0.00%; expected volatility of 116%; risk-free interest rate of 1.31% and expected term of 3.1 years.

Options outstanding and options exercisable at September 30, 2011 and 2010 had no intrinsic value.

 
-11-

 
The following tabulation summarizes the remaining terms of the options outstanding:

Exercise
   
Remaining
   
Options
   
  Options
 
Price
   
Life (Yrs)
   
Outstanding
   
Exercisable
 
$ 2.00       4.00       96,000       96,000  
$ 1.94       4.40       160,000       -  
$ 4.05       4.50       200,000       -  
       
Total
      456,000       96,000  

As of September 30, 2011, total unrecognized stock-based compensation expense related to all non-vested stock options was $701,100, which is being recognized over a weighted average period of approximately 3.4 years.

As of September 30, 2011, the number of shares available for issuance under the Company’s Long Term Incentive Plan was approximately 47,400.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings. The Company is periodically named in legal actions arising from normal business activities. Lucas evaluates the merits of these actions and, if the Company determines that an unfavorable outcome is probable and can be reasonably estimated, we will establish the necessary reserves. Lucas does not anticipate any material losses as a result of commitments and contingent liabilities. Lucas is not involved in any material legal proceedings.

NOTE 10 – POSTRETIREMENT BENEFITS

On April 1, 2011, Lucas established a matched defined contribution savings plan for its employees.  During the three and six months ended September 30, 2011, Lucas's total costs recognized for the savings plan were approximately $7,400 and $14,700, respectively.

NOTE 11 – SUPPLEMENTAL CASH FLOW INFORMATION
 
   
Six Months Ended September 30,
 
   
2011
   
2010
 
 Interest
  $ 5,842     $ 261,212  
 Income taxes
    -       -  
                 
 Issuance of common stock for the purchase of
               
 certain oil and gas properties
    441,000       117,506  
 Common stock payable for the purchase of
               
 certain oil and gas properties
    -       200,000  
 Increase in asset retirement obligations
    -       43,170  
 Deferred offering costs applied to sale of
               
 common stock
    -       119,912  

NOTE 12 – SUBSEQUENT EVENTS

On October 13, 2011, Lucas entered into a purchase and sale agreement with Nordic Oil USA I, LLLP (Nordic 1), with an effective date of July 1, 2011, to purchase all of Nordic 1’s interests in certain oil, gas and mineral leases, rights and assets located in Gonzales, Karnes and Wilson Counties, Texas, which represent all of Nordic 1's interests in the existing two capital programs operated by Lucas (the Nordic 1 Transaction).  Pursuant to the agreement, the closing of the Nordic 1 Transaction is deferred until the transaction is ratified by Nordic 1's shareholders.  In early November 2011, Lucas was informed by Nordic 1 that its shareholders had ratified the transaction and the transaction will officially close upon receipt of the proper confirmation documentation from Nordic 1. Pursuant to
 
 
-12-

 
the transaction, Lucas agreed to pay $22 million to Nordic 1 in the form of a senior secured promissory note, the payment of which will be secured by a deed of trust, security agreement, financing statement and assignment of production on the properties acquired. The note will be due a year from the official closing date and will bear interest at 6% per annum.

On October 13, 2011, Lucas also entered into a purchase agreement with an individual, with an effective date of July 1, 2011, to purchase all of the individual’s interests in the properties acquired from Nordic 1 in consideration for 2,000 shares of to be designated series of Series A Convertible Preferred Stock of the Company, each of which shares will be convertible into an aggregate of 1,000 shares of the Company’s common stock. The closing of the transaction with the individual was subject to the successful closing of the Nordic 1 Transaction. The Series A Convertible Preferred Stock to be issued will contain a provision that limits the amount of common shares that the individual 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.

In October 2011, Lucas entered into a purchase and sale agreement with Nordic Oil USA 2, LLLP (Nordic 2), with an effective date of February 1, 2011, to sell to Nordic 2 all of Lucas’s interests, or a 7.56% working interest, in and to certain oil, gas and mineral leases located in McKinley County, New Mexico for $4 million in cash. A total of $0.5 million of the $4 million due pursuant to the agreement has been received as of the date of this report. The Company acquired the properties in January 2011 in a purchase transaction for $2.5 million, which included a deposit of $0.5 million. Nordic 2 acquired, among other things, the rights to the $0.5 million deposit. Net proceeds to the Company from the sale were approximately $3.6 million after deducting commission. There have not been any revenues or expenses recorded by Lucas relating to these properties since the properties were acquired in January 2011.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included elsewhere in this report, and should be read in conjunction with management’s discussion and analysis contained in Lucas’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (the 2011 Annual Report) and related discussion of our business and properties contained therein.  The terms "Company," "Lucas Energy," "Lucas," "we," "us" and "our" refer to Lucas Energy, Inc. and its subsidiary.
 
Overview
 
Lucas Energy, Inc., a Nevada corporation, is an independent oil and gas company based in Houston, Texas. Lucas Energy, Inc. together with its subsidiary, acquires oil and gas properties and develops, produces and markets crude oil and natural gas from various known geological formations, including the Austin Chalk, Eagle Ford and Buda Formations, primarily in Gonzales, Wilson, Karnes and Atascosa Counties south of the City of San Antonio in South Texas and McKinley County in New Mexico.  Our goal is to become a recognized player in the development and production of crude oil and natural gas in established oil fields.
 
The Company's strategy is twofold:
 
·  
We focus on building and developing a portfolio of oil and gas assets by acquiring what we believe are undervalued, underdeveloped and underperforming properties and for which we believe we can increase production economically and profitably. We do not operate in land not known to be a productive field; that is, we do not drill wildcat wells.
·  
To efficiently pave the way towards growth, we monetize and divest non-core oil and gas assets and enter into joint ventures, farm-outs and drilling arrangements with select and reputable oil and gas companies to exploit the productive geological formations in our properties.
 
Our fiscal year ends on the last day of March of the calendar year.  We refer to the twelve-month period ended March 31, 2012 as our 2012 fiscal year and the three months ended September 30, 2011 as our second quarter of fiscal year 2012.

 
-13-

 
Operations. During the first six months of our fiscal year 2012, we continued our efforts on improving production from our existing Austin Chalk wells to capitalize on their undeveloped potential.  Our efforts resulted in a 9% growth in our gross crude oil production for the first six months of this fiscal year as compared to the first six months of our prior fiscal year.

To expedite the production growth of the Company, we prepared for our 2012 Austin Chalk horizontal well drilling program early in the first quarter of the 2012 fiscal year; and in late June, commenced the program by drilling a new horizontal well, the Rainey Unit No.1H, in Gonzales County. A portion of the well is on the same lease as the two Hagen Eagle Ford No. 1H and No. 2H wells operated by Hilcorp Energy Company ("Hilcorp"). The Rainey Unit No.1H well was successfully completed in early September and is currently producing 80–100 gross barrels of oil per day (BOPD) from the Austin Chalk formation. Seidler Oil and Gas is a joint venture partner with Lucas in this well, and Lucas owns an approximate 30% working interest in the well. In October 2011, the Company completed the re-drilling of the lateral on the Milton Hines No.1 well, and it is currently producing 80–100 gross BOPD. Lucas owns a 100% working interest in this well.  We are presently drilling the Kuntschik #1 lateral extension and anticipate the extension to add more than 100 gross BOPD for the 2012 third fiscal quarter’s totals when completed. The Company plans to drill at least three new Austin Chalk horizontal wells and five more new Austin Chalk laterals from old well bores during the remainder of its 2012 fiscal year. In addition, the Hilcorp operated Eagle Ford program is anticipated to add another two to three wells during the same period.

Lucas also plans to increase its production by acquiring additional property interests in the Austin Chalk. On October 13, 2011, the Company entered into a purchase and sale agreement with Nordic Oil USA I, LP (Nordic 1), whereby effective July 1, 2011, the Company purchased all of Nordic 1’s right, title and interest in certain oil, gas and mineral leases located in Gonzales, Karnes and Wilson Counties, Texas.  The property interests acquired represent all of Nordic 1's interests in the LEI 2009 II and III Capital Programs.  Pursuant to the agreement, the closing of the Nordic 1 Transaction is deferred until the transaction is ratified by Nordic 1's shareholders.  In early November 2011, Lucas was informed by Nordic 1 that its shareholders had ratified the transaction and the transaction will officially close upon receipt of the proper confirmation documentation from Nordic 1. Pursuant to the transaction, Lucas agreed to pay $22 million to Nordic 1 in the form of a senior secured promissory note, the payment of which will be secured by a deed of trust, security agreement, financing statement and assignment of production on the properties acquired. The note will be due a year from the official closing date and will bear interest at 6% per annum.  The Company also entered into a purchase agreement with an individual pursuant to which the Company agreed to purchase the individual’s property interests in the property to be acquired from Nordic 1 in consideration for 2,000 shares of to be designated Series A Convertible Preferred Stock of the Company.  The Series A Convertible Preferred Stock will have no voting rights, no liquidation rights and no redemption rights, but will have conversion rights.  The conversion rights will provide the holder thereof the right to convert each Series A Convertible Preferred Stock share into 1,000 shares of the Company's common stock, from time to time at the option of the holder, provided that no conversion will be allowed at any time that the number of shares to be issued to the holder thereof, together with any other shares of common stock beneficially owned by the holder, would exceed 4.99% of the Company’s then outstanding common stock.

Lucas expects the performance of the Company's existing wells, its current capital expenditure program and the newly acquired property interests to give rise to an average daily production rate of approximately 300 gross BOPD for the last six months of the 2012 fiscal year and the daily production rate at the end of the 2012 fiscal year to be approximately 500 gross BOPD, subject to operational risks, economic uncertainties and other factors that may cause the actual results to be materially different.

Eagle Ford Acreage.  The Company has been meeting with potential buyers and investment banking groups to discuss various possible future plans concerning its approximately 4,700 net Eagle Ford acres. The Company is considering different alternatives and strategies for the property, including but not limited to converting the position to cash and focusing on the development of the Austin Chalk reserves.  

Financial Strengths.  The only material debt that the Company has is the $22 million senior secured promissory note in connection with the Nordic 1 acquisition described above.   The note is secured by the properties acquired.

In an effort to secure the funding for the capital expenditure program for the current fiscal year and to avoid the unpredictable nature of the financial market, the Company incentivized the institutional investors who purchased securities in the Company's December 2010 unit offering to exercise the Series C Warrants they purchased as part of
 
 
-14-

 
the offering by entering into an amendment to the original Series C Warrant Agreement on July 18, 2011 (the "Amendment Agreement").  The expiration date for the Series C Warrants was August 3, 2011.  Without changing the expiration date, the Amendment Agreement required the investors to exercise immediately 25% of the Series C Warrants they held and the Company to lower the exercise price of the Series C Warrants to $2.48 per share from the original exercise price of $2.62 per share.  Pursuant to the Series C Warrant Agreement, as amended, the investors were required to exercise all of their remaining Series C Warrants if the closing bid price of the Company's stock was higher than the amended exercise price on August 3, 2011.  Since the closing bid price on that date for the Company's stock was $2.51, all remaining Series C Warrants were exercised and a total of 2,510,506 shares of the Company's common stock were issued.  Net proceeds to the Company from the exercises of the Series C Warrants were approximately $5.8 million after deducting commission to the placement agent.  The Company used the net proceeds for general corporate purposes, including the funding of capital expenditures.

To further secure the funding for its capital expenditure program, the Company entered into a purchase and sale agreement with Nordic Oil USA 2 LLLP (Nordic 2) on October 13, 2011.  Pursuant to the agreement, which had an effective date of February 1, 2011, the Company agreed to sell to Nordic 2 for $4 million all of its interests, or a 7.56% working interest, in and to certain oil, gas and mineral leases located in McKinley County, New Mexico.   A total of $0.5 million of the $4 million due pursuant to the agreement has been received as of the date of this report. The Company acquired the properties in January 2011 in a purchase transaction for $2.5 million, which included a deposit of $0.5 million. Nordic 2 acquired, among other things, the rights to the $0.5 million deposit. Net proceeds to the Company from the sale were approximately $3.6 million after deducting commission.

Major Expenditures.  The table below sets out the major components of our expenditures (including amounts capitalized) for the six months ended September 30, 2011 and 2010:

   
Six Months Ended September 30,
 
   
2011
   
2010
 
Additions to Oil and Gas Properties (Capitalized)
       
 Acquisitions Using Cash
  $ 416,001     $ 4,926,634  
 Tangible and Intangible Drilling Costs
               
 and Title Related Expenses
    4,607,329       2,126,102  
       Subtotal
    5,023,330       7,052,736  
 Acquisitions Using Shares
    441,000       317,506  
 Other Non-Cash Acquisitions (a)
    -       21,947  
 Total Additions to Oil and Gas Properties
    5,464,330       7,392,189  
 Lease Operating Expenditures (Expensed)
    1,634,769       619,197  
 Severance and Property Taxes (Expensed)
    119,524       88,774  
    $ 7,218,623     $ 8,100,160  
                 
 General and Administrative Expense (Cash)
  $ 2,213,826     $ 1,271,857  
 Share-Based Compensation (Non-Cash)
  $ 217,551     $ 86,340  
 
(a) Other non-cash acquisitions include assumption of note payable and discharge of note receivable.

RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations for the three and six months ended September 30, 2011 and 2010 should be read in conjunction with the condensed consolidated financial statements of Lucas Energy and notes thereto included in this Quarterly Report on Form 10-Q.  As used below, the abbreviations "Bbls" stands for barrels, "Mcf" for thousand cubic feet and "Boe" for barrels of oil equivalent on the basis of six Mcf per barrel.

 
-15-

 
Three Months Ended September 30, 2011 vs. Three Months Ended September 30, 2010

We reported a net loss for the three months ended September 30, 2011 of $2.1 million, or $0.11 per share. For the same period a year ago, we reported a net loss of $0.5 million, or $0.04 per share. Net loss increased by $1.6 million primarily due to increased operating expenses, a non-cash non-operating expense related to the modification of the Series C Warrant and decreased crude oil sale volumes.

The following table sets forth the operating results and production data for continuing operations for the three months ended September 30, 2011 and 2010.
 
 
 
Three Months Ended
             
   
September 30,
   
Increase
   
%
 
   
2011
   
2010
   
(Decrease)
   
Incr (Decr)
 
Sale Volumes:
                       
Crude Oil (Bbls)
    10,674       12,991       (2,317 )     -18 %
Natural Gas (Mcf)
    8,739       580       8,159       1407 %
Total (Boe)
    12,131       13,088       (957 )     -7 %
                                 
Per Day Sale Volumes:
                               
Crude Oil  (Bbls per day)
    116       141       (25 )     -18 %
Natural Gas (Mcf per day)
    95       6       89       1483 %
Total (Boe per day)
    132       142       (10 )     -7 %
                                 
Average Sale Price:
                               
Crude Oil ($/Bbl)
  $ 86.93     $ 72.12     $ 14.81       21 %
Natural Gas ($/Mcf)
  $ 4.52     $ 3.00     $ 1.52       51 %
                                 
                                 
Net Operating Revenues:
                               
Crude Oil
  $ 927,924     $ 936,849     $ (8,925 )     -1 %
Natural Gas
    39,518       1,741       37,777       2170 %
           Total Revenues
  $ 967,442     $ 938,590     $ 28,852       3 %
 
Oil and Gas Revenues
 
Total crude oil and natural gas revenues for the three months ended September 30, 2011 increased slightly to $1.0 million from $0.9 million for the same period a year ago due primarily to a favorable crude oil price variance of $0.2 million offset by an unfavorable crude oil volume variance of $0.1 million.

Operating and Other Expenses
   
Three Months Ended
             
   
September 30,
   
Increase
   
%
 
   
2011
   
2010
   
(Decrease)
   
Incr (Decr)
 
Lease Operating Expenses
  $ 1,033,286     $ 309,090     $ 724,196       234 %
Severance and Property Taxes
    59,749       50,473       9,276       18 %
Depreciation, Depletion, and Amortization
    290,933       352,183       (61,250 )     -17 %
General and Administrative  (Cash)
    1,273,721       689,361       584,360       85 %
Share-Based Compensation (Non-Cash)
    112,942       74,420       38,522       52 %
Other Income (Expense), Net
    (292,555 )     (7,810 )     (284,745 )     3646 %
Interest Expense
    2,355       -       2,355       100 %
 
Lease operating expenses increased $0.7 million for the current quarter as compared to the prior year period principally due to higher work-over costs of $0.4 million resulting from expanding efforts during the current quarter to increase production volumes from existing wells.

 
-16-

 
Depreciation, Depletion, Amortization and Accretion ("DD&A")
 
DD&A decreased $61,000 primarily due to a decrease in production for the current quarter ended September 30, 2011 totaling 957 barrels of oil equivalent less than the prior year period.  The rate per BOE increased from $25.40 to $30.50.

General and Administrative Expenses
 
General and administrative expenses, including share-based compensation, increased $0.6 million for the current quarter as compared to the prior year’s quarter.  The increase is primarily due to higher employee-related costs ($0.3 million) and higher legal and other professional fees ($0.2 million).
 
Other Income (Expense), Net

        Other Income (Expense) primarily consisted of $293,277 representing the increase in the value of the Series C Warrants as a result of the modification of the warrant agreements to incentivize the warrant holders to exercise the warrants. The value was calculated based on the Black Scholes option pricing model.

Six Months Ended September 30, 2011 vs. Six Months Ended September 30, 2010

We reported a net loss for the six months ended September 30, 2011 of $3.0 million, or $0.17 per share. For the same period a year ago, we reported a net loss of $1.4 million, or $0.10 per share. Net loss increased by $1.6 million primarily due to increased operating expenses of $2.3 million partially offset by increased net operating revenues of $0.7 million and reduced interest expense of $0.3 million.

The following table sets forth the operating results and production data for continuing operations for the six months ended September 30, 2011 and 2010.

 
 
Six Months Ended
             
   
September 30,
   
Increase
   
%
 
   
2011
   
2010
   
(Decrease)
   
Incr (Decr)
 
Sale Volumes:
                       
Crude Oil (Bbls)
    22,841       20,876       1,965       9 %
Natural Gas (Mcf)
    12,839       580       12,259       2114 %
Total (Boe)
    24,981       20,973       4,008       19 %
                                 
Per Day Sale Volumes:
                               
Crude Oil  (Bbls per day)
    125       114       11       10 %
Natural Gas (Mcf per day)
    70       3       67       2233 %
Total (Boe per day)
    137       115       22       19 %
                                 
Average Sale Price:
                               
Crude Oil ($/Bbl)
  $ 93.36     $ 72.54     $ 20.82       29 %
Natural Gas ($/Mcf)
  $ 5.26     $ 3.00     $ 2.26       75 %
                                 
                                 
Net Operating Revenues:
                               
Crude Oil
  $ 2,132,344     $ 1,514,389     $ 617,955       41 %
Natural Gas
    67,545       1,741       65,804       3780 %
           Total Revenues
  $ 2,199,889     $ 1,516,130     $ 683,759       45 %
 
Oil and Gas Revenues
 
Total crude oil and natural gas revenues for the six months ended September 30, 2011 increased $0.7 million, or 47%, to $2.2 million from $1.5 million for the same period a year ago due primarily to a favorable crude oil price variance of $0.4 million and a favorable crude oil volume variance of $0.3 million.

 
-17-

 
Operating and Other Expenses
 
   
Six Months Ended
             
   
September 30,
   
Increase
   
%
 
   
2011
   
2010
   
(Decrease)
   
Incr (Decr)
 
Lease Operating Expenses
  $ 1,634,769     $ 619,197     $ 1,015,572       164 %
Severance and Property Taxes
    119,524       88,774       30,750       35 %
Depreciation, Depletion, and Amortization
    698,866       564,292       134,574       24 %
General and Administrative  (Cash)
    2,213,826       1,271,857       941,969       74 %
Share-Based Compensation (Non-Cash)
    217,551       86,340       131,211       152 %
Other Income (Expense), Net
    (291,709 )     (22,660 )     (269,049 )     1187 %
Interest Expense
    5,842       261,212       (255,370 )     -98 %
 
Lease operating expenses increased $1.0 million for the current period as compared to the prior year period principally due to higher work-over costs of $0.5 million resulting from expanding efforts commencing in the second quarter of fiscal 2012 to increase production volumes from existing wells.

Depreciation, Depletion, Amortization and Accretion
 
DD&A increased $135,000 primarily due to an increase in production for the six months ended September 30, 2011 totaling 4,008 barrels of oil equivalent in excess of the prior year period.  The rate per BOE increased from $25.46 to $30.47.

General and Administrative Expenses
 
       General and administrative expenses, including share-based compensation, increased $1.1 million for the six months ended September 30, 2011 as compared to the prior year period.  The increase is primarily due to higher employee-related costs ($0.7 million) resulting from expanded land, production management and production administration functions and higher legal and other professional fees ($0.2 million).

Other Income (Expense), Net

       Other Income (Expense) primarily consisted of $293,277 representing the increase in the value of the Series C Warrants as a result of the modification of the warrant agreements to incentivize the warrant holders to exercise the warrants. The value was calculated based on the Black Scholes option pricing model.

Interest Expense

During the six months ended September 30, 2011, we incurred interest expense of $5,800 on a note assumed during a property acquisition. Interest expense of $261,000 for the six months ended September 30, 2010 was due primarily to our expensing the remaining unamortized balance of deferred financing costs originally incurred in connection with our credit facility with Amegy Bank, which we terminated and repaid in full during the six months ended September 30, 2010.

LIQUIDITY AND CAPITAL RESOURCES 
 
The primary sources of cash for Lucas during the six months ended September 30, 2011 were funds generated from operations and proceeds from the exercise of the Series C Warrants as further discussed below.  The primary uses of cash were funds used in operations and additions of oil and gas properties. Our cash balance decreased from $2.5 million to $1.5 million as of September 30, 2011 as compared to March 31, 2011.
 
In an effort to secure the funding for the capital expenditure program for the current fiscal year and to avoid the unpredictable nature of the financial market, the Company incentivized the institutional investors who purchased securities in the Company's December 2010 unit offering to exercise the Series C Warrants they purchased as part of the offering by entering into an amendment to the original Series C Warrant Agreement on July 18, 2011 (the "Amendment Agreement"). The expiration date for the Series C Warrants was August 3, 2011. Without changing the original expiration date, the Amendment Agreement required the investors to exercise immediately 25% of the Series C Warrants they held and the Company to lower the exercise price to purchase a share of the Company's common stock to $2.48 per share from the original exercise price of $2.62 per share. Pursuant to the Series C
 
 
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Warrant Agreement, as amended, the investors were required to exercise all of their remaining Series C Warrants if the closing bid price of the Company's stock was higher than the amended exercise price on August 3, 2011. Since the closing bid price on that date for the Company's stock was $2.51, all remaining Series C Warrants were exercised.  Net proceeds to the Company from the exercises of all of the 2,510,506 Series C Warrants were approximately $5.8 million after deducting commissions paid to the placement agent.  The Company used the net proceeds for general corporate purposes, including the funding of capital expenditures.

Cash Flows.

The primary sources of cash for Lucas during the six months ended September 30, 2011 were funds generated from sales of crude oil production, net proceeds from the exercises of the Series C Warrants and proceeds from asset sales. The primary uses of cash were funds used in operations and capital expenditures.  During the first six months of its fiscal year 2011, Lucas's cash balance decreased $1 million to $1.5 million from $2.5 million at March 31, 2011.

Net cash used in operating activities for the six months ended September 30, 2011 decreased $0.6 million to $2.1 million from $2.7 million for the prior year period.  The $0.6 million decrease was primarily due to favorable changes in working capital and other assets of $1.9 million and increased revenues of $0.7 million, partially offset by the increase of cash operating expenses of $2.0 million.

Net cash used in investing activities for the six months ended September 30, 2011 of $4.7 million decreased by $7.8 million compared to net cash provided by investing activities of $3.1 million for the prior year period due primarily to a decrease in proceeds from sale of oil and gas properties ($9.6 million), partially offset by a decrease in oil and gas property additions ($2.0 million).  Proceeds from sale of oil and gas properties of $9.7 million for the prior year period was due primarily to our sale of an undivided 85% interest in our "deep rights" located in Gonzales County, Texas.

Net cash provided by financing activities for the six months ended September 30, 2011 was $5.7 million resulting primarily from the proceeds from the exercise of the Series C Warrants as discussed above. For the six months ended September 30, 2010, net cash flow used in financing activities was $0.8 million and consisted of funds expended to pay off the outstanding principal on our credit facility with Amegy Bank of $2.2 million, less net proceeds from the sale of common stock in our "at-the-market" public equity offering of $1.4 million.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q 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" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" but may be found in other locations as well. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, among others,
 
·  
our growth strategies;
·  
anticipated trends in our business;
·  
our ability to make or integrate acquisitions;
·  
our liquidity and ability to finance our exploration, acquisition and development strategies;
·  
market conditions in the oil and gas industry;
·  
the timing, cost and procedure for proposed acquisitions;
·  
the impact of government regulation;
·  
estimates regarding future net revenues from oil and natural gas reserves and the present value thereof; 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.
 
 
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        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 our Annual Report on Form 10-K and other sections of this report and our Form 10-K, 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.

 ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
       Market risk is the risk of loss arising from adverse changes in market rates and prices. We are exposed to risks related to increases in the prices of fuel and raw materials consumed in exploration, development and production. We do not engage in commodity price hedging activities.
 
ITEM 4.  CONTROLS AND PROCEDURES.
 
Disclosure Controls and Procedures.

Disclosure controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. The Company’s management, including the Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2011.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting during the six months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II - OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS.
 
See Part 1, Item 1, Note 9 to Condensed Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 1A.  RISK FACTORS.

In addition to the risk factors set forth in our Annual Report on Form 10-K for the year ended March 31, 2011 ("2011 Annual Report"), as filed with the SEC on June 28, 2011, you should carefully consider the risk factors identified below.  The risk factors disclosed in this section and in our 2011 Annual Report, in addition to the other information set forth in this quarterly report, could materially affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition or results of operations.
 
If the warrant holders sell a large number of shares all at once or in blocks after exercising the warrants to purchase the registered shares, the trading value of our shares could decline in value.
 
We registered 2,510,506 shares of common stock and an additional 941,053 shares of common stock issuable upon the exercise of outstanding Series C Warrants in connection with the filing of our original prospectus supplement.  Additionally, pursuant to our resale registration statement we registered an aggregate of 4,230,589 shares of common stock, which number includes all of the shares of common stock issuable upon exercise of the Series B Warrants and the Series C Warrants (collectively the “Warrants”), not registered in the original prospectus supplement (of which all of the Series C Warrants to purchase 2,510,506 shares of common stock have been exercised to date pursuant to the Amendment Agreement).  We have 19,515,826 shares of common stock issued and outstanding as of the date of this report.  As a result, the offer or sale of large numbers of shares in the future, including those shares registered in our original prospectus supplement and the resale registration statement, may cause the market price of our securities to decline in value.  The amount of common stock registered on behalf of the investors, which shares will be eligible for immediate resale upon the exercise of the Warrants, pursuant to their terms, would represent approximately 11.4% of our outstanding shares of common stock assuming the full exercise of all remaining unexercised warrants (of which all 2,510,506 Series C Warrants have been exercised to date).

We face potential liability under the Amendment Agreement 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 Warrants and shares of common stock issuable upon exercise thereof have been sold by the holders thereof or have expired.

Pursuant to the Amendment Agreement, we agreed that if at any time prior to the date that all of the 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 under the Amendment Agreement.
 
 
-21-

 
The Investors in the Company’s December 2010 sale of 2,510,506 Units obtained a right of first refusal to provide additional funding to the Company.

Pursuant to the Securities Purchase Agreement (the "Purchase Agreement"), pursuant to which the investors purchased an aggregate of 2,510,506 units in December 2010, the Company agreed that until December 30, 2011, the Company would not undertake any of the following, without the prior written consent of all of the investors (as described in greater detail in the Purchase Agreement): (A), directly or indirectly, file any registration statement with the SEC, (B) directly or indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition of) any of its equity securities, including without limitation any debt, preferred stock or other instrument or security (a "Subsequent Placement"), or (C) be party to any solicitations or negotiations with regard to the foregoing.  Additionally, the Company agreed that until December 30, 2012, the Company would not, directly or indirectly, effect any Subsequent Placement unless the Company first provides the investors notice of such Subsequent Placement and provides such investors an opportunity to purchase up to 25% of the securities offered in such Subsequent Placement pursuant to the terms and conditions described in greater detail in the Purchase Agreement.
 
However, the above requirements do not apply to the Company's issuance or grant of any common stock issued or issuable: (i) in connection with any employee benefit plan approved by the Board of Directors, subject to a maximum of 150,000 shares to be issued to consultants in any calendar year; (ii) upon exercise of the Warrants (and other warrants granted in connection with the Purchase Agreement); (iii) upon exercise of any options or convertible securities which were outstanding on the day immediately preceding the closing date of the offering; and (iv) in connection with mergers, acquisitions, strategic business transactions or joint ventures with a strategic partner who is not in the business of making financial investments, in each case with non-affiliated third parties and otherwise on an arm's-length basis, the primary purpose of which is not to raise additional capital (collectively (i) through (iv), "Excluded Securities"); provided that any shares issued or issuable in connection with any transaction contemplated by this clause (iv) that is either primarily (A) attributable to capital raising for the Company (other than nominal amounts of capital) or (B) to raise capital for the Company, directly or indirectly, in connection with any transaction contemplated by this clause (iv), including, without limitation, securities issued in one or more related transactions or that result in similar economic consequences, shall not be deemed to be Excluded Securities.
 
As a result of the above, it may be harder for the Company to raise funding and/or issue securities in consideration for certain business purposes not included in the Excluded Securities, described above, which could prevent the Company from meeting its capital needs, limit the Company’s ability to grow its operations and implement its business plan and ultimately cause the value of the Company’s securities to decline in value.

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, as well as by the governments and regulatory agencies in the foreign countries in which we do business, 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 gas industry could change in ways that we cannot predict and that might substantially increase our costs of compliance and, in turn, materially and adversely affect our business, results of operations and financial condition.

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

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.

 
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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.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
In connection with the purchase agreement with the individual described above, which was entered into in connection with the Purchase Agreement with Nordic 1, the Company agreed to issue the individual 2,000 shares of to be designated Series A Preferred Stock of the Company to the individual, which shares have not been issued as of the date of this Report.

The Company plans to claim an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Act”) for the foregoing issuance as the recipient will take the shares for investment and not resale, the Company will take appropriate measures to restrict transfer, and the recipient will have access to similar documentation and information as would be required in a Registration Statement under the Act.
 
 
 
 
 
 

 
 
-23-

 
ITEM 6.  EXHIBITS.

EXHIBIT INDEX
 
Exhibit No.
 
Description
     
*       3.1
 
Certificate of Designations of Series A Preferred Stock
     
        10.1
-
Purchase and Sale Agreement – Lucas Energy, Inc. and Nordic Oil USA 2 LLP (October 13, 2011)(Filed as an exhibit to the Company’s Form 8-K, filed with the Commission on October 19, 2011 and incorporated herein by reference)
     
*      31.1
-
Section 302 Certification of Periodic Report of Principal Executive Officer.
     
*      31.2
-
Section 302 Certification of Periodic Report of Principal Financial Officer.
     
*      32.1
-
Section 906 Certification of Periodic Report of Principal Executive Officer.
     
*      32.2
-
Section 906 Certification of Periodic Report of Principal Financial Officer.
     
*  **101.INS
-
XBRL Instance Document.
     
*  **101.SCH
-
XBRL Schema Document.
     
*  **101.CAL
-
XBRL Calculation Linkbase Document.
     
*  **101.LAB
-
XBRL Label Linkbase Document.
     
*  **101.PRE
-
XBRL Presentation Linkbase Document.
 
 
* Exhibits filed herewith

** Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language):  (i) the Condensed Consolidated Balance Sheets –September 30, 2011 and March 31, 2011, (ii) the Condensed Consolidated Statements of Income - Three and Six Months Ended September 30, 2011 and 2010, (iii) the Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2011 and 2010; and (iv) Notes to Condensed Consolidated Financial Statements.  Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 
-24-

 
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
LUCAS ENERGY, INC.
 
(Registrant)
   
   
Date: November 14, 2011
By:/s/ K. ANDREW LAI
 
K. Andrew Lai
 
Chief Financial Officer
 
(Principal Financial Officer and
 
Duly Authorized Officer)


                   
 
 
 
 
 
 
 
 
 
 
-25-

 
EXHIBIT INDEX
Exhibit No.
 
Description
     
*        3.1
 
Certificate of Designations of Series A Preferred Stock
     
         10.1
-
Purchase and Sale Agreement – Lucas Energy, Inc. and Nordic Oil USA 2 LLP (October 13, 2011)(Filed as an exhibit to the Company’s Form 8-K, filed with the Commission on October 19, 2011 and incorporated herein by reference)
     
*      31.1
-
Section 302 Certification of Periodic Report of Principal Executive Officer.
     
*      31.2
-
Section 302 Certification of Periodic Report of Principal Financial Officer.
     
*      32.1
-
Section 906 Certification of Periodic Report of Principal Executive Officer.
     
*      32.2
-
Section 906 Certification of Periodic Report of Principal Financial Officer.
     
*  **101.INS
-
XBRL Instance Document.
     
*  **101.SCH
-
XBRL Schema Document.
     
*  **101.CAL
-
XBRL Calculation Linkbase Document.
     
*  **101.LAB
-
XBRL Label Linkbase Document.
     
*  **101.PRE
-
XBRL Presentation Linkbase Document.
 
* Exhibits filed herewith

** Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language):  (i) the Condensed Consolidated Balance Sheets –September 30, 2011 and March 31, 2011, (ii) the Condensed Consolidated Statements of Income - Three and Six Months Ended September 30, 2011 and 2010, (iii) the Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2011 and 2010; and (iv) Notes to Condensed Consolidated Financial Statements.  Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. 
 
 
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